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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
COMMISSION FILE NUMBER 1-12551
------------------------
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of July 31, 2003 was $76,193,820.
As of July 31, 2003 the Registrant had 48,386,626 shares of Common
Stock, $0.01 par value, outstanding.
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TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements........................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
Item 4. Controls and Procedures..................................... 32
PART II--OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Securities Holders....... 33
PART IV
Item 6. Exhibits and Reports on Form 8-K............................ 34
i
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
JUNE 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 746 $ 2,650
Accounts receivable, net................................ 200,013 219,924
Inventories, net........................................ 101,486 103,533
Net assets held for sale................................ -- 4,492
Other current assets.................................... 31,795 45,762
---------- ----------
TOTAL CURRENT ASSETS................................ 334,040 376,361
Property, plant and equipment, net.......................... 396,489 379,624
Goodwill.................................................... 298,014 290,361
Other intangible assets, net................................ 17,723 18,586
Other assets, net........................................... 40,341 42,435
---------- ----------
TOTAL ASSETS................................................ $1,086,607 $1,107,367
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 123,028 $ 151,930
Accrued compensation and related liabilities............ 49,095 53,292
Other current liabilities............................... 62,050 67,848
Current maturities of long-term debt.................... 2,819 2,961
---------- ----------
TOTAL CURRENT LIABILITIES........................... 236,992 276,031
Long-term debt.............................................. 765,245 760,938
Deferred income taxes....................................... 5,245 10,336
Other liabilities........................................... 17,108 17,294
---------- ----------
TOTAL LIABILITIES........................................... 1,024,590 1,064,599
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 25,000 shares
authorized, none issued............................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 48,386,626 and 48,337,031 shares issued
and outstanding as of June 30, 2003 and December 31,
2002, respectively.................................... 484 483
Paid-in capital......................................... 213,988 213,826
Retained deficit........................................ (155,034) (155,481)
Deferred compensation................................... (2,319) (2,471)
Accumulated other comprehensive income (loss)........... 4,898 (13,589)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......................... 62,017 42,768
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,086,607 $1,107,367
========== ==========
See notes to condensed consolidated financial statements.
1
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except earnings per share amounts)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales............................... $407,826 $420,967 $ 835,146 $ 864,449
Cost of sales........................... 328,917 342,129 672,350 697,582
-------- -------- --------- ---------
Gross profit............................ 78,909 78,838 162,796 166,867
Operating expenses:
Selling, general and
administrative.................... 62,747 69,048 126,226 137,239
Amortization of intangibles......... 418 514 863 1,016
Loss from the early extinguishment
of debt........................... -- 8,718 -- 16,463
Impairment loss on assets held for
sale.............................. -- 8,871 -- 8,871
Impairment on operations formerly
held for sale..................... -- 10,407 -- 10,407
Restructuring and other charges..... 119 9,273 804 23,800
-------- -------- --------- ---------
Operating income (loss)................. 15,625 (27,993) 34,903 (30,929)
Other expense:
Interest expense.................... 18,119 18,973 36,333 33,878
Other............................... 355 45 487 337
-------- -------- --------- ---------
Loss from continuing operations before
income taxes and cumulative effect of
a change in accounting principle...... (2,849) (47,011) (1,917) (65,144)
Income tax benefit...................... (1,168) (8,942) (767) (13,466)
-------- -------- --------- ---------
Loss from continuing operations before
cumulative effect of a change in
accounting principle.................. (1,681) (38,069) (1,150) (51,678)
Loss (gain) on disposal of discontinued
operations............................ 581 153 (1,919) 8,152
Cumulative effect of a change in
accounting principle.................. -- -- 322 111,748
-------- -------- --------- ---------
Net income (loss)....................... $ (2,262) $(38,222) $ 447 $(171,578)
======== ======== ========= =========
Earnings (loss) per share--basic and
diluted:
Continuing operations............... $ (0.04) $ (0.80) $ (0.02) $ (1.08)
Discontinued operations............. (0.01) -- 0.04 (0.17)
Cumulative effect of a change in
accounting principle.............. -- -- (0.01) (2.35)
-------- -------- --------- ---------
Earnings (loss) per share--basic and
diluted............................... $ (0.05) $ (0.80) $ 0.01 $ (3.60)
======== ======== ========= =========
Weighted average shares--basic.......... 47,679 47,668 47,672 47,663
Weighted average shares--diluted........ 47,679 47,668 48,207 47,663
See notes to condensed consolidated financial statements.
2
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
SIX MONTHS ENDED JUNE 30
---------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Loss from continuing operations........................... $ (1,150) $ (51,678)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:
Depreciation......................................... 23,347 23,021
Amortization......................................... 2,815 4,060
Noncash portion of restructuring, impairment and
other charges....................................... -- 30,257
Deferred income tax benefit.......................... (6,270) (10,404)
Loss on disposal of assets........................... 581 535
Other noncash charges, net........................... 846 69
Changes in operating assets and liabilities, excluding the
effects of acquisitions and dispositions:
Accounts receivable.................................. 26,150 33,112
Inventories.......................................... 4,070 1,576
Accounts payable and accrued compensation............ (37,009) (3,302)
Accrued taxes........................................ 8,808 (7,253)
Other working capital changes........................ (2,634) (6,600)
Other, net................................................ 605 958
--------- ---------
Net cash provided by operating activities........... 20,159 14,351
Cash flows from investing activities:
Acquisitions.......................................... -- (1,021)
Capital expenditures.................................. (13,010) (21,409)
Proceeds from divestitures, net....................... 3,864 96,887
Proceeds from sales of property, plant and
equipment........................................... 627 6,053
--------- ---------
Net cash (used in) provided by investing
activities........................................ (8,519) 80,510
Cash flows from financing activities:
Proceeds from issuance of common stock................ 16 18
Proceeds from issuance of long-term debt.............. 947,205 706,288
Repayments of long-term debt.......................... (960,947) (629,114)
Capitalized loan fees................................. (437) (16,574)
--------- ---------
Net cash (used in) provided by financing
activities........................................ (14,163) 60,618
Effect of exchange rate changes on cash and cash
equivalents................................................ 619 (129)
Cash flows from discontinued operations..................... -- (8,550)
--------- ---------
Net (decrease) increase in cash and cash
equivalents....................................... (1,904) 146,800
Cash and cash equivalents at beginning of year.............. 2,650 894
--------- ---------
Cash and cash equivalents at end of period.................. $ 746 $ 147,694
========= =========
See notes to condensed consolidated financial statements.
3
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
Mail-Well, Inc. and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the
information and footnote disclosures required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 2002.
The Company adopted the Financial Accounting Standards Board
Interpretation ("FASB") No. 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51,
("Interpretation 46") retroactive to January 1, 2003. The first quarter
Form 10-Q dated March 31, 2003 will be restated prospectively. The
implementation of Interpretation 46 did not have an impact on earnings per
share from continuing operations the first quarter of 2003.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1, 2002
and completed its determination of the goodwill impairment of the
Commercial Printing segment in the fourth quarter of 2002. The transitional
impairment of $111.7 million was recorded as the cumulative effect of a
change in accounting principle as of January 1, 2002 and required the
restatement of the condensed consolidated statement of operations for the
six months ended June 30, 2002.
