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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001
Commission file number 1-12551
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400, ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $0.01 par value per share The New York Stock Exchange
Convertible Subordinated Notes due 2002 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 22, 2002 was $148,282,413.
As of February 22, 2002 the Registrant had 48,322,248 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 and 13
and part of Item 10) is incorporated by reference from the registrant's
Proxy Statement to be filed pursuant to Regulation 14A with respect to the
registrant's Annual Meeting of Stockholders to be held on or about May 1,
2002.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business
The Company
Commercial Printing
Envelope
2001 Strategic Plan
Discontinued Operations
The Printing and Envelope Industries
Our Products
Our Services
Marketing, Distribution and Customers
Printing and Manufacturing
Materials and Supply Arrangements
Patents, Trademarks and Brand Names
Competition
Employees
Environmental
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART I
ITEM 1. BUSINESS
THE COMPANY
Unless the context otherwise requires, in this report, references to "the
Company" and "Mail-Well" as well as "we," "us," and "our," mean collectively
Mail-Well, Inc. and its consolidated subsidiaries. In Item 1 of this report,
all information excludes Curtis 1000 Inc., which was divested on
February 22, 2002.
We are one of the largest printers in North America competing primarily in
the commercial printing and envelope market segments. We believe we are the
world's largest manufacturer of envelopes, the leading printer of envelopes
in the U.S. and Canada, the premier high impact color printer in the U.S.,
and a leading general commercial printer in several major U.S. markets. We
operate 103 printing and manufacturing facilities throughout North America
and three in the United Kingdom. The combination of our broad network of
facilities and our sales force, which is among the largest in the industry,
has enabled us to build our customer base to over 20,000 in our commercial
printing and envelope businesses.
COMMERCIAL PRINTING
Our commercial printing business generated $818 million of sales for the
year ended December 31, 2001. We serve two primary commercial printing
markets: (i) high impact color printing, in which we print a wide range of
longer run premium products for national and regional accounts; and (ii)
general commercial printing, in which we print a wide array of products and
offer printing services to local commercial customers. Our commercial
printing business operates 29 plants throughout the U.S. and one in Canada.
ENVELOPE
Our envelope business generated $836 million of sales for the year ended
December 31, 2001. We serve two primary markets: (i) customized envelopes
and packaging products, including Tyvek(R) mailers used by the U.S. Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (ii) envelopes and other products sold to wholesalers,
paper merchants, printers, brokerage firms, office product establishments
and superstores. We manufacture envelopes in 34 U.S. plants and 13 Canadian
plants.
2001 STRATEGIC PLAN
In May 2001, we completed a comprehensive review of our operations and
adopted a new strategy that focuses on our two core businesses - commercial
printing and envelopes. In support of this strategy, we have announced our
intention and are in the process of seeking to divest our label and printed
office products businesses and certain other non-core assets. Accordingly,
in the second quarter of 2001 we began reporting the label and printed
office products segments as discontinued operations, began reporting the
other non-core assets as assets held for sale, and recorded the losses
anticipated on the dispositions of these operations. In February 2002, we
sold Curtis 1000 Inc., a printed office products company, for approximately
$40 million, including the assumption of debt. We have not entered
into any definitive agreements to sell any of the other companies we
plan to divest or our other non-core assets. We intend to use proceeds
from any divestitures to reduce our debt. In conjunction with our new strategic
plan, we also announced plans to consolidate three of our commercial
printing plants into one facility and to close nine of our envelope plants and
redeploy the equipment and other assets at other facilities. We have completed
five of these plant consolidations, and plan to complete the remainder by the
end of 2002.
Our new strategy also includes the launch of several initiatives to
significantly improve operations and marketing effectiveness. Both the
commercial printing and envelope businesses have programs in place to
institute best practices, install pricing disciplines and align equipment
and services to better serve our customers and markets.
DISCONTINUED OPERATIONS-LABEL AND PRINTED OFFICE PRODUCTS
In addition to our two primary businesses, we also operate a label business
and a printed office products business. We are seeking to sell these
businesses and therefore account for them as discontinued operations. Our
label business generated $219 million of sales for the year ended December
31, 2001. Our label business is the second largest supplier in the North
American label printing market.
1
Our label business has 14 plants in North America and three in the United
Kingdom. Our printed office products, excluding Curtis 1000, business generated
$215 million of sales for the year ended December 31, 2001. We believe we are
the largest manufacturer of printed office products sold through distributors.
The printed office products business prints a diverse line of custom products
for small and medium-sized businesses including both traditional and specialty
forms for use with desktop computers and laser printers. Our printed office
products business has 12 manufacturing facilities located throughout the U.S.
THE PRINTING AND ENVELOPE INDUSTRIES
The printing industry is one of the largest and most fragmented industries
in the United States with total estimated 2000 sales of $163 billion among
an estimated 47,667 printing businesses, according to the Printing Industry
of America, Inc. The printing industry includes general commercial printing,
financial printing, printing and publishing of books, labels, newspapers and
periodicals, quick printing and production of business forms and greeting
cards. The envelope industry is not as highly fragmented as the printing
industry. Envelope printing and manufacturing combined constitutes a $4.3
billion market in North America according to the Envelope Manufacturers'
Association. Products in the envelope industry include customized envelopes
for direct mail, transactional envelopes, non-custom envelopes for resale,
and specialty envelopes and files.
OUR PRODUCTS
Commercial Printing. We serve two primary commercial printing markets: (i)
high impact color printing, in which we print a wide range of longer run
premium products for national and regional accounts; and (ii) general
commercial printing, in which we print a wide array of products and offer
printing services to local commercial customers. Our printing products
include advertising literature, corporate identity materials, annual
reports, car brochures, calendars, greeting cards, brand marketing
materials, catalogs, maps, CD packaging and direct mail.
Envelope. We serve two primary markets: (i) customized envelopes and
packaging products, including Tyvek(R) mailers used by the U.S. Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (ii) envelopes and other products sold to wholesalers,
paper merchants, printers, brokerage firms, office product establishments and
superstores. In the customized envelope market, we offer printed customized
conventional envelopes for billing and remittance, filing systems, direct
mail marketers, photo processing, medical records, catalog orders and other
end-users, such as banks, brokerage firms and credit card companies. In the
wholesale envelope market, we manufacture and print a broad line of custom
envelopes that are featured in national catalogs for the office products
market or offered through office products retailers, including contract
stationers.
OUR SERVICES
We offer our customers a wide variety of related services to enhance the
value of our printed products, such as:
Prepress. The traditional design phase typically requires us to incorporate
customer-submitted graphics, photograph the artwork, develop the file and
prepare a plate from which to print.
Electronic Prepress. We offer a fully automated electronic process that
allows the customer to submit its artwork and other data in digital format,
either on a diskette, high speed transmission line or in hard copy that can
be computer-scanned. We can then manipulate the image, prepare color
separations and edit the design on a computer to create the file from which
the printing plate is made. Electronic prepress greatly reduces the time and
the number of people involved in the production of plates, and we believe
that we are an industry leader in fully automated electronic prepress
operations.
Direct-to-Plate Technology. We offer digital direct-to-plate technology,
which eliminates the production of film and several manual functions in the
platemaking process. This technology offers a complete digital workflow,
providing a better printed product and faster turnaround without additional
cost.
Mail-Well 1-2-1. We offer on-demand digital printing services using variable
imaging and other features to produce personalized marketing material,
direct mail and other forms of targeted customer communications.
2
Digital Archiving. We allow customers to store digitally rendered artwork on
our file servers. The artwork can then be accessed and retrieved either at
the plant during the prepress stage or from a remote site via high speed
transmission during the design stage.
Delivery Systems. We offer a flexible "just-in-time" delivery program. This
program allows customers to receive their products just prior to when they
are needed.
Warehousing Services. A customer will often place an order for significantly
more product than it may need at the time. When this occurs, we offer to
store the finished product and drop-ship them on an "as-needed" basis.
Inventory Management Systems. We offer this service primarily to large
national organizations with centralized purchasing and supply departments
that service multiple locations. We facilitate order processing by giving
customers information on usage by item and/or available supply in our
warehouses and provide for summary billing.
E-commerce. We have the capability to offer our customers a full range of
e-commerce services to order printing or other products through their web
page.
Printmailwell.com. We offer a full range of robust Internet-based print
procurement and print management solutions via our Printmailwell.com
e-commerce platform, powered by PrintCafe.
Our goal is to offer the highest standards in meeting our customers' needs
with our primary focus on responding quickly and competitively to customer
demands and requirements. Many of our production facilities are open 24
hours a day, seven days a week, to allow for timely production of materials.
At certain facilities we also offer a number of unique services to our
customers such as complimentary transportation between the airport and our
offices, in-plant overnight accommodations, on-site meeting rooms and
lounge, travel and hotel arrangements and computers for use by the customers
when on-site.
We believe that the consolidation of the printing industry is being driven
in part by the rapid pace of technological change. Recent advances in
computer-based prepress equipment, such as electronic prepress, allow for
faster and more precise manipulation of images and text prior to printing.
Similarly, recent advances in photo imaging technology have greatly
increased the quality of the final image produced in the printing process.
These advances have increased the capital requirements for maintaining
technologically advanced equipment. We believe that many smaller local and
regional commercial printers will find it increasingly difficult to obtain
adequate financial resources to remain competitive in the segments of the
commercial printing market in which we operate.
MARKETING, DISTRIBUTION AND CUSTOMERS
As a result of the wide array of applications, customer preferences and
order sizes, our marketing efforts vary significantly among markets and by
region. Although our marketing efforts traditionally have been local or
regional, we continue to emphasize a more focused national accounts program
to attract customers whose needs are national or cover multiple regions. We
now have a national marketing director and a print marketing campaign.
We maintain one of the largest sales staffs in the industry, with over 740
sales representatives in the commercial printing and envelope businesses, as
of December 31, 2001. The vast majority of our printed products are sold
through sales representatives, the exception being occasional "house" or
company accounts. Our sales representatives work closely with customers from
the initial concept through prepress, proofing and finally the press run.
Because our sales representatives are our primary contacts with our
customers, our goal is to attract, train and retain an experienced,
qualified sales force in each of our businesses. Sales representatives
typically are compensated by commission. Commissions generally depend on
such factors as order size and type, prepress work, reruns or rework and
overall profitability of the job. We also coordinate sales efforts among
regions within our operating businesses, and among the operating businesses
themselves, in order to compete for national account business, enhance the
internal dissemination of successful new product ideas, efficiently allocate
our production equipment, share technical expertise and increase
company-wide selling of specialty products manufactured at selected
facilities.
3
In commercial printing our marketing efforts differ between two broad
product areas: high impact color products, such as auto brochures, annual
reports and high-end catalogs, and general commercial work. We market high
impact printing primarily on a regional basis, through sales representatives
working out of sales offices across the United States. Because of the highly
fragmented nature of the general commercial printing and envelope
businesses, and the wide array of customer needs and preferences, we market
most of our general commercial printing and envelopes locally. Due to the
project-oriented nature of these market segments, sales to particular
customers may vary significantly from year to year depending upon the number
and size of their projects. Our customer supply agreements are typically on
an order by order basis or for a specified period of time. The sales force
is supported by a technical service team that provides customers with highly
customized printing solutions. Most of our printing facilities have customer
service representatives that work with the sales team and the customers to
manage orders efficiently and effectively. In some cases, the customer
service representatives have direct responsibility for accounts. In 2001, we
implemented our innovative "Go-to" marketing program as part of our
strategic plan. This program utilizes a team approach to customer service
relationships that we believe is unique in the printing industry.
Our customer base totals more than 20,000. Our customers in the high impact
commercial printing market include Fortune 500 companies, graphic designers
in the commercial printing and envelope businesses and advertising agencies.
Our customers in the general commercial printing and envelope businesses
include national and local businesses, insurance and finance companies, the
U.S. Postal Service and other government agencies and not-for-profit
organizations. None of our customers accounted for more than 2% of revenue
in 2001.
PRINTING AND MANUFACTURING
Our commercial printing business operates 29 printing facilities throughout
the U.S., and one in Canada. These plants combine advanced prepress
technology with high-quality web and sheet-fed color presses and extensive
binding and finishing operations. Many of our commercial printing facilities
operate seven days a week, 24 hours a day to meet customer printing
requirements.
Our envelope business operates 47 printing facilities throughout North
America. Envelopes are produced from either flat sheets or rolls of paper.
The paper is folded into an envelope, which is glued at the seams and on the
flap, and then printed as required. Webs are typically used for larger runs
with multiple colors and numerous features, and 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.
MATERIALS AND SUPPLY ARRANGEMENTS
The primary materials used in each of our businesses are paper, ink, film,
offset plates, chemicals and cartons, with paper accounting for the majority
of total material costs. We purchase these materials from a number of
suppliers and have not experienced any significant difficulties in obtaining
the raw materials necessary for our operations. We have implemented an
inventory management system in which a limited number of paper suppliers
supply all of our paper needs. These suppliers are responsible for
delivering paper on a "just-in-time" basis directly to our facilities. We
believe that this system has allowed us to enhance the flexibility and speed
with which we can serve customers, improve pricing on paper purchases,
eliminate a significant amount of paper inventory and reduce costs by
reducing warehousing capacity. We believe that we purchase our materials and
supplies at very competitive prices due to our volume leverage.
PATENTS, TRADEMARKS AND BRAND NAMES
We market products under a number of trademarks and brand names. We also
hold or have rights to use various patents relating to our envelope
business, which expire at various times through 2012. Our sales do not
materially depend upon any single or group of related patents.
4
COMPETITION
The commercial printing industry is highly competitive and fragmented. We
compete against a number of large, diversified and financially stronger
printing companies, as well as regional and local commercial printers, many
of which are capable of competing with us in both volume and production
quality. Although we believe customers are price sensitive, we also believe
that customer service and high quality products are important competitive
factors. We believe we provide premium quality and customer service while
maintaining competitive prices through stringent cost control efforts. The
main competitive factors in our markets are customer service, product
quality, reliability, flexibility, technical capabilities and price. We
believe we compete effectively in each of these areas.
In envelope printing, we compete with a few multi-plant and many
single-plant companies that primarily service regional and local markets. We
also face competition from alternative sources of communication and
information transfer such as facsimile machines, electronic mail, the
Internet, interactive video disks, interactive television and electronic
retailing. Although these sources of communication and advertising may
eliminate some domestic envelope sales in the future, we believe that we
will experience continued demand for envelope products due to (i) the
ability of our customers to obtain a relatively low-cost information
delivery vehicle that may be customized with text, color, graphics and
action devices to achieve the desired presentation effect, (ii) the ability
of our direct mail customers to penetrate desired markets as a result of the
widespread delivery of mail to residences and businesses through the U.S.
Postal Service and the Canadian 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.
EMPLOYEES
We employed approximately 13,150 people as of December 31, 2001, a reduction
of approximately 1,600 employees from December 31, 2000. Approximately 2,315
people we employ at the various facilities are represented by unions
affiliated with the AFL-CIO or Affiliated National Federation of Independent
Unions. These employees are governed by collective bargaining agreements,
each of which covers the workers at a particular facility, expires from time
to time and is negotiated separately. Accordingly, we believe that no single
collective bargaining agreement is material to our operations as a whole.
ENVIRONMENTAL
Our operations are subject to federal, state and local environmental laws
and regulations including those relating to air emissions, waste generation,
handling, management and disposal, and remediation of contaminated sites.
We have implemented environmental programs designed to ensure that we
operate in compliance with the applicable laws and regulations
governing environmental protection. Our policy is that management at all
levels be aware of the environmental impact of operations and direct such
operations in compliance with applicable standards. We believe that we are
in substantial compliance with applicable laws and regulations relating to
environmental protection. We do not anticipate that material capital
expenditures will be required to achieve or maintain compliance with
environmental laws and regulations. However, there can be no assurance that
newly discovered conditions or new or stricter interpretations of existing
laws and regulations will not result in material expenses.
5
ITEM 2. PROPERTIES
At December 31, 2001, the Company operated 110 printing and manufacturing
facilities in North America and the United Kingdom. Mail-Well owns 50
facilities and leases 92 facilities for printing, administration and
warehouse space. The Company also leases approximately 44,000 square feet of
office space for its corporate and operating segment headquarters in
Englewood, Colorado.
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.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "MWL." At February 21, 2002, there were approximately 456
shareholders of record and, as of that date, the Company estimates that
there were more than 15,000 beneficial owners holding stock in nominee or
"street" name. The following table sets forth, for the periods indicated,
the range of the high and low sales prices for the Company's common stock as
reported by the NYSE.
2000 HIGH LOW
First Quarter $12.88 $6.94
Second Quarter 9.63 7.50
Third Quarter 9.44 4.75
Fourth Quarter 5.06 3.86
2001 HIGH LOW
First Quarter $7.30 $4.50
Second Quarter 6.22 4.25
Third Quarter 5.30 3.70
Fourth Quarter 4.50 3.67
The Company has not paid a dividend on common stock since its incorporation
and does not anticipate paying dividends in the foreseeable future because
our senior secured credit facility and senior subordinated notes limit
the Company's ability to pay common stock dividends.
7
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived from the
historical audited financial statements of the Company. The financial data
presented reflect the restatement of all historical data for discontinued
operations. The results of operations acquired in acquisitions accounted for
under the purchase method have been included in the historical income
statement data of the Company from their respective acquisition dates.
Historical income statement data for 1998 and 1997 have been restated as
appropriate to reflect mergers accounted for as poolings-of-interests. The
data presented below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and the related notes included
elsewhere herein.
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999 1998 1997
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Net sales $1,653,471 $1,823,583 $1,533,840 $1,337,006 $1,086,401
Income (loss) from continuing operations (13,041)(a) 34,209(b) 58,602(c) 23,392(d) 34,791
Income (loss) per diluted share from
continuing operations $(0.27)(a) $0.69(b) $1.10(c) $0.48(d),(e) $0.82(e)
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Total assets 1,449,124 1,652,957 1,294,412 1,099,453 665,974
Total long-term debt, including current
maturities 852,999 919,793 663,349 583,657 340,890
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<FN>
(a) The 2001 results include a restructuring charge of $41.8 million and an
impairment loss on assets held for sale of $2.9 million, or $27.0
million after tax. Excluding these charges, income from continuing
operations would have been $14.0 million or $0.29 per diluted share.
