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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 1-12551
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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 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value per share The New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
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 February 22, 2005 was $87,220,338.
As of February 22, 2005 the Registrant had 48,711,979 shares of Common
Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part II (Item 5) and Part III of this
form (Items 11, 12, 13 and 14, and part of Item 10) is incorporated by
reference from the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A with respect to the Registrant's Annual Meeting of
Stockholders to be held on or about April 27, 2005.
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 1
The Company................................................. 1
Commercial.................................................. 1
Resale...................................................... 1
Our Industries.............................................. 1
Our Products................................................ 1
Our Services................................................ 2
Our Marketing, Distribution and Customers................... 3
Printing and Manufacturing.................................. 4
Raw Materials............................................... 4
Patents, Trademarks and Brand Names......................... 4
Competition................................................. 5
Backlog..................................................... 5
Employees................................................... 5
Environmental............................................... 5
Available Information....................................... 6
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities......... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 57
Item 9A. Controls and Procedures..................................... 57
Item 9B. Other Information........................................... 57
PART III
Item 10. Directors and Executive Officers of Registrant.............. 58
Item 11. Executive Compensation...................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 61
Item 13. Certain Relationships and Related Transactions.............. 61
Item 14. Principal Accountant Fees and Services...................... 62
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 62
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PART I
ITEM 1. BUSINESS
THE COMPANY
Cenveo is one of North America's largest providers of visual
communication solutions delivered through print and electronic media. Our
products include offset and digital printing, custom and stock envelopes,
and business documents and labels. We also provide communications
consulting, end-to-end project management and eServices. Our operational
footprint spans North America with 84 production facilities and five
fulfillment and distribution centers strategically located in or near major
urban centers throughout North America.
COMMERCIAL
Our commercial business had sales of $1.33 billion in 2004. This
business segment operates 64 manufacturing facilities and specializes in
the printing of annual reports, car brochures, brand marketing collateral,
financial communications, general commercial printing and the manufacturing
and printing of customized envelopes for billing and remittance and direct
mail advertising. In addition, we operate five distribution and fulfillment
centers and provide our customers with other value added services such as
eCommerce.
RESALE
Our resale business had sales of $413 million in 2004. This business
segment operates 20 manufacturing facilities and produces business forms
and labels, custom and stock envelopes and specialty packaging and mailers
generally sold to third-party dealers such as print distributors, forms
suppliers and office-products retail chains.
Refer to Note 19 of our consolidated financial statements included
elsewhere in this report for additional information concerning our
operating and geographic segments.
OUR INDUSTRIES
The printing industry is one of the largest and most fragmented
industries in the United States with total estimated sales of $157 billion
in 2003 generated by more than 44,500 companies, according to Printing
Industries of America, Inc. The printing industry includes general
commercial printing, financial and legal printing, greeting cards, labels
and wrappers, magazines, newspapers, books, other specialty and quick
printing and related services such as prepress and finishing. We estimate
that the market in which we primarily compete has total annual sales of
approximately $49 billion serviced by over 20,000 printing businesses.
Envelope printing and manufacturing combined constitutes an estimated
$3.6 billion market in North America according to the Envelope
Manufacturer's Association. Products in the envelope industry include
customized envelopes for direct mail, transactional envelopes, non-custom
envelopes for resale, and specialty envelopes and filing products.
Printed office products constitutes an estimated $15 billion market,
with the short-run indirect segment of the market in which we compete
estimated at $3.4 billion.
OUR PRODUCTS
Commercial Printing. We serve two primary commercial printing markets
and the growing market for visual communications products and services
other than print. Our general commercial printing markets are: (1) high end
color printed materials, such as annual reports and car brochures, which
are longer run premium products for major national and regional companies
and (2) general commercial printing products such as advertising and
promotional materials for local markets. Our printing products also include
advertising literature, corporate identity materials, calendars, greeting
cards, brand marketing materials, catalogs, maps, CD packaging and direct
mail. We also offer our
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customers services such as design, fulfillment, eCommerce, inventory
management and other enterprise solutions for companies seeking strategic
partners for their branding and other communications priorities.
Envelopes. We serve two primary markets: (1) customized envelopes and
packaging products, including Tyvek(R) mailers used by the U.S. Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (2) envelopes and other products sold to wholesalers,
paper merchants, printers, contract stationers, independent retailers and
office products superstores. In the customized envelope market, we offer
printed customized conventional envelopes for billing and remittance,
direct mail marketers, catalog orders and other end users, such as banks,
brokerage firms and credit card companies. In the wholesale envelope
market, we manufacture and print a broad line of stock and custom envelopes
that are featured in national catalogs for the office products market or
offered through office products retailers and contract stationers.
Business Forms and Labels. We print a diverse line of custom products
for small and mid-size businesses including both traditional and specialty
forms and labels for use with desktop PCs and laser printers. Our printed
office products include business documents, specialty documents produced
through VersaSeal(R), Hi-Reply(TM) and Pro-card(TM) brands and short-run
secondary labels, which are made of paper or film affixed with pressure
sensitive adhesive and are used for mailing, messaging, bar coding and
other applications. These products are generally sold through independent
value-added resellers of office products.
OUR SERVICES
We offer our customers a wide variety of related services to enhance
the value of our printed products and assist them in using digital
technologies to improve the effectiveness of their visual communications.
Among our services are:
Cenveo ColorScience(TM). Cenveo ColorScience is our remote customer
proofing solution. It is the first supply chain end-to-end process control
solution that measures and controls color quality throughout the printing
process from digital file creation to printed output. ColorScience offers
the digital delivery of a hardcopy contract proof at the customer's
location.
Delivery Systems. We offer a flexible "just-in-time" delivery program
which allows customers to receive their products just prior to when they
are needed.
Digital Archiving. We offer customers the option to store digitally
rendered artwork on our file servers. The artwork can then be accessed and
retrieved at any time for use by any authorized design or production group
via high speed transmission links.
Direct-to-Plate and Direct Imaging Technology. We have both
direct-to-plate and direct imaging technologies, which eliminate labor and
material costs in the prepress stage of a printing job. Both technologies
support a completely digital workflow, providing a better printed product,
faster turnaround and in the case of direct imaging, reduced inventory,
capability to print on demand and lower distribution costs.
eCENergy(TM). eCENergy is the Cenveo web portal providing access to a
suite of eSolutions designed to automate and streamline transactions with
customers. Current applications include an online ordering and fulfillment
system called eCatalog, soft and remote proofing and digital asset
management.
Electronic Prepress. We offer fully automated electronic prepress
services that allow the customer to submit artwork and other data in
hardcopy or digitally either on disk, CD or via high speed transmission
line. Hardcopy artwork is digitally scanned and mastered to create a file
for use either in direct-to-plate or direct-to-press applications. We also
provide traditional prepress services to customers who require graphics and
artwork to be photographed, composed and incorporated into files for plate
or direct-to-press applications.
2
Enterprise Solutions. Large national organizations looking for
integrated, managed supply chain solutions can avail themselves of flexible
solutions that connect them to their internal departments and external
customers and suppliers. We have the supply chain management processes,
techniques, systems and resources to manage, produce and deliver their
products from our facilities strategically located across the U.S.
Fulfillment. We have full-service fulfillment centers with on-line
order assembly and bar coding strategically located throughout the U.S.
Many of these centers have digital presses to reduce the costs of inventory
and obsolescence.
Inventory Management Systems. Large national organizations with
centralized purchasing and supply departments serving multiple locations
use our inventory management services. Included in these services are
reports on usage by inventory unit (SKU), available warehouse supply and
summary billing.
Warehousing Services. For customers who prefer to outsource the
management of their printed product, storage and distribution we have the
expertise and capacity to store finished product and drop ship in bulk or
ship on an "as needed" basis.
OUR MARKETING, DISTRIBUTION AND CUSTOMERS
Because of the highly fragmented nature of the general commercial
printing and envelope businesses, and the diversity in customer needs and
preferences, we market most of our general commercial printing and
envelopes locally and regionally. Given the project-oriented nature of
these markets, sales to particular customers may vary significantly from
year to year depending upon the number and size of their communications
plans. Our customer supply agreements are typically on an order-by-order
basis or for a specified period of time. Our sales team is supported by a
technical service team that provides customers with highly customized
printing solutions. Most of our facilities have customer service
representatives that work with the sales team and the customers to manage
orders efficiently and effectively. In some cases, the customer service
representatives have direct responsibility for accounts.