The Company adopted SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
on January 1, 2003. The provisions of SFAS No. 145 required the
reclassification of the loss from the early extinguishment of debt that was
recorded as an extraordinary item in 2002 into income from continuing
operations and the restatement of the condensed consolidated statements of
operations for the three and six months ended June 30, 2002.
The table below is a reconciliation of loss per share for the six
months ended June 30, 2002 as originally reported and the loss per share as
restated.
JUNE 30, 2002
AS ORIGINALLY IMPACT OF IMPACT OF JUNE 30, 2002
REPORTED SFAS 142 SFAS 145 RESTATED
------------- --------- --------- -------------
Loss per share--basic and diluted*:
Continuing operations........................ $(0.87) $ -- $(0.22) $(1.08)
Discontinued operations...................... (0.17) -- -- (0.17)
Extraordinary items.......................... (0.22) -- 0.22 --
Cumulative effect of a change in accounting
principle.................................. -- (2.35) -- (2.35)
------ ------ ------ ------
Loss per share............................... $(1.26) $(2.35) $ -- $(3.60)
====== ====== ====== ======
- ---------------
* The individual components of loss per share may not equal the total loss per share due to rounding.
4
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation 46 which requires the
consolidation of variable interest entities ("VIE") in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of
the entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interest in the entity. Currently, entities
are generally consolidated by the enterprise that has a controlling
financial interest through ownership of a majority voting interest in the
entity.
The Company leases printing equipment from a bankruptcy-remote trust
(the "Trust") under an operating lease. At the end of the lease, the Company
has the option to purchase the equipment for the aggregate outstanding loan
balance of the Trust or to direct the sale of the equipment to a third
party. If the Company were to direct the sale of the equipment, it has
guaranteed the Trust that the proceeds from the sale will be at least 60.9%
of the original fair value of the leased assets which could be as much as
$11.6 million. If the sales proceeds exceed the guaranteed value of the
leased assets, the Company retains the excess.
The Company began consolidating this Trust effective January 1, 2003,
because it believes it is the primary beneficiary of this VIE under
Interpretation 46. As of the adoption date, the Company consolidated
equipment valued at $18.1 million, net of accumulated depreciation, and
debt of $18.5 million and recorded a charge of $0.3 million, net of tax, as
a cumulative effect of a change in accounting principle. Rent expense
reported for the six months ended June 30, 2003, decreased $1.2 million,
while depreciation expense and interest expense increased by $1.3 million
and $0.5 million, respectively.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and should be applied
prospectively, with the exception of certain SFAS No. 133 implementation
issues that were effective for all fiscal quarters prior to June 15, 2003.
This statement does not impact the financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 applies specifically to a number of
financial instruments that companies have historically presented within
their financial statements either as equity or between the liabilities
section and the equity section, rather than as liabilities. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. This statement does not impact the
financial statements of the Company.
3. STOCK-BASED COMPENSATION
Stock options and other stock-based compensation awards are accounted
for using the intrinsic value method prescribed by Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. This
method requires compensation expense to be recognized for the excess of the
quoted market price of the stock at the grant date or the measurement date
over the amount an employee must pay to acquire the stock.
5
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. STOCK-BASED COMPENSATION (CONTINUED)
The following table illustrates the pro forma effect of net income
(loss) and earnings (loss) per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, for the three and six months ended June 30, 2003 and 2002 (in
thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- ----------------------
2003 2002 2003 2002
--------- --------- ------ ---------
Net income (loss):
As reported...................... $ (2,262) $ (38,222) $ 447 $(171,578)
Pro forma........................ (2,818) (39,110) (1,407) (174,539)
Earnings (loss) per share--basic and
diluted:
As reported...................... $ (0.05) $ (0.80) $ 0.01 $ (3.60)
Pro forma........................ (0.06) (0.82) (0.03) (3.66)
The effect on pro forma net income (loss), earnings (loss) per
share--basic and earnings (loss) per share--diluted of expensing the
estimated fair value of stock options is not necessarily representative of
the effect on reported earnings for future years due to the vesting period
of the stock options and the potential for issuance of additional stock
options in future years.
4. ACQUISITION
In August 2002, the Company acquired the in-house printing and
fulfillment operations of American Express Company, located in Minneapolis,
Minnesota, for $1.3 million. This acquisition has been accounted for as a
purchase; accordingly, its assets and liabilities have been recorded at
estimated fair value with the excess of the purchase price over the
estimated fair value recorded as goodwill. The consolidated financial
statements reflect the operations of the acquired business since August
2002. Goodwill recorded as a result of this acquisition was $0.8 million.
Additional consideration will be paid if annual revenues during each year
of the five year period commencing on January 1, 2003 total a specified
amount. This may result in additional consideration of up to $17.5
million. Sales included in the three and six months ended June 30, 2003
were $20.8 and $30.0 million, respectively.
5. ASSETS HELD FOR SALE
The Company sold the filing products division of the Envelope segment
in August 2002 and certain digital graphics operations of the Commercial
Printing segment in March 2003. The following table presents the sales and
operating income of these operations included in the condensed consolidated
statements of operations for the three and six months ended June 30, 2003
and 2002 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2003 2002 2003 2002
------ ------- ------ -------
Sales........................................ -- $21,228 $2,872 $43,291
Operating income............................. -- $ 1,241 $ 167 $ 2,606
6
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUPPLEMENTAL BALANCE SHEET INFORMATION
INVENTORIES
The Company's inventories by major category are as follows (in
thousands):
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
Raw materials.......................................... $ 31,002 $ 32,515
Work in process........................................ 21,857 25,832
Finished goods......................................... 54,685 50,854
-------- --------
107,544 109,201
Reserves............................................... (6,058) (5,668)
-------- --------
$101,486 $103,533
======== ========
PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consists of
the following (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
Land and land improvements............................. $ 20,316 $ 19,529
Buildings and improvements............................. 110,376 105,646
Machinery and equipment................................ 490,674 463,896
Furniture and fixtures................................. 15,785 15,178
Construction in progress............................... 11,771 5,510
--------- ---------
648,922 609,759
Accumulated depreciation............................... (252,433) (230,135)
--------- ---------
$ 396,489 $ 379,624
========= =========
The December 31, 2002 balances do not include the impact of the
implementation of Interpretation 46 (see Note 2). Property, plant and
equipment at June 30, 2003 includes $16.8 million of assets in a VIE that
was consolidated on January 1, 2003.
COMPREHENSIVE INCOME (LOSS)
A summary of the comprehensive income (loss) is as follows (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -------------------------
2003 2002 2003 2002
-------- --------- ------- ---------
Net income (loss)...................... $(2,262) $(38,222) $ 447 $(171,578)
Other comprehensive income:
Currency translation adjustment, net... 11,099 5,779 18,487 4,431
------- -------- ------- ---------
Comprehensive income (loss)............. $ 8,837 $(32,443) $18,934 $(167,147)
======= ======== ======= =========
7
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. LONG-TERM DEBT
At June 30, 2003 and December 31, 2002, long-term debt consisted of the
following (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
Senior Secured Credit Facility, due 2005............... $ 90,438 $101,932
Senior Notes, due 2012................................. 350,000 350,000
Senior Subordinated Notes, due 2008.................... 300,000 300,000
Other.................................................. 27,626 11,967
-------- --------
768,064 763,899
Less current maturities................................ (2,819) (2,961)
-------- --------
Long-term debt...................................... $765,245 $760,938
======== ========
The December 31, 2002 balances do not include the impact of the
implementation of Interpretation 46 (see Note 2). Long-term debt at June
30, 2003 includes debt of $17.8 million of a VIE that was consolidated on
January 1, 2003.
