============================================================================== - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 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) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes /X/ No / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of April 29, 2004 was $109,200,148. As of April 29, 2004 the Registrant had 48,384,789 shares of Common Stock, $0.01 par value, outstanding. - ------------------------------------------------------------------------------ ============================================================================== TABLE OF CONTENTS PART I--FINANCIAL INFORMATION PAGE ---- Item 1. Condensed Consolidated Financial Statements................. 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 24 Item 4. Controls and Procedures..................................... 25 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................ 26 i PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MAIL-WELL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) MARCH 31, 2004 (UNAUDITED) DECEMBER 31, 2003 -------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 259 $ 307 Accounts receivable, net............................... 224,034 223,541 Inventories, net....................................... 99,639 91,402 Other current assets................................... 50,236 48,135 ---------- ---------- TOTAL CURRENT ASSETS............................... 374,168 363,385 Property, plant and equipment, net......................... 380,328 388,240 Goodwill................................................... 298,885 299,392 Other intangible assets, net............................... 18,281 19,687 Other assets, net.......................................... 40,311 36,689 ---------- ---------- TOTAL ASSETS............................................... $1,111,973 $1,107,393 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable....................................... $ 151,188 $ 140,468 Accrued compensation and related liabilities........... 53,938 53,209 Other current liabilities.............................. 52,102 64,360 Current maturities of long-term debt................... 2,588 2,575 ---------- ---------- TOTAL CURRENT LIABILITIES.......................... 259,816 260,612 Long-term debt, less current maturities.................... 774,749 746,386 Deferred income taxes...................................... 1,507 6,717 Other liabilities.......................................... 26,243 25,659 ---------- ---------- TOTAL LIABILITIES.......................................... 1,062,315 1,039,374 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, 48,384,123 and 48,380,457 shares issued and outstanding as of March 31, 2004 and December 31, 2003, respectively................................... 484 484 Paid-in capital........................................ 213,857 213,850 Retained deficit....................................... (166,866) (150,331) Deferred compensation.................................. (1,569) (1,714) Accumulated other comprehensive income................. 3,752 5,730 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY......................... 49,658 68,019 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $1,111,973 $1,107,393 ========== ========== See notes to condensed consolidated financial statements. 1 MAIL-WELL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except earnings per share amounts) THREE MONTHS ENDED MARCH 31, ------------------------- 2004 2003 -------- -------- Net sales................................................... $423,742 $427,320 Cost of sales............................................... 335,322 343,400 -------- -------- Gross profit................................................ 88,420 83,920 Operating expenses: Selling, general and administrative..................... 67,998 63,425 Amortization of intangibles............................. 1,405 445 Restructuring charges................................... 103 771 -------- -------- Operating income............................................ 18,914 19,279 Other expense: Interest expense........................................ 18,399 18,214 Loss from the early extinguishment of debt.............. 17,748 -- Other................................................... 441 132 -------- -------- Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle................................................. (17,674) 933 Income tax benefit (expense)................................ 1,139 (401) -------- -------- Income (loss) from continuing operations before cumulative effect of a change in accounting principle................ (16,535) 532 Gain on disposal of discontinued operations................. -- 2,500 Cumulative effect of a change in accounting principle....... -- (322) -------- -------- Net income (loss)........................................... $(16,535) $ 2,710 ======== ======== Earnings (loss) per share--basic and diluted: Continuing operations................................... $ (0.35) $ 0.01 Discontinued operations................................. -- 0.05 Cumulative effect of a change in accounting principle... -- -- -------- -------- Earnings (loss) per share--basic and diluted................ $ (0.35) $ 0.06 ======== ======== Weighted average shares--basic.............................. 47,739 47,668 Weighted average shares--diluted............................ 47,739 48,376 See notes to condensed consolidated financial statements. 2 MAIL-WELL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) THREE MONTHS ENDED MARCH 31, ----------------------------- 2004 2003 ----------- --------- Cash flows from operating activities: Income (loss) from continuing operations.................. $ (16,535) $ 532 Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation......................................... 11,465 11,723 Amortization......................................... 2,549 1,383 Write-off of deferred financing fees................. 4,220 -- Deferred income tax benefit.......................... (4,672) (2,072) Loss (gain) on disposal of assets.................... (39) 258 Other noncash charges, net........................... (281) 1,012 Changes in operating assets and liabilities, excluding the effects of operations sold: Accounts receivable.................................. (649) (5,716) Inventories.......................................... (8,038) (414) Accounts payable and accrued compensation............ 11,752 (12,668) Income taxes payable................................. (801) (2,379) Other working capital changes........................ (11,369) (5,388) Other, net........................................... (2,080) 662 ----------- --------- Net cash used in operating activities............... (14,478) (13,067) Cash flows from investing activities: Capital expenditures.................................. (5,647) (6,416) Proceeds from divestitures, net....................... -- 3,864 Proceeds from sales of property, plant and equipment........................................... 229 515 ----------- --------- Net cash used in investing activities............... (5,418) (2,037) Cash flows from financing activities: Proceeds from issuance of long-term debt.............. 1,174,037 485,122 Repayments of long-term debt.......................... (1,145,661) (472,188) Proceeds from issuance of common stock................ 7 -- Capitalized loan fees................................. (8,291) (316) ----------- --------- Net cash provided by financing activities........... 20,092 12,618 Effect of exchange rate changes on cash and cash equivalents................................................ (244) 180 ----------- --------- Net decrease in cash and cash equivalents........... (48) (2,306) Cash and cash equivalents at beginning of year.............. 307 2,650 ----------- --------- Cash and cash equivalents at end of quarter................. $ 259 $ 344 =========== ========= See notes to condensed consolidated financial statements. 