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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 SEPTEMBER 30, 2003
COMMISSION FILE NUMBER 1-12551
------------------------
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes /X/ No / /
As of October 31, 2003 the Registrant had 48,386,626 shares of Common
Stock, $0.01 par value, outstanding.
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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..................................... 33
PART IV
Item 6. Exhibits and Reports on Form 8-K............................ 34
i
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 1,094 $ 2,650
Accounts receivable, net............................ 229,889 219,924
Inventories, net.................................... 97,994 103,533
Net assets held for sale............................ -- 4,492
Other current assets................................ 36,231 45,762
---------- ----------
TOTAL CURRENT ASSETS............................ 365,208 376,361
Property, plant and equipment, net...................... 390,091 379,624
Goodwill................................................ 297,783 290,361
Other intangible assets, net............................ 17,423 18,586
Other assets, net....................................... 38,228 42,435
---------- ----------
TOTAL ASSETS............................................ $1,108,733 $1,107,367
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 152,312 $ 151,930
Accrued compensation and related liabilities........ 56,225 53,292
Other current liabilities........................... 55,236 67,848
Current maturities of long-term debt................ 2,733 2,961
---------- ----------
TOTAL CURRENT LIABILITIES....................... 266,506 276,031
Long-term debt.......................................... 758,614 760,938
Deferred income taxes................................... 3,814 10,336
Other liabilities....................................... 16,133 17,294
---------- ----------
TOTAL LIABILITIES....................................... 1,045,067 1,064,599
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 25,000 shares
authorized, none issued........................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 48,386,626 and 48,337,031 shares
issued and outstanding as of September 30, 2003
and December 31, 2002, respectively............... 484 483
Paid-in capital..................................... 214,047 213,826
Retained deficit.................................... (152,864) (155,481)
Deferred compensation............................... (2,244) (2,471)
Accumulated other comprehensive income (loss)....... 4,243 (13,589)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY...................... 63,666 42,768
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,108,733 $1,107,367
========== ==========
See notes to condensed consolidated financial statements.
1
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except earnings per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
Net sales............................. $412,218 $428,720 $1,247,363 $1,293,169
Cost of sales......................... 330,341 343,485 1,002,691 1,041,064
-------- -------- ---------- ----------
Gross profit.......................... 81,877 85,235 244,672 252,105
Operating expenses:
Selling, general and
administrative.................. 59,278 61,273 185,172 198,509
Amortization of intangibles....... 500 526 1,363 1,542
Loss from the early extinguishment
of debt......................... -- -- -- 16,463
Impairment loss on assets held for
sale............................ -- -- -- 8,871
Impairment on operations formerly
held for sale................... -- -- -- 10,407
Restructuring and other charges... 76 39,408 1,212 63,208
-------- -------- ---------- ----------
Operating income (loss)............... 22,023 (15,972) 56,925 (46,895)
Other expense:
Interest expense.................. 17,831 18,675 54,163 52,553
Other............................. 574 1,720 1,063 2,061
-------- -------- ---------- ----------
Income (loss) from continuing
operations before income taxes and
cumulative effect of a change in
accounting principle................ 3,618 (36,367) 1,699 (101,509)
Provision for income taxes............ 1,446 (14,218) 679 (27,684)
-------- -------- ---------- ----------
Income (loss) from continuing
operations before cumulative effect
of a change in accounting
principle........................... 2,172 (22,149) 1,020 (73,825)
Loss (gain) on disposal of
discontinued operations............. -- 5,804 (1,919) 13,958
Cumulative effect of a change in
accounting principle................ -- -- 322 111,748
-------- -------- ---------- ----------
Net income (loss)..................... $ 2,172 $(27,953) $ 2,617 $ (199,531)
======== ======== ========== ==========
Earnings (loss) per share--basic:
Continuing operations............. $ 0.05 $ (0.46) $ 0.02 $ (1.55)
Discontinued operations........... -- (0.13) 0.04 (0.29)
Cumulative effect of a change in
accounting principle............ -- -- (0.01) (2.35)
-------- -------- ---------- ----------
Earnings (loss) per share--basic...... $ 0.05 $ (0.59) $ 0.05 $ (4.19)
======== ======== ========== ==========
Earnings (loss) per share--diluted:
Continuing operations............. $ 0.04 $ (0.46) $ 0.02 $ (1.55)
Discontinued operations........... -- (0.13) 0.04 (0.29)
Cumulative effect of a change in
accounting principle............ -- -- (0.01) (2.35)
-------- -------- ---------- ----------
Earnings (loss) per share--diluted.... $ 0.04 $ (0.59) $ 0.05 $ (4.19)
======== ======== ========== ==========
Weighted average shares--basic........ 47,689 47,668 47,677 47,665
Weighted average shares--diluted...... 48,406 47,668 48,268 47,665
See notes to condensed consolidated financial statements.
2
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------
2003 2002
------------ -----------
Cash flows from operating activities:
Income (loss) from continuing operations.................. $ 1,020 $ (73,825)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Depreciation......................................... 34,852 34,587
Amortization......................................... 4,393 5,851
Write-off of deferred financing cost................. -- 16,463
Noncash portion of restructuring, impairment and
other charges..................................... -- 29,226
Deferred income taxes................................ (7,826) (19,433)
Loss on disposal of assets........................... 891 405
Other noncash charges, net........................... 590 250
Changes in operating assets and liabilities, excluding the
effects of acquisitions and dispositions:
Accounts receivable.................................. (3,886) 5,566
Inventories.......................................... 7,431 5,262
Accounts payable and accrued compensation............ 242 (1,908)
Accrued taxes........................................ 10,888 2,459
Other working capital changes........................ (14,717) 2,098
Other, net................................................ (193) 744
----------- ----------
Net cash provided by operating activities........... 33,634 7,745
Cash flows from investing activities:
Acquisitions.......................................... -- (2,552)
Capital expenditures.................................. (19,722) (26,943)
Proceeds from divestitures, net....................... 3,864 128,649
Proceeds from sales of property, plant and
equipment........................................... 658 6,267
----------- ----------
Net cash (used in) provided by investing
activities........................................ (15,200) 105,421
Cash flows from financing activities:
Proceeds from issuance of common stock................ 16 18
Proceeds from issuance of long-term debt.............. 1,384,781 1,006,154
Repayments of long-term debt.......................... (1,405,239) (951,077)
Capitalized loan fees................................. (484) (17,402)
----------- ----------
Net cash (used in) provided by financing
activities........................................ (20,926) 37,693
Effect of exchange rate changes on cash and cash
equivalents............................................... 936 (1,088)
Cash flows from discontinued operations..................... -- (10,827)
----------- ----------
Net (decrease) increase in cash and cash
equivalents....................................... (1,556) 138,944
Cash and cash equivalents at beginning of year.............. 2,650 894
----------- ----------
Cash and cash equivalents at end of period.................. $ 1,094 $ 139,838
=========== ==========
See notes to condensed consolidated financial statements.
3
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
Mail-Well, Inc. and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2003. The balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of the
information and footnote disclosures required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 2002.
The Company adopted the Financial Accounting Standards Board ("FASB")
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51, ("Interpretation
46") in the second quarter retroactive to January 1, 2003. The first
quarter Form 10-Q dated March 31, 2003 will be restated when the first
quarter Form 10-Q for 2004 is filed. The implementation of Interpretation
46 does not have an impact on earnings per share from continuing
operations.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1, 2002
and completed its determination of the goodwill impairment of the
Commercial Printing segment in the fourth quarter of 2002. The transitional
impairment of $111.7 million was recorded as the cumulative effect of a
change in accounting principle as of January 1, 2002 and required the
restatement of the condensed consolidated statement of operations for the
nine months ended September 30, 2002.
