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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 1-12551
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MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value per share The New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
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 February 24, 2004 was $101,753,845.
As of February 24, 2003 the Registrant had 48,384,123 shares of Common
Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this form (Items 11, 12, 13
and 14, and part of Item 10) is incorporated by reference from the
Registrant's Proxy Statement to be filed pursuant to Regulation 14A with
respect to the Registrant's Annual Meeting of Stockholders to be held on or
about April 29, 2004.
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TABLE OF CONTENTS
PART I
PAGE
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Item 1. Business.................................................... 1
The Company................................................. 1
Commercial.................................................. 1
Resale...................................................... 1
The Printing and Envelope Industries........................ 1
Our Products................................................ 1
Our Services................................................ 2
Marketing, Distribution and Customers....................... 3
Printing and Manufacturing.................................. 4
Materials and Supply Arrangements........................... 4
Patents, Trademarks and Brand Names......................... 5
Competition................................................. 5
Backlog..................................................... 5
Employees................................................... 5
Environmental............................................... 6
Available Information....................................... 6
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 70
Item 9A. Controls and Procedures..................................... 70
PART III
Item 10. Directors and Executive Officers of Registrant.............. 71
Item 11. Executive Compensation...................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 74
Item 13. Certain Relationships and Related Transactions.............. 75
Item 14. Principal Accountant Fees and Services...................... 75
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 76
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PART I
ITEM 1. BUSINESS
THE COMPANY
We are one of North America's leading providers of printing and
printing related products and value added services. We produce general
commercial printing, high impact premium printing, custom and stock
envelopes, printed business forms and labels. We believe we are the world's
largest manufacturer of envelopes, the leading printer of envelopes in the
United States and Canada, and the premier printer of high impact color
printing in the United States and the largest US manufacture of business
forms and labels sold through distributors. We operate 86 printing and
manufacturing facilities and five distribution and fulfillment centers.
COMMERCIAL
Our commercial business had sales of $1.3 billion in 2003. This
business segment operates 66 manufacturing facilities and specializes in
the printing of annual reports, car brochures, brand marketing collateral,
financial communications, general commercial printing and the manufacture
and printing of customized envelopes for billing and remittance and direct
mail advertising. In addition, we operate five distribution and fulfillment
centers and provide our customers with other value added services such as
ecommerce.
RESALE
Our resale business had sales of $399 million in 2003. This business
segment operates 20 manufacturing facilities and produces business forms
and labels, custom and stock envelopes and specialty packaging and mailers
generally sold to third-party dealers such as print distributors, forms
suppliers and office-products retail chains.
Refer to Note 17 of our consolidated financial statements included
elsewhere in this report for additional information concerning the
operating and geographic segments.
OUR INDUSTRIES
The printing industry is one of the largest and most fragmented
industries in the United States with total estimated sales of $155.5
billion in 2002 generated by more than 45,000 companies, according to the
Printing Industries of America, Inc. The printing industry includes general
commercial printing, financial and legal printing, greeting cards, labels
and wrappers, magazines, newspapers, books, other specialty and quick
printing and related services such as prepress and finishing. We estimate
that the market in which we primarily compete has total annual sales of
approximately $52.2 billion serviced by over 20,000 printing businesses.
Envelope printing and manufacturing combined constitutes a $4.1 billion
market in North America according to the Envelope Manufacturer's
Association. Products in the envelope industry include customized envelopes
for direct mail, transactional envelopes, non-custom envelopes for resale,
and specialty envelopes and filing products.
Printed office products constitutes an estimated $15 billion market,
with the short-run indirect segment of the market in which we compete
estimated at $3.4 billion.
OUR PRODUCTS
Commercial Printing. We serve two primary commercial printing markets
and the growing market for visual communications products and services
other than print. Our general commercial printing markets are: (1) high end
color printed materials, such as annual reports and car brochures, which
are longer run premium products for major national and regional companies
and (2) general commercial printing products such as advertising and
promotional materials for local markets. Our printing products also include
advertising literature, corporate identity materials, calendars, greeting
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cards, brand marketing materials, catalogs, maps, CD packaging and direct
mail. We also offer our customers services such as design, fulfillment,
ecommerce, inventory management and other enterprise solutions for
companies seeking strategic partners for their branding and other
communications priorities.
Envelope. We serve two primary markets: (1) customized envelopes and
packaging products, including Tyvek(R) mailers used by the US Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (2) envelopes and other products sold to wholesalers,
paper merchants, printers, contract stationers, independent retailers and
superstores. In the customized envelope market, we offer printed customized
conventional envelopes for billing and remittance, direct mail marketers,
catalog orders and other end-users, such as banks, brokerage firms and
credit card companies. In the wholesale envelope market, we manufacture and
print a broad line of stock and custom envelopes that are featured in
national catalogs for the office products market or offered through office
products retailers, including contract stationers.
Printed Office Products. We print a diverse line of custom products
for small and mid-size businesses including both traditional and specialty
forms for use with desktop PCs and laser printers and pressure sensitive
labels. Our printed office products include business documents, specialty
documents produced through VersaSeal(R), Hi-Reply(TM) and Pro-card(TM)
brands and short-run secondary labels, which are made of paper or film
affixed with pressure sensitive adhesive and are used for mailing,
messaging, bar coding and other applications. These products are generally
sold through independent value-added resellers of office products.
OUR SERVICES
We offer our customers a wide variety of related services to enhance
the value of our printed products and assist them in using digital
technologies to improve the effectiveness of their visual communications.
Among our services are:
Delivery systems. We offer a flexible "just-in-time" delivery program
which allows customers to receive their products just prior to when they
are needed.
Digital archiving. We offer customers the option to store digitally
rendered artwork on our file servers. The artwork can then be accessed and
retrieved at any time for use by any authorized design or production group
via high speed transmission links.
Direct-to-Plate and Direct Imaging Technology. We have both
direct-to-plate and direct imaging technologies, which eliminate several
manual functions and material costs in the prepress stage. Both
technologies support a completely digital workflow, providing a better
printed product, faster turnaround and in the case of direct imaging,
reduced inventory, capability to print-on-demand and lower distribution
costs.
E-commerce. We have the capability to provide to our customers a full
range of e-commerce services to obtain estimates, do remote proofing, and
order printing or other products through their web page. Included, at
customer request, are a variety of reporting, marketing and service
functions designed to increase on-line sales.
Electronic Prepress. We offer a fully automated electronic prepress
that allows the customer to submit artwork and other data in hardcopy or
digitally either on disk, CD or via high speed transmission line. Hardcopy
artwork is digitally scanned and mastered to create a file for use either
in direct-to-plate or direct-to-press applications. We also provide
traditional prepress services to customers who require graphics and artwork
to be photographed, composed and incorporated into files for plate or
direct-to-press applications.
Fulfillment. Strategically located throughout the United States we
have full-service fulfillment centers with online order assembly and bar
coding. Many of these centers have digital presses to reduce the costs of
inventory and obsolescence.
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Inventory management systems. Large national organizations with
centralized purchasing and supply departments serving multiple locations
use our inventory management services. Included in these services are
reports on usage by inventory unit (SKU) and/or available warehouse supply
and summary billing.
E-Solutions. We offer a full range of robust and dynamic
Internet-based print procurement, print management and print distribution
solutions. We also work with leading service providers to improve the
effectiveness and speed of internet-based processes for our customers.
Warehousing Services. For customers who prefer to contract out the
management of their printed product storage and distribution we have the
expertise and space to store finished product and drop ship in bulk or ship
on an "as needed" basis.
Enterprise solutions. Large national organizations looking for
integrated, managed supply chain solutions can avail themselves of flexible
solutions that connect them to their internal departments and external
customers and suppliers. We have the supply chain management processes,
techniques, systems and resources to manage, produce and deliver their
products from our facilities strategically located across the US.
MARKETING, DISTRIBUTION AND CUSTOMERS
Because of the highly fragmented nature of the general commercial
printing and envelope businesses, and the diversity in customer needs and
preferences, we market most of our general commercial printing and
envelopes locally and regionally. Given the project-oriented nature of
these markets, sales to particular customers may vary significantly from
year to year depending upon the number and size of their communications
plans. Our customer supply agreements are typically on an order-by-order
basis or for a specified period of time. The sales force is supported by a
technical service team that provides customers with highly customized
printing solutions. Most of our facilities have customer service
representatives that work with the sales team and the customers to manage
orders efficiently and effectively. In some cases, the customer service
representatives have direct responsibility for accounts.
Our marketing efforts for commercial printing differ between two broad
product areas: high impact color products, such as auto brochures, annual
reports and high-end catalogs, and general commercial work. We market high
impact printing primarily on a regional basis, through sales
representatives working out of sales offices across the United States. We
utilize a team approach to customer service relationships that we believe
is unique in the printing industry.