(b) The 2000 results include a restructuring charge of $6.2 million, or
$3.8 million after tax. Excluding these charges, income from continuing
operations would have been $38.0 million or $0.76 per diluted share.
(c) The 1999 results include a restructuring charge of $1.8 million, or
$1.1 million after tax. Excluding these charges, income from continuing
operations would have been $59.7 million or $1.12 per diluted share.
(d) The 1998 results include restructuring charges of $16.7 million, or
$10.3 million after tax and other charges of $12.2 million, with no tax
impact, principally related to deleveraging the Employee Stock Ownership
Plan. Excluding these charges, income from continuing operations would
have been $45.9 million or $0.90 per diluted share.
(e) Per share amounts have been restated to reflect the 3:2 stock split in
June 1997 and the 2:1 stock split in June 1998.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
We are one of the largest printers in North America competing primarily in
the commercial printing and envelope market segments. We believe we are the
world's largest manufacturer of envelopes, the leading printer of envelopes
in the United States and Canada, the premier high impact color printer in
the United States, and a leading general commercial printer in several major
U.S. markets. We operate 77 facilities throughout North America in our
commercial printing and envelope businesses. The combination of our broad
printing facility network and our sales force, which is among the largest in
the industry, has enabled us to build our primary customer base to over
20,000 customers.
In May 2001, we completed a comprehensive review of our operations and
adopted a new strategy that focuses on our two primary businesses -
commercial printing and envelope. In support of this strategy, we have
announced our intention and are in the process of seeking to divest our
label and printed office products businesses and certain other non-strategic
assets. Accordingly, in the second quarter of 2001, we began reporting the
label and printed office products businesses as discontinued operations,
began reporting the other non-strategic assets as assets held for sale, and
recorded a loss of $75.9 million anticipated on these dispositions. As a
result of a deterioration in the market after September 11, we recorded an
additional charge of $45.1 million in the fourth quarter. In February 2002, we
sold Curtis 1000 Inc., a printed office products company, for approximately
$40 million. We intend to use the net proceeds from the divestitures to
reduce our senior secured debt. In connection with our new strategic plan,
we also announced plans to consolidate three of our commercial printing
plants into one facility, to close nine of our envelope plants and to
redeploy the equipment and assets at other facilities. We have completed the
plant consolidations in commercial printing and three of the closures in
envelope, and plan to complete the remaining consolidations by the end of
2002. Our new strategy includes the launch of several initiatives to
significantly improve operations and marketing effectiveness. Both the
envelope and commercial printing businesses have programs in place to
institute best practices, install pricing disciplines and align equipment
and services to better serve our customers and markets. We believe these
initiatives will significantly improve the performance of our businesses.
Paper is our most significant raw material. We purchased approximately
437,000 tons of paper in 2001 for our envelope and commercial printing
businesses. Prices of uncoated papers, which are the principal grades of
paper used to manufacture envelopes, decreased 10% in 2001 after an increase
of approximately 5% at the end of 1999. Prices of coated papers, which are
used principally in commercial printing, increased approximately 3% in 2000
but decreased approximately 8% in 2001. Changes in paper pricing generally
do not affect the operating results of our commercial printing business
because we can pass on paper price increases to our customers. Paper pricing
does, however, impact the operating margins of our envelope business. When
paper prices are rising, operating margins on our envelope products tend to
be lower because we generally are not able to increase our prices as quickly
as paper prices increase. Thus, when uncoated paper prices increased at the
end of 1999, operating margins of the envelope business were negatively
impacted in 2000. We expect uncoated and coated paper pricing to be stable
in 2002.
Our significant growth has been primarily due to our acquisition strategy.
However, we curtailed our acquisitions in 2001 in order to concentrate on
implementing our strategic plan. In 2000, we acquired American Business
Products, Inc. and four smaller companies. In 1999, we acquired eight
companies. The acquisitions completed in 2000 and 1999 were accounted for as
purchase transactions. Recording acquisitions in this manner impacts
comparability of our financial statements because the results of each of the
acquired companies are included in the consolidated results from the dates
acquired. The impacts of our acquisitions are included in the following
discussions of our results.
CONSOLIDATED RESULTS OF OPERATIONS
The financial statements for all periods presented have been restated as
required by generally accepted accounting principles to report the results
of our label and printed office products businesses as discontinued
operations. The
9
summary financial data set forth in the tables that follow present reported
amounts as well as comparable financial data for New Mail-Well. When we
refer to "New Mail-Well," we are referring to results of the operations that
will constitute Mail-Well subsequent to the planned divestitures of the
operations reported as discontinued operations and assets held for sale and
that exclude restructuring, asset impairments and other charges reported
in the consolidated statements of operations for the years ended December
31, 2001, 2000 and 1999.
The economic downturn in 2001 adversely affected the sales and margins of
both of our primary businesses, especially the portion of our commercial
printing business related to print advertising. The reduced sales and
margins have resulted in corresponding decreases in operating income and net
income mitigated in part by reductions in operating expenses and interest
expense.
SALES
YEAR ENDED DECEMBER 31 % CHANGE
(dollars in thousands) 2001 2000 1999 2001 2000
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Reported $1,653,471 $1,823,583 $1,533,840 (9)% 19%
New Mail-Well* $1,563,749 $1,719,393 $1,436,068 (9)% 20%
- ----------------------------------------------------------------------------------------------
<FN>
* Excludes sales of certain operations of our envelope and commercial
printing businesses held for sale. New Mail-Well's sales include sales to
Curtis 1000 Inc. and other operations being divested, which sales are anticipated
to continue subsequent to the dispositions of these operations.
New Mail-Well's sales were down $155.6 million, or 9%, in 2001. Excluding
the impact of acquisitions completed during 2000, the sales decline was 11%.
The slowdown in the economy during 2001 significantly impacted sales.
Reductions by our customers in spending on printed advertising material and
direct mail promotions impacted sales of commercial printing and envelopes.
Problems in the technology, telecommunications and travel industries also
adversely affected our business.
New Mail-Well's sales of $1.7 billion in 2000 were $283.3 million higher
than sales in 1999. Sales contributed by acquisitions completed in 2000 and
1999 accounted for $159 million of this increase. Internal growth in both
our commercial printing and envelope businesses accounted for the remainder.
Reported sales in 2001 and 2000 changed from the prior year in the same
proportions and were impacted by the same factors as the sales of New
Mail-Well.
RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
2001. In connection with our new strategic plan, we developed plans to
consolidate certain operations to eliminate excess internal capacity in
order to reduce costs and improve our long-term competitive position. The
restructuring charges related to these plans totaled $37.4 million in 2001,
and we expect additional charges of approximately $38.0 million in 2002. The
following table and discussion present the details of these restructuring
charges, as well as other charges recorded in 2001:
Commercial
(in thousands) Envelope Printing Corporate Total
- -----------------------------------------------------------------------------------------------------------
Employee separation and related
expenses $ 9,042 $ 385 $ - $ 9,427
Lease termination costs 1,368 346 - 1,714
Other exit costs 13,174 1,632 - 14,806
Asset impairment charges 8,178 601 - 8,779
Strategic assessment costs - - 2,677 2,677
- -----------------------------------------------------------------------------------------------------------
Total restructuring costs 31,762 2,964 2,677 37,403
Other charges 1,360 1,482 1,600 4,442
- -----------------------------------------------------------------------------------------------------------
Restructuring, asset impairments and
other charges $33,122 $4,446 $4,277 $41,845
===========================================================================================================
10
Our envelope business has implemented a plan to consolidate nine of our
manufacturing facilities over an 18-month period. This plan will
substantially reduce excess internal capacity and improve utilization of
equipment and resources at the remaining 41 plants. The separation and
related employee costs cover 923 employees to be terminated over the course
of this project, of which 359 had been separated as of December 31, 2001.
Other exit costs include training costs for those employees at the plants
that are absorbing the sales of the plants being closed and external
assistance in implementing the plant closures. As of December 31, 2001, we
had completed the closure of our facilities in Omaha, Nebraska; Allentown,
Pennsylvania; and Santa Fe Springs, California. The $8.2 million asset
impairment charge relates to the write down of equipment taken out of
service as a result of these plant closures.
Our commercial printing business consolidated three printing operations in
the Philadelphia, Pennsylvania area into one. This consolidation was done to
improve the cost effectiveness of these operations and their competitive
position in the Philadelphia market. The costs associated with this
consolidation included severance and related expenses covering the
termination of 25 employees, all of whom have been terminated. Other exit
costs include expenses incurred to move and reinstall equipment. Equipment
taken out of service was written down $0.6 million to its fair market value.
In developing our new 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.
Our new strategy includes the launch of several initiatives to significantly
improve operations and marketing effectiveness. Both the envelope and
commercial printing businesses have programs in place to institute best
practices, install pricing disciplines and align equipment and services to
better serve our customers and markets. We believe these initiatives will
significantly improve the performance of our businesses; accordingly, we
have expedited the implementation of these programs in our commercial
printing business by investing in outside assistance. The external
incremental cost incurred for these initiatives totaled $2.1 million in 2001
and is reported as other charges.
Other charges include the write-off of a $1.6 million investment in a
company developing a service to enable online management of the creative
process of a printing job and a $0.7 million write-off of the cost incurred
for a human resource information system that will not be implemented.
2000. We began our comprehensive review of our operations in 2000 and
identified certain actions that could be taken at that time. The following
table and discussion present the details of restructuring charges, as well
as other charges recorded in 2000:
Commercial
(in thousands) Envelope Printing Total
------------------------------------------------------------------------------------------------
Employee separation and related
expenses $ 86 $ 188 $ 274
Lease termination costs - 428 428
Asset impairment charges - 749 749
Other exit costs - 45 45
------------------------------------------------------------------------------------------------
Total restructuring costs 86 1,410 1,496
------------------------------------------------------------------------------------------------
Other asset impairments 1,872 2,036 3,908
------------------------------------------------------------------------------------------------
Total restructuring, asset impairments and
other charges $1,958 $3,446 $5,404
================================================================================================
Our envelope business closed a resale operation in Vancouver, Washington.
The separation and related employee costs covered the termination of 19
employees, all of whom have been terminated.
Our commercial printing business consolidated two operations in St. Louis
into an existing facility and closed our bindery operation in Mexico. We
reduced our total workforce by 165 employees by taking these actions.
We also incurred asset impairment charges in 2000 totaling $3.9 million
that were unrelated to the restructuring. These assets were taken out of
service and could not be redeployed or sold, and therefore were written off.
11
We completed a restructuring program initiated in 1998 during 2000. Changes
related to that program, which were recorded in 2000, totaled $0.8 million.
IMPAIRMENT OF ASSETS HELD FOR SALE
As part of our new strategy, the sale of certain assets that are not
strategic to our envelope or commercial printing businesses was approved in
May 2001. We incurred a charge of $2.9 million in 2001 to write down certain
of these assets to fair value.
OPERATING INCOME
YEAR ENDED DECEMBER 31 % CHANGE
(dollars in thousands) 2001 2000 1999 2001 2000
- ----------------------------------------------------------------------------------------------
Reported
Operating income $33,816 $117,523 $137,010 (71)% (14)%
Operating margin 2% 6% 9%
- ----------------------------------------------------------------------------------------------
New Mail-Well*
Operating income $65,848 $110,497 $127,233 (40)% (13)%
Operating margin 4% 6% 9%
- ----------------------------------------------------------------------------------------------
<FN>
*Excludes operating income in 2001, 2000 and 1999 of certain operations of
our envelope and commercial printing businesses held for sale, the $2.9
million impairment of assets held for sale in 2001 and restructuring, asset
impairments and other charges of $41.8 million, $6.2 million and $1.8
million in 2001, 2000 and 1999, respectively.
New Mail-Well's operating income declined 40% in 2001 to $65.8 million.
Excluding earnings contributed by acquisitions completed in 2000, the
decline was 42%. The reduction in operating income was primarily due to the
estimated $53 million of contribution margin lost on the decline in sales.
Increased competition resulting from the lower demand due to the slowdown in
the economy impacted contribution margins by approximately $6 million.
Offsetting these declines were reductions in fixed manufacturing costs,
primarily production support, and administrative expenses, which totaled
approximately $13 million during 2001.
New Mail-Well's operating income in 2000 declined 13%. Excluding the $8.2
million attributable to acquisitions completed in 2000 and 1999, the decline
was 19%. This decline was the result of lower margins in our envelope
business due to higher paper prices and lower profits in our commercial
printing business. The lower earnings of our commercial printing business
were due to a change in the mix of the products sold and to poor operating
performance at four manufacturing facilities, including asset write-offs and
accrual adjustments, totaling $6.1 million at two of these plants. Corporate
expenses were also higher primarily due to special retirement expenses of
$2.6 million recorded in 2000.
12
INTEREST EXPENSE
YEAR ENDED DECEMBER 31 % CHANGE
(dollars in thousands) 2001 2000 1999 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Total interest expense $ 78,891 $ 92,138 $ 55,247 (14)% 67%
Less: Allocated to discontinued operations (26,140) (30,011) (15,039)
- --------------------------------------------------------------------------------------------------------------------
Reported interest expense 52,751 62,127 40,208 (15)% 55%
Less: Allocated to assets held for sale (5,255) (6,013) (4,796)
- --------------------------------------------------------------------------------------------------------------------
New Mail-Well $ 47,496 $ 56,114 $ 35,412 (15)% 58%
- --------------------------------------------------------------------------------------------------------------------
In 2001, total interest expense declined 14% due to lower average debt
balances and lower average interest rates. Interest rates and expense are
expected to increase in 2002 due to anticipated debt refinancing related to
the repayment of our 5% convertible notes on or before their maturity at
November 1, 2002.
In February 2000, we entered into a new senior secured credit facility to
finance the acquisition of American Business Products, Inc. The increase in
interest in 2000 was due to higher total borrowings and higher average
interest rates.
Reported interest is net of an allocation of interest expense to
discontinued operations based on the net assets of those operations.
Interest expense applicable to New Mail-Well also excludes interest
allocated to certain operations of the envelope and commercial printing
businesses which are held for sale, based on the net proceeds anticipated
from the sales of these assets.
INCOME TAXES
YEAR ENDED DECEMBER 31
(dollars in thousands) 2001 2000 1999
------------------------------------------------------------------------------------------
Reported
Provision (benefit) for income taxes $(7,684) $20,213 $39,428
Effective tax rate 37.1% 37.1% 40.2%
------------------------------------------------------------------------------------------
New Mail-Well
Provision for income taxes $ 7,146 $19,242 $37,428
Effective tax rate 43.4% 36.1% 40.2%
------------------------------------------------------------------------------------------
New Mail-Well's effective tax rate for 2001 increased by 7.3 percentage
points due to lower pre-tax income, which increased the impact of
nondeductible goodwill amortization on the effective rate.
The 4.1 percentage point decline in New Mail-Well's effective tax rate for
2000 was due in part to a reduction in the statutory rates in Canada. In
addition, net impact of permanent differences reduced taxable income in
2000. The reported effective tax rate for 2001 reflects the tax impact of
the restructuring charge.
13
INCOME (LOSS) FROM CONTINUING OPERATIONS AND INCOME PER SHARE - ASSUMING
DILUTION
YEAR ENDED DECEMBER 31 % CHANGE
(dollars in thousands) 2001 2000 1999 2001 2000
- --------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
Reported $(13,041) $34,209 $58,602 (138)% (42)%
New Mail-Well* $ 9,319 $34,060 $55,622 (73)% (39)%
- --------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
per share - assuming dilution
Reported $ (0.27) $ 0.69 $ 1.10 (139)% (38)%
New Mail-Well* $ 0.19 $ 0.69 $ 1.05 (72)% (34)%
- --------------------------------------------------------------------------------------------------------------
<FN>
*Excludes income from continuing operations in 2001, 2000 and 1999 of
certain operations of our envelope and commercial printing businesses held
for sale, the $2.9 million impairment of assets held for sale in 2001 and
restructuring, asset impairments and other charges of $41.8 million, $6.2
million and $1.8 million in 2001, 2000 and 1999, respectively.
New Mail-Well's income (loss) from continuing operations per share declined
72% in 2001, reflecting a similar decrease in income from continuing
operations. The earnings decline was due to lower sales and lower margins
partially offset by lower fixed costs and lower interest expense. In
addition, our reported loss from continuing operations of $13 million, or
$0.27 per share, was also negatively impacted by the restructuring, asset
impairment and other charges of $41.8 million and the impairment charge
recorded on assets held for sale of $2.9 million which are excluded from
income from continuing operations of New Mail-Well.
In 2000, income from continuing operations for New Mail-Well declined 39%
with a corresponding 34% decrease in earnings per share. This decline in
earnings reflected lower operating margins, higher fixed costs, higher
amortization expense and higher interest expense than in 1999.
LOSS ON DISCONTINUED OPERATIONS
In June 2001, we announced our intention to sell our label and printed
office products businesses. Generally accepted accounting principles require
that our financial statements be restated to exclude the sales and expenses
of these business and that their results be reported as discontinued
operations. The loss reported from discontinued operations was $123.2
million, or $2.59 per share, after income tax benefits from the loss and
included the following:
o A write-down to net realizable value based on estimated
sales proceeds; and
o The actual and forecasted results of these businesses from
the date of the announcement through the expected date of
disposal, including an allocation of interest expense.
We have based our estimates of the sales proceeds expected from the
divestitures on data provided by our financial advisors and indications of
value received from prospective buyers. The loss will be adjusted once the
actual sales proceeds are known or management has information indicating
that the actual sales proceeds are likely to differ from the estimates. We
do not expect the actual sales proceeds to be significantly different from
those assumed, and we expect to complete these dispositions by June 30,
2002.
Sales of our label and printed office products businesses in 2001 totaled
$605.6 million. The operating income earned by these businesses in 2001 was
$19.3 million.
14
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE - ASSUMING DILUTION
YEAR ENDED DECEMBER 31 % CHANGE
(dollars in thousands) 2001 2000 1999 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Net income (loss)
Reported $(136,217) $27,618 $64,482 (593)% (57)%
New Mail-Well $ 9,319 $34,060 $55,622 (73)% (39)%
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) per share - assuming
dilution
Reported $ (2.86) $ 0.56 $ 1.20 (611)% (53)%
New Mail-Well $ 0.19 $ 0.69 $ 1.05 (72)% (34)%
- -----------------------------------------------------------------------------------------------------------------
In 2001, the reported net loss was $136.2 million, or $2.86 per share
assuming dilution. This loss was due to lower operating results from
continuing operations, the restructuring, asset impairments and other
charges and the losses recognized on discontinued operations and assets held
for sale. Net income in 2000 included an extraordinary gain of $1.4 million.