During 2002, the Company expensed deferred financing costs in
connection with the early payment of the term loans of the bank credit
facility which was replaced with a new asset based credit facility in June
2002. These write-offs of $8.7 million and $16.5 million are reported as
loss from the early extinguishment of debt in the condensed consolidated
statement of operations for the three and six months ended June 30, 2002,
respectively.
The Senior Notes and the Senior Subordinated Notes are guaranteed by
Mail-Well, Inc. and its U.S. subsidiaries (the "Guarantor Subsidiaries")
all of which are wholly owned. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
ability of the Guarantor Subsidiaries to transfer funds to the issuing
subsidiary in the form of cash dividends, loans or advances, other than
ordinary legal restrictions under corporate law, fraudulent transfer and
bankruptcy laws.
As of June 30, 2003, the Company was in compliance with all of the
covenants of its various debt agreements.
8. RESTRUCTURING AND OTHER CHARGES
The Company has completed the restructuring programs initiated in June
2001 which continued during 2002. The restructuring expenses related to
these programs recorded during the six-month period ended June 30, 2003
were $0.8 million. These expenses were as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
PRINTING PRODUCTS TOTAL
---------- -------- -----
Employee separation and related expenses.................... $ 43 $(140) $(97)
Equipment moves............................................. 865 -- 865
Other exit costs............................................ 92 (56) 36
------ ----- ----
Total................................................... $1,000 $(196) $804
====== ===== ====
COMMERCIAL PRINTING. In the fourth quarter of 2002, Commercial Printing
announced the closure of its web printing operation in Indianapolis,
Indiana and the redeployment of the two web presses and
8
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
related equipment to St. Louis, Missouri and Baltimore, Maryland. A
substantial portion of the cost to dismantle, move and reinstall this
equipment was incurred during the six months ended June 30, 2003.
The other restructuring charges incurred relate to plans initiated in
the fourth quarter of 2002 to right size printing plants in the Northwest.
PRINTED OFFICE PRODUCTS. In the fourth quarter of 2002, Printed Office
Products closed its business forms plant in Clearwater, Florida and
consolidated its production in its Fairhope, Alabama plant. The employee
separation and related expenses paid as a result of this consolidation were
less than originally estimated.
A summary of the activity charged to the 2002 restructuring liability
during the six months ended June 30, 2003 is as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
PRINTING PRODUCTS TOTAL
---------- -------- -------
Balance, December 31, 2002.......................... $ 3,990 $ 653 $ 4,643
Payments for severance.......................... (189) (149) (338)
Payments for lease termination and property exit
costs......................................... (1,437) (40) (1,477)
Payments for other exit costs................... (163) (268) (431)
Reversal of unused accrual...................... -- (16) (16)
------- ----- -------
Balance, June 30, 2003.............................. $ 2,201 $ 180 $ 2,381
======= ===== =======
A summary of the activity charged to the 2001 restructuring liability
during the six months ended June 30, 2003 is as follows (in thousands):
COMMERCIAL
ENVELOPE PRINTING TOTAL
-------- ---------- ------
Balance, December 31, 2002............................ $2,518 $ 449 $2,967
Payments for severance............................ (286) -- (286)
Payments for lease termination and property exit
costs........................................... (556) (377) (933)
------ ----- ------
Balance, June 30, 2003................................ $1,676 $ 72 $1,748
====== ===== ======
9. DISCONTINUED OPERATIONS
During the first quarter of 2003, a gain was recorded on the disposal
of discontinued operations in the amount of $2.5 million. This gain was the
result of a change in the estimated tax impact of the disposition of the
Company's prime label business, which was sold in May 2002. The gain was
reduced by $0.6 million in the second quarter based on the completion of
the tax return.
9
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing
net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. A
reconciliation of the amounts included in the computation of basic earnings
(loss) per share and diluted earnings (loss) per share is as follows (in
thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2003 2002 2003 2002
------- -------- ------- --------
Numerator:
Numerator for basic and diluted loss per
share--loss from continuing operations...... $(1,681) $(38,069) $(1,150) $(51,678)
======= ======== ======= ========
Denominator:
Denominator for basic loss per share--weighted
average shares.............................. 47,679 47,668 47,672 47,663
Effects of dilutive securities:
Stock options and restricted stock........ -- -- 535 --
------- -------- ------- --------
Denominator for diluted loss per share--
adjusted weighted average shares and
assumed conversions......................... 47,679 47,668 48,207 47,663
======= ======== ======= ========
Loss for continuing operations per share:
Basic and diluted......................... $ (0.04) $ (0.80) $ (0.02) $ (1.08)
======= ======== ======= ========
During the three and six months ended June 30, 2002, interest, net of
tax, on Convertible Notes in the amount of $1.2 million and $2.4 million,
respectively, and shares of 7,319,000 that would have been issued upon
assumed conversion of these Convertible Notes were excluded from the
calculation of diluted loss per share due to the antidilutive effect on loss
per share. In addition, the outstanding options and shares of restricted
stock in 2003 and 2002 in the amount of 6,887,000 and 6,773,000 common
shares, respectively, were excluded from the calculation of diluted loss per
share because the effect would be antidilutive.
11. SEGMENT INFORMATION
The Company operates in three principal operating segments. The
Commercial Printing segment specializes in high impact printing, which
includes a wide range of premium printed products such as annual reports,
car brochures and brand marketing collateral for national and regional
customers, and general commercial printing for local and regional
customers. The Envelope segment manufactures customized and stock envelopes
for billing and remittance and direct mail advertising. The Envelope
segment is also a producer of specialty packaging products and a
manufacturer of stock products for the resale market. The Printed Office
Products segment produces customized and stock labels, mailers, and printed
business documents which are sold to small and mid-size businesses
generally through distributors of office products. Intercompany sales for
the three and six months ended June 30, 2003 were $4.4 million and $7.6
million, respectively. Intercompany sales for the three and six months
ended June 30, 2002 were $2.5 million and $9.4 million, respectively. These
amounts are eliminated in consolidation and excluded from reported net
sales.
10
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. SEGMENT INFORMATION (CONTINUED)
The following tables present certain business segment information for
the three and six months ended June 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales:
Envelope............................ $170,831 $195,168 $349,902 $396,143
Commercial Printing................. 186,652 173,727 384,601 364,482
Printed Office Products............. 50,343 52,072 100,643 103,824
-------- -------- -------- --------
Total............................... $407,826 $420,967 $835,146 $864,449
======== ======== ======== ========
Operating income (loss)(a):
Envelope............................ $ 13,897 $ 11,453 $ 31,892 $ 18,865
Commercial Printing................. 2,693 (8,062) 4,689 (11,963)
Printed Office Products............. 4,772 5,114 8,624 8,675
Corporate........................... (5,737) (36,498) (10,302) (46,506)
-------- -------- -------- --------
Total............................... $ 15,625 $(27,993) $ 34,903 $(30,929)
======== ======== ======== ========
Restructuring, impairments and other
charges:
Envelope............................ $ -- $ 7,545 $ -- $ 19,559
Commercial Printing................. 176 1,448 1,000 2,455
Printed Office Products............. (57) 168 (196) 1,047
Corporate........................... -- 28,108 -- 36,480
-------- -------- -------- --------
Total............................... $ 119 $ 37,269 $ 804 $ 59,541
======== ======== ======== ========
- ---------------
(a) Operating income (loss) is net of all costs and expenses directly
related to the segment involved. Corporate expenses are net of certain
supplier rebates and include corporate general and administrative
expenses, lease expense and other miscellaneous expenses. Corporate
expenses in 2002 include the loss from the early extinguishment of
debt, impairment loss on assets held for sale and impairment loss on
operations formerly held for sale.