We believe our commercial segment has one of the largest sales forces
in the industry, with approximately 600 sales representatives as of
December 31, 2003. Most of our commercial printing and envelope products
are sold through sales representatives who work closely with customers from
the initial concept through prepress, proofing and production. Because our
sales representatives are our primary contacts with our customers, our goal
is to attract, train and retain an experienced, qualified sales force in
each of our businesses. Sales representatives typically are compensated by
commission, which generally depends on order size and type, prepress work,
reruns or rework and overall profitability of the job. For our growing list
of enterprise customers we have account teams, some members of which are
situated on the customer's premises.
We market the majority of our envelopes and packaging products through
sales representatives, who generally work with customers from the initial
product design stage through product delivery to ensure that finished
products meet the customers' applications and marketing needs. Products not
marketed by our own sales representatives are sold through distributors to
better serve selected wholesale markets, geographic regions without direct
sales representation and certain specialty markets.
Our reorganization into two business segments supports our "Total
Customer Solutions" initiative, through which we offer our customers a full
spectrum of products and services from design through fulfillment including
e-services, direct mail and digital printing capabilities. Our Total
Customer
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Solutions sales and service teams are organized to focus on vertical
markets including travel and leisure, health services, financial services
and technology and to offer customers in these markets customized solutions
to their visual communications needs.
In our resale segment, our products are marketed primarily under the
"PrintXcel" brand through distributors who act as intermediaries between us
and the end-users of its products. We also market our office products under
the "Quality Park" brand to office products retailers. The resale segment
sells most of its products through five major channels; independent
solution providers, outsource for "direct" solution providers, commercial
printers, ad specialty dealers and quick printers. Our resale segment sells
its products primarily through catalogs, telemarketing and the Internet to
over 20,000 value-added resellers who distribute our products to end-users.
We coordinate sales efforts among geographic regions within our
operating segments, and among the operating businesses themselves, in order
to compete for national account business, enhance the internal
dissemination of successful new product ideas, efficiently allocate our
production equipment, share technical expertise and increase company-wide
selling of specialty products manufactured at selected facilities.
Our customer base totals approximately 40,000. The customers of our
commercial segment include Fortune 500 companies, graphic designers and
advertising agencies, regional and local businesses, insurance and finance
companies, government agencies and not-for-profit organizations. The
customers of our resale segment total over 20,000 office products
distributors and office products retail businesses as well as the U.S.
Postal Service. None of our customers accounted for more than 4% of revenue
in 2003.
PRINTING AND MANUFACTURING
Our commercial segment operates 66 manufacturing facilities throughout
the US and Canada. Our 36 commercial printing plants combine advanced
prepress technology with high-quality web and sheet-fed lithographic
presses, digital presses and extensive binding and finishing operations.
Our 30 envelope plants produce envelopes from either flat sheets or rolls
of paper. The paper is folded into an envelope, which is glued at the seams
and on the flap, and then printed as required. Web machines are typically
used for larger runs with multiple colors and numerous features. Die cut
machines, which require a preliminary step to provide die cut envelope
blanks from paper sheets, are used primarily for smaller orders typically
including customized value-added features. The manufacturing process used
is dependent upon the size of a particular order, custom features required,
machine availability and delivery requirements. Many of our commercial
facilities operate seven days a week, 24 hours a day to meet customer
requirements.
In our resale segement, we operate twenty facilities in the United
States. We design and print business forms and labels and envelopes for a
wide range of businesses. A majority of these products orders are delivered
to us "camera ready," and we perform prepress and plate making functions
and print on web presses. Ten of our resale facilities manufacture stock
envelopes that are sold to office products retail chains.
MATERIALS AND SUPPLY ARRANGEMENTS
The primary materials used in each of our businesses are paper, ink,
film, offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a number
of suppliers and have not experienced any significant difficulties in
obtaining the raw materials necessary for our operations. We have
implemented an inventory management system in which a limited number of
paper suppliers supply all of our paper needs. These suppliers are
responsible for delivering paper on a "just-in-time" basis directly to our
facilities. We believe that this system has allowed us to enhance the
flexibility and speed with which we can serve customers, improve pricing on
paper purchases, eliminate a significant amount of paper inventory and
reduce costs by reducing warehousing capacity. We believe that we purchase
our materials and supplies at very competitive prices due to our volume
leverage.
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PATENTS, TRADEMARKS AND BRAND NAMES
We market products under a number of trademarks and brand names. We
also hold or have rights to use various patents relating to our envelope
business, which expire at various times through 2012. Our sales do not
materially depend upon any single or group of related patents.
COMPETITION
Commercial printing is highly competitive and fragmented. We compete
against a diminishing number of large, diversified and financially strong
printing companies, as well as regional and local commercial printers, many
of which are capable of competing with us in both volume and production
quality. Although there are a significant number of buyers who are price
sensitive, we also believe that customer service and high quality products
are important competitive factors, especially to companies seeking
enterprise solutions and high impact color products. We believe we provide
premium quality and customer service while maintaining competitive prices
through stringent cost control efforts. The main competitive factors in our
markets are customer service, product quality, reliability, flexibility,
technical capabilities and price. We believe we compete effectively in each
of these areas.
In selling our envelope products, we compete with a few multi-plant and
many single-plant companies that primarily service regional and local
markets. We also face competition from alternative sources of communication
and information transfer such as facsimile machines, electronic mail, the
Internet, interactive videodisks, interactive television and electronic
retailing. Although these sources of communication and advertising may
eliminate some domestic envelope sales in the future, we believe that we
will experience continued demand for envelope products due to (i) the
ability of our customers to obtain a relatively low-cost information
delivery vehicle that may be customized with text, color, graphics and
action devices to achieve the desired presentation effect, (ii) the ability
of our direct mail customers to penetrate desired markets as a result of
the widespread delivery of mail to residences and businesses through the US
Postal Service and the Canada Post Corporation and (iii) the ability of our
direct mail customers to include return materials in their mail-outs.
Principal competitive factors in the envelope business are quality, service
and price. Although all three are equally important, various customers may
emphasize one or more over the others. We believe we compete effectively in
each of these areas.
In selling our printed business forms and labels products,we compete
with other document printers with nationwide manufacturing locations and
regional/local printers, which typically sell within a 100 to 300-mile
radius of their plants. To a limited extent we compete with much larger
direct selling forms manufacturers. We compete mainly on the breadth of our
product offerings and close customer relationships.
BACKLOG
At December 31, 2003 and 2002, the backlog of customer orders to be
produced or shipped in the next 120 days was approximately $113.0 million
and $98.8 million, respectively.
EMPLOYEES
We employed approximately 10,000 people as of December 31, 2003, and
approximately 1,800 of our employees at the various facilities are
represented by unions affiliated with the AFL-CIO or Affiliated National
Federation of Independent Unions. Collective bargaining agreements, each of
which cover the workers at a particular facility, expire from time to time
and are negotiated separately. Accordingly, we believe that no single
collective bargaining agreement is material to our operations as a whole.
We are committed to employee development and increased organizational
effectiveness. We operate Mail-Well University, our an in-house training
program, which provides courses in process improvement, quality control,
supervisory and management skills and increasing employee
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empowerment. Complementing our in-house initiatives, Mail-Well contracts
leading industry experts to provide skill-building courses to our sales
representatives and managers.
ENVIRONMENTAL
Our operations are subject to federal, state and local environmental
laws and regulations including those relating to air emissions, waste
generation, handling, management and disposal, and remediation of
contaminated sites. We have implemented environmental programs designed to
ensure that we operate in compliance with the applicable laws and
regulations governing environmental protection. Our policy is that
management at all levels be aware of the environmental impact of operations
and direct such operations in compliance with applicable standards. We
believe that we are in substantial compliance with applicable laws and
regulations relating to environmental protection. We do not anticipate that
material capital expenditures will be required to achieve or maintain
compliance with environmental laws and regulations. However, there can be
no assurance that newly discovered conditions or new or stricter
interpretations of existing laws and regulations will not result in
material expenses.
AVAILABLE INFORMATION
Our Internet address is: www.mail-well.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13 (a) or 15 (d) of the Exchange Act as
soon as reasonably practicable after such documents are filed
electronically with the Securities and Exchange Commission. In addition,
our earnings conference calls are web cast live via our website and
presentations to securities analysts are included on our website.
ITEM 2. PROPERTIES
We occupy 86 printing and manufacturing facilities in the United States
and Canada and five print fulfillment and distribution centers, of which 38
are owned and 53 are leased. In addition to on-site storage at these
facilities, we store products in 19 warehouses, of which four are owned,
and we lease 21 sales offices. We also lease 47,153 square feet of office
space in Englewood, Colorado for our corporate headquarters. We believe
that we have adequate facilities for the conduct of our current and future
operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and
estimable. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on the Company. In the case of administrative proceedings related to
environmental matters involving governmental authorities, management does
not believe that any imposition of monetary damages or fines would be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "MWL." At February 19, 2004, there were approximately 451
shareholders of record and, as of that date, we estimate that there were
more than 9,702 beneficial owners holding stock in nominee or "street"
name. The following table sets forth, for the periods indicated, the range
of the high and low sales prices for our common stock as reported by the
NYSE.
