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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
COMMISSION FILE NUMBER 1-12551
------------------------
CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400
ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of October 29, 2004 was $89,690,010.
As of October 28, 2004 the Registrant had 48,702,832 shares of Common
Stock, $0.01 par value, outstanding.
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TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
PAGE
----
Item 1. Condensed Consolidated Financial Statements............ 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk................................................. 30
Item 4. Controls and Procedures................................ 30
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 31
i
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, 2004
(UNAUDITED) DECEMBER 31, 2003
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 379 $ 307
Accounts receivable, net............................ 252,230 223,541
Inventories, net.................................... 115,547 91,402
Other current assets................................ 45,711 48,135
---------- ----------
TOTAL CURRENT ASSETS............................ 413,867 363,385
Property, plant and equipment, net...................... 372,327 388,240
Goodwill................................................ 306,097 299,392
Other intangible assets, net............................ 15,863 19,687
Other assets, net....................................... 40,563 36,689
---------- ----------
TOTAL ASSETS............................................ $1,148,717 $1,107,393
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 178,452 $ 140,468
Accrued compensation and related liabilities........ 59,960 53,209
Other current liabilities........................... 59,442 64,360
Current maturities of long-term debt................ 2,264 2,575
---------- ----------
TOTAL CURRENT LIABILITIES....................... 300,118 260,612
Long-term debt, less current maturities................. 767,719 746,386
Deferred income taxes................................... -- 6,717
Other liabilities....................................... 25,995 25,659
---------- ----------
TOTAL LIABILITIES....................................... 1,093,832 1,039,374
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 25,000 shares
authorized, none issued........................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 48,701,832 and 48,380,457 shares
issued and outstanding as of September 30, 2004
and December 31, 2003, respectively............... 487 484
Paid-in capital..................................... 214,900 213,850
Retained deficit.................................... (166,442) (150,331)
Deferred compensation............................... (2,205) (1,714)
Accumulated other comprehensive income.............. 8,145 5,730
---------- ----------
TOTAL SHAREHOLDERS' EQUITY...................... 54,885 68,019
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,148,717 $1,107,393
========== ==========
See notes to condensed consolidated financial statements.
1
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except earnings per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
Net sales.............................. $428,099 $412,218 $1,261,238 $1,247,363
Cost of sales.......................... 343,596 330,341 1,004,682 1,002,441
-------- -------- ---------- ----------
Gross profit........................... 84,503 81,877 256,556 244,922
Operating expenses:
Selling, general and
administrative................... 62,315 59,278 196,728 185,433
Amortization of intangibles........ 1,313 500 4,114 1,363
Restructuring charges.............. (269) 76 851 1,201
-------- -------- ---------- ----------
Operating income....................... 21,144 22,023 54,863 56,925
Other expense:
Interest expense................... 17,859 17,831 53,771 54,163
Loss from the early extinguishment
of debt.......................... -- -- 17,748 --
Other.............................. 787 574 1,755 1,063
-------- -------- ---------- ----------
Income (loss) from continuing
operations before income taxes and
cumulative effect of a change in
accounting principle................. 2,498 3,618 (18,411) 1,699
Income tax expense (benefit)........... 8 1,446 (1,070) 679
-------- -------- ---------- ----------
Income (loss) from continuing
operations before cumulative effect
of a change in accounting
principle............................ 2,490 2,172 (17,341) 1,020
Gain on disposal of discontinued
operations, net of taxes of $770 in
2004................................. -- -- (1,230) (1,919)
Cumulative effect of a change in
accounting principle................. -- -- -- 322
-------- -------- ---------- ----------
Net income (loss)...................... $ 2,490 $ 2,172 $ (16,111) $ 2,617
======== ======== ========== ==========
Earnings (loss) per share--basic:
Continuing operations.............. $ 0.05 $ 0.05 $ (0.36) $ 0.02
Discontinued operations............ -- -- 0.02 0.04
Cumulative effect of a change in
accounting principle............. -- -- -- (0.01)
-------- -------- ---------- ----------
Earnings (loss) per share--basic....... $ 0.05 $ 0.05 $ (0.34) $ 0.05
======== ======== ========== ==========
Earnings (loss) per share--diluted:
Continuing operations.............. $ 0.05 $ 0.04 $ (0.36) $ 0.02
Discontinued operations............ -- -- 0.02 0.04
Cumulative effect of a change in
accounting principle............. -- -- -- (0.01)
-------- -------- ---------- ----------
Earnings (loss) per share--diluted..... $ 0.05 $ 0.04 $ (0.34) $ 0.05
======== ======== ========== ==========
Weighted average shares--basic......... 47,753 47,689 47,742 47,677
Weighted average shares--diluted....... 48,504 48,406 47,742 48,268
See notes to condensed consolidated financial statements.
2
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations.................. $ (17,341) $ 1,020
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:
Depreciation......................................... 35,014 34,852
Amortization......................................... 7,513 4,393
Write-off of deferred financing fees................. 4,220 --
Deferred income tax.................................. (9,718) (7,826)
Loss on disposal of assets........................... 438 891
Other noncash charges, net........................... (1,958) 590
Changes in operating assets and liabilities, excluding the
effects of acquired businesses:
Accounts receivable.................................. (23,941) (3,886)
Inventories.......................................... (21,893) 7,431
Accounts payable and accrued compensation............ 40,863 242
Income taxes payable................................. (2,830) 10,888
Other working capital changes........................ 3,762 (14,717)
Other, net........................................... (132) (244)
----------- -----------
Net cash provided by operating activities.......... 13,997 33,634
Cash flows from investing activities:
Acquisitions, net of cash acquired................... (9,803) --
Capital expenditures................................. (20,246) (19,722)
Proceeds from divestitures, net...................... 2,000 3,864
Proceeds from sales of property, plant and
equipment........................................... 1,475 658
----------- -----------
Net cash used in investing activities.............. (26,574) (15,200)
Cash flows from financing activities:
Proceeds from issuance of long-term debt............. 2,129,193 1,384,781
Repayments of long-term debt......................... (2,108,171) (1,405,239)
Proceeds from issuance of common stock............... 1,053 16
Capitalized loan fees................................ (9,076) (484)
----------- -----------
Net cash provided by (used in) financing
activities........................................ 12,999 (20,926)
Effect of exchange rate changes on cash and cash
equivalents................................................ (350) 936
----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 72 (1,556)
Cash and cash equivalents at beginning of year.............. 307 2,650
----------- -----------
Cash and cash equivalents at end of period.................. $ 379 $ 1,094
=========== ===========
See notes to condensed consolidated financial statements.
3
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Cenveo,
Inc. (formerly known as Mail-Well, Inc.) and subsidiaries (collectively,
the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial statements
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2004. The
balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the
information and footnote disclosures required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 2003.
The Company's reporting periods in this report consist of thirteen and
thirty-nine week periods, respectively, ending on the Saturday closest to
the last day of the calendar month. The reporting periods for 2004 and 2003
ended September 25, 2004 and September 27, 2003, respectively. For
convenience, the accompanying financial statements have been shown as
ending on the last day of the calendar month.
On April 29, 2004, the shareholders of the Company approved the change
of the Company's name from Mail-Well, Inc. to Cenveo, Inc.
2. STOCK-BASED COMPENSATION
Stock options and other stock-based compensation awards are accounted
for using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. This method
requires compensation expense to be recognized for the excess of the quoted
market price of the stock at the grant date or the measurement date over
the amount an employee must pay to acquire the stock. The exercise price
for stock options is the quoted market price of the stock on the day
granted; accordingly, no compensation expense is recognized for its fixed
stock option grants. The compensation expense for restricted stock issued
is recognized ratably over the vesting period of the restricted stock.
Compensation expense was $0.2 million and $0.5 million for the three and
nine months ended September 30, 2004, respectively, and $0.1 million and
$0.4 million for the three months and nine months ended September 30, 2003,
respectively.
4
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCK-BASED COMPENSATION (CONTINUED)
If the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, the stock based compensation expense that would
have been included in the determination of net income would have been $1.0
million and $3.2 million for the three and nine months ended September 30,
2004, respectively, and $1.2 million and $3.9 million for the three and
nine months ended September 30, 2003, respectively. The Company's reported
and pro forma net income (loss) and earnings (loss) per share would have
been as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2004 2003 2004 2003
------- ------- -------- -------
Net income (loss):
As reported........................... $ 2,490 $ 2,172 $(16,111) $ 2,617
Pro forma............................. $ 1,294 $ 1,131 $(17,745) $ (74)
Earnings (loss) per share--basic:
As reported........................... $ 0.05 $ 0.05 $ (0.34) $ 0.05
Pro forma............................. $ 0.03 $ 0.01 $ (0.37) $ 0.02
Earnings (loss) per share--diluted:
As reported........................... $ 0.05 $ 0.04 $ (0.34) $ 0.05
Pro forma............................. $ 0.03 $ 0.02 $ (0.37) $ (0.01)
The effect on pro forma net income (loss), earnings (loss) per
share--basic and earnings (loss) per share--diluted of expensing the
estimated fair value of stock options is not necessarily representative of
the effect on reported earnings for future periods due to the vesting
periods of the stock options and the potential for issuance of additional
stock options.