Reported net income and net income per share in 2000 were down over 50% from
1999 because of lower operating results, higher amortization expense and
higher interest expense.
New Mail-Well's net income and net income per share are the same as shown
from New Mail-Well's continuing operations because New Mail-Well excludes
results of discontinued operations, the impairment on assets held for sale
and the restructuring, asset impairments and other charges.
BUSINESS SEGMENTS
ENVELOPE
The following table presents the reported sales and operating income of our
envelope business, as well as its sales and operating income excluding the
results of certain operations that are held for sale and the restructuring
charges recorded in 2001 and 2000 ("New Envelope").
YEAR ENDED DECEMBER 31 % CHANGE
(dollars in thousands) 2001 2000 1999 2001 2000
- ---------------------------------------------------------------------------------------------------------
Net sales
Reported $835,534 $861,803 $738,288 (3)% 17%
New Envelope* $781,463 $801,253 $679,257 (2)% 18%
- ---------------------------------------------------------------------------------------------------------
Operating income
Reported $ 54,168 $ 90,202 $ 90,996 (40)% (1)%
New Envelope* $ 79,286 $ 84,980 $ 86,344 (7)% (2)%
- ---------------------------------------------------------------------------------------------------------
<FN>
*Excludes sales and operating income of certain operations of our envelope
business held for sale. New Envelope sales include sales to Curtis 1000 Inc.
and other operations being divested, which sales are anticipated to continue
subsequent to the dispositions of these operations.
New Envelope's sales in 2001 were down 2% from the prior year. Excluding the
impact of acquisitions completed in 2000, sales were down approximately
$35.6 million, or approximately 4%. This decline was due primarily to the
general decline in the economy. Sales to direct mail customers were lower in
2001 by approximately $12.2 million due to reductions in spending on direct
mail promotions. Sales of specialty packaging were down approximately $12.6
million primarily due to reduced demand from the U.S. Postal Service. We
also experienced lower sales of approximately $4.7 million in the resale
segment of our market as customers reduced inventories.
In 2000, approximately $78.2 million of New Envelope's sales increase was
due to the impact of companies acquired in 2000. Internal growth accounts
for the remaining increase of $43.8 million.
15
Operating income of New Envelope was down 7% in 2001 from the prior year.
Excluding the earnings of companies acquired in 2000 the decline was 9%. The
decline in operating income in 2001 was due to lower sales and the resulting
decrease in gross profit of $11.2 million. In response to the lower sales,
we reduced fixed manufacturing costs in 2001 such that gross profit margin
was down only 50 basis points to 20.5%. Excluding the impact of
acquisitions, selling and administrative expenses were down $3.5 million
from 2000 reflecting lower sales commissions and reductions in
administrative overhead.
In 2000, New Envelope's operating income was also down from the prior year.
Excluding earnings of companies acquired in 2000 and 1999, the decline in
operating income was 10%. In 2000, selling prices remained relatively
constant with selling prices in 1999 despite higher paper costs in 2000
compared to 1999. Lower margins reduced gross profits by $14.5 million.
Excluding the impact of acquisitions, administrative expenses were $1.8
million lower in 2000 than in 1999.
COMMERCIAL PRINTING
The following table presents the reported sales and operating income of our
commercial printing business, as well as its sales and operating income
excluding the results of certain of its operations that are held for sale
and the restructuring and impairment charges recorded in 2001 and 2000 ("New
Commercial Printing").
YEAR ENDED DECEMBER 31 % CHANGE
(dollars in thousands) 2001 2000 1999 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Net sales
Reported $817,937 $961,780 $795,552 (15)% 21%
New Commercial Printing* $782,286 $918,140 $756,811 (15)% 21%
- ----------------------------------------------------------------------------------------------------------------
Operating income
Reported $ 14,763 $ 54,758 $ 65,108 (73)% (16)%
New Commercial Printing* $ 15,974 $ 52,648 $ 59,673 (70)% (12)%
- ----------------------------------------------------------------------------------------------------------------
<FN>
*Excludes sales and operating income of certain operations of our commercial
printing business held for sale. New Commercial Printing sales include sales
to Curtis 1000 Inc. and other operations being divested, which sales are
anticipated to continue subsequent to the dispositions of these operations.
The economic slowdown in 2001 had a significant impact on our commercial
printing business. Sales of New Commercial Printing were down 15% from the
prior year. Excluding the impact of acquisitions completed in 2000, the
sales decline was $147.3 million, or 16%. Customers have reduced spending on
advertising in reaction to the recession, which has directly impacted our
commercial printing business. We estimate that approximately 50% of
commercial printing sales are related to advertising. Reductions in spending
by our customers on print advertising account for approximately 28% of the
sales decline in 2001. In addition, sales to our technology and
telecommunications customers were down approximately $30 million, or
approximately 20% of the decline, in 2001. The remaining sales decline was
due to general reductions in demand and increased competition.
New Commercial Printing's sales in 2000 were up 21%. Excluding the impact of
sales by companies acquired in 2000 and 1999, the increase was 13%. Sales of
annual reports, automotive brochures, magazine inserts and printed
educational materials were strong in 2000 and responsible for much of this
growth.
The decline in operating income of New Commercial Printing in 2001 was
primarily related to the significant sales decline in 2001. Contribution
margin lost due to lower sales was more than $40 million. This reduction was
offset by a reduction in administrative expenses, before considering
acquisitions, of $3.3 million.
In 2000, New Commercial Printing's operating income declined 12%. Excluding
the impact of acquisitions completed in 2000 and 1999, the decline in
operating income was 17%. Despite the increase in sales during 2000, margins
declined primarily due to significant operating problems at four of our
printing plants. The operating income at these four plants was $10.1 million
lower in 2000 than in 1999, before considering charges of $6.1 million to
write-off assets and adjust accruals at two of these plants. A change in mix
of business in 2000 also had a negative impact on results.
16
LIQUIDITY AND CAPITAL RESOURCES
We generated cash of $152.0 million from continuing operations in 2001
compared to $131.4 million in 2000 and $107.2 million in 1999. While
earnings declined in 2001 and 2000, non-cash charges increased primarily due
to the increase in the non-cash portion of the restructuring and asset
impairment charges recorded in 2001 and 2000. In addition, working capital,
which consists of current assets exclusive of cash and cash equivalents, net
assets of discontinued operations and net assets held for sale, less current
liabilities, exclusive of the current portion of long-term debt, was reduced
$88.5 million in 2001 to $135.2 million at December 31, 2001 compared to a
reduction of $35 million in 2000 and an increase of $4.3 million 1999.
Capital expenditures, excluding acquisitions, were $26.8 million in 2001,
$57.8 million in 2000 and $65.1 million in 1999. We anticipate capital
expenditures of approximately $42 million in 2002.
Consistent with our new strategy to reduce our leverage, free cash flow in
2001 was used primarily to reduce debt. There were no significant
acquisitions in 2001. In 2000, we obtained a new senior secured credit
facility to fund the acquisition of American Business Products, Inc. for
$331.1 million in cash plus $7.5 million of assumed debt. We sold the
extrusion coating and laminating operation of American Business Products in
September 2000 for after-tax cash proceeds of approximately $110.6 million.
Other acquisitions in 2000 included three commercial printing companies and
an envelope company. The cash paid for these four companies totaled $48.1
million. Debt was the principal source of funds used in 1999 for the
acquisitions of seven printing companies and one envelope company for
purchase prices totaling $130.9 million.
We repurchased 1,821,000 shares of common stock for an aggregate purchase
price of $10.0 million during 2000. We did not repurchase any common stock
in 2001 and have no plans to do so in 2002. In addition, we repurchased
$13.0 million of our outstanding convertible subordinated notes in 2000.
These transactions reduced the number of shares outstanding on a fully
diluted basis by 473,402 and 541,491, respectively. The impact on diluted
earnings per share was not material.
The percentage of New Mail-Well's debt to total capital was 70.2% at
December 31, 2001, up from 69.1% at December 31, 2000.
The following table summarizes our cash obligations as of December
31, 2001:
PAYMENTS DUE BY PERIOD
----------------------
(in thousands) Less than 1 year Years 2 and 3 Years 4 and 5 Thereafter Total
- --------------------------------------------------------------------------------------------------------------
Long-term debt $302,822 $40,004 $194,228 $315,945 $ 852,999
Operating leases 33,844 56,913 42,545 32,066 165,368
- --------------------------------------------------------------------------------------------------------------
Total cash obligations $336,666 $96,917 $236,773 $348,011 $1,018,367
- --------------------------------------------------------------------------------------------------------------
Long-term debt due during 2002 includes the retirement of our convertible
notes, other current debt and the portion of our bank borrowings that will
be paid from the proceeds from our planned divestitures pursuant to the
terms of our senior credit facility, net of amounts that would become
available as a result of such repayments under our revolving credit
facility.
At December 31, 2001, we had outstanding letters of credit of approximately
$5.9 million related to performance and payment guarantees. In addition, we
have issued letters of credit of $16.1 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.
17
Our convertible notes mature in November 2002. We intend to offer $300
million in new senior debt securities with a ten year maturity, with the
net proceeds from the offering used to pay down our senior credit
facility. In conjunction with this offering, we are obtaining an
amendment to the senior credit facility that, upon completion of the
offering, will allow us to set aside funds under the senior credit
facility needed for the retirement of the convertible notes on or
before their maturity, subject to meeting applicable borrowing conditions.
We expect to be able to fund our operations, capital expenditures and debt
and other contractual commitments over the next 12 months from internally
generated cash flow and funds available under our revolving credit facility.
In addition, we expect to receive approximately $300 million in proceeds
from the sales of our planned divestitures. At December 31, 2001, we had
$131.5 million of unused available credit under our revolving credit
facilities.
OUTLOOK
The economic downturn in 2001 continues to affect our business in 2002. We
do not expect significant increases in sales or improvements in our margins
until the economy, and especially advertising, rebounds. In the meantime, we
have continued to take steps through our strategic initiatives and otherwise
to reduce costs and improve our operations.
SEASONALITY AND ENVIRONMENT
Our commercial printing business experiences seasonal variations. Our
revenues from annual reports are generally concentrated from February
through April. Revenues associated with holiday catalogs and automobile
brochures tend to be concentrated from July through October, and calendars
May to September. As a result of these seasonal variations, we are at near
capacity in some facilities at certain time during these periods.
Several consumer direct market segments served by our envelope business,
such as photo finishing packaging and certain segments of the direct mail
market, experience seasonality, with a higher percentage of 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. Seasonality is offset by the diversity of
our other products and markets, which are not materially affected by
seasonal conditions.
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact
in the future.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
In preparing our financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. We evaluate our estimates and judgments on an
ongoing basis, including those related to bad debts, inventory valuations,
property, plant and equipment, intangible assets, income taxes,
restructuring costs, and contingencies and litigation. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances. Actual results may differ
from these estimates.
The most significant judgments made in our financial statements for 2001
involve the estimation of net sales proceeds to be received form the sales
of our discontinued operations and assets held for sale. We have based our
estimates on indications of value expressed by prospective buyers and the
advice of our financial advisors. We do not expect the actual proceeds to be
significantly different from our estimates; however, until we have completed
each of our planned divestitures, the possibility exists that actual
proceeds could be materially different from our estimates.
We exercise judgment in evaluating our long-lived assets for impairment. We
believe our businesses will generate sufficient undiscounted cash flow to
more than recover the investments we have made in property, plant and
equipment, as well as the goodwill and other intangibles recorded as a
result of our acquisitions.
We are self-insured for the majority of our workers' compensation costs and
group health insurance costs. We rely on claims experience and the advice of
consulting actuaries and administrators in determining an adequate liability
for self-insurance claims.
18
The determination of our tax provision is complex due to the number of
acquisitions we have completed and due to operations in several tax
jurisdictions outside the United States. In addition, realization of certain
deferred tax assets is dependent upon our ability to generate future taxable
income.
ADDITIONAL FINANCIAL INFORMATION
See Exhibit 99.1 filed with this report for the unaudited Consolidating
Condensed Financial Information of Mail-Well I Corporation, as Issuer,
certain of its subsidiaries as guarantor subsidiaries, certain of its
subsidiaries as non-guarantor subsidiaries and Mail-Well, Inc. as parent
guarantor. These statements are provided for compliance with the reporting
requirements under the indenture for the 8 3/4% Senior Subordinated Notes due
in 2008.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also includes guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after June 30, 2001.
SFAS 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives.
We will apply SFAS 142 beginning in the first quarter of 2002. Application
of the nonamortization provisions of SFAS 142 is expected to result in an
increase in net income of $7.1 million ($0.15 per share) in 2002. We will
reclassify an assembled workforce intangible asset with an unamortized
balance of $3.9 million and a customer relationship intangible asset with
unamortized balance of $9.4 million along with a related deferred tax
liability of $5.1 million to goodwill at the date of adoption. We will test
goodwill for impairment using the two-step process prescribed in SFAS 142.
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. We expect to complete the
first step by June 30, 2002. Based on steps we have taken to prepare for the
adoption of SFAS 142, it is possible that a portion of the unamortized
goodwill related to our commercial printing business, which totals $213.5
million, will be impaired using the impairment measurement methodology
required by SFAS 142. We have not yet determined the amount of the potential
impairment loss, if any. Any impairment that is required to be recognized
when adopting SFAS 142 will be reflected as the cumulative effect of a
change in accounting principle in the first quarter of 2002. We will complete
measurement of any impairment loss upon the initial adoption of SFAS No. 142
by December 31, 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting model to
be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal
transactions. SFAS 144 supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects Of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. We will adopt SFAS 144 as of January 1, 2002 and do
not anticipate any immediate impact from the adoption of this statement.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. We will adopt SFAS 143 in the first
quarter of fiscal year 2003. We are evaluating the impact of the adoption of
SFAS 143 on the consolidated financial statements.
19
FORWARD LOOKING INFORMATION
Certain statements in this report, and in particular, statements found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Generally, the words
"believe," "expect," "intend," "estimate," "anticipate," "project," "will"
and similar expressions identify forward-looking statements, which generally
are not historical in nature. All statements which address operating
performance, events or developments that we expect or anticipate will occur in
the future are forward-looking statements. Such statements reflect the current
views of Mail-Well with respect to future events and are subject to risks and
uncertainties. Actual results may differ materially form those expressed or
implied in these statements. As and when made, management believes that these
forward-looking statements are reasonable. However, caution should be taken not
to place undue reliance on any such forward-looking statements since such
statements speak only as of the date when made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
The following are some of the factors that could cause our actual results to
differ materially from the expected results described in or underlying the
Company's forward-looking statements:
o We reported losses for the last three fiscal quarters of 2001 primarily
as a result of expenses related to our restructuring initiatives and
the economic slowdown, which in particular adversely affected our sales
to significant advertising and automotive customers and direct mail.
Our ability to return to profitability depends in part on our
customers' recovery from this slowdown and the success of our efforts
to reduce operating expenses through our plant consolidations and
ongoing cost-cutting measures in connection with our recent strategic
initiatives. Our operating results are difficult to predict, and we
cannot provide assurance we will be successful in achieving increased
revenues, positive cash flows or profitability.
o The Company has outstanding $139 million in aggregate principal amount
of 5% convertible notes. The convertible notes are due November 1,
2002. We expect to use available cash and, to the extent necessary,
borrowings under our revolving credit facility to repay these notes.
The senior credit facility has several conditions to borrowing. If we
are unable to satisfy all of these conditions, we would be unable to
borrow under the senior credit facility to repay the convertible notes.
We would then need to obtain the funds to repay the convertible notes
through other sources, which funds may not be available to us on
favorable terms, on a timely basis or at all. The Company's failure to
pay the convertible notes when due would be an event of default under
the convertible notes.
20
o In May 2001, we announced the adoption of a strategic restructuring
plan that calls for the divestiture of our label and printed office
products businesses. We currently continue to operate those businesses
much as we have in the past but, for accounting purposes, we account
for these operations as "discontinued operations." The implementation
of our plan to sell these businesses may adversely affect the results
of operations of these businesses due to diversion of management's
attention, the impact on customers and other factors. We have sold
Curtis 1000 Inc., but we have not entered into any other definitive
agreements of sale. There can be no assurance that we will be able to
consummate any sale of those businesses, or that the terms, conditions
or timing of any sale, if consummated, will achieve the results
contemplated by our restructuring plan. We intend to use the proceeds
of these proposed sales to repay some of our existing debt under our
senior credit facility. There can be no assurance that we will receive
cash proceeds in the amounts contemplated by our strategic plan to
retire a material amount of existing debt. In addition, if any
proposed sale is consummated, we may have to retain certain
liabilities associated with those business segments' prior operations,
including pension benefit obligations, environmental liabilities and
indemnification obligations customarily contained in sale agreements.
o In the past, we have grown rapidly through acquisitions. Although
we believe that our experience in making acquisitions is an
important asset, our strategic plan and the terms of our senior
credit facility limit the acquisitions that we may currently
pursue. To the extent that we pursue acquisitions, we cannot be
certain that we will be able to identify and acquire other
businesses on favorable terms or that, if we are able to acquire
businesses on favorable terms, we will be able to successfully
integrate the acquired businesses into our current business or
profitably manage them.
o The printing industry in which we compete is generally characterized by
individual orders from customers or short-term contracts. Most of our
customers are not contractually obligated to purchase products or
services from us. Most customer orders are for specific printing jobs,
and repeat business largely depends on our customers' satisfaction with
the work we do. Although our business does not depend on any one
customer or group of customers, we cannot be sure that any particular
customer will continue to do business with us for any period of time.