HIGH LOW
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2003
First Quarter........................................... $2.55 $1.85
Second Quarter.......................................... $3.13 $2.05
Third Quarter........................................... $3.60 $2.76
Fourth Quarter.......................................... $4.61 $3.58
HIGH LOW
----- ---
2002
First Quarter........................................... $6.28 $4.42
Second Quarter.......................................... $6.80 $5.02
Third Quarter........................................... $5.14 $0.99
Fourth Quarter.......................................... $2.64 $1.03
We have not paid a dividend on common stock since our incorporation and
do not anticipate paying dividends in the foreseeable future because our
senior secured credit facility, senior notes and senior subordinated notes
limit our ability to pay common stock dividends.
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived
from the historical audited financial statements of the Company. The
financial data presented reflect the restatement of all historical data for
discontinued operations and Statement of Financial Accounting Standards No.
145. The results of acquisitions accounted for under the purchase method
have been included in the income statement data of the Company from their
respective acquisition dates. The data presented below should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial
statements and the related notes included elsewhere herein.
YEAR ENDED DECEMBER 31
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2003 2002 2001 2000 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................ $1,671,664 $1,728,705 $1,868,768 $2,044,350 $1,699,222
Income (loss) from continuing
operations..................... 3,924 (73,488) (45,213) 36,193 61,997
Income (loss) per diluted share
from continuing operations..... 0.08 (1.54) (0.95) 0.73 1.16
Total assets..................... 1,107,393 1,107,367 1,476,867 1,683,592 1,310,260
Total long-term debt, including
current maturities............. 748,961 763,899 855,221 922,351 666,397
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
We are one of North America's leading providers of printing,
printing-related products and value added services to meet the visual
communications needs of customers. Our mission is to produce
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products and provide services that help our customers deliver their
messages more effectively. In October 2003, we reorganized Mail-Well into
two business segments: commercial and resale. This reorganization aligns
our structure with our principal strategic goals: to operate as one
company; to provide our customers with one point of entry into Mail-Well;
and to go to market with all of our products and services.
The commercial segment combines our commercial printing plants and the
custom portion of our envelope business into a single business that
generally sells directly to national and local customers. The commercial
segment consists of 66 manufacturing facilities and five distribution and
fulfillment centers and specializes in the printing of annual reports, car
brochures, brand marketing collateral, financial communications, general
commercial printing and customized envelopes for billing and remittance and
direct mail advertising.
The resale segment combines all of our operations that sell to
third-party dealers such as print distributors, forms suppliers and
office-products retail chains. This business consists of 20 plants that
produce a variety of products including business forms, business labels,
custom and stock envelopes, specialty packaging and mailers.
BUSINESS IMPROVEMENT INITIATIVES. Our reorganization was a continuation
of the evolution of Mail-Well that began in June 2001 when we announced
plans to divest certain businesses we had identified as non-strategic. In
addition to these divestitures, we initiated a restructuring program to
consolidate many of our manufacturing facilities to reduce excess capacity
and improve our competitive position. We also initiated other programs to
significantly improve operations, reduce costs and increase marketing
effectiveness.
In February 2002, we sold Curtis 1000, the distribution business
included in our printed office products business. In May 2002, we sold
Mail-Well Label, our prime label business. In August 2002, we sold our
filing products division, and in March 2003, we sold certain of our digital
graphics operations. Our divesture program is complete.
We have substantially completed our other restructuring programs, which
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
business forms manufacturing facilities into our plants in Girard,
Kansas, Fairhope, Alabama and Marshall, Texas.
* The restructuring of our debt.
RAW MATERIALS. Paper is our most significant raw material. We purchase
approximately 470,000 tons of paper annually to meet our production
requirements. Historical changes in paper pricing generally have not
affected the margins of our commercial printing products because we have
been able to pass on paper price increases to our customers. Paper pricing
has, however, impacted the margins of our envelope products. 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. Prices of coated papers, which are used
principally in commercial printing, increased approximately 3% in 2000,
decreased approximately 8% in 2001 and remained flat in 2002 and 2003.
Prices of uncoated papers, which are the principal grades of paper used to
manufacture envelopes, increased 10% in the fourth quarter of 2002. The
cost of uncoated papers had declined approximately 10% during 2001 after a
year of stable prices in 2000. Margins of our envelope products were
negatively impacted by higher uncoated paper prices in the first half of
2003; however, the market for
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uncoated papers softened in the third quarter of 2003. As a result, the
price of uncoated papers no longer negatively impacted operating margins of
our envelope operations in the second half of 2003.
In early 2004, we received notifications from several paper companies
announcing a 10% increase in the price of uncoated paper. We believe the
current market conditions do not support this price increase. However, if
this price increase takes effect in 2004, the margins of our envelope
products will be negatively impacted in 2004 to the extent we are unable to
increase the prices of our envelope products.
OUTLOOK. The economic slowdown that began in 2001 continued to
adversely affect the sales and margins of our businesses in 2002 and 2003.
Demand for many of our products, especially printed advertising and direct
mail promotions, remained depressed at the end of 2003. The market for
traditional business forms, which has been declining for several years,
continues to decline. These market conditions have 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,
particularly advertising and direct mail, recover. Our restructuring and
other cost reduction initiatives have mitigated the impact of the downturn
in our markets and we believe these actions have positioned us to benefit
from improvements in our markets when they occur. In the meantime, we have
continued to manage our costs and balance production with the needs of our
customers.
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. If the challenge to the Do Not Call program is
successful, our sales could be adversely affected.
Our reorganization into two business segments supports our "Total
Customer Solutions" initiative, through which we offer our customers a full
spectrum of products and services from design through fulfillment including
e-services, direct mail and digital printing capabilities. By offering the
full breadth of our products and services as one company organized around
the types of customers we serve, we believe we will be an easier company
with which to do business. We believe this new structure will greatly
improve our ability to deliver our quality products and services with the
speed, reliability and efficiency that our customers demand. We also expect
our customers to benefit as a result of a decrease in their total cost of
procuring our products and services. Our Total Customer Solutions sales and
service teams are organized to focus on vertical markets including travel
and leisure, health services, financial services and technology and to
offer customers in these markets customized solutions to their visual
communications needs.
In early 2003, we launched a major initiative we refer to as
"Mobilization". Mobilization is a comprehensive program to actively involve
all of our employees in improving service, quality, efficiency and
innovation. We believe this initiative has improved teamwork, communication
and accountability throughout our business and has resulted in many ideas
which have improved operations, safety, customer service and reduced costs.
We believe the national Do Not Call program and our Total Customer
Solutions and Mobilization initiatives have had a positive impact on our
business during 2003 and will continue to do so in the future.
CONSOLIDATED RESULTS OF OPERATIONS
The financial statements for all periods presented have been restated
as required by generally accepted accounting principles to report the
results of our prime label and Curtis 1000 businesses as discontinued
operations. In analyzing our year-over-year financial results, it is
important to recognize
9
the following items that have had a significant impact on the comparability
of our results over the last several years.
* In August 2002, we acquired the in-house printing and fulfillment
operations of American Express Company. This acquisition has been
accounted for as a purchase transaction and the results of this
operation are included in our consolidated results from the date
acquired.
* Consolidated results also include the results of the filing products
division sold in August 2002 and the digital graphics operations sold
in March 2003 until the dates those operations were sold.
* Consolidated results include significant restructuring and other
expenses related to the execution of our strategic plans and other
initiatives as well as other operating charges.
* The results of our Canadian operations were positively impacted by
the strength of the Canadian dollar during 2003.
The impacts of these items are specifically noted when significant in
the following discussions of our consolidated results and the results of
our business segments.
NET SALES
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS)
Commercial.............................. $1,272,525 $1,268,367 $1,357,430
Resale.................................. 399,139 460,338 511,338
---------- ---------- ----------
Total net sales..................... $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
Consolidated net sales decreased $57.0 million, or 3.3%, in 2003
compared to sales in 2002. Included in this sales decline was an $11.2
million decrease in sales from the digital graphics operations that we sold
in March 2003. In addition, the filing products division that we sold in
August 2002 had sales of $42.3 million in 2002 prior to its divestiture.
* Sales of our commercial segment increased $4.2 million despite the
sale of the digital graphics operations which resulted in a sales
decline of $11.2 million. Sales of the in-house printing and
fulfillment operations acquired in August 2002 were $38.8 million
higher for the full year 2003 than in 2002. Sales of our Canadian
operations increased approximately $16.7 million in 2003 due to the
impact of foreign currency exchange rates. Sales of the commercial
segment in 2003 were lower on a comparable basis than in 2002 due to
lower sales volume and lower selling prices.
* Sales of our resale segment declined $61.2 million in 2003 compared
to 2002 due to the sale of the filing products division and a decline
of $18.9 million primarily driven by lower sales volume of business
forms to distributors of office products, lower sales volume to
office-products retail chains and lower average selling prices.