At the annual meeting of stockholders on April 29, 2004, an amendment
to the 2001 Long-Term Equity Incentive Plan, (the "Incentive Plan") was
approved. The amendment increased the number of shares that can be granted
under the Incentive Plan to 7,450,000 from 4,425,000. On August 3, 2004,
the Board issued 288,787 restricted shares and 335,688 stock options. The
restricted shares vest five years from the date granted and the stock
options generally vest 20% per year and expire 7 years from the grant date.
On April 29, 2004, members of the Board of Directors received 14,922
restricted shares that vested over a six-month period. The Company has
2,807,000 stock options available for issuance under the Incentive Plan.
3. SUPPLEMENTAL INFORMATION
INVENTORIES
The Company's inventories by major category were as follows (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Raw materials.......................................... $ 38,749 $28,344
Work in process........................................ 28,422 21,483
Finished goods......................................... 53,314 46,570
-------- -------
120,485 96,397
Reserves............................................... (4,938) (4,995)
-------- -------
$115,547 $91,402
======== =======
5
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUPPLEMENTAL INFORMATION (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consisted of
the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Land and land improvements............................. $ 19,237 $ 20,043
Buildings and building improvements.................... 109,344 109,563
Machinery and equipment................................ 526,338 511,820
Furniture and fixtures................................. 16,589 15,986
Construction in progress............................... 9,645 9,696
--------- ---------
681,153 667,108
Accumulated depreciation............................... (308,826) (278,868)
--------- ---------
$ 372,327 $ 388,240
========= =========
COMPREHENSIVE INCOME (LOSS)
A summary of the comprehensive income (loss) is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ----------------------
2004 2003 2004 2003
------ ------ -------- -------
Net income (loss)........................... $2,490 $2,172 $(16,111) $ 2,617
Other comprehensive income (loss):
Currency translation adjustment........ 7,495 (655) 2,415 17,832
------ ------ -------- -------
Comprehensive income (loss)................. $9,985 $1,517 $(13,696) $20,449
====== ====== ======== =======
AMORTIZATION EXPENSE
Amortization expense reported in the condensed statements of cash flows
includes the following:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2004 2003
------ ------
Amortization of intangibles............................ $4,114 $1,363
Amortization of deferred financing fees................ 3,269 3,030
Other.................................................. 130 --
------ ------
Total amortization.................................. $7,513 $4,393
====== ======
The amortization of deferred financing fees is included in interest
expense in the condensed consolidated statements of operations.
4. ACQUISITIONS
On July 6, 2004 the Company purchased the stock of Valco Graphics Inc.,
a commercial printing company in Seattle, Washington with annual sales of
approximately $18.0 million, for $9.6 million. The Company plans to
consolidate Valco Graphics Inc. with its existing commercial printing
operation in Seattle and operate the combined entity as Cenveo, Seattle.
6
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
On August 27, 2004 the Company purchased the assets of WWP Property
Management, Inc., a commercial printing company in San Francisco,
California with annual sales of approximately $14.0 million, for $2.8
million. The Company plans to consolidate this operation with its existing
commercial printing operation in San Francisco and operate the combined
entity as Cenveo, San Francisco.
Revenues and expenses of the acquired businesses have been included in
the accompanying condensed consolidated financial statements beginning on
their respective dates of acquisition. The allocation of purchase price to
the acquired assets and liabilities is based on estimated fair market value
and may be revised if additional information concerning the asset and
liability valuations is obtained, provided such information is received no
later than one year after the date of acquisition.
The purchase prices of the two businesses acquired were allocated as
follows: $7.4 million to current assets, $3.4 million to machinery and
equipment, and $0.5 million to other assets. Current liabilities assumed
were $5.1 million. Goodwill recorded totaled $5.3 million.
5. LONG-TERM DEBT
At September 30, 2004 and December 31, 2003, long-term debt consisted
of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Senior Secured Credit Facility, due 2008............... $ 77,976 $ 73,310
Senior Notes, due 2012................................. 350,000 350,000
Senior Subordinated Notes, due 2008.................... -- 300,000
Senior Subordinated Notes, due 2013.................... 320,000 --
Other.................................................. 22,007 25,651
-------- --------
769,983 748,961
Less current maturities................................ (2,264) (2,575)
-------- --------
Long-term debt...................................... $767,719 $746,386
======== ========
Current maturities consist of scheduled payments on other long-term
debt.
In January 2004, the Company sold $320 million of 7 7/8% senior
subordinated notes due 2013. The proceeds from the sale of these notes were
used to redeem the $300 million of 8 3/4% senior subordinated notes due
2008. The Company incurred costs of $7.2 million to issue the 7 7/8% senior
subordinated notes. These costs have been deferred and will be amortized
over the term of the notes. A loss of $17.7 million was recorded on the
early extinguishment of the 8 3/4% senior subordinated notes consisting of
redemption premiums of $13.5 million and unamortized debt issuance costs of
$4.2 million.
In March 2004, the Company amended its $300 million senior secured
credit facility due 2005 to extend its term to June 2008. The cost incurred
to amend the credit facility was $1.9 million. These debt issuance costs
will be amortized over the extended term of the facility.
As of September 30, 2004, the Company was in compliance with all of the
covenants of its various debt agreements.
7
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
GUARANTEES
On May 21, 2002, the Company sold its prime label business. The Company
continues to guarantee a lease obligation of this former business. The
guarantee requires the lessor to pursue collection and other remedies
against the buyer of this business before demanding payment from the
Company. The remaining payment under the lease term, which expires April
2008, totals approximately $5.3 million. If the Company were required to
honor its obligation under the guarantee, any loss would be reduced by the
amount generated from the liquidation of the equipment.
The senior notes due 2012 and the senior subordinated notes due 2013
are guaranteed by Cenveo, Inc. (the "Parent Guarantor") and all of its
wholly-owned operating subsidiaries (the "Guarantor Subsidiaries"). The
guarantees are joint and several, full, complete and unconditional. There
are no material restrictions on the ability of the Guarantor Subsidiaries
to transfer funds to the issuing subsidiary in the form of cash dividends,
loans or advances, other than ordinary legal restrictions under corporate
law, fraudulent transfer and bankruptcy laws.
6. INCOME TAXES
The income tax benefit recorded on the loss before income taxes was
based on the projected annual effective tax rate of 19%. The Company's
effective tax rate was negatively impacted by the establishment of
additional valuation allowances on certain deferred tax assets. Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes,
("SFAS 109") requires the evaluation of the realizability of deferred tax
assets on a quarterly basis. SFAS 109 requires a valuation allowance when
it is more likely than not that all or a portion of deferred tax assets
will not be realized. In circumstances where there is sufficient negative
evidence with respect to the realizability of deferred tax assets,
establishment of a valuation allowance must be considered. Under provisions
of SFAS 109, the substantial losses incurred by the Company over the most
recent three-year period represent sufficient negative evidence.
Accordingly, the Company has provided an additional valuation allowance to
cover the estimated impairment of the U.S. related deferred tax asset
arising from operating losses generated in 2004.
7. RESTRUCTURING CHARGES
In February 2004, the commercial segment began the closure of its
envelope manufacturing plant in Bensalem, Pennsylvania and its integration
into the Company's Philadelphia printing facility. The expenses incurred in
connection with this plant closure during the nine months ended September
30, 2004 were as follows (in thousands):
Employee separation and related expenses................ $ 708
Equipment write-downs................................... 774
Equipment moving expenses............................... 157
Building clean-up and other expenses.................... 608
Net gain from the sale of building...................... (1,396)
-------
Total............................................... $ 851
=======
The Company has substantially completed the restructuring programs
initiated in 2001 and 2002.
8
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RESTRUCTURING CHARGES (CONTINUED)
A summary of the activity charged to the 2002 restructuring liability
during the nine months ended September 30, 2004 is as follows (in
thousands):
COMMERCIAL RESALE TOTAL
---------- ------ ------
Balance, December 31, 2003............................. $1,279 $ 30 $1,309
Payments for lease termination and property exit
costs............................................ (366) (16) (382)
Payments for other exit costs...................... (125) -- (125)
------ ---- ------
Balance, September 30, 2004............................ $ 788 $ 14 $ 802
====== ==== ======
A summary of the activity charged to the 2001 restructuring liability
during the nine months ended September 30, 2004 is as follows (in
thousands):
COMMERCIAL
----------
Balance, December 31, 2003.............................. $688
Payments for lease termination and property exit
costs............................................. (242)
----
Balance, September 30, 2004............................. $446
====
8. PENSION PLANS
The components of the Company's net periodic pension cost were as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2004 2003 2004 2003
----- ----- ------- -------
Service cost................................. $ 670 $ 362 $ 1,735 $ 1,085
Interest cost................................ 529 834 2,006 2,501
Expected return on plan assets............... (557) (906) (2,212) (2,717)
Net amortization and deferral................ 167 (47) 268 (141)
Other........................................ -- 83 -- 248
----- ----- ------- -------
Net periodic pension expense.............. $ 809 $ 326 $ 1,797 $ 976
===== ===== ======= =======
As previously disclosed in its financial statements for the year ended
December 31, 2003, the Company expects to contribute $2.8 million to its
pension plans in 2004. As of September 30, 2004, contributions of $0.4
million have been made.