Our marketing efforts for commercial printing differ between two broad
product areas: high impact color products, such as auto brochures, annual
reports and high-end catalogs, and general commercial work. We market high
impact printing primarily on a regional basis, through sales
representatives working out of sales offices across the United States. We
utilize a team approach to customer service relationships that we believe
is unique in the printing industry.
We believe our commercial segment has one of the largest sales forces
in the industry, with approximately 700 sales representatives as of
December 31, 2004. Most of our commercial printing and envelope products
are sold through sales representatives who work directly with customers
from the initial concept through prepress, proofing, production and
delivery. Because our sales representatives are our primary contacts with
our customers, our goal is to attract, train and retain an experienced,
qualified sales force in each of our businesses. Sales representatives
typically are compensated by commission, which generally depends on order
size and type, prepress work, reruns or rework and overall profitability of
the job. For our growing list of enterprise customers we have account
teams, some members of which are located on the customer's premises.
Through our "Strategic Sales" initiative, we offer customers our full
spectrum of products and services such as design, fulfillment, eCommerce
and inventory management. Our Strategic Sales team is organized to focus on
vertical markets including travel and leisure, health services, financial
services and technology and to offer customers in these markets customized
solutions to their visual communications needs.
In our resale segment, our products are marketed under "Quality Park".
The resale segment sells most of its products through 5 major channels;
independent solution providers, commercial printers, ad specialty dealers,
quick printers and office products distributors. Our resale segment sells
its products
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primarily through catalogs, telemarketing and the Internet to over 22,000
value-added resellers who distribute our products to end users.
We coordinate sales efforts among geographic regions within our
operating segments, and among the operating businesses themselves, in order
to compete for national account business, enhance the internal
dissemination of successful new product ideas, efficiently allocate our
production equipment, share technical expertise and increase company-wide
selling of specialty products manufactured at selected facilities.
Our direct customer base totals approximately 30,000. The customers of
our commercial segment include Fortune 500 companies, graphic designers and
advertising agencies, regional and local businesses, insurance and finance
companies, government agencies and not-for-profit organizations. The
customers of our resale segment total over 22,000 distributors and office
products retail businesses as well as the U.S. Postal Service. None of our
customers accounted for more than 5% of revenue in 2004.
PRINTING AND MANUFACTURING
Our commercial segment operates 64 manufacturing facilities throughout
the United States and Canada. Our 36 commercial printing plants combine
advanced prepress technology with high-quality web and sheet-fed
lithographic presses, digital presses and extensive binding and finishing
operations. Our 28 envelope plants produce envelopes from either flat sheets
which are die-cut into pre-shaped blanks or rolls of paper which are run on
our web machines. The paper is folded into an envelope and is glued at the
seams and on the flap. Flat sheets are often printed before the envelope is
produced. Printing can also occur during the folding process or after the
envelope is produced. Web machines are typically used for larger runs with
multiple colors and numerous features. Die cut machines, which require a
preliminary step to provide die cut envelope blanks from paper sheets, are
used primarily for smaller orders typically including customized value-added
features. The manufacturing process used is dependent upon the size of a
particular order, custom features required, machine availability and
delivery requirements. Some of our commercial facilities operate seven days
a week, 24 hours a day to meet customer requirements.
In our resale segment, we operate 20 facilities in the United States.
We design and print business forms and labels and envelopes for a wide
range of businesses. A majority of the orders for these products are sent
to us electronically. We perform prepress and plate making functions and
print on proprietary presses. Six of our resale facilities manufacture
stock envelopes that are sold to paper merchants and office products retail
chains.
RAW MATERIALS
The primary materials used in each of our businesses are paper, ink,
film, offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a number
of suppliers and have not experienced any significant difficulties in
obtaining the raw materials necessary for our operations. We have
implemented an inventory management system in which a limited number of
paper suppliers provide all of our paper needs. These suppliers are
responsible for delivering paper on a "just-in-time" basis directly to our
facilities. We believe that this system has allowed us to enhance the
flexibility and speed with which we can serve customers, improve pricing on
paper purchases, eliminate a significant amount of paper inventory and
reduce costs by reducing warehousing capacity. We believe that we purchase
our materials and supplies at competitive prices due to our volume
leverage.
PATENTS, TRADEMARKS AND BRAND NAMES
We market products under a number of trademarks and brand names. We
also hold or have rights to use various patents relating to our businesses,
which expire at various times through 2012. Our sales do not materially
depend upon any single or group of related patents.
4
COMPETITION
Commercial printing is highly competitive and fragmented. We compete
against a diminishing number of large, diversified and financially strong
printing companies, as well as regional and local commercial printers, many
of which are capable of competing with us in both volume and production
quality. Although there are a significant number of buyers who are price
sensitive, we also believe that customer service and high quality products
are important competitive factors, especially to companies seeking
enterprise solutions and high impact color products. We believe we provide
premium quality and superior customer service while maintaining competitive
prices through stringent cost control efforts. The main competitive factors
in our markets are customer service, product quality, reliability,
flexibility, technical capability and price. We believe we compete
effectively in each of these areas.
In selling our envelope products, we compete with a few multi-plant and
many single-plant companies that primarily service regional and local
markets. We also face competition from alternative sources of communication
and information transfer such as electronic mail, the Internet, interactive
videodisks, interactive television, electronic retailing and facsimile
machines. Although these sources of communication and advertising may
eliminate some domestic envelope sales in the future, we believe that we
will experience continued demand for envelope products due to (1) the
ability of our customers to obtain a relatively low-cost information
delivery vehicle that may be customized with text, color, graphics and
action devices to achieve the desired presentation effect, (2) the ability
of our direct mail customers to penetrate desired markets as a result of
the widespread delivery of mail to residences and businesses through the
U.S. Postal Service and the Canada Post Corporation and (3) the ability of
our direct mail customers to include return materials in their mail-outs.
Principal competitive factors in the envelope business are quality, service
and price. Although all three are equally important, various customers may
emphasize one or more over the others. We believe we compete effectively in
each of these areas.
In selling our printed business forms and labels products, we compete
with other document and labels print facilities with nationwide
manufacturing locations and regional and local printers, which typically
sell within a 100- to 300-mile radius of their plants. We compete mainly on
quick turn customization of products and unparalled service levels.
BACKLOG
At December 31, 2004 and 2003, the backlog of customer orders to be
produced or shipped in the next 120 days was approximately $127.0 million
and $113.0 million, respectively.
EMPLOYEES
We employed approximately 10,000 people as of December 31, 2004, and
approximately 1,800 of our employees at the various facilities are
represented by unions affiliated with the AFL-CIO or Affiliated National
Federation of Independent Unions. Collective bargaining agreements, each of
which cover the workers at a particular facility, expire from time to time
and are negotiated separately. Accordingly, we believe that no single
collective bargaining agreement is material to our operations as a whole.
We are committed to employee development and increased organizational
effectiveness. We operate Cenveo University, our in-house training program,
which provides courses in process improvement, quality control, supervisory
and management skills and increasing employee empowerment. Complementing
our in-house initiatives, Cenveo contracts leading industry experts to
provide skill-building courses to our sales representatives and managers.
ENVIRONMENTAL
Our operations are subject to federal, state and local environmental
laws and regulations including those relating to air emissions, waste
generation, handling, management and disposal, and remediation of
contaminated sites. We have implemented environmental programs designed to
ensure that we
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operate in compliance with the applicable laws and regulations governing
environmental protection. Our policy is that management at all levels be
aware of the environmental impact of operations and direct such operations
in compliance with applicable standards. We believe that we are in
substantial compliance with applicable laws and regulations relating to
environmental protection. We do not anticipate that material capital
expenditures will be required to achieve or maintain compliance with
environmental laws and regulations. However, there can be no assurance that
newly discovered conditions or new or stricter interpretations of existing
laws and regulations will not result in material expenses.
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 Exchange Act as
soon as reasonably practicable after such documents are filed
electronically with the Securities and Exchange Commission. In addition,
our earnings conference calls are archived for replay on our website and
presentations to securities analysts are also included on our website.