3 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Mail-Well, Inc. and subsidiaries (collectively, the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2003. The condensed consolidated financial statements for the three months ended March 31, 2003 reported in the Form 10-Q for the quarterly period ended March 31, 2003 have been restated as a result of the Company's adoption of the Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, ("Interpretation 46") in the second quarter of 2003. The provisions of Interpretation 46 required the Company to consolidate a trust that leases equipment to the Company under an operating lease. The effect of this consolidation was to increase net property, plant and equipment by $18.1 million and total debt by $18.5 million on January 1, 2003. The cumulative effect of this change in accounting principle was an after-tax charge of $0.3 million recorded January 1, 2003. 2. STOCK-BASED COMPENSATION Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the measurement date over the amount an employee must pay to acquire the stock. If the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's reported and pro forma net income (loss) and earnings (loss) per share would have been as follows (in thousands, except per share data): THREE MONTHS ENDED MARCH 31, --------------------- 2004 2003 -------- ------ Net income (loss): As reported....................................... $(16,535) $2,710 Pro forma......................................... $(17,205) $1,824 Earnings (loss) per share--basic and diluted: As reported....................................... $ (0.35) $ 0.06 Pro forma......................................... $ (0.36) $ 0.04 The effect on pro forma net income (loss), earnings (loss) per share--basic and earnings (loss) per share--diluted of expensing the estimated fair value of stock options is not necessarily representative 4 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. STOCK-BASED COMPENSATION (CONTINUED) 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. 3. SUPPLEMENTAL BALANCE SHEET INFORMATION INVENTORIES The Company's inventories by major category were as follows (in thousands): MARCH 31, DECEMBER 31, 2004 2003 --------- ------------ Raw materials.......................................... $ 31,047 $ 28,344 Work in process........................................ 24,532 21,483 Finished goods......................................... 49,127 46,570 -------- -------- 104,706 96,397 Reserves............................................... (5,067) (4,995) -------- -------- $ 99,639 $ 91,402 ======== ======== PROPERTY, PLANT AND EQUIPMENT The Company's investment in property, plant and equipment consisted of the following (in thousands): MARCH 31, DECEMBER 31, 2004 2003 --------- ------------ Land and land improvements............................. $ 19,758 $ 20,043 Buildings and building improvements.................... 109,848 109,563 Machinery and equipment................................ 515,541 511,820 Furniture and fixtures................................. 16,098 15,986 Construction in progress............................... 10,291 9,696 --------- --------- 671,536 667,108 Accumulated depreciation............................... (291,208) (278,868) --------- --------- $ 380,328 $ 388,240 ========= ========= COMPREHENSIVE INCOME (LOSS) A summary of the comprehensive income (loss) was as follows (in thousands): THREE MONTHS ENDED MARCH 31, ------------------------- 2004 2003 --------- --------- Net income (loss)...................................... $(16,535) $ 2,710 Other comprehensive income (loss): Currency translation adjustment, net.............. (1,978) 7,388 -------- ------- Comprehensive income (loss)............................ $(18,513) $10,098 ======== ======= 5 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT At March 31, 2004 and December 31, 2003, long-term debt consisted of the following (in thousands): MARCH 31, DECEMBER 31, 2004 2003 --------- ------------ Senior Secured Credit Facility, due 2008............... $ 83,923 $ 73,310 Senior Notes, due 2012................................. 350,000 350,000 Senior Subordinated Notes, due 2008.................... -- 300,000 Senior Subordinated Notes, due 2013.................... 320,000 -- Other.................................................. 23,414 25,651 -------- -------- 777,337 748,961 Less current maturities................................ (2,588) (2,575) -------- -------- Long-term debt...................................... $774,749 $746,386 ======== ======== Current maturities consist of scheduled payments on other long-term debt. In January 2004, the Company sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem the $300 million of 8 3/4% senior subordinated notes due 2008. The Company incurred costs of $6.9 million to issue the 7 7/8% senior subordinated notes. These costs have been deferred and will be amortized over the term of the notes. A loss of $17.7 million was recorded on the early extinguishment of the 8 3/4% senior subordinated notes consisting of redemption premiums of $13.5 million and unamortized debt issuance costs of $4.2 million. In March 2004, the Company amended its $300 million senior secured credit facility due 2005 to extend its term to June 2008. The cost incurred to amend the credit facility was $1.4 million. These debt issuance costs will be amortized over the extended term of the facility. The senior notes due 2012 and the senior subordinated notes due 2013 are guaranteed by Mail-Well, Inc. (the "Parent Guarantor") and all of its wholly owned operating subsidiaries (the "Guarantor Subsidiaries"). The guarantees are joint and several, full, complete and unconditional. There are no material restrictions on the ability of the Guarantor Subsidiaries to transfer funds to the issuing subsidiary in the form of cash dividends, loans or advances, other than ordinary legal restrictions under corporate law, fraudulent transfer and bankruptcy laws. As of March 31, 2004, the Company was in compliance with all of the covenants of its various debt agreements. 5. INCOME TAXES The effective tax rate for the three months ended March 31, 2004 was 6.4% which was primarily the result of an additional tax valuation allowance of $6.8 million recorded as of March 31, 2004. At December 31, 2003, the Company had recorded a valuation allowance of $6.5 million for the estimated impairment of certain loss carryforwards. The Company had tax planning strategies available that it believed could enable it to realize remaining net deferred tax assets. Since the Company incurred additional net operating losses in the first quarter of 2004, it was necessary to record a valuation allowance to reduce the estimated tax benefit from this additional net operating loss. This valuation allowance covers the estimated portion of the tax benefit that would not be utilized by the reversal of existing temporary tax differences or tax planning strategies. 6 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. RESTRUCTURING CHARGES In February 2004, the commercial segment announced the closure of its envelope manufacturing plant in Bensalem, Pennsylvania and its integration into the Company's Philadelphia printing facility. The expenses incurred during the three months ended March 31, 2004 were $0.1 million and were primarily fees related to human resource issues and expenses incurred incidental to equipment moves. The total cost of the closure is expected to be approximately $2.2 million consisting of the following (in thousands): Employee separation and related expenses................ $ 868 Equipment write-downs, net.............................. 500 Equipment moving expenses............................... 225 Building clean-up and other expenses.................... 570 ------ Total............................................... $2,163 ====== The Company has substantially completed the restructuring programs initiated in June 2001 and 2002. A summary of the activity charged to the 2002 restructuring liability during the three months ended March 31, 2004 is as follows (in thousands): COMMERCIAL RESALE TOTAL ---------- ------ ------ Balance, December 31, 2003............................. $1,279 $ 30 $1,309 Payments for lease termination and property exit costs............................................ (143) (10) (153) Payments for other exit costs...................... (43) -- (43) ------ ---- ------ Balance, March 31, 2004................................ $1,093 $ 20 $1,113 ====== ==== ====== A summary of the activity charged to the 2001 restructuring liability during the three months ended March 31, 2004 is as follows (in thousands): COMMERCIAL ---------- Balance, December 31, 2003.............................. $688 Payments for lease termination and property exit costs............................................. (56) ---- Balance, March 31, 2004................................. $632 ==== 7. PENSION PLANS The components of the net periodic pension cost for the Company's pension plans and the supplemental executive retirement plans were as follows (in thousands): THREE MONTHS ENDED MARCH 31, ------------------- 2004 2003 ----- ----- Service cost........................................... $ 544 $ 362 Interest cost.......................................... 711 834 Expected return on plan assets......................... (844) (906) Net amortization and deferral.......................... 53 (47) Other.................................................. -- 83 ----- ----- Net periodic pension expense........................... $ 464 $ 326 ===== ===== 7 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. PENSION PLANS (CONTINUED) The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expects to contribute $2.8 million to its pension plans in 2004. As of March 31, 2004, contributions of $0.1 million have been made. 8. EARNINGS PER SHARE Basic earnings per share exclude dilution and are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. A reconciliation of the amounts included in the computation of basic earnings (loss) per share and diluted earnings (loss) per share is as follows (in thousands, except per share amounts): THREE MONTHS ENDED MARCH 31, ---------------------- 2004 2003 -------- ------- Numerator: Numerator for basic and diluted earnings (loss) per share--income (loss) from continuing operations........... $(16,535) $ 532 ======== ======= Denominator: Denominator for basic earnings (loss) per share--weighted average shares............................................ 47,739 47,668 Effects of dilutive securities: Stock options and restricted stock...................... -- 708 -------- ------- Denominator for diluted earnings (loss) per share--adjusted weighted average shares................................... 47,739 48,376 ======== ======= Earnings (loss) from continuing operations per share: Basic and diluted....................................... $ (0.35) $ 0.01 ======== ======= In the three months ended March 31, 2004 and 2003, outstanding options and shares of restricted stock in the amount of 6,468,000 and 6,072,000, respectively, were excluded from the calculation of diluted earnings per share because the effect would be antidilutive. 9. ASSETS HELD FOR SALE The Company sold certain digital graphics operations of its commercial segment in March 2003. The condensed consolidated statement of operations for the three months ended March 31, 2003 includes sales of $2.9 million and operating income of $0.2 million related to these operations. 10. DISCONTINUED OPERATIONS During the first quarter of 2003, the Company recorded a gain on the disposal of discontinued operations in the amount of $2.5 million. This gain was the result of a change in the estimated tax impact of the disposition of its prime label business, which was sold in May 2002. The data required to determine the full tax impact of this transaction was not available until 2003. The Company finalized this estimate upon filing the final tax return in the second quarter of 2003. 8 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SEGMENT INFORMATION In October 2003, the Company reorganized into two operating segments: commercial and resale. This reorganization aligns the Company's structure with its strategic goals. Segment information for the three months ended March 31, 2003 has been restated to reflect the new operating segments. The commercial segment specializes in printing annual reports, car brochures, brand marketing collateral, financial communications, general commercial printing and the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. The commercial segment also offers services such as design, fulfillment, e-commerce and inventory management. These products and services are sold directly to national and local customers. The resale segment produces business forms and labels, custom and stock envelopes and specialty packaging and mailers. These products are generally sold through professional print distributors, business forms suppliers, office-products retail chains and the Internet. Operating income of each segment includes all costs and expenses directly related to the segment's operations. Corporate expenses include corporate general and administrative expenses. Inter-company sales for the three months ended March 31, 2004 and 2003 were $5.2 million and $4.1 million, respectively. These amounts were eliminated in consolidation and excluded from reported net sales. The following tables present certain segment information for the three months ended March 31, 2004 and 2003 (in thousands): THREE MONTHS ENDED MARCH 31, ----------------------- 2004 2003 -------- -------- Net sales: Commercial.......................................... $323,849 $324,063 Resale.............................................. 99,893 103,257 -------- -------- Total............................................... $423,742 $427,320 ======== ======== Operating income (expense): Commercial.......................................... $ 11,996 $ 12,481 Resale.............................................. 11,463 11,851 Corporate........................................... (4,545) (5,053) -------- -------- Total............................................... $ 18,914 $ 19,279 ======== ======== Restructuring charges: Commercial.......................................... $ 103 $ 911 Resale.............................................. -- (140) -------- -------- Total............................................... $ 103 $ 771 ======== ======== Net sales by product line: Commercial printing................................. $198,647 $196,830 Envelopes........................................... 173,764 180,190 Business forms and labels........................... 51,331 50,300 -------- -------- Total............................................... $423,742 $427,320 ======== ======== 9 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Mail-Well I Corporation ("Issuer" or "MWI"), the Company's wholly-owned subsidiary, and the only direct subsidiary of the Company, has issued $350 million aggregate principal amount of 9 5/8% Senior Notes ("Senior Notes") due in 2012 and $320 million aggregate principal amount of 7 7/8% Senior Subordinated Notes ("Senior Subordinated Notes") due in 2013. The Senior Notes and Senior Subordinated Notes are guaranteed by the Guarantor Subsidiaries and the Parent Guarantor. The guarantees are joint and several, full, complete and unconditional. There are no material restrictions on the ability of the Guarantor Subsidiaries to transfer funds to MWI in the form of cash dividends, loans or advances, other than ordinary legal restrictions under corporate law, fraudulent transfer and bankruptcy laws. The following condensed consolidating financial information illustrates the composition of the Parent Guarantor, Issuer, and Guarantor Subsidiaries. The Issuer and the Guarantor Subsidiaries comprise all of the direct and indirect subsidiaries of the Parent Guarantor. Management has determined that separate complete financial statements would not provide additional material information that would be useful in assessing the financial composition of the Guarantor Subsidiaries. Investments in subsidiaries are accounted for under the equity method, wherein the investor company's share of earnings and income taxes applicable to the assumed distribution of such earnings are included in net income. In addition, investments increase in the amount of permanent contributions to subsidiaries and decrease in the amount of distributions from subsidiaries. The elimination entries remove the equity method investment in subsidiaries and the equity in earnings of subsidiaries, intercompany payables and receivables and other transactions between subsidiaries. 10 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED) March 31, 2004 (in thousands) COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- ---------- ------------ --------- ------------ Current assets: Cash and cash equivalents.......... $ -- $ -- $ 259 $ -- $ 259 Accounts receivable, net........... -- 47,318 176,716 -- 224,034 Inventories, net................... -- 40,180 59,459 -- 99,639 Note receivable from subsidiaries...................... -- 603,100 -- (603,100) -- Other current assets............... -- 30,268 19,968 -- 50,236 ------- ---------- -------- --------- ---------- Total current assets............. -- 720,866 256,402 (603,100) 374,168 Investment in subsidiaries........... 