9
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share exclude dilution and are computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. A
reconciliation of the amounts included in the computation of basic and
diluted earnings (loss) per share from continuing operations is as follows
(in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- ------- -------- -------
Numerator:
Numerator for basic and diluted earnings
(loss) per share--earnings (loss) from
continuing operations....................... $ 2,490 $ 2,172 $(17,341) $ 1,020
======== ======= ======== =======
Denominator:
Denominator for basic earnings (loss) per
share--weighted average shares.............. 47,753 47,689 47,742 47,677
Effects of dilutive securities:
Stock options and restricted stock........ 751 717 -- 591
-------- ------- -------- -------
Denominator for diluted earnings (loss) per
share--adjusted weighted average shares..... 48,504 48,406 47,742 48,268
======== ======= ======== =======
Earnings (loss) from continuing operations per
share:
Basic..................................... $ 0.05 $ 0.05 $ (0.36) $ 0.02
======== ======= ======== =======
Diluted................................... $ 0.05 $ 0.04 $ (0.36) $ 0.02
======== ======= ======== =======
In the three months ended September 30, 2004 and 2003, outstanding
options and shares of restricted stock in the amount of 7,533,000 and
6,181,000, respectively, were excluded from the calculation of diluted
earnings per share because the effect would be antidilutive. In the nine
months ended September 30, 2004 and 2003, outstanding options and shares of
restricted stock in the amount of 7,477,000 and 6,310,000, respectively,
were excluded from the calculation of diluted earnings (loss) per share
because the effect would be antidilutive.
10. DISCONTINUED OPERATIONS
In September 2000, the Company sold the extrusion coating and
laminating business segment of American Business Products, Inc., a company
acquired in February 2000. The consideration received for this business
included an unsecured note which was fully reserved at the time of the
sale. This note was redeemed by the issuer in June 2004 for $2.0 million.
The proceeds, net of tax, have been recorded as a gain on disposal of
discontinued operations.
The gain on disposal of discontinued operations as of September 30,
2003 reflects a change in the tax impact of the disposition of the
Company's prime label business, which was sold in May 2002.
11. SEGMENT INFORMATION
In October 2003, the Company reorganized into two operating segments:
commercial and resale. This reorganization aligned the Company's structure
with the way its products are sold. Segment information for the three and
nine months ended September 30, 2003 has been restated to reflect the new
operating segments.
10
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION (CONTINUED)
The commercial segment specializes in printing annual reports, car
brochures, brand marketing collateral, financial communications and general
commercial printing and in the manufacturing and printing of customized
envelopes for billing and remittance and direct mail advertising. The
commercial segment also offers services such as design, fulfillment,
e-commerce and inventory management. The products and services of the
commercial segment are sold directly to national and local customers.
The resale segment produces business forms and labels, custom and stock
envelopes and specialty packaging and mailers. These products are generally
sold through professional print distributors, business forms suppliers,
office-products retail chains and the Internet.
Operating income of each segment includes all costs and expenses
directly related to the segment's operations. Corporate expenses include
corporate general and administrative expenses. Inter-company sales for the
three months ended September 30, 2004 and 2003 were $44.7 million and $42.4
million, respectively. Inter-company sales for the nine months ended
September 30, 2004 and 2003 were $146.5 million and $113.5 million,
respectively. These amounts were eliminated in consolidation and excluded
from reported net sales.
The following tables present certain segment information for the three
and nine months ended September 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
Net sales:
Commercial....................... $327,365 $315,029 $ 958,797 $ 945,699
Resale........................... 100,734 97,189 302,441 301,664
-------- -------- ---------- ----------
Total............................ $428,099 $412,218 $1,261,238 $1,247,363
======== ======== ========== ==========
Operating income (expense):
Commercial....................... $ 16,366 $ 16,877 $ 38,281 $ 39,643
Resale........................... 9,469 9,946 33,291 32,256
Corporate........................ (4,691) (4,800) (16,709) (14,974)
-------- -------- ---------- ----------
Total............................ $ 21,144 $ 22,023 $ 54,863 $ 56,925
======== ======== ========== ==========
Restructuring charges:
Commercial....................... $ (269) $ 94 $ 851 $ 1,305
Resale........................... -- (18) -- (104)
-------- -------- ---------- ----------
Total............................ $ (269) $ 76 $ 851 $ 1,201
======== ======== ========== ==========
Net sales by product line:
Commercial printing.............. $207,181 $194,597 $ 594,301 $ 580,419
Envelopes........................ 172,636 167,824 515,942 515,740
Business forms and labels........ 48,282 49,797 150,995 151,204
-------- -------- ---------- ----------
Total............................ $428,099 $412,218 $1,261,238 $1,247,363
======== ======== ========== ==========
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Cenveo Corporation (formerly known as Mail-Well I Corporation)
("Issuer"), the Company's wholly-owned subsidiary, and the only direct
subsidiary of the Company, has issued $350 million aggregate principal
amount of 9 5/8% Senior Notes ("Senior Notes") due in 2012 and $320 million
aggregate principal amount of 7 7/8% Senior Subordinated Notes ("Senior
Subordinated Notes") due in
11
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
2013. The Senior Notes and Senior Subordinated Notes are guaranteed by the
Guarantor Subsidiaries and the Parent Guarantor. The guarantees are joint
and several, full, complete and unconditional. There are no material
restrictions on the ability of the Guarantor Subsidiaries to transfer funds
to the issuer in the form of cash dividends, loans or advances, other than
ordinary legal restrictions under corporate law, fraudulent transfer and
bankruptcy laws.
The following condensed consolidating financial information illustrates
the composition of the Parent Guarantor, Issuer, and Guarantor
Subsidiaries. The Issuer and the Guarantor Subsidiaries comprise all of the
direct and indirect subsidiaries of the Parent Guarantor. Management has
determined that separate complete financial statements would not provide
additional material information that would be useful in assessing the
financial composition of the Guarantor Subsidiaries.
Investments in subsidiaries are accounted for under the equity method,
wherein the investor company's share of earnings and income taxes
applicable to the assumed distribution of such earnings are included in net
income. In addition, investments increase in the amount of permanent
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries. The elimination entries remove the equity method
investment in subsidiaries and the equity in earnings of subsidiaries,
intercompany payables and receivables and other transactions between
subsidiaries.