In addition, the timing of particular jobs or types of jobs at
particular times of year may cause significant fluctuations in the
operating results of our various printing operations in any given
quarter. We depend to some extent on sales to certain industries such
as the advertising and automotive industries. We estimate that
approximately 50% of our commercial printing sales are related to
advertising. To the extent these industries experience downturns,
as is currently the case in advertising, the results of our
operations are adversely affected.
o The printing industry in which we compete is extremely fragmented and
highly competitive. In the commercial printing market, we compete
against a number of large, diversified and financially stronger
printing companies, as well as regional and local commercial printers,
many of which are capable of competing with us on volume, price and
production quality. In the envelope market, we compete primarily with a
few multi-plant and many single-plant companies servicing regional and
local markets. There currently is excess capacity in the printing
industry, which could result in excessive price competition. We are
constantly seeking ways to reduce our costs and become more efficient
competitor. However, we cannot be certain that these efforts will be
successful or that our competitors will not be more successful in their
similar efforts to reduce costs and become more efficient. If we fail
to reduce costs and increase productivity, we may face decreased profit
margins in markets where we encounter price competition, which in turn
could reduce our cash flow and profitability.
o Most envelopes used in the United States and Canada are sent through
the mail and as a result, postal rates can significantly affect
envelope usage. Historically, increases in postal rates, relative to
changes in the cost of alternative delivery means and/or advertising
media, have resulted in temporary reductions in the growth rate of mail
sent, including direct mail, which is a significant portion of our
envelope volume. We cannot be sure that direct mail marketers will not
reduce their volume as a result of any increases. Because rate
increases in the U.S. and Canada are outside our control, we can
provide no assurance that any increases in U.S. and/or Canadian postal
rates will not have a negative effect on the level of mail sent, or the
volume of envelopes purchased, in either or both countries. In such
event, we would expect to experience a decrease in cash flow and
profitability or financial position. Factors other than postal rates
that detrimentally affect the volume of mail sent through the U. S. and
Canadian postal systems may also negatively affect our business. If the
threats of mass bio-terrorism in the U. S. mail system persist, or if
there is a perception of a lack of safety in the U. S. or Canadian
postal systems, we cannot be sure that direct mail marketers will not
reduce their volume as a result of any such persisting threats or
insecurity, or
21
that such decreases in demand will not have a negative effect on the
level of mail sent or the volume of envelopes purchased.
o As of December 31, 2001, we had approximately 13,150 full-time
employees, of whom approximately 2,315 were members of various
local labor unions. If our unionized employees were to engage in a
concerted strike or other work stoppage, or if other employees were
to become unionized, we could experience a disruption of
operations, higher labor costs or both. A lengthy strike could
result in a material decrease in our cash flow or profitability.
o Paper costs represent a significant portion of our cost of materials.
Changes in paper pricing generally do no affect the operating margins
of our commercial printing business because we historically have been
able to pass on paper price increases and increased proceeds from waste
paper sales. Paper pricing does, however, impact the operating margins
of our envelope business because we generally are not able to increase
our prices as quickly as paper prices increase. We cannot be certain
that we will be able to continue to pass on future increases in the
cost of paper. Moreover, rising paper costs and their consequent
impact on our pricing could lead to a decrease in our volume of units
sold. For example, successive paper price increases during late 1995
and early 1996 resulted in a decline in demand for our products,
particularly from the direct mail advertising industry. Although we
have been successful in negotiating favorable pricing terms
with paper vendors, we cannot be certain we will be successful in
negotiating favorable pricing terms in the future. This may result in
decreased sales volumes as well as decreased cash flow and
profitability. Due to the significance of paper in the manufacture of
most of our products, we depend on the availability of paper. During
periods of tight paper supply, many paper producers allocate shipments
of paper based on the historical purchase levels of customers. As a
result of our large volume paper purchases from several paper
producers, we generally have not experienced difficulty in obtaining
adequate quantities of paper, although we have occasionally experienced
minor delays in delivery. Although we believe that our attractiveness
to vendors as a large volume paper purchaser will continue to enable us
to receive adequate supplies of paper in the future, unforeseen
developments in world paper markets coupled with shortages of raw paper
could result in a decrease in supply, which in turn would cause a
decrease in the volume of products we could produce and sell and a
corresponding decrease in cash flow and profitability.
o Our envelope manufacturing and printing business is highly dependent
upon the demand for envelopes sent through the mail. Such demand comes
from utility companies, banks and other financial institutions, among
others. Our printing business also depends upon demand for printed
advertising and business forms, among others. Customers increasingly
use the Internet and other electronic media to purchase goods and
services, and for other purposes such as paying utility and credit
card bills. Advertisers use them for targeted campaigns directed at
specific electronic user groups. Large and small businesses use
electronic media to conduct business, send invoices and collect bills.
As a result, we expect the demand for envelopes and other printed
materials for these purposes to decline. Although we expect
countervailing trends, such as the growth of targeted direct mail
campaigns based upon mailing lists generated by electronic purchases,
to cause overall demand for envelopes and other printed materials to
continue to grow at rates comparable to recent historical levels, we
cannot be certain that the acceleration of the trend towards
electronic media such as the Internet and other alternative media
will not cause a decrease in the demand for our products.
o Our operations are subject to federal, state, local and foreign
environmental laws and regulations, including those relating to air
emissions, wastewater discharge, waste generation, handling, management
and disposal, and remediation of contaminated sites. In addition, some
of the sellers from which we have bought businesses in the past have
been designated as potentially responsible parties under the federal
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, or CERCLA, or similar legislation in Canada, with
respect to off-site disposal of hazardous waste at two sites. CERCLA
imposes strict, and in certain circumstances joint and several,
liability for response costs. Liability may also include damages to
natural resources. We believe that we have minimal exposure as a result
of such designations, either because indemnities obtained in the course
of acquisitions or because of the de minimis nature of the claims, or
both. We also believe that our current operations are in substantial
compliance with applicable environmental laws and regulations. We
cannot be certain, however, that available indemnities will be adequate
to cover all costs or that currently unknown conditions or matters, new
laws and regulations, or stricter interpretations of existing laws and
regulations will not have a material adverse effect on our business or
operations in the future.
22
o Our success will continue to depend to a significant extent on our
executive officers and other key management personnel. We do not as a
matter of policy have employment agreements with our executive
officers. We cannot be certain that we will be able to retain our
executive officers and key personnel or attract additional qualified
management in the future. The success of our new strategic plan may
depend, in part, on our ability to retain management personnel during
the implementation of the plan. In addition, the success of any
acquisitions we may pursue may depend, in part, on our ability to
retain management personnel of the acquired companies. We do not carry
key-person insurance on any of our managerial personnel.
The foregoing list of important factors is not exclusive.
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 currently 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, 2001
and 2000, we had variable rate debt outstanding of $402.3 million and $447.2
million, respectively. A 1% increase in LIBOR on the maximum amount
available under our credit agreement, which is $546 million, would increase
our interest expense by $5.5 million and reduce our net income by
approximately $3.4 million.
We have operations in Canada, the United Kingdom and Mexico, and are exposed
to market risk for changes in foreign currency exchange rates of the
Canadian dollar, the British pound and the Mexican peso.
23
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, 2001 and 2000, 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,
2001. Our audits also included the financial statement schedules for each of
the three years in the period ended December 31, 2001 listed in the Index at
Item 14(a). 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, 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.
ERNST & YOUNG LLP
Denver, Colorado
January 23, 2002, except for Note 15,
as to which the date is February 22, 2002.
24
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31
2001 2000
--------------------------------
Assets
Current assets:
Cash and cash equivalents $ 809 $ 94
Accounts receivable, net 207,750 203,968
Inventories, net 104,544 131,417
Net assets of discontinued operations 246,377 394,215
Net assets held for sale 54,073 -
Other current assets 67,001 58,026
--------------------------------
Total current assets 680,554 787,720
Property, plant and equipment, net 375,415 431,025
Goodwill and other intangible assets, net 347,061 389,148
Other assets, net 46,094 45,064
--------------------------------
Total assets $1,449,124 $1,652,957
================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 142,521 $ 127,912
Accrued compensation and related liabilities 44,310 48,444
Other current liabilities 57,245 57,978
Current maturities of long-term debt 302,822 40,040
--------------------------------
Total current liabilities 546,898 274,374
Long-term debt 550,177 879,753
Deferred income taxes 93,573 86,765
Other liabilities 16,599 26,212
--------------------------------
Total liabilities 1,207,247 1,267,104
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 25,000 shares authorized,
none issued - -
Common stock, $0.01 par value; 100,000,000 shares authorized, 48,325,801
and 47,454,879 shares issued and outstanding at 2001 and 2000,
respectively 483 474
Paid-in capital 214,138 210,067
Retained earnings 46,623 182,840
Deferred compensation (3,359) -
Accumulated other comprehensive loss (16,008) (7,528)
--------------------------------
Total shareholders' equity 241,877 385,853
--------------------------------
Total liabilities and shareholders' equity $1,449,124 $1,652,957
================================
See notes to consolidated financial statements.
25
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
2001 2000 1999
---------------------------------------------------
Net sales $1,653,471 $1,823,583 $1,533,840
Cost of sales 1,324,091 1,438,435 1,182,893
---------------------------------------------------
Gross profit 329,380 385,148 350,947
Operating expenses:
Selling, general and administrative 238,111 248,808 202,721
Amortization of intangibles 12,663 12,657 9,409
Impairment of assets held for sale 2,945 - -
Restructuring, asset impairments and other charges 41,845 6,160 1,807
---------------------------------------------------
Total operating expenses 295,564 267,625 213,937
Operating income 33,816 117,523 137,010
Other (income) expense:
Interest expense 52,751 62,127 40,208
Other (income) expense 1,790 974 (1,228)
---------------------------------------------------
Income (loss) from continuing operations,
before income taxes (20,725) 54,422 98,030
Provision (benefit) for income taxes (7,684) 20,213 39,428
---------------------------------------------------
Income (loss) from continuing operations (13,041) 34,209 58,602
Income (loss) from discontinued operations,
net of income tax expense (benefit) of $90, $(1,525)
and $3,920, respectively (2,176) (8,038) 5,880
Loss on disposal of discontinued operations, net of
income tax benefit of $45,779 (121,000) - -
---------------------------------------------------
Income (loss) before extraordinary items (136,217) 26,171 64,482
Extraordinary items, net of income taxes of $907 - 1,447 -
---------------------------------------------------
Net income (loss) $ (136,217) $ 27,618 $ 64,482
===================================================
Earnings (loss) per share - basic:
Continuing operations $(0.27) $0.70 $1.20
Discontinued operations (2.59) (0.16) 0.12
Extraordinary item - 0.03 -
---------------------------------------------------
Earnings (loss) per share - basic $(2.86) $0.57 $1.32
===================================================
Earnings (loss) per share - diluted:
Continuing operations $(0.27) $0.69 $1.10
Discontinued operations (2.59) (0.16) 0.10
Extraordinary item - 0.03 -
--------------------------------------------------
Earnings (loss) per share - diluted $(2.86) $0.56 $1.20
===================================================
See notes to consolidated financial statements.
26
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
2001 2000 1999
----------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations $ (13,041) $ 34,209 $ 58,602
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Depreciation 40,966 42,855 34,141
Amortization 18,669 17,367 11,653
Extraordinary gain on early retirement of debt - (2,355) -
Noncash portion of restructuring and impairment charges 14,022 4,657 -
Deferred income taxes 2,850 8,121 12,215
Loss (gain) on disposal of assets 582 (923) (1,172)
Other noncash charges (credits), net 958 902 (1,203)
Changes in operating assets and liabilities,
excluding the effects of acquired businesses:
Accounts receivable 56,316 (12,472) (14,678)
Inventories 18,667 (991) (12,388)
Accounts payable and accrued compensation 16,269 24,272 19,019
Income tax payable (6,094) 26,817 7,748
Other working capital changes 3,295 (2,672) (3,970)
Other, net (1,476) (8,387) (2,763)
----------------------------------------------
Net cash provided by operating activities 151,983 131,400 107,204
Cash flows from investing activities:
Acquisitions, net of cash acquired (3,838) (227,044) (130,910)
Capital expenditures (26,799) (57,772) (65,087)
Proceeds from divestiture - 110,646 -
Proceeds from sales of property and equipment 3,777 30,941 7,259
Purchase of investment (100) (1,500) -
----------------------------------------------
Net cash used in investing activities (26,960) (144,729) (188,738)
Cash flows from financing activities:
Increase (decrease) in accounts receivable financing facility (75,000) (73,500) 95,900
Proceeds from exercise of stock options 413 335 2,029
Proceeds from issuance of long-term debt 634,404 1,131,069 386,116
Repayments of long-term debt (699,188) (879,316) (314,289)
Capitalized loan fees (4,439) (15,002) (1,481)
Repurchases of common stock - (10,000) -
Redemption of a nonvoting common stock of a subsidiary - (3,508) -
----------------------------------------------
Net cash provided by (used in) financing activities (143,810) 150,078 168,275
Effect of exchange rate changes on cash and cash equivalents (60) - 16
Cash flows from discontinued operations 19,562 (136,925) (86,487)
----------------------------------------------
Net increase (decrease) in cash and cash equivalents 715 (176) 270
Cash and cash equivalents at beginning of year 94 270 -
----------------------------------------------
Cash and cash equivalents at end of year $ 809 $ 94 $ 270
==============================================
See notes to consolidated financial statements.
27
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS) EQUITY
--------------------------------------------------------------------------------
Balance at December 31, 1998 $488 $217,218 $ 90,740 $ - $ (9,071) $ 299,375
Comprehensive income:
Net income 64,482 64,482
Other comprehensive income (loss):
Pension liability adjustment, net
of tax of $76 122 122
Currency translation adjustment 8,768 8,768
Unrealized loss on investment, net of tax
benefit of $11 (18) (18)
-------------
Other comprehensive income 8,872
-------------
Total comprehensive income 73,354
Exercise of stock options 4 2,025 2,029
Adjustment to deferred tax asset for:
Pooled entities (168) (168)
Stock options 757 757
Other (37) (37)
--------------------------------------------------------------------------------
Balance at December 31, 1999 492 219,795 155,222 - (199) 375,310
Comprehensive income:
Net income 27,618 27,618
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $72 (115) (115)
Currency translation adjustment (6,555) (6,555)
Unrealized loss on investments, net of tax
benefit of $412 (659) (659)
-------------
Other comprehensive loss (7,329)
-------------
Total comprehensive income 20,289
Exercise of stock options 1 334 335
Purchase and retirement of common stock (18) (9,982) (10,000)
Other (1) (80) (81)
--------------------------------------------------------------------------------
Balance at December 31, 2000 474 210,067 182,840 - (7,528) 385,853
Comprehensive income (loss):
Net loss (136,217) (136,217)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $581 (928) (928)
Currency translation adjustment (8,467) (8,467)
Unrealized loss on investments, net of tax
of $119 915 915
-------------
Other comprehensive loss (8,480)
-------------
Total comprehensive loss (144,697)
Exercise of stock options 2 411 413
Deferred compensation 7 3,679 (3,686) -
Amortization of deferred compensation 327 327
Other (19) (19)
--------------------------------------------------------------------------------
Balance at December 31, 2001 $483 $214,138 $ 46,623 $(3,359) $(16,008) $ 241,877
================================================================================
See notes to consolidated financial statements.
28
MAIL-WELL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Mail-Well, Inc. and subsidiaries (collectively, the "Company") prints and
manufactures envelopes in the United States and Canada and is a leading
commercial printer in the United States. The Company, headquartered in
Englewood, Colorado, is organized under Colorado law, and its common stock
is traded on the New York Stock Exchange.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Mail-Well,
Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Except as otherwise noted, all amounts
and disclosures have been restated to reflect only the Company's continuing
operations (see note 3).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from
those estimates.
See Exhibit 99.1 filed with this report for the unaudited Consolidating
Condensed Financial Information of Mail-Well I Corporation, as Issuer,
certain of its subsidiaries as guarantor subsidiaries, certain of its
subsidiaries as non-guarantor subsidiaries and Mail-Well, Inc. as parent
guarantor. These statements are provided for compliance with the reporting
under the indenture for the requirements of the 8 3/4% Senior Subordinated
Notes due in 2008.
REVENUE RECOGNITION
Revenue is recognized at the time product is shipped or title passes
pursuant to the terms of the agreement with the customer, the amount due
from the customer is fixed, and collectibility of the related receivable is
reasonably assured.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of sales in the
consolidated statements of operations. Shipping and handling costs billed to
customers are recognized in net sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit and investments with
original maturities of three months or less. Cash and cash equivalents are
stated at cost, which approximates fair value.
ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable. Allowances for doubtful
accounts of $4.7 million and $4.4 million have been applied as reductions of
accounts receivable at December 31, 2001 and 2000, respectively.
29
INVENTORIES
Inventory values include all costs directly associated with manufacturing
products: materials, labor and manufacturing overhead. These values are
presented at the lower of cost or market, with cost determined on a
first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. When assets are retired or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations. Expenditures for repairs and maintenance are charged to expense
as incurred, and expenditures that increase the capacity, efficiency or
useful lives of existing assets are capitalized.
For financial reporting purposes, depreciation is calculated using the
straight-line method based on the estimated useful lives of 15 to 45 years
for buildings and improvements, 10 to 15 years for machinery and equipment
and three to 10 years for furniture and fixtures. For tax purposes,
depreciation is computed using accelerated methods.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of acquisition costs over the fair value of
net assets of businesses acquired and is amortized on a straight-line basis
over 40 years. Other intangibles primarily arise from the purchase price
allocations of businesses acquired and are based on independent appraisals
or internal estimates and are amortized on a straight-line basis over
appropriate periods (currently four to 21 years). Accumulated amortization
was $46.9 million and $33.4 million at December 31, 2001 and 2000,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
All long-lived assets, including goodwill and other intangibles, are
evaluated for impairment on the basis of undiscounted cash flows whenever
events or changes in circumstances indicate that the carrying value of the
assets may not be recoverable, as measured by comparing their net book value
to the estimated future undiscounted cash flows generated by their use.
Impaired assets are written down to their estimated fair market value.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries operating outside the United States
with a functional currency other than the U.S. dollar are translated at
current exchange rates. Income and expense items are translated at the
average rates for the year. The effects of translation are included as a
component of other comprehensive income. Foreign currency transaction gains
and losses are recorded in income when realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after
June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. SFAS No. 142 requires that
these assets be reviewed for impairment at least annually. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives.
30
The Company will apply SFAS No. 142 beginning in the first quarter of 2002.