The Company adopted SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
on January 1, 2003. The provisions of SFAS No. 145 required the
reclassification of the loss from the early extinguishment of debt that was
recorded as an extraordinary item in 2002 into income from continuing
operations and the restatement of the condensed consolidated statements of
operations for the nine months ended September 30, 2002.
The table below is a reconciliation of loss per share for the nine
months ended September 30, 2002 as originally reported and the loss per
share as restated.
SEPTEMBER 30, 2002
AS ORIGINALLY IMPACT OF IMPACT OF SEPTEMBER 30, 2002
REPORTED SFAS 142 SFAS 145 RESTATED
------------------ --------- --------- ------------------
Loss per share--basic and diluted:
Continuing operations................ $(1.34) $ -- $(0.21) $(1.55)
Discontinued operations.............. (0.29) -- -- (0.29)
Extraordinary items.................. (0.21) -- 0.21 --
Cumulative effect of a change in
accounting principle............... -- (2.35) -- (2.35)
------ ------ ------ ------
Loss per share....................... $(1.84) $(2.35) $ -- $(4.19)
====== ====== ====== ======
4
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation 46. Interpretation 46
introduced a new consolidation model, the variable interest model, which
determines control and whether an entity is to be consolidated based on
potential variability in gains and losses of the entity. Variable interests
are contractual, ownership or other interests in an entity that expose its
holders to the risks and rewards of the variable interest entity ("VIE").
Variable interests include equity investments, loans, leases, derivatives,
guarantees and other instruments whose values change with changes in the
VIE's assets.
The Company leases printing equipment from a bankruptcy-remote trust
(the "Trust") under an operating lease. At the end of the lease, the
Company has the option to purchase the equipment for the aggregate
outstanding loan balance of the Trust or to direct the sale of the
equipment to a third party. If the Company were to direct the sale of the
equipment, it has guaranteed the Trust that the proceeds from the sale will
be at least 60.9% of the original fair value of the leased assets which
could be as much as $11.6 million. If the sales proceeds exceed the
guaranteed value of the leased assets, the Company retains the excess.
The Company is the primary beneficiary of this Trust, a VIE, and is
therefore required by Interpretation 46 to consolidate the Trust in its
financial statements. The Company adopted Interpretation 46 effective
January 1, 2003 and consolidated equipment valued at $18.1 million, net of
accumulated depreciation, and debt of $18.5 million and recorded a charge
of $0.3 million, net of tax, as a cumulative effect of a change in
accounting principle.
3. STOCK-BASED COMPENSATION
Stock options and other stock-based compensation awards are accounted
for using the intrinsic value method prescribed by Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees.
This method requires compensation expense to be recognized for the excess
of the quoted market price of the stock at the grant date or the
measurement date over the amount an employee must pay to acquire the stock.
The following table illustrates the pro forma effect of net income
(loss) and earnings (loss) per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, for the three and nine months ended September 30, 2003 and
2002 (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2003 2002 2003 2002
------ --------- ------ ---------
Net income (loss):
As reported......................... $2,172 $ (27,953) $2,617 $(199,531)
Pro forma........................... $1,131 $ (28,836) $ (74) $(202,405)
Earnings (loss) per share--diluted:
As reported......................... $ 0.04 $ (0.59) $ 0.05 $ (4.19)
Pro forma........................... $ 0.02 $ (0.60) $(0.01) $ (4.25)
The pro forma effect on net income (loss) and earnings (loss) per
share--diluted of expensing the estimated fair value of stock options is
not necessarily representative of the effect on reported earnings for
future years due to the vesting period of the stock options and the
potential for issuance of additional stock options in future years.
5
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ACQUISITION
In August 2002, the Company acquired the in-house printing and
fulfillment operations of American Express Company, located in Minneapolis,
Minnesota, for $1.3 million. This acquisition has been accounted for as a
purchase; accordingly, its assets and liabilities have been recorded at
estimated fair value with the excess of the purchase price over the
estimated fair value recorded as goodwill. The consolidated financial
statements reflect the operations of the acquired business since August
2002. Goodwill recorded as a result of this acquisition was $0.8 million.
Additional consideration will be paid if annual revenues during each year
of the five year period commencing on January 1, 2003 total a specified
amount. This may result in additional consideration of up to $17.5 million.
Sales included in the three and nine months ended September 30, 2003 were
$14.9 million and $45.0 million, respectively.
5. ASSETS HELD FOR SALE
The Company sold the filing products division of the Envelope segment
in August 2002 and certain digital graphics operations of the Commercial
Printing segment in March 2003. The following table presents the sales and
operating income of these operations included in the condensed consolidated
statements of operations for the three and nine months ended September 30,
2003 and 2002 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- --------------------
2003 2002 2003 2002
------ ------ ------ -------
Sales......................................... -- $9,746 $2,872 $53,038
Operating income.............................. -- $ 717 $ 167 $ 4,761
6. SUPPLEMENTAL BALANCE SHEET INFORMATION
INVENTORIES
The Company's inventories by major category are as follows (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Raw materials........................................... $ 29,596 $ 32,515
Work in process......................................... 23,255 25,832
Finished goods.......................................... 51,219 50,854
-------- --------
104,070 109,201
Reserves................................................ (6,076) (5,668)
-------- --------
$ 97,994 $103,533
======== ========
6
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consists of
the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Land and land improvements.............................. $ 20,273 $ 19,529
Buildings and improvements.............................. 110,642 105,646
Machinery and equipment................................. 489,905 463,896
Furniture and fixtures.................................. 15,392 15,178
Construction in progress................................ 14,111 5,510
--------- ---------
650,323 609,759
Accumulated depreciation................................ (260,232) (230,135)
--------- ---------
$ 390,091 $ 379,624
========= =========
The December 31, 2002 balances do not include the impact of the
implementation of Interpretation 46 (see Note 2). Machinery and equipment
at September 30, 2003 includes approximately $16 million of assets in a VIE
that was consolidated on January 1, 2003.
COMPREHENSIVE INCOME (LOSS)
A summary of the comprehensive income (loss) is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2003 2002 2003 2002
------ -------- ------- ---------
Net income (loss)........................ $2,172 $(27,953) $ 2,617 $(199,531)
Currency translation adjustment, net... (655) (4,778) 17,832 (347)
------ -------- ------- ---------
Comprehensive income (loss).............. $1,517 $(32,731) $20,449 $(199,878)
====== ======== ======= =========
7. LONG-TERM DEBT
At September 30, 2003 and December 31, 2002, long-term debt consisted
of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Senior Secured Credit Facility, due 2005................ $ 84,710 $101,932
Senior Notes, due 2012.................................. 350,000 350,000
Senior Subordinated Notes, due 2008..................... 300,000 300,000
Other................................................... 26,637 11,967
-------- --------
761,347 763,899
Less current maturities................................. (2,733) (2,961)
-------- --------
Long-term debt...................................... $758,614 $760,938
======== ========
7
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. LONG-TERM DEBT (CONTINUED)
The December 31, 2002 balances do not include the impact of the
implementation of Interpretation 46 (see Note 2). Other long-term debt at
September 30, 2003 includes debt of $17.4 million of a VIE that was
consolidated on January 1, 2003.
During 2002, the Company expensed deferred financing costs in
connection with the early payment of the term loans of the bank credit
facility which was replaced with a new asset based credit facility in June
2002. The write-off of $16.5 million is reported as loss from the early
extinguishment of debt in the condensed consolidated statement of
operations for the nine months ended September 30, 2002.