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In March 2002, Mail-Well I Corporation ("Issuer" or "MWI"), the
Company's wholly-owned subsidiary, and the only direct subsidiary of the
Company, issued $350 million aggregate principal amount of 9 5/8% Senior
Notes ("Senior Notes") due in 2012. The Senior Notes are guaranteed by all
of the subsidiaries (the "Guarantor Subsidiaries") of MWI, all of
which are wholly owned, and by Mail-Well, Inc. ("Parent Guarantor"). The
guarantees are joint and several, full, complete and unconditional. There
are no material restrictions on the ability of the Guarantor Subsidiaries
to transfer funds to MWI in the form of cash dividends, loans or advances,
other than ordinary legal restrictions under corporate law, fraudulent
transfer and bankruptcy laws.
In December 1998, MWI issued $300 million aggregate principal amount of
8 3/4% Senior Subordinated Notes ("Senior Subordinated Notes") due in 2008.
The Senior Subordinated Notes are guaranteed by Guarantor Subsidiaries and
by the Parent Guarantor. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
ability of the Guarantor Subsidiaries to transfer funds to MWI in the form
of cash dividends, loans or advances, other than ordinary legal restrictions
under corporate law, fraudulent transfer and bankruptcy laws.
11
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
The following condensed consolidating financial information illustrates
the composition of the Parent Guarantor, Issuer, and Guarantor
Subsidiaries. The Issuer and the Guarantor Subsidiaries comprise all of the
direct and indirect subsidiaries of the Parent Guarantor. Management has
determined that separate complete financial statements would not provide
additional material information that would be useful in assessing the
financial composition of the Guarantor Subsidiaries.
Investments in subsidiaries are accounted for under the equity method,
wherein the investor company's share of earnings and income taxes
applicable to the assumed distribution of such earnings are included in net
income. In addition, investments increase in the amount of permanent
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries. The elimination entries remove the equity method
investment in subsidiaries and the equity in earnings of subsidiaries,
intercompany payables and receivables and other transactions between
subsidiaries.
12
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
June 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ --------- ------------
Current assets:
Cash and cash equivalents.......... $ -- $ (341) $ 1,087 $ -- $ 746
Accounts receivable, net........... -- 47,176 152,837 -- 200,013
Inventories, net................... -- 41,578 59,908 -- 101,486
Other current assets............... -- 23,209 8,586 -- 31,795
------- ---------- -------- --------- ----------
Total current assets............. -- 111,622 222,418 -- 334,040
Investment in subsidiaries........... 62,017 228,490 -- (290,507) --
Property, plant and equipment, net... -- 98,585 297,904 -- 396,489
Goodwill and other intangible assets,
net................................. -- 84,999 230,738 -- 315,737
Note receivable from subsidiaries.... -- 603,100 -- (603,100) --
Other assets, net.................... -- 31,825 8,516 -- 40,341
------- ---------- -------- --------- ----------
Total assets......................... $62,017 $1,158,621 $759,576 $(893,607) $1,086,607
======= ========== ======== ========= ==========
Current liabilities:
Accounts payable................... $ -- $ 16,661 $106,367 $ -- $ 123,028
Other current liabilities.......... -- 59,137 52,008 -- 111,145
Intercompany payable
(receivable)...................... -- 256,697 (256,697) -- --
Current portion of long-term
debt.............................. -- 1,767 1,052 -- 2,819
------- ---------- -------- --------- ----------
Total current liabilities........ -- 334,262 (97,270) -- 236,992
Long-term debt....................... -- 759,606 5,639 -- 765,245
Note payable to Issuer............... -- -- 603,100 (603,100) --
Deferred income tax (asset)
liability........................... -- (10,362) 15,607 -- 5,245
Other long-term liabilities.......... -- 13,098 4,010 -- 17,108
------- ---------- -------- --------- ----------
Total liabilities................ -- 1,096,604 531,086 (603,100) 1,024,590
Shareholders' equity................. 62,017 62,017 228,490 (290,507) 62,017
------- ---------- -------- --------- ----------
Total liabilities and shareholders'
equity.............................. $62,017 $1,158,621 $759,576 $(893,607) $1,086,607
======= ========== ======== ========= ==========
13
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ ----------- ------------
Current assets:
Cash and cash equivalents......... $ -- $ 1,957 $ 693 $ -- $ 2,650
Accounts receivable, net.......... -- 54,274 165,650 -- 219,924
Inventories, net.................. -- 42,805 60,728 -- 103,533
Net assets held for sale.......... -- -- 4,492 -- 4,492
Other current assets.............. -- 32,462 13,300 -- 45,762
------- ---------- --------- ----------- ----------
Total current assets............ -- 131,498 244,863 -- 376,361
Investment in subsidiaries.......... 42,768 417,049 -- (459,817) --
Property, plant and equipment,
net................................ -- 119,737 259,887 -- 379,624
Goodwill and other intangible
assets, net........................ -- 85,097 223,850 -- 308,947
Note receivable from subsidiaries... -- 603,100 -- (603,100) --
Other assets, net................... -- 34,030 8,405 -- 42,435
------- ---------- --------- ----------- ----------
Total assets........................ $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
Current liabilities:
Accounts payable.................. $ -- $ 41,057 $ 110,873 $ -- $ 151,930
Other current liabilities......... -- 68,128 53,012 -- 121,140
Intercompany payable
(receivable)..................... -- 507,381 (507,381) -- --
Current portion of long-term
debt............................. -- 970 1,991 -- 2,961
------- ---------- --------- ----------- ----------
Total current liabilities....... -- 617,536 (341,505) -- 276,031
Long-term debt...................... -- 754,983 5,955 -- 760,938
Note payable to Issuer.............. -- -- 603,100 (603,100) --
Deferred income tax liabilities
(assets)........................... -- (38,269) 48,605 -- 10,336
Other long-term liabilities......... -- 13,493 3,801 -- 17,294
------- ---------- --------- ----------- ----------
Total liabilities............... -- 1,347,743 319,956 (603,100) 1,064,599
Shareholders' equity................ 42,768 42,768 417,049 (459,817) 42,768
------- ---------- --------- ----------- ----------
Total liabilities and shareholders'
equity............................. $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
14
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales............................... $ -- $101,904 $305,922 $ -- $407,826
Cost of sales........................... -- 85,035 243,882 -- 328,917
------- -------- -------- -------- --------
Gross profit............................ -- 16,869 62,040 -- 78,909
Other operating expenses................ -- 18,054 45,111 -- 63,165
Restructuring and other charges......... -- -- 119 -- 119
------- -------- -------- -------- --------
Operating income (loss)................. -- (1,185) 16,810 -- 15,625
Other expense (income):
Interest expense...................... -- 18,172 13,650 (13,703) 18,119
Other expense (income)................ -- (13,724) 376 13,703 355
------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and equity in
undistributed earnings of
subsidiaries........................... -- (5,633) 2,784 -- (2,849)
Income tax benefit...................... -- (2,206) 1,038 -- (1,168)
------- -------- -------- -------- --------
Income (loss) from continuing operations
before equity in undistributed earnings
of subsidiaries........................ -- (3,427) 1,746 -- (1,681)
Equity in undistributed earnings of
subsidiaries........................... (2,262) 1,746 -- 516 --
------- -------- -------- -------- --------
Income (loss) from continuing
operations............................. (2,262) (1,681) 1,746 516 643
Loss on disposal........................ -- 581 -- -- 581
------- -------- -------- -------- --------
Net income (loss)....................... $(2,262) $ (2,262) $ 1,746 $ 516 $ (2,262)
======= ======== ======== ======== ========
15
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales............................... $ -- $127,798 $293,169 $ -- $420,967
Cost of sales........................... -- 108,069 234,059 -- 342,129
-------- -------- -------- -------- --------
Gross profit............................ -- 19,729 59,110 -- 78,838
Operating expenses:
Selling, administrative and other..... 29 20,496 49,037 -- 69,562
Restructuring, asset impairments and
other charges........................ -- 16,024 21,246 -- 37,269
-------- -------- -------- -------- --------
Operating income (loss)................. (29) (16,791) (11,173) -- (27,993)