Consolidated net sales decreased $140.1 million, or 7.5%, in 2002
compared to sales in 2001. The explanation of this sales decline by segment
is as follows:
* Sales of our commercial segment declined $89.1 million, or 6.6%, in
2002. Approximately 50% of our commercial printing sales and 40% of
our envelope sales are related to advertising and direct mail
promotions. In response to the economic slowdown in 2002, many of our
customers significantly reduced promotional spending which had a
significant impact on the sales of our commercial segment.
* Sales of our resale segment declined $51.0 million in 2002. Sales of
the filing products division were $32.0 million lower in 2002 than in
2001 due to our divestiture of this division in August
10
2002. In addition, sales of business forms to office products distributors
and sales to office products retail chains declined approximately
$19.0 million.
RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES
We have responded to the impact of the current economic environment on
our businesses by continuing to evaluate our operations for improvement
opportunities. Because of the significant decline in sales experienced over
the last several years by many of our operations, we have taken actions to
consolidate facilities, optimize capacity and otherwise reduce costs. These
actions have resulted in significant restructuring, impairment and other
related charges. This process is ongoing due to continuing changes in our
industry and markets, and we expect to take the actions we believe
necessary to react to these changes. We anticipate additional restructuring
charges in 2004.
2003 ACTIVITY
In 2003, we substantially completed the restructuring programs
described above under "Business Improvement Initiatives." We incurred
expenses related to these programs in 2003 that could not be accrued and
were the result of our continuing initiatives to optimize capacity.
Restructuring expenses recorded during 2003 were $1.5 million. The
following table and discussion present the details of these charges (in
thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Employee separation and related expenses............ $ 815 $ 660 $ 1,475
Equipment moves..................................... 1,002 -- 1,002
Other costs......................................... 94 (10) 84
Reversal of unused accruals......................... (713) (318) (1,031)
------ ----- -------
Total restructuring charges..................... $1,198 $ 332 $ 1,530
====== ===== =======
Continued efforts in 2003 to adjust the operations of both segments to
reflect lower sales volumes, resulted in additional employee separation
expenses of $1.5 million in 2003.
COMMERCIAL. In the fourth quarter of 2002, we announced the closure of
our web printing operation in Indianapolis and the redeployment of its 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 2003.
We were able to sub-lease a facility that was idled as a result of the
consolidation of our envelope plant in the Northeast 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. In
addition, we reversed the remaining expenses that had been accrued to cover
the costs of maintaining a building that was sold in 2003.
RESALE SEGMENT. In the fourth quarter of 2002, we closed our business
forms plant in Clearwater, Florida and consolidated its production in
plants located in Fairhope, Alabama and Marshall, Texas. The employee
separation expenses and other costs incurred as a result of this
consolidation were less than originally estimated.
11
2002 ACTIVITY
Restructuring, impairment and other related charges recorded in 2002
were $74.6 million. The following table and discussion present the details
of these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses............ $ 4,090 $1,404 $ -- $ 5,494
Employee training expenses.......................... 6,647 396 -- 7,043
Project management expenses......................... 8,101 1,145 -- 9,246
Asset impairment charges, net....................... 12,178 1,650 -- 13,828
Other costs......................................... 7,685 1,883 -- 9,568
Reversal of unused accruals......................... (500) -- -- (500)
------- ------ ------- -------
Total restructuring costs....................... 38,201 6,478 -- 44,679
Other charges....................................... 6,693 161 23,018 29,872
------- ------ ------- -------
Total restructuring and other charges........... $44,894 $6,639 $23,018 $74,551
======= ====== ======= =======
COMMERCIAL. We completed the consolidation of our envelope
manufacturing facilities in 2002. We began this consolidation in 2001 in
order to reduce excess internal capacity and improve utilization of the
equipment and resources at our other envelope plants in the United States
and Canada. The costs incurred during 2002 related to this consolidation
were as follows:
* Employee training expenses of $6.6 million were incurred to train the
employees hired at the plants that absorbed the production of the
plants that were closed. The training programs for these employees
were between three and nine months in duration.
* We incurred project management expenses of $8.1 million which were
primarily consulting fees and related expenses incurred to assist
management in managing the consolidation project. Consultants were
used to assist in such tasks as capacity planning, workflow planning,
production scheduling and change management.
* Impairment charges of $8.9 million were recorded for property and
equipment taken out of service or sold as a result of the plant
consolidations, net of $5.9 million received from the sales of those
assets.
* Other costs of $3.0 million include the expenses incurred to
dismantle, move and reinstall equipment, and the costs incurred to
restore buildings to the condition required by lease agreements or to
maintain them while they are held for sale.
* In 2001, we accrued employee separation expenses to cover the 766
employees we expected would be affected over the course of the
project to consolidate our envelope manufacturing facilities. At the
completion of the project, 722 employees had been separated and we
reduced the accrual by $0.5 million.
We closed our commercial printing operation in New York City in
September 2002. We recorded employee separation expenses of $1.0 million
covering 80 employees, asset impairment charges of $1.0 million and lease
commitment and other expenses of $2.2 million in connection with this plant
closure.
We moved a web press from our plant in Portland, Oregon to our plant in
St. Louis and began the consolidation of our web printing operation in
Indianapolis with our web plants in St. Louis and Baltimore. We recorded
employee separation expenses of $0.3 million to cover the cost of 52
employees affected by these actions, impairment charges of $1.0 million on
equipment taken out of service and $1.8 million to cover the expenses
associated with terminating lease commitments and the costs incurred in
2002 to dismantle, move and reinstall equipment.
Additionally, the commercial segment reduced the size of many of its
operations during 2002 in response to the significant decline in sales. The
costs associated with these actions included $2.8 million to cover the cost
of the elimination of 331 jobs, impairment charges of $1.3 million for
equipment
12
taken out of service and $0.7 million for expenses associated with lease
commitments and the cost incurred to dismantle, move and reinstall
equipment.
RESALE. During 2002, the documents division of our resale segment
closed its business forms plant in Clearwater, Florida and its plant in
Denver, Colorado which had been curtailed in 2001. The employee separation
expenses covering 64 employees were $0.7 million. Impairment charges
related to equipment taken out of service as a result of these closures
totaled $0.6 million. Other expenses of $0.7 million primarily related to
expenses incurred to maintain the two buildings held for sale.
The resale segment completed the closure of its envelope operations in
Hattiesburg, Mississippi. The costs in 2002 were $2.4 million, which were
primarily additional impairment charges, consulting fees, the costs
incurred to dismantle, move and reinstall equipment and expenses incurred
to clean up the building.
Additionally, the resale segment incurred $2.1 million in expenses to
reduce the size of several of its other operations. Employee separation
expenses incurred to cover the elimination of 193 jobs were $0.7 million,
asset impairments were $0.5 million and training, project management and
other costs were $0.9 million.
OTHER CHARGES. Other charges include the following items:
* In 2001, we initiated several programs to significantly improve
operations and marketing effectiveness. These programs included the
implementation of best practices, the standardization of costing and
pricing systems in our commercial segment and the alignment of
equipment and services to better serve our customers and markets. We
used outside assistance in the implementation of these programs which
cost $4.4 million in 2002.
* In connection with the refinancing of our bank credit facility in
June 2002, we were required to refinance an operating lease stemming
from a sale/leaseback arrangement executed in 1997 and amended in
2000. The value of the equipment subject to the lease was reduced
from $34.9 million to $19.1 million, and we were required to pay the
difference of $15.8 million. In addition, we wrote off deferred costs
of $6.1 million associated with the lease prior to this refinancing.
* We recorded an impairment charge of $1.8 million related to the
write-down of idle equipment in our commercial business to net
realizable value.
* We incurred severance payments unrelated to the restructure plans of
$1.1 million.
* We incurred consulting fees of $0.7 million related to tax matters
that arose as a result of our divestitures.
2001 ACTIVITY
The restructuring, impairment and other related charges totaled $43.1
million in 2001. The following table and discussion present the details of
these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses............ $ 7,276 $2,769 $ -- $10,045
Employee training expenses.......................... 2,414 214 -- 2,628
Project management expenses......................... 4,985 419 -- 5,404
Asset impairment charges, net....................... 4,897 2,582 -- 7,479
Other costs......................................... 7,524 1,655 -- 9,179
Strategic assessment costs.......................... -- -- 2,677 2,677
------- ------ ------ -------
Total restructuring costs....................... 27,096 7,639 2,677 37,412
Other charges....................................... 2,842 -- 1,600 4,442
------- ------ ------ -------
Total restructuring and other charges........... $29,938 $7,639 $4,277 $41,854
======= ====== ====== =======
13
COMMERCIAL. Our commercial segment announced the consolidation of eight
envelope plants in 2001 and recorded employee separation expenses of $6.9
million covering 766 employees that were expected to be affected over the
course of the consolidation project. In 2001, we incurred training costs of
$2.4 million and project management fees of $5.0 million, and recorded
impairment charges of $4.3 million on the equipment that was taken out of
service and $5.5 million to cover lease termination costs, the costs of
equipment moves and building clean-up expenses.