The Senior Notes and the Senior Subordinated Notes are guaranteed by
Mail-Well, Inc. and all of its subsidiaries (the "Guarantor Subsidiaries")
all of which are wholly owned. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
ability of the Guarantor Subsidiaries to transfer funds to the issuing
subsidiary in the form of cash dividends, loans or advances, other than
ordinary legal restrictions under corporate law or fraudulent transfer and
bankruptcy laws.
As of September 30, 2003, the Company was in compliance with all of the
covenants of its various debt agreements.
8. RESTRUCTURING AND OTHER CHARGES
The Company has completed most of the restructuring programs initiated
in June 2001 which continued during 2002 and into 2003. In 2003, the
Company has incurred expenses related to these restructuring programs that
could not be accrued and are the result of the continuation of actions to
rationalize and realign capacity. The restructuring expenses related to
these programs recorded during the nine-month period ended September 30,
2003 were $0.9 million. These expenses were as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
PRINTING ENVELOPE PRODUCTS TOTAL
---------- -------- -------- ------
Employee separation and related expenses....... $ 750 $ 62 $ (79) $ 733
Equipment moves................................ 943 -- -- 943
Other exit costs............................... 92 (500) (56) (464)
------ ----- ----- ------
Total...................................... $1,785 $(438) $(135) $1,212
====== ===== ===== ======
COMMERCIAL PRINTING. In the fourth quarter of 2002, Commercial Printing
announced the closure of its web printing operation in Indianapolis,
Indiana and the redeployment of the two web presses and related equipment
to St. Louis, Missouri and Baltimore, Maryland. A substantial portion of
the cost to dismantle, move and reinstall this equipment has been incurred
during 2003.
The other restructuring charges incurred in 2003 primarily relate to
plans initiated in the fourth quarter of 2002 to right size printing plants
in the Northwest.
ENVELOPE. Envelope was able to sub-lease a facility idled as a result
of its consolidation program sooner than estimated when the liability under
the lease contract was established. Accordingly, $0.5 million of the
reserve recorded for this lease was reversed.
PRINTED OFFICE PRODUCTS. In the fourth quarter of 2002, Printed Office
Products closed its business forms plant in Clearwater, Florida and
consolidated its production in plants located in Fairhope,
8
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
Alabama and Marshall, Texas. The employee separation and related expenses
and other exit costs paid as a result of this consolidation were less than
originally estimated.
A summary of the activity charged to the 2002 restructuring liability
during the nine months ended September 30, 2003 is as follows (in
thousands):
PRINTED
COMMERCIAL OFFICE
PRINTING PRODUCTS TOTAL
---------- -------- -------
Balance, December 31, 2002.......................... $ 3,990 $ 653 $ 4,643
Payments for severance.......................... (189) (39) (228)
Payments for lease termination and property exit
costs......................................... (1,946) (47) (1,993)
Payments for other exit costs................... (194) (260) (454)
Reversal of unused accrual...................... (54) (152) (206)
------- ----- -------
Balance, September 30, 2003......................... $ 1,607 $ 155 $ 1,762
======= ===== =======
A summary of the activity charged to the 2001 restructuring liability
during the nine months ended September 30, 2003 is as follows (in
thousands):
COMMERCIAL
ENVELOPE PRINTING TOTAL
-------- ---------- ------
Balance, December 31, 2002............................ $2,518 $ 449 $2,967
Payments for severance............................ (343) -- (343)
Payments for lease termination and property exit
costs........................................... (770) (417) (1,187)
Reversal of unused accrual........................ (500) -- (500)
------ ----- ------
Balance, September 30, 2003........................... $ 905 $ 32 $ 937
====== ===== ======
9. DISCONTINUED OPERATIONS
The gain on disposal of discontinued operations as of September 30,
2003 reflects a change in the tax impact of the disposition of the
Company's prime label business, which was sold in May 2002.
9
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. INCOME (LOSS) PER SHARE
Basic income (loss) per share excludes dilution and is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted income (loss) per share reflect the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised. A reconciliation of the amounts included
in the computation of basic income (loss) per share and diluted income
(loss) per share is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2003 2002 2003 2002
------- -------- ------- --------
Numerator:
Numerator for basic and diluted income (loss)
per share--income (loss) from continuing
operations.................................. $ 2,172 $(22,149) $ 1,020 $(73,825)
======= ======== ======= ========
Denominator:
Denominator for basic income (loss) per
share--weighted average shares.............. 47,689 47,668 47,677 47,665
Effects of dilutive securities:
Stock options and restricted stock........ 717 -- 591 --
------- -------- ------- --------
Denominator for diluted income (loss) per
share--adjusted weighted average shares..... 48,406 47,668 48,268 47,665
======= ======== ======= ========
Income (loss) for continuing operations per
share:
Basic..................................... $ 0.05 $ (0.46) $ 0.02 $ (1.55)
======= ======== ======= ========
Diluted................................... $ 0.04 $ (0.46) $ 0.02 $ (1.55)
======= ======== ======= ========
During the three and nine months ended September 30, 2002, interest,
net of tax, on Convertible Notes in the amount of $1.2 million and $3.6
million, respectively, and shares of 7,319,000 that would have been issued
upon assumed conversion of these Convertible Notes were excluded from the
calculation of diluted loss per share due to the antidilutive effect on
loss per share. In addition, the outstanding options and shares of
restricted stock in the three and nine months ended September 30, 2003 in
the amount of 6,181,000 and 6,310,000 common shares, respectively, were
excluded from the calculation of diluted income (loss) per share because
the effect would have been antidilutive. The options and shares of
restricted stock excluded in 2002 totaled 6,943,000.
11. SEGMENT INFORMATION
The Company operates in three principal operating segments. The
Commercial Printing segment specializes in high impact printing, which
includes a wide range of premium printed products such as annual reports,
car brochures and brand marketing collateral for national and regional
customers, and general commercial printing for local and regional
customers. The Envelope segment manufactures customized and stock envelopes
for billing and remittance and direct mail advertising. The Envelope
segment is also a producer of specialty packaging products and a
manufacturer of stock products for the resale market. The Printed Office
Products segment produces customized and stock labels, mailers, and printed
business documents which are sold to small and mid-size businesses
generally through distributors of office products. Intercompany sales for
the three and nine months ended September 30, 2003 were $5.4 million and
$12.9 million, respectively. Intercompany sales for the three and nine
months ended September 30, 2002 were $1.7 million and $11.0 million,
respectively. These amounts are eliminated in consolidation and excluded
from reported net sales.
10
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. SEGMENT INFORMATION (CONTINUED)
The following tables present certain business segment information for
the three and nine months ended September 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ---------------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
Net sales:
Commercial Printing.............. $195,090 $194,659 $ 579,690 $ 559,140
Envelope......................... 167,608 183,352 517,510 579,495
Printed Office Products.......... 49,520 50,709 150,163 154,534
-------- -------- ---------- ----------
Total............................ $412,218 $428,720 $1,247,363 $1,293,169
======== ======== ========== ==========
Operating income (loss)(a):
Commercial Printing.............. $ 6,539 $ (5,586) $ 11,230 $ (17,549)
Envelope......................... 16,037 10,415 47,930 29,280
Printed Office Products.......... 3,996 4,865 12,618 13,540
Corporate........................ (4,549) (25,666) (14,853) (72,166)
-------- -------- ---------- ----------
Total............................ $ 22,023 $(15,972) $ 56,925 $ (46,895)
======== ======== ========== ==========
Restructuring, impairments and other
charges:
Commercial Printing.............. $ 474 $ 8,643 $ 1,785 $ 11,098
Envelope......................... (458) 8,376 (438) 27,935
Printed Office Products.......... 60 303 (135) 1,350
Corporate........................ -- 22,086 -- 58,566
-------- -------- ---------- ----------
Total............................ $ 76 $ 39,408 $ 1,212 $ 98,949
======== ======== ========== ==========
- --------
(a) Operating income (loss) is net of all costs and expenses directly
related to the segment involved. Corporate expenses are net of certain
supplier rebates and include corporate general and administrative
expenses, lease expenses and other miscellaneous expenses. Corporate
expenses in 2002 include the loss from the early extinguishment of
debt, impairment loss on assets held for sale and impairment loss on
operations formerly held for sale.