Application of the nonamortization provisions of SFAS No. 142 is expected to
result in an increase in net income of $7.1 million ($0.15 per share) in
2002. The Company will reclassify an assembled workforce intangible asset
with an unamortized balance of $3.9 million and a customer relationship
intangible asset with an unamortized balance of $9.4 million along with a
related deferred tax liability of $5.1 million to goodwill at the date of
adoption. The Company will test goodwill for impairment using the two-step
process prescribed in SFAS No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if
any. The Company expects to complete the first step by June 30, 2002. Based
on steps the Company has taken to prepare for the adoption of SFAS No. 142,
it is possible that a portion of the unamortized goodwill related to the
commercial printing segment, which totals $213.5 million, will be impaired
using the impairment measurement methodology required by SFAS No. 142. The
Company has not yet determined the amount of the potential impairment loss, if
any. Any impairment that is required to be recognized when adopting SFAS No.
142 will be reflected as the cumulative effect of a change in accounting
principle in the first quarter of 2002. The Company will complete
measurement of any impairment loss upon the initial adoption of SFAS No. 142
by December 31, 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting model to
be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. The Company will adopt SFAS No. 144 as of January
1, 2002 and does not anticipate any immediate impact from the adoption of
this statement.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The Company will adopt SFAS No. 143
in the first quarter of fiscal year 2003. The Company is evaluating the
impact of the adoption of SFAS No. 143 on the consolidated financial
statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. ACQUISITIONS
The acquisitions described below have been accounted for as purchases;
accordingly, the assets and liabilities of the acquired companies have been
recorded at their estimated fair values with the excess of the purchase
price over the estimated fair values recorded as goodwill. Certain of the
Company's acquisition agreements provide for deferred payments by the
Company, contingent upon future revenues or profits of the companies
acquired. Such payments are capitalized and recorded as goodwill. The
financial statements reflect the operations of the acquired businesses, from
their respective acquisition dates.
ACQUISITIONS IN THE COMMERCIAL PRINTING SEGMENT
In January 2000, the Company acquired the assets and assumed certain
liabilities of Braceland Brothers, Inc., located in Philadelphia,
Pennsylvania; Atlanta, Georgia; and Steubenville, Ohio, for $13.7 million.
The Philadelphia location has been closed. Goodwill recorded as a result of
this acquisition was $3.1 million.
In May 2000, the Company purchased the stock of Craftsmen Litho, Inc.,
located in Waterbury, Connecticut, for $9.3 million. Goodwill recorded as a
result of this acquisition was $5.5 million.
In June 2000, the Company purchased the stock of Strathmore Press, Inc.,
located in Cherry Hill, New Jersey, for $9.3 million. This company has been
consolidated with another operation in the Philadelphia area. Goodwill
recorded as a result of this acquisition was $4.9 million.
31
During 1999, the Company paid $103.6 million and assumed debt of $1.6
million to acquire seven commercial printing companies. The goodwill
recorded in connection with these acquisitions was approximately $63.4
million.
ACQUISITIONS IN THE ENVELOPE SEGMENT
In February 2000, the Company acquired American Business Products, Inc.
("ABP") in a cash tender offer, in which the total value of the transaction,
including the assumption of debt, was approximately $338.5 million. Goodwill
recorded as a result of this acquisition was $154.6 million. In September
2000, the Company sold Jen-Coat, the extrusion and coating laminating
business unit of ABP for $110.6 million. In June 2001, the Company announced
its intent to divest Curtis 1000 and Discount Label, two other business
units acquired in the ABP acquisition. Jen-Coat, Curtis 1000 and Discount
Label have been included within the discontinued operations. International
Envelope is the only ABP business unit included in continuing operations.
The portion of the ABP purchase price allocated to International Envelope
was $75.9 million including goodwill of $39.1 million.
In July 2000, the Company purchased the stock of CML Industries Ltd., a
supplier of envelopes and converted paper products located in Ontario and
Quebec, Canada, for $20.9 million. Goodwill recorded as a result of this
acquisition was $12.1 million.
In October 1999, the Company purchased the stock of Northeastern Envelope,
located in Braintree, Massachusetts, for $2.6 million. Goodwill recorded as
a result of this acquisition was $1.3 million.
3. DISCONTINUED OPERATIONS
In June 2001, the Company announced plans to sell its Label and Printed
Office Products segments. Management expects to complete these dispositions
by June 30, 2002. These segments have been segregated from continuing
operations and reported as discontinued operations for all periods presented
in the accompanying consolidated financial statements.
The reported loss on disposition of the Label and Printed Office Products
segments includes the write-down to net realizable value based on estimated
proceeds, costs associated with the planned dispositions, the estimated
earnings or losses from operations of the discontinued businesses through
the expected date of these dispositions and the related income tax expense.
Management has based its estimates of the sales proceeds expected from the
divestitures of Label and Printed Office Products on data provided by its
financial advisors and indications of value received from prospective
buyers. The loss will be adjusted if management has information indicating
that the actual sales proceeds are different than the estimates. The accrual
for estimated earnings or losses from the measurement date to December 31,
2001 was not materially different than the actual results.
In September 2000, the Company sold Jen-Coat, the extrusion coating and
laminating business segment of ABP. The operating results of this business
unit were recorded as discontinued operations in the 2000 consolidated
statement of operations.
Interest expense has been allocated to the operating results and the
expected earnings included in the calculation of the loss on disposal of
discontinued operations based upon the relative net assets of Jen-Coat,
Label and Printed Office Products. This allocation of interest totaled $26.1
million, $30.0 million and $15.0 million for the years ended December 31,
2001, 2000 and 1999, respectively.
32
Operating results of the discontinued operations are summarized as follows
(in thousands):
2001 2000 1999
------------------------------------------------
Net sales:
Label $ 219,182 $223,994 $188,008
Printed Office Products 386,446 377,636 165,382
Jen-Coat - 56,036 -
------------------------------------------------
$ 605,628 $657,666 $353,390
================================================
Income (loss) from operations:
Label $ (1,028) $(15,005) $ 3,411
Printed Office Products (1,058) 3,721 6,389
Jen-Coat - 1,721 -
------------------------------------------------
(2,086) (9,563) 9,800
Income tax expense (benefit) 90 (1,525) 3,920
------------------------------------------------
$ (2,176) $ (8,038) $ 5,880
================================================
Loss on disposal of discontinued operations:
Label $ (87,062) $ - $ -
Printed Office Products (79,717) - -
------------------------------------------------
(166,779) - -
Income tax expense (benefit) (45,779) - -
------------------------------------------------
$(121,000) $ - $ -
================================================
The assets and liabilities of discontinued operations, which have been
reflected as net assets of discontinued operations in the consolidated
balance sheets, are summarized as follows (in thousands):
2001 2000
---------------------------------
Label segment:
Current assets $ 46,285 $ 59,569
Long-term assets 97,109 146,969
---------------------------------
Total assets 143,394 206,538
Current liabilities 40,085 29,751
Long-term liabilities 3,909 6,092
---------------------------------
Total liabilities 43,994 35,843
---------------------------------
Net assets of the Label segment 99,400 170,695
Printed Office Products segment:
Current assets 56,227 65,961
Long-term assets 158,875 222,313
---------------------------------
Total assets 215,102 288,274
Current liabilities 49,068 40,319
Long-term liabilities 19,057 24,435
---------------------------------
Total liabilities 68,125 64,754
---------------------------------
Net assets of the Printed Office Products segment 146,977 223,520
---------------------------------
Net assets of discontinued operations $246,377 $394,215
==================================
Assets primarily consist of accounts receivable, inventories, property and
equipment and deferred income taxes. Liabilities primarily consist of
accounts payable, accrued expenses, deferred income taxes and other
long-term liabilities. The net assets of discontinued operations presented
in the 2001 consolidated balance sheet include the write-down of assets to
estimated net realizable value, the accrual of obligations associated with
the sale of the two segments and the accrual of estimated earnings from
December 31, 2001 to the expected date of disposal.
33
4. ASSETS HELD FOR SALE
The Company's divestiture plans also include the sale of certain operations
that are not strategic to its Envelope and Commercial Printing segments. The
Company expects to complete the dispositions of these operations by June 30,
2002. The following table presents the sales and operating income of these
operations for the years ended December 31, 2001, 2000 and 1999 (in
thousands):
2001 2000 1999
-----------------------------------------------
Sales $112,626 $120,045 $96,070
Operating income 9,999 13,189 11,584
Certain of these assets were written down to their fair market values based
on estimated sales proceeds resulting in an impairment charge of $2.9
million in 2001.
The assets of these operations at December 31, 2001 totaled $67.4 million
and are reported net of $13.3 million of related liabilities and are
reflected as "Net assets held for sale" in the accompanying 2001
consolidated balance sheet.
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
INVENTORIES
The Company's inventories by major category are as follows (in thousands):
2001 2000
-------------------------------
Raw materials $ 29,964 $ 44,083
Work in process 21,868 27,955
Finished goods 56,768 63,695
-------------------------------
108,600 135,733
Reserves (4,056) (4,316)
-------------------------------
$104,544 $131,417
===============================
PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consists of the
following (in thousands):
2001 2000
--------------------------------
Land and land improvements $ 11,818 $ 19,707
Buildings and improvements 95,939 104,165
Machinery and equipment 429,206 447,396
Furniture and fixtures 13,091 13,259
Construction in progress 8,922 9,735
--------------------------------
558,976 594,262
Accumulated depreciation (183,561) (163,237)
--------------------------------
$ 375,415 $ 431,025
================================
34
ACCUMULATED OTHER COMPREHENSIVE LOSS
The after-tax components comprising accumulated other comprehensive loss are
as follows (in thousands):
2001 2000
-------------------------------
Currency translation adjustment $(14,934) $(6,467)
Pension liability adjustment (1,074) (146)
Unrealized loss on investments - (915)
-------------------------------
$(16,008) $(7,528)
===============================
6. LONG-TERM DEBT
At December 31, 2001 and 2000, long-term debt consists of the following (in
thousands):
2001 2000
--------------------------------
Secured Senior Credit Facility:
Tranche A term loan, due 2006 $ 194,918 $237,586
Tranche B term loan, due 2007 192,749 209,603
Revolving loan facility, due 2006 6,000 -
Senior Subordinated Notes, due 2008 300,000 300,000
Convertible Subordinated Notes, due 2002 139,063 139,063
Other 20,269 33,541
--------------------------------
852,999 919,793
Less current maturities (302,822) (40,040)
--------------------------------
Long-term debt $ 550,177 $879,753
================================
In February 2000, the Company entered into an $800,000,000 Senior Secured
Credit Facility (the "Credit Facility"). The Credit Facility originally
consisted of a $300 million Tranche A term loan, a $250 million Tranche B
term loan and a $250 million revolving loan facility. The Company is
required to repay $33.3 million in principal on the Tranche A term loan in
2002, increasing $7.8 million each year through 2005 with a final payment of
$14.7 million in 2006. The Company is required to repay $490,000 each
quarter on the Tranche B term loan through the first quarter of 2005, with
four quarterly balloon payments of $46.1 million per quarter thereafter. Any
optional or required prepayments of principal are applied proportionately
between the Tranche A and B term loans. Interest under the Credit Facility,
which is payable quarterly, is based on London Interbank Offered Rate
("LIBOR") plus a margin. At December 31, 2001, the interest rates on Tranche
A and B term loans were 5.56% and 5.77%, respectively, and the interest rate
on the revolving loan facility was 6.75%. The Credit Facility is secured by
substantially all of the Company's domestic property.
In November 1998, the Company issued $300,000,000 of 8.75% Senior
Subordinated Notes (the "Senior Notes"), which are due November 2008.
Interest is payable semi-annually. The Company may redeem the Senior Notes,
in whole or in part, on or after December 15, 2003, at redemption prices
which range from 100% to 104.375%, plus accrued and unpaid interest.
In November 1997, the Company issued $152,050,000 of 5% Convertible
Subordinated Notes due 2002 (the "Convertible Notes"). Interest is payable
semi-annually. The Convertible Notes are convertible at the option of the
holder into shares of the Company's common stock at a conversion price of
$19.00 per share at any time prior to November 1, 2002. In March 2000, the
Company repurchased $12,987,000 of the outstanding Convertible Notes at a
discount and recorded a gain of $2,989,000, which was reported net of tax as
an extraordinary item in the consolidated statements of operations. The
Credit Facility provides for the funds needed for the mandatory retirement
of the Convertible Notes on their due date, subject to meeting applicable
borrowing conditions.
Other long-term debt is primarily term debt with banks with interest rates
which range from 6.0% to 12.0% at December 31, 2001. Other long-term debt
also includes capital lease obligations.
At December 31, 2001, the Company had $131.5 million available on its
existing lines of credit.
35
In February 2000, the Company wrote off deferred financing costs of $635,000
capitalized in connection with the bank borrowings, which were repaid in
February 2000. The charge is reported net of tax as an extraordinary item in
the consolidated statements of operations.
The aggregate annual maturities for long-term debt at December 31, 2001 are
as follows (in thousands):
2002 $302,822
2003 27,814
2004 12,190
2005 13,832
2006 180,396
Thereafter 315,945
--------------
$852,999
==============
Current maturities include the anticipated retirement of the Convertible
Notes and also include the portion of bank borrowings that will be paid from
the proceeds from planned divestitures pursuant to the terms of the Credit
Facility, net of amounts that would become available as a result of such
repayments under the revolving credit facility due in 2006.
The Credit Facility, Senior Notes and Convertible Notes contain certain
restrictive covenants that, among other things and with certain exceptions,
limit the ability of the Company to incur additional indebtedness or issue
capital stock, prepay subordinated debt, transfer assets outside of the
Company, pay dividends or repurchase shares of common stock. In addition to
these restrictions, the Company is required to satisfy certain financial
covenants. As of December 31, 2001, the Company is in compliance with all of
these covenants.
Cash paid for interest (including interest allocated to discontinued
operations) on long-term debt was $71,494,000, $89,923,000 and $51,849,000
for the years ended December 31, 2001, 2000 and 1999, respectively.
The estimated fair value of the Company's Credit Facility, Senior Notes,
Convertible Notes and other long-term debt based on current rates available
to the Company for debt of the same remaining maturity was $793.6 million
and $794.2 million at December 31, 2001 and 2000, respectively.
7. ACCOUNTS RECEIVABLE FINANCING FACILITY
In 2000 and until July 2001, the Company utilized an accounts receivable
financing facility which entitled the Company to transfer, without recourse,
certain trade accounts receivable to a special purpose entity and to receive
up to $75 million from a group of unrelated third party purchasers at a cost
of funds equal to commercial paper rates. The Company continued to service
the receivables that were transferred to the special purpose entity under
the facility for which it received a fee as specified by the facility and
considered adequate compensation.
At December 31, 2000, net accounts receivable of $151.1 million had been
transferred to the special purpose entity under the facility. Of the total
transferred, $75.0 million was sold to third party purchasers. The value of
the Company's retained subordinated interest at December 31, 2000 was $75.4
million and is included in accounts receivable in the consolidated balance
sheet. This value was determined by considering the average life of accounts
receivables, which was 45 days, and the rate of expected credit losses,
which was very low due to the collection experience of the Company. The
facility was terminated in July 2001.
36
8. INCOME TAXES
Income (loss) from continuing operations for the years ended December 31,
2001, 2000 and 1999 was (in thousands):
2001 2000 1999
--------------------------------------------------
Domestic $(48,748) $31,721 $77,415
Foreign 28,023 22,701 20,615
--------------------------------------------------
Income (loss) from continuing operations
before income taxes $(20,725) $54,422 $98,030
==================================================
The provision for income taxes on income from continuing operations for the
years ended December 31, 2001, 2000 and 1999 consisted of the following (in
thousands):
2001 2000 1999
-------------------------------------------------
Current tax provision (benefit):
Federal $(18,293) $ 3,338 $19,063
Foreign 9,589 8,421 6,244
State (1,830) 333 1,906
-------------------------------------------------
(10,534) 12,092 27,213
Deferred provision:
Federal 2,234 6,218 9,537
Foreign 392 1,281 1,725
State 224 622 953
-------------------------------------------------
2,850 8,121 12,215
-------------------------------------------------
Provision (benefit) for income taxes $ (7,684) $20,213 $39,428
=================================================
A reconciliation of the federal statutory tax rate to the Company's
effective income tax rate is summarized below:
2001 2000 1999
-----------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State tax, net of federal tax benefit 3.5 3.5 3.5
Nondeductible goodwill amortization (13.0) 4.9 2.2
Nontaxable investment benefit 10.4 (3.9) (2.0)
Other 1.2 (2.4) 1.5
-----------------------------------------------
Effective income tax rate 37.1% 37.1% 40.2%
===============================================
37
Deferred taxes are recorded to give recognition to temporary differences
between the tax basis of assets or liabilities and their reported amounts in
the financial statements. 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 future years. Deferred tax liabilities generally represent items
that have been deducted for tax purposes, but have not yet been recorded in
the consolidated statements of operations. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax
benefit will not be realized. The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 2001 and 2000 are presented below (in
thousands):
2001 2000
-------------------------------
Deferred tax assets:
Alternative minimum tax credit carryforwards $ 5,563 $ 4,413
Net operating loss carryforwards 5,626 159
Compensation and benefit related accruals 15,910 13,326
Restructuring accruals 8,620 6,179
Accounts receivable 1,718 2,986
Other 896 4,566
Valuation allowance (254) (275)
-------------------------------
Total deferred tax assets 38,079 31,354
Deferred tax liabilities:
Property, plant and equipment 91,349 83,843
Goodwill and other intangibles 14,850 16,091
Other 3,006 3,173
-------------------------------
Total deferred tax liabilities 109,205 103,107
-------------------------------
Net deferred tax liability $ 71,126 $ 71,753
===============================
The net deferred income tax liability at December 31, 2001 and 2000 includes
the following components (in thousands):
2001 2000
--------------------------------
Current deferred tax asset $ 22,447 $ 15,012
Non-current deferred tax liability (93,573) (86,765)
--------------------------------
Total $(71,126) $(71,753)
================================
Net operating losses of $14.6 million are being carried forward and are
available to reduce future taxable income. These net operating losses will
expire in 2020. The Company also has tax credit carryforwards of $5.6
million at December 31, 2001, which may be carried forward indefinitely.
Cash payments for income taxes (including the amounts allocated to
discontinued operations) were $2,385,000, $8,813,000 and $21,255,000 in
2001, 2000 and 1999, respectively.
The Company does not provide U.S. income taxes on the unremitted earnings of
its foreign subsidiaries since these earnings are deemed permanently
invested. Unremitted earnings of the Company's foreign subsidiaries as of
December 31, 2001 were $70.9 million.