Other (income) expense:
Interest expense...................... 1,262 21,718 12,664 (16,671) 18,973
Other expense (income)................ (1,500) (15,201) 75 16,671 45
-------- -------- -------- -------- --------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries........................... 209 (23,308) (23,912) -- (47,011)
Provision (benefit) for income taxes.... -- (7,043) (1,899) -- (8,942)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations, before cumulative effect of
a change in accounting principle and
undistributed earnings of
subsidiaries........................... 209 (16,265) (22,013) -- (38,069)
Equity in undistributed earnings of
subsidiaries........................... (38,431) (22,166) -- 60,597 --
-------- -------- -------- -------- --------
Income from continuing operations before
cumulative effect of a change in
accounting principle................... (38,222) (38,431) (22,013) 60,597 (38,069)
Loss from discontinued operations....... -- -- 153 -- 153
-------- -------- -------- -------- --------
Net income (loss)....................... $(38,222) $(38,431) $(22,166) $ 60,597 $(38,222)
======== ======== ======== ======== ========
16
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Six Months Ended June 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales............................... $ -- $209,547 $625,599 $ -- $835,146
Cost of sales........................... -- 175,019 497,331 -- 672,350
------ -------- -------- -------- --------
Gross profit............................ -- 34,528 128,268 -- 162,796
Other operating expenses................ -- 33,884 93,205 -- 127,089
Restructuring and other charges......... -- -- 804 -- 804
------ -------- -------- -------- --------
Operating income (loss)................. -- 644 34,259 -- 34,903
Other expense (income):
Interest expense...................... -- 36,259 27,430 (27,356) 36,333
Other expense (income)................ -- (27,381) 512 27,356 487
------ -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and equity in
undistributed earnings of
subsidiaries........................... -- (8,234) 6,317 -- (1,917)
Income tax benefit...................... -- (3,294) 2,527 -- (767)
------ -------- -------- -------- --------
Income (loss) from continuing operations
before equity in undistributed earnings
of subsidiaries........................ -- (4,940) 3,790 -- (1,150)
Equity in undistributed earnings of
subsidiaries........................... 447 3,790 -- (4,237) --
------ -------- -------- -------- --------
Income (loss) from continuing
operations............................. 447 (1,150) 3,790 (4,237) (1,150)
Gain on disposal........................ -- (1,919) -- -- (1,919)
Cumulative effect of a change in
accounting principle................... -- 322 -- -- 322
------ -------- -------- -------- --------
Net income (loss)....................... $ 447 $ 447 $ 3,790 $ (4,237) $ 447
====== ======== ======== ======== ========
17
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Six Months Ended June 30, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ -------- ------------
Net sales............................. $ -- $ 268,672 $ 595,777 $ -- $ 864,449
Cost of sales......................... -- 221,564 476,018 -- 697,582
--------- --------- --------- -------- ---------
Gross profit.......................... -- 47,108 119,759 -- 166,867
Operating expenses:
Selling, administrative and other... 34 40,022 98,119 -- 138,255
Restructuring, asset impairments and
other charges...................... -- 37,183 22,358 -- 59,541
--------- --------- --------- -------- ---------
Operating income (loss)............... (34) (30,097) (798) -- (30,929)
Other (income) expense:
Interest expense.................... 3,000 39,380 26,886 (35,388) 33,878
Other expense (income).............. (3,477) (31,687) 113 35,388 337
--------- --------- --------- -------- ---------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries......................... 443 (37,790) (27,797) -- (65,144)
Provision (benefit) for income
taxes................................ -- (12,715) (751) -- (13,466)
--------- --------- --------- -------- ---------
Income (loss) from continuing
operations, before cumulative effect
of a change in accounting principle
and undistributed earnings of
subsidiaries......................... 443 (25,075) (27,046) -- (51,678)
Equity in undistributed earnings of
subsidiaries......................... (172,021) (146,946) -- 318,967 --
--------- --------- --------- -------- ---------
Income from continuing operations
before cumulative effect of a change
in accounting principle.............. (171,578) (172,021) (27,046) 318,967 (51,678)
Loss from discontinued operations..... -- -- 8,152 -- 8,152
Cumulative effect of a change in
accounting principle................. -- -- 111,748 -- 111,748
--------- --------- --------- -------- ---------
Net income (loss)..................... $(171,578) $(172,021) $(146,946) $318,967 $(171,578)
========= ========= ========= ======== =========
18
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
June 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- --------- ------------ ------------
Cash flows from (used in) operating
activities..................................... $ -- $ (17,035) $ 37,194 $ 20,159
Cash flows from investing activities:
Capital expenditures.......................... -- (976) (12,034) (13,010)
Proceeds from divestitures, net............... -- 3,864 -- 3,864
Intercompany advances......................... (16) 25,257 (25,241) --
Proceeds from the sale of assets.............. -- -- 627 627
--------- --------- -------- ---------
Net cash provided by (used in) investing
activities................................... (16) 28,145 (36,648) (8,519)
Cash flows from financing activities:
Proceeds from the issuance of common stock.... 16 -- -- 16
Proceeds from long-term debt.................. -- 947,205 -- 947,205
Repayments of long-term debt.................. -- (960,176) (771) (960,947)
Capitalized loan fees......................... -- (437) -- (437)
--------- --------- -------- ---------
Net cash provided by (used in) financing
activities................................... 16 (13,408) (771) 14,163
Effect of exchange rate changes on cash......... -- -- 619 619
--------- --------- -------- ---------
Net change in cash and cash equivalents......... -- (2,298) 394 (1,904)
Balance at beginning of year.................... -- 1,957 693 2,650
--------- --------- -------- ---------
Balance at end of year.......................... $ -- $ (341) $ 1,087 $ 746
========= ========= ======== =========
19
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
June 30, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ -------- ------------
Cash flows from operating activities... $(18) $ (12,105) $ 111,513 $(85,039) $ 14,351
Cash flows from investing activities:
Acquisition costs, net of cash
acquired............................ -- (1,021) -- -- (1,021)
Capital expenditures................. -- (1,814) (19,595) -- (21,409)
Proceeds from divestitures, net...... -- 96,887 -- -- 96,887
Proceeds from sale of property, plant
& equipment......................... -- 5,940 113 -- 6,053
---- --------- --------- -------- ---------
Net cash provided by (used in)
investing activities................ -- 99,992 (19,482) -- 80,510
Cash flows from financing activities:
Proceeds from issuance of common
stock............................... 18 -- -- -- 18
Proceeds from issuance of long-term
debt................................ -- 706,288 -- -- 706,228
Repayments of long-term debt......... -- (612,629) (101,524) 85,039 (629,114)
Capitalized loan fees................ -- (16,574) -- -- (16,574)
---- --------- --------- -------- ---------
Net cash provided by (used in)
financing activities................ -- 77,085 (101,524) 85,039 60,618
Effect of exchange rate changes on cash
and cash equivalents.................. -- -- (129) -- (129)
Cash flows from discontinued
operations............................ -- -- (8,550) -- (8,550)
---- --------- --------- -------- ---------
Net increase (decrease) in cash and
cash equivalents...................... -- 164,972 (18,172) -- 146,800
Cash and cash equivalents at beginning
of year............................... -- (18,004) 18,898 -- 894
---- --------- --------- -------- ---------
Cash and cash equivalents at end of
year.................................. $ -- $ 146,968 $ 726 $ -- $ 147,694
==== ========= ========= ======== =========
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
We are one of North America's largest printing companies. Our mission
is to produce products and provide services that help our customers deliver
their messages more effectively. We are one company organized into three
business segments:
* Envelopes
* Commercial Printing
* Printed Office Products
We believe we are the world's largest manufacturer of envelopes. We
produce approximately 38 billion envelopes annually in our 39 envelope
manufacturing facilities located throughout the United States and Canada.