On October 27, 2003, the Company announced a reorganization of its
management structure and manufacturing operations. Under the new
organization, operations that sell directly to end users of the Company's
products will be managed separately from those operations that sell the
Company's products to distributors, wholesalers or other value-added
resellers. The Company anticipates a change in its operating segments as a
result of this reorganization.
12. CONTINGENCIES
The Company is party to various legal actions that are ordinary and
incidental to its business. While the outcome of legal actions cannot be
predicted with certainty, management believes the outcome of these various
proceedings will not have a material adverse effect on the Company's
consolidated financial condition or results of operations.
The Company's income, sales and use and other tax returns are routinely
subject to audit by various taxing authorities. The Company believes that
the resolution of any matters raised during such audits will not have a
material adverse effect on the Company's financial position or results of
operations.
11
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In March 2002, Mail-Well I Corporation ("Issuer" or "MWI"), the
Company's wholly-owned subsidiary, and the only direct subsidiary of the
Company, issued $350 million aggregate principal amount of 9 5/8% Senior
Notes ("Senior Notes") due in 2012. The Senior Notes are guaranteed by all
of the subsidiaries (the "Guarantor Subsidiaries") of MWI, all of which are
wholly owned, and by Mail-Well, Inc. ("Parent Guarantor"). The guarantees
are joint and several, full, complete and unconditional. There are no
material restrictions on the ability of the Guarantor Subsidiaries to
transfer funds to MWI in the form of cash dividends, loans or advances,
other than ordinary legal restrictions under corporate law, fraudulent
transfer and bankruptcy laws.
In December 1998, MWI issued $300 million aggregate principal amount of
8 3/4% Senior Subordinated Notes ("Senior Subordinated Notes") due in 2008.
The Senior Subordinated Notes are guaranteed by Guarantor Subsidiaries and
by the Parent Guarantor. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
ability of the Guarantor Subsidiaries to transfer funds to MWI in the form
of cash dividends, loans or advances, other than ordinary legal
restrictions under corporate law, fraudulent transfer and bankruptcy laws.
The following condensed consolidating financial information illustrates
the composition of the Parent Guarantor, Issuer, and Guarantor
Subsidiaries. The Issuer and the Guarantor Subsidiaries comprise all of the
direct and indirect subsidiaries of the Parent Guarantor. Management has
determined that separate complete financial statements would not provide
additional material information that would be useful in assessing the
financial composition of the Guarantor Subsidiaries.
Investments in subsidiaries are accounted for under the equity method,
wherein the investor company's share of earnings and income taxes
applicable to the assumed distribution of such earnings are included in net
income. In addition, investments increase in the amount of permanent
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries. The elimination entries remove the equity method
investment in subsidiaries and the equity in earnings of subsidiaries,
intercompany payables and receivables and other transactions between
subsidiaries.
12
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
September 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ --------- ------------
Current assets:
Cash and cash equivalents............ $ -- $ (229) $ 1,323 $ -- $ 1,094
Accounts receivable, net............. -- 47,385 182,504 -- 229,889
Inventories, net..................... -- 38,626 59,368 -- 97,994
Other current assets................. -- 25,360 10,871 -- 36,231
------- -------- -------- --------- ----------
Total current assets............... -- 111,142 254,066 -- 365,208
Investment in subsidiaries............. 63,666 16,347 -- (80,013) --
Property, plant and equipment, net..... -- 97,877 292,214 -- 390,091
Goodwill and other intangible assets,
net................................... -- 84,895 230,311 -- 315,206
Note receivable from subsidiaries...... -- 603,100 -- (603,100) --
Other assets, net...................... -- 31,178 7,050 -- 38,228
------- -------- -------- --------- ----------
Total assets........................... $63,666 $944,539 $783,641 $(683,113) $1,108,733
======= ======== ======== ========= ==========
Current liabilities:
Accounts payable..................... $ -- $ 27,869 $124,443 $ -- $ 152,312
Other current liabilities............ -- 55,009 56,452 -- 111,461
Intercompany payable (receivable).... -- 39,361 (39,361) -- --
Current portion of long-term debt.... -- 1,772 961 -- 2,733
------- -------- -------- --------- ----------
Total current liabilities.......... -- 124,011 142,495 -- 266,506
Long-term debt......................... -- 753,434 5,180 -- 758,614
Note payable to Issuer................. -- -- 603,100 (603,100) --
Deferred income tax (asset)
liability............................. -- (9,167) 12,981 -- 3,814
Other long-term liabilities............ -- 12,595 3,538 -- 16,133
------- -------- -------- --------- ----------
Total liabilities.................. -- 880,873 767,294 (603,100) 1,045,067
Shareholders' equity................... 63,666 63,666 16,347 (80,013) 63,666
------- -------- -------- --------- ----------
Total liabilities and shareholders'
equity................................ $63,666 $944,539 $783,641 $(683,113) $1,108,733
======= ======== ======== ========= ==========
13
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ ----------- ------------
Current assets:
Cash and cash equivalents......... $ -- $ 1,957 $ 693 $ -- $ 2,650
Accounts receivable, net.......... -- 54,274 165,650 -- 219,924
Inventories, net.................. -- 42,805 60,728 -- 103,533
Net assets held for sale.......... -- -- 4,492 -- 4,492
Other current assets.............. -- 32,462 13,300 -- 45,762
------- ---------- --------- ----------- ----------
Total current assets............ -- 131,498 244,863 -- 376,361
Investment in subsidiaries.......... 42,768 417,049 -- (459,817) --
Property, plant and equipment,
net................................ -- 119,737 259,887 -- 379,624
Goodwill and other intangible
assets, net........................ -- 85,097 223,850 -- 308,947
Note receivable from subsidiaries... -- 603,100 -- (603,100) --
Other assets, net................... -- 34,030 8,405 -- 42,435
------- ---------- --------- ----------- ----------
Total assets........................ $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
Current liabilities:
Accounts payable.................. $ -- $ 41,057 $ 110,873 $ -- $ 151,930
Other current liabilities......... -- 68,128 53,012 -- 121,140
Intercompany payable
(receivable)..................... -- 507,381 (507,381) -- --
Current portion of long-term
debt............................. -- 970 1,991 -- 2,961
------- ---------- --------- ----------- ----------
Total current liabilities....... -- 617,536 (341,505) -- 276,031
Long-term debt...................... -- 754,983 5,955 -- 760,938
Note payable to Issuer.............. -- -- 603,100 (603,100) --
Deferred income tax liabilities
(assets)........................... -- (38,269) 48,605 -- 10,336
Other long-term liabilities......... -- 13,493 3,801 -- 17,294
------- ---------- --------- ----------- ----------
Total liabilities............... -- 1,347,743 319,956 (603,100) 1,064,599
Shareholders' equity................ 42,768 42,768 417,049 (459,817) 42,768
------- ---------- --------- ----------- ----------
Total liabilities and shareholders'
equity............................. $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
14
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------- ------------
Net sales................................ $ -- $100,697 $311,521 $ -- $412,218
Cost of sales............................ -- 83,173 247,168 -- 330,341
------ -------- -------- ------- --------
Gross profit............................. -- 17,524 64,353 -- 81,877
Other operating expenses................. -- 15,388 44,390 -- 59,778
Restructuring and other charges.......... -- (458) 534 -- 76
------ -------- -------- ------- --------
Operating income (loss).................. -- 2,594 19,429 -- 22,023
Other expense (income):
Interest expense....................... -- 17,594 237 -- 17,831
Intercompany interest (income)
expense............................... -- (13,422) 13,422 -- --
Other expense.......................... -- 440 134 -- 574
------ -------- -------- ------- --------
Income (loss) from continuing operations
before income taxes and equity in
undistributed earnings of
subsidiaries............................ -- (2,018) 5,636 -- 3,618
Provision for income taxes............... -- (746) 2,192 -- 1,446
------ -------- -------- ------- --------
Income (loss) from continuing operations
before equity in undistributed earnings
of subsidiaries......................... -- (1,272) 3,444 -- 2,172
Equity in undistributed earnings of
subsidiaries............................ 2,172 3,444 -- (5,616) --
------ -------- -------- ------- --------
Net income (loss)........................ $2,172 $ 2,172 $ 3,444 $(5,616) $ 2,172
====== ======== ======== ======= ========
15
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales............................... $ -- $124,827 $303,893 $ -- $428,720
