UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ___________ to ________________

Commission file number 0-01097

THE STANDARD REGISTER COMPANY

(Exact name of Registrant as specified in its charter)

                                       OHIO                                                           31-0455440

                     (State or other jurisdiction of                                         (I.R.S. Employer

                     Incorporation or organization)                                       Identification No.)

                    600 ALBANY STREET, DAYTON OHIO                      45408

                        (Address of principal executive offices)                        (Zip Code)

                                                                  (937) 443-1000

                                       (Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT

None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]    No [ ]    

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)  Yes [X]     No [ ]   

The aggregate market value of all stock held by non-affiliates of the Registrant at June 29, 2003, was approximately $195,502,922, based on a closing sales price of $16.61 per share on June 29, 2003.

At January 23, 2004, the number of shares outstanding of the issuer's classes of common stock is as follows:

Part III incorporates information by reference from the Proxy Statement for Registrant's Annual Meeting of Shareholders to be held on April 22, 2004.

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THE STANDARD REGISTER COMPANY

FORM 10-K

TABLE OF CONTENTS

Item                    Description

Page

Item  1.              Business

1

Item  2.              Properties

11

Item  3.              Legal Proceedings

12

Item  4.              Submission of Matters to a Vote of Security Holders

12

Item  5.              Market for Registrant’s Common Stock and Related

                                 Shareholder Matters

14

Item  6.              Selected Consolidated Financial Data

15

Item  7.              Management’s Discussion and Analysis of Financial Condition
                                and Results of Operations

16

Item  7A.            Qualitative and Quantitative Disclosures about Market Risk

39

Item  8.              Financial Statements and Supplementary Data

41

Item  9.              Changes In and Disagreements with Accountants on Accounting
                                and Financial Disclosure

82

Item 9A.             Controls and Procedures

82

Item 10.             Directors and Executive Officers of the Registrant

82

Item 11.             Executive Compensation

83

Item 12.             Security Ownership of Certain Beneficial Owners and Management

83

Item 13.             Certain Relationships and Related Transactions

84

Item 14.             Fees and Services of Battelle & Battelle LLP

84

Item 15.             Exhibits, Financial Statement Schedules, and Reports on Form 8-K

85

Signatures

86

Index to Exhibits

87

Independent Auditors’ Report on Supplemental Schedule

88

Schedule II – Valuation and Qualifying Accounts and Reserves

89

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PART I

Item 1 - BUSINESS

Company Overview

The Standard Register Company (referred to in this report as the “Company,” “we,” “us,” “our,” or “Standard Register”) is a publicly traded company that began operations in 1912 in Dayton, Ohio.  Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol SR.  Our principal executive offices are located at 600 Albany Street, Dayton, Ohio 45408 (telephone number: 937-443-1000).

Throughout Standard Register’s history, our core business has been providing solutions to improve business processes and the flow of information.  It started with the autographic register, a system that automated the processing of bills, receipts, and other forms.  Since then, we have expanded our products and services to include the design, production, management, and distribution of printed and electronic documents; label solutions; data-capture systems; document security; fulfillment and other outsourcing services; e-business solutions; and consulting services.  In 2002, we completed two acquisitions to complement our existing e-business and document management and fulfillment services and to enhance our digital print-on-demand operations.  With a wide array of capabilities-from consulting to printing to technology solutions-Standard Register is Improving the Way Business Gets Done™.

Our Industries

We primarily serve the healthcare, financial services, insurance, pharmaceutical, manufacturing, and transportation industries.  We are a leading provider of products and services to approximately 60% of the acute care hospitals in the United States as well as many of the largest financial institutions, including nine of the top ten U.S. commercial banks.  

Our Products and Services

Our strategy is to provide a full spectrum of solutions — from print to digital — that help organizations effectively capture, manage, and use information to improve their business results.  Organizations leverage Standard Register’s deep industry expertise and innovative solutions to increase efficiency, reduce cost, enhance security, and strengthen customer loyalty.  For example:

º

In the financial services industry, our ArmoredTrac™ solution automatically traces the movement of deposit pickups from bank branches, ATMs, and commercial customers, providing financial institutions with greater control, efficiency, and accuracy in collections.  

º

In healthcare, our Patient Linkup® Enterprise system helps improve information flow across processes while ensuring the integrity of patient information as vital statistics, billing information, diagnoses, prescriptions, and procedures are all routed electronically throughout a hospital system.  

º

Across industries, we provide a host of document security solutions to help prevent counterfeiting and other forms of document fraud for everything from checks to automobile titles.  

º

Our business communication solutions enable the creation and distribution of effective, often personalized, business communications through our web-based design and ordering solution and our print-on-demand capabilities.  

º

Our Less Paper Strategy - Organize, Manage, Migrate® helps streamline the document process, allowing our customers to reduce cost, increase revenue, and reduce paper no matter what business they are in so they can focus on satisfying their customers.

Our Restructuring Programs

Beginning in 2000, we embarked on a series of restructuring efforts to renew the value of the Company and establish a strong foundation for long-term growth.

2000 Restructuring

In order to reduce excess production capacity and decrease costs, we eliminated 364 jobs and closed four manufacturing facilities during 2000.  We closed our equipment plant in Dayton, Ohio, and printing plants in Toccoa, Georgia; Corning, Iowa; and Dayton, Ohio.  We also offered an early retirement plan to select employees at our Dayton, Ohio, headquarters.  

Renewal Plan

In 2000, we also began work on a restructuring and renewal plan (the “Renewal Plan”) to recover the market value of Standard Register and to establish a solid platform for long-term earnings growth.  Late in that year, we concluded that as much as 20% of our customer accounts did not return sufficient margin to justify the levels of investment and overhead required to support them. This low margin business was driving our overall return on capital to a level below our cost of capital.  

A second conclusion was that we were becoming increasingly over-invested in markets with below-average growth prospects.  Further, we reinforced this tendency by having a functional organizational structure that did not nurture those elements of our business that had significant growth potential.  

Finally, it was apparent that Standard Register had many strong attributes, including leadership positions in the hospital and financial services markets, a track record of providing innovative document and workflow solutions valued by our customers, strong cash flow from a diversified base of renewable business, and a very strong financial condition.  

The Renewal Plan included four components:  restructuring, reorganization, performance improvement, and early stage investments for future growth.  We believed that all four of these elements were critical to renewing the Company’s value.  We directed most of the emphasis in 2001 to restructuring and reorganization.  However, we also initiated several key investments to lay the groundwork for operational improvement and growth.

2001 Restructuring

We eliminated the portion of our business that we believed could not be improved to provide an acceptable return.  This represented an estimated $250 million of our $1.3 billion in annual revenue.  At the end of 2001, our annual revenue base was reduced to approximately $1.1 billion.  

The restructuring program also included consolidation of regional sales offices, manufacturing plants and warehouses.  In conjunction with these actions, we targeted and exceeded a $125 million reduction in annualized costs, including manufacturing fixed costs, selling, general, and administrative expense, and depreciation.  On an annualized basis, our objective was for the cost reductions to exceed the loss of contribution margin from the business we eliminated.  

During the restructuring, we closed 25 plants and print centers.  Some production capacity was relocated to other locations, but overall capacity was reduced by about 30%, in line with the Renewal Plan.  In addition, 149 sales offices and 29 warehouses were either closed or consolidated into other locations.  The closings and consolidations reduced our workforce by 2,330 people, equivalent to 29% of our total workforce.  

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2003 Restructuring

In 2003, we initiated additional actions to improve utilization and profitability and to provide for continuing investment in growth initiatives.  We consolidated four printing and service operations within the Fulfillment Services segment to form a new state-of-the-art regional print-on-demand and fulfillment center in Carrollton, Texas.  Within the Document and Label Solutions segment, we closed a rotary printing plant to trim excess capacity and consolidated several warehouses in response to shifting demand in favor of print-on-demand services.  We also eliminated positions within our InSystems segment, at SMARTworks, and at our corporate headquarters.  

You can read additional information related to these restructuring actions in Note 3 “Restructuring and Asset Impairment Charges” in the Notes to Consolidated Financial Statements.   

2003 Realignment

In January 2003, we realigned our operating segments to gain operational synergies. As a result, we have three reportable segments in 2003: Document and Label Solutions, Fulfillment Services, and InSystems. Under the realignment, we combined Document Management and Label Solutions.  We also separated one of Document Management’s business units into two operating units: CopyConcepts (now part of Fulfillment Services) and PathForward.  We also moved Document Management’s print-on-demand operations to Fulfillment Services and their software development operations to InSystems.  There are three remaining, individually insignificant, operating segments that we aggregate into Other.  They include International (previously part of Document Management), SMARTworks, and PathForward.  

You can read additional information related to the revenues, operating profit, identifiable assets, and capital expenditures of each business segment for years 2001 through 2003 in Note 18 “Segment Reporting” in the Notes to Consolidated Financial Statements.

Our Business Segments

DOCUMENT AND LABEL SOLUTIONS  

Products and Services - Document and Label Solutions accounted for 68.9%, 70.6%, and 72.8% of our consolidated revenues in 2003, 2002, and 2001.  In this segment, we offer custom printed documents, integrated systems, business supplies, equipment services, and distribution services that help customers manage their business information and transact with their customers and suppliers.  We also offer identification solutions that improve our customers’ operational performance by reducing cycle time, error rate, and processing costs.  These products and services are used for inventory control, product identification, distribution, regulatory compliance, healthcare, and other applications that require accuracy and security.  

We are also one of the leading producers of custom pressure-sensitive labels in the United States. We produce flexographic, screen and offset printed labels, automatic identification and data collection systems (bar coding), compliance labels, and variable image products that use the latest laser and thermal transfer technology.  Our primary markets are large-and middle-market companies in the healthcare, financial services, manufacturing, and distribution/logistics industries.  Our wide array of products, services, and integrated solutions include the following:

º

Document design

º

Custom printed business documents

º

Secure documents (checks, birth certificates, automobile titles, etc.)