Approximately 84% of these envelopes are customized specifically for our
customers for use in billing and remittance, direct mail advertising and
specialty packaging. The remaining 16% are stock envelopes sold into the
resale market.
We are one of the largest commercial printers in the United States. We
operate 35 printing plants located strategically throughout the United
States and one in Canada. We specialize in high impact printing, which
includes a wide range of premium printed products such as annual reports,
car brochures and brand marketing collateral, for national and regional
customers, and general commercial printing for local and regional
customers.
We are also a leading domestic supplier of customized and stock labels,
mailers and printed business documents to small and mid-size businesses
generally through independent distributors of office products. Our Printed
Office Products segment operates 11 manufacturing plants strategically
located throughout the United States.
We have completed an 18-month restructuring of Mail-Well that began in
June 2001. This restructuring included the following:
* The consolidation of our best envelope equipment, expertise and
operational capabilities into 39 facilities, down from 50 in 2000.
* The consolidation of our printing operations in the Philadelphia
market into one facility, the closure of our printing operation in
New York City, and the consolidation of our web printing plant in
Indianapolis, Indiana into our web printing plants in St. Louis,
Missouri and Baltimore, Maryland.
* The consolidation of the Denver, Colorado and Clearwater, Florida
manufacturing facilities of our Printed Office Products segment.
* The sale of Curtis 1000, our prime label business, the filing
products division of our Envelope segment and certain of the digital
graphics operations of our Commercial Printing segment.
* The restructuring of our debt.
Paper is our most significant raw material. We purchase approximately
500,000 tons of paper annually for our businesses. Prices of uncoated
papers, which are the principal grades of paper used to manufacture
envelopes, increased approximately 10% in the fourth quarter of 2002.
Prices of coated papers, which are used principally in commercial printing,
did not increase in 2002 and have remained flat in 2003. Historically,
changes in paper pricing generally have not affected the operating results
of our Commercial Printing segment because we have been able to pass on
paper price increases to our customers. Paper pricing, however, has
impacted the operating margins of our Envelope segment. When paper prices
are rising, operating margins on our envelope products tend to be lower
because we generally are not able to increase our prices as quickly as
paper prices increase. We are experiencing this in 2003 since we have been
unable to increase the prices of our envelope products sufficiently to
cover the higher cost of uncoated papers.
21
CONSOLIDATED RESULTS OF OPERATIONS
In August 2002, the Company acquired the in-house printing and
fullfillment operations of American Express Company. The acquisition has
been accounted for as a purchase transaction, which impacts comparability
of our financial statements because the results of these operations are
included in the consolidated results from the date acquired. Where
appropriate, we have noted the impact of this acquisition in the following
discussions of our results.
The tables and discussions of sales and operating income that follow
present reported amounts as well as "ongoing" amounts. Ongoing sales
exclude sales of the filing products division of our Envelope segment that
was sold in August 2002 and the sales of certain digital graphics
operations of our Commercial Printing segment that were held for sale at
December 2002 and sold in March 2003. Ongoing operating income excludes the
operating income of the operations sold and restructuring and other charges
incurred in 2002 and during the first quarter of 2003. Since our planned
dispositions are now complete and we have completed our restructuring
programs, we believe that this analysis provides the most meaningful basis
for an understanding of our results during the second quarter and first six
months of 2003.
Demand for many of our products especially printed advertising and
direct mail promotions remain depressed and the market for traditional
business forms continues to decline. This has led to overcapacity in our
industry and significant competitive pricing pressures. We do not expect
internal growth or increases in margins until the markets we serve,
especially advertising and direct mail, recover.
Effective October 2003, Congress has instituted a federal "Do Not Call"
program, which our industry believes will increase demand for printed
advertising and direct mail as our customers shift promotional spending from
telemarketing to direct mail to reach their prospective customers. Our
efforts over the past 18 months in restructuring, and our focus this year on
Total Customer Solutions and Mobilization have enabled us to mitigate the
impact of the downturn in our markets and to benefit from improvements in
our markets, should they occur. Total Customer Solutions is our strategic
focus to align the capabilities of our three operating segments to better
service the needs of customers who purchase a variety of the products and
services we provide. Mobilization is our initiative to actively involve all
of our employees in improving service, quality, efficiency and innovation.
We believe all of these factors, both external and internal, may improve our
business during the remainder of 2003 and in 2004.
NET SALES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
Ongoing................................... $407,826 $399,739 $832,274 $821,158
Filing products division............. -- 17,483 -- 36,009
Digital graphics operations.......... -- 3,745 2,872 7,282
-------- -------- -------- --------
Reported.................................. $407,826 $420,967 $835,146 $864,449
======== ======== ======== ========
Reported sales in the second quarter of 2003 were $13.1 million, or
3.1%, lower than in the second quarter of 2002 and during the six months
ended June 30, 2003 were $29.3 million, or 3.4%, lower than during the
comparable period of 2002. Excluding the sales of the filing products
division sold in August 2002 and the digital graphics operations that were
sold in March 2003, sales of our ongoing operations increased $8.1 million,
or 2.0%, in the second quarter of 2003 and $11.1 million, or 1.4%, during
the six months ended June 30, 2003 from the comparable periods of 2002.
Significant factors influencing the ongoing sales of our business segments
during the first half of 2003 were as follows:
* Envelope sales were $6.9 million lower in the second quarter of 2003
compared to the second quarter of 2002. On a year to date basis,
Envelope sales were $10.2 million lower than the
22
comparable period of 2002. Approximately 71% of this revenue decline in
the second quarter was due to a decline in units shipped and the remaining
29% was due to lower average selling prices. On a year to date basis
volume made up approximately 57% of the decline and lower average
selling prices accounted for approximately 43%. We believe the price
competition we are experiencing is due to significant overcapacity in
this industry. Our volume decline in the second quarter was the result
of our decision not to reduce prices sufficiently to retain certain low
margin business and lower demand by our customers.