Cost of sales........................... -- 100,445 243,040 -- 343,485
-------- -------- -------- -------- --------
Gross profit............................ -- 24,382 60,853 -- 85,235
Operating expenses:
Selling, administrative and other..... 76 16,698 45,025 -- 61,799
Restructuring, asset impairments and
other charges........................ -- 31,077 8,331 -- 39,408
-------- -------- -------- -------- --------
Operating income (loss)................. (76) (23,393) 7,497 -- (15,972)
Other (income) expense:
Interest expense...................... 1,740 19,469 15,964 (18,498) 18,675
Other expense (income)................ (1,977) (15,108) 307 18,498 1,720
-------- -------- -------- -------- --------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries........................... 161 (27,754) (8,774) -- (36,367)
Provision (benefit) for income taxes.... -- (7,773) (6,445) -- (14,218)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations, before cumulative effect of
a change in accounting principle and
undistributed earnings of
subsidiaries........................... 161 (19,981) (2,329) -- (22,149)
Equity in undistributed earnings of
subsidiaries........................... (28,114) (8,133) -- 36,247 --
-------- -------- -------- -------- --------
Income from continuing operations before
cumulative effect of a change in
accounting principle................... (27,953) (28,114) (2,329) 36,247 (22,149)
Loss from discontinued operations....... -- -- 5,804 -- 5,804
-------- -------- -------- -------- --------
Net income (loss)....................... $(27,953) $(28,114) $ (8,133) $ 36,247 $(27,953)
======== ======== ======== ======== ========
16
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------- ------------
Net sales................................ $ -- $310,244 $937,119 $ -- $1,247,363
Cost of sales............................ -- 257,396 745,295 -- 1,002,691
------ -------- -------- ------- ----------
Gross profit............................. -- 52,848 191,824 -- 244,672
Operating expenses:
Selling, administrative and other...... -- 49,426 137,109 -- 186,535
Restructuring, asset impairments and
other charges......................... -- (458) 1,670 -- 1,212
------ -------- -------- ------- ----------
Operating income......................... -- 3,880 53,045 -- 56,925
Other (income) expense:
Interest expense....................... -- 53,852 311 -- 54,163
Intercompany interest (income)
expense............................... -- (40,778) 40,778 -- --
Other expense.......................... -- 415 648 -- 1,063
------ -------- -------- ------- ----------
Income (loss) from continuing operations,
before income taxes and undistributed
earnings of subsidiaries................ -- (9,609) 11,308 -- 1,699
Provision (benefit) for income taxes..... -- (3,844) 4,523 -- 679
------ -------- -------- ------- ----------
Income (loss) from continuing operations,
before cumulative effect of a change in
accounting principle and undistributed
earnings of subsidiaries................ -- (5,765) 6,785 -- 1,020
Equity in undistributed earnings of
subsidiaries............................ 2,617 6,785 -- (9,402) --
------ -------- -------- ------- ----------
Income from continuing operations before
cumulative effect of a change in
accounting principle.................... 2,617 1,020 6,785 (9,402) 1,020
Loss (gain) from discontinued
operations.............................. -- (1,919) -- -- (1,919)
Cumulative effect of a change in
accounting principle.................... -- 322 -- -- 322
------ -------- -------- ------- ----------
Net income (loss)........................ $2,617 $ 2,617 $ 6,785 $(9,402) $ 2,617
====== ======== ======== ======= ==========
17
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ -------- ------------
Net sales............................. $ -- $ 403,207 $ 889,962 $ -- $1,293,169
Cost of sales......................... -- 327,422 713,642 -- 1,041,064
--------- --------- --------- -------- ----------
Gross profit.......................... -- 75,785 176,320 -- 252,105
Other operating expenses.............. 110 57,250 142,691 -- 200,051
Restructuring and other charges....... -- 74,321 24,628 -- 98,949
--------- --------- --------- -------- ----------
Operating income (loss)............... (110) (55,786) 9,001 -- (46,895)
Other expense (income):
Interest expense.................... 5,216 57,355 44,344 (54,362) 52,553
Other expense (income).............. (5,931) (46,796) 426 54,362 2,061
--------- --------- --------- -------- ----------
Income (loss) from continuing
operations before income taxes and
equity in undistributed earnings of
subsidiaries......................... 605 (66,345) (35,769) -- (101,509)
Income tax benefit.................... -- (16,387) (11,297) -- (27,684)
--------- --------- --------- -------- ----------
Income (loss) from continuing
operations before equity in
undistributed earnings of
subsidiaries......................... 605 (49,958) (24,472) -- (73,825)
Equity in undistributed earnings of
subsidiaries......................... (200,136) (150,178) -- 350,314 --
--------- --------- --------- -------- ----------
Income (loss) from continuing
operations........................... (199,531) (200,136) (24,472) 350,314 (73,825)
Loss from discontinued operations..... -- -- 13,958 -- 13,958
Cumulative effect of a change in
accounting principle................. -- -- 111,748 -- 111,748
--------- --------- --------- -------- ----------
Net income (loss)..................... $(199,531) $(200,136) $(150,178) $350,314 $ (199,531)
========= ========= ========= ======== ==========
18
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
September 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows from (used in) operating
activities................................... $ -- $ (1,057) $ 34,691 $ 33,634
Cash flows from investing activities:
Capital expenditures........................ -- (1,111) (18,611) (19,722)
Proceeds from divestitures, net............. -- 3,864 -- 3,864
Intercompany advances....................... (16) 15,848 (15,832) --
Proceeds from the sale of assets............ -- -- 658 658
--------- ----------- -------- -----------
Net cash provided by (used in) investing
activities................................. (16) 18,601 (33,785) (15,200)
Cash flows from financing activities:
Proceeds from the issuance of common
stock...................................... 16 -- -- 16
Proceeds from long-term debt................ -- 1,384,781 -- 1,384,781
Repayments of long-term debt................ -- (1,404,027) (1,212) (1,405,239)
Capitalized loan fees....................... -- (484) -- (484)
--------- ----------- -------- -----------
Net cash provided by (used in) financing
activities................................. 16 (19,730) (1,212) (20,926)
Effect of exchange rate changes on cash....... -- -- 936 936
--------- ----------- -------- -----------
Net change in cash and cash equivalents....... -- (2,186) 630 (1,556)
Balance at beginning of year.................. -- 1,957 693 2,650
--------- ----------- -------- -----------
Balance at end of year........................ $ -- $ (229) $ 1,323 $ 1,094
========= =========== ======== ===========
19
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
September 30, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- --------- ------------ ------------
Cash flows from operating activities............. $(18) $ (41,419) $ 49,182 $ 7,745
Cash flows from investing activities:
Acquisition costs, net of cash acquired........ -- (2,552) -- (2,552)
Capital expenditures........................... -- (2,762) (24,181) (26,943)
Proceeds from divestitures, net................ -- 128,649 -- 128,649
Proceeds from sale of property, plant &
equipment..................................... -- 5,940 327 6,267
---- --------- --------- ---------
Net cash provided by (used in) investing
activities.................................... -- 129,275 (23,854) 105,421
Cash flows from financing activities:
Proceeds from issuance of common stock......... 18 -- -- 18
Proceeds from issuance of long-term debt....... -- 1,006,154 -- 1,006,154
Repayments of long-term debt................... -- (939,683) (11,394) (951,077)
Capitalized loan fees.......................... -- (17,402) -- (17,402)
---- --------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 18 49,069 (11,394) 37,693
Effect of exchange rate changes on cash and cash
equivalents..................................... -- -- (1,088) (1,088)
Cash flows from discontinued operations.......... -- -- (10,829) (10,827)
---- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... -- 49,069 2,019 138,944
Cash and cash equivalents at beginning of year... -- -- 894 894
---- --------- --------- ---------
Cash and cash equivalents at end of year......... $ -- $ 136,925 $ 2,913 $ 139,838
==== ========= ========= =========
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
We are one of North America's largest printing companies. Our mission
is to produce products and provide services that help our customers deliver
their messages more effectively. We are one company organized into three
business segments:
* Envelopes
* Commercial Printing
* Printed Office Products
We believe we are the world's largest manufacturer of envelopes. We
produce approximately 38 billion envelopes annually in our 39 envelope
manufacturing facilities located throughout the United States and Canada.