º

Commercial printing and binding

º

Document security services

º

Document warehousing and distribution services

º

Custom and stock label products

º

Electronic Forms

º

Form/label combinations

º

Automatic identification and data-collection systems

º

Software and system integration

º

Business supplies and equipment services

º

Complete packaged solutions for distribution warehousing and manufacturing

Market Trends - Excess production capacity and stiff price competition are prevalent in the Document and Label Solutions segment.  The introduction of alternative technologies and a relatively weak economy have reduced industry demand for traditional custom printed business documents.  A very competitive market has led to tremendous price competition.  In spite of these challenges, we believe there is opportunity to increase our market share if we effectively carry out our sales strategies. We also believe we can gain market share by offering our customers an increasing array of application software and professional services to help them improve their business processes.

Driven by an increase in both consumer and industrial end-use applications, the market for pressure sensitive labels in North America is projected to exhibit steady growth.  Companies in the industry will increasingly need to incorporate technologies such as bar-code technology, Internet-based commerce, digital presses, and environmentally friendly adhesives and inks.  All of these factors will make the industry more efficient, allowing us to compete for new markets with alternative technologies.  Market trends include:

º

Organizations believe that documents that touch their customers are strategic to their business

º

Customers are migrating to single source suppliers

º

Paper-based documents and workflow are increasingly being automated and migrated to digital form

º

Industry consolidation is creating larger printing companies

º

Demand for Radio Frequency Identification, linerless, laser, thermal, and on-press adhesives is increasing

º

Media recommendations by printer manufacturers are influencing designs

º

Customers are buying labels as part of a package with printers, software, and services

º

Customers are increasing their use of variable data

º

Growing use of removable adhesive

º

Electronic commerce is driving an increase in shipping-label demand as more businesses and individuals buy goods on line

Competition – Our principal competitors include Moore Wallace Incorporated and The Relizon Company (a privately held company spun off from Reynolds and Reynolds).  These companies offer products and services similar to ours.  In addition, we compete against local and regional manufacturers, brokers and distributors.  We believe we have several strategic advantages over our competitors including:

º

We are recognized as a leader in secure documents (particularly in the healthcare and financial services markets)

º

We have knowledge and experience in document workflow management, a national reputation, geographic coverage, and a complete line of products from paper to digital

Backlog – Document and Label Solutions backlog of custom printing orders at January 23, 2004, was approximately $44.2 million compared to $31.0 million at February 21, 2003.  We expect to fill all orders in 2004.

FULFILLMENT SERVICES  

Products and Services - Fulfillment Services accounted for 25.7%, 24.9%, and 23.8% of our consolidated revenues in 2003, 2002, and 2001.  Utilizing digital output and other technologies, we help our customers communicate effectively with their customers.  We help them provide information and marketing materials that are customized to each of their customers. Examples are monthly billing statements, customized marketing brochures and information kits, or one-to-one marketing communications.  We focus on outsourcing services that primarily serve large-and middle-market companies in the financial services, healthcare, and membership industries. The types of products and services we offer include:

º

Billing and statement solutions

º

Electronic document presentment

º

One-to-one marketing communications (variable print-on-demand)

º

Web-based “information request” fulfillment

º

Customer information kits (cards, policies, statements, manuals, etc.)

º

Short-run, quick print production (print-on demand)

The Fulfillment Process - Fulfillment consists of a series of steps.  First, we design the document and program the format and data from the host location.  Second, we print the document and put it on an electronic website.  Finally, we process the document through finishing equipment, or it is assembled (kitted) into a customized package and mailed to the end consumer. The creation of packages requires special inserting equipment or manual labor to assemble the information kits.  Most companies outsource this activity to have a firm with fulfillment as a core competency to handle the technology, information security, labor, storage, and distribution.  We provide our customers with complete fulfillment services, including programming, design, printing, imaging and distribution of documents – in paper or electronic form.

Market Trends – We expect the overall market for document outsourcing, which includes our Fulfillment Services segment, to grow as companies seek outside help in performing business communications.  Increasingly, companies strive to reach their customers with very targeted and customized promotions.  The ability to print and distribute these communications on demand will also fuel growth in this area.  Statement production and kitting represents a large and growing market. There are approximately a dozen national companies that compete based on capabilities and price.  Our focus remains on growing document outsourcing and digital color as well as the print on demand business.  The weak economy and customers’ delays in expenditures has slowed our progress in these growth initiatives. Market trends include:

º

Utilization of more technology such as providing statements and billing on the Internet

º

Using digital technology to produce printed or electronic personalized communications to increase customer retention and response rates

Competition – Our principal competitors include Moore Wallace Incorporated, ADP Investor Communications Services, Vestcom, Regulus, and Lason, Inc., among others. Some of these companies are much smaller than we are or are regional rather than national.  Others are larger than we are and concentrate on specific market segments.

Backlog – Fulfillment Services’ backlog of orders at January 23, 2004, was approximately $10.1 million compared to $8.5 million at February 21, 2003.  We expect to fill all orders in 2004.

INSYSTEMS

Products and Services - InSystems accounted for 4.9%, 4.3% and 3.2% of the Company’s consolidated revenues in 2003, 2002 and 2001.  We are a leading provider of e-business solutions for financial services organizations.  Our solutions enable companies to improve processes and organize, manage and distribute information in both paper and digital infrastructures. Our software solutions group focuses on software solutions for the automation of document-intensive business processes in the financial services industry, particularly insurance. Our Document Systems group focuses on hardware and software solutions for negotiable and secure document output in insurance, banking, healthcare and other markets.

The types of products and solutions we offer include:

º

InSystems Calligo™

InSystems Calligo™ is an integrated document automation suite for organizations that need to create, manage and distribute highly personalized, error-free documents in a controlled and distributed environment.

º

InSystems Tracker Enterprise

InSystems Tracker Enterprise automates the product development and state compliance filing process, monitors and tracks approvals, and provides web-access for the status of rates, rules, and forms for the entire organization.  InSystems Tracker is designed for high volume, multi-user environments.

º

Document Systems LinkUp® (LUE) Enterprise

LUE is an intelligent printing solution that creates secure disbursements on command from one laser printer and one supply of stock.  Whether used as a stand-alone system or attached to a network, LUE can process thousands of documents a month with efficiency, flexibility, and security.

º

Document Systems Patient LinkUp® (PLUE) Enterprise

PLUE is a solution designed to simplify and speed the admission process within hospitals.  Admission staffs no longer have to change trays or go to a separate printer each time they need a different form or label.  With a push of a button, they get a complete admissions kit, including patient admitting documents, patient billing, and patient identification barcoded labels and wristbands.

º

Services

Our professional services group provides a broad range of services to assist in implementation and deployment of its software solutions. Service categories include product-specific services, integration services and Internet services.

Market Trends - We focus on the financial services industry.  Industry analysts predict increased information technology spending for financial services organizations in general and specifically for insurance, bringing insurance spending comparable with spending of other financial services, with 8% of revenue being spent on information technology projects.  Market trends include increased emphasis on regulatory compliance for new product development, security, customer and distribution channel loyalty, and the migration from paper to digital solutions.

Competition – Our competitors include in-house development by insurance companies and other companies that offer document automation and document management solutions, such as Docucorp and Document Sciences Corporation.

Backlog – Our backlog of professional services and software maintenance contracted for but not yet performed as of January 23, 2004, is approximately $7.2 million, compared to $12.5 million as of February 21, 2003.  Of this, approximately $1.3 million is not expected to be realized in 2004.

OTHER  

Our Other segment includes SMARTworks, PathForward, and International.  

SMARTworks’ web-based applications enable organizations to reduce the time, complexity, and costs of designing, customizing, procuring and delivering printed information.  Document and Label Solutions and Fulfillment Services also use these applications in their products and services.  SMARTworks operates as an Application Service Provider of its SMARTworks® Web application.  

PathForward offers comprehensive consulting services to help customers reduce costs, improve efficiency, and increase revenue.  Its solutions focus on designing enterprise document strategies, along with providing software integration and implementation services, and sourcing management.  They develop and implement enterprise-wide strategies that include (1) analyzing, mapping and reengineering document workflow, (2) benchmarking and improving on-site print and data center operations, and (3) helping companies negotiate and implement fact-based output sourcing and technology (hardware and software) investment decisions.  

Our International business segment generates revenue through various revenue streams including membership fees and royalties from its Global Print Network members, products and services sold to international associates, license fees, professional services, and patent royalties.  On April 7, 2003, the International business segment entered into a joint venture partnership agreement with Grupo Calidata Thomas Greg, S.A. de C.V.  We have a 40% equity interest in this joint venture, located in Mexico and known as Label Solutions, S. de R.L. de C.V. The joint venture manufactures and sells label products, and also imports our label products.  We do not receive a material portion of our revenues or net income from sales to foreign customers.  

Marketing and Distribution  

In late 2002 and early 2003, we strengthened our sales organization through the following actions:

º

Consolidated the Document Management and Label Solutions sales forces and established incentives to increase the level of cross-selling.  

º

Established a strategic sales force to develop new business at targeted accounts.  

º

Created an inside sales force to retain and develop new business at smaller accounts where the direct sales force cannot be cost effective.  

º

Formed a lead generation group to develop qualified leads for selected high value added marketing programs.  

º

Added a sales team focused on the healthcare market, which has been successful in obtaining new opportunities in that market.  

º

Hired several sales representatives within the Document and Label Solutions and Fulfillment segments with strong industry experience to create a dedicated sales force for these segments. Fulfillment Services’ products and services are also sold by Document and Label Solutions’ sales force as part of an enterprise solution.  

We use customer relationship management systems to improve sales productivity by automating repetitive and administrative tasks, reducing selling costs, and enhancing account management.  We plan to continue to invest in strategic marketing tools to help in our account management and satisfaction systems, one-to-one marketing, and e-business efforts.

Documents are printed at 35 geographically disbursed locations in the United States.  Documents are shipped directly to customers or are stored by us in warehouses for subsequent on-demand delivery.  The management of document inventories to provide just-in-time delivery is a major element of customer service.

Raw Materials  

We purchase raw paper in a wide variety of weights, grades, and colors from various paper mills in the United States and Canada.  Carbonless paper, inks, and printing supplies are available nationally and are purchased from leading vendors.  We continuously ensure we have adequate supplies to meet present and future sales objectives.  We generally order from suppliers with whom we have long-standing relationships.