12
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
September 30, 2004
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ --------- ------------
Current assets:
Cash and cash equivalents............ $ -- $ -- $ 379 $ -- $ 379
Accounts receivable, net............. -- 63,385 188,845 -- 252,230
Inventories, net..................... -- 48,086 67,461 -- 115,547
Notes receivable from subsidiaries... -- 598,400 -- (598,400) --
Other current assets................. -- 24,938 20,773 -- 45,711
------- -------- -------- --------- ----------
Total current assets............... -- 734,809 277,458 (598,400) 413,867
Investment in subsidiaries............. 54,885 24,617 -- (79,502) --
Property, plant and equipment, net..... -- 90,583 281,744 -- 372,327
Goodwill and other intangible assets,
net................................... -- 86,465 235,495 -- 321,960
Deferred tax asset (liability)......... -- 13,856 (9,904) -- 3,952
Other assets, net...................... -- 31,834 4,777 -- 36,611
------- -------- -------- --------- ----------
Total assets........................... $54,885 $982,164 $789,570 $(677,902) $1,148,717
======= ======== ======== ========= ==========
Current liabilities:
Accounts payable..................... $ -- $ 47,417 $131,035 $ -- $ 178,452
Other current liabilities............ -- 48,857 70,545 -- 119,402
Intercompany payable (receivable).... -- 48,684 (48,684) -- --
Notes payable to Issuer.............. -- -- 598,400 (598,400) --
Current maturities of long-term
debt................................ -- 1,789 475 -- 2,264
------- -------- -------- --------- ----------
Total current liabilities.......... -- 146,747 751,771 (598,400) 300,118
Long-term debt, less current
maturities............................ -- 763,448 4,271 -- 767,719
Other liabilities...................... -- 17,084 8,911 -- 25,995
------- -------- -------- --------- ----------
Total liabilities.................. -- 927,279 764,953 (598,400) 1,093,832
Shareholders' equity................... 54,885 54,885 24,617 (79,502) 54,885
------- -------- -------- --------- ----------
Total liabilities and shareholders'
equity................................ $54,885 $982,164 $789,570 $(677,902) $1,148,717
======= ======== ======== ========= ==========
13
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ --------- ------------
Current assets:
Cash and cash equivalents............ $ -- $ -- $ 307 $ -- $ 307
Accounts receivable, net............. -- 50,125 173,416 -- 223,541
Inventories, net..................... -- 35,509 55,893 -- 91,402
Notes receivable from subsidiaries... -- 603,100 -- (603,100) --
Other current assets................. -- 32,109 16,026 -- 48,135
------- -------- -------- --------- ----------
Total current assets............... -- 720,843 245,642 (603,100) 363,385
Investment in subsidiaries............. 68,019 12,364 -- (80,383) --
Property, plant and equipment, net..... -- 90,956 297,284 -- 388,240
Goodwill and other intangible assets,
net................................... -- 67,474 251,605 -- 319,079
Other assets, net...................... -- 29,322 7,367 -- 36,689
------- -------- -------- --------- ----------
Total assets........................... $68,019 $920,959 $801,898 $(683,483) $1,107,393
======= ======== ======== ========= ==========
Current liabilities:
Accounts payable..................... $ -- $ 29,092 $111,376 $ -- $ 140,468
Other current liabilities............ -- 58,868 58,701 -- 117,569
Intercompany payable (receivable).... -- 9,059 (9,059) -- --
Notes payable to Issuer.............. -- -- 603,100 (603,100) --
Current maturities of long-term
debt................................ -- 1,776 799 -- 2,575
------- -------- -------- --------- ----------
Total current liabilities.......... -- 98,795 764,917 (603,100) 260,612
Long-term debt, less current
maturities............................ -- 741,589 4,797 -- 746,386
Deferred income taxes.................. -- (4,040) 10,757 -- 6,717
Other long-term liabilities............ -- 16,596 9,063 -- 25,659
------- -------- -------- --------- ----------
Total liabilities.................. -- 852,940 789,534 (603,100) 1,039,374
Shareholders' equity................... 68,019 68,019 12,364 (80,383) 68,019
------- -------- -------- --------- ----------
Total liabilities and shareholders'
equity................................ $68,019 $920,959 $801,898 $(683,483) $1,107,393
======= ======== ======== ========= ==========
14
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, 2004
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------- ------------
Net sales................................ $ -- $113,171 $314,928 $ -- $428,099
Cost of sales............................ -- 93,946 249,650 -- 343,596
------- -------- -------- ------- --------
Gross profit............................. -- 19,225 65,278 -- 84,503
Operating expenses:
Selling, general and administrative and
amortization.......................... -- 14,744 48,884 -- 63,628
Restructuring charges.................. -- -- (269) -- (269)
------- -------- -------- ------- --------
Operating income......................... -- 4,481 16,663 -- 21,144
Other expense:
Interest expense....................... -- 17,841 18 -- 17,859
Intercompany interest expense
(income).............................. -- (13,168) 13,168 -- --
Other.................................. -- 668 119 -- 787
------- -------- -------- ------- --------
Income (loss) from continuing operations,
before income taxes and undistributed
earnings of subsidiaries................ -- (860) 3,358 -- 2,498
Income tax expense (benefit)............. -- (50) 58 -- 8
------- -------- -------- ------- --------
Income (loss) from continuing operations,
before undistributed earnings of
subsidiaries............................ -- (810) 3,300 -- 2,490
Equity in undistributed earnings of
subsidiaries............................ 2,490 3,300 -- (5,790) --
------- -------- -------- ------- --------
Net income (loss)........................ $ 2,490 $ 2,490 $ 3,300 $(5,790) $ 2,490
======= ======== ======== ======= ========
15
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------- ------------
Net sales................................ $ -- $100,697 $311,521 $ -- $412,218
Cost of sales............................ -- 83,173 247,168 -- 330,341
------ -------- -------- ------- --------
Gross profit............................. -- 17,524 64,353 -- 81,877
Selling, general and administrative and
amortization.......................... -- 15,388 44,390 -- 59,778
Restructuring and other charges........ -- (458) 534 -- 76
------ -------- -------- ------- --------
Operating income......................... -- 2,594 19,429 -- 22,023
Other expense (income):
Interest expense....................... -- 17,594 237 -- 17,831
Intercompany interest expense
(income).............................. -- (13,422) 13,422 -- --
Other expense.......................... -- 440 134 -- 574
------ -------- -------- ------- --------
Income (loss) from continuing operations
before income taxes and equity in
undistributed earnings of
subsidiaries............................ -- (2,018) 5,636 -- 3,618
Income taxes expense (benefit)........... -- (746) 2,192 -- 1,446
------ -------- -------- ------- --------
Income (loss) from continuing operations
before equity in undistributed earnings
of subsidiaries......................... -- (1,272) 3,444 -- 2,172
Equity in undistributed earnings of
subsidiaries............................ 2,172 3,444 -- (5,616) --
------ -------- -------- ------- --------
Net income (loss)........................ $2,172 $ 2,172 $ 3,444 $(5,616) $ 2,172
====== ======== ======== ======= ========
16
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30, 2004
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales............................... $ -- $335,080 $926,158 $ -- $1,261,238
Cost of sales........................... -- 271,574 733,108 -- 1,004,682
-------- -------- -------- -------- ----------
Gross profit............................ -- 63,506 193,050 -- 256,556
Selling, general and administrative
and amortization..................... -- 50,813 150,029 -- 200,842
Restructuring changes................. -- -- 851 -- 851
-------- -------- -------- -------- ----------
Operating income........................ -- 12,693 42,170 -- 54,863
Other expense (income):
Interest expense (income)............. -- 53,846 (75) -- 53,771
Intercompany interest expense
(income)............................. -- (39,443) 39,443 -- --
Loss on early extinguishment of
debt................................. -- 17,748 -- -- 17,748
Other expense (income)................ -- 1,624 131 -- 1,755
-------- -------- -------- -------- ----------
Income (loss) from continuing operations
before income taxes and equity in
undistributed earnings of
subsidiaries........................... -- (21,082) 2,671 -- (18,411)
Income tax expense (benefit)............ -- (1,225) 155 -- (1,070)
-------- -------- -------- -------- ----------
Income (loss) from continuing operations
before equity in undistributed earnings
of subsidiaries........................ -- (19,857) 2,516 -- (17,341)
Equity in undistributed earnings of
subsidiaries........................... (16,111) 2,516 -- 13,595 --
-------- -------- -------- -------- ----------
Income (loss) from continuing
operations............................. (16,111) (17,341) 2,516 13,595 (17,341)
Gain on disposal of discontinued
operations, net of taxes of $770....... -- (1,230) -- -- (1,230)
-------- -------- -------- -------- ----------
Net income (loss)....................... $(16,111) $(16,111) $ 2,516 $ 13,595 $ (16,111)
======== ======== ======== ======== ==========
17
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------- ------------
Net sales................................ $ -- $310,244 $937,119 $ -- $1,247,363
Cost of sales............................ -- 257,396 745,045 -- 1,002,441
------ -------- -------- ------- ----------
Gross profit............................. -- 52,848 192,074 -- 244,922
Operating expenses:
Selling, general and administrative and
amortization.......................... -- 49,426 137,370 -- 186,796
Restructuring charges.................. -- (458) 1,659 -- 1,201
------ -------- -------- ------- ----------
Operating income......................... -- 3,880 53,045 -- 56,925
Other (income) expense:
Interest expense....................... -- 53,852 311 -- 54,163
Intercompany interest (income)
expense............................... -- (40,778) 40,778 -- --
Other expense.......................... -- 415 648 -- 1,063
------ -------- -------- ------- ----------
Income (loss) from continuing operations,
before income taxes and undistributed
earnings of subsidiaries................ -- (9,609) 11,308 -- 1,699
Provision (benefit) for income taxes..... -- (3,844) 4,523 -- 679
------ -------- -------- ------- ----------
Income (loss) from continuing operations,
before cumulative effect of a change in
accounting principle and undistributed
earnings of subsidiaries................ -- (5,765) 6,785 -- 1,020
Equity in undistributed earnings of
subsidiaries............................ 2,617 6,785 -- (9,402) --
------ -------- -------- ------- ----------
Income from continuing operations before
cumulative effect of a change in
accounting principle.................... 2,617 1,020 6,785 (9,402) 1,020
Gain on disposal of discontinued
operations.............................. -- (1,919) -- -- (1,919)
Cumulative effect of a change in
accounting principle.................... -- 322 -- -- 322
------ -------- -------- ------- ----------
Net income (loss)........................ $2,617 $ 2,617 $ 6,785 $(9,402) $ 2,617
====== ======== ======== ======= ==========
18
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2004
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows provided by (used in) from
operating activities......................... $ -- $ (27,356) $ 41,353 $ 13,997
Cash flows from investing activities:
Acquisitions, net of cash acquired.......... -- (9,803) -- (9,803)
Capital expenditures........................ -- (4,671) (15,575) (20,246)
Intercompany advances....................... (1,053) 25,559 (24,506) --