We closed a printing plant in Philadelphia, Pennsylvania and
consolidated two other printing operations in the Philadelphia area. We
took these actions to improve our cost effectiveness and our competitive
position in the Philadelphia market. The costs associated with the
consolidation included employee separation expenses of $0.4 million
covering the elimination of 25 jobs, impairment charges of $0.6 million on
equipment taken out of service and other costs of $2.0 million to cover the
lease termination costs and costs to dismantle, move and reinstall
equipment.
RESALE. Our resale segment began the closure of its envelope
manufacturing facility in Mississippi. The cost recorded in 2001 was $6.5
million and included employee separation expenses of $1.6 million covering
142 employees, impairments on equipment taken out of service of $3.9
million and $1.0 million of training, project management and other costs.
The documents division of our resale segment substantially curtailed
its business forms plant in Denver, Colorado in 2001. The employee
separation expenses of $0.6 million related to the elimination of 62 jobs.
Other costs of $0.7 million were incurred to dismantle, move and reinstall
equipment. Additionally, we reversed an impairment charge of $1.3 million
taken in 2000 to write down a building to its estimated fair market value.
This building was sold for more than its original carrying value.
Our resale segment closed a warehouse and distribution center in Santa
Fe Springs, California. The cost associated with this closure was $0.9
million which was primarily employee separation expenses covering 17
employees and lease termination costs.
CORPORATE. In developing our strategic plan, we engaged outside
advisors to research and evaluate our markets, survey our customers and
assess existing strategies. In addition, we engaged financial advisors to
evaluate options for improving our capital structure. The cost of these
advisors was $2.7 million in 2001.
OTHER CHARGES. Other charges include the following items:
* The outside assistance used in the implementation of initiatives in
our commercial segment to establish best practices, standardize our
costing and pricing systems, and align equipment and services to
better serve our customers and markets totaled $2.1 million in 2001.
* We wrote off costs of $0.7 million incurred by our commercial segment
for a human resource information system that was not implemented.
* We wrote off a $1.6 million investment in a company that was
developing a service, which would enable online collaborative design
and management of a printing job.
OTHER SIGNIFICANT OPERATING EXPENSES
The table below summarizes other significant charges we have recorded
over the last three years related to the restructuring of our debt and the
divestitures announced in June 2001.
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Loss from the early extinguishment of debt............... $ -- $ 16,463 $ --
Impairment loss (gain) on assets held for sale........... $ (117) $ 6,436 $ --
Impairment on operations formerly held for sale.......... $ -- $ 12,842 $ 36,523
Settlement of litigation................................. $ 5,330 $ -- $ 1,231
14
LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT. In 2002, we wrote off the
deferred financing fees of $16.5 million related to our bank credit
facility that was refinanced in June 2002.
IMPAIRMENT LOSS (GAIN) ON ASSETS HELD FOR SALE. In August 2002, we
completed the sale of the filing products division of our resale segment,
which had been held for sale since June 2001. The impairment loss on assets
held for sale recorded in 2002 included a $6.1 million impairment in
connection with this divestiture.
The impairment loss on assets held for sale also includes a $0.3
million impairment charge related to the digital graphics assets of our
commercial segment held for sale at December 31, 2002 and sold in March
2003. No additional impairment on these assets was required as a result of
the sale.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE. PrintXcel, part of our
former printed office products segment, was held for sale at the end of
2001 and during the first half of 2002. In 2001, we reduced the carrying
amount of the net assets of PrintXcel by $33.6 million to reflect its
expected net realizable value. PrintXcel's net realizable value was based
on estimated sales proceeds, net of expenses and a tax benefit of $11.5
million that would have resulted from the sale. This charge was reported as
an impairment on operations formerly held for sale in 2001.
Due to our decision in June 2002 not to sell PrintXcel, we reversed the
tax benefit because it would not be realized and $1.1 million of expenses
related to the sale that had been accrued but not incurred. The net amount
of $10.4 million was reported as an impairment on operations formerly held
for sale in 2002. PrintXcel is now an important part of our resale segment.
In October 2002, we discontinued our efforts to sell one of our digital
graphics operations. The impairment on operations formerly held for sale in
2001 and 2002 includes $2.9 million and $2.5 million, respectively, related
to the digital graphics operation no longer held for sale.
SETTLEMENT OF LITIGATION. In 2003, we accrued $5.3 million to cover the
cost of settling a lawsuit after an unfavorable award was granted by a jury
in Los Angeles County, California on February 20, 2004 to an ex-employee
who had contested his termination.
OPERATING INCOME (LOSS)
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Commercial.................................. $ 60,816 $ 3,076 $ 42,305
Resale...................................... 45,711 44,317 44,588
Corporate................................... (26,312) (80,312) (72,069)
-------- -------- --------
Total operating income (loss)........... $ 80,215 $(32,919) $ 14,824
======== ======== ========
Consolidated operating income increased $113.1 million in 2003 compared
to the loss recorded in 2002. This improvement in operating income was due
to the following:
* The operating income of the commercial segment improved $57.7 million
in 2003. This improvement was due primarily to lower restructuring
expenses of $43.7 million and a reduction in fixed costs of $11.4
million.
* The operating income of the resale segment increased $1.4 million in
2003. This improvement was due primarily to lower restructuring
expenses of $6.3 million and $3.0 million in reductions in fixed
costs partially offset by the impact of lower sales volume and lower
selling prices and the loss of the operating income of the filing
products division that was sold in August 2002.
* Corporate expenses were $54.0 million lower in 2003 due primarily to
restructuring and other significant operating charges which were
$53.5 million lower in 2003 than in 2002.
15
Consolidated operating income decreased $47.7 million in 2002. This
decrease in operating income was due to the following:
* The operating income of the commercial segment declined $39.2 million
in 2002. Restructuring expenses were $15.0 million higher and the
impact on operating income of the sales decline was approximately
$48.0 million. Reduced benefit expenses, lower fixed manufacturing
and administrative expenses realized from our restructuring and other
cost reductions programs totaled $22.5 million.
* The operating income of the resale segment decreased $0.3 million in
2002. Operating income in 2002 included $2.8 million of operating
income from the filing products division which was $5.3 million lower
than the full year of 2001. In addition, restructuring expenses were
$2.2 million lower in 2002, and fixed manufacturing costs and
administrative expenses were reduced $7.1 million in 2002 as a result
of our restructuring and other cost reduction initiatives. These
reductions more than offset the impact on operating income of lower
sales.
* Corporate expenses were $8.2 million higher in 2002. Corporate
expenses increased due to higher restructuring and other charges of
$18.7 million, the $16.5 million loss on the early extinguishment of
debt and the impairment charge of $6.4 million on assets held for
sale. Also in 2002, we recorded a $4.4 million charge to cover the
cost of workers' compensation claims estimated by our insurance
actuary. The impairment charge of $12.8 million on operations
formerly held for sale was $23.7 million lower than the charge
recorded in 2001. Amortization expense was $14.8 million lower in
2002 than in 2001 due to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002, which eliminated the amortization of
goodwill.
INTEREST EXPENSE
YEAR ENDED DECEMBER 31
------------------------------------
2003 2002 2001
------- ------- --------
(IN THOUSANDS)
Total interest expense............................ $71,891 $76,031 $ 78,891
Less: Allocated to discontinued operations........ -- (5,570) (15,577)
------- ------- --------
Reported interest expense......................... $71,891 $70,461 $ 63,314
======= ======= ========
Total interest expense declined 5.4% in 2003 compared to 2002. In 2003,
total interest expense reflects average outstanding debt of $792.7 million
and a weighted average interest rate of 8.4% compared to the average
outstanding debt of $890.6 million and a weighted average interest rate of
7.9% for 2002. The average outstanding debt decreased in 2003 primarily due
to the application of the proceeds from our divestitures to the repayment
of debt in 2002. Our weighted average interest rate increased in 2003 as a
result of the issuance of $350 million of 9 5/8% senior notes in March
2002, the proceeds of which were used primarily to repay bank debt that
accrued interest at a lower variable rate. In November 2002, we redeemed
our 5% convertible subordinated notes. In addition, total interest expense
in 2002 was higher as a result of the write-off of the deferred financing
fees associated with the bank credit facility that was refinanced in June
of that year.
Total interest expense declined 3.6% in 2002 compared to 2001. In 2002,
total interest expense reflects average outstanding debt of $890.6 million
in 2002 compared to $978.8 million in 2001. The reduction in the
outstanding debt in 2002 was due to the use of proceeds from our
divestitures to repay debt. Our weighted average interest rate was 7.9% in
2002 compared to 7.3% in 2001. The increase in the weighted average
interest rate was primarily due to the issuance of $350 million of 9 5/8%
senior notes in March 2002, the proceeds of which were used to repay bank
debt, which accrued interest at a lower variable rate, and redeem our 5%
convertible notes.
16
Reported interest expense excludes the allocation of interest expense
to discontinued operations which was based on the net assets of those
operations relative to the net assets of the Company. Reported interest
expense in 2003 and 2002 was substantially higher than in 2001 because the
net asset amounts used to allocate interest expense exceeded the actual net
proceeds received from the dispositions of the discontinued operations.