Research and Development  

During 2003, we spent $17.2 million on research and development compared to $17.9 and $14.4 million for 2002 and 2001.  Research and development spending for 2003 primarily focused on two areas: the design and development of new products, services, software and technologies, and process improvement activities. The design and development of new products and technologies also includes equipment design and development used in production as well as the integration of new technologies available in the marketplace.

Intellectual Property

We have many patents related to documents, equipment, labels, and security products that provide a competitive advantage or which generate license income.  None of these, individually, have a material effect upon the business.

Seasonal

No material portion of our business could be considered seasonal.

Customers

The business of the Company taken as a whole, or by individual business segments, is not dependent upon any single customer or a few customers.  No single customer accounts for 10% or more of total consolidated revenue.

Governmental and Environmental Regulation

We have no significant exposure with regard to the renegotiation or termination of government contracts.  Any expenditure made to comply with federal, state, or local provisions of environmental protection have not had a material effect upon our capital expenditures, earnings, or competitive position.

Employees

At December 28, 2003, we had approximately 5,000 employees compared to 5,700 at December 29, 2002, and December 30, 2001.

FORWARD-LOOKING INFORMATION

This report includes forward-looking statements covered by the Private Securities Litigation Reform Act of 1995.  Because such statements deal with future events, they are subject to various risks and uncertainties and actual results for fiscal year 2004 and beyond could differ materially from the Company’s current expectations.  Forward-looking statements are identified by words such as “anticipates,” “projects,” “expects,” “plans,” “intends,” “believes,” “estimates,” “targets,” and other similar expressions that indicate trends and future events.  Factors that could cause the Company’s results to differ materially from those expressed in forward-looking statements include, without limitation, variation in demand and acceptance of the Company’s products and services, the frequency, magnitude, and timing of paper and other raw material price changes, general business and economic conditions beyond the Company’s control, timing of the completion and integration of acquisitions, the consequences of competitive factors in the marketplace, ability to retain large customer contracts, the Company’s success in attracting and retaining key personnel, and the effect of alternative technologies on the Company’s traditional product offerings.  The Company undertakes no obligation to update forward-looking statements as a result of new information since these statements may no longer be accurate or timely.  

We caution you that the following risks and factors, and those other business risks discussed elsewhere in this report, could cause our actual results to differ materially from those included in forward-looking statements.

Variation in demand and acceptance of our products and services

We have a wide array of products and services—from printed products to digital solutions to managed services.  Our custom-printed single- and multiple-part business forms represent mature products that are in decline as companies increasingly adopt electronic forms and other e-business solutions.  These declines could be offset by capturing increased market share in the traditional document business and generating new revenue through solutions such as print-on-demand, document automation software and managed services. Demand for our new offerings will vary by customer and industry, depending on their technological advancement and business priorities.

Frequency, magnitude, and timing of paper and other raw material price changes

When paper mills raise prices on raw material, we generally increase prices to recover these costs.  We have historically been successful in passing on the majority of price increases over a period of several quarters.

General business and economic conditions beyond our control

Economic conditions impact the demand for our products and services.  A weak economy can cause delays in customers’ investments in technology, business process improvements and other initiatives as well as cause lower consumption of forms, labels and customer communications through reduced business activity.

Timing of the completion and integration of acquisitions

In order to take advantage of growth opportunities and to enhance the products and services we offer, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties.  These risks and uncertainties include: (1) our ability to achieve strategic objectives, cost savings, and other benefits from the acquisition; (2) the risk that the technologies acquired do not prove to be those needed to succeed in those markets; (3) the potential loss of key employees of the acquired business; (4) the risk of entering new markets in which we have limited experience; and (5) the impact from future impairments of goodwill of an acquired business.

Consequences of competitive factors in the marketplace

Some of the industries in which we operate are highly competitive, and we expect that this level of competition on pricing and product offerings will continue.  Factors that could affect our ability to compete successfully include competitive pressures that result in increased price reductions and further consolidation of the forms industry, resulting in much larger competitors.

Ability to retain large customer contracts

Approximately 35% of our revenue is generated through contractual agreements with a number of healthcare group purchasing organizations.  Our ability to retain and grow these relationships generally impacts revenue in this industry segment.  

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Success in attracting and retaining key personnel  

Our success depends in large part on our ability to attract and retain highly skilled technical, managerial, sales, and marketing personnel.  The loss of services of any of our key personnel or our inability to attract or retain qualified personnel in the future could impair our ability to meet our key objectives.

The effect of alternative technologies on our traditional product offerings

The market for our traditional products is undergoing significant change.  Our success, in part, is dependent on our ability to successfully develop and introduce new digital products and services.

Available Information

Our Internet website is www.standardregister.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports are available, without charge, on the website as soon as reasonably practicable after we file these reports with the SEC.  You can also obtain these reports, free of charge, by contacting Investor Relations, Standard Register, Corporate Offices, P.O. Box 1167, Dayton, Ohio 45401, E-mail: investor@standardregister.com, phone:1-937-221-1304. You can also obtain these reports and other information, free of charge, at www.sec.gov.  You may also read and copy materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330.

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Item 2 – PROPERTIES  

Our corporate offices are located in Dayton, Ohio.  SMARTworks’ principal offices are located in Miamisburg, Ohio, and InSystems is located in Toronto, Ontario, Canada.  The following table is a list of our major production facilities:

Sacramento, California; Tampa, Florida; Carrollton, Texas; and Tolland, Connecticut are leased facilities.  In addition, we operate 22 smaller Stanfast Print Centers.  In most cases these facilities are located in major metropolitan cities in the U.S. and are leased.

Our current capacity, with modest capital additions, is expected to be sufficient to meet production requirements for the near future.  Utilization by press varies significantly, averaging an estimated 58% overall.  We believe our production facilities are suitable and can meet our future production needs.

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Item 3 - LEGAL PROCEEDINGS

(a.)

We have no material claims or litigation pending against us.

(b.)

Standard Register has been named as a potentially responsible party by the U.S. Environmental Protection Agency or has received a similar designation by state environmental authorities in several situations.  None of these matters have reached the stage where a significant liability has been assessed against the Company.  We have evaluated each of these matters and believe that none of them individually, nor all of them in the aggregate, would give rise to a material charge to earnings or a material amount of capital expenditures.  This assessment is notwithstanding our ability to recover on existing insurance policies or from other parties that we believe would be held as joint and several obligors under any such liabilities.  However, since these matters are in various stages of process by the relevant environmental authorities, future developments could alter these conclusions.  However, currently, we do not believe that there is a likelihood of a material adverse effect on our financial condition in these circumstances.

Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal 2003, no matters were submitted to a vote of our shareholders.

Executive Officers of the Registrant

The following is a list of our executive officers, their ages as of January 25, 2004, their current titles, and any positions they held during at least the last five years:

There are no family relationships among any of the officers.  Officers are elected at the annual organizational meeting of the Board of Directors, which is held immediately after the annual meeting of shareholders, to serve at the pleasure of the Board.  

PART II

Item 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

(a.)

Market Price

The following table lists the high and low market prices as reported on the NYSE and dividends paid per share for each quarterly period during fiscal years 2003 and 2002:

(b.)

Approximate Number of Holders of Common Stock

On January 23, 2004, there were approximately 2,785 shareholders of record of our common stock.  This number includes restricted shares, but excludes individual holders whose shares are held by nominees.  There are also 16 holders of Class A stock.

(c.)

Dividend Policy  

We expect to continue paying quarterly cash dividends in the future, however, the amounts paid will be dependent upon earnings and the future financial condition of the Company.  

Information regarding our equity compensation plans is in Item 12 on page 83 and is incorporated by reference into this section of Item 5.

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Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Dollars in Millions, Except Per Share Amounts)

OVERVIEW

The Company - We are a leading provider of information solutions for the healthcare, financial services, insurance, pharmaceutical, manufacturing, and transportation industries.  Our products and services include the design, production, management, and distribution of printed and electronic documents; label solutions; data-capture systems; document security; fulfillment and other outsourcing services; e-business solutions; and consulting services.  

As a strategic partner in migrating companies from paper-based to digital processes, our strategy is to provide a full spectrum of solutions – from printed documents to consulting to digital solutions - and continue to expand capabilities that help organizations effectively capture, manage, and use information to improve their business results.  Organizations leverage Standard Register’s deep industry expertise and innovative solutions to increase efficiency, reduce cost, enhance security, and strengthen customer loyalty.  Our operations include three reportable segments: Document and Label Solutions, Fulfillment Services, and InSystems.

Industry challenges - The overall market for most printed business documents will increasingly be marked by unfavorable economic forces.  The industry is currently oversupplied, and competing software and Internet technologies will continue to make inroads, eliminating or devaluing the role of many traditional paper forms.  These conditions will lead to lower unit demand and relatively weak pricing.  The pace of change is expected to be gradual, but is difficult to predict.

Advances in digital printing will increasingly intrude on the quality and cost advantages historically claimed by conventional long-run offset printing.   For many print applications, this will require the industry to add capital investment and will accelerate the “commoditization” of custom printed documents.  

Business Challenges – The above industry conditions, exacerbated by some post 2001 restructuring sales productivity issues, resulted in revenue decreases in each of the past two years.  The lower revenue has, in turn, produced substantial profit declines.  The payoff from the significant realignment and investments made in our sales force in recent months, while predictable, has taken time to develop.  

Our strategy of expanding our portfolio of products and services to provide for long-term growth requires that we redirect some investment away from traditional capital spending and toward people, technology, and other capabilities, most of which are expensed.  This places additional stress on our near-term profitability.

The weak stock market in 2001 and 2002, coupled with historically low interest rates, has driven our pension plan from an overfunded to an underfunded position.  Pensions produced earnings in 2002 equal to $0.04 per share, but resulted in expense in 2003 equivalent to $0.76 per share, the latter including a pension settlement charge of $0.57 per share triggered by an unusually high number of retirements.  Pension expense for 2004 is currently estimated at $0.51 per share with no settlement charge expected.  

Paper costs have changed little in recent years, but are expected to increase as paper mill operating rates improve, inventories fall, and the overall economy gains momentum.   Although the document-pricing environment is difficult, we would expect to recover higher paper costs over a several quarter period.  