Proceeds from divestitures, net............. -- 2,000 -- 2,000
Proceeds from sales of assets............... -- 1,475 -- 1,475
--------- ----------- -------- -----------
Net cash provided by (used in) investing
activities............................... (1,053) 14,560 (40,081) (26,574)
Cash flows from financing activities:
Proceeds from issuance of long-term debt.... -- 2,129,193 -- 2,129,193
Repayments of long-term debt................ -- (2,107,321) (850) (2,108,171)
Proceeds from issuance of common stock...... 1,053 -- -- 1,053
Capitalized loan fees....................... -- (9,076) -- (9,076)
--------- ----------- -------- -----------
Net cash provided by (used in) financing
activities............................... 1,053 12,796 (850) 12,999
Effect of exchange rate changes on cash and
cash equivalents............................. -- -- (350) (350)
--------- ----------- -------- -----------
Net change in cash and cash equivalents... -- -- 72 72
Cash and cash equivalents at beginning of
year......................................... -- -- 307 307
--------- ----------- -------- -----------
Cash and cash equivalents at end of period.... $ -- $ -- $ 379 $ 379
========= =========== ======== ===========
19
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows from (used in) operating
activities................................... $ -- $ (1,057) $ 34,691 $ 33,634
Cash flows from investing activities:
Capital expenditures........................ -- (1,111) (18,611) (19,722)
Intercompany advances....................... (16) 15,848 (15,832) --
Proceeds from divestitures, net............. -- 3,864 -- 3,864
Proceeds from the sale of assets............ -- -- 658 658
--------- ----------- -------- -----------
Net cash provided by (used in) investing
activities............................... (16) 18,601 (33,785) (15,200)
Cash flows from financing activities:
Proceeds from issuance of long-term debt.... -- 1,384,781 -- 1,384,781
Repayments of long-term debt................ -- (1,404,027) (1,212) (1,405,239)
Proceeds from the issuance of common
stock...................................... 16 -- -- 16
Capitalized loan fees....................... -- (484) -- (484)
--------- ----------- -------- -----------
Net cash provided by (used in) financing
activities............................... 16 (19,730) (1,212) (20,926)
Effect of exchange rate changes on cash....... -- -- 936 936
--------- ----------- -------- -----------
Net change in cash and cash equivalents... -- (2,186) 630 (1,556)
Balance at beginning of year.................. -- 1,957 693 2,650
--------- ----------- -------- -----------
Balance at end of year........................ $ -- $ (229) $ 1,323 $ 1,094
========= =========== ======== ===========
20
CENVEO, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are one of North America's leading providers of visual
communications. We produce a variety of products and provide services that
help our customers deliver customized messages more effectively. In October
2003, we reorganized into two business segments. This reorganization
aligned our structure with our principal strategic goals: to operate as one
company, to provide our customers with one point of entry, and to provide
our customers with a full spectrum of our products and services delivered
with speed, reliability and efficiency.
In keeping with our strategy to operate as one company and unite all of
our operations under one identity, our shareholders approved the change of
the Company's name from Mail-Well, Inc. to Cenveo, Inc. on April 29, 2004.
COMMERCIAL
Our commercial segment specializes in printing annual reports, car
brochures, brand marketing collateral, financial communications and general
commercial printing and in the manufacturing and printing of customized
envelopes for billing and remittance and direct mail advertising. We also
offer our customers services such as design, fulfillment, e-commerce,
inventory management and other enterprise solutions for companies seeking
strategic partners for their branding and other communications priorities.
These products and services are sold directly to national and local
customers. Our commercial segment consists of 36 printing plants, 28
envelope plants and five distribution and fulfillment centers.
MARKET AND OTHER FACTORS. Approximately 50% of our commercial printing
sales and approximately 40% of our custom envelope sales are related to
advertising and direct mail promotions. Beginning in 2001, many of our
customers significantly reduced promotional spending in response to the
economic slowdown. Advertising and promotional spending historically has
not improved as quickly as the overall economy after a recession and this
has affected our performance in 2004. Our sales, however, in the third
quarter of 2004 were the highest third quarter sales we have had since
2001. While the volumes of certain of our products are beginning to
increase and our margins are improving, there is overcapacity in our
industry and significant competitive pricing pressures.
AREAS OF FOCUS. Because of the changes that have occurred in our
markets we have two principal areas of focus:
* It is important that we grow our share of the market. We have made a
substantial investment in our sales and marketing organization to
differentiate ourselves from our competitors and enable us to offer
and deliver to our customers a full spectrum of our products and
services with speed, reliability and efficiency. Additionally, we
have extended our product offering by investing in digital presses
and our distribution and fulfillment capabilities.
* We must continue to manage our capacity and operating leverage. In
the third quarter of 2004, we strengthened our market position in
Seattle, Washington and in San Francisco, California by purchasing
two commercial printing companies. We will consolidate our existing
operations in these two markets with the newly acquired companies.
Since 2001 we have consolidated many of our manufacturing facilities
to reduce excess capacity and improve our competitive position. We
have closed eleven of our envelope facilities and four printing
operations including an envelope facility closed in the second
quarter of 2004.
RESALE
Our resale segment produces business forms and labels, custom and stock
envelopes and specialty packaging and mailers. These products are generally
sold through professional print distributors,
21
CENVEO, INC. AND SUBSIDIARIES
business forms suppliers, office-products retail chains and the Internet.
The resale segment operates 20 manufacturing facilities.
MARKET AND OTHER FACTORS. Demand for business forms, especially
continuous forms, has been declining for several years as businesses have
acquired laser-printing capabilities. The resale market for office products
has become extremely price competitive. Mass merchandisers, wholesalers and
paper merchants are consolidating suppliers. Product offerings, competitive
prices and service are key to retaining business.
AREAS OF FOCUS. In response to industry and market challenges, we are
focusing on the following:
* We are defending our share of the business forms market and our sales
into the office products retail channel. We believe we have the
national manufacturing capability and the cost structure to be
successful in this effort.
* We must grow our sales of business labels and specialty business
documents. The markets for these products are growing and we have the
production capability and products to benefit from this market
growth.
* We must match our manufacturing capacity of business forms to the
demands of our customers. Since 2001, we have closed two of our
business forms plants.
CORPORATE
In addition to the business improvement actions and areas of focus for
each of our business segments, we have several important corporate-wide
initiatives.
* Our company was formed through a strategic roll-up of many
acquisitions. The companies we acquired had different cultures,
operating procedures and information systems. We have taken and will
continue to take actions to integrate our operations into one
company, build a unique culture and standardize procedures and
systems. As mentioned, we have changed the company's name to promote
one identity. In addition, we are implementing a common information
system and standard operating procedures in our printing facilities.
This investment will result in more efficient manufacturing and
consistency in our operations. It will also provide the information
needed to serve our customers as one company.
* We have refinanced our debt over the last several years. Currently,
we have no significant maturities on any of our long-term debt until
2008. Our focus is on generating sufficient internal cash flow to
fund investments in capital equipment and acquisitions and reductions
in debt outstanding under our senior secured credit facility.
* In 2003, we launched a major initiative we refer to as
"Mobilization." Mobilization is a comprehensive program designed to
actively involve all of our employees in improving service, quality,
efficiency and innovation. We believe this initiative has and will
continue to improve teamwork, communication and accountability
throughout our business and thus improve operations, safety and
customer service, and reduce costs.
* Prices of coated and uncoated paper have increased in the first nine
months of 2004. These increases in the cost of manufacturing our
products have negatively impacted our profit margins to the extent we
were unable to increase our prices. It will be important for us to
mitigate the impact of the increased cost of our primary raw
materials.
CONSOLIDATED RESULTS
The summary financial data set forth in the tables that follow present
reported net sales and operating income amounts as well as division net
sales and operating income. Division net sales exclude sales of our digital
graphics operations sold in March 2003. Division operating income is the
22
CENVEO, INC. AND SUBSIDIARIES
operating income of our two operating segments before considering
restructuring expenses and the operating results of the digital graphics
operations and excludes unallocated corporate expenses. We believe this
presentation provides information useful to understanding our current
operating performance.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
Division net sales....................... $428,099 $412,218 $1,261,238 $1,244,490
Divested operations................. -- -- -- 2,873
-------- -------- ---------- ----------
Net sales................................ 428,099 412,218 1,261,238 1,247,363
Division operating income................ 25,566 26,899 72,423 72,932
Unallocated corporate expense........ (4,691) (4,800) (16,709) (14,974)
Restructuring adjustment (expense)... 269 (76) (851) (1,201)
Divested operations.................. -- -- -- 168
-------- -------- ---------- ----------
Operating income......................... 21,144 22,023 54,863 56,925
Interest expense..................... 17,859 17,831 53,771 54,163
Loss on early extinguishment of
debt............................... -- -- 17,748 --
Other................................ 787 574 1,755 1,063
-------- -------- ---------- ----------
Income (loss) from continuing operations
before income taxes.................... 2,498 3,618 (18,411) 1,699
Income tax expense (benefit)......... 8 1,446 (1,070) 679
Gain on disposal of discontinued
operations......................... -- -- (1,230) (1,919)
Change in accounting principle....... -- -- -- 322
-------- -------- ---------- ----------
Net income (loss)........................ $ 2,490 $ 2,172 $ (16,111) $ 2,617
======== ======== ========== ==========
Earnings (loss) per share - diluted...... $ 0.05 $ 0.04 $ (0.34) $ 0.05
======== ======== ========== ==========
NET SALES
Net sales and division net sales increased $15.9 million for the three
months ended September 30, 2004 compared to net sales for the comparable
period of 2003. Sales of our commercial segment increased $12.3 million and
included sales of $4.7 million from operations acquired during the quarter.