49,658 132,384 -- (182,042) -- Property, plant and equipment, net... -- 90,676 289,652 -- 380,328 Goodwill and other intangible assets, net................................. -- 67,253 249,913 -- 317,166 Other assets, net.................... -- 33,736 6,575 -- 40,311 ------- ---------- -------- --------- ---------- Total assets......................... $49,658 $1,044,915 $802,542 $(785,142) $1,111,973 ======= ========== ======== ========= ========== Current liabilities: Accounts payable................... $ -- $ 30,835 $120,353 $ -- $ 151,188 Other current liabilities.......... -- 47,232 58,808 -- 106,040 Intercompany payable (receivable)...................... -- 137,359 (137,359) -- -- Note payable to Issuer............. -- -- 603,100 (603,100) -- Current maturities of long-term debt.............................. -- 1,780 808 -- 2,588 ------- ---------- -------- --------- ---------- Total current liabilities........ -- 217,206 645,710 (603,100) 259,816 Long-term debt, less current maturities.......................... -- 770,291 4,458 -- 774,749 Deferred income taxes................ -- (8,671) 10,178 -- 1,507 Other liabilities.................... -- 16,431 9,812 -- 26,243 ------- ---------- -------- --------- ---------- Total liabilities................ -- 995,257 670,158 (603,100) 1,062,315 Shareholders' equity................. 49,658 49,658 132,384 (182,042) 49,658 ------- ---------- -------- --------- ---------- Total liabilities and shareholders' equity.............................. $49,658 $1,044,915 $802,542 $(785,142) $1,111,973 ======= ========== ======== ========= ========== 11 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION December 31, 2003 (in thousands) COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ --------- ------------ Current assets: Cash and cash equivalents............ $ -- $ -- $ 307 $ -- $ 307 Accounts receivable, net............. -- 50,125 173,416 -- 223,541 Inventories, net..................... -- 35,509 55,893 -- 91,402 Note receivable from subsidiaries.... -- 603,100 -- (603,100) -- Other current assets................. -- 32,109 16,026 -- 48,135 ------- -------- -------- --------- ---------- Total current assets............... -- 720,843 245,642 (603,100) 363,385 Investment in subsidiaries............. 68,019 12,364 -- (80,383) -- Property, plant and equipment, net..... -- 90,956 297,284 -- 388,240 Goodwill and other intangible assets, net................................... -- 67,474 251,605 -- 319,079 Other assets, net...................... -- 29,322 7,367 -- 36,689 ------- -------- -------- --------- ---------- Total assets........................... $68,019 $920,959 $801,898 $(683,483) $1,107,393 ======= ======== ======== ========= ========== Current liabilities: Accounts payable..................... $ -- $ 29,092 $111,376 $ -- $ 140,468 Other current liabilities............ -- 58,868 58,701 -- 117,569 Intercompany payable (receivable).... -- 9,059 (9,059) -- -- Note payable to Issuer............... -- -- 603,100 (603,100) -- Current maturities of long-term debt................................ -- 1,776 799 -- 2,575 ------- -------- -------- --------- ---------- Total current liabilities.......... -- 98,795 764,917 (603,100) 260,612 Long-term debt, less current maturities............................ -- 741,589 4,797 -- 746,386 Deferred income taxes.................. -- (4,040) 10,757 -- 6,717 Other long-term liabilities............ -- 16,596 9,063 -- 25,659 ------- -------- -------- --------- ---------- Total liabilities.................. -- 852,940 789,534 (603,100) 1,039,374 Shareholders' equity................... 68,019 68,019 12,364 (80,383) 68,019 ------- -------- -------- --------- ---------- Total liabilities and shareholders' equity................................ $68,019 $920,959 $801,898 $(683,483) $1,107,393 ======= ======== ======== ========= ========== 12 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Quarter Ended March 31, 2004 (in thousands) COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ ------- ------------ Net sales................................ $ -- $100,591 $323,151 $ -- $423,742 Cost of sales............................ -- 81,144 254,178 -- 335,322 -------- -------- -------- ------- -------- Gross profit............................. -- 19,447 68,973 -- 88,420 Operating expenses: Selling, general and administrative.... -- 16,063 53,340 -- 69,403 Restructuring charges.................. -- -- 103 -- 103 -------- -------- -------- ------- -------- Operating income......................... -- 3,384 15,530 -- 18,914 Other expense: Interest expense....................... -- 18,333 66 -- 18,399 Intercompany interest expense (income).............................. -- (13,562) 13,562 -- -- Loss on early extinguishment of debt... -- 17,748 -- -- 17,748 Other.................................. -- 318 123 -- 441 -------- -------- -------- ------- -------- Income (loss) from continuing operations, before income taxes and undistributed earnings of subsidiaries................ -- (19,453) 1,779 -- (17,674) Income tax benefit....................... -- 112 1,027 -- 1,139 -------- -------- -------- ------- -------- Income (loss) from continuing operations, before undistributed earnings of subsidiaries............................ -- (19,341) 2,806 -- (16,535) Equity in undistributed earnings of subsidiaries............................ (16,535) 2,806 -- 13,729 -- -------- -------- -------- ------- -------- Net income (loss)........................ $(16,535) $(16,535) $ 2,806 $13,729 $(16,535) ======== ======== ======== ======= ======== 13 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Quarter Ended March 31, 2003 (in thousands) COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ -------- ------------ Net sales............................... $ -- $107,643 $319,677 $ -- $427,320 Cost of sales........................... -- 88,797 254,603 -- 343,400 ------ -------- -------- -------- -------- Gross profit............................ -- 18,846 65,074 -- 83,920 Operating expenses: Selling, general and administrative... -- 15,713 48,157 -- 63,870 Restructuring charges................. -- -- 771 -- 771 ------ -------- -------- -------- -------- Operating income (loss)................. -- 3,133 16,146 -- 19,279 Other expense (income): Interest expense...................... -- 17,852 14,016 (13,654) 18,214 Other expense (income)................ -- (13,657) 135 13,654 132 ------ -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries........................... -- (1,062) 1,995 -- 933 Income tax benefit (expense)............ -- 457 (858) -- (401) ------ -------- -------- -------- -------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries........................ -- (605) 1,137 -- 532 Equity in undistributed earnings of subsidiaries........................... 2,710 1,248 -- (3,958) -- ------ -------- -------- -------- -------- Income (loss) from continuing operations............................. 2,710 643 1,137 (3,958) 532 Gain on disposal........................ -- 2,500 -- -- 2,500 Cumulative effect of a change in accounting principle................... -- -- (322) -- (322) ------ -------- -------- -------- -------- Net income (loss)....................... $2,710 $ 3,143 $ 815 $ (3,958) $ 2,710 ====== ======== ======== ======== ======== 14 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) Quarter Ended March 31, 2004 (in thousands) COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- ----------- ------------ ------------ Cash flows from operating activities.......................... $ -- $ (36,876) $ 22,398 $ (14,478) Cash flows from investing activities: Capital expenditures............... (2,950) (2,697) (5,647) Intercompany advances.............. (7) 19,736 (19,729) -- Proceeds from sale of property, plant & equipment................. -- -- 229 229 ------- ----------- -------- ----------- Net cash used in investing activities........................ (7) 16,786 (22,197) (5,418) Cash flows from financing activities: Proceeds from long-term debt....... -- 1,174,037 -- 1,174,037 Repayments of long-term debt....... -- (1,145,343) (318) (1,145,661) Proceeds from issuance of common stock............................. 7 -- -- 7 Capitalized loan fees.............. -- (8,291) -- (8,291) ------- ----------- -------- ----------- Net cash used in financing activities........................ 