Our Focus - Our objective is to improve the sales trend in our core document business by taking market share in targeted accounts and vertical markets where we have a strong reputation and value proposition.  We will continue to reduce costs and improve productivity in order to stay cost competitive.  

We plan to provide for an increasing market demand for digital print-on-demand output, including color and variable print.  Services that provide the customer with added convenience, design capability, and control over the process are expected to be a strong differentiator.  

We intend to continue to bring our customers software products and support services, such as InSystems, SMARTworks, and ExpeData that improve their ability to capture, organize, and move information.  We also plan on continuing to offer a portfolio of Standard Register managed services that help our customers reduce cost and improve their business processes.  

We expect to maintain our current strong financial condition and to maintain our focus on cash flow.

CRITICAL ACCOUNTING POLICIES

In preparing our financial statements and accounting for the underlying transactions and balances, we applied the accounting policies disclosed in the Notes to the Consolidated Financial Statements.  Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Although we believe our estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates.

We consider the estimates discussed below as critical to an understanding of our financial statements because they place the most significant demands on management’s judgment about the effect of matters that are inherently uncertain.  Specific risks for these critical accounting estimates are described in the following paragraphs. The impact and any associated risks related to these estimates are discussed throughout this discussion and analysis where such estimates affect reported and expected financial results.  The impact of changes in the estimates and assumptions pertaining to restructuring, impairments, and business combinations is directly reflected in the financial results of the individual segment.  The impact of changes in estimates and assumptions related to pension and postretirement healthcare benefit plans affect segment results through an allocation of corporate expense.

For a detailed discussion of the application of these and other accounting policies, see “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.  Management has discussed the development and selection of the critical accounting policies and the related disclosure included herein with the Audit Committee of the Board of Directors.

Pension and Postretirement Healthcare Benefit Plan Assumptions

We have defined-benefit pension plans covering substantially all of our employees. We also have a postretirement benefit plan that provides certain healthcare benefits for eligible retired employees. Included in our financial results are significant pension and postretirement obligations and benefit costs and credits, which are measured using actuarial valuations. The use of actuarial models requires us to make certain assumptions concerning future events that will determine the amount and timing of the benefit payments.  Such assumptions include the discount rate, the expected long-term rate of return on plan assets, the rate of future compensation increases, and the healthcare cost trend rate.  In addition, the actuarial calculation includes subjective factors such as withdrawal and mortality rates to estimate the projected benefit obligation. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension or postretirement obligations and benefit expense recorded in future periods.

Discount rate - One of the principal components of calculating the projected benefit obligation, the accumulated benefit obligation, and certain components of pension and postretirement healthcare benefit expense is the assumed discount rate.  The discount rate is the assumed rate at which future pension and postretirement healthcare benefits could be effectively settled.  The discount rate established at fiscal year-end for the benefit obligations is also used in the calculation of the interest component of benefit expense for the following year.  Discount rates are established based on prevailing market rates for high-quality, fixed-income instruments with maturities equal to the future cash flows to pay the benefit obligations when due.

Expected long-term rate of return on plan assets - One of the principal components of the net periodic pension cost calculation is the expected long-term rate of return on plan assets.  The required use of an expected long-term rate of return on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year.  Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees.  Our qualified defined benefit pension plan’s assets are invested in a broadly diversified portfolio consisting primarily of publicly traded common stocks and fixed-income securities.  We use long-term historical actual return experience and estimates of future long-term investment return with consideration to the expected investment mix of the plan’s assets to develop our expected rate of return assumption used in the net periodic pension cost calculation.  Differences between actual and expected returns are recognized in the pension cost calculation over five years using a five-year, market-related asset value method of amortization. The amortization of these differences could have a significant effect on net periodic pension cost.

Our non-qualified pension and postretirement healthcare benefit plans are unfunded plans and have no plan assets.  Therefore, the expected long-term rate of return on plan assets is not a factor in accounting for these benefit plans.

Rate of future compensation increases - The rate of anticipated future compensation increases is another significant assumption used in the actuarial model for pension accounting and is determined based upon our long-term plans for such increases.

Healthcare cost trend rate - One of the principal components of calculating the projected benefit obligation as well as the net periodic benefit cost for our postretirement healthcare plan is the healthcare cost trend rate.  We review external data and our own historical trends for healthcare costs to determine the healthcare cost trend rates used for the benefit obligation and expense.  

We review the assumptions used to account for pension and postretirement healthcare benefits each fiscal year-end, and as a result of our annual evaluation, in 2003 we lowered the discount rate, expected return on plan assets, salary increase assumptions, and healthcare cost trend rates to better reflect current U.S. economic conditions.

Weighted-average Assumptions

These assumption changes increased the pension and postretirement healthcare obligations recorded on our balance sheet in 2003 by $39.8 million and $2.7 million, respectively.  Holding all other assumptions constant, a one percent increase or decrease in the discount rate would increase or decrease the pension or postretirement obligation recorded by approximately $55.4 million and $2.8 million, respectively.  A one percent increase in the assumed healthcare cost trend rate would increase the postretirement healthcare benefit obligation recorded by $4.7 million and a one percent decrease would reduce the obligation by $4.2 million.

These assumption changes increased 2003 pension and postretirement healthcare benefit cost by $2.2 million and $0.7 million, respectively.  Holding all other assumptions constant, a one percent increase or decrease in the discount rate would increase or decrease pension or postretirement benefit cost by approximately $8.4 million and $0.1 million, respectively.  A one percent change in the assumed healthcare cost trend rate would result in an approximately $0.4 million increase or decrease in postretirement healthcare expense for 2003.

Amortization of differences between the expected and actual returns on the plan assets, including those resulting from losses in 2002 and 2001, will continue to impact our pension cost. The long-term rate of return on plan assets that we expect to use to determine fiscal 2004 net periodic pension cost is 8.75% which would increase expense by $6.0 million.  This, plus the amortization of past market losses and other probable changes in actuarial assumptions, is expected to increase 2004 pension cost by approximately $14.7 million over the 2003 amount, before the settlement charge.

On December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) into law.  The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.  Following proposed guidance of the Financial Accounting Standards Board, we have elected to recognize the effects of the Act in the accounting for our postretirement plan.  Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information.

The postretirement healthcare obligation at December 28, 2003, reflects that we will recognize a 28% subsidy as an offset to plan costs.  The effect is a $9.3 million unrecognized net actuarial gain reflected in the postretirement obligation that will be amortized to income in future periods.  The postretirement benefit cost for 2003 does not include any impact from the effect of the subsidy.  The 28% subsidy is expected to reduce our prescription drug plan costs by about 600 dollars per individual in 2006 and this amount is expected to increase by the valuation trend rates.  Our actuaries have determined that our prescription drug plan provides a benefit that is at least actuarially equivalent to the Medicare prescription drug plan, and projections indicate that this will be the case indefinitely.

Restructuring

We initiated restructuring actions in the second quarter of 2003 which are being accounted for according to SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  Unlike previous restructurings, under SFAS No. 146, liabilities for costs associated with a restructuring cannot be recorded until the liability is incurred and the fair value can be estimated, except for certain one-time termination benefits.  

Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available.  If quoted market prices are not available, the estimate of fair value is based on the best information available in the circumstances.  We used estimates to calculate the fair value of our obligations related to severance and other employer-related costs, lease cancellations, and other contract exit and termination costs related to the 2003 restructuring.  Critical estimates used in the measurement of the 2003 restructuring liabilities included management’s estimate of our ability to sublease closed facilities within three months and the amount of such sublease arrangements, which range from 40 to 50% of the original lease amount.  As of the end of fiscal 2003, we have not been able to sublease any of the facilities related to the 2003 restructuring. If we are unable to sublease the facilities, or the amount or timing of the sublease arrangement differs from expectations, we could incur up to an additional $1.0 million of restructuring expense, which is not included in the total estimated restructuring costs to be incurred.  Additionally, our estimate of total expected costs to be incurred could increase or decrease depending upon the variability of these estimates, other assumptions used, and the outcome of any remaining restructuring activities.

During 2000 and 2001, we were engaged in significant restructuring actions that required us to develop formalized plans related to the restructuring activities.  The development of these plans required the use of significant estimates related to, among other things, lease cancellations. We have not been able to sublease as many of the facilities as expected or to buyout the leases with as favorable terms as originally anticipated.  As a result, the liability for contract exit and termination costs was in excess of the amount originally estimated.  Approximately $4.9 million of remaining lease payments will be charged to restructuring expense as incurred through 2006, of which $1.6 million was expensed in 2003.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, which include intangible assets, goodwill, and plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  

Factors considered important that could trigger an impairment review include but are not limited to the following:

º

Sustained underperformance relative to expected historical or projected future operating results

º

Changes in the manner of use of the assets, their physical condition or the strategy for the Company’s overall business

º

Negative industry or economic trends

º

Declines in stock price of an investment for a sustained period

º

The Company’s market capitalization relative to net book value

º

A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit, or a long-lived asset will be sold or otherwise disposed of, significantly before the end of its previously estimated useful life

º

A significant decrease in the market price of a long-lived asset  

º

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator

º

An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset  

º

A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset  

º

Unanticipated competition

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A loss of key personnel.

Long-Lived Assets - We evaluate recoverability of assets to be held and used by comparing the carrying amount of the asset to quoted market prices, if available, or undiscounted expected future cash flows to be generated by the assets.  If such assets are considered to be impaired, the impairment amount is calculated using a fair-value-based test that compares the fair value of the asset to its carrying value. Fair values are typically calculated using discounted expected future cash flows, using a risk-adjusted discount rate.  Assets held for sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell.

In performing tests of impairment, we estimate future cash flows that are expected to result from the use of the asset and its eventual disposition.  These estimates of future cash flows, based on reasonable and supportable assumptions and projections, require significant management judgment.  The time periods for estimating future cash flows is often lengthy, which increases the sensitivity to the assumptions made.  Depending on the assumptions and estimates used, the estimated future cash flows used for impairment testing could vary considerably.  