Sales of our resale segment increased $3.6 million.
For the nine months ended September 30, 2004, net sales increased $13.9
million compared to net sales for the comparable period of 2003. Sales in
the first nine months of 2003 included sales of $2.9 million of the digital
graphics operations divested in the first quarter of 2003. Division net
sales for the nine months ended September 30, 2004 increased $16.7 million.
Sales of our commercial segment increased $15.9 million including the sales
of operations acquired. Sales of our resale segment decreased $0.8 million.
OPERATING INCOME
Operating income declined $0.9 million and $2.1 million during the
three and nine months ended September 30, 2004 compared to operating income
earned in the comparable periods of 2003.
DIVISION OPERATING INCOME. Division operating income decreased $1.3
million in the three months ended September 30, 2004 compared to division
operating income earned during the comparable period of 2003. Division
operating income of our commercial segment declined $0.8 million. Division
operating income of our resale segment declined $0.5 million.
23
CENVEO, INC. AND SUBSIDIARIES
For the nine months ended September 30, 2004, division operating income
declined $0.5 million. The division operating income of our commercial
business declined $1.6 million. The division operating income of our resale
segment increased $1.1 million.
UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include
the costs of our corporate headquarters. The increase in corporate expenses
for the nine months ended September 30, 2004 was primarily due to an
increase in the cost of workers' compensation claims. We did not allocate
these expenses to our segments because the increased costs related to the
development of claims incurred prior to 2004.
RESTRUCTURING EXPENSES. We continue to evaluate our operations for
opportunities to optimize capacity and reduce costs. In February 2004, we
began the closure of our envelope plant in Bensalem, Pennsylvania and its
integration into our Philadelphia printing facility. The expenses incurred
in connection with this closure totaled $0.9 million as of September 30,
2004.
The total cost of the closure is expected to be approximately $1.5
million consisting of the following (in thousands):
Employee separation and related expenses................ $ 800
Equipment write-downs................................... 1,175
Equipment moving expenses............................... 171
Building clean-up and other expenses.................... 750
Gain from sale of building.............................. (1,396)
------
Total............................................... $1,500
======
We anticipate incurring the remainder of these expenses prior to the
end of 2004.
DIVESTED OPERATIONS. Operating income in 2003 included operating income
of $0.2 million from the digital graphics operations divested in March
2003.
INTEREST EXPENSE
Interest expense increased slightly during the three months ended
September 30, 2004 over the comparable period of 2003. Interest expense
reflected our average outstanding debt during the quarter of $802.9 million
and a weighted average interest rate of 8.10% compared to the average
outstanding debt of $777.7 million and a weighted average interest rate of
8.44% in 2003.
For the nine months ended September 30, 2004, interest expense was $0.4
million lower than the comparable period of 2003. Interest expense
reflected our average outstanding debt of $809.2 million and a weighted
average interest rate of 8.16% compared to the average outstanding debt of
$797.6 million and a weighted average interest rate of 8.38% during the
first nine months of 2003.
Our average outstanding debt and weighted average interest rate in 2004
reflect the issuance of $320 million of 7 7/8% senior subordinated notes in
January, the proceeds of which were used to redeem the $300 million of
8 3/4% senior subordinated notes.
LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT
In January 2004, we sold $320 million of 7 7/8% senior subordinated
notes due 2013. The proceeds from the sale of these notes were used to
redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to
redeem the 8 3/4% notes and the unamortized debt issuance costs on the
8 3/4% notes, which were written off, totaled $17.7 million.
TAX BENEFIT
Our effective tax rate in 2004 has been negatively impacted by the
establishment of additional valuation allowances on certain deferred tax
assets. Statement of Financial Accounting Standards No.
24
CENVEO, INC. AND SUBSIDIARIES
109, Accounting for Income Taxes, ("SFAS 109") requires us to evaluate the
realizability of our deferred tax assets on a quarterly basis. SFAS 109
requires us to provide a valuation allowance when it is more likely than
not that all or a portion of deferred tax assets will not be realized. In
circumstances where there is sufficient negative evidence with respect to
the realizability of deferred tax assets, establishment of a valuation
allowance must be considered. Under provisions of SFAS 109, the substantial
losses we incurred over the most recent three-year period represent
sufficient negative evidence. Accordingly, we have provided an additional
valuation allowance to cover the estimated impairment of the deferred tax
asset arising from U.S. related operating losses that are expected to be
generated in 2004.
We currently believe our remaining deferred tax assets will be realized
through the reversal of our existing temporary differences and the
execution of available tax planning strategies. Additional valuation
allowances may be required if we are unable to execute our tax planning
strategies or generate future taxable income. The valuation allowance that
has been established will be maintained until there is sufficient positive
evidence to conclude that it is more likely than not that our deferred tax
assets will be realized. When sufficient positive evidence occurs, our
income tax expense will be reduced to the extent we decrease the amount of
our valuation allowance. The establishment or reversal of valuation
allowances could have a significant negative or positive impact on future
earnings.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS
In September 2000, we sold the extrusion coating and laminating
business segment of American Business Products, Inc., a company we acquired
in February 2000. The consideration received for this business included an
unsecured note which was fully reserved at the time of the sale. This note
was redeemed by the issuer in June 2004 for $2.0 million. The proceeds, net
of tax, have been recorded as a gain on disposal of discontinued
operations.
The gain on the disposal of discontinued operations recorded in 2003
was the result of adjustments made to the tax impact of the sale of our
prime label business in 2002.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE--DILUTED
Net income was $2.5 million, or $0.05 per share, for the three months
ended September 30, 2004 compared to $2.2 million, or $0.04 per share, for
the three months ended September 30, 2003. The increase was due primarily
to lower tax expense in 2004 compared to 2003.
The net loss of $16.1 million, or $0.34 million, for the nine months
ended September 30, 2004, compared to net income of $2.6 million, or $0.05
per share, for the nine months ended September 30, 2003 was due primarily
to the $17.7 million loss incurred on the early extinguishment of debt.
25
CENVEO, INC. AND SUBSIDIARIES
BUSINESS SEGMENTS
COMMERCIAL
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Division net sales.......................... $327,365 $315,029 $958,797 $942,826
Divested operations.................... -- -- -- 2,873
-------- -------- -------- --------
Net sales................................... $327,365 $315,029 $958,797 $945,699
Division operating income................... 16,097 16,861 39,132 40,780
Restructuring adjustments (expense)..... 269 16 (851) (1,305)
Divested operations..................... -- -- -- 168
-------- -------- -------- --------
Operating income............................ 16,366 16,877 38,281 39,643
Operating income margin..................... 5.0% 5.4% 4.0% 4.2%
Net sales of our commercial segment for the three months ended
September 30, 2004 increased $12.3 million over the comparable period of
2003.
* Sales of our commercial printing products increased $8.4 million.
This increase was driven by growth in sales of our high impact
printing products to our national and regional customers, higher
sales to our local customers and sales contributed by operations
acquired. During the third quarter, the two printing operations we
acquired contributed sales of $4.7 million.
* Sales of our envelope products declined approximately $0.7 million.
The average unit selling prices of our envelope products were down
slightly in the quarter compared to the prior year.
* The favorable impact of the strength of the Canadian dollar on the
sales of our Canadian operations was $2.1 million.
Operating income for the three months ended September 30, 2004
decreased $0.5 million from the comparable period of 2003. Division
operating income decreased $0.8 million. Pricing and manufacturing
performance improved slightly during the quarter compared to 2003. The
improvement in gross margin and the gross profit from the increase in
sales, however, were not sufficient to offset higher selling expenses and
higher amortization expense. Amortization expense was $1.0 million higher
in the third quarter of 2004 due to the amortization of an intangible asset
recorded in connection with the payment of contingent purchase price on an
acquisition completed in 2002.
Net sales of our commercial segment for the nine months ended September
30, 2004 increased $13.1 million over the comparable period of 2003. Net
sales in 2003 included sales of $2.9 million of the digital graphics
operations that were sold in March 2003. Division net sales increased $16.0
million.
* Sales of our commercial printing products increased by $11.1 million.
This increase was driven by growth in sales of high impact printing
products and the sales contributed in the third quarter by the newly
acquired operations.
* Envelope sales were $5.1 million lower driven by lower average
selling prices in 2004 compared to 2003.
* The favorable impact of the strength of the Canadian dollar on the
sales of our Canadian operations was $9.9 million.