Approximately 84% of these envelopes are customized specifically for our
customers for use in billing and remittance, direct mail advertising and
specialty packaging. The remaining 16% are stock envelopes sold into the
resale market.
We are one of the largest commercial printers in the United States. We
operate 35 printing plants located strategically throughout the United
States and one in Canada. We specialize in high impact printing, which
includes a wide range of premium printed products such as annual reports,
car brochures and brand marketing collateral, for national and regional
customers, and general commercial printing for local and regional
customers.
We are also a leading domestic supplier of customized and stock labels,
mailers and printed business documents to small and mid-size businesses
generally through independent distributors of office products. Our Printed
Office Products segment operates 11 manufacturing plants strategically
located throughout the United States.
We have substantially completed the restructuring of Mail-Well that
began in June 2001. This restructuring included the following:
* The consolidation of our best envelope equipment, expertise and
operational capabilities into 39 facilities, down from 50 in 2000.
* The consolidation of our printing operations in the Philadelphia
market into one facility, the closure of our printing operation in
New York City, and the consolidation of our web printing plant in
Indianapolis, Indiana into our web printing plants in St. Louis,
Missouri and Baltimore, Maryland.
* The consolidation of the Denver, Colorado and Clearwater, Florida
manufacturing facilities into other plants of our Printed Office
Products segment.
* The sale of Curtis 1000 (a distributor of business documents and
envelopes), our prime label business, the filing products division of
our Envelope segment and certain of the digital graphics operations
of our Commercial Printing segment.
* The restructuring of our debt.
Paper is our most significant raw material. We purchase approximately
500,000 tons of paper annually for our businesses. Prices of uncoated
papers, which are the principal grades of paper used to manufacture
envelopes, increased approximately 10% in the fourth quarter of 2002.
Prices of coated papers, which are used principally in commercial printing,
did not increase in 2002 and have remained unchanged in 2003. Historically,
changes in paper pricing generally have not affected the operating results
of our Commercial Printing segment because we have been able to pass on
paper price increases to our customers. Paper pricing, however, impacts the
operating margins of our Envelope segment. When paper prices are rising,
operating margins on our envelope products tend to be lower because we
generally are not able to increase our prices as quickly as paper prices
increase. The
21
market for uncoated papers softened in the third quarter. As a result, the
price of uncoated papers is no longer negatively impacting operating
margins of our Envelope segment.
CONSOLIDATED RESULTS OF OPERATIONS
In August 2002, we acquired the in-house printing and fullfillment
operations of American Express Company. The acquisition has been accounted
for as a purchase transaction, which impacts comparability of our financial
statements because the results of these operations are included in the
consolidated results from the date acquired. Where appropriate, we have
noted the impact of this acquisition in the following discussions of our
results.
The tables and discussions of sales and operating income that follow
present reported amounts as well as "ongoing" amounts. Ongoing sales
exclude sales of the filing products division of our Envelope segment that
was sold in August 2002 and the sales of certain digital graphics
operations of our Commercial Printing segment that were held for sale at
December 2002 and sold in March 2003. Ongoing operating income excludes the
operating income of the operations sold and restructuring and other charges
incurred in 2002 and during 2003. Since our planned dispositions are now
complete and we have completed our restructuring programs, we believe that
this analysis provides the most meaningful basis for an understanding of
our results during the third quarter and nine months ended September 30,
2003.
Demand for many of our products, especially printed advertising and
direct mail promotions, remain depressed, and the market for traditional
business forms continues to decline. This has led to overcapacity in our
industry and significant competitive pricing pressures. We do not expect
internal growth or increases in margins, especially in the Envelope
segment, until the markets we serve, particularly advertising and direct
mail, recover.
In October 2003, Congress instituted a federal "Do Not Call" program,
which our industry believes will increase demand for printed advertising
and direct mail as our customers shift promotional spending from
telemarketing to direct mail to reach their prospective customers. The
Federal Trade Commission continues to operate the registry despite
litigation brought to challenge its legality on regulatory and
constitutional grounds. In addition, our restructuring and other cost
reduction initiatives have enabled us to mitigate the impact of the
downturn in our markets and position us to benefit from improvements in our
markets when they occur. In 2003, we began a "Total Customer Solutions"
initiative to align the capabilities of our three operating segments to
better service the needs of customers who purchase a variety of the
products and services we provide. We also initiated "Mobilization", a
comprehensive program to actively involve all of our employees in improving
service, quality, efficiency and innovation. We believe all of these
factors, both external and internal, have improved our business during 2003
and will continue to do so in the fourth quarter, in 2004 and beyond.
NET SALES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ---------------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
(IN THOUSANDS)
Ongoing................................ $412,218 $418,974 $1,244,491 $1,240,131
Filing products division.......... -- 6,330 -- 42,340
Digital graphics operations....... -- 3,416 2,872 10,698
-------- -------- ---------- ----------
Reported............................... $412,218 $428,720 $1,247,363 $1,293,169
======== ======== ========== ==========
Reported sales in the third quarter of 2003 were $16.5 million, or
3.8%, lower than in the third quarter of 2002 and during the nine months
ended September 30, 2003 were $45.8 million, or 3.5%, lower than during the
comparable period of 2002. Excluding the sales of the filing products
division sold in August 2002 and sales of the digital graphics operations
that were sold in March 2003, sales of
22
our ongoing operations decreased $6.8 million, or 1.6%, in the third
quarter of 2003 and increased $4.4 million, or 0.4%, during the nine months
ended September 30, 2003 from the comparable periods of 2002. Significant
factors influencing the ongoing sales of our business segments during the
three and nine months ended September 30, 2003 were as follows:
* Envelope sales were $9.4 million lower in the third quarter of 2003
compared to the third quarter of 2002. On a year to date basis,
Envelope sales were $19.6 million lower than the comparable period of
2002. Approximately 60% of this revenue decline in the third quarter
was due to a decline in units shipped and the remaining 40% was due
to lower average selling prices. On a year to date basis volume made
up 52% of the decline and lower average selling prices accounted for
48%. We believe that overcapacity in this industry has lead to
significant price competition. A portion of our volume decline is the
result of our not reducing prices sufficiently to retain certain low
margin business.