In conjunction with the 2003 restructuring, we identified certain pieces of equipment and two buildings that were closed that we believed could be sold.  We considered recent sales of similar properties, real estate broker valuations, and offers and bids to determine fair value.  As of January 25, 2004, we had sold a majority of the assets held for sale. While we believe that the fair value of the remaining assets held for sale is reasonable, if we are not successful in selling the assets, further impairments may need to be recognized.

The Document and Label Solutions segment also recorded an impairment charge in 2003 related to forms-designs software that became technologically outdated.  The carrying value of the software was written down to its fair value, based upon the fair value of the number of estimated remaining forms to be designed with the software, and its useful life was reduced.  The fair value was calculated based upon the weighted average of probable future cash flows of the asset.

Goodwill and Intangible Assets - Goodwill and indefinite-lived intangibles are required to be evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value.  Fair values are typically calculated using discounted expected future cash flows, using a risk-adjusted discount rate.

The consolidation of PlanetPrint and other Fulfillment Services’ centers in Dallas, Texas, triggered the requirement for an impairment test of the goodwill related to the PlanetPrint acquisition in the second quarter of 2003.  During the third quarter of 2003, we also performed the annual test for goodwill impairment related to the InSystems acquisition. These tests were performed at the reporting unit level and were conducted with the assistance of independent valuation consultants.  In both tests, we determined that the discounted sum of the expected future cash flows from the assets exceeded the carrying value of those assets; therefore, no impairment of goodwill was recognized.

In performing the tests for impairment, we made assumptions about future sales and profitability.  This required significant judgment due to the short period of time for which we owned these business units.  In estimating expected future cash flows related to the PlanetPrint assets, we used internal forecasts that were based upon actual results, assuming an average revenue growth of 9% per year and minimal increases in gross margin.  

In estimating expected future cash flows related to the InSystems assets, we used internal forecasts that reflected our assumptions about future sales and profitability.  We used a weighted-average of probable expected future cash flows over a five-year period, discounted using a risk-adjusted discount rate of 9.4 %, after considering terminal values.   Our expected future cash flow estimates were based on the strategic direction of InSystems at that time, which included enhancements to document automation software, growth from utilizing the components of the eXterity™ software suite, and growth in the Tracker software product.  These strategic plans included significant research and development expenditures in 2004 and beyond.  

At the time of the impairment tests, the carrying values of net assets for PlanetPrint and InSystems were $7.9 million and $83.7 million, respectively.  If our estimate of expected future cash flows had been 10% lower, the expected future cash flows would still have exceeded the carrying value of the assets for either PlanetPrint or InSystems, including goodwill.

In the fourth quarter of 2003, we saw a need for a change in strategic direction for InSystems in order to improve their earnings performance for 2004.  The strategic direction of InSystems was changed to focus on penetrating markets with existing products and canceling all plans related to its eXterity™ software, which resulted in a restructuring.  As a result of these actions, in the fourth quarter of 2003, we performed an additional impairment test of goodwill and tested other intangible assets and capitalized software development costs related to InSystems for impairment.  The change in strategic direction significantly reduced our forecast of future estimated revenues.  The discounted sum of the expected future cash flows from the assets in this test also exceeded the carrying value of those assets, although by a much smaller margin.  Although there was no impairment of goodwill required, we did recognize a $4.5 million impairment charge related to capitalized software development costs due to the cancellation of all plans related to the use of InSystems’ eXterity™ software platform.

The most critical estimates, in order of significance, used in the impairment test include (1) estimated revenue in year five (2) the weight of probability given to each business case (3) the terminal value assumed (4) the amount of research and development spending (5) the foreign exchange rate used and (6) the discount rate applied.  In developing each business case, the estimates were primarily based on expected license revenue, service revenue, maintenance revenue, recovery in the general economy allowing increased capital spending in the insurance market, and development of new functionality and uses for our document automation software. A 10% change in any one of these assumptions, of which revenue in year five has the most significant impact, would have required us to record an impairment.  A 10% change in year-five revenue would increase or decrease our expected future cash flows by approximately $34 million on an undiscounted basis.  If InSystems is unable to achieve its business plans, the likelihood of future goodwill impairment increases.

We cannot predict the occurrence of future impairment triggering events nor the impact such events might have on its reported asset values.  Such events may include strategic decisions made in response to economic conditions relative to operations and the impact of technology, economic conditions, and industry trends on our customer base.  

Business Combinations

We are required to allocate the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development, based on their estimated fair values.  We engaged an independent third-party to complete a valuation to assist in determining the fair value of assets acquired and liabilities assumed for the two acquisitions completed during 2002.  Such valuations require us to make significant estimates and assumptions, especially related to intangible assets.  The significant purchased intangible assets recorded by us for the 2002 acquisitions and the fair value assigned to them are discussed in detail below.

Critical estimates made in valuing certain intangible assets include but are not limited to: future expected cash flows from customer contracts; acquired developed technologies and patents; assumptions used in determining the useful life; and discount rates.  Our estimates are based upon assumptions we believe are reasonable, but which are inherently uncertain and unpredictable; as a result, actual results may differ from estimates.

In 2003, we reviewed the useful life of the service relationships assigned at the acquisition date for InSystems.  We estimated the discounted future cash flows from the related software and compared them with the amount calculated at the time of acquisition.  As a result, the useful life was decreased from twelve to seven years.  This change in estimate increased amortization expense in 2003 by $0.3 million and will increase amortization expense in years 2004-2008 by $1.2 million per year and decrease amortization expense by $0.1 million in 2009.

RESULTS OF OPERATIONS

Two factors that significantly affect the comparability of results of operations are the acquisitions made in 2002 and the restructuring and impairment charges in 2001 and 2003.

Acquisitions

On July 2, 2002, we paid $88.7 million in cash for all of the outstanding stock of InSystems Technologies, Inc. (InSystems), a privately owned company based in Toronto Ontario, Canada.  InSystems is a leading provider of e-business solutions for financial services organizations.  In conjunction with the acquisition of InSystems, we recorded approximately $47.1 million of goodwill, $17.1 million of purchased intangibles, and $21.0 million of capitalized software development costs. Results of operations for InSystems are included in our consolidated financial statements from the date of acquisition.  In connection with the acquisition, we paid a former director of the Company a consulting fee of $0.6 million for his work in securing the agreement.

On July 12, 2002, we acquired selected assets from PlanetPrint, a business services company headquartered in Minneapolis, Minnesota. We paid $9.4 million in cash for a digital print-on-demand operation in Dallas, Texas, and software development and consulting operations in Minneapolis.  In conjunction with the acquisition, we recorded approximately $6.5 million of goodwill and $1.6 million of capitalized software development costs.  Results of operations are included in our consolidated financial statements from the date of acquisition and included with the Fulfillment Services segment.  Concurrently, we also acquired selected intellectual assets of PathForward for $1.0 million in cash, which was recorded as an intangible asset.   

Restructuring

The Renewal Plan - In July 2000, we began work on a restructuring and renewal plan (Renewal Plan) designed to recover our market value and establish a solid platform for long-term earnings growth.  Late in that year, we concluded that as much as 20% of our customer accounts did not return sufficient margin to justify the levels of investment and overhead required to support them.  The effect of this low-margin business was to drive our overall return on capital to a level below our cost of capital.  

A second conclusion was that we were becoming increasingly over-invested in markets with below-average growth prospects.  Further, this tendency was being reinforced by a functional organizational structure that did not nurture those elements of the business that had significant growth potential.  

Finally, it was apparent that we had many strong attributes, including leadership positions in the healthcare and financial services markets, a track record of providing innovative document and work flow solutions valued by our customers, strong cash flow from a diversified base of renewable business, and a very strong financial condition.  

In January 2001, we announced the Renewal Plan, comprised of four components: restructuring, reorganization, performance improvement, and early stage investments for future growth.  Management’s judgment was that all four of these elements were critical to renewing our value.  Most of the emphasis in 2001 was directed to restructuring and reorganization.  However, several key investments were also initiated in the year to lay the groundwork for operational improvement and growth.

In the restructuring phase, we eliminated that portion of our business that likely could not be improved to provide an acceptable return, representing an estimated $250 million of our $1.3 billion in annual revenue.  In conjunction with these actions, we targeted, and met, a $125 million reduction in annualized costs, including manufacturing fixed costs, selling, general, and administrative (SG&A) expense, and depreciation.  The cost reductions resulted primarily from the reduction of an estimated 2,400 jobs, and a 30% reduction in production capacity. The objective was for the annualized value of the cost reductions to exceed the annualized loss of contribution margin on the eliminated business.

Year 2001 Restructuring Costs - Due to the nature of the changes and the duration of the program, estimates of the timing and amount of cost savings required significant judgment and changed in 2001.  The Plan resulted in the closing of 25 production facilities.  In addition, 149 sales offices, and 29 warehouses were consolidated into other locations.  In connection with the closing of these facilities, we recorded a total of $24.3 million in severance and employer related costs related to the elimination of 2,400 positions company wide. The employment reduction primarily affected employees in manufacturing, sales, warehousing, and administrative positions.  Ultimately, 2,330 positions were eliminated during 2001, but as a result of voluntary resignations we paid severance to only 1,985 persons.  An additional 70 were later eliminated during 2002.  Outplacement and stay bonuses were likewise less than originally expected. Also, we incurred lower than expected payments for compliance with the Worker Adjustment and Retraining Act.  These changes resulted in reversals to the accrual established for severance and employer related costs of $7.5 million in 2001 and $1.7 million in 2002.   

Total expense for contract exit and termination costs was $26.9 million.  Net liabilities originally recorded for contract exit and termination costs aggregated $20.6 million and included $12.9 million for various contractual commitments on leased facilities and $4.4 million for contractual commitments for taxes, utilities, and maintenance costs primarily related to the closed leased facilities.  Also included was $1.0 million for travel to implement the restructuring and $2.3 million of other exit costs, primarily related to the removal of equipment.  In addition to the original charge, we incurred $6.3 million of contract exit and termination costs that were in excess of the originally estimated charges and charged directly to restructuring expense as incurred.  