* Sales of the Commercial Printing segment were $16.7 million higher in
the second quarter of 2003 and $24.5 million higher during the six
months ended June 30, 2003 than the comparable periods of 2002. These
increases were primarily due to the acquisition completed in August
2002, which contributed sales of $20.8 million during the second
quarter and $30.0 million on a year to date basis which was partially
offset by the loss of sales resulting from by the closure of our
operation in New York City.
* Sales of Printed Office Products decreased $1.7 million in the second
quarter of 2003 and $3.2 million on a year to date basis from the
comparable periods of 2002 primarily due to lower sales of multi-ply
traditional business forms and competitive pricing pressures.
RESTRUCTURING EXPENSES
As mentioned earlier, we have completed the restructuring programs
initiated in June 2001 which continued during 2002. We continually evaluate
opportunities to improve our operations. It is possible that we will incur
additional charges in the future should improvement opportunities require
restructuring plans that are approved and implemented.
Restructuring expenses recorded during the six months ended June 30,
2003 were $0.8 million, all of which related to restructuring programs
initiated prior to 2003.
PRINTED
COMMERCIAL OFFICE
PRINTING PRODUCTS TOTAL
---------- -------- -----
(IN THOUSANDS)
Employee separation and related expenses.................... $ 43 $(140) $(97)
Equipment moves............................................. 865 -- 865
Other exit costs............................................ 92 (56) 36
------ ----- ----
Total................................................... $1,000 $(196) $804
====== ===== ====
COMMERCIAL PRINTING. In the fourth quarter of 2002, Commercial Printing
announced the closure of its web printing operation in Indianapolis and the
redeployment of the two web presses and related equipment to St. Louis and
Baltimore. A substantial portion of the cost to dismantle, move and
reinstall this equipment was incurred during the first six months of 2003.
The other restructuring charges incurred relate to plans initiated in
the fourth quarter of 2002 to right size our printing plants in the
Northwest.
PRINTED OFFICE PRODUCTS. In the fourth quarter of 2002, Printed Office
Products closed its business forms plant in Clearwater, Florida and
consolidated its production in its Fairhope, Alabama plant. The employee
separation and related expenses paid as a result of this consolidation were
less than originally estimated as were other costs.
23
OPERATING INCOME (LOSS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2003 2002 2003 2002
------- -------- ------- --------
(IN THOUSANDS)
Ongoing...................................... $15,744 $ 7,461 $35,540 $ 24,573
Impairment loss on assets held for
sale................................... -- 1,815 167 4,039
Restructuring, impairments and other
charges................................ (119) (37,269) (804) (59,541)
------- -------- ------- --------
Reported..................................... $15,625 $(27,993) $34,903 $(30,929)
======= ======== ======= ========
Excluding the operating income of the filing products division and
digital graphics operations that have been sold and charges related to our
restructuring, impairments and other charges recorded in 2002, ongoing
operating income increased $8.3 million in the second quarter of 2003 and
$11.0 million on a year to date basis over operating income in the
comparable periods of 2002.
* Operating income of our Envelope segment for the second quarter and
on a year to date basis was $4.0 million below results in 2002. This
was due to primarily to lower volume and lower margins.
* Commercial Printing's ongoing operating income improved $9.6 million
in the second quarter of 2003 and on a year to date basis $15.1
million over the losses recorded in the second quarter and first six
months of 2002. The improvement in operating income was attributable
primarily to the results of the acquisition completed in August 2002,
operating improvements made during 2002 and savings that have
resulted from the restructuring actions taken during the second half
of 2002.
* The ongoing operating income of Printed Office Products for the
second quarter of 2003 was $0.6 million lower than the second quarter
of 2002 and on a year to date basis was $1.3 million lower than 2002.
This decline reflects lower sales partially offset by savings from
the plant consolidations during 2002.
* Expenses associated with corporate services decreased $3.3 million in
the second quarter of 2003 and $1.2 million on a year to date basis
over the comparable periods of 2002. Lower corporate expenses in the
first half of 2003 were the result of a reduction in workers'
compensation expense of $4.4 million partially offset by lower
supplier rebates and higher spending on employee safety programs and
employee training.
INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS)
Total interest expense........................ $18,119 $20,966 $36,333 $39,448
Less: Allocated to discontinued operations.... -- (1,993) -- (5,570)
------- ------- ------- -------
Reported interest expense..................... $18,119 $18,973 $36,333 $33,878
======= ======= ======= =======
Interest expense incurred during the second quarter of 2003 reflects
our average outstanding debt during the quarter of $801.9 million and a
weighted average interest rate of 8.36% compared to the average outstanding
debt of $943.2 during the second quarter of 2002 and a weighted average
interest rate of 8.08%. Interest expense incurred during the six months
ended June 30, 2003 reflects average outstanding debt of $807.5 million and
a weighted average interest rate of 8.35% compared to the average
outstanding debt of $945.0 during the first six months of 2002 and a
weighted average interest rate of 7.48%. The average outstanding debt has
decreased year over year due primarily to the application of the proceeds
from our divestitures to the repayment of debt. Our weighted average
interest increased in 2003 as a result of the issuance of $350 million of
9 5/8% senior notes on March 13,
24
2002 the proceeds of which were used primarily to repay bank debt that
accrued interest at a lower variable rate, and in November 2002, our 5%
convertible subordinated notes were redeemed. In addition, total interest
expense has been reduced in 2003 from amounts recorded in 2002 as a result
of the write-off of the deferred financing costs associated with the bank
credit facility that was refinanced in June 2002.
Reported interest expense for the six months ended June 30, 2003 was
higher than in the first half of 2002 due to the allocation of interest
expense to discontinued operations in 2002. The amount of interest expense
allocated to discontinued operations exceeded the actual reduction in
interest expense attributable to the divestitures of the discontinued
operations. In 2002, a portion of our interest expense was allocated to
discontinued operations based on the net assets of the discontinued
operations relative to the net asset of the Company as required by
generally accepted accounting principles. The net asset amounts used to
allocate interest expense exceeded the actual net proceeds received from
the dispositions of the discontinued operations.
INCOME TAXES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Income tax benefit............................ $(1,168) $(8,942) $ (767) $(13,466)
Effective tax rate............................ 41% 19% 40% 21%
The effective tax rate for 2003 is estimated to be 40%. The effective
tax rate for 2002 was lower than 2003 primarily due to a higher estimated
pre-tax loss in 2002 that increased the impact of nondeductible permanent
differences on the overall effective rate.
LOSS FROM CONTINUING OPERATIONS AND LOSS PER SHARE--DILUTED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2003 2002 2003 2002
------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Loss from continuing operations.............. $(1,681) $(38,069) $(1,150) $(51,678)
Loss from continuing operations per share.... $ (0.04) $ (0.80) $ (0.02) $ (1.08)
The loss from continuing operations in the second quarter of 2003 was
$36.4 million less than the second quarter of 2002 and was $50.5 million
less on a year to date basis than the first six months of 2002. This
improvement is due to the acquisition completed in August 2002, improved
operating performance, lower overhead, and significantly lower
restructuring and other charges. Interest expense was higher in the first
six months of 2003 than in 2002. The low effective tax rate in 2002 reduced
the tax benefit of the losses in 2002 compared to the benefit in 2003. In
addition, the loss on the early extinguishment of debt recorded as an
extraordinary item in the three and six months ended June 30, 2002, $8.7
million and $16.5 million, respectively, was reclassified as a loss from
continuing operations in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections.