* Sales of the Commercial Printing segment were $3.8 million higher in
the third quarter of 2003 and $28.4 million higher during the nine
months ended September 30, 2003 than the comparable periods of 2002.
These increases were primarily due to the acquisition completed in
August 2002, which contributed sales of $14.9 million during the
third quarter and $45.0 million on a year to date basis, partially
offset by the sales lost as a result of the closure of our printing
facility in New York City in the third quarter of 2002.
* Sales of Printed Office Products decreased $1.2 million in the third
quarter of 2003 and $4.4 million on a year to date basis from the
comparable periods of 2002 primarily due to lower sales of multi-ply
traditional business forms and lower average selling prices due to
competitive pricing pressures.
RESTRUCTURING EXPENSES
As mentioned, we have completed most of the restructuring programs
initiated in June 2001 and continued during 2002 and into 2003. In 2003, we
have incurred expenses related to these restructuring programs that could
not be accrued and are the result of the continuation of actions to
rationalize and realign capacity. We continually evaluate opportunities to
improve our operations and anticipate additional restructuring charges in
the fourth quarter of approximately $1.0 million.
Restructuring expenses recorded during the nine months ended September
30, 2003 were $1.2 million, all of which related to restructuring programs
initiated prior to 2003.
PRINTED
COMMERCIAL OFFICE
PRINTING ENVELOPE PRODUCTS TOTAL
---------- -------- -------- ------
(IN THOUSANDS)
Employee separation and related expenses....... $ 750 $ 62 $ (79) $ 733
Equipment moves................................ 943 -- -- 943
Other exit costs............................... 92 (500) (56) (464)
------ ----- ----- ------
Total...................................... $1,785 $(438) $(135) $1,212
====== ===== ===== ======
COMMERCIAL PRINTING. In the fourth quarter of 2002, Commercial Printing
announced the closure of its web printing operation in Indianapolis and the
redeployment of the two web presses and related equipment to St. Louis and
Baltimore. A substantial portion of the cost to dismantle, move and
reinstall this equipment has been incurred during 2003.
The other restructuring charges incurred in 2003 relate primarily to
plans initiated in the fourth quarter of 2002 to right size our printing
plants in the Northwest.
ENVELOPE. Envelope was able to sub-lease a facility idled as a result
of its consolidation program sooner than estimated when the liability under
the lease contract was established. Accordingly, $0.5 million of the
reserve recorded for this lease was reversed.
23
PRINTED OFFICE PRODUCTS. In the fourth quarter of 2002, Printed Office
Products closed its business forms plant in Clearwater, Florida and
consolidated its production in plants located in Fairhope, Alabama and
Marshall, Texas. The employee separation and related expenses and other
exit costs paid as a result of this consolidation were less than originally
estimated.
OPERATING INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2003 2002 2003 2002
------- -------- ------- --------
(IN THOUSANDS)
Ongoing...................................... $22,099 $ 22,719 $57,970 $ 47,293
Assets held for sale..................... -- 717 167 4,761
Restructuring, impairments and other
charges................................ (76) (39,408) (1,212) (98,949)
------- -------- ------- --------
Reported..................................... $22,023 $(15,972) $56,925 $(46,895)
======= ======== ======= ========
Reported operating income in the third quarter of 2003 was $22.0
million, a $38.0 million improvement over the loss reported in the third
quarter of 2002. For the nine months ended September 30, 2003 operating
income was $56.9 million, a $103.8 million improvement over the loss
reported for the comparable period of 2002. Excluding the operating income
of the filing products division and digital graphics operations that have
been sold and restructuring, impairments and other charges, ongoing
operating income decreased $0.6 million in the third quarter of 2003 and
increased $10.7 million on a year to date basis over operating income in
the comparable periods of 2002.
* Ongoing operating income of our Envelope segment for the third
quarter was $3.0 million lower than the third quarter of 2002 and on
a year to date basis was $7.0 million below results in 2002. This
decline in operating income was due primarily to lower sales volume
and lower average selling prices.
* Commercial Printing's ongoing operating income improved $4.0 million
in the third quarter of 2003 and $19.4 on a year to date basis from
the comparable periods of 2002. The improvement in operating income
was attributed primarily to the results of the acquisition completed
in August 2002, the closure of our unprofitable printing operation in
New York City, and savings that have resulted from the restructuring
and other actions taken during 2002.
* The ongoing operating income of Printed Office Products for the third
quarter of 2003 was $1.1 million lower than the third quarter of 2002
and on a year to date basis was $2.4 million lower than 2002. This
decline in operating income reflects the impact of lower sales
partially offset by savings from the plant consolidations during
2002.
* Expenses associated with corporate services were higher in the third
quarter of 2003 and lower on a year to date basis. The increase in
the third quarter is primarily due to higher spending on employee
safety and training programs. On a year to date basis corporate
expenses are lower due to a reduction in workers' compensation
expense offset by lower supplier rebates and higher spending on the
employee safety and training programs.
* In 2002, we recorded a charge of $4.4 million to cover the estimated
cost of workers' compensation claims based on estimates provided by
our insurance actuary. This charge is reflected in the ongoing
results for the nine months ended September 30, 2002. In the third
quarter of 2003, our actuaries revised their estimate of the cost of
workers' compensation claims incurred prior to 2003 by $1.5 million.
This charge has been included in the ongoing results for the third
quarter.
24
INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
(IN THOUSANDS)
Total interest expense........................ $17,831 $18,675 $54,163 $58,123
Less: Allocated to discontinued operations.... -- -- -- (5,570)
------- ------- ------- -------
Reported interest expense..................... $17,831 $18,675 $54,163 $52,553
======= ======= ======= =======
Interest expense incurred during the third quarter of 2003 reflects our
average outstanding debt during the quarter of $777.7 million and a
weighted average interest rate of 8.44% compared to the average outstanding
debt of $856.1 million during the third quarter of 2002 and a weighted average
interest rate of 8.23%. Interest expense incurred during the nine months
ended September 30, 2003 reflects average outstanding debt of $797.6
million and a weighted average interest rate of 8.38% compared to the
average outstanding debt of $915.4 million during the comparable period of
2002 and a weighted average interest rate of 7.72%. The average outstanding
debt has decreased year over year due primarily to the application of the
proceeds from our divestitures to the repayment of debt. Our weighted
average interest increased in 2003 as a result of the issuance of $350
million of 9 5/8% senior notes on March 13, 2002 the proceeds of which were
used primarily to repay bank debt that accrued interest at a lower variable
rate, and in November 2002, our 5% convertible subordinated notes were
redeemed. In addition, total interest expense has been reduced in 2003 from
amounts recorded in 2002 as a result of the write-off of the deferred
financing costs associated with the bank credit facility that was
refinanced in June 2002.