Inventory and other asset write-downs were $11.8 million in 2001, of which $10.9 million was classified in cost of sales.  Substantially all of this write-down related to excess supplies inventory at closed facilities and finished inventory related to eliminated low-margin accounts.  In addition, we incurred $6.5 million of inventory write-downs that were in excess of the originally estimated charges and were charged directly to restructuring expense as incurred.  The $4.1 million reversal shown in the table related to excess supplies inventory and inventory for a business line that was discontinued in conjunction with the restructuring, but was later sold to a buyer.  

Implementation costs related to the relocation of equipment and personnel from closed facilities were also charged directly to restructuring expense as incurred.  

Pre-tax components of the 2001 restructuring charge is as follows:

A summary of the 2001 restructuring accrual activity is as follows:

In 2001, we reversed $1.8 million of contract exit and termination costs, primarily related to equipment removal costs that were lower than estimated.  The remaining liability at December 29, 2002, related to long-term lease obligations through 2006 that we were attempting to sublease or cancel.  Due to the nature of the charges and the duration of the program, estimates of the liability amounts required significant judgment.  We have been unable to sublease as many of the facilities as expected or to buy-out the leases with as favorable terms as originally anticipated.  As a result, the liability for contract exit and termination costs was in excess of the amount originally estimated.  Approximately $4.9 million of lease payments will be charged to restructuring expense as incurred through 2006, of which $1.6 was expensed in 2003.

Year 2003 Restructuring Costs

In 2003, the Company adopted the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities.  This statement requires that liabilities for costs associated with an exit or disposal activity not be recognized until the liability is incurred and the fair value can be estimated, except for certain one-time termination benefits.  As a result, SFAS No.146 may affect the timing of the recognition of costs associated with a restructuring.

Pre-tax components of the total restructuring charges recorded in 2003 are as follows:

In 2003, we initiated several actions to improve utilization and profitability and to provide for continuing investment in growth initiatives.  We consolidated four printing and service operations within the Fulfillment Services segment to form a new state-of-the-art regional print-on-demand and fulfillment center in Dallas, Texas.  Within the Document and Label Solutions segment, a rotary printing plant was closed to trim excess capacity and several warehouses were consolidated in response to shifting demand in favor of print-on-demand services.  

Within the InSystems segment, we determined that certain software development initiatives would not produce an adequate return and elected to stop further investment in those projects.  In conjunction with this decision and to further reduce costs, we reduced staffing levels within this segment.  We also eliminated management and other positions at our corporate headquarters.  Most of these actions were completed by the end of 2003.  Costs incurred include severance and employer related costs, contract termination costs, and other associated costs directly related to the restructuring efforts. Total restructuring charges expected to be incurred for the 2003 restructuring actions total $19.6 million pretax.  Under SFAS No. 146, liabilities for costs associated with a restructuring cannot be recorded until the liability is incurred and the fair value can be estimated, except for certain one-time termination benefits.  Therefore, certain restructuring costs, primarily sublease payments and the associated taxes, utilities and maintenance costs, and remaining relocation costs will be expensed as incurred through 2005.  All costs are included in restructuring charges in the accompanying Consolidated Statements of Income.  

Pre-tax components of the 2003 restructuring charge are as follows:

A summary of the 2003 restructuring accrual activity is as follows:

Impairments

2001 Asset Impairment

In conjunction with the 2001 restructuring, management performed a review of its existing property and equipment and determined that certain long-lived assets were impaired. These assets were either written off or written down to estimated fair value if the asset was to be sold, resulting in total impairment charges of $41.5 million.  This impairment was comprised of machinery and equipment write-offs totaling $32.5 million and building impairments of $9.0 million.  At December 29, 2002, assets held for sale related to the Document and Label Solutions segment included buildings with net book values of $2.3 million.  These buildings were sold during 2003, resulting in a total gain of $1.1 million that is included as a credit to Asset Impairments for 2003 in the accompanying Consolidated Statement of Income.  

2003 Asset Impairment

In conjunction with the 2003 restructuring, assets were either written off or written down to estimated fair value if the asset was to be sold.  Due to an oversupply of used production equipment in the marketplace, approximately $2.5 million of assets, primarily machinery and equipment, were determined to have no fair value and were disposed of, resulting in a non-cash impairment charge.  Of this amount, $1.6 million related to the Document and Label Solutions segment and $0.9 million related to the Fulfillment Services segment.   

The Company also identified certain pieces of equipment and two buildings that were closed that it believed could be sold.  The carrying values were adjusted to their fair value less costs to sell, considering recent sales of similar properties, real estate brokers valuations, and offers and bids, resulting in a net impairment charge of $6.8 million.  Of this amount, $5.4 million related to the Document and Label Solutions segment and $1.4 million related to the Fulfillment Services segment.

The carrying values of assets held for sale are classified as Net Assets Held for Sale in the accompanying Consolidated Balance Sheet.  At December 28, 2003, assets held for sale related to the Fulfillment Services and Document and Label Solutions segments totaled $1.2 million and $0.9 million, respectively.  We discontinued depreciation on these assets in June 2003.  As of January 25, 2004, we have sold a majority of the assets held for sale.  We believe that the remaining assets will be sold within the one-year timeframe and plan to sell the remaining equipment through brokers.  

In addition, the Document and Label Solutions segment recorded an impairment charge of $2.0 million related to form-designs software that became technologically outdated.  We are replacing the software used for forms design to one that is more widely used by our customers and is more of an industry standard.  Accordingly, the carrying value of the software was written down to its fair value, based upon the fair value of the number of estimated remaining forms to be designed with the software, and its useful life was reduced.  The fair value was calculated based upon the weighted average of probable future cash flows of the asset.  The effect on annual amortization expense is not material.

PathForward recorded an impairment charge of $1.2 million related to capitalized software development costs recorded with the acquisition of PlanetPrint.  The software was used exclusively by one customer; beginning in the fourth quarter of 2003, the use of this software by this customer ceased as a result of a mutual decision by both the Company and the customer.  We have determined there are no alternative uses for this software.  

InSystems recorded an impairment charge of $4.5 million related to capitalized software development costs recorded with the acquisition.  A change in the strategic direction of InSystems that resulted in the restructuring actions previously discussed, also included the cancellation of all plans related to the use of the InSystems’ eXterity™ software platform.

The above impairment charges are included in Asset Impairments in the accompanying Consolidated Statement of Income.  

Investment Write-Down

In June 2002, we purchased 500,000 shares of common stock in Printcafe, a publicly traded provider of enterprise software, for $5.0 million.  We did not have intentions of selling the shares in the near term and therefore classified them as available-for-sale securities.  The investment was reported at fair value, with unrealized losses reported in accumulated other comprehensive income (loss) in shareholders’ equity.  

On January 23, 2003, an unsolicited offer was made for all of the shares of Printcafe.  The Board of Directors of Printcafe subsequently formed a special committee to evaluate all potential offers to purchase Printcafe.  We believed that this sequence of events would likely lead to a sale of Printcafe Therefore, we believed that an other-than-temporary decline occurred and recognized a portion of the unrealized loss based on the offer price.  The resulting $3.7 million unrealized loss on investment was included in Investment and Other Income (Expense) in the Consolidated Statements of Income for the year ended December 29, 2002. An additional unrealized loss of $0.7 million was recorded as a component of other comprehensive income (loss).

On February 26, 2003, Printcafe and Electronics for Imaging, Inc. (EFI) signed a merger agreement providing for EFI's acquisition of Printcafe for $2.60 per share for each outstanding Printcafe share.  This was the per-share amount we used to calculate the unrealized loss recognized in 2002.  The acquisition was completed on October 21, 2003 and we elected to receive cash for our shares of Printcafe stock.  

Analysis of Operations

The following discussion and analysis provides information which management believes is relevant to an understanding of our consolidated results of operations and financial condition, supplemented with a discussion of segment results.  This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.  

The table below presents an analysis of operations for each of the years 2003, 2002, and 2001:

2003 Compared to 2002

The net loss for 2003 was $39.1 million or $1.38 per share, compared to net income of $32.6 million or $1.14 per share in 2002.  The following factors had a significant impact on the year-to-year comparison:

Restructuring & Impairment - We consolidated manufacturing facilities, discontinued a software program at InSystems, and took other asset retirement and cost saving actions during 2003 that resulted in restructuring and asset impairment expenses totaling $36.0 million.  These expenses, previously discussed in detail, were equivalent to $0.78 per share.

Pension Settlement - An unusually large number of associates elected to retire in 2003 and took a lump-sum payout as a result of low prevailing interest rates that boosted the present value of their pension benefits.  This triggered a non-cash pension settlement charge equal to $0.57 per share.  The charge primarily represents the immediate recognition of deferred pension plan investment results and is required when pension payments become significant.  We do not expect a pension settlement charge in 2004.

Other Pension Expense - As a result of the weak stock market in 2001 and 2002 and declining interest rates, the assets in the qualified pension plan trust dropped below the accumulated benefit obligation in late 2002.  This triggered the amortization of past asset and liability losses, increasing 2003 expense by approximately $8.0 million.  Changes in plan assumptions for the discount rate and expected investment return, also discussed earlier, added about $2.2 million to 2003 expense.  The total increase of $11.0 million to pension expense reduced earnings per share by $0.24 per share, on a year-over-year basis.

Pension expense for 2004 is currently estimated at $24.0 million – an approximate $14.7 million increase over the 2003 expense (before pension settlement).  The increase is expected to result from increased amortization and changes in the discount rate and investment return assumptions discussed under Critical Accounting Policies.

Inventory Write-offs - We elected to discontinue selected equipment product lines and scrapped or reserved service parts deemed obsolete.  These actions added $4.3 million to cost of sales, reducing net income by $0.09 per share.

The balance of the year-to-year change is attributed to lower revenue offset in part by lower manufacturing cost, selling, general, and administrative (SG&A) expense, and interest expense.  These items are discussed below.

Revenue - Consolidated revenue decreased $111.8 million or 10.9%.  Excluding the effect in both years of the mid-year 2002 acquisition of InSystems, revenue declined 11.5% from the prior year.  The decrease in revenue was a function of the items identified in the overview – weak demand for our traditional core products as a result of technology inroads, lower customer transaction volumes in a relatively poor economy, weak pricing in an oversupplied industry, and internal sales effectiveness issues that gave rise to recent changes in our sales organization, incentives, and focus.  