38
9. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
2001 RESTRUCTURING
In June 2001, the Company announced a new strategic plan, which includes
plans to further consolidate certain operations to eliminate excess internal
capacity in order to reduce costs and improve its long-term competitive
position. The restructuring charge related to these plans totaled $37.4
million in 2001. Additional charges of approximately $38.0 million are
expected in 2002. The following table presents the details of this
restructuring charge, as well as other charges recorded in 2001 (in
thousands):
COMMERCIAL
ENVELOPE PRINTING CORPORATE TOTAL
------------------------------------------------------------
Employee separation and related
expenses $ 9,042 $ 385 $ - $ 9,427
Lease termination costs 1,368 346 - 1,714
Other exit costs 13,174 1,632 - 14,806
Asset impairment charges 8,178 601 - 8,779
Strategic assessment costs - - 2,677 2,677
------------------------------------------------------------
Total restructuring costs 31,762 2,964 2,677 37,403
------------------------------------------------------------
Other charges 1,360 1,482 1,600 4,442
------------------------------------------------------------
Restructuring, asset impairments and
other charges $33,122 $4,446 $4,277 $41,845
============================================================
The Envelope segment implemented a plan to consolidate nine of its
manufacturing facilities over an 18-month period. This plan will
substantially reduce excess internal capacity and improve utilization of
equipment and resources at the remaining 41 plants. The employee separation
and related expenses cover 923 employees to be terminated over the course of
this project, of which 359 employees have been terminated as of December 31,
2001. Other exit costs include training expenses for those employees at the
plants that are absorbing the sales of the plants being closed and external
assistance in implementing the plant closures. As of December 31, 2001,
plants in Omaha, Nebraska; Allentown, Pennsylvania; and Santa Fe Springs,
California were closed. Equipment taken out of service as a result of these
plant closures was written down $8.2 million to its fair market value.
Commercial Printing consolidated three of its printing operations in the
Philadelphia, Pennsylvania area into one existing facility. This
consolidation was done to improve the cost effectiveness of these operations
and their competitive position in the Philadelphia market. The costs
associated with this consolidation included severance and related expenses
covering the termination of 25 employees all of whom have been terminated.
Other exit costs included expenses incurred to move and reinstall equipment.
Equipment taken out of service was written down $0.6 million to its fair
market value.
In developing the Company's new strategic plan, outside advisors were
engaged to research and evaluate markets, survey customers and assess
existing strategies. Financial advisors were also engaged to evaluate
options for improving the Company's capital structure. The cost of these
advisors was $2.7 million.
The following table is an analysis of the reserve recorded for the 2001
restructuring (in thousands):
COMMERCIAL
ENVELOPE PRINTING TOTAL
-------------------------------------------------
Initial accrual $13,449 $1,952 $15,401
Payments for severance (2,962) (381) (3,343)
Payments for lease termination costs (219) (608) (827)
Payments for other exit costs (142) (45) (187)
Reversal of unused portion - (314) (314)
-------------------------------------------------
Balance, December 31, 2001 $10,126 $ 604 $10,730
=================================================
39
The Company launched several initiatives during 2001 to significantly
improve operations and marketing. Both Envelope and Commercial Printing have
programs in place to institute best practices, install pricing disciplines
and align equipment and services to better serve customers and markets. The
Company has invested in outside assistance to expedite the implementation of
these programs. The external incremental cost incurred totaled $2.1 million
in 2001 and is included in other charges.
Other charges also include a $1.6 million write-off of an investment in a
company developing a service to enable online management of the creative
process of a printing job and a $0.7 million write-off in the envelope
segment for the cost of a human resource information system that will not be
implemented.
2000 RESTRUCTURING
In 2000, the Company began the comprehensive review of its operations, which
ultimately led to the new strategy announced in 2001, and identified certain
actions that could be taken at that time. The following table presents the
details of the restructuring and asset impairment charges recorded in 2000
(in thousands):
COMMERCIAL
ENVELOPE PRINTING TOTAL
-----------------------------------------------
Employee separation and related expenses $ 86 $ 188 $ 274
Lease termination costs - 428 428
Other exit costs - 45 45
Asset impairment charges - 749 749
-----------------------------------------------
Total restructuring costs 86 1,410 1,496
Other asset impairments 1,872 2,036 3,908
-----------------------------------------------
Restructuring, asset impairments and other
charges $1,958 $3,446 $5,404
===============================================
Envelope closed a resale operation in Vancouver, Washington. The employee
separation costs covered the severance expenses of 19 employees.
Commercial Printing consolidated two operations in St. Louis, Missouri into
an existing facility and closed its bindery operation in Mexico.
Approximately 165 employees of commercial printing were terminated as a
result of these actions.
The Company also incurred asset impairment charges in 2000 totaling $3.9
million that were unrelated to the restructuring. These assets were not in
use and could not be redeployed or sold, and therefore were written-off.
Charges from the 1998 restructuring plan recorded in 2000 and 1999 were $0.8
million and $1.8 million, respectively. This plan was completed in 2000.
The following table is an analysis of the reserve recorded for the 2000
restructuring (in thousands):
COMMERCIAL
ENVELOPE PRINTING TOTAL
-------------------------------------------------
Balance, December 31, 2000 $ 86 $1,485 $1,571
Payments for severance (86) (461) (547)
Payments for property exit costs - (452) (452)
Payments for other exit activities - (572) (572)
-------------------------------------------------
Balance, December 31, 2001 $ - $ - $ -
=================================================
40
10. STOCK OPTION PLANS
In May 2001, the Company adopted a Long-Term Equity Incentive Plan (the
"Incentive Plan"), which replaced all prior stock option plans (the "Option
Plans"). The Incentive Plan allows the compensation committee of the Board
of Directors to grant stock options, stock appreciation rights ("SARs"),
restricted common stock, performance awards and any other stock-based awards
to officers, directors and employees of the Company. Under the Incentive
Plan, the Board granted 669,000 Performance-Based Restricted Shares ("PARS")
and 3,113,420 stock options in 2001. The stock options vest over 4 1/2
years, at a vesting rate of 20% annually with the final 20% vesting in
December 2005. Fifty percent of the PARS will vest in June 2006 and the
other fifty percent will vest in June 2007. The Incentive Plan provides for
an acceleration of the vesting of both the stock options and the PARS if the
Company's stock price closes at certain levels for 20 consecutive trading
days as set forth in the following schedule:
AMOUNT OF ACCELERATED STOCK PRICE AT WHICH VESTING OCCURS
VESTING OPTIONS PARS
-----------------------------------------------------------------------
First one-third $ 7.50 $ 8.00
Second one-third $10.00 $11.00
Final one-third $12.50 $14.00
The Company recorded fixed deferred compensation in the amount of $3,686,000
equal to the value of the PARS on the date of grant. This deferred
compensation is being amortized over the vesting period of six years;
however, the expense will be prorated to the applicable vesting period if
acceleration terms expedite the vesting period. The Company recorded
compensation expense in the amount of $327,000 for the year ended December
31, 2001. At December 31, 2001, 217,783 stock options were available for
issuance under the Incentive Plan.
Stock options which were granted under the Option Plans, of which 3,015,127
shares are outstanding at December 31, 2001, generally vest over four or
five years and expire ten years from the date granted. Options were granted
at a price equal to the fair market value of the Company's common stock on
the date of grant. At December 31, 2001, no stock options were available for
issuance under the Option Plans.
The following table summarizes the activity and terms of outstanding options
at December 31, 2001, 2000 and 1999:
2001 2000 1999
---------------------------------------------------------------------------
OPTIONS AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------------------------------
Options outstanding at 3,670,867 $8.71 2,598,119 $8.76 2,619,759 $ 7.37
beginning of year
Granted 3,265,036 5.45 1,362,659 8.65 466,300 13.54
Exercised (201,922) 2.05 (61,856) 4.99 (388,555) 5.53
Expired/cancelled (605,344) 9.83 (228,055) 9.04 (99,385) 6.59
---------------------------------------------------------------------------
Options outstanding at end of year 6,128,637 $7.08 3,670,867 $8.75 2,598,119 $ 8.76
===========================================================================
Options exercisable at end of year 1,679,137 $8.60 1,289,717 $7.48 820,740 $ 6.35
===========================================================================
41
Summary information about the Company's stock options outstanding at
December 31, 2001 is as follows:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE OUTSTANDING AT REMAINING LIFE EXERCISE DECEMBER 31, EXERCISE
PRICES DECEMBER 31, 2001 (IN YEARS) PRICE 2001 PRICE
------------------------------------------------------------------------------------------------------------------
$1.32 - $1.42 79,411 3.2 $ 1.33 79,411 $ 1.33
$2.19 - $4.37 243,505 6.5 $ 3.86 155,505 $ 3.71
$4.38 - $6.56 3,311,500 4.8 $ 5.45 58,000 $ 5.43
$6.57 - $8.74 1,338,019 5.7 $ 7.52 720,506 $ 7.04
$8.75 - $10.93 237,200 7.8 $ 9.71 103,734 $ 9.62
$10.94 - $13.10 581,600 6.4 $12.28 328,154 $12.20
$13.20 - $15.30 319,402 6.3 $13.82 215,827 $13.76
$21.86 18,000 6.3 $21.86 18,000 $21.86
------------------------------------------------------------------------------------------------------------------
$ 1.32 - $21.86 6,128,637 5.4 $ 7.08 1,679,137 $ 8.60
==================================================================================================================
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company accounts for the plans under Accounting Principles Board Opinion No.
25; however, the Company has computed for pro forma disclosure purposes the
value of all options granted during 2001, 2000 and 1999 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 and using
the following average assumptions:
2001 2000 1999
--------------------------------------------------
Risk-free interest rate 3.5%-7.2% 5.8%-7.2% 5.8%-7.2%
Expected dividend yield 0% 0% 0%
Expected option lives 4-6 years 4-6 years 4-6 years
Expected volatility 33%-68% 33%-68% 33%-68%
The weighted average fair value of options granted in 2001, 2000 and 1999
was $5.45, $5.47 and $8.43, respectively, per option. Had compensation
expense for the plans been determined consistent with the fair value
provisions of SFAS No. 123, the Company's reported and pro forma net income
and earnings per share for the years ended December 31, 2001, 2000 and 1999
would have been as follows (in thousands, except per share data):
2001 2000 1999
-------------------------------------------------
Net income (loss):
As reported $(136,217) $27,618 $64,482
Pro forma $(140,709) $23,467 $61,481
Earnings per (loss) share - basic:
As reported $(2.86) $0.57 $1.32
Pro forma $(2.96) $0.48 $1.25
Earnings per (loss) share - diluted:
As reported $(2.86) $0.56 $1.20
Pro forma $(2.96) $0.48 $1.15
The effect on 2001, 2000 and 1999 pro forma net income, earnings per share -
basic and earnings per share - diluted of expensing the estimated fair value
of stock options is not necessarily representative of the effect on reported
earnings for future years due to the vesting period of the stock options and
the potential for issuance of additional stock options in future years.
42
11. RETIREMENT PLANS
SAVINGS PLANS
The Company sponsors a defined contribution plan to provide substantially
all U.S. salaried and certain hourly employees an opportunity to accumulate
personal funds for their retirement. As determined by the provisions of the
plan, the Company matches a certain percentage of each employee's voluntary
contribution. The plan provides for a minimum contribution by the Company to
the plan for all eligible employees of 1% of their salary. This contribution
can be increased at the Company's discretion. All contributions made by the
Company are made in cash and allocated to the funds selected by the
employee. Company contributions to the plan were approximately $8,979,000,
$5,899,000 and $3,970,000 for the years ending in 2001, 2000 and 1999,
respectively.
PENSION PLANS
The Company maintains pension plans for certain of its employees in the U.S.
and Canada under collective bargaining agreements with unions representing
these employees. The Company expects to continue to fund these plans based
on governmental requirements, amounts deductible for income tax purposes and
as needed to ensure that plan assets are sufficient to satisfy plan
liabilities. As of December 31, 2001, plan assets consist primarily of
government bonds, corporate bonds, equity and fixed income funds.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
As a result of the acquisition of ABP, the Company assumed responsibility
for the ABP supplemental executive retirement plans ("SERP") which provides
benefits to certain former directors and executives of ABP. For accounting
purposes, these plans are unfunded; however, ABP had purchased annuities
to cover the benefits for certain participants. In 2001, the Company
accelerated the benefit payments to all participants for whom there was
no annuity.
43
The following table sets forth the financial status of the pension plans and
the SERP and the amounts recognized in the Company's consolidated balance
sheets as of December 31, 2001 and 2000 (in thousands):
PENSION PLANS SERP
-------------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $29,613 $28,693 $17,844 $ 18,077
Service cost 1,424 2,000 - -
Interest cost 2,137 1,569 853 1,557
Actuarial gains and loss 1,418 3 - -
Foreign currency exchange rate changes (1,056) (733) - -
Benefits paid (1,987) (1,919) (9,655) (1,790)
-------------------------------------------------------------
Benefit obligation at end of year 31,549 29,613 9,042 17,844
-------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 34,662 34,423 - -
Foreign currency exchange rate changes (1,197) 1,574 - -
Actual return on plan assets (286) (707) - -
Employer contributions 1,744 1,291 - -
Benefits paid (2,208) (1,919) - -
-------------------------------------------------------------
Fair value of plan assets at end of year 32,715 34,662 - -
-------------------------------------------------------------
Funded status 1,166 5,049 (9,042) 17,844
Unrecognized actuarial loss 7,260 3,124 - -
Unrecognized prior service cost 249 368 - -
Unrecognized transition asset (4,021) (4,711) - -
-------------------------------------------------------------
Net amount recognized $ 4,654 $ 3,830 $(9,042) $(17,844)
=============================================================
Amounts recognized in the consolidated balance
sheets:
Prepaid benefit cost $ 4,283 $ 3,997 $ - $ -
Accrued benefit liability (1,450) (446) (9,042) (17,844)
Intangible asset 75 42 - -
Deferred tax asset 672 91 - -
Accumulated other comprehensive loss 1,074 146 - -
-------------------------------------------------------------
Net amount recognized $ 4,654 $ 3,830 $(9,042) $(17,844)
=============================================================
The components of the net periodic pension cost for the pension plans and
the SERP were as follows (in thousands):
2001 2000 1999
--------------------------------------------------
Service cost $ 1,075 $ 2,000 $ 1,435
Interest cost on projected benefit obligation 2,991 2,789 2,037
Expected return on plan assets (3,017) (2,963) (2,958)
Net amortization and deferral (396) (400) (423)
Recognized actuarial loss 36 31 37
Curtailment loss 129 38 -
--------------------------------------------------
Net periodic pension expense $ 818 $ 1,495 $ 128
==================================================
The assumptions used in computing the net pension cost and the funded status
were as follows:
2001 2000 1999
----------------------------------------------------
Weighted average discount rate 7.25% 7.50% 7.50%
Expected long-term rate of return on assets 8.75 - 9% 8.75 - 9% 8.75 - 9%
Rate of compensation increase 2 - 4% 2 - 4% 2 - 4%
44
The aggregate accumulated benefit obligation and aggregate fair value of
plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $9.0 million and $7.6 million, respectively,
as of December 31, 2001. The aggregate accumulated benefit obligation and
aggregate fair value of plan assets for pension plans with accumulated
benefit obligations in excess of plan assets were $3.1 million and
$2.9 million, respectively, as of December 31, 2000.
Certain other U.S. employees are included in multi-employer pension plans to
which the Company makes contributions in accordance with the contractual
union agreements. Such contributions are made on a monthly basis in
accordance with the requirements of the plans and the actuarial computations
and assumptions of the administrators of the plans. Contributions to
multi-employer plans were $2.7 million, $2.6 million, and $3.6 million for
2001, 2000 and 1999, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan, which was frozen in
December 2000. The Company has not made contributions to this plan since
1998. At December 31, 2001 and 2000, the Employee Stock Ownership Plan held
3,896,544 shares of the Company's common stock, all of which have been
allocated to participant accounts.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases buildings and equipment under operating lease agreements
expiring at various dates through 2011. Certain leases include renewal and
purchase options. At December 31, 2001, future minimum annual payments under
non-cancelable lease agreements with original terms in excess of one year
are as follows (in thousands):
2002 $ 33,844
2003 29,864
2004 27,049
2005 24,106
2006 18,439
Thereafter 32,066
--------------
Total $165,368
==============
Aggregate future minimum rentals to be received under noncancelable
subleases as of December 31, 2001 are approximately $4.5 million.
Rent expense for the years ended December 31, 2001, 2000 and 1999 was
$32.7 million, $33.9 million and $24.8 million, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company has limited concentrations of credit risk with respect to
financial instruments. Temporary cash investments and other investments are
placed with high credit quality institutions, and concentrations within
accounts receivable are limited due to the Company's customer base and its
dispersion across different industries and geographic areas.
45
LITIGATION
The Company is party to various legal actions that are ordinary and
incidental to its business. While the outcome of legal actions cannot be
predicted with certainty, management believes the outcome of these various
proceedings will not have a material adverse effect on the Company's
financial condition or results of operations.
13. EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
or converted into common stock. A reconciliation of the amounts included in
the computation of basic earnings per share and diluted earnings per share
is as follows (in thousands, except per share amounts):
2001 2000 1999
---------------------------------------------------
Numerator:
Numerator for basic earnings per share - income
(loss) from continuing operations $(13,041) $34,209 $58,602
Interest on Convertible Notes - 4,951 5,254
---------------------------------------------------
Numerator for diluted earnings per share - income
(loss) from continuing operations after assumed
conversions $(13,041) $39,160 $63,856
===================================================
Denominator:
Denominator for basic earnings per share - weighted
average shares 47,562 48,789 48,990
Effects of dilutive securities:
Conversion of Convertible Notes - 7,461 8,003
Stock options - 404 940
Other - 24 221
---------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 47,562 56,678 58,154
===================================================
Earnings (loss) per share:
Basic $(0.27) $0.70 $1.20
===================================================
Diluted $(0.27) $0.69 $1.10
===================================================
During the year ended December 31, 2001, interest, net of tax, on the
Convertible Notes in the amount of $4,854,000 and shares of 7,319,000 that
would be issued upon assumed conversion of the Convertible Notes were
excluded from the calculation of diluted loss per share due to the
antidilutive effect on loss per share. In 2001, 2000 and 1999, outstanding
options to purchase approximately 6,798,000, 3,266,000 and 1,658,000 common
shares, respectively, were excluded from the calculation of diluted earnings
per share because the effect would be antidilutive.