INCOME TAXES
YEAR ENDED DECEMBER 31
-----------------------------------
2003 2002 2001
------ -------- -------
(DOLLARS IN THOUSANDS)
Provision (benefit) for income taxes......... $2,581 $(31,646) $(5,200)
Effective tax rate........................... 39.7% 30.1% 10.3%
The effective tax rate in 2003 was 39.7%. The effective tax rates for
2002 and 2001 were lower than 2003 primarily due to the pre-tax losses in
2002 and 2001 that increased the impact of nondeductible permanent
differences on the overall effective rate.
LOSS FROM DISCONTINUED OPERATIONS
The $1.5 million gain on disposal of discontinued operations for 2003
was primarily an adjustment made to the tax impact of the disposition of
our prime label business, which was sold in May 2002. Further adjustments
to the overall losses incurred on the disposals of Curtis 1000 and our
prime label business are possible if expenses accrued in connection with
the sales of these operations are different than those estimated or if
there are further revisions to the tax impacts of these dispositions.
The loss from discontinued operations for 2002 was $16.9 million, or
$0.35 per share. The loss on discontinued operations reflects the proceeds
received from our divestitures of Curtis 1000 and our prime label business,
net of related selling expenses and tax benefits.
The loss from discontinued operations for 2001 was $91.0 million, or
$1.91 per share and included the following:
* A write-down of our prime label business and Curtis 1000 to net
realizable value in the amount of $88.0 million, net of a tax benefit
of $35.4 million, based on estimated sales proceeds.
* The actual and forecasted results of our prime label business and
Curtis 1000 from the date of the announcement through the expected
date of disposal, including an allocation of interest expense and
income taxes.
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 ("FIN 46"), effective January 1, 2003.
The implementation of FIN 46 required us to consolidate a trust that is
leasing equipment to us 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 January 1, 2003 was
an after-tax charge of $0.3 million at the time of adoption.
We adopted SFAS No. 142 on January 1, 2002. SFAS No. 142 required an
impairment test of the goodwill recorded for each of our operating segments
as of that date. Our testing indicated an impairment of the goodwill
recorded by the commercial printing operations in our commercial segment.
This impairment was due to the significant decline in the performance of
our commercial printing operations in 2001 and the impact of that decline
on expected future cash flows. We estimated the fair value of our
commercial printing operations by discounting the expected future cash
flows and
17
the use of market multiples. Using the estimated fair value of the business
and the application of the other provisions of SFAS No. 142, we determined
that $111.7 million of the goodwill associated with our commercial printing
operations was impaired. This transitional impairment loss was reported as
a cumulative effect of a change in accounting principle in 2002.
Our annual impairment tests of goodwill as of December 1, 2003 and 2002
did not indicate any additional impairment.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTED
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
------ --------- ---------
(DOLLARS IN THOUSANDS)
Net income (loss)........................... $5,150 $(202,104) $(136,217)
Net income (loss) per share--diluted........ $ 0.11 $ (4.24) $ (2.86)
The net income and net income per share in 2003 reflect the
substantial improvement in operating results, the gain on disposal of
discontinued operations and no impairment of our goodwill in 2003.
The net loss and net loss per share in 2002 reflect the substantial
loss from operations, the loss on the disposal of discontinued operations
and the goodwill impairment charge recorded as a cumulative effect of a
change in accounting principle as a result of the adoption of SFAS No. 142.
BUSINESS SEGMENTS
COMMERCIAL
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Sales............................. $1,272,525 $1,268,367 $1,357,430
Operating income.................. 60,816 3,076 42,305
Operating income margins.......... 4.8% 0.2% 3.1%
Sales of our commercial segment increased $4.2 million, or 0.3%, in
2003 compared to sales in 2002. The following factors influenced sales in
2003:
* The increase in the sales due to the in-house printing and
fulfillment operations acquired from American Express Company in
August 2002 was $38.8 million in 2003.
* The sales of our Canadian operations were $16.7 million higher in
2003 primarily due to the strength of the Canadian dollar. Sales of
our Canadian operations in local currency were lower in 2003 than in
2002.
* Sales of envelope products were approximately $27.4 million lower in
2003 than in 2002. A significant portion of this sales decline was
due to lower average selling prices in 2003.
* Sales to our local printing customers were $12.4 million higher which
we believe reflects an improvement in demand in our local markets.
Sales of our high impact printing were $13.1 million lower primarily
due to work performed in 2002 that did not repeat in 2003.
* Sales of our digital graphics operations that were sold in March 2003
were $11.2 million lower in 2003.
* In September 2002, we closed our printing facility in New York City.
Sales of this operation were $12.0 million in 2002.
18
Sales declined $89.1 million, or 6.6%, in 2002 compared to sales in
2001. The following factors influenced sales in 2002:
* Approximately 50% of our commercial printing sales and 40% of our
custom envelope sales are related to advertising and direct mail
promotions. Many of our customers significantly reduced promotional
spending in 2002 in response to the economic slowdown. The impact on
the sales of our printing operations serving local markets was
approximately $21.1 million. Additionally, sales of envelopes
decreased approximately $10.9 million as a result of less spending by
our customers on direct mail promotions.
* Sales of commercial printing in the Philadelphia market were
approximately $24.0 million lower in 2002 than in 2001. This decline
was due in part to the closure of one of our plants in Philadelphia
in April 2001. Much of the work produced by this plant was marginal
work which could not be produced profitably at any of our other
facilities in the area. In October 2001, we consolidated our other
two plants serving this market, and many of our customers did not
move their printing to the new facility.
* The average selling price of our custom envelope products fell
approximately 2% in 2002 due to competitive pressures on the prices
of many of our products and lower sales of higher value added
products.
* The sales of the in-house printing and fulfillment operations
acquired in August 2002 were $11.9 million.
* Sales at our printing plant in Indianapolis declined $9.4 million
during 2002. In our efforts to improve the profitability of this
plant, we lost some of our low margin business. We have since closed
the web printing operation at the plant.
* In February 2002, we exited the domestic photo envelope market. Sales
of these envelopes were $5.4 million in 2001.
* Sales at our plant in New York City declined $4.7 million in 2002. We
ceased production at this plant in September 2002.
The operating income of the commercial segment increased $57.7 million
in 2003. Operating income in 2003 was impacted by the following:
* Restructuring expenses and other charges incurred in 2003 were $1.2
million, $43.7 million lower than incurred in 2002.
* The operating income of the printing and fulfillment operations we
acquired in August 2002 and the impact of the strong Canadian dollar
offset much of the impact of lower sales volume and lower selling
prices in 2003.
* Fixed manufacturing costs and administrative expenses were reduced
$11.4 million primarily due to the closure of our web printing
operation in Indianapolis and other cost control initiatives during
2003.
* Results in 2002 included a $3.2 million loss incurred by our printing
operation in New York City, which was closed in September 2002.
Operating income of the commercial segment declined $39.2 million in
2002. Operating income in 2002 was impacted by the following:
* Restructuring expenses and other charges incurred in 2002 were $44.9
million, $15.0 million higher than incurred in 2001.
* The impact on operating income of the sales decline was approximately
$48.0 million, of which approximately $18.6 million was related to
lower average selling prices.
19
* Fixed manufacturing costs and administrative expenses were reduced
$22.5 million, primarily due to the consolidation of eight envelope
facilities during 2001 and 2002, the closure and consolidation of our
printing operations in Philadelphia and lower employee benefit
expenses.
RESALE
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales........................... $399,139 $460,338 $511,338
Operating income................ 45,711 44,317 44,588
Operating income margin......... 11.5% 9.6% 8.7%
Sales of our resale segment declined $61.2 million, or 13.3%, in 2003
compared to sales in 2002. This decline in sales was due to the following:
* Sales in 2002 included sales of $42.3 million from the filing
products division that was sold in August 2002.
* Approximately $6.4 million of the sales decline in 2003 was due to
lower selling prices driven by competitive pricing pressures in the
market.
* Sales to our merchant and office products customers were $5.2 million
lower in 2003 due to losses of certain customers and weak demand in
the office products retail market.
* Sales of our high strength mailing envelopes were $4.0 million lower
due in part to planned reductions of certain low margin business.
* Sales to our office products distribution customers were $3.2 million
lower due primarily to lower sales of traditional business forms.
Over the last few years demand for traditional business forms has
declined as businesses have acquired laser printing capabilities.
Sales of labels and envelopes to our distribution customers in 2003
were approximately the same as in 2002.
Sales declined $51.0 million, or 10.0%, in 2002 compared to sales in
2001. This decline in sales was due to the following:
* Sales of the filing products division were $32.0 million lower in
2002 than for the full year of 2001.
* Sales to office products distribution customers declined $12.8
million due to lower sales of traditional business forms, lower sales
of our label products to quick printers and lower sales of envelopes.