Operating income for the nine months ended September 30, 2004 was $1.4
million lower than the operating income earned in the comparable period of
2003. Division operating income declined by $1.6 million. Pricing and
improved manufacturing performance during 2004 are reflected in a 90 basis
point improvement in gross profit margin compared to 2003. Despite the
improvement in gross margin and
26
CENVEO, INC. AND SUBSIDIARIES
the gross profit from the increase in sales, division operating income
declined primarily as a result of higher selling expenses and amortization
expense which was $3.0 million higher than in the first nine months of
2003.
RESALE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales................................... $100,734 $ 97,189 $302,441 $301,664
Division operating income................... 9,469 10,038 33,291 32,152
Restructuring adjustments (expense).... -- (92) -- 104
-------- -------- -------- --------
Operating income............................ 9,469 9,946 33,291 32,256
Operating income margin..................... 9.4% 10.2% 11.0% 10.7%
Net sales of our resale segment for the three months ended September
30, 2004 increased by $3.5 million over the comparable period of 2003.
Growth in sales of business labels continued during the third quarter,
increasing $2.5 million, or 10.3%. Sales of office products increased $3.7
million, or 9.0%, as a result of market share gains in the office products
retail channel. Sales of our traditional business forms, especially
continuous forms, declined $2.7 million. The demand for these products is
declining due to the increased use of laser printing by our customers.
Operating income for the three months ended September 30, 2004 declined
$0.5 million from the comparable period of 2003. This decline in operating
income was due primarily to expenses incurred in connection with our market
share gains in the office products retail channel.
Net sales for the nine months ended September 30, 2004 were $0.8
million higher than net sales in the comparable period of 2003. This
increase was due to sales of our business labels products, which have been
strong all year, and strong sales of office products in the third quarter.
Operating income for the nine months ended September 30, 2004 was $1.0
million higher than operating income earned in the comparable period of
2003. The increase in operating income was due to the strong performance of
our business labels products and lower administrative expenses which offset
the cost incurred in connection with our sales growth in the office
products retail channel.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Cash provided by operations was $14.0 million
during the first nine months of 2004 compared to $33.6 million provided by
operations during the comparable period of 2003. During the first nine
months of 2004, we paid redemption premiums of $13.5 million to redeem our
8 3/4% senior subordinated notes. In addition, cash used for increases in
working capital during the first nine months of 2004 totaled $4.3 million
compared to an increase of $0.2 million during the comparable period of
2003. This increase was primarily due to the payment of a $4.9 million
legal settlement accrued at December 31, 2003 and increases in receivables
and inventory to support new business.
INVESTING ACTIVITIES. Capital expenditures were $20.2 million as of
September 30, 2004 compared to $19.7 million as of September 30, 2003. We
anticipate capital expenditures for all of 2004 to be approximately $25.0
million.
On July 6, 2004, we purchased the stock of Valco Graphics Inc., a
commercial printing company in Seattle, Washington. On August 27, 2004, we
purchased certain assets of WWP Property Management, Inc., a commercial
printing company in San Francisco, California. Net cash used to purchase
these two operations was $9.8 million.
27
CENVEO, INC. AND SUBSIDIARIES
FINANCING ACTIVITIES. In January 2004, we sold $320 million of 7 7/8%
senior subordinated notes due 2013. The proceeds from the sale of these
notes were used to redeem the $300 million of 8 3/4% senior subordinated
notes due 2008. The cost incurred to issue the 7 7/8% senior subordinated
notes was $7.2 million. These debt issuance costs have been deferred and
will be amortized over the term of the notes.
In March 2004, we amended our $300 million senior secured credit
facility to extend its term to June 2008. The cost incurred to amend the
credit facility was $1.9 million. These debt issuance costs will be
amortized over the extended term of the facility.
The following table summarizes our cash payment obligations as of
September 30, 2004 by year:
OTHER LONG- PURCHASE TOTAL CASH
LONG-TERM DEBT OPERATING LEASES TERM LIABILITIES COMMITMENTS OBLIGATIONS
-------------- ---------------- ---------------- ----------- -----------
Year 1............... $ 2,264 $ 31,929 $ -- $ 3,428 $ 37,621
Year 2............... 2,324 26,345 3,521 4,073 36,263
Year 3............... 13,893 22,266 3,252 3,653 43,064
Year 4............... 78,927 15,909 2,124 3,653 100,613
Year 5............... 1,021 9,165 1,945 -- 12,131
Thereafter........... 671,554 19,081 15,153 -- 705,788
-------- -------- ------- ------- --------
Total................ $769,983 $124,695 $25,995 $14,807 $935,480
======== ======== ======= ======= ========
Purchase commitments include additional consideration of $14.2 million
for an operation acquired in 2002. This additional consideration is payable
if annual revenues total a specified amount each year through 2007.
At September 30, 2004, we had outstanding letters of credit of
approximately $24.1 million related to performance and payment guarantees.
In addition, we have issued letters of credit of $1.0 million as credit
enhancements in conjunction with other debt. Based on our experience with
these arrangements, we do not believe that any obligations that may arise
will be significant.
In conjunction with the sale of the prime label business in May 2002,
we guaranteed certain lease obligations. As of September 30, 2004, the
contingent liability under the guarantee was $5.3 million. We have not made
and do not expect to make any payments under this guarantee.
Our current credit ratings are as follows:
SENIOR
SECURED SENIOR
CREDIT SENIOR SUBORDINATED
REVIEW AGENCY FACILITY NOTES DEBT LAST UPDATE
- ------------- -------- ------ ------------ -----------
Standard & Poor's......... BB BB- B April 2004
Moody's................... Ba3 B1 B3 April 2004
The terms of our existing debt agreements have no rating triggers, and
we do not believe that our current ratings will impact our ability to raise
additional capital.
We expect to be able to fund our operations, capital expenditures, debt
and other contractual commitments within the next year from internally
generated cash flow and funds available under our senior secured credit
facility. Based on the certificate filed for September 30, 2004 activity,
we had $132.4 million of unused credit available under this credit
facility.
SEASONALITY AND ENVIRONMENT
Our commercial segment experiences seasonal variations. Revenues from
annual reports are generally concentrated from February through April.
Revenues associated with holiday catalogs and automobile brochures tend to
be concentrated from July through October. As a result of these seasonal
variations, some of our commercial printing operations are at or near
capacity at certain times during these periods.
28
CENVEO, INC. AND SUBSIDIARIES
In addition, several envelope market segments and certain segments of
the direct mail market experience seasonality, with a higher percentage of
the volume of products sold to these markets occurring during the fourth
quarter of the year. This seasonality is due to the increase in sales to
the direct mail market due to holiday purchases.
The mailer operations of our resale segment are at or near capacity at
times during the fourth quarter.
Seasonality is offset by the diversity of our other products and
markets, which are not materially affected by seasonal conditions.
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact in the
future.
AVAILABLE INFORMATION
Our Internet address is: www.cenveo.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after such documents are
filed electronically with the Securities and Exchange Commission. In
addition, our earnings conference calls are web cast live via our website.
Presentations to securities analysts are also included on our website.
LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and can be
estimated. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on us.
FORWARD-LOOKING INFORMATION
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
often identified by the words, "believe," "expect," "intend," "appear,"
"estimate," "anticipate," "project," "will" and other similar expressions.
All such statements address operating performance, events or developments
that we expect or anticipate will occur in the future and are not
historical in nature. All forward-looking statements reflect our current
views of Cenveo with respect to future events and are subject to risks and
uncertainties. Actual results may differ materially from those expressed or
implied in these statements. As and when made, we believe that these
forward-looking statements are reasonable; however, these statements
involve known and unknown risks, including, but not limited to:
* General economic, business and labor conditions
* The ability to implement our strategic initiatives
* The ability to regain profitability after substantial losses in 2002
and 2001 and in the first quarter of 2004
* The majority of our sales are not subject to long-term contracts
* The industry is extremely competitive due to over capacity
* The impact of the Internet and other electronic media on the demand
for envelopes and printed material
* Postage rates and other changes in the direct mail industry
29
CENVEO, INC. AND SUBSIDIARIES
* Environmental laws may affect our business
* The ability to retain key management personnel
* Compliance with recently enacted and proposed changes in laws and
regulations affecting public companies could be burdensome and
expensive
* The ability to successfully identify, manage and integrate possible
future acquisitions
* Dependence on suppliers and the costs of paper and other raw
materials and the ability to pass paper price increases onto
customers
* The ability to meet customer demand for additional value-added
products and services
* Changes in interest rates and currency exchange rates of the Canadian
dollar
* The ability to manage operating expenses
* The risk that a decline in business volume or profitability could
result in a further impairment of goodwill
* The ability to timely or adequately respond to technological changes
in our industry
In view of such uncertainties, investors should not place undue
reliance on any forward-looking statements since such statements speak only
as of the date when made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of our
operations and our financial position. We have operations in Canada, and
thus are exposed to market risk for changes in foreign currency exchange
rates of the Canadian dollar. Risks from interest and foreign currency
exchange rate fluctuations are managed through normal operating and
financing activities. We do not utilize derivatives for speculative
purposes, nor have we hedged interest rate exposure through the use of
swaps and options or foreign exchange exposure through the use of forward
contracts.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At September
30, 2004, we had variable rate debt outstanding of $93.3 million. A 1%
increase in LIBOR on the maximum amount of debt subject to variable
interest rates, which is $315.3 million, would increase our annual interest
expense by $3.2 million.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness
of our "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this report,
have concluded that as of the Evaluation Date, our disclosure controls and
procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to
them by others within those entities.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or procedures or in other factors that could
significantly affect our disclosure controls and procedures subsequent to
the Evaluation Date.