14. SEGMENT INFORMATION
The Company operates in two principal business segments. The Commercial
Printing segment specializes in printing annual reports, brand marketing
collateral, catalogs, brochures, maps and guidebooks, calendars, financial
communications and CD packaging. The Envelope segment manufactures
customized and stock envelopes for billing and remittance, direct mail
advertising, filing systems, photo processing, medical records and catalog
orders. The Envelope segment is also a producer of specialty packaging
products and a manufacturer of stock products for the resale market.
Intersegment sales, which were at market prices, totaled $5.7 million and
$4.1 million in 2001 and 2000, respectively. Intersegment sales in 1999 were
not significant.
46
The following tables present certain business segment information for the
years ended December 31, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
----------------------------------------------------
Net sales:
Commercial Printing $ 817,937 $ 961,780 $ 795,552
Envelope 835,534 861,803 738,288
----------------------------------------------------
Total $1,653,471 $1,823,583 $1,533,840
====================================================
Operating income:
Commercial Printing $ 14,763 $ 54,758 $ 65,108
Envelope 54,168 90,202 90,996
Corporate (a) (35,115) (27,437) (19,094)
----------------------------------------------------
Total $ 33,816 $ 117,523 $ 137,010
====================================================
Restructuring, asset impairments and other charges:
Commercial Printing $ 4,446 $ 3,658 $ -
Envelope 33,122 2,502 1,807
Corporate 4,277 - -
----------------------------------------------------
Total $ 41,845 $ 6,160 $ 1,807
====================================================
Significant other noncash charges: (b)
Commercial Printing $ 3,547 $ 2,785 $ -
Envelope 8,875 1,872 -
Corporate 1,600 - -
----------------------------------------------------
Total $ 14,022 $ 4,657 $ -
====================================================
Depreciation and amortization:
Commercial Printing $ 25,396 $ 27,153 $ 22,768
Envelope 20,682 20,633 15,263
Corporate 7,551 18,047 8,998
----------------------------------------------------
Total $ 53,629 $ 65,833 $ 47,029
====================================================
Capital expenditures:
Commercial Printing $ 13,613 $ 34,902 $ 34,580
Envelope 12,078 20,955 30,133
Corporate 1,108 1,915 374
----------------------------------------------------
Total $ 26,799 $ 57,772 $ 65,087
====================================================
2001 2000
----------------------------------
Identifiable assets: (c)
Commercial Printing $ 620,421 $ 685,871
Envelope 537,747 635,508
Corporate (9,494) (62,637)
----------------------------------
1,148,674 1,258,742
Net assets of discontinued operations 246,377 394,215
Net assets held for sale 54,073 -
----------------------------------
Total $1,449,124 $1,652,957
==================================
47
<FN>
(a) Operating income is net of all costs and expenses directly related to
the segment involved. Corporate expenses include corporate general and
administrative expenses, lease expense, amortization expense of other
intangible assets and goodwill, gains or losses on disposal of assets
and other miscellaneous expenses.
(b) Represents the noncash portion of restructuring and other asset
impairment charges.
(c) Identifiable assets are accumulated by facility within each business
segment. Certain operating assets, which are under lease, are
reported as business segment assets for evaluation purposes. The net
book value of these assets has been eliminated by contra assets
included with corporate assets in order to reconcile identifiable
assets with the total assets of the Company. Corporate assets consist
primarily of cash and cash equivalents, other receivables, other
assets and deferred tax assets.
Geographic information at December 31, 2001 and 2000 and for the years ended
December 31, 2001, 2000 and 1999, is presented below (in thousands):
2001 2000 1999
-----------------------------------------------------
Net sales:
U.S. $1,490,886 $1,668,948 $1,381,338
Canada 162,585 154,438 151,908
Other foreign - 197 594
-----------------------------------------------------
Total $1,653,471 $1,823,583 $1,533,840
=====================================================
Identifiable assets:
U.S. $1,010,574 $1,106,733
Canada 138,100 151,582
Other foreign - 427
------------------------------------
Total $1,148,674 $1,258,742
====================================
15. SUBSEQUENT EVENT
On February 22, 2001, the Company sold Curtis 1000 Inc., an operation
included in discontinued operations, for approximately $40 million. The
estimated proceeds from the sale were not significantly different from the
amount used to estimate the loss on disposal.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER (a) QUARTER QUARTER QUARTER
-----------------------------------------------------------
2001
Net sales $432,976 $418,278 $411,773 $390,444
Gross profit 87,834 86,015 77,571 77,960
Income (loss) from continuing operations (b) 4,187 (14,950) (1,668) (610)
Discontinued operations (565) (77,575) 105 (45,141)
-----------------------------------------------------------
Net income (loss) $ 3,622 $(92,525) $ (1,563) $(45,751)
===========================================================
Earnings (loss) per share - basic:
Income (loss) from continuing operations $0.08 $(0.31) $(0.04) $(0.01)
Discontinued operations - (1.64) 0.01 (0.95)
-----------------------------------------------------------
Net income (loss) per share - basic $0.08 $(1.95) $(0.03) $(0.96)
===========================================================
Earnings (loss) per share - diluted:
Income (loss) from continuing operations $0.08 $(0.31) $(0.04) $(0.01)
Discontinued operations - (1.64) 0.01 (0.95)
-----------------------------------------------------------
Net income (loss) per share - diluted $0.08 $(1.95) $(0.03) $(0.96)
===========================================================
48
FIRST SECOND THIRD FOURTH
QUARTER (a) QUARTER (a) QUARTER (a) QUARTER (a)
-----------------------------------------------------------
2000
Net sales $434,678 $442,148 $476,300 $470,457
Gross profit 94,865 92,750 97,316 100,217
Income from continuing operations (c) 13,877 8,657 10,345 1,330
Discontinued operations 2,459 2,587 (3,622) (9,462)
Extraordinary item 1,447 - - -
-----------------------------------------------------------
Net income (loss) $ 17,783 $ 11,244 $ 6,723 $ (8,132)
===========================================================
Earnings (loss) per share - basic:
Income from continuing operations $0.28 $0.18 $0.21 $0.03
Discontinued operations 0.05 0.05 (0.07) (0.20)
Extraordinary item 0.03 - - -
-----------------------------------------------------------
Net income (loss) per share - basic $0.36 $0.23 $0.14 $(0.17)
===========================================================
Earnings (loss) per share - diluted:
Income from continuing operations $0.26 $0.17 $0.20 $0.03
Discontinued operations 0.04 0.05 (0.06) (0.20)
Extraordinary item 0.03 - - -
-----------------------------------------------------------
Net income (loss) per share - diluted $0.33 $0.22 $0.14 $(0.17)
===========================================================
<FN>
(a) These results have been restated from those previously reported to reflect discontinued operations.
(b) Includes an impairment loss on assets held for sale of $2.9 million and restructuring, asset
impairments and other charges of $41.8 million, of which $26.5 million occurred
in the second quarter, $5.4 million in the third quarter and $9.9 million in the
fourth quarter.
(c) Includes restructuring and impairment charges of $6.2 million that primarily occurred in the fourth quarter.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Under the terms of the Company's Articles of Incorporation and Bylaws, each
of the Directors named below is to serve until the next annual meeting of
Shareholders.
NAME AGE POSITION DIRECTOR SINCE(1)
- ----- --- -------- --------------
Paul V. Reilly 49 Director, Chairman of the Board & Chief 1998
Executive Officer
Michel P. Salbaing 56 Senior Vice President & Chief Financial
Officer
Herbert H. Davis III 54 Senior Vice President - Corporate
Development & Chief Legal Officer
Robert C. Hart 64 President and Chief Executive Officer -
Envelope Division
David W. Blue 58 President and Chief Executive Officer -
Commercial Print
Roger Wertheimer 42 Vice President - General Counsel &
Secretary
D. Robert Meyer, Jr. 45 Vice President - Treasurer
Mark L. Zoeller 42 Vice President - Corporate Development
William W. Huffman, Jr. 53 Vice President - Controller
Kimberly T. Henry 51 Vice President - Human Resources
Keith T. Pratt 55 Vice President - Purchasing
Frank P. Diassi(4)(5) 68 Director 1993
Frank J. Hevrdejs(2)(3)(5) 56 Director 1993
Janice C. Peters(3)(5) 50 Director 1999
Jerome W. Pickholz(2)(4) 69 Director 1994
W. Thomas Stephens(2)(3) 59 Director 2000
William R. Thomas(4) 73 Director 1998
<FN>
(1) Directors serve one-year terms.
(2) Member of the Nominating Committee.
(3) Member of the Compensation Committee.
(4) Member of the Audit Committee.
(5) Member of the Environmental, Health and Safety Committee.
PAUL V. REILLY was named our Chief Executive Officer in March 2001 and he
became Chairman of the Board in September 2001. Prior to that Mr. Reilly was
our President and Chief Operating Officer from January 1998 to March 2001
and was our Senior Vice President-Finance and Chief Financial Officer from
September 1995 to January 1998. Mr. Reilly spent 14 years with Polychrome
Corporation, a prepress supplier to the printing industry, where he held a
number of positions including Assistant Corporate Treasurer, Corporate
Treasurer, Vice President and Chief Financial Officer, and General Manager
of United States Operations. Mr. Reilly is a Certified Public Accountant.
MICHEL P. SALBAING has been our Senior Vice President-Finance and Chief
Financial Officer since November 2000. From 1996 to November 2000, Mr.
Salbaing was with Quebecor World, the largest North American printer, where
he held a number of positions including Chief Financial Officer of the
overall corporation, President and Chief Executive Officer of Quebecor
Printing Europe and Senior Vice President and Chief Financial Officer of
Quebecor
50
World North America. Prior to 1996, Mr. Salbaing held various
senior financial positions with three large Canadian manufacturing firms and
spent eight years with Ernst & Young LLP. Mr. Salbaing is a member of the
Canadian Institute of Chartered Accountants.
HERBERT H. DAVIS III has been our Senior Vice President-Corporate
Development and Chief Legal Officer since August 2001. Prior to that time,
Mr. Davis was in the private practice of law and was a partner at the
Denver, Colorado law firm of Rothgerber Johnson & Lyons LLP for over
20 years.
ROBERT C. HART has served as Chief Executive Officer of the envelope segment
of the Company since October 2000. From 1998 until he joined Mail-Well, he
owned his own consulting firm after having spent over thirty years, from 1967
to 1998, with Riverwood International, a $1.3 billion paperboard and
packaging company headquartered in Atlanta, GA. Throughout his tenure with
Riverwood, Hart served as Vice President & Mill Manager; Vice President,
Sales and Marketing; Vice President, and General Manager of Paperboard
Operations. Most recently, as Senior Vice President of the $600 million
Paperboard Operation, Hart directed the operations of three paper mills,
producing 1.4 million tons of packaging products to improve productivity
over 250,000 tons in eight years.
DAVID W. BLUE has served as Chief Executive Officer of the commercial print
segment of the Company since September 2000. He served as President of
USFI, the $1 billion Specialty Ingredient Division of ConAgra, from 1998
until joining Mail-Well. His career included 15 years at Kraft Foods, from
1976 to 1991 where he was Vice President, Marketing and Vice President,
Finance for Kraft Cheese, as well as President of Churny Company, a Kraft
subsidiary which he grew eightfold in four years. From 1991 to 1995,
Mr. Blue was with Stella Foods as President of Stella Cheese and Executive
Vice President, Sales and Marketing of Stella Foods. From 1995-1998 he was
President and Owner of O'Boisie Corporation, a manufacturer and distributor
of snack foods.
ROGER WERTHEIMER has been our Vice President-General Counsel and Secretary
since February 1995. Mr. Wertheimer began practicing law in 1984 and served
as Corporate Counsel for PACE Membership Warehouse, Inc. from 1988 to 1994.
Mr. Wertheimer was in private practice from March 1994 until February 1995,
when he joined us.
D. ROBERT MEYER, JR. has been our Vice President-Treasurer and Tax since
1998. Mr. Meyer is a licensed attorney, Certified Public Accountant and
Certified Financial Planner. From 1988 to 1998, Mr. Meyer was a partner in
the tax department of the accounting firm of Deloitte & Touche LLP.
MARK L. ZOELLER has been our Vice President-Corporate Development since May
2001. From 1997 to May 2001 he was Assistant General Counsel. Prior to
joining us, Mr. Zoeller was an associate at the law firm of Rothgerber
Johnson & Lyons LLP, and he is a licensed attorney.
WILLIAM W. HUFFMAN, JR. has been our Vice President-Controller since November
2000. Prior to that he served in various financial capacities at Custom
Papers Group, Specialty Coatings International, and James River Corporation.
Mr. Huffman began his career with Coopers & Lybrand, and is a Certified
Public Accountant.
KIMBERLY TAYLOR HENRY has been our Vice President-Human Resources since
March 2000. From 1988 to March 2000, she worked for Samsonite Corporation in
various capacities, most recently Vice President Human Resources. Ms. Henry
is a licensed attorney.
KEITH T. PRATT has been our Vice President-Purchasing since 1998. From 1994
to 1998, Mr. Pratt was Vice President of Material Sourcing and Logistics of
Ply Gem Industries. From 1981 to 1994, Mr. Pratt was responsible for
purchasing and logistics with several companies where he held a variety of
positions up to the director level.
FRANK P. DIASSI has been a director since February 1994. Mr. Diassi has been
Chairman of Sterling Chemicals, Inc., a manufacturer of commodity
petrochemicals and chemicals used primarily in the pulp and paper industry,
since August 1996. He was a founding director of Arcadian Corporation, the
largest nitrogen fertilizer company in North America. From 1989 to 1994,
Mr. Diassi was a Director and Chairman of the Finance Committee of Arcadian
Corporation. Mr. Diassi is a director of Fibreglass Holdings, Inc., a truck
accessory manufacturer, a director and Chairman of Amerlux Inc., a
commercial lighting company, and director and Chairman of Software
51
Plus, Inc., a human resources/payroll software design firm. On July 16, 2001,
Sterling Chemicals, Inc., a company for which Mr. Diassi has served as an
executive officer, filed a voluntary petition for reorganization under Chapter
11 of the United States Bankruptcy Code. Mr. Diassi is a member of the Audit
Committee of the Board of Directors and Chairman of the Environmental, Health
and Safety Committee
FRANK J. HEVRDEJS has been a director since our inception in November 1993.
In 1982 Mr. Hevrdejs co-founded The Sterling Group, L.P., a major management
buyout company, where he is currently a principal shareholder and president.
He also serves as Chairman of First Sterling Ventures Corp., an investment
company, Endoro Holdings, Inc., a structural and electrical manufacturing
company, and Fibreglass Holdings, Inc., a truck accessory manufacturer. He
is a director of Eagle U.S.A., an air-freight company, Sterling Chemicals,
Inc., a petroleum chemical company and serves on the Houston Regional Board
of J.P. Morgan Chase and Co., a financial institution. Mr. Hevrdejs serves
as Chairman of the Nominating Committee and is a member of the Compensation
Committee of the Board of Directors.
JANICE C. PETERS has been a director since 1999. From 1997 to 2000,
Ms. Peters served as President and Chief Executive Officer of MediaOne(R),
the broadband services arm of MediaOne Group. From 1995 to 1997, Ms.
Peters was employed by US WEST, MediaOne's former parent company, in
various positions including Executive Vice President of Media One Group,
Managing Director of One2One, a United Kingdom wireless communications
joint venture between US WEST and Cable & Wireless, and President of
Wireless Operations for US WEST Media Group. Ms. Peters serves as a
director of Primus Knowledge Solutions, Inc., a knowledge-enabled
software provider. Ms. Peters serves as Chairperson of the Compensation
Committee of the Board of Directors.
JEROME W. PICKHOLZ has been a director since September 1994. From 1978 until
1994, he was Chief Executive Officer of Ogilvy & Mather Direct Worldwide, a
direct advertising agency. From 1994 until September 1995, he served as
Chairman of the Board of Ogilvy & Mather Direct worldwide where he is now
Chairman Emeritus. Since January 1, 1996, Mr. Pickholz has served as founder
and Chairman of Pickholz, Tweedy, Cowan, L.L.C., a marketing communications
company. Mr. Pickholz serves as the Chairman of the Audit Committee and as a
member of the Nominating Committee of the Board of Directors.
W. THOMAS STEPHENS has been a director since 2000 and served as Chairman
of the Board from January 2001 to September 2001. From 1997 to 1999,
Mr. Stephens served as President and Chief Executive Officer of MacMillan
Bloedel, Canada's largest forest products company. From 1986 to 1996, he
served as CEO and President of Johns Manville Corporation serving as
Chairman from 1993 to 1996. Currently, Mr. Stephens is a director of
Qwest Communications International, Inc., Norske Skog Canada Limited,
Xcel Energy, Inc., TransCanada PipeLines Ltd., and a trustee of Putnam
Mutual Funds. Mr. Stephens is a member of the Compensation Committee and
the Nominating Committee of the Board of Directors.
WILLIAM R. THOMAS has been a director since 1998. He has served as Chairman
of Capital Southwest Corporation, a publicly owned venture capital
investment company, since 1982 and as President since 1980. Mr. Thomas has
been a director of Capital Southwest Corporation since 1972 and was Senior
Vice President from 1969 to 1980. Mr. Thomas also serves as a director of
Alamo Group, Inc., a heavy-duty mowing equipment company, Encore Wire
Corporation, an electrical wire and cable company, and Palm Harbor Homes,
Inc., a manufactured housing company. Mr. Thomas is a member of the Audit
Committee of the Board of Directors.