* Sales to our merchant and office products customers declined
approximately $6.3 million due to inventory reductions by many of our
customers and planned reductions of certain low margin business.
The operating income of the resale segment increased 3.1% to $45.7
million in 2003 from operating income of $44.3 million in 2002. Operating
income in 2003 was impacted by the following factors:
* Restructuring expenses and other charges in 2003 were $0.3 million,
$6.3 million lower than in 2002.
* The impact of lower sales volume and lower selling prices on
operating income was approximately $5.2 million.
20
* Fixed manufacturing and administrative expenses were reduced $3.0
million primarily due to the closure of our Clearwater, Florida
business forms plant in 2002 and other cost control initiatives in
2003.
* Operating income in 2002 included operating income of $2.8 million
from the filing products division.
Operating income declined slightly in 2002 to $44.3 million from
operating income of $44.6 million in 2001. Operating income in 2002 was
impacted by the following:
* Restructuring expenses and other charges in 2002 were $2.2 million
lower than in 2001.
* The impact of lower sales volume and lower selling prices on
operating income was approximately $4.3 million.
* Fixed manufacturing and administrative expenses were reduced $7.1
million in 2002 primarily as a result of the curtailment of the
business forms plant in Denver, the closure of the envelope operation
in Hattiesburg, Mississippi and the closure of the warehouse and
distribution center in Santa Fe Springs, California.
* Operating income of the filing products division was $5.3 million
lower in 2002 than the full year of 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, our outstanding debt was $749.0 million, $14.9
million lower than at December 31, 2002. At December 31, 2003, our
revolving loan balance was $28.6 million lower than at December 31, 2002.
Our outstanding debt at December 31, 2003 included $17.0 million of debt
held by a variable interest entity that was consolidated on January 1, 2003
in accordance with FIN 46.
CASH PROVIDED BY OPERATIONS. Our operations generated cash flow of
$59.5 million in 2003 compared with $23.0 million in 2002 and $170.9
million in 2001. The increase in operating cash flow in 2003 from the
amount generated in 2002 was primarily due to earnings from continuing
operations compared to the loss in 2002.
INVESTING ACTIVITIES. Acquisition spending was $2.8 million in 2003,
$2.6 million in 2002 and $3.8 million in 2001. In 2002, we purchased the
in-house printing and fulfillment operations of American Express Company.
The acquisition spending in 2003 also relates to this investment. In 2001,
we purchased a small printing and fulfillment operation in Denver,
Colorado.
Capital expenditures were $31.6 million in 2003, $30.9 million in 2002
and $32.7 million in 2001. We anticipate capital expenditures in 2004 to be
approximately $20.0 to $30.0 million.
In March 2003, we received net proceeds of $3.9 million from the sale
of the digital graphics operations. In 2002, we received net proceeds of
$31.5 million from the sale of the filing products division, $67.0 million
from the sale of the prime label business and $20.5 million from the sale
of Curtis 1000.
FINANCING ACTIVITIES. During 2002, we completed a significant
restructuring of our outstanding debt. In March 2002, we sold $350 million
of 9 5/8% senior notes due 2012. We used the net proceeds from this
offering to repay $197.0 million of our bank term debt, $134.0 million of
our revolving credit facility, and $9.2 million of other debt. The
remaining $2.0 million of net proceeds from the offering were used for
other working capital needs.
In June 2002, we entered into a three-year $300 million senior secured
credit facility with a syndicate of banks. The purpose of the new facility
was to enable the refinancing of our existing bank term debt and secure
financing for ongoing working capital needs and other general corporate
purposes. Loans made under this facility are issued on a revolving basis
and are subject to availability and a borrowing base. Loans bear interest
at a base rate or LIBOR, plus a margin, and are secured by substantially
all of our assets.
21
On November 1, 2002, we redeemed the $139.1 million convertible
subordinated notes due on that date.
At December 31, 2003, we had outstanding letters of credit of
approximately $25.1 million related to performance and payment guarantees.
In addition, we have issued letters of credit of $1.9 million as credit
enhancements in conjunction with other debt. Based on our experience with
these arrangements, we do not believe that any obligations that may arise
will be significant.
Our current credit ratings are as follows:
SENIOR SENIOR
SECURED SENIOR SUBORDINATED
REVIEW AGENCY CREDIT FACILITY NOTES DEBT LAST UPDATE
- ------------- --------------- ------ ------------ ------------
Standard & Poors..... BB- BB- B May 2003
Moody's.............. Ba3 B1 B3 January 2004
The terms of our existing debt do not have any rating triggers, and we
do not believe that our current ratings will impact our ability to raise
additional capital.
On February 4, 2004, we sold $320 million of 7 7/8% senior subordinated
notes due 2013. The proceeds of these notes will be used to purchase the
$300 million of 8 3/4% senior subordinated notes due 2008. On February 3,
2004, we accepted tenders of $166.4 million of the 8 3/4% notes at a price
of $1,045 for each $1,000 of principal amount together with accrued
interest. The remaining outstanding notes were called for redemption at a
price of $1,043.75 for each $1,000 of principal amount plus accrued
interest to the redemption date. In the first quarter of 2004 we will
record a loss of approximately $17.8 million on the early extinguishment of
our 8 3/4% senior subordinated notes.
CONTRACTUAL OBLIGATIONS. The following table aggregates material
expected contractual obligations and commitments as of December 31, 2003,
as adjusted for the new 7 7/8% senior subordinated notes sold on February
4, 2004 (in thousands):
OTHER
LONG-TERM OPERATING LONG-TERM PURCHASE TOTAL CASH
DEBT LEASES LIABILITIES COMMITMENTS OBLIGATIONS
--------- --------- ----------- ----------- -----------
2004............... $ 2,575 $ 31,057 $ -- $ 720 $ 34,352
2005............... 75,834 26,308 3,521 420 106,083
2006............... 2,327 21,786 3,259 -- 27,372
2007............... 13,532 16,301 2,220 -- 32,053
2008............... 300,964 14,777 2,042 -- 317,783
Thereafter......... 373,729 11,412 14,617 -- 399,758
-------- -------- ------- ------ --------
Total.............. $768,961 $121,641 $25,659 $1,140 $917,401
======== ======== ======= ====== ========
EMPLOYMENT CONTRACTS. We have an employment contract with Paul Reilly,
our CEO, providing for severance payments under certain circumstances. We
have also entered into change of control agreements with certain other
executives providing for severance payments in the event of a change of
control.
OFF-BALANCE SHEET ARRANGEMENTS. We do not have any off-balance sheet
arrangements with unconsolidated entities or other persons.
We expect to be able to fund our operations, capital expenditures, debt
and other contractual commitments within the next year from internally
generated cash flow and funds available under our senior secured credit
facility. The borrowing base certificate filed January 16, 2004, reflecting
assets included in the December 31, 2003 consolidated balance sheet,
reported $111.6 million of unused credit available under our senior secured
credit facility.
22
SEASONALITY AND ENVIRONMENT
Our commercial segment experiences seasonal variations. Revenues from
annual reports are generally concentrated from February through April.
Revenues associated with holiday catalogs and automobile brochures tend to
be concentrated from July through October. As a result of these seasonal
variations, some of our commercial printing operations are at or near
capacity at certain times during these periods.
In addition, several envelope market segments and certain segments of
the direct mail market, experience seasonality, with a higher percentage of
the volume of products sold to these markets occurring during the fourth
quarter of the year. This seasonality is due to the increase in sales to
the direct mail market due to holiday purchases.
The mailer operations of our resale segment are at or near capacity at
times during the fourth quarter.
Seasonality is offset by the diversity of our other products and
markets, which are not materially affected by seasonal conditions.
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact in the
future.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. In preparing these financial
statements, we are required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. We evaluate these estimates and assumptions on an ongoing basis,
including those related to bad debts, property, plant and equipment,
intangible assets, income taxes, and contingencies. We base our estimates
on historical experience and various other assumptions that are considered
reasonable in view of relevant facts and circumstances. Because of the
uncertainty inherent in such estimates, actual results may differ from our
estimates.
Critical accounting policies are defined as those policies that relate
to estimates that require assumptions about matters that are highly
uncertain at the time the estimate is made and could have a material impact
on our results due to changes in the estimate or the use of different
estimates that reasonably could have been used.
ALLOWANCES FOR LOSSES ON ACCOUNTS RECEIVABLE. We maintain a valuation
allowance based upon the expected collectibility of accounts receivable.
The allowance includes specific amounts for customer collection issues we
have identified and an estimate of accounts that may become uncollectible
based on the age of the receivables. Our accounts receivable allowance at
December 31, 2003 was $4.0 million. In 2003, we wrote-off uncollectible
accounts of $4.0 million to the reserve net of recoveries. In 2002, we
wrote-off uncollectible accounts of $4.7 million net of recoveries. While
credit losses have historically been within our expectations, we cannot
guarantee that we will continue to experience the same credit loss rates
that we have in the past. These estimates may prove to be inaccurate, in
which case we may have overstated or understated the reserve required for
uncollectible accounts receivable.