7 20,403 (318) 20,092 Effect of exchange rate changes on cash and cash equivalents........... -- (313) 69 (244) ------- ----------- -------- ----------- Net decrease in cash and cash equivalents......................... -- -- (48) (48) Cash and cash equivalents at beginning of year................... -- -- 307 307 ------- ----------- -------- ----------- Cash and cash equivalents at end of quarter............................. $ -- $ -- $ 259 $ 259 ======= =========== ======== =========== 15 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) Quarter Ended March 31, 2003 (in thousands) COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- --------- ------------ ------------ Cash flows from operating activities............ $ -- $ 1,760 $(14,827) $ (13,067) Cash flows from investing activities: Capital expenditures.......................... -- (809) (5,607) (6,416) Proceeds from divestitures, net............... -- 3,864 -- 3,864 Intercompany advances......................... -- (20,902) 20,902 -- Proceeds from the sale of assets.............. -- -- 515 515 --------- --------- -------- --------- Net cash provided by (used in) investing activities................................... -- (17,847) 15,810 (2,037) Cash flows from financing activities: Proceeds from long-term debt.................. -- 485,122 -- 485,122 Repayments of long-term debt.................. -- (471,147) (1,041) (472,188) Capitalized loan fees......................... -- (316) -- (316) --------- --------- -------- --------- Net cash provided by (used in) financing activities................................... -- 13,659 (1,041) 12,618 Effect of exchange rate changes on cash......... -- -- 180 180 --------- --------- -------- --------- Net change in cash and cash equivalents......... -- (2,428) 122 (2,306) Cash and cash equivalents at beginning of year.. -- 1,957 693 2,650 --------- --------- -------- --------- Cash and cash equivalents at end of quarter..... $ -- $ (471) $ 815 $ 344 ========= ========= ======== ========= 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW We are one of North America's leading providers of visual communications. We produce a variety of products and provide services that help our customers deliver customized messages more effectively. In October 2003, we reorganized Mail-Well into two business segments. This reorganization aligned our structure with our principal strategic goals: to operate as one company; to provide our customers with one point of entry into Mail-Well; and to go to market with all of our products and services. COMMERCIAL Our commercial segment specializes in printing annual reports, car brochures, brand marketing collateral, financial communications, general commercial printing and the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. We also offer our customers services such as design, fulfillment, e-commerce, inventory management and other enterprise solutions for companies seeking strategic partners for their branding and other communications priorities. These products and services are sold directly to national and local customers. Our commercial segment consists of 36 printing plants, 29 envelope plants and five distribution and fulfillment centers. MARKET AND OTHER FACTORS. Approximately 50% of our commercial printing sales and approximately 40% of our custom envelope sales are related to advertising and direct mail promotions. Beginning in 2001, many of our customers significantly reduced promotional spending in response to the economic slowdown. Advertising and promotional spending historically has not improved as quickly as the overall economy after a recession. Additionally, we expect growth in printed advertising and promotional spending to be slower than it was prior to the recession. As a result, there is overcapacity in our industry and significant competitive pricing pressures. We do not expect internal growth or increases in margins until capacity is reduced or the markets served by our commercial segment, particularly advertising and direct mail, begin to recover from the recession. AREAS OF FOCUS. Because of the changes that have occurred in our markets we have two principal areas of focus: * It is important that we grow our share of the market. We have made a substantial investment in our sales and marketing organization to differentiate ourselves from our competitors and enable us to offer and deliver to our customers a full spectrum of our products and services with speed, reliability and efficiency. * We must continue to manage our capacity and operating leverage. In 2001, we began a restructuring program to consolidate many of our manufacturing facilities to reduce excess capacity and improve our competitive position. We have closed eleven of our envelope facilities and four printing operations to improve the utilization of our capacity. In the first quarter of 2004 we announced the closure of another envelope facility. RESALE Our resale segment produces business forms and labels, custom and stock envelopes and specialty packaging and mailers. These products are generally sold through professional print distributors, business forms suppliers, office-products retail chains and the Internet. The resale segment operates 20 manufacturing facilities. MARKET AND OTHER FACTORS. Demand for business forms has been declining for several years as businesses have acquired laser-printing capabilities. The resale market for office products has become extremely price competitive. Mass merchandisers, wholesalers and paper merchants are consolidating suppliers. Product offerings, competitive prices and service are keys to retaining business. 17 AREAS OF FOCUS. In response to industry and market challenges, we are focusing on the following: * We are defending our share of the business forms market and our sales into the office products retail channel. We believe we have the national manufacturing capability and the cost structure to be successful in this effort. * We must grow our sales of business labels and specialty business documents. The markets for these products are growing and we have the production capability and products to benefit from this market growth. * We must match our manufacturing capacity of business forms to the demands of our customers. Since 2001, we have closed two of our business forms plants. CORPORATE In addition to the business improvement actions and areas of focus for each of our business segments, we have several important corporate-wide initiatives. * Our company was formed through a strategic roll-up of many acquisitions. The companies we acquired had different cultures, operating procedures and information systems. We have taken and will continue to take actions to integrate our operations into one company, build our own unique culture and standardize procedures and systems. In keeping with our strategy to unite the organization under one identity, on April 29, 2004, our shareholders approved a proposal to amend the Articles of Incorporation of Mail-Well, Inc. to change its corporate name to "Cenveo, Inc." The Company intends to file the amendment with the Colorado Secretary of State to be effective May 17, 2004. On such date, our common stock is expected to begin trading on the New York Stock Exchange under its new symbol: "CVO." * We have refinanced our debt over the last several years. Currently, we have no significant maturities on any of our long-term debt until 2008. Our focus is on generating sufficient internal cash flow to fund investments in capital equipment and acquisitions and reductions in our outstanding debt. * In 2003, we launched a major initiative we refer to as "Mobilization." Mobilization is a comprehensive program designed to actively involve all of our employees in improving service, quality, efficiency and innovation. We believe this initiative has and will continue to improve teamwork, communication and accountability throughout our business and thus improve operations, safety, customer service and reduce costs. * Uncoated paper prices increased 10% on April 1, 2004. This increase in the cost of manufacturing our envelope products will negatively impact the margins of both segments to the extent we are unable to increase our prices on these products. It will be important for us to manage the impact of this price increase. 