The section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" appearing in the Company's Proxy Statement filed pursuant to
Regulation 14A in connection with the 2002 Annual Meeting of Stockholders
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections captioned "Director Compensation," "Compensation Committee
Interlocks and Insider Participation," "Executive Compensation," "Summary
Compensation Table," "Option Grants in 2001," "Aggregated Option Exercises
in 2001 and 2001 Year-End Option Values," "Long-Term Incentive Plans -
Awards in Last Fiscal Year." "Compensation Committee Report on Executive
Compensation" and "Stock Price Performance Graph" appearing in the Company's
Proxy Statement filed pursuant to Regulation 14A in connection with the
2002 Annual Meeting of Stockholders are incorporated herein by reference.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section captioned "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's Proxy Statement filed pursuant to
Regulation 14A in connection with the 2002 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Included in Part II, Item 8 of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this Report:
Page
Schedule I Condensed Parent-Only Balance Sheets as of December 31, 2001 and 2000 and
Condensed Parent-Only Statements of Operations and Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999...........................58
Schedule II Valuation and Qualifying Accounts for the Years Ended
December 31, 2001, 2000, and 1999...............................................62
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(i) Articles of Incorporation of the Company - incorporated by
reference from Exhibit 3(i) of the Company's Form 10-Q for the
quarter ended September 30, 1997.
3(ii) Bylaws of the Company - incorporated by reference from Exhibit
3.4 of the Company's Registration Statement on Form S-1 dated
September 21, 1995.
4.1.1.1 Form of Certificate representing the Common Stock, par value $0.01
per share, of the Company - incorporated by reference from
Exhibit 4.1 of the Company's Amendment No. 1 to Form S-3 dated
October 29, 1997 (Reg. No. 333-35561).
4.1.1.2 Form of Indenture between the Company and The Bank of New York,
as Trustee, dated November 1997, relating to the Company's
$152,050,000 aggregate principal amount of 5% Convertible
Subordinated Notes due 2002--incorporated by reference from
Exhibit 4.2 to the Company's Amendment No. 2 to Form S-3 dated
November 10, 1997 (Reg. No. 333-36337).
4.1.1.3 Form of Supplemental Indenture between the Company and The Bank
of New York, as Trustee, dated November 1997, relating to the
Company's $152,050,000 aggregate principal amount of 5%
Convertible Subordinated Notes due 2002 and Form of Convertible
Note--incorporated by reference from Exhibit 4.5 to the Company's
Amendment No. 2 to Form S-3 dated November 10, 1997 (Reg. No.
333-36337).
4.2 Indenture dated as of December 16, 1998 between Mail-Well I
Corporation ("MWI") and State Street Bank and Trust Company, as
Trustee, relating to MWI's $300,000,000 aggregate principal
amount of 8 3/4% Senior Subordinated Notes due 2008 -
incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
4.5 Form of Senior Subordinated Note - Incorporated by reference from
the company's Annual Report of Form 10-K for the year ended
December 31, 1998.
10.1 Form of Indemnity Agreement between the Company and each of its
officers and directors - incorporated by reference from Exhibit
10.17 of the Company's Registration Statement on Form S-1 dated
March 25, 1994.
53
10.2 Form of Indemnity Agreement between Mail-Well I Corporation and
each of its officers and directors - incorporated by reference
from Exhibit 10.18 of the Company's Registration Statement on
Form S-1 dated March 25, 1994.
10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of
February 23, 1994 and related Employee Stock Ownership Plan Trust
Agreement - incorporated by reference from Exhibit 10.19 of the
Company's Registration Statement on Form S-1 dated March 25,
1994.
10.4 Form of M-W Corp. 401(k) Savings Retirement Plan - incorporated by
reference from Exhibit 10.20 of the Company's Registration
Statement on Form S-1 dated March 25, 1994.
10.5 Mail-Well, Inc. 1994 Stock Option Plan, as amended on May 7, 1997
- incorporated by reference from Exhibit 10.56 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
10.6 Form of 1994 Incentive Stock Option Agreement - incorporated by
reference from Exhibit 10.22 of the Company's Registration
Statement on Form S-1 dated March 25, 1994.
10.7 Form of the Company Nonqualified Stock Option Agreement -
incorporated by reference from Exhibit 10.23 of the Company's
Registration Statement on Form S-1 dated March 25, 1994.
10.8 Mail-Well, Inc. 1997 Non-Qualified Stock Option Plan--
incorporated by reference from exhibit 10.54 of the Company's
Form 10-Q for the quarter ended March 31, 1997
10.9 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from exhibit 10.54 of the Company's Form 10-Q for the
quarter ended March 31, 1997.
10.10 Mail-Well, Inc. 1998 Incentive Stock Option Plan--incorporated
by reference from Exhibit 10.58 to the Company's Quarterly report
on Form 10-Q for the quarter ended March 31, 1998.
10.11 Form of 1998 Incentive Stock Option Agreement--incorporated by
reference from Exhibit 10.59 to the Company's Quarterly report on
Form 10-Q for the quarter ended March 31, 1998.
10.12 Credit Agreement dated as of March 16, 1998 among Supremex Inc.,
certain Guarantors, Bank of America National Trust and Savings
Association, as Agent and other financial institutions party
thereto--incorporated by reference from Exhibit 10.61 to the
Company's Quarterly report on Form 10-Q for the quarter ended
March 31, 1998.
10.13 Participation Agreement dated as of December 15, 1997 among
Mail-Well I Corporation, Keybank National Association, as Trustee
and other financial institutions party thereto--incorporated by
reference from Exhibit 10.62 to the Company's Quarterly report on
Form 10-Q for the quarter ended March 31, 1998.
10.14 Equipment Lease dated as of December 15, 1997 among Mail-Well I
Corporation, Keybank National Association, as Trustee and other
financial institutions party thereto--incorporated by reference
from Exhibit 10.63 to the Company's Quarterly report on Form 10-Q
for the quarter ended March 31, 1998.
10.15 Guaranty Agreement dated as of December 15, 1997 among Mail-Well,
Inc., Graphic Arts Center, Inc., Griffin Envelope Inc., Murray
Envelope Corporation, Shepard Poorman Communications Corporation,
Wisco Envelope Corp., Wisco II, LLC, Wisco III, LLC, Mail-Well I
Corporation, Keybank National Association, as Trustee and other
financial institutions party thereto--incorporated by reference
from Exhibit 10.64 to the Company's Quarterly report on Form 10-Q
for the quarter ended March 31, 1998.
10.16 Merger Agreement and Plan of Merger by and among American
Business Products, Inc., Mail-Well, Inc. and Sherman Acquisition
Corporation dated January 13, 2000--incorporated by reference
from Exhibit (c) (1) to the Registrant's Tender Offer Statement
on Schedule 14D-1 filed with the commission on January 21, 2000.
10.17 Change of Control Agreement dated November 15, 1999, between the
Company and Paul V. Reilly--incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended December
31, 1999.
10.19 Change of Control Agreement dated November 15, 1999, between the
Company and Robert Meyer--incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended December
31, 1999.
10.20 Change of Control Agreement dated November 15, 1999, between the
Company and Michael A. Zawalski--incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.21 Credit Agreement dated as of February 18, 2000 among Mail-Well I
Corporation, Bank of America, N.A., as Administrative Agent and
Letter of Credit Issuing Bank, ABN AMRO Bank, N.V., as
Syndication Agents, the Bank of Nova Scotia, as Documentation
Agent and certain other financial institutions party thereto -
incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
10.22 Security Agreement dated as of February 18, 2000, by and among
Mail-Well I Corporation, Mail-Well, Inc., certain other
affiliates of the Company and Bank of America, N.A., as agent -
incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
10.23 Second Amendment to Credit Agreement dated as of March 28, 2001
among Mail-Well I Corporation, Mail-Well, Inc., certain Mail-Well
subsidiaries, Bank of America, N.A., as Administrative Agent and
Letter of
54
Credit Issuing Bank, ABN AMRO Bank, N.V., as Syndication Agents,
the Bank of Nova Scotia, as Documentation Agent and certain other
financial institutions party thereto - incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001.
10.24 Mail-Well, Inc. 2001 Long-Term Equity Incentive Plan -
incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001.
10.25 Form of Non-Qualified Stock Option Agreement under 2001 Long-Term
Equity Incentive Plan - incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.26 Form of Incentive Stock Option Agreement under 2001 Long-Term
Equity Incentive Plan - incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.27 Form of Restricted Stock Award Agreement under 2001 Long-Term
Equity Incentive Plan - incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.28 First Amendment to Credit Agreement dated as of July 28, 2000
among Mail-Well I Corporation, Mail-Well, Inc., certain Mail-Well
subsidiaries, Bank of America, N.A., as Administrative Agent and
Letter of Credit Issuing Bank, ABN AMRO Bank, N.V., as
Syndication Agent, the Bank of Nova Scotia, as Documentation
Agent and certain other financial institutions party thereto -
incorporated by reference from the Company's First Amendment to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
10.29 Third Amendment to Credit Agreement dated as of June 29, 2001
among Mail-Well I Corporation, Mail-Well, Inc., certain Mail-Well
subsidiaries, Bank of America, N.A., as Administrative Agent and
Letter of Credit Issuing Bank, ABN AMRO Bank, N.V., as
Syndication Agent, the Bank of Nova Scotia, as Documentation
Agent and certain other financial institutions party thereto -
incorporated by reference from the Company's First Amendment to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
10.30 Fourth Amendment to Credit Agreement dated as of August __, 2001
Mail-Well I Corporation, Mail-Well, Inc., certain Mail-Well
subsidiaries, Bank of America, N.A., as Administrative Agent and
Letter of Credit Issuing Bank, ABN AMRO Bank, N.V., as
Syndication Agent, the Bank of Nova Scotia, as Documentation
Agent and certain other financial institutions party thereto -
incorporated by reference from the Company's Current Report on
Form 8-K filed August 10, 2001.
99.1* Consolidating Condensed Financial Statements of Mail-Well I
Corporation, as Issuer, certain of its subsidiaries as Guarantor
Subsidiaries, certain of its subsidiaries as Non-guarantor
Subsidiaries and Mail-Well, Inc. as Parent Guarantor for the
three year period ended December 31, 2001 and for the years
ending December 31, 2001 and 2000.
23.1* Consent of Ernst & Young LLP
(b) Reports on Form 8-K
Current Report on Form 8-K filed November 14, 2001
Current Report on Form 8-K filed October 22, 2001
<FN>
- -------------
* Filed herewith.
55
MAIL-WELL, INC. (PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
ASSETS DECEMBER 31,
2001 2000
---- ----
Current assets:
Other current assets $ 295 $ 262
Note receivable from Mail-Well I Corporation 147,436 147,436
-------- --------
Total current assets 147,731 147,698
Investment in subsidiary 240,954 385,505
Other assets - 1,500
Intangible assets (net of accumulated amortization of $3,747 and $2,789) 1,023 1,981
-------- --------
Total assets $389,708 $536,684
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued interest and other current liabilities $ 8,768 $ 11,768
Convertible subordinated notes 139,063 -
-------- --------
Total current liabilities 147,831 11,768
Convertible subordinated notes - 139,063
-------- --------
Total liabilities 147,831 150,831
Shareholders' equity 241,877 385,853
-------- --------
Total liabilities and shareholders' equity $389,708 $536,684
======== ========
See notes to condensed financial statements.
56
MAIL-WELL, INC. (PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
Other operating costs:
Administrative $ 359 $ 267 $ 24
Amortization 19 27 176
--------- -------- -------
Total other operating costs 378 294 200
--------- -------- -------
Operating loss (378) (294) (200)
Other (income) expense:
Interest expense-debt 7,970 8,035 8,543
Interest income from subsidiary (8,923) (8,846) (8,846)
---------- -------- -------
Income from continuing operations 575 517 103
--------- -------- -------
Provision for income taxes:
Current - - (39)
Deferred - - -
--------- -------- -------
Income before extraordinary items and equity in
undistributed earnings of subsidiary 575 517 64
Equity (loss) in undistributed earnings of subsidiary (136,792) 25,263 64,418
--------- -------- -------
Income (loss) before extraordinary items (136,217) 25,780 64,482
Extraordinary items - 1,838 -
--------- -------- -------
Net income (loss) $(136,217) $ 27,618 $64,482
========== ======== =======
See notes to condensed financial statements.
57
MAIL-WELL, INC. (PARENT-ONLY FINANCIAL SUPPLEMENTAL STATEMENTS) SCHEDULE I
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
Cash flow from operating activities:
Net income (loss) $(136,217) $ 27,618 $ 64,482
Adjustments to reconcile net income to net cash
provided (used in) by operating activities:
Equity in undistributed earnings (loss) of subsidiary 136,792 (25,262) (64,418)
Amortization 958 720 959
Extraordinary item - pre-tax - (2,989) -
Changes in operating assets and liabilities, net of effects
of acquired businesses:
Other working capital 2,725 (3,430) 3,572
Other assets - 242 -
--------- -------- --------
Net cash provided by (used in) operating activities 4,258 (3,101) 4,595
Cash flow from investing activities:
Investment in subsidiary (413) 9,665 (2,029)
Other activity with subsidiary, net (5,758) 14,599 (4,595)
Investment in marketable securities 1,500 (1,500) -
--------- -------- --------
Net cash provided by (used in) investing activities (4,671) 22,764 (6,624)
Cash flow from financing activities:
Net proceeds from issuance of common stock 413 335 2,029
Repurchase of common stock - (10,000) -
Repayment of long-term debt - (9,998) -
--------- -------- --------
Net cash provided by (used in) financing activities 413 (19,663) 2,029
--------- -------- --------
Net increase (decrease) in cash and cash equivalents - - -
Cash and cash equivalents at beginning of year - - -
--------- -------- --------
Cash and cash equivalents at end of year $ - $ - $ -
========= ======== ========
See notes to condensed financial statements.
58
MAIL-WELL, INC. (PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED SUPPLEMENTAL FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The financial statements of Mail-Well,
Inc. (the "Company") reflect the investment in Mail-Well I Corporation
("M-W Corp."), a wholly-owned subsidiary, using the equity method.
INCOME TAXES - The provision for income taxes is based on income
recognized for financial statement purposes. Deferred income taxes are
recognized for the effects of temporary differences between such income
and that recognized for income tax purposes. The Company files a
consolidated U.S. income tax return with M-W Corp.
RECLASSIFICATIONS - Certain reclassifications have been made to the
1999 and 2000 financial statements to conform to the 2001 presentation.
2. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements and related
Notes of Mail-Well, Inc. and Subsidiaries included elsewhere herein for
additional information.
3. NOTES RECEIVABLE
During 1997, the Company loaned M-W Corp. $147,436,000 which is payable
on demand and earns interest at 6% payable annually. The note is
unsecured and is subordinate in right of payment to any and all other
existing and future indebtedness of the Company.
4. DEBT AND GUARANTEES
Information on the debt of the Company is filed as Exhibit 99.1 to this
report. The Company has guaranteed all debt of M-W Corp. ($723.0
million outstanding at December 31, 2001, including current maturities)
and certain other obligations arising in the ordinary course of
business. The aggregate amounts of M-W Corp.'s debt maturities for the
five years following 2001 are: 2002 - $163.8 million; 2003 - $14.6
million; 2004 - $12.2 million; 2005 - $13.8 million; 2006 - $35.3
million; and $483.3 million thereafter.
5. DIVIDENDS RECEIVED
No dividends have been received from M-W Corp. since the Company's
inception. M-W Corp.'s ability to declare dividends to the Company is
restricted by the terms of its bank credit agreements and the indenture
relating to M-W Corp.'s Senior Subordinated Notes.
59
MAIL-WELL, INC. AND SUBSIDIARIES SCHEDULE II
SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE ALLOWANCES FOR THE YEAR ENDED DECEMBER 31,
- ------------------------------
2001 2000 1999
---- ---- ----
Balance at beginning of year $ 4,403 $ 307 $ 4,201
Charged to costs and expenses 2,594 4,130 3,434
Charged to other accounts (1) 3,502(2) 2,050(3) (4,451)(4)
Deductions (5) (5,817) (2,084) (2,877)
---------- ---------- ----------
Balance at end of year $ 4,682 $ 4,403 $ 307
========== ========== ==========
INVENTORY RESERVES
- ------------------
Balance at beginning of year $ 4,316 $ 3,169 $ 2,107
Charged to costs and expenses 1,057 2,129 1,591
Charged to other accounts (1) (286)(2) 278(3) 362(4)
Deductions (5) (1,031) (1,260) (891)
---------- ---------- ----------
Balance at end of year $ 4,056 $ 4,316 $ 3,169
========== ========== ==========
<FN>
(1) Recoveries of accounts previously written off.
(2) Includes amounts transferred from Mail-Well Trade Receivable
Corporation in the amount of $(3,162). In addition, this amount
includes the reclassifications in the amounts of $361 and $369 which
relate to reserves for accounts receivable allowances and inventory
reserves transferred to assets held for sale, respectively.
(3) Includes the beginning balances of $(409) of the allowance for doubtful
accounts for the companies acquired in 2000 and $3,352 of amounts
transferred to Mail-Well Trade Receivable Corporation. In addition,
this includes beginning balances of $525 for inventory reserves for
companies acquired in 2000.
(4) Includes the beginning balances of $(346) for the allowance for
doubtful accounts for the companies acquired in 1999 and $5,049 of
amounts transferred to Mail-Well Trade Receivable Corporation. In
addition, this includes beginning balances of ($525) for inventory
reserves for companies acquired in 1999.
(5) Accounts and inventories written off.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the city of Englewood, state of Colorado, on February 22, 2002.
Mail-Well, Inc.
By: /s/ Paul V. Reilly
----------------------------------------------------
Paul V. Reilly, Chief Executive Officer
By: /s/ Michel P. Salbaing
----------------------------------------------------
Michel P. Salbaing, Senior Vice President-Finance
and Chief Financial Officer
61
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed by the
following persons in the capacities and on the dates indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Roger Wertheimer and Mark Zoeller, and each of them, as attorneys-in-fact,
each with the power of substitution, for him or her in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Paul V. Reilly Chairman of the Board, February 22, 2002
- ---------------------------- Chief Executive Officer
Paul V. Reilly
/s/ Frank P. Diassi Director February 22, 2002
- ----------------------------
Frank P. Diassi
/s/ Frank. J. Hevrdejs Director February 22, 2002
- ----------------------------
Frank J. Hevrdejs
/s/ Janice C. Peters Director February 22, 2002
- ----------------------------
Janice C. Peters
/s/ Jerome W. Pickholz Director February 22, 2002
- ----------------------------
Jerome W. Pickholz
/s/ W. Thomas Stephens Director February 22, 2002
- ----------------------------
W. Thomas Stephens
/s/ William R. Thomas Director February 22, 2002
- ----------------------------
William R. Thomas
62