Manufacturing Cost  - The lower revenue, plus the effect of the inventory write-offs discussed above, were the primary factors that explain the $66.8 million, 2.5 percentage point reduction in gross margin.  The restructuring produced an estimated $10.0 million reduction in fixed costs during the year.  However, these savings were erased in large part by high training related costs in the second half of the year, as a result of production equipment moved during the restructuring and the relatively large number of retirements.

SG&A - SG&A expense increased $25.0 million in 2003, which included the $25.2 million pension settlement expense discussed above.  The full year effect of the mid-year acquisition of InSystems added approximately $9.0 million to current year expense.  Excluding these two items, SG&A expense was down about $9.0 million for the year.  On an annualized basis, the second half 2003 SG&A expense ran approximately $18.0 million below the first half as a result of the second quarter cost reduction initiatives.  

Interest Expense - Interest expense was $9.2 million lower in 2003 as a result of lower debt balances and lower interest rates.  The Company paid down $77.6 million of debt during the year.  An interest rate swap that fixed our borrowing rate at an all-in rate of 6.65% for 2002 expired in January 2003, allowing the Company to take advantage of much lower floating rate debt.  

Our earnings prospects for 2004 are heavily dependent on the success of our initiatives to improve the revenue trend.  The changes in sales structure, planning tools, and incentives have placed increased focus on penetrating strategic accounts and vertical markets where we have a strong presence and value proposition.  

In July 2003, we signed a five-year agreement with Broadlane, Inc., a leading group purchasing organization for 2,000 hospitals across the country.  We are one of five vendors named by Broadlane to meet their hospitals’ document management needs, estimated at $100 million annually.  We have thus far secured approximately $26 million in contracts from member hospitals.  We will begin to realize revenue in 2004 as existing inventories are depleted.

At this writing, paper companies have announced increases in paper prices to become effective in late February.  If the price increase holds up, we would in all likelihood increase the price of our printed documents to recover the cost increase.  In the past, we have been successful in recovering these cost increases over a period of several quarters.

2002 Compared to 2001

Net income improved from a loss of $43.3 million or $1.57 per share in 2001 to income of $32.6 million in 2002 or $1.14 per share.  The following factors had a significant impact on the year-to-year comparison:

Restructuring & Impairment - The effect of restructuring and impairment figured prominently in the comparison.  These expenses, previously discussed in detail, were equivalent to $0.04 per share in 2002 compared with a loss of $2.25 per share in 2001.  

Revenue - Revenue for 2002 was $1.028 billion compared to $1.188 billion in 2001.  The acquisitions of InSystems and PlanetPrint early in the third quarter added revenue of $18.8 million to 2002’s revenue.  Excluding the acquisitions, revenue declined approximately 15% or $178.3 million.

A majority of this reduction relates to the quarterly step-down in revenue that resulted through the restructuring period of 2001, causing us to enter 2002 with a much lower revenue base than the average for 2001.  We estimate approximately $100 million of the reduction is attributable to this factor, based on annualizing the fourth quarter 2001 revenue and adjusting for typical seasonality.  

The balance of the reduction is attributed to two general categories of items:  (1) external factors related to general economic and industry conditions, and (2) internal factors arising primarily as a consequence of actions taken during the restructuring.   Although it is not possible to measure or reasonably estimate the effect of individual factors, we believe that both categories had a meaningful adverse effect on 2002 revenue.  

The Document and Label Solutions segment represented a majority of our consolidated revenue in 2002.  As previously discussed, this business operates in an industry characterized by oversupply and competitive pricing.  This condition, coupled with a weak economy that focused increased customer attention on cost reductions, produced decreased unit volumes and lower prices, particularly in traditional product lines where utilization is lowest.  In order to bring value to our customers and remain competitive, we pursue a strategy of helping our customers improve their profitability by improving their business processes.  This can lead to lower revenue as improved processes may require fewer or lower value-added documents for existing clients.  

The 2001 restructuring also produced some unintended consequences that dampened sales activity during 2002.  The reassignment of accounts to a fewer number of representatives and a change in the sales incentive system to focus more on profitability resulted in an increased level of account losses, particularly smaller accounts, and a reduced rate of new account development.  In addition, some marginally profitable business held over from the restructuring period was lost during the year.  Finally, the desired level of cross-selling between the general and newly formed specialty sales forces did not materialize.  

We took actions late in 2002 and early in 2003 designed to improve the revenue trend.  First, the sales incentive system was changed to bring the focus back in the direction of growth.  Second, the Document and Label Solutions sales forces were consolidated and incentives were established to increase the level of cross-selling.  Third, we established a strategic sales force to develop new business at targeted accounts.  Fourth, an inside sales force was created to retain and develop new business at smaller accounts where the direct sales force cannot be cost effective.  Fifth, a lead generation group was formed to develop qualified leads for selected high value added marketing programs.  Sixth, we added a sales team focused on the healthcare market to obtain new opportunities in that market.  Finally, the Fulfillment sales force hired sales representatives with strong industry experience.

Gross Margin - The gross margin in 2002 was 39.6% of revenue – significantly better than the 34.2% reported for 2001.  This improvement reflected the lower cost and improved mix of business brought about through the restructuring.  

SG&A Expense - SG&A and R&D expense was lower in 2002 as a result of the cost reductions achieved during the restructuring, described earlier.  Excluding $8.3 million in second half expense incurred by the acquired businesses, expenses were $34.4 million lower in 2002. This lower rate of spending included lower commission and management incentive payouts.

In the final analysis, the improved profit for 2002 can be attributed to the continuing positive effects of the restructuring, which overcame the effect of weakening revenue.  Despite the improved performance year over year, we were disappointed with the year’s financial results and with revenue in particular.  We maintained the improved cost structure achieved during the restructuring, but did not take advantage of the potential leverage on profit that increased revenue would have delivered.  

SEGMENT REPORTING

Realignment of Segments

In January 2003, we realigned our operating segments to gain operational synergies. As a result, we have three reportable segments in 2003: Document and Label Solutions, Fulfillment Services, and InSystems. Under the realignment, we combined Document Management and Label Solutions.  We also separated one of Document Management’s business units into two operating units: CopyConcepts (now part of Fulfillment Services) and PathForward.  We also moved Document Management’s print-on-demand operations to Fulfillment Services and their software development operations to InSystems.  We have three remaining, individually insignificant, operating segments that we aggregate into Other.  They include International (previously part of Document Management), SMARTworks, and PathForward.  

The segment discussions that follow include annual operating results, excluding LIFO inventory adjustments, interest income, and interest expense.  Total assets represent those identifiable or allocable to each segment. The return on assets calculation equals income on operations less income taxes, divided by total assets.

Document and Label Solutions

This segment provides custom printed documents, storage and distribution services, pressure sensitive labels, and service and supplies. It primarily serves companies in the healthcare, financial, manufacturing, and distribution markets.  This segment comprised about 68.9% of our 2003 total revenue.

Excess production capacity and stiff price competition are prevalent in this segment, as the industry demand for traditional custom printed business forms and related services has been flat or in modest decline in recent years.  Major factors responsible for the revenue decline in this segment were discussed earlier under the Results of Operations – relatively weak economic conditions driving increased strategic sourcing by customers, weak pricing in an oversupplied industry, and inroads made by alternative technologies lessening demand for core products.  The labels portion of this segment has been particularly hard hit by pressure to reduce prices. We believe there are many opportunities for growth in this segment and have undertaken initiatives, described earlier, which are focused on taking market share and increasing revenue.  This segment is being successful in obtaining new contracts and customers; however, given the competitive environment, some of this new business is at lower gross margins, which is having an impact on operating income. Our agreement with Broadlane will have a positive effect on this segment as revenue is generated from commitments received under this contract.  

The decrease in 2003 operating income compared to the prior periods primarily reflects the loss of contribution margin (revenue less variable costs) resulting from the lower revenue.  The $4.3 million of non-cash charges previously discussed all related to this business segment.  Most of the increased plant costs stemming from higher quality, overtime, training, and other costs resulting from plant consolidations and associate retirements, also occurred in this business segment, which had a negative effect on operating income.  This segment also incurred increased SG&A expense in 2003, the net of lower incentive compensation and increased spending on inside sales, lead generation, and other initiatives designed to drive sales.  

Fulfillment Services

This segment helps our customers communicate effectively with their customers by helping them provide customized information and marketing materials.  Examples are monthly billing statements, customized marketing brochures and information kits, or one-to-one marketing communications.  We focus on outsourcing services that primarily serve large-and middle-market companies in the financial services, healthcare, and membership industries.  

Revenue in 2003 decreased 7.9% compared to 2002.  Revenue for the first six months of 2003 included $7.7 million in revenue from acquisitions, which are not included in 2002 results for that period.  Excluding this effect, revenue decreased by 10.9%, or $28 million.  Traditional product lines for this segment continue to decrease at a faster rate than the rate at which growth product lines are increasing. This segment also experienced lower volume in 2003, because our existing customers are experiencing reduced transaction volume with their customers and, therefore, require fewer statements, marketing brochures, etc.  A significant share of this shortfall occurred in traditional short-run offset printing, attributed to shifting technology, pricing pressure, and the residual effects of the 2001 restructuring discussed earlier.  A dedicated, specialized sales force has been put in place to drive revenue growth.  This segment’s focus remains on growing document outsourcing and digital color as well as the print on demand business.  Progress in these growth initiatives has been slowed by the weak economy and by the customers’ delays in expenditures.  

The decline in operating income is primarily a function of the lower revenue, increased investments in the sales force, change in product mix, and the effect of consolidating operations in 2003.

InSystems

There are two business units in our InSystems segment with solutions that enable companies to improve processes, and organize, manage, and distribute information in both paper and digital infrastructures. Our software solutions group focuses on software solutions for the automation of document-intensive business processes in the financial services industry, particularly insurance. Our document systems group focuses on hardware and software solutions for negotiable and secure document output in insurance, banking, healthcare and other markets.  

The revenue increase in 2003 is primarily related to the acquisition of InSystems in July 2002.  This segment has experienced a slowdown in software spending as customers delay software purchases due to continued weakness in the insurance industry.  During 2003, one of InSystems’ larger customers was acquired by another company.  As a result of this acquisition, InSystems’ customer will no longer be utilizing InSystems software.  While this has had minimal effect on 2003 results, there will be an impact in 2004 and going forward.  Annual revenue received from this customer was approximately $3 million.