LOSS (GAIN) ON DISPOSAL OF DISCONTINUED OPERATIONS
During the first quarter of 2003, we recorded a gain on the disposal of
discontinued operations in the amount of $2.5 million. This gain was the
result of an adjustment made to the tax impact of the disposition of our
prime label business, which was sold in May 2002. The gain was reduced by
$0.6 million in the second quarter based on the completion of the tax
return.
25
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
We adopted Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("Interpretation 46") effective January
1, 2003. The implementation of Interpretation 46 required the Company to
consolidate a trust that is leasing equipment to the Company under an
operating lease. The effect of this consolidation was to increase net
property, plant and equipment by $18.1 million and total debt by $18.5
million on January 1, 2003. The cumulative effect of this change in
accounting principle was an after-tax charge of $0.3 million.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ---------------------
2003 2002 2003 2002
------- -------- ----- ---------
(DOLLARS IN THOUSANDS)
Net income (loss)............................. $(2,262) $(38,222) $ 447 $(171,578)
Net income (loss) per share................... $ (0.05) $ (0.80) $0.01 $ (3.60)
The net income (loss) and net income (loss) loss per share in the
second quarter of 2003 and on a year to date basis reflect the reduction in
income (loss) from continuing operations, the loss (gain) recorded on the
disposal of discontinued operations and the cumulative effect of a change
in accounting principle.
The net loss and net loss per share reported in the second quarter of
2002 and for the six months ended June 30, 2002 reflected the loss from
continuing operations, losses of $0.2 million in the quarter and $8.2
million for the six months ended June 30, 2002 on disposal of discontinued
operations and the $111.7 goodwill impairment charge recorded as a
cumulative effect of a change in accounting principle as a result of the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
BUSINESS SEGMENTS
ENVELOPE
SALES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
Ongoing................................... $170,831 $177,685 $349,902 $360,134
Filing products division.............. -- 17,483 -- 36,009
-------- -------- -------- --------
Reported.................................. $170,831 $195,168 $349,902 $396,143
======== ======== ======== ========
OPERATING INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- --------
(IN THOUSANDS)
Ongoing....................................... $13,897 $17,866 $31,892 $ 35,884
Filing products division.................. -- 1,132 -- 2,540
Restructuring expenses.................... -- (7,545) -- (19,559)
------- ------- ------- --------
Reported...................................... $13,897 $11,453 $31,892 $ 18,865
======= ======= ======= ========
Reported sales of the Envelope segment were $170.8 million in the
second quarter of 2003, $24.3 million below sales in the second quarter of
2002. Excluding sales of the filing products division, which was sold in
August 2002, the sales decline was $6.9 million, or 3.9%. Excluding the
impact of the
26
foreign currency benefit from the strength of the Canadian dollar, the
sales decline was $10.2 million and due primarily to the following:
* Domestic sales of our direct mail and consumer direct envelopes were
down approximately $7.3 million, or 8.3%, in the second quarter.
Approximately 71% of this decline was related to volume and 29%
related to lower pricing. The decline in volume was due to lower
demand by our customers for transactional envelopes, lower sales to
direct mail customers and volume lost due to competitive pricing. Our
average selling price decreased due to competitive pricing pressures
and lower sales of higher value added products.
* Sales into the resale segment of the market decreased approximately
$1.4 million, or 3.7%, due almost entirely to competitive pricing
pressures. Unit sales into this market segment decreased only
slightly in the quarter.
* Excluding the impact of foreign currency, sales in Canada decreased
approximately $0.8 million, or 2.5%, entirely due to competitive
pricing pressures. Unit sales in Canada were higher during the second
quarter than in the second quarter of 2002.
Reported operating income of the Envelope segment in the second quarter
of 2003 was $13.9 million, $2.4 million higher than the second quarter of
2002. Excluding the operating income of the filing products division and
restructuring expenses, operating income was $4.0 million lower than the
second quarter of 2002. The impact of lower pricing was approximately $5.0
million and the impact of the decline in volume was approximately $2.3
million. Manufacturing overhead and selling and administrative expenses
were reduced by approximately $2.6 million from the second quarter of 2002.
The foreign currency translation benefit to operating income was $0.7
million.
Reported sales were $349.9 million for the six months ended June 30,
2003, $46.2 million below sales during the comparable period of 2002.
Excluding sales of the filing products division, the sales decline was
$10.2 million, or 2.8%. Excluding the impact of the foreign currency
benefit, the sales decline was $15.3 million and was due primarily to the
following:
* Domestic sales of our direct mail and consumer direct envelopes
decreased approximately $11.6 million, or 6.4%. Lower volume
contributed approximately 57.0% of this decline and lower average
selling prices contributed the remaining 43.0%.
* Sales into the resale segment of the market decreased approximately
$0.6 million, or 1.0% due primarily to volume, which was lower in the
first quarter than in the first quarter of 2002. Average selling
prices were favorable enough in the first quarter to offset the lower
pricing experienced in the second quarter.
* Sales in Canada decreased approximately $1.3 million on a
year-to-date basis due entirely to lower pricing. Units sold by our
Canadian operations were slightly higher in the first six months of
2003 than during the comparable period of 2002.
Reported operating income was $31.9 million for the six months ended
June 30, 2003, $13.0 million higher than the comparable period of 2002.
Excluding the operating income of the filing products division and
restructuring expenses, operating income was $4.0 million lower than during
the first six months of 2002. Lower average selling prices for our products
reduced operating income by approximately $6.6 million. The impact of lower
sales volume was approximately $4.9 million. Manufacturing overhead and
selling and administrative expenses were reduced by approximately
$6.4 million. The foreign currency translation benefit to operating income
was $1.1 million.
27
COMMERCIAL PRINTING
SALES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
Ongoing................................... $186,652 $169,982 $381,729 $357,200
Digital graphics operations........... -- 3,745 2,872 7,282
-------- -------- -------- --------
Reported.................................. $186,652 $173,727 $384,601 $364,482
======== ======== ======== ========
OPERATING INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ----------------------
2003 2002 2003 2002
------ ------- ------- --------
(IN THOUSANDS)
Ongoing........................................ $2,869 $(6,723) $ 5,522 $ (9,574)
Digital graphics operations................ -- 109 167 66
Restructuring expenses..................... (176) (1,448) (1,000) (2,455)
------ ------- ------- --------
Reported....................................... $2,693 $(8,062) $ 4,689 $(11,963)
====== ======= ======= ========
Reported sales of the Commercial Printing segment were $186.7 million
in the second quarter of 2003, $12.9 million higher than sales in the
second quarter of 2002. Excluding sales of the digital graphics operations,
which were sold in March 2003, the sales increase was $16.7 million, or
9.8%.
* Sales of our high-impact printing to our national and regional
customers were $2.1 million higher than the second quarter of 2002.
* Excluding sales of $20.8 million of the acquisition completed in
August 2002, sales to our local commercial printing customers were
approximately $2.3 million below the second qua