30
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation of the Company--incorporated by
reference from Exhibit 3(i) of the Company's Form 10-Q for the
quarter ended June 30, 1997.
3.2 Articles of Amendment to the Articles of Incorporation of the
Company dated May 17, 2004--incorporated by reference to
Exhibit 3.2 to Cenveo Inc.'s quarterly report on Form 10-Q for
the quarter ended June 30, 2004.
3.3 Bylaws of the Company--incorporated by reference from Exhibit
3(ii) of the Company's Form 10-Q for the quarter ended June 30,
1997.
3.4 Certificate of Amendment of Certificate of Incorporation of
Cenveo Corporation (formerly known as Mail-Well I Corporation)
dated May 14, 2004 --incorporated by reference to Exhibit 3.4
to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter
ended June 30, 2004.
3.5 Bylaws of Mail-Well I Corporation--incorporated by reference
from Mail-Well I Corporation's Form S-4 filed March 15, 1999
(Reg. No. 333-74409).
4.1 Indenture dated as of March 13, 2002 between Mail-Well I
Corporation and State Street Bank and Trust Company, as Trustee
relating to Mail-Well I Corporation's $350,000,000 aggregate
principal amount of 9 5/8% Senior Notes due 2012--incorporated
by reference to Exhibit 10.30 to Mail-Well, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
4.2 Form of Senior Note and Guarantee relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount 9 5/8%
due 2012--incorporated by reference to Exhibit 10.31 to
Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.
4.3 Indenture dated as of February 4, 2004 between Mail-Well I
Corporation and U.S. Bank National Association, as Trustee, and
Form of Senior Subordinated Note and Guarantee relating to
Mail-Well I Corporation's $320,000,000 aggregate principal
amount of 7 7/8 Senior Subordinated Notes due
2013--incorporated by reference to Exhibit 4.5 to Mail-Well,
Inc.'s Annual Form 10-K filed February 27, 2004.
4.4 Registration Rights Agreement dated February 4, 2004, between
Mail-Well I Corporation and Credit Suisse First Boston, as
Initial Purchaser, relating to Mail-Well I Corporation's
$320,000,000 aggregate principal amount of 7 7/8 Senior
Subordinated Notes due 2013--incorporated by reference to
Exhibit 4.6 to Mail-Well, Inc.'s Annual Form 10-K filed
February 27, 2004.
10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of
its officers and directors--incorporated by reference from
Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on
Form S-1 dated March 25, 1994.
10.2 Form of Indemnity Agreement between Mail-Well I Corporation and
each of its officers and directors--incorporated by reference
from Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement
on Form S-1 dated March 25, 1994.
10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of
February 23, 1994 and related Employee Stock Ownership Plan
Trust Agreement--incorporated by reference from Exhibit 10.19
of Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
31
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated
by reference from Exhibit 10.20 of Mail-Well, Inc.'s
Registration Statement on Form S-1 dated March 25, 1994.
10.5 Form of Mail-Well, Inc. Incentive Stock Option
Agreement--incorporated by reference from Exhibit 10.22 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.6 Form of Mail-Well, Inc. Nonqualified Stock Option
Agreement--incorporated by reference from Exhibit 10.23 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.7 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q for
the quarter ended March 31, 1997.
10.8 Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive
Stock Option Agreement--incorporated by reference from Exhibit
10.59 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
10.9 Mail-Well, Inc. 2001 Long-Term Equity Incentive
Plan--incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
10.10 Form of Non-Qualified Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
10.11 Form of Incentive Stock Option Agreement under 2001 Long-Term
Equity Incentive Plan--incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.12 Form of Restricted Stock Award Agreement under 2001 Long-Term
Equity Incentive Plan--incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.13 Purchase Agreement dated March 8, 2002, between Mail-Well I
Corporation, and Credit Suisse First Boston, UBS Warburg LLC,
Banc of America Securities LLC, U.S. Bancorp Piper Jaffray
Inc., First Union Securities, Inc., and Scotia Capital (USA)
Inc., as Initial Purchasers, relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount of 9 5/8%
Senior Notes due 2012--incorporated by reference to Exhibit
10.30 to Mail-Well I Corporation's Registration Statement on
Form S-4 filed June 11, 2002.
10.14 Registration Rights Agreement dated March 13, 2002, between
Mail-Well I Corporation, and Credit Suisse First Boston, UBS
Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper
Jaffray Inc., First Union Securities, Inc., and Scotia Capital
(USA) Inc., as Initial Purchasers, relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount of 9 5/8%
Senior Notes due 2012--incorporated by reference to Exhibit
10.32 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002.
10.15 Second Amended and Restated Equipment Lease dated as of August
6, 2002 between Wells Fargo Bank Northwest, National
Association, as trustee under MW 1997-1 Trust, and Mail- Well I
Corporation--incorporated by reference to Exhibit 10.26 of
Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30,
2002.
10.16 Second Amended and Restated Guaranty Agreement dated as of
August 6, 2002, among Mail-Well I Corporation as Lessee,
certain of its subsidiaries and Mail-Well, Inc. as Guarantors,
Fleet Capital Corporation as Agent, and the Trust Certificate
Purchasers named therein--incorporated by reference to Exhibit
10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter ended
September 30, 2002.
32
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.17 Second Amended and Restated Participation Agreement dated as of
August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet
Capital Corporation as Arranger and Agent, and the Trust
Certificate Purchasers named therein--incorporated by reference
to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the quarter
ended September 30, 2002.
10.18 Amendment Agreement No. 1 dated as of September 25, 2002, among
Mail-Well I Corporation as Lessee, certain of its subsidiaries
and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as
Agent, and the Trust Certificate Purchasers named
therein--incorporated by reference to Exhibit 10.29 of
Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30,
2002.
10.19 Employment and Executive Severance Agreement dated as of March
10, 2003, between the Company and Paul V. Reilly--incorporated
by reference to Exhibit 10.26 of the Company's Annual Form 10-K
filed March 31, 2003.
10.20 Form of Executive Severance Agreement entered into between the
Company and each of the following: Michel Salbaing, Gordon
Griffiths, Brian Hairston, Keith Pratt, William Huffman, D.
Robert Meyer and Mark Zoeller--incorporated by reference to
Exhibit 10.27 of the Company's Annual Form 10-K filed March 31,
2003.
10.21 Amendment Agreement No. 2 dated as of March 25, 2004 among
Mail-Well I Corporation as Lessee, certain of its subsidiaries
and Mail-Well, Inc. as Guarantor, Fleet Capital Corporation as
Agent, and the Trust Purchasers named therein--incorporated by
reference to Exhibit 10.21 of the Company's Form 10-Q for
quarter ended March 31, 2004.
10.22 Second Amended and Restated Credit Agreement dated March 25,
2004 among Mail-Well, Inc., Mail-Well I Corporation, certain
subsidiaries of Mail-Well I, the lenders under the Second
Amended and Restated Credit Agreement, and Bank of America,
N.A., as administrative agent for the lenders--incorporated
by reference to Exhibit 10.22 of the Company's Form 10-Q for
quarter ended March 31, 2004.
10.23 Second Amended and Restated Security Agreement dated March 25,
2004 among Mail-Well, Inc., Mail-Well I Corporation, certain
subsidiaries of Mail-Well I, the lenders under the Second
Amended and Restated Credit Agreement, and Bank of America,
N.A., as administrative agent for the lenders--incorporated by
reference to Exhibit 10.23 of the Company's Form 10-Q for
quarter ended March 31, 2004.
10.24 Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as amended
--incorporated by reference to Exhibit 10.24 to Cenveo Inc.'s
quarterly report on Form 10-Q for the quarter ended June 30,
2004.
31.1* Certification of Periodic Report by Paul V. Reilly, President
and Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Periodic Report by Michel P. Salbaing, Senior
Vice President--Finance and Chief Financial Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Periodic Report by Paul V. Reilly, President
and Chief Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** Certification of Periodic Report by Michel P. Salbaing, Senior
Vice President--Finance and Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------
* Filed herewith.
** Furnished herewith.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Englewood, state of Colorado, on October 29, 2004.
CENVEO, INC.
By: /S/ PAUL V. REILLY
-----------------------------------------------
Paul V. Reilly, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ MICHEL P. SALBAING
-----------------------------------------------
Michel P. Salbaing, Senior Vice President--
Finance and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
34