Vertis Announces Q2 Loss; Sales Down 7.7%

Press release from the issuing company

Baltimore, MD (July 31, 2003) -- Vertis, Inc. today reported results for the three and six months ended June 30, 2003. For the quarter ended June 30, 2003, net sales were $377.3 million, or 7.7% below the quarter ended June 30, 2002. For the six months ended June 30, 2003, net sales amounted to $748.6 million, or 7.7% below the comparable 2002 six-month period. The decline in net sales was largely the result of competitive pricing pressures, sluggish direct mail business domestically as well as in Europe, and weak advertising agency business at the Company’s Advertising Technology Services segment. Donald Roland, Chairman, President, and Chief Executive Officer stated, “The challenging economic and geo-political conditions continued in the second quarter which resulted in increased unemployment, put pressure on retail sales, and dampened advertising spending. Our Direct Marketing and Europe segments began feeling the effects of these challenges in the third quarter of 2002 and our Retail and Newspaper Services segment felt the impacts in the fourth quarter of last year. These factors have negatively impacted our customers and in turn our industry and our business.” Earnings before interest, taxes, depreciation, amortization and the cumulative effect of accounting change (“EBITDA”) amounted to $39.2 million in the second quarter, a decline of $18.5 million, or 32.1% versus the second quarter of 2002. On a year-to-date basis, EBITDA amounted to $82.4 million, a decline of $22.0 million, or 21.1% when compared to the six months ended June 30, 2002. These results reflect the competitive pricing pressures and other downward pressures on net sales noted above. The Company continues to manage its costs, including reducing costs commensurate with changes in demand and continues to garner production efficiency improvements. These cost initiatives, however, did not fully cover the earnings decline associated with the decline in net sales. In addition, the first six months of 2003 benefited from a $10.1 million recovery from a settlement to a legal proceeding and a $3.9 million decline in restructuring and restructuring-related charges. Vertis reported a net loss of $71.9 million in the second quarter and $77.8 million net loss through the first six months of 2003 versus net losses of $1.7 million and $120.4 million in the comparable 2002 periods. The net loss in the three and six months ended June 30, 2003 reflects a non-cash tax provision of $48.8 million to provide a valuation allowance against previously recorded deferred tax benefits related to net operating loss carryforwards, as required by Statement of Financial Accounting Standards (“SFAS”) No. 109. The valuation allowance was recorded in the second quarter due to the continuation of the poor economic climate and the projected increase in annual interest expense resulting from the high-yield bond offering completed in June 2003. The 2002 net loss reflects the $108.4 million after-tax cumulative effect of adopting SFAS No. 142 as it relates to goodwill and other intangibles. Noted Mr. Roland, “Although we are disappointed in the lingering poor economic conditions and their impact on our results, we continue to see evidence that our strategy is sound. In these difficult times, we continue to manage our costs, capital spending, and working capital to maximize our cash flow.” In addition to providing second quarter results, the Company provided an update to earnings guidance issued on May 19, 2003. Dean D. Durbin, Chief Financial Officer commented, “The conditions we experienced in May and June were worse than we expected. We cannot ignore the potential impact of a continuation of the uncertain economic climate and its impact on advertising spending. As such, we now expect the full-year 2003 EBITDA to be between $196.0 million and $206.0 million and the net loss to be between $75.1 million and $64.9 million.” Mr. Durbin added, “Our management team is diligently pursuing profitable top-line gains and cost reductions to get back to the guidance we issued in May.”