ITEM 2. PROPERTIES
We occupy 84 printing and manufacturing facilities in the United States
and Canada and five print fulfillment and distribution centers, of which 36
are owned and 53 are leased. In addition to on-site storage at these
facilities, we store products in 19 warehouses, of which four are owned,
and we lease 21 sales offices. We also lease 47,153 square feet of office
space in Englewood, Colorado for our corporate headquarters. We believe
that we have adequate facilities for the conduct of our current and future
operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and
estimable. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on the Company. In the case of administrative proceedings related to
environmental matters involving governmental authorities, management does
not believe that any imposition of monetary damages or fines would be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CVO." At February 22, 2005, there were approximately 458
shareholders of record and, as of that date, we estimate that there were
more than 7,534 beneficial owners holding stock in nominee or "street"
name. The following table sets forth, for the periods indicated, the range
of the high and low sales prices for our common stock as reported by the
NYSE:
2004 HIGH LOW
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First Quarter........................................... $5.00 $3.53
Second Quarter.......................................... $4.52 $2.60
Third Quarter........................................... $3.70 $2.40
Fourth Quarter.......................................... $3.70 $2.60
2003 HIGH LOW
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First Quarter........................................... $2.55 $1.85
Second Quarter.......................................... $3.13 $2.05
Third Quarter........................................... $3.60 $2.76
Fourth Quarter.......................................... $4.61 $3.58
We have not paid a dividend on common stock since our incorporation and
do not anticipate paying dividends in the foreseeable future because our
senior secured credit facility, senior notes and senior subordinated notes
limit our ability to pay common stock dividends.
No purchases of our common stock were made by or on behalf of the
Company or any affiliated purchaser during the fourth quarter of 2004.
The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Equity
Compensation Plan Information" appearing in the Company's Proxy Statement
filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting
of Stockholders is incorporated herein by reference.
7
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived
from the historical audited financial statements of the Company. The
results of acquisitions have been included in the income statement data of
the Company from their respective acquisition dates in accordance with
purchase method accounting for acquisitions. The data presented below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated
financial statements and the related notes included elsewhere herein.
YEAR ENDED DECEMBER 31
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2004 2003(1) 2002(2) 2001(3) 2000
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................ $1,742,914 $1,671,664 $1,728,705 $1,868,768 $2,044,350
Income (loss) from continuing
operations..................... $ (20,938) $ 3,924 $ (73,488) $ (45,213) $ 36,193
Income (loss) per diluted share
from continuing operations..... $ (0.44) $ 0.08 $ (1.54) $ (0.95) $ 0.73
Total assets..................... $1,174,747 $1,111,446 $1,107,367 $1,476,867 $1,683,592
Total long-term debt, including
current maturities............. $ 769,769 $ 748,961 $ 763,899 $ 855,221 $ 922,351
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(1) In 2003, reported net income was $5.2 million, or earnings of $0.11 per
share, which included a $0.3 million charge for a cumulative effect of
change in accounting principle and a $1.5 million gain on a disposal of
discontinued operations.
(2) In 2002, reported net loss was $202.1 million, or a loss of $4.24
per share, which included a charge of $111.7 million for a cumulative
effect of change in accounting principle and a $16.9 million for the
loss on a disposal of discontinued operations.
(3) In 2001, reported net loss was $136.2 million, or a loss of $2.86
per share, which included a charge of $91.0 million for the loss on a
disposal of discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
Cenveo is one of North America's largest providers of visual
communication solutions delivered through print and electronic media. Our
products include offset and digital printing, custom and stock envelopes
and business documents and labels. We also provide communications
consulting, end-to-end project management and eServices. We have production
facilities and fulfillment and distribution centers strategically located
throughout North America. We are organized into two business segments--
commercial and resale.
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. The
commercial segment also offers services such as design, fulfillment,
eCommerce and inventory management. These products and services are
provided directly to national and local customers. Our commercial segment
consists of 36 printing plants, 28 envelope plants and five distribution
and fulfillment centers.
Our resale segment produces business forms and labels, custom and stock
envelopes and specialty packaging and mailers. These products are generally
sold through print distributors, business forms suppliers, office products
retail chains and the Internet. The resale segment operates 20
manufacturing facilities.
REVIEW OF RESULTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations includes an overview of our consolidated results from
2002 through 2004 followed by a discussion of the results of each of our
business segments for the same period.
8
It is important to consider the economic environment for the printing
industry when evaluating our results from 2002 to 2004. The recession that
began in 2001 was more severe in the printing industry than in the general
economy and many of our markets lagged the overall economy in recovering
from the recession. In 2004, most of our markets had not yet returned to
pre-recession growth rates. Excess capacity in concert with declining or
weak volume growth in many of our markets resulted in extreme competitive
pricing pressures. In addition, the cost of paper, film and other raw
materials increased significantly in 2004. The cost of uncoated paper,
which is the primary raw material used in manufacturing envelopes, declined
slightly in 2002 and 2003 and increased approximately 17% in 2004. Our
paper suppliers also increased uncoated paper prices approximately 9% in
early 2005. The prices of coated paper, the primary raw material used by
our commercial printing operations, were relatively stable in 2002 and
2003. Certain grades of coated paper increased as much as 18% in 2004. Our
paper suppliers have not announced increases in the prices of coated papers
in 2005.
In our commercial segment, approximately 50% of our commercial printing
sales and approximately 40% of our custom envelope sales are related to
advertising and direct mail promotions. Spending by our customers on
printed advertising materials and direct mail promotions has increased over
the last three years; however, our customers are not spending as they did
prior to the recession.
In our resale segment, the demand for traditional business forms,
especially continuous and multi-part forms, has declined significantly over
the last several years as businesses have acquired laser-printing
capabilities. Many of our customers have consolidated and pricing has been
extremely competitive.
To meet the challenges presented by the economic environment in which we
operate and the markets we serve, we have taken significant actions. We do
not expect our markets to return to pre-recession growth rates over the next
several years. We believe that our success in this environment will be
dependent on offering products and services that provide customers with
solutions to reduce cycle time and total cost of ownership. We believe that
if we offer our customers "one-stop shopping" with efficiency and quality,
we will succeed by growing market share. In 2003, we reorganized Cenveo to
operate as one company and to make it easier for customers to purchase our
products and services. As we are now organized, we offer customers products
and services and production capabilities that clearly differentiate us from
our competition. In addition, we have created a strategic sales team to
service those customers that purchase a broader range of multiple products
and services and utilize our national manufacturing capabilities. In 2004,
sales managed by this team increased $43 million. In 2002, we expanded our
service offering by acquiring an operation with national distribution and
fulfillment capabilities. In 2004, we strengthened our market position in
two key local markets by acquiring Valco Graphics in Seattle, Washington and
Waller Press in San Francisco, California.
To compete effectively in an environment of excess capacity and rising
costs, we have focused on improving productivity and creating operating
leverage. In late 2000, we began aligning our capacity and costs with the
demands of our customers, and we consolidated 12 envelope facilities, 8
printing operations and 6 business forms plants. Over the last three years
we replaced 13 offset presses with 6 newer, more productive presses without
reducing our revenue generating capacity. These actions enabled us to
mitigate much of the impact of lower margins due to lower selling prices
and increased costs. The announced 2005 price increase of uncoated paper
will increase our costs by approximately $10.0 million. Our margins in 2005
will be reduced to the extent we are unable to recover this cost through
higher selling prices or other cost reduction measures.
We are defending our share of the business forms market by improving
customer service, on-time deliveries and quality. We began to see success
from this strategy in 2004. The sales of our documents division declined
only 4% in 2004 compared to a decline of 7% in 2003.
In 2003, sales of office products to our wholesale customers and office
products superstores were 7% lower than in 2002. Much of this sales decline
was due to a shift by consumers to the office products superstores where our
market position was weak. Our strategy in 2004 was to strengthen our
position with key office products superstores and regain our share of the
office products market. We
9
have been successful executing this strategy. Our sales in this channel were
13% higher in 2004 than in 2003.