GOODWILL. We evaluate the carrying value of our goodwill as of December
1 of each year, or if there are indications of impairment. Our evaluation
is based on discounting the future cash flows of each of our business
segments and comparisons to market multiples of other similar companies. In
preparing projected future cash flows, we use our judgment in projecting
the profitability of our segments, their growth in future years, the
capital spending required, the working capital requirements and the
selection of a discount rate. In our comparisons to market multiples of
other similar companies, we use our judgment in the selection of the
companies used in the analysis. While we believe there is no further
impairment of our goodwill, if our estimates of future cash flows prove to
be inaccurate, an impairment charge could be necessary in future years.
23
IMPAIRMENT OF LONG-LIVED ASSETS. We periodically evaluate long-lived
assets, including property, plant and equipment and other intangible assets
whenever events or changes in conditions indicate that the carrying value
may not be recoverable. The evaluation requires us to estimate future
undiscounted cash flows associated with an asset or group of assets. If the
cost of the asset or group of assets cannot be recovered by these
undiscounted cash flows, then an impairment may exist. Estimating future
cash flows requires judgments regarding future economic conditions, product
demand and pricing. Although we believe our estimates are appropriate,
significant differences in the actual performance of the asset or group of
assets may materially affect our asset values and require an impairment
charge to future results.
SELF-INSURANCE. We are self-insured for the majority of our workers'
compensation costs and group health insurance costs, subject to specific
retention levels. We rely on claims experience and the advice of consulting
actuaries and administrators in determining an adequate liability for
self-insurance claims. Our self-insured workers' compensation liability is
estimated based on reserves for claims that are established by a
third-party administrator. The estimate of these reserves is increased to
reflect the estimated future development of the claims. Our liability for
workers' compensation claims is the estimated total cost of the claims on a
fully-developed basis. Our liability for workers' compensation claims at
December 31, 2003 was $8.1 million. The actuarial estimate of the cost of
claims incurred in 2003 was $3.6 million and $5.1 million in 2002. In
addition, in 2002, we recorded a charge of $4.4 million to adjust our
workers' compensation liability to a fully developed basis. In 2003, we
recorded additional charges of $1.8 million due to negative development of
old claims.
Our self-insured healthcare liability is estimated based on our actual
claims experience and multiplied by a lag factor. Our healthcare liability
represents our estimate of claims that have been incurred but have not been
reported. The liability at December 31, 2003 was $6.8 million. The lag
factor used to estimate this liability was approximately 75 days.
While we believe that our assumptions are appropriate, significant
differences in our experience or a significant change in any of our
assumptions could materially affect our workers' compensation costs and
group health insurance costs.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements we are required to estimate our income
taxes in each of the jurisdictions in which we operate. This process
involves estimating our actual current tax exposure, together with
assessing temporary differences resulting from differing treatment of items
for tax and financial reporting purposes. The tax effects of these
temporary differences are recorded as deferred tax assets or deferred tax
liabilities. Deferred tax assets generally represent items that can be used
as a tax deduction or credit in our tax return in future years for which we
have already recorded the tax benefit in the statement of operations.
Deferred tax liabilities generally represent tax items that have been
deducted for tax purposes, but have not yet been recorded in the statement
of operations.
We must then assess the likelihood that our deferred tax assets support
the use of the future deduction or credit. To the extent we believe that
the use of the future tax asset is not likely, we must establish a
valuation allowance. The valuation allowance is based on our estimates of
taxable income by jurisdiction in which we operate, tax planning strategies
and the period over which our deferred tax assets will be recoverable. In
the event that actual results differ from these estimates, we are unable to
implement certain tax planning strategies or we adjust these estimates in
future periods, we may need to establish an additional valuation allowance
that could have a material negative impact on our statement of operations
and our balance sheet.
Significant judgment is required in determining our effective tax rate
and in evaluating our tax positions. We establish reserves when, despite
our belief that our tax return positions are fully supportable, we believe
that certain positions are likely to be challenged and that we may not
succeed. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of reserve provisions and changes to reserves that we
consider appropriate, as well as related interest.
24
A company of our size is often under audit by various tax agencies in
the jurisdictions in which we operate. A number of years may elapse before
a particular matter, for which we have established a reserve, is audited
and finally resolved. The number of years with open tax audits varies
depending on the tax jurisdiction. We currently have no open audits for the
years prior to 1997. While it is difficult to predict the final outcome or
the timing of resolution of any particular tax matter, we believe that our
reserves reflect the probable outcome of known tax contingencies.
NEW ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities. This statement amends SFAS No. 133 to provide
clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. The adoption of
SFAS No. 149, which is effective for contracts entered into or modified
after June 30, 2003, did not have an impact on our financial condition or
results of operations.
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 to classify and measure certain
financial instruments with characteristics of both liabilities and equity.
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. The adoption of
SFAS No. 150 did not have an impact on our financial condition or results
of operations.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits,
that improves financial statement disclosures for defined benefit plans.
The change replaces existing SFAS No. 132 disclosure requirements for
pensions and other postretirement benefits and revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by
SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits. SFAS No. 132 retains the disclosure
requirements contained in the original SFAS No. 132, but requires
additional disclosures about the plan assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132 is effective for annual
and interim periods with fiscal years ending after December 15, 2003. We
have adopted the revised disclosure provisions as of December 31, 2003.
On December 17, 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which
supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB
No. 104's primary purpose is to rescind accounting guidance contained in
SAB No. 101 related to multiple element revenue arrangements. SAB No. 104
will not have an impact on our recognition of revenue.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
often identified by the words, "believe," "expect," "intend," "appear,"
"estimate," "anticipate," "project," "will" and other similar expressions.
All such statements which address operating performance, events or
developments that we expect or anticipate will occur in the future and are
not historical in nature. All forward-looking statements reflect our
current views of Mail-Well with respect to future events and are subject to
risks and uncertainties. Actual results may differ materially from those
expressed or implied in these statements. As and when made, we believe that
these forward-looking statements are reasonable; however, these statements
involve known and unknown risks, including, but not limited to:
* General economic, business and labor conditions
25
* The ability of the Company to implement its strategic initiatives
* The ability to sustain profitability after substantial losses in 2002
and 2001
* The ability to successfully identify, manage or integrate possible
future acquisitions
* Sales are not subject to long-term contracts
* The industry is extremely competitive
* The impact of the Internet and other electronic media on the demand
for envelopes and printed material
* Postage rates and other changes in the direct mail industry
* Environmental laws may affect our business
* The ability to retain key management personnel
* Compliance with recently enacted and proposed changes in laws and
regulations affecting public companies could be burdensome and
expensive
* Dependence on suppliers and the costs of paper and other raw
materials
* The ability of the company to meet customer demand for additional
value-added products and services
* Changes in interest rates and currency exchange rates of the Canadian
dollar
* The ability to manage operating expenses
* The risk that a decline in business volume or profitability could
result in a further impairment of goodwill
* The ability to timely or adequately respond to technological changes
in our industry
* The ability to extend our current credit facility beyond 2005
In view of such uncertainties, investors should not place undue
reliance on any forward-looking statements since such statements speak only
as of the date when made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of operations
and financial position. Risks from interest and foreign currency exchange
rate fluctuations are managed through normal operating and financing
activities. We do not utilize derivatives for speculative purposes, nor do
we hedge interest rate exposure through the use of swaps and options or
foreign exchange exposure through the use of forward contracts.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At December
31, 2003 and 2002, we had variable rate debt outstanding of $91.8 million
and $103.8 million, respectively. A 1% increase in LIBOR on the maximum
amount of debt subject to variable interest rates, which was $318.5 million
in 2003 and $301.8 million in 2002, would increase our interest expense by
$3.2 million in 2003 and $3.0 million in 2002 and reduce our net income by
approximately $1.9 million in 2003 and 2002.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Mail-Well, Inc.
We have audited the accompanying consolidated balance sheets of
Mail-Well, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 2003. Our audits also included the financial statement
schedules for each of the three years in the period ended December 31, 2003
listed in the Index at Item 15(a)(2). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Mail-Well, Inc. and subsidiaries at December 31, 2003 and 2002,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
ERNST & YOUNG LLP
Denver, Colorado
February 4, 2004, except for Note 19,
as to which the date is February 23, 2004
27
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------------
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 307 $ 2,650
Accounts receivable, net................................ 223,541 219,924
Inventories, net........................................ 91,402 103,533
Net assets held for sale................................ -- 4,492
Other current assets.................................... 48,135 45,762
---------- ----------
TOTAL CURRENT ASSETS................................ 363,385 376,361
Property, plant and equipment, net.......................... 388,240 379,624
Goodwill.................................................... 299,392 290,361
Other intangible assets, net................................ 19,687 18,586
Other assets, net........................................... 36,689 42,435
---------- ----------
TOTAL ASSETS............................................ $1,107,393 $1,107,367
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 140,468 $ 151,930
Accrued compensation and related liabilities............ 53,209 53,292
Other current liabilities............................... 64,360 63,386
Curre