Of the $17.7 million increase in operating loss for 2003, approximately $6.8 million is acquisition related, which includes amortization of purchased intangibles and software development costs. This segment has experienced a temporary slowdown in IT spending by the insurance industry, with new contracts being delayed.  This has resulted in less license revenue, which is at much higher margins than service revenue.  

ENVIRONMENTAL MATTERS

We have been named as one of a number of potentially responsible parties at several waste disposal sites, none of which has ever been Company owned.  Our policy is to accrue for investigation and remediation at sites where costs are probable and estimable.  At this writing, there are no identified environmental liabilities that are expected to have a material adverse effect on our operating results, financial condition, or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

In 2003, we funded $20.0 million in pension plan contributions, $19.7 million in restructuring spending, $18.3 million in capital expenditures, $77.6 million in debt reductions, and $26.1 million in dividend payments.  Aided by strong operating cash flow, our cash position at year-end was $77.0 million.  Our discussion of liquidity and capital resources will highlight information about our cash flows for 2003, an analysis of our net investment and capital structure, and a summary of our significant contractual obligations.    

The major elements of the Statements of Cash Flows are summarized below:

¹ Non-cash adjustments included above include depreciation, amortization, asset impairments, restructuring, gain or loss on sale of assets, and other items reported on the Consolidated Statement of Cash Flows under the category “Adjustments to reconcile net income (loss) to net cash provided by operating activities.”

Cash Flow from Operating Activities

$40.4 million in 2003 cash flow came from reductions in accounts receivable and inventory balances, reflecting lower revenue and continued focus on collection efforts and asset management.  Inventory balances in the near future may increase if we are successful in our efforts to displace our competitors in large document management accounts that carry high custom stored inventories.  The longer-term trend, however, will be a reduction in inventory as print-on-demand displaces the traditional practice of long production runs and subsequent storage of custom documents for customers.  The balance of prepaid taxes decreased $16.8 million, primarily from $14.8 million in federal income tax refunds.

Restructuring spending in 2003 was  $19.7 million.  This spending will continue through 2005, although at a much lower rate, as severance and related employer costs, lease payments and other associated costs related to the restructuring are incurred.  See Results of Operations for further discussion of the restructurings.  Pension and other postretirement obligations utilized $25.4 million, which included $20 million in voluntary contributions to the qualified defined-benefit pension plan.

Cash Flows From Investing Activities

Our investing activities included capital expenditures totaling $18.3 million in 2003, primarily for machinery and equipment. Our strategy for future growth relies more heavily on the acquisition and development of talented people and intellectual assets, much of which is recorded as expense rather than as long-term capital.  This shift is reflected in the capital spending in the last three years that has averaged $23 million, well below the $50 million average for the preceding five years. We expect to spend $20-$25 million on capital projects in 2004, including improvements to our internal systems infrastructure and current year investments in our print-on-demand strategy.

Cash Flows From Financing Activities

We repaid approximately $77.6 million of debt in 2003, of which $75 million was related to our revolving credit facility and $2.3 million was related to the final payment on industrial development revenue bonds.  Our interest rate swap expired in January 2003, and we made the decision to apply a portion of our available cash to reducing the borrowing level.

We have paid a $.23 quarterly dividend in each quarter of the last three years.  

Net Investment and Capital Structure

Our condensed balance sheet is shown below

The management of working capital continued to improve in 2003 as indicated by the increase in the turnover of net current assets (excluding cash, debt and accrued restructuring) from 6.0x in 2002 to 7.8x in 2003.  The turnover calculation divides fourth quarter’s revenue times four by the ending balance of net current assets.

Excluding the asset impairment charges in 2003, the net book value (NBV) of capital assets decreased $25.3 million, primarily reflecting a $22.7 million gap between the $18.3 of capital spending and $41.0 million in annual depreciation.  The balance is expected to decrease further in 2004 as an estimated $44 million in depreciation will once again exceed capital spending, currently estimated at $20 to $25 million.

Total debt was $125.0 million, as we made $77.6 million in debt re-payments in 2003.  Cash decreased $45.6 million from $122.6 million at the beginning of 2003 to $77.0 million at December 28, 2003, primarily as a result of the debt re-payments.  Net debt (total debt less cash and cash equivalents) was $48.0 million at December 28, 2003, compared to $79.7 million at December 29, 2002.  Our strong financial condition is illustrated by the 16% ratio of net debt to total capital at December 28, 2003.  

At December 28, 2003, we had a $220 million unsecured revolving credit facility agreement with ten banks. The agreement provided for a four-year commitment of up to $170 million, maturing May 2005, and a 364-day commitment plus a one-year term loan extension at our option, maturing May 2005, of up to $50 million.  Subsequent to year-end, we requested a reduction in the credit facility amount from $220 million to $150 million.  The four-year commitment amount was reduced to $150 million and the one-year commitment amount of $50 million was terminated. The credit facility incurs interest at a floating rate of the London Interbank Offered Rate (LIBOR) plus a spread dependent upon our net debt to total capital ratio.  The credit facility also contains financial covenants that require us to maintain, among other things, a minimum coverage of interest expense.  

The following table summarizes the Company’s significant contractual obligations at December 28, 2003:

Our near-term cash requirements are primarily related to funding our operations and capital expenditures.  The remaining cash requirements of our restructuring programs are approximately $5.3 million, through 2006, primarily for severance and lease obligations.  We do not expect to have a minimum funding requirement in 2004, although we may elect to make a $10 million voluntary contribution to our defined benefit pension plan.  We made voluntary contributions of $20 million in 2003.  Our expected cash requirements for our postretirement healthcare benefit plan are approximately $4.0 million for 2004.  

We are obligated under operating leases for real estate, sales offices, transportation equipment and computer and other equipment.  Purchase commitments at December 28, 2003 totaled $4.7 million, including $1.9 million for capital improvements.  

We also have a four-year commitment with an equipment supplier to spend a total of $4.0 million over the commitment term.  In addition, we have various other purchase commitments for telecommunications services from suppliers under multi-year agreements that provide for minimum commitments of $2.0 million.  We outsource certain information technology services from a supplier under a multi-year agreement that provides for an early termination penalty.  At December 28, 2003, the early termination penalty is approximately $0.9 million.  The remaining term of the agreement is approximately four years.  As this remaining term diminishes, the termination penalty amount declines.  We have no purchase agreements with suppliers extending beyond normal quantity requirements.

We believe that the combination of internally generated funds, available cash reserves, and our existing credit facility are sufficient to fund our operations, including capital expenditures, dividends, remaining restructuring costs, and investments in growth initiatives over the next year.  In our judgment, our strong balance sheet could support additional debt financing, if necessary, to pursue acquisitions.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In 2003, we adopted FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."  FIN 45 requires recognition of an initial liability for the fair value of an obligation assumed by issuing a guarantee and disclosure of the nature of the guarantee, including the approximate term of the guarantee, how the guarantee arose, and the events or circumstances that would require the guarantor to perform under the guarantee. The maximum potential amount of future payments under the guarantee, the carrying amount of the liability, if any, for the guarantor’s obligations, and the nature and extent of any recourse provisions that would enable the guarantor to recover amounts paid under the guarantee must also be disclosed.  FIN 45 is effective, on a prospective basis, to guarantees issued or modified after December 31, 2002. The adoption of this standard did not have a material effect on our consolidated results of operations, financial position, or cash flows.  

In 2003, we also adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which requires issuers to classify certain financial instruments as liabilities (or assets in some circumstances).  SFAS No.150 covers certain financial instruments that embody an obligation that the issuer can or must settle by issuing its own equity shares and instruments that require the issuing company to buy back all or some of its shares in exchange for cash or other assets.  The new standard also requires disclosures about alternative ways to settle the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003.  The adoption of this standard did not have a material effect on our consolidated results of operations, financial position, or cash flows.

Item 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK

Interest Rates

We are exposed to interest rate risk arising from fluctuations in interest rates on our borrowings under our revolving credit facility agreement (the “Credit Facility”).  At December 28, 2003, we had $125 million borrowed against the Credit Facility.  The Credit Facility incurs interest at a floating rate of the London Interbank Offered Rate (LIBOR) plus a spread dependent upon the net debt to total capital ratio.  A hypothetical 100 basis point movement in the prevailing interest rates on the $125 million of borrowings under the credit facility would result in a $1.3 million annualized effect on our interest expense.

We also have short-term investments of $65.2 million as of December 28, 2003 that primarily bear interest at variable rates.  A hypothetical 100 basis point movement in the interest rate would result in an approximate $0.6 million annualized effect on our investment income.

Foreign Currency

We are exposed to market risk from changes in foreign currency exchange rates and utilize derivative financial instruments to manage our exposure to such fluctuations.  Our risk management objective is to minimize the effects of volatility on our cash flows by identifying the assets, liabilities or forecasted transactions exposed to these risks and hedging them with forward contracts or by embedding terms into certain contracts that affect the ultimate amount of cash flows under the contract. Since there is a high correlation between the hedging instruments and the underlying exposures, the gains and losses on these exposures are generally offset by reciprocal changes in value of the hedging instruments when used. We use derivative financial instruments as risk management tools and not for trading or speculative purposes.

Commodity Prices

Paper is the principal raw material in the production of business forms.  Because we have historically been successful in adjusting our sales prices in response to changes in paper costs, we do not believe a 10% change in paper costs would have a material effect on our financial statements; however, an increase of 10% in paper costs, if not recovered by us, would increase cost of sales by approximately $16.0 million.

Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS’ REPORT

Board of Directors and Shareholders

The Standard Register Company

Dayton, Ohio

We have audited the accompanying consolidated balance sheet of The Standard Register Company and subsidiaries as of December 28, 2003 and December 29, 2002, and the related consolidated statements of income and comprehensive income, cash flows, and shareholders’ equity for each of the three years in the period ended December 28, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Standard Register Company and subsidiaries as of December 28, 2003 and December 29, 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ Battelle & Battelle LLP

Dayton, Ohio

February 6, 2004

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