Reported interest expense for the nine months ended September 30, 2003
was higher than in the nine months ended September 30, 2002 due to the
allocation of interest expense to discontinued operations in 2002. In 2002,
a portion of our interest expense was allocated to discontinued operations
based on the net assets of the discontinued operations relative to the net
assets of the Company as required by generally accepted accounting
principles. The net asset amounts used to allocate interest expense
exceeded the actual net proceeds received from the dispositions of the
discontinued operations.
INCOME TAXES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- -------------------
2003 2002 2003 2002
------ -------- ---- --------
(DOLLARS IN THOUSANDS)
Income tax expense (benefit).................... $1,446 $(14,218) $679 $(27,684)
Effective tax rate.............................. 40% 39% 40% 27%
The effective tax rate for 2003 is estimated to be 40%. The effective
tax rate for 2002 was lower than 2003 primarily due to the estimated
pre-tax loss in 2002 that increased the impact of nondeductible permanent
differences on the overall effective rate.
INCOME (LOSS) FROM CONTINUING OPERATIONS AND INCOME (LOSS) PER
SHARE--DILUTED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2003 2002 2003 2002
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Income (loss) from continuing operations....... $2,172 $(22,149) $1,020 $(73,825)
Income (loss) from continuing operations per
share--diluted............................... $ 0.04 $ (0.46) $ 0.02 $ (1.55)
25
Income from continuing operations in the third quarter of 2003 was
$24.3 million more than the loss recorded in the third quarter of 2002, and
for the nine months ended September 30, 2003, income from continuing
operations was a $74.8 million improvement over the loss reported during
the nine months ended September 30, 2002. The improvement in income from
continuing operations is due to the acquisition completed in August 2002,
the closure of our unprofitable operation in New York City, improved
operating performance, lower overhead, and significantly lower
restructuring and other charges. Interest expense was higher during the
nine months ended September 30, 2003 than during the comparable period of
2002. In addition, the $16.5 million loss on the early extinguishment of
debt recorded as an extraordinary item in the nine months ended September
30, 2002 was reclassified as a loss from continuing operations in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections.
LOSS (GAIN) ON DISPOSAL OF DISCONTINUED OPERATIONS
The gain on disposal of discontinued operations as of September 30,
2003 reflects an adjustment made prior to the third quarter to the tax
impact of the disposition of our prime label business, which was sold in
May 2002.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
We adopted Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("Interpretation 46") effective January
1, 2003. The implementation of Interpretation 46 required the Company to
consolidate a trust that is leasing equipment to the Company under an
operating lease. The effect of this consolidation was to increase net
property, plant and equipment by $18.1 million and total debt by $18.5
million on January 1, 2003. The cumulative effect of this change in
accounting principle recorded on January 1, 2003 was an after-tax charge of
$0.3 million at the time of adoption.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ----------------------
2003 2002 2003 2002
------ -------- ------ ---------
(DOLLARS IN THOUSANDS)
Net income (loss)............................. $2,172 $(27,953) $2,617 $(199,531)
Net income (loss) per share--diluted.......... $ 0.04 $ (0.59) $ 0.05 $ (4.19)
The net income and net income per share in the third quarter of 2003
and on a year to date basis reflect the improvement in income from
continuing operations in 2003 over the losses from continuing operations
recorded in 2002, the gain recorded on the disposal of discontinued
operations and the cumulative effect of a change in accounting principle
recorded upon the adoption of Interpretation 46.
The net loss and net loss per share reported in the third quarter of
2002 and for the nine months ended September 30, 2002 reflected the loss
from continuing operations, losses of $5.8 million and $14.0 million for
the three and nine months ended September 30, 2002, respectively, on
disposal of discontinued operations and the $111.7 million goodwill
impairment charge recorded as a cumulative effect of a change in accounting
principle as a result of the adoption of SFAS No. 142, Goodwill and Other
Intangible Assets.
26
BUSINESS SEGMENTS
ENVELOPE
SALES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
Ongoing................................... $167,608 $177,022 $517,510 $537,155
Filing products division.............. -- 6,330 -- 42,340
-------- -------- -------- --------
Reported.................................. $167,608 $183,352 $517,510 $579,495
======== ======== ======== ========
OPERATING INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- --------
(IN THOUSANDS)
Ongoing....................................... $15,579 $18,625 $47,492 $ 54,509
Filing products division.................. -- 166 -- 2,706
Restructuring expenses.................... 458 (8,376) 438 (27,935)
------- ------- ------- --------
Reported...................................... $16,037 $10,415 $47,930 $ 29,280
======= ======= ======= ========
Reported sales of the Envelope segment were $167.6 million in the third
quarter of 2003, $15.7 million below sales in the third quarter of 2002.
Excluding sales of the filing products division, which was sold in August
2002, the sales decline was $9.4 million, or 5.3%.
* Domestic sales of our direct mail and transactional envelopes were
down approximately $6.5 million, or 7.2%, in the third quarter.
Approximately 60% of this decline was related to volume and 40%
related to lower pricing. The decline in volume is due to lower
demand by our customers for transactional envelopes, lower sales to
direct mail customers and volume lost due to competitive pricing. Our
average selling price has decreased approximately 2% due to
competitive pricing pressures and lower sales of higher value added
products. Many of the price concessions we have made have been in
connection with long-term contracts we have with certain customers.
* Sales into the resale segment of the market were down approximately
$3.4 million, or 8.8%, due primarily to lower volume. Units sold were
down approximately 7.8%.
* Sales of our high strength specialty envelopes were down
approximately $2.2 million due to the planned reductions of certain
low margin business.
* Sales in Canada were $2.7 million higher in the third quarter,
however, excluding the favorable impact of foreign currency, sales in
Canada declined approximately $1.4 million, or 4.3%, due primarily to
lower volume.
Reported operating income of the Envelope segment in the third quarter
of 2003 was $16.0 million, $5.6 million higher than the third quarter of
2002. Excluding the operating income of the filing products division and
restructuring expenses, operating income was $3.0 million lower than the
third quarter of 2002.
* Lower sales reduced operating income by approximately $2.5 million.
Productivity gains and reductions in cost of materials were not
sufficient to offset the impact of lower volume.
* Fixed expenses increased approximately $1.2 million primarily due to
the relocation of our Sacramento facility and higher employee benefit
expenses.
27
* Operating income was increased $0.7 million by the strength of the
Canadian dollar during the third quarter.
Reported sales were $517.5 million for the nine months ended September
30, 2003, $62.0 million below sales during the comparable period of 2002.
Excluding sales of the filing products division, the sales decline was
$19.6 million, or 3.7%.
* Domestic sales of our direct mail and transactional envelopes
decreased approximately $18.1 million, or 6.7%. Lower volume
contributed to 52% of this decline and lower average selling prices
contributed the remaining 48%.
* Sales into the resale segment of the market decreased approximately
$4.8 million. Lower volume during the nine months ended September 30,
2003 contributed to 77% of this sales decline.
* Sales of our high strength specialty envelopes were down
approximately $3.7 million due to the planned reductions of certain
low margin business.
* Sales in Canada increased $7.0 million, however, excluding the
favorable effect of foreign currency, sales declined $2.6 million.
Approximately 60% of this decline was due to lower average selling
prices of products sold.
Reported operating income was $47.9 million for the nine months ended
September 30, 2003, $18.6 million higher than the comparable period of
2002. Excluding operating income of the filing products division and
restructuring expenses, operating income was $47.5 million, $7.0 million
lower than during the first nine months of 2002.
* Lower volume and lower average selling prices for products sold have
reduced profits $8.3 million.
* Fixed expenses have increased $0.7 million. Higher manufacturing
overhead was partially offset by lower administrative expenses.
* The favorable effect of the strength of the Canadian dollar on
operating income has been $2.0 million.
COMMERCIAL PRINTING
SALES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30