In 2001, we recognized the need to reduce and restructure our debt. We
sold our prime label business and our office products distribution business
in 2002. We sold the filing products division of our resale segment and the
photo envelope business of our commercial segment in 2002. We also sold
certain digital graphics operations of our commercial segment in 2003. The
net proceeds from these divestitures, which totaled $122.3 million, were
applied to our outstanding debt. In 2002, we replaced bank term debt with
$350 million of 9 5/8% senior notes due 2012. In 2004, we refinanced our
8 3/4% senior subordinated notes due 2008 with 7 7/8% senior subordinated
notes due 2013 and extended our senior secured credit facility to 2008.
Other than our credit agreement which expires in 2008, we have no
significant liquidity events before 2012.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income as well
as the net sales and operating income of our business segments used
internally to assess operating performance. Division sales exclude sales of
divested operations and division operating income excludes unallocated
corporate expenses, restructuring, impairment and other charges, the profits
of divested operations and charges related to divestitures. Our fiscal year
ends on the Saturday closest to the last day of the calendar year, and as a
result, 2004 was a 53-week year. Because our business tends to be slow
during the holiday season, we do not believe that 53rd week had a
significant impact, unless otherwise noted, on the comparability of our
results in 2004 with 2003 and 2002 which were 52-week years.
DECEMBER 31
--------------------------------------------
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
Division net sales................................. $1,742,914 $1,668,792 $1,672,260
Divested operations........................... -- 2,872 56,445
---------- ---------- ----------
Net sales.......................................... $1,742,914 $1,671,664 $1,728,705
========== ========== ==========
Division operating income.......................... $ 97,797 $ 104,770 $ 93,042
Unallocated corporate expenses................. (19,655) (17,979) (18,970)
Restructuring, impairment and other charges.... (5,407) (6,860) (74,551)
Divested operations............................ -- 167 3,301
Gain (loss) on operations held for sale........ -- 117 (19,278)
---------- ---------- ----------
Operating income (loss)............................ 72,735 80,215 (16,456)
Interest expense............................... 73,125 71,891 70,461
Loss from the early extinguishment of debt..... 17,748 -- 16,463
Other non-operating expenses................... 2,459 1,819 1,754
---------- ---------- ----------
Income (loss) before income taxes.................. (20,597) 6,505 (105,134)
Income tax expense (benefit)................... 341 2,581 (31,646)
---------- ---------- ----------
Income (loss) from continuing operations........... (20,938) 3,924 (73,488)
Gain (loss) on disposal of discontinued
operations................................... 1,230 1,548 (16,868)
Cumulative effect of change in accounting
principle.................................... -- (322) (111,748)
---------- ---------- ----------
Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104)
========== ========== ==========
Earnings (loss) per share--basic and diluted....... $ (0.41) $ 0.11 $ (4.24)
========== ========== ==========
NET SALES
Net sales increased 4% in 2004 reflecting growth in the national
accounts of our commercial segment and higher sales of office products in
our resale segment. Net sales decreased 3% in 2003.
10
Sales in 2002 included sales of $42.3 million for the filing products
division of our resale segment that was sold in August 2002 and sales of
$14.1 million for the digital graphics operations of our commercial segment
that were sold in February 2003.
OPERATING INCOME
Operating income in 2004 declined $7.5 million, or 9%. This decline was
due to lower operating performance of our two business segments which was
7% lower in 2004 than 2003. In 2003, operating income improved
significantly over results in 2002 which included significant restructuring
and impairment charges. The operating performance of our two business
segments increased 13% in 2003.
UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include
the costs of our corporate headquarters and certain expenses not allocated
to our segments. The increase in unallocated corporate expenses in 2004 was
due, in part, to an increase of $0.6 million in the cost of workers'
compensation claims incurred prior to 2004. Over the last three years, it
has been our practice to allocate the cost of current year claims to our
segments but not to allocate the cost of changes in the development of
claims incurred in prior years. The other major increase in unallocated
corporate expenses was our cost to comply with the Sarbanes- Oxley Act of
2002. Our out-of-pocket cost of compliance was approximately $0.8 million.
Unallocated corporate expenses were lower in 2003 than 2002 due to lower
workers' compensation expense on claims incurred in prior years partially
offset by the costs associated with training programs initiated in 2003 to
actively involve our employees in improving service, quality, efficiency and
innovation.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. We continually evaluate
our operations for opportunities to optimize capacity and reduce costs.
Since 2000, we have rationalized and realigned capacity to operate fewer
facilities without sacrificing revenue capability. We have taken other
actions to reduce the cost structures of our operations to mitigate the
impact of lower margins. This process is ongoing as our industry and
markets continue to evolve. We anticipate additional restructuring charges
in 2005.
2004: During 2004, restructuring and impairment charges totaled $5.4
million. We closed our envelope plant in Bensalem, Pennsylvania and moved
most of its equipment into our printing operation in Philadelphia. The cost
of this plant closure was $1.2 million, net of a $1.4 million gain on the
sale of the plant building and inclusive of impairment charges of $1.0
million.
We acquired printing operations in Seattle, Washington and San
Francisco, California during 2004. A key aspect of our strategy in
acquiring these operations was to consolidate our existing operations in
these two cities with the newly acquired operations. The cost incurred
during 2004 to merge these operations was $1.1 million, including asset
impairment charges of $0.8 million.
In December 2004, we negotiated the termination of a lease on a
building in New York City that had been used by an operation that was
closed in 2002. The cost to terminate the lease and write off the
unamortized value of leasehold improvements was $1.2 million.
During the development of our operating plans for 2005, we made a
decision to close a small printing operation in the first quarter of 2005
and consolidate its production into another facility. Accordingly, we
recorded an impairment charge of $1.4 million on the equipment that will be
taken out of service and $0.1 million of lease termination fees. We expect
to incur expenses of approximately $0.8 million to complete this closure in
2005.
Other asset impairments recorded in 2004 totaled $0.4 million.
2003: In 2003, restructuring and other charges totaled $6.9 million. We
closed our web printing operation in Indianapolis, Indiana and redeployed
its two web presses and related equipment to our facilities in St. Louis,
Missouri and Baltimore, Maryland. The cost to move this equipment was $1.1
million. We also incurred employee separation expenses of $1.5 million in
connection with workforce reductions across most of our operations.
11
The 2003 restructuring charge included credits of $1.0 million for the
reversals of reserves recorded in 2001 and 2002 that were no longer
required.
We recorded a charge of $5.3 million in 2003 to cover the cost of
settling a lawsuit after an unfavorable award was granted by a jury in Los
Angeles County, California to an ex-employee who had contested his
termination. We elected to settle this dispute in order to avoid the
expense and risk of further litigation and appeals.
2002: During 2002, restructuring, impairment and other charges totaled
$74.6 million. In 2001, we began a major consolidation of the envelope
manufacturing facilities in our commercial segment to reduce excess
internal capacity and improve the utilization of the equipment and
resources at our other envelope plants in the United States and Canada.
This consolidation was completed in 2002 and the cost incurred in 2002
totaled $26.6 million.
We closed a commercial printing operation in New York City at a cost of
$4.2 million; business forms plants in Clearwater, Florida and Denver,
Colorado at a cost of $2.0 million; and an envelope operation of our resale
segment in Hattiesburg, Mississippi at a cost of $2.4 million. In addition,
we began the realignment of our web presses in Indianapolis that was
completed in 2003. The cost incurred in 2002 was $3.1 million.
Other charges include $21.9 million incurred in connection with the
refinancing of an operating lease, consulting fees of $4.4 million incurred
in connection with business improvement initiatives, severance expenses of
$4.8 million, asset impairments of $3.6 million and $1.6 million for other
restructuring activities including the reversal of a $0.5 million excess
accrual.
A further discussion of restructuring, impairment and other charges
can be found in Note 14 to the consolidated financial statements.
GAIN (LOSS) ON OPERATIONS HELD FOR SALE
The table below summarizes charges we recorded in 2003 and 2002 related
to operations that had been held for sale.
2003 2002
---- --------
(IN THOUSANDS)
Gain (loss) on assets held for sale......................... $117 $ (6,436)
Impairment on operations formerly held for sale............. -- (12,842)
---- --------
$117 $(19,278)
==== ========
IMPAIRMENT LOSS ON ASSETS HELD FOR SALE. In 2002, we completed the sale
of the filing products division. We incurred a $6.1 million loss in
connection with this divestiture. We also reduced the value of the digital
graphics assets held for sale at the end of 2002 by $0.3 million. These
assets were sold in 2003.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE. In 2001, an operation
that is now an important part of our resale segment was held for sale. In
2002, we made the decision not to sell this business. Accordingly, we
reversed the tax benefit of $11.5 million expected to be realized upon the
sale that had been recorded in 2001 and expenses of $1.1 million that had
been accrued but not incurred. We also discontinued our efforts to sell one
of the digital graphics operations that had been held for sale at the end
of 2001 and recorded an impairment charge of $2.4 million.