18 CONSOLIDATED RESULTS THREE MONTHS ENDED MARCH 31, ----------------------- 2004 2003 -------- -------- (DOLLARS IN THOUSANDS) Division net sales.......................................... $423,742 $424,446 Divested operations.................................... -- 2,873 -------- -------- Net sales................................................... $423,742 $427,320 ======== ======== Division operating income................................... $ 23,562 $ 24,935 Unallocated corporate expenses.......................... (4,545) (5,053) Restructuring expenses.................................. (103) (771) Divested operations..................................... -- 168 -------- -------- Operating income............................................ 18,914 19,279 Interest expense........................................ (18,399) (18,214) Loss from the early extinguishment of debt.............. (17,748) -- Other................................................... (441) (132) -------- -------- Income before income taxes.................................. (17,674) 933 Income tax benefit (expense)............................ 1,139 (401) Gain on disposal of discontinued operations............. -- 2,500 Change in accounting principle.......................... -- (322) -------- -------- Net income (loss)........................................... $(16,535) $ 2,710 ======== ======== Earnings (loss) per share................................... $ (0.35) $ 0.06 ======== ======== NET SALES Net sales declined $3.6 million in the first quarter of 2004 compared to the first quarter of 2003. Net sales in 2003 included sales of $2.9 million from the digital graphics operations that were divested in March 2003. Division net sales were down only slightly. Sales of our commercial segment increased primarily due to higher sales of annual reports and other high impact commercial printing products. Sales in our resale segment declined in the quarter primarily due to lower demand for office products in the retail segment of the market. OPERATING INCOME Operating income declined $0.4 million in the first quarter of 2004 from $19.3 million in the first quarter of 2003. DIVISION OPERATING INCOME. Division operating income was $1.4 million lower in the first quarter of 2004 than in the first quarter of 2003 primarily due to investments made in sales and marketing in our commercial segment, higher employee related expenses and higher amortization expense. RESTRUCTURING EXPENSES. We continue to evaluate our operations for opportunities to optimize capacity and reduce costs. In February 2004, we announced the closure of our envelope plant in Bensalem, Pennsylvania and its integration into our Philadelphia printing facility. The expenses incurred in connection with this closure were primarily fees related to human resource issues and 19 expenses incurred incidental to equipment moves. The total cost of the closure is expected to be approximately $2.2 million consisting of the following (in thousands): Employee separation and related expenses................ $ 868 Equipment write-downs, net.............................. 500 Equipment moving expenses............................... 225 Building clean-up and other expenses.................... 570 ------ Total............................................... $2,163 ====== We anticipate incurring most of these expenses prior to June 30, 2004. UNALLOCATED CORPORATE EXPENSES. Corporate unallocated expenses include the costs of our corporate headquarters. The decrease in corporate expenses in the first quarter of 2004 was primarily due to adjustments to vendor rebate accruals which were not allocated to the segments. DIVESTED OPERATIONS. Operating income in 2003 included operating income of $0.2 million from the digital graphics operations divested in March 2003. INTEREST EXPENSE Interest expense increased slightly in the first quarter of 2004 compared to the first quarter of 2003. Interest expense incurred during the first quarter of 2004 reflects our average outstanding debt during the quarter of $817.7 million and a weighted average interest rate of 8.38% compared to the average outstanding debt of $813.2 million and a weighted average interest rate of 8.34% in the first quarter of 2003. Our average outstanding debt was higher in the first quarter of 2004 due to issuance of the 7 7/8% senior subordinated notes in January and the period of time that a portion of the 8 3/4% senior subordinated notes remained outstanding prior to their redemption. LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to redeem the 8 3/4% notes and the unamortized debt issuance costs on the 8 3/4% notes, which were written off, totaled $17.7 million. TAX BENEFIT The effective tax rate for the first quarter of 2004 was 6.4% which was primarily the result of an additional tax valuation allowance of $6.8 million recorded as of March 31, 2004. At December 31, 2003, we recorded a valuation allowance of $6.5 million for the estimated impairment of certain loss carryforwards. We had tax planning strategies available that we believed could enable us to realize remaining net deferred tax assets. Since we incurred additional net operating losses in the first quarter of 2004, it was necessary for us to record a valuation allowance to reduce the recorded estimated tax benefit from this additional net operating loss. This valuation allowance covers the estimated portion of the tax benefit that would not be utilized by the reversal of our existing temporary differences or tax planning strategies. NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE--DILUTED Net loss and loss per share for the first quarter of 2004 reflect the loss from the early extinguishment of debt and the tax valuation allowance recorded in the first quarter of 2004; and higher selling, general and administrative expenses and higher amortization expense in the first quarter of 2004 than in the first quarter of 2003. Net income and earnings per share in the first quarter of 2003 included a gain on the disposal of discontinued operations, which was the result of an adjustment to the tax impact of the sale of the prime label business in 2002, and the cumulative effect of a change in accounting principle resulting from the adoption of Financial Accounting Standards Board Interpretation No. 46. 20 BUSINESS SEGMENTS COMMERCIAL THREE MONTHS ENDED MARCH 31, ----------------------- 2004 2003 -------- -------- (DOLLARS IN THOUSANDS) Division net sales.......................................... $323,849 $321,190 Divested operations.................................... -- 2,873 -------- -------- Total net sales............................................. $323,849 $324,063 ======== ======== Division operating income................................... $ 12,099 $ 13,224 Restructuring expenses.................................. (103) (911) Divested operations..................................... -- 168 -------- -------- Operating income............................................ $ 11,996 $ 12,481 ======== ======== Operating margin............................................ 3.7% 3.9% Net sales of the commercial segment declined slightly in the first quarter of 2004 compared to the first quarter of 2003. The change in net sales is explained as follows: * Sales of commercial printing products were $4.7 million, or 2.3%, higher driven by higher sales of high impact printing to our national customers. Sales of annual reports in the first quarter of 2004 were stronger than in the first quarter of 2003. * Envelope sales of our domestic operations were $5.2 million, or 5.7%, lower due to a decline in units sold and lower average selling prices. * The strength of the Canadian dollar in the first quarter of 2004 compared to the first quarter of 2003 had a $4.4 million favorable impact on the envelope sales of our Canadian operations. In local currency, sales were 10.2% lower due to lower volume and lower average selling prices. * Net sales in 2003 included sales of $2.9 million of the digital graphics operations that were sold in March 2003. Operating income of the commercial segment decreased $0.5 million in the first quarter of 2004 compared to the first quarter of 2003. Gross profit improved 6.8% as a result of an overall improvement in margins and lower fixed manufacturing expenses. In addition, restructuring expenses declined $0.8 million. These gains, however, were offset by an increase in spending for sales and marketing, higher employee related expenses and higher amortization expense. Amortization expense increased $1.0 million in the first quarter of 2004 due to the amortization of an intangible asset recorded in connection with the payment of contingent purchase price on an acquisition consummated in 2002. RESALE THREE MONTHS ENDED MARCH 31, ---------------------- 2004 2003 ------- -------- (DOLLARS IN THOUSANDS) Division net sales.......................................... $99,893 $103,257 ======= ======== Division operating income................................... $11,463 $ 11,711 Reversal of restructuring expenses...................... -- 140 ------- -------- Operating income............................................ $11,463 $ 11,851 ======= ======== Operating margin............................................ 11.5% 11.5% 21 Net sales of our resale segment declined $3.4 million in the first quarter of 2004 compared to the first quarter of 2003. Sales of business labels increased $3.5 million, or 14.4%, during the quarter. This strong sales performance, however, was not sufficient to offset the decline in sales in the office products retail channel, which were down $5.2 million, or 11.0%, in the quarter compared to the prior year, and lower sales of business forms, which declined $1.7 million, or 7.0%, from the prior year. The decline in sales of office products was due to lower retail demand for these products which has driven increased competition and lower prices. Demand for traditional business forms continues to decline as users of these products acquire laser printing capabilities. Operating income was $0.4 million lower in the first quarter of 2004 than in the first quarter of 2003 primarily due to lower sales. Despite the decrease in sales, our resale segment has controlled its costs and maintained its overall operating margin of 11.5%. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. Cash used in operations was $1.4 million greater in the first quarter of 2004 than cash used by operations in the first quarter of 2003. During the first quarter of 2004, we paid a $4.9 million legal settlement accrued at December 31, 2003 and accelerated the payment of $4.7 million of interest in connection with the redemption of our 8 7/8% senior subordinated notes. INVESTING ACTIVITIES. Capital expenditures were $5.6 million in the first quarter of 2004 compared to $6.4 million in the first quarter of 2003. We anticipate capital expenditures for all of 2004 to be approximately $25.0 million. FINANCING ACTIVITIES. In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem the $300 million of 8 3/4% senior subordinated notes due 2008. The cost incurred to issue the 7 7/8% senior subordinated notes was $6.9 million. These debt issuance costs have been deferred and will be amortized over the term of the notes. We recorded a loss of $17.7 million on the early extinguishment of the 8 3/4% senior subordinated notes which consisted of redemption premiums of $13.5 million and unamortized debt issuance costs of $4.2 million. In March 2004, we amended our $300 million senior secured credit facility to extend its term to June 2008. The cost incurred to amend the credit facility was $1.4 million. These debt issuance costs will be amortized over the extended term of the facility. The following table summarizes our cash payment obligations as of March 31, 2004 by year: OTHER LONG- PURCHASE TOTAL CASH LONG-TERM DEBT OPERATING LEASES TERM LIABILITIES COMMITMENTS OBLIGATIONS -------------- ---------------- ---------------- ----------- ----------- 2004................. $ 2,588 $ 32,213 $ -- $540 $ 35,341 2005................. 2,309 27,625 3,521 420 33,875 2006................. 2,345 24,155 3,259 -- 29,759 2007................. 13,181 18,267 2,220 -- 33,668 2008................. 84,911 11,658 2,042 -- 98,611 Thereafter........... 672,003 19,339 15,201 -- 706,543 -------- -------- ------- ---- -------- Total................ $777,337 $133,257 $26,243 $960 $937,797 ======== ======== ======= ==== ======== At March 31, 2004, we had outstanding letters of credit of approximately $24.8 million related to performance and payment guarantees. In addition, we have issued letters of credit of $1.6 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. 22 Our current credit ratings are as follows: SENIOR SECURED SENIOR CREDIT SENIOR SUBORDINATED REVIEW AGENCY FACILITY NOTES DEBT LAST UPDATE - ------------- -------- ------ ------------ ----------- Standard & Poor's......... BB BB- B April 2004 Moody's................... Ba3 B1 B3 April 2004 The terms of our existing debt agreements have no rating triggers, and we do not believe that our current ratings will impact our ability to raise additional capital. We expect to be able to fund our operations, capital expenditures, debt and other contractual commitments within the next year from internally generated cash flow and funds available under our senior secured credit facility. At March 31, 2004, we had $119.2 million of unused credit available under this credit facility. SEASONALITY AND ENVIRONMENT Our commercial segment experiences seasonal variations. Revenues from annual reports are generally concentrated from February through April. Revenues associated with holiday catalogs and automobile brochures tend to be concentrated from July through October. As a result of these seasonal variations, some of our commercial printing operations are at or near capacity at certain times during these periods. In addition, several envelope market segments and certain segments of the direct mail market experience seasonality, with a higher percentage of the volume of products sold to these markets occurring during the fourth quarter of the year. This seasonality is due to the increase in sales to the direct mail market due to holiday purchases. The mailer operations of our resale segment are at or near capacity at times during the fourth quarter. Seasonality is offset by the diversity of our other products and markets, which are not materially affected by seasonal conditions. Environmental matters have not had a material financial impact on our historical operations and are not expected to have a material impact in the future. AVAILABLE INFORMATION Our Internet address is: www.mailwell.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission. In addition, our earnings conference calls are web cast live via our website and presentations to securities analysts are included on our website. 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 can be estimated. 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 us. 23 FORWARD-LOOKING INFORMATION Certain statements in this report, and in particular, statements found in Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, "believe," "expect," "intend," "appear," "estimate," "anticipate," "project," "will" and other similar expressions. All such statements address operating performance, events or developments that we expect or anticipate will occur in the future and are not historical in nature. All forward-looking statements reflect our current views of Mail-Well with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. As and when made, we believe that these forward-looking statements are reasonable; however, these statements involve known and unknown risks, including, but not limited to: * General economic, business and labor conditions * The ability to implement our strategic initiatives * The ability to sustain profitability after substantial losses in 2002 and 2001 and in the first quarter of 2004 * The ability to successfully identify, manage or integrate possible future acquisitions * Sales are not subject to long-term contracts * The industry is extremely competitive * The impact of the Internet and other electronic media on the demand for envelopes and printed material * Postage rates and other changes in the direct mail industry * Environmental laws may affect our business * The ability to retain key management personnel * Compliance with recently enacted and proposed changes in laws and regulations affecting public companies could be burdensome and expensive * Dependence on suppliers and the costs of paper and other raw materials * The ability to meet customer demand for additional value-added products and services * Changes in interest rates and currency exchange rates of the Canadian dollar * The ability to manage operating expenses * The risk that a decline in business volume or profitability could result in a further impairment of goodwill * The ability to timely or adequately respond to technological changes in our industry * The ability to extend our current credit facility beyond 2008 In view of such uncertainties, investors should not place undue reliance on any forward-looking statements since such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. 