12
INTEREST EXPENSE
Interest expense in 2004, 2003 and 2002 was as follows:
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Total interest expense..................................... $73,125 $71,891 $76,031
Less: Allocated to discontinued operations................. -- -- (5,570)
------- ------- -------
Reported interest expense.................................. $73,125 $71,891 $70,461
======= ======= =======
Interest expense increased $1.2 million in 2004 compared to 2003. In
2004, interest expense reflected our average outstanding debt of $811.4
million during the year and a weighted average interest rate of 8.2%
compared to our average outstanding debt of $792.7 million in 2003 and a
weighted average interest rate of 8.4% for 2003. Our average outstanding
debt and weighted average interest rate in 2004 reflect the issuance in
January of $320 million of 7 7/8% senior subordinated notes due 2013, the
proceeds of which were used to redeem the $300 million of 8 3/4% senior
subordinated notes due in 2008. The increase in interest expense in 2004
was due primarily to an extra week of interest.
Interest expense in 2002 excluded the interest expense that was
allocated to discontinued operations. Total interest expense declined 5.4%
in 2003 compared to 2002. In 2003, total interest expense reflected our
average outstanding debt of $792.7 million during the year and a weighted
average interest rate of 8.4% compared to our average outstanding debt of
$890.6 million and a weighted average interest rate of 7.9% for 2002. The
average outstanding debt decreased in 2003 primarily due to the application
of the proceeds from our divestitures to the repayment of debt. Our
weighted average interest rate increased in 2003 as a result of the
issuance of $350 million of 9 5/8% senior notes in March 2002, the proceeds
of which were used primarily to repay bank debt that accrued interest at a
lower variable rate. In November 2002, we redeemed our 5% convertible
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.
In 2002, we wrote off $16.5 million of unamortized debt issuance costs
related to the bank credit facility that was refinanced.
INCOME TAXES
2004 2003 2002
-------- ------- --------
(IN THOUSANDS)
Income tax benefit for U.S. operations.................... $(12,302) $(8,890) $(42,171)
Income tax expense for foreign operations................. 12,643 11,471 10,525
-------- ------- --------
Income tax expense (benefit)............................ $ 341 $ 2,581 $(31,646)
======== ======= ========
Effective income tax rate............................... (1.7)% 39.7% 30.1%
======== ======= ========
The income tax expense reported in 2004 on the loss before income taxes
was primarily the result of establishing valuation allowances on certain
deferred tax assets and the tax expense recorded for foreign operations
that generated taxable income in 2004.
13
The effective tax rate in 2003 approximates the statutory effective tax
rate considering the tax jurisdictions in which we operate. In 2002, the
low effective tax rate was the result of significant nondeductible charges
included in income from continuing operations before income taxes.
GAIN (LOSS) 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 2004 for $2.0 million. The proceeds, net of
tax, have been recorded as a gain on disposal of discontinued operations in
2004.
The gain on the disposal of discontinued operations recorded in 2003
was primarily the result of adjustments made to the tax impact of the sale
of our prime label business in 2002.
The loss on the disposal of discontinued operations recorded in 2002
reflects the additional loss on the divestitures of the two businesses
reported as discontinued operations in 2001 and sold in 2002.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In 2003, we adopted Financial Accounting Standards Board Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("FIN 46"). The implementation of FIN 46
required us to consolidate a trust that is leasing equipment to us under an
operating lease. In addition to the equipment and the debt of the trust, we
recorded an after-tax charge of $0.3 million as the effect of this
accounting change in 2003.
We adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets ("SFAS No. 142"), on January 1, 2002. SFAS No.
142 required an impairment test of the goodwill recorded for each of our
reporting units as of that date. We determined that $111.7 million of the
goodwill associated with our commercial printing operations (formerly the
commercial printing segment) was impaired. This impairment loss was
reported as the effect of a change in accounting principle in 2002.
SEGMENT OPERATIONS
Our chief executive officer monitors the performance of the ongoing
operations of each of our business segments. We assess performance based on
division net sales and division operating income. The summaries of sales
and operating income of our two segments have been presented to show each
segment without the sales of divested operations ("Division net sales") and
to show the operating income of each segment without the results of
divested operations and excluding restructuring, impairment and other
charges ("Division operating income"). Sales and operating income of
operations divested and restructuring, impairment and other charges are
included in the tables below to reconcile segment sales and operating
income reported in Note 19 to our consolidated financial statements to
division net sales and division operating income on which our segments are
evaluated.
14
COMMERCIAL
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
Segment sales...................................... $1,329,778 $1,272,525 $1,268,367
Divested operations............................ -- (2,872) (14,105)
---------- ---------- ----------
Division net sales................................. $1,329,778 $1,269,653 $1,254,262
========== ========== ==========
Segment operating income........................... $ 50,538 $ 58,704 $ 1,513
Restructuring, impairment and other charges.... 4,158 1,198 44,894
Divested operations............................ -- (167) (598)
---------- ---------- ----------
Division operating income.......................... $ 54,696 $ 59,735 $ 45,809
========== ========== ==========
Division operating income margin................... 4% 5% 4%
Division net sales of our commercial segment increased $60.1 million,
or 5%, in 2004 compared to net sales in 2003. This increase was due to the
following:
* Sales to the customers managed by our strategic sales team increased
$42.7 million, or 28%. Sales in our local markets declined $11.2
million in 2004.
* In 2004, our newly acquired operations in Seattle and San Francisco
contributed sales of $15.6 million including $1.9 million of sales
managed by our strategic sales team.
* The favorable impact of the strength of the Canadian dollar on the
sales of our Canadian operations was $14.2 million.
Division operating income of our commercial segment declined $5.0
million, or 8%, in 2004 compared to 2003. Excluding the impact of
acquisitions and foreign currency, gross profit increased $11.0 million as
a result of the increase in sales and lower fixed manufacturing expenses.
The increase in gross profit, however, was offset by the following:
* Selling expenses increased $9.9 million. In 2003, we formed a
strategic sales team to build sales with large customers that
purchase multiple products and services from multiple facilities. The
incremental cost of this team in 2004 was approximately $4.9 million.
Increased expenses associated with our local market sales were
approximately $5.0 million.
* Administrative expenses increased $6.9 million. Included in this
increase were higher information technology costs of $3.5 million and
expenses of $1.2 million associated with changing our name to Cenveo.
* In 2004, we recorded the remaining contingent purchase price of $14.2
million for an acquisition we completed in 2002. This contingent
purchase price was recorded as a customer-related intangible asset
that is being amortized over the remaining four-year life of a service
agreement. As a result, amortization expense increased $3.6 million
in 2004.
Division operating income in 2004 increased $4.4 million as a result of
the foreign currency impact of the strength of the Canadian dollar, the
results of our acquisitions and lower losses on dispositions of assets.
Division net sales of our commercial segment increased $15.4 million in
2003 compared to net sales in 2002. This increase was due to the following:
* Accounts designated as strategic sales accounts increased $42.2
million in 2003. Most of this increase was due to the acquisition in
August 2002 of the in-house printing and fulfillment operations of
American Express Company.
* Sales in our local markets declined $47.3 million. Lower average
selling prices for our envelope products contributed significantly to
this decline.
15
* The favorable impact of the strength of the Canadian dollar on the
sales of our Canadian operations was $20.5 million.
Division operating income of the commercial segment increased $13.9
million, or 30%, in 2003 compared to 2002. The increase in operating income
was due to the following:
* Excluding the impact of acquisitions and foreign currency, gross
profit declined $7.8 million. This was due primarily to lower volume
in our local markets and lower selling prices of our envelope
products partially offset by lower manufacturing overhead.
* Selling and administrative expenses were $15.5 million lower in 2003.
These reductions were the result of lower sales, the closure of our
printing operation in New York City in the fourth quarter of 2002,
the closure of our web printing operation in Indianapolis in the
first quarter of 2003 and other initiatives to reduce costs.
* The favorable impact on operating income of the strength of the
Canadian dollar and the results of the acquisition completed in 2002
totaled approximately $6.2 million.
RESALE
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Segment sales........................................... $413,136 $399,139 $460,338
Divested operations................................. -- -- (42,340)
-------- -------- --------
Division net sales...................................... $413,136 $399,139 $417,998
======== ======== ========
Segment operating income................................ $ 43,102 $ 44,703 $ 43,298
Restructuring, impairment and other charges......... -- 332 6,639
Divested operations................................. -- -- (2,703)
-------- -------- --------
Division operating income............................... $ 43,102 $ 45,035 $ 47,234
======== ======== ========
Division operating income margin........................ 10% 11% 11%
Division net sales of our resale segment increased $14.0 million, or 4%,
in 2004 compared to 2003. Sales of office products to our retail, wholesale
and trade customers were up 13% from the prior year. Lower net pricing,
however, reduced our overall revenue growth from these customers to 4%.
Sales of business forms, labels and envelopes to our distribution customers
increased 4%. This increase was driven by strong sales of business labels
which were up 12%.
Division operating income of our resale segment declined $1.9 million,
or 4%, in 2004 compared to 2003. Gross profit declined $4.8 million driven
by lower selling prices of office products, and higher paper costs and
higher manufacturing overhead. Lower selling, general and administrative
expenses partially offset the decline in gross profit.
Division net sales in 2003 decreased $18.9 million, or 5%, compared to
2002. Sales of office products to our wholesale and trade customers
declined 7% in 2003. Sales of business forms, labels and envelopes sold to
distributors in 2003 were 3% lower than 2002. A 7% decrease in sales of
business forms drove this decline.
Division operating income declined $2.2 million, or 5%, in 2003
compared to 2002. Because of the decline in sales, gross profit was $3.8
million lower than in 2003. Lower administrative expenses in 2003 partially
offset the impact of the decline in gross profit.
16
LIQUIDITY AND CAPITAL RESOURCES
Our cash flows from operating, investing and financing activities, as
reflected in the consolidated statements of cash flows, are summarized as
follows:
2004 2003 2002
-------- -------- ---------
(IN THOUSANDS)
Cash provided by (used in):
Operating activities................................ $ 37,991 $ 59,459 $ 22,971
Investing activities................................ (35,597) (29,856) 100,819
Financing activities................................ (1,749) (33,256) (110,222)
Effect of exchange rate changes on cash............. (156) 1,310 (985)
Discontinued operations............................. -- -- (10,827)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents.... $ 489 $ (2,343) $ 1,756
======== ======== =========
OPERATING ACTIVITIES. In 2004, cash provided by our operations was
$21.5 million lower than cash provided in 2003. This decrease was due
primarily to our loss from continuing operations and the increase in
working capital of $11.0 million compared to the $12.9 million decrease in
working capital in 2003.
In 2003, cash provided by our operations increased $36.5 million. This
increase was due primarily to income from continuing operations and
reductions in working capital in 2003 compared to 2002.
INVESTING ACTIVITIES. Acquisition spending was $13.2 million in 2004,
$2.8 million in 2003 and $2.6 million in 2002. In 2004, we purchased Valco
Graphics in Seattle and Waller Press in San Francisco. In 2002, we
purchased the in-house printing and fulfillment operations of American
Express Company. Acquisition spending includes contingent purchase price of
$3.2 million in 2004 and $2.8 million in 2003 paid to American Express
Company.
Capital expenditures were $27.4 million in 2004, $31.6 million in 2003
and $30.9 million in 2002. We anticipate spending $20.0 million to $25.0
million on capital investments in 2005.
In 2004, the purchaser of a business we sold in 2000 redeemed a note
issued in connection with the sale for $2.0 million. In 2003, we received
net proceeds of $3.9 million from the sale of certain digital graphics
operations of our commercial segment. In 2002, we received net proceeds of
$31.5 million from the sale of our filing products division, $67.0 million
from the sale of our prime label business, $20.5 million from the sale of
Curtis 1000 and $3.3 million from the sale of our photo envelope business.
Proceeds from the sales of property and equipment were $3.0 million in
2004, $0.7 million in 2003 and $12.0 million in 2002.
FINANCING ACTIVITIES. At December 31, 2004, our outstanding debt was
$769.8 million, an increase of $20.8 million from December 31, 2003. In
January 2004, we sold $320 million of 7 7/8% senior subordinated notes due
2013. The proceeds of these notes were used to purchase the $300 million of
8 3/4% senior subordinated notes due 2008. The redemption premiums incurred
to purchase the 8 3/4% notes totaled $13.5 million. The cost incurred to
issue the new notes was $7.2 million. In March 2004, we amended our $300
million senior secured credit facility to extend its term to June 2008. The
cost of this amendment was $1.9 million.
At December 31, 2003, our outstanding debt was $749.0 million which
included the $17.0 million of debt held by a trust that was consolidated in
accordance the requirements of FIN 46. In 2003, we used $32.8 million of
our cash flow to reduce outstanding debt.
17
In 2002, we reduced outstanding debt by $91.6 million using proceeds
from divestitures. We incurred debt issuance cost of $18.6 million in
connection with the sale of our 9 5/8% senior notes due 2012 and the
refinancing of our senior secured credit facility.
At December 31, 2004, we had outstanding letters of credit of
approximately $25.2 million related to performance and payment guarantees.
In addition, we had outstanding letters of credit of $1.0 million issued 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.
Our current credit ratings are as follows:
SENIOR SENIOR
SECURED CREDIT SENIOR SUBORDINATED
REVIEW AGENCY FACILITY NOTES NOTES LAST CHANGE
------------- -------------- ------ ------------ -------------
Standard & Poor's.................. BB- B+ B- December 2004
Moody's............................ Ba3 B1 B3 April 2004
The terms of our existing debt do not have any rating triggers, and we
do not believe that our current ratings will impact our ability to raise
additional capital.
We expect internally generated cash flow and the financing available
under our senior secured credit facility will be sufficient to fund our
working capital needs and long-term growth; however, this cannot be
assured. Based on the certificate filed January 21, 2005, we had $110.8
million of unused credit available under our senior secured credit
facility.
CONTRACTUAL OBLIGATIONS AND PROBABLE LIABILITY PAYMENTS. The following
table is a summary of our significant contractual obligations and probable
liability payments at December 31, 2004 (in thousands):
OTHER
LONG- LONG- PURCHASE
TERM OPERATING TERM COMMITMENTS TOTAL CASH
PAYMENTS DUE DEBT LEASES LIABILITIES AND OTHER OBLIGATIONS
------------ --------- --------- ----------- ----------- -----------
2005........................ $ 2,270 $ 33,765 $ -- $35,353 $ 71,388
2006........................ 2,325 27,931 8,449 4,200 42,905
2007........................ 13,530 23,902 6,793 3,700 47,925
2008........................ 79,402 15,395 6,248 1,483 102,528
2009........................ 1,022 8,958 2,225 -- 12,205
Thereafter.................. 671,220 4,189 16,854 -- 692,263
-------- -------- ------- ------- --------
Total....................... $769,769 $114,140 $40,569 $44,736 $969,214
======== ======== ======= ======= ========
Purchase commitments and other consists primarily of payments for
equipment that has been ordered but not received, obligations to be paid
pursuant to an employment agreement, required pension contributions and
incentive payments to customers.
OFF-BALANCE SHEET ARRANGEMENTS. It is not our business practice to
enter into off-balance sheet arrangements.
GUARANTEES. In conjunction with the sale of the prime label business in
May 2002, we guaranteed a certain lease obligation. At December 31, 2004,
the contingent liability under the guarantee was $5.5 million. We have not
made, nor do we expect to make any payments under this guarantee.
In connection with the disposition of certain operations, we have
indemnified the purchasers for certain contingencies as of the date of
disposition. We have accrued the estimated probable cost of these
contingencies.
18
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements, we are required to
make estimates based on assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate
these estimates on an ongoing basis. We base our estimates on historical
experience and various other assumptions that are considered reasonable in
view of relevant facts and circumstances.
The accounting estimates and assumptions discussed in this section are
those that inherently involve significant judgments and the most
uncertainty. The nature of these accounting estimates and assumptions are
important to understanding our financial statements. Because future events
rarely develop exactly as anticipated, even the best estimates routinely
require adjustment.
ALLOWANCE FOR LOSSES ON ACCOUNTS RECEIVABLE. We maintain a valuation
allowance based on the expected collectibility of accounts receivable. The
allowance includes an estimate of accounts that may become uncollectible
based on the age of amounts due and specific amounts for customer
collection issues that we have identified. The valuation allowance provided
for potentially uncollectible accounts receivable at December 31, 2004 was
$4.7 million. In 2004, 2003 and 2002, our actual loss experience was in
line with our expectations. We wrote off uncollectible accounts, net of
recoveries, of $2.0 million in 2004, $3.3 million in 2003 and $4.5 million
in 2002. While credit losses have historically been within our
expectations, we cannot guarantee that our credit losses will be consistent
with those in the past. These estimates may prove to be inaccurate, in
which case we may have overstated or understated the allowance for losses
required for uncollectible accounts receivable.
IMPAIRMENT OF LONG-LIVED ASSETS. We evaluate long-lived assets,
including property, plant and equipment and intangible assets other than
goodwill, for impairment whenever events or changes in circumstances
indicate that the carrying amounts of specific assets or group of assets
may not be recoverable. When an evaluation is required, we estimate the
future undiscounted cash flows associated with the specific asset or group
of assets. If the cost of the asset or group of assets cannot be recovered
by these undiscounted cash flows, then an impairment exists. Our estimates
of future cash flows are based on experience and our internal business
plans. Our internal business plans require judgments regarding future
economic conditions, product demand and pricing. Although we believe our
estimates are appropriate, significant differences in the actual
performance of the asset or group of assets may materially affect our
evaluation of the recoverability of the asset values currently recorded.
Additional impairment charges may be necessary in future years.
GOODWILL. We evaluate the carrying value of our goodwill in the fourth
quarter each year and whenever events or circumstances make it more likely
than not that an impairment may have occurred. Determining whether an
impairment has occurred requires the valuation of each of our reporting
units, which we estimate using a discounted cash flow methodology. In
addition, we use comparative market multiples to corroborate the discounted
cash flow results. In preparing projected future cash flows, we use our
judgment in projecting the profitability of our reporting units, their
growth in future years, investment and working capital requirements and the
selection of an appropriate discount rate. In our comparisons to market
multiples of other similar companies, we use judgment in the selection of
the companies included in the analysis. While we believe there is no further
impairment of our goodwill, if our estimates of future discounted cash flows
prove to be inaccurate, an impairment charge could be necessary in future
years.
SELF-INSURANCE. We are self-insured for the majority of our workers'
compensation costs and group health insurance costs, subject to specific
retention levels. We rely on claims experience and the advice of consulting
actuaries and administrators in determining an adequate liability for
self-insurance claims. Our self-insurance workers' compensation liability
is estimated based on reserves for claims that are established by a
third-party administrator. The estimate of these reserves is increased to
reflect the estimated future development of the claims. Our liability for
workers' compensation claims is the estimated total cost of the claims on a
fully-developed basis discounted based on anticipated payment patterns. The
undiscounted liability at December 31, 2004 was $11.4 million. The
discounted liability
19
was $9.9 million determined using a 4% discount rate. Workers' compensation
expense for claims incurred in 2004 was $4.8 million and was based on an
actuarial estimate. In 2004, we recorded $2.4 million of additional expense
due to the negative development of claims incurred prior to 2004. In 2003,
we recorded additional expense of $1.8 million due to the negative
development of claims incurred prior to 2003.
Our self-insurance healthcare liability represents our estimate of
claims that have been incurred but not reported as of December 31, 2004.
This liability, which totaled $7.4 million at December 31, 2004, was
estimated based on our claims experience. We determine the actual average
daily claims cost and the number of days between the incurrence of a claim
and the date it is paid. The estimate of our liability for employee
healthcare represents 72 days of unreported claims.
While we believe that the estimates of our self-insurance liabilities
are reasonable, significant differences in our experience or a significant
change in any of our assumptions could materially affect the amount of
workers' compensation and healthcare expenses we have recorded.
ACCOUNTING FOR INCOME TAXES. We are required to estimate our income
taxes in each jurisdiction in which we operate. This process involves
estimating our actual current tax exposure, together with assessing
temporary differences resulting from differing treatment of items for tax
and financial reporting purposes. The tax effects of these temporary
differences are recorded as deferred tax assets or deferred tax
liabilities. Deferred tax assets generally represent items that can be used
as a tax deduction or credit in our tax return in future years for which we
have already recorded the expense in our financial statements. Deferred tax
liabilities generally represent tax items that have been deducted for tax
purposes, but have not yet been recorded as expenses in our financial
statements.
At December 31, 2004, our net deferred tax asset, the future tax benefit
arising from net deductible differences and tax carryforwards from U.S.
operations, was $35.6 million. Our net deferred tax liability of $11.0
million reflects our deferred foreign tax liabilities. We are required by
generally accepted accounting principles to assess the likelihood that the
future tax benefit represented by our net deferred tax asset will be
realized. To the extent we believe that the use of the future tax asset in
any jurisdiction is not likely, we must establish a valuation allowance. In
assessing the need for a valuation allowance, we consider all available
positive and negative evidence, including estimates of taxable income in
each jurisdiction in which we operate, tax planning strategies and the
period over which our deferred tax assets will be recoverable. 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 No. 109, Accounting
for Income Taxes, the substantial losses we have incurred in our U.S.
operations over the most recent three-year period represent sufficient
negative evidence with respect to the realizability of the U.S. deferred tax
asset recorded as a result of our operating losses. Accordingly, a portion
of the U.S. deferred tax asset arising from these operating losses is
potentially impaired. In addition, we believe that it is not likely that we
will be able to use all of our U.S. capital loss carryforwards. To provide
for these impairments, we have recorded a valuation allowance of $26.8
million against the U.S. net deferred tax asset. This valuation allowance
was increased $20.3 million in 2004 primarily due to the generation of
additional U.S. net operating losses and foreign tax credits.
We 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 increase or reversal of all or a portion of our
tax valuation allowance could have a significant negative or positive
impact on future earnings.
20
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43 Chapter
4. This statement requires abnormal production costs such as idle facility
expense, excessive spoilage, rehandling costs and abnormal freight to be
excluded from inventory costing and treated as period expenses. In
addition, this standard requires the allocation of fixed production
overhead to be based on normal capacity of the production facility. We do
not expect the adoption of this standard in 2005 to have a significant
effect on our results.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment: an amendment of FASB Statements No. 123 and 95 ("SFAS
No. 123R"). SFAS No. 123R requires all share-based payments to employees,
including grants of stock options, to be recognized in the financial
statements based on their fair value. We expect to implement SFAS 123R in
the third quarter of 2005 and use the modified-prospective transition
method of implementation. Under the modified-prospective transition method,
we will recognize compensation expense in the financial statements issued
subsequent to the date of adoption, which will be July 1, 2005, for all
share-based payments granted, modified or settled after July 1, 2005 as
well as for any awards that were granted prior to July 1, 2005 for which
the requisite service has not been provided as of July 1, 2005. We will
recognize compensation expense on awards granted subsequent to July 1, 2005
using the fair values determined by a valuation model prescribed by SFAS
123R. The compensation expense on awards granted prior to July 1, 2005 will
be recognized using the fair values determined for use in our pro forma
disclosures on stock-based compensation. The amount of compensation expense
that will be recognized on awards granted prior to July 1, 2005 that have
not fully vested will exclude the compensation expense cumulatively
recognized in our pro forma disclosures on stock-based compensation. Our
preliminary estimate of the compensation expense that will be recorded in
2005 on unvested awards at July 1, 2005 will be approximately $2.0 million.
CAUTIONARY STATEMENTS
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. We believe these
forward-looking statements are based upon reasonable assumptions within the
bounds of our knowledge of Cenveo. All such statements involve risks and
uncertainties, and as a result, actual results could differ materially from
those projected, anticipated or implied by these statements. Such
forward-looking 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 be profitable on a
consistent basis; dependence on sales that are not subject to long-term
contracts; dependence on suppliers; the ability to recover the rising cost
of key raw materials in markets that are highly price competitive; the
ability to meet customer demand for additional value-added products and
services; the ability to timely or adequately respond to technological
changes in the industry; the impact of the Internet and other electronic
media on the demand for envelopes and printed material; postage rates; the
ability to manage operating expenses; the ability to manage financing costs
and interest rate risk; a decline in business volume and profitability could
result in a further impairment of goodwill; the ability to retain key
management personnel; the ability to identify, manage or integrate future
acquisitions; the costs associated with and the outcome of outstanding and
future litigation; and changes in government regulations.
In view of such uncertainties, investors should not place undue
reliance on our 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.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of operations
and financial position. Risks from interest rate fluctuations and changes
in foreign currency exchange rates are managed through normal operating and
financing activities. We do not utilize derivatives for speculative
purposes, nor do we hedge interest rate exposure through the use of swaps
and options or foreign exchange exposure through the use of forward
contracts.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At December
31, 2004, we had variable rate debt outstanding of $93.4 million. A 1%
increase in LIBOR on the maximum amount of debt subject to variable
interest rates, which was $314.9 million, would increase our interest
expense and reduce our net income by approximately $3.1 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar. In 2004,
a uniform 10% strengthening of the U.S. dollar relative to the Canadian
dollar would have resulted in a decrease in sales and net income of
approximately $21.0 million and $2.8 million, respectively. The effects of
foreign currency exchange rates on future results would also be impacted by
changes in sales levels or local currency prices.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
Cenveo, Inc.
We have audited the accompanying consolidated balance sheets of Cenveo,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31,
2004. Our audits also included the financial statement schedules for each
of the three years in the period ended December 31, 2004 listed in the
Index at Item 15(a)(2). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Cenveo, Inc. and subsidiaries at December 31, 2004 and 2003,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Cenveo, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2005 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 28, 2005
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
Cenveo, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Cenveo, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Cenveo, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of
the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Cenveo, Inc. maintained
effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Cenveo, Inc. maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31,
2004 of Cenveo, Inc. and our report dated February 28, 2005 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 28, 2005
24
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control
over financial reporting is a process designed under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of the Company's financial statements for external
reporting purposes in accordance with accounting principles generally
accepted in the United States.
Management has conducted an assessment of the effectiveness of the
Company's internal control over financial reporting based on the framework
established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2004 is effective.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of
assets; provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that
receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited
by Ernst and Young LLP, an independent registered public accounting firm,
as stated in their report appearing on page 24.
25
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------------
2004 2003
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 796 $ 307
Accounts receivable, net................................ 252,711 223,541
Inventories, net........................................ 112,219 91,402
Deferred income taxes................................... 15,911 18,652
Prepaids and other current assets....................... 30,108 29,483
---------- ----------
TOTAL CURRENT ASSETS................................ 411,745 363,385
Property, plant and equipment, net.......................... 367,260 388,240
Goodwill.................................................... 308,938 299,392
Other intangible assets, net................................ 28,788 19,687
Deferred income taxes....................................... 19,730 4,053
Other assets, net........................................... 38,286 36,689
---------- ----------
TOTAL ASSETS............................................ $1,174,747 $1,111,446
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 172,731 $ 140,468
Accrued compensation and related liabilities............ 58,639 53,209
Other current liabilities............................... 64,714 64,360
Current maturities of long-term debt.................... 2,270 2,575
---------- ----------
TOTAL CURRENT LIABILITIES........................... 298,354 260,612
Long-term debt.............................................. 767,499 746,386
Deferred income taxes....................................... 10,971 10,770
Other liabilities........................................... 40,569 25,659
---------- ----------
TOTAL LIABILITIES....................................... 1,117,393 1,043,427
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, 48,702,832 and 48,380,457 shares issued
and outstanding as of December 31, 2004 and 2003,
respectively.......................................... 487 484
Paid-in capital......................................... 214,902 213,850
Retained deficit........................................ (170,039) (150,331)
Deferred compensation................................... (2,003) (1,714)
Accumulated other comprehensive income.................. 14,007 5,730
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......................... 57,354 68,019
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,174,747 $1,111,446
========== ==========
See notes to consolidated financial statements.
26
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31
--------------------------------------------
2004 2003 2002
---------- ---------- ----------
Net sales.......................................... $1,742,914 $1,671,664 $1,728,705
Cost of sales...................................... 1,393,521 1,337,118 1,385,361
---------- ---------- ----------
Gross profit....................................... 349,393 334,546 343,344
Operating expenses:
Selling, general and administrative............ 265,870 245,689 263,734
Amortization of intangibles.................... 5,381 1,899 2,237
Loss (gain) on assets held for sale............ -- (117) 6,436
Impairment on operations formerly held for
sale......................................... -- -- 12,842
Restructuring, impairment and other charges.... 5,407 6,860 74,551
---------- ---------- ----------
Operating income (loss)............................ 72,735 80,215 (16,456)
Other expenses:
Interest expense............................... 73,125 71,891 70,461
Loss from the early extinguishment of debt..... 17,748 -- 16,463
Other.......................................... 2,459 1,819 1,754
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle............................. (20,597) 6,505 (105,134)
Income tax expense (benefit)....................... 341 2,581 (31,646)
---------- ---------- ----------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle........................................ (20,938) 3,924 (73,488)
Gain (loss) on disposal of discontinued
operations....................................... 1,230 1,548 (16,868)
Cumulative effect of change in accounting
principle........................................ -- (322) (111,748)
---------- ---------- ----------
Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104)
========== ========== ==========
Earnings (loss) per share--basic and diluted:
Continuing operations.......................... $ (0.44) $ 0.08 $ (1.54)
Discontinued operations........................ 0.03 0.04 (0.35)
Cumulative effect of change in accounting
principle.................................... -- (0.01) (2.35)
---------- ---------- ----------
Earnings (loss) per share--basic and diluted... $ (0.41) $ 0.11 $ (4.24)
========== ========== ==========
Weighted average shares--basic................. 47,750 47,687 47,665
Weighted average shares--diluted............... 47,750 48,315 47,665
See notes to consolidated financial statements.
27
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations................. $ (20,938) $ 3,924 $ (73,488)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Depreciation........................................ 47,602 46,069 47,818
Amortization (including amortization of deferred
financing fees included in interest)............. 9,959 5,883 7,635
Debt refinancing costs.............................. 17,748 -- 16,463
Non-cash portion of restructuring, impairment and
other charges.................................... 3,228 -- 42,282
Loss on assets held for sale........................ -- -- 6,436
Deferred income tax benefit......................... (12,536) (10,854) (27,726)
Loss on disposal of assets.......................... 686 1,221 346
Other non-cash expenses, net........................ 198 435 91
Changes in operating assets and liabilities, excluding
the effects of acquired businesses:
Accounts receivable................................. (23,283) 3,414 12,756
Inventories......................................... (18,122) 14,647 8,906
Accounts payable and accrued compensation........... 32,784 (15,417) (11,036)
Income taxes payable................................ (1,663) 12,212 4,193
Other working capital changes....................... (711) (1,952) (7,130)
Other, net.......................................... 3,039 (123) (4,575)
----------- ----------- -----------
Net cash provided by operating activities.......... 37,991 59,459 22,971
Cash flows from investing activities:
Acquisitions, net of cash acquired.................. (13,174) (2,800) (2,610)
Capital expenditures................................ (27,435) (31,602) (30,896)
Proceeds from divestitures, net..................... 2,000 3,864 122,330
Proceeds from sales of property, plant and
equipment.......................................... 3,012 682 11,995
----------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... (35,597) (29,856) 100,819
Cash flows from financing activities:
Proceeds from exercise of stock options............. 48 75 18
Proceeds from issuance of long-term debt............ 2,724,655 1,915,452 1,635,102
Repayments of long-term debt........................ (2,703,847) (1,948,299) (1,726,718)
Payment of redemption premiums...................... (13,528) -- --
Debt issuance costs................................. (9,077) (484) (18,624)
----------- ----------- -----------
Net cash used in financing activities.............. (1,749) (33,256) (110,222)
Effect of exchange rate changes on cash and cash
equivalents............................................... (156) 1,310 (985)