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 our operations and our 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 have we hedged interest rate 24 exposure through the use of swaps and options or foreign exchange exposure through the use of forward contracts. Our Board of Directors has given management authority to engage in interest rate swaps and we are currently considering this option. 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 March 31, 2004, we had variable rate debt outstanding of $100.3 million. A 1% increase in LIBOR on the maximum amount of debt subject to variable interest rates, which is $316.4 million, would increase our annual interest expense by $3.2 million. We have operations in Canada, and thus are exposed to market risk for changes in foreign currency exchange rates of the Canadian dollar. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal controls or procedures or in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. 25 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Certificate of Incorporation of Mail-Well Corporation--incorporated by reference from Mail- Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No. 333-74409). 3.2 Certificate of Amendment of Certificate of Incorporation of Mail-Well Corporation-- incorporated by reference from Mail-Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No. 333-74409). 3.3 Certificate of Correction Filed to Correct Certain Errors in the Certificate of Amendment of Mail-Well I Corporation Filed in the Office of the Secretary of State of Delaware on September 11, 1995--incorporated by reference from Mail-Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No. 333-74409). 3.4 Certificate of Change of Registered Agent and Registered Office--incorporated by reference from Mail-Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No. 333-74409). 3.5 Bylaws of Mail-Well I Corporation--incorporated by reference from Mail-Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No. 333-74409). 4.1 Indenture dated as of March 13, 2002 between Mail-Well I Corporation and State Street Bank and Trust Company, as Trustee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.30 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.2 Form of Senior Note and Guarantee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount 9 5/8% due 2012--incorporated by reference to Exhibit 10.31 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.3 Indenture dated as of February 4, 2004 between Mail-Well I Corporation and U.S. Bank National Association, as Trustee, and Form of Senior Subordinated Note and Guarantee relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.5 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 4.4 Registration Rights Agreement dated February 4, 2004, between Mail-Well I Corporation and Credit Suisse First Boston, as Initial Purchaser, relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013-- incorporated by reference to Exhibit 4.6 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of its officers and directors--incorporated by reference from Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 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 Mail-Well, Inc.'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 Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 26 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated by reference from Exhibit 10.20 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.5 Form of Mail-Well, Inc. Incentive Stock Option Agreement-- incorporated by reference from Exhibit 10.22 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.6 Form of Mail-Well, Inc. Nonqualified Stock Option Agreement-- incorporated by reference from Exhibit 10.23 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.7 1997 Non-Qualified Stock Option Agreement--incorporated by reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q for the quarter ended March 31, 1997. 10.8 Mail-Well, Inc. 1998 Incentive Stock Option Plan 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. 10.9 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. 10.10 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. 10.11 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. 10.12 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. 10.13 Purchase Agreement dated March 8, 2002, between Mail-Well I Corporation, and Credit Suisse First Boston, UBS Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., First Union Securities, Inc., and Scotia Capital (USA) Inc., as Initial Purchasers, relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.30 to Mail-Well I Corporation's Registration Statement on Form S-4 filed June 11, 2002. 10.14 Registration Rights Agreement dated March 13, 2002, between Mail-Well I Corporation, and Credit Suisse First Boston, UBS Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., First Union Securities, Inc., and Scotia Capital (USA) Inc., as Initial Purchasers, relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.32 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.15 Second Amended and Restated Equipment Lease dated as of August 6, 2002 between Wells Fargo Bank Northwest, National Association, as trustee under MW 1997-1 Trust, and Mail- Well I Corporation--incorporated by reference to Exhibit 10.26 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.16 Second Amended and Restated Guaranty Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 27 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.17 Second Amended and Restated Participation Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet Capital Corporation as Arranger and Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.18 Amendment Agreement No. 1 dated as of September 25, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.29 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.19 Employment and Executive Severance Agreement dated as of March 10, 2003, between the Company and Paul V. Reilly--incorporated by reference to Exhibit 10.26 of the Company's Annual Form 10-K filed March 31, 2003. 10.20 Form of Executive Severance Agreement entered into between the Company and each of the following: Michel Salbaing, Gordon Griffiths, Brian Hairston, Keith Pratt, William Huffman, D. Robert Meyer and Mark Zoeller--incorporated by reference to Exhibit 10.27 of the Company's Annual Form 10-K filed March 31, 2003. 10.21* Amendment Agreement No. 2 dated as of March 25, 2004 among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantor, Fleet Capital Corporation as Agent, and the Trust Purchasers named therein. 10.22* Second Amended and Restated Credit Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders. 10.23* Second Amended and Restated Security Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders. 31.1* Certification of Periodic Report by Paul V. Reilly, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Periodic Report by Paul V. Reilly, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. <FN> - -------- * Filed herewith. ** Furnished herewith. 28 (b) REPORTS ON FORM 8-K 1. Current report filed under Item 5 of Form 8-K dated as of January 21, 2004 in connection with a tender offer and consent solicitation for the Company's 8 3/4% Senior Subordinated Notes due 2008. 2. Current report filed under Item 5 of Form 8-K dated as of February 9, 2004 in connection with the accompanying pro forma condensed consolidated income statements. 3. Current report filed under Item 9 of Form 8-K dated as of February 9, 2004 in connection with the Company's earnings release for the fourth quarter. 4. Current report filed under Item 5 of Form 8-K dated as of February 17, 2004 in connection with the transcript of the Company's investor conference call held on February 9, 2004. 29 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 May 3, 2004. MAIL-WELL, INC. By: /s/ PAUL V. REILLY ------------------------------------------- Paul V. Reilly, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /s/ MICHEL P. SALBAING ------------------------------------------- Michel P. Salbaing, Senior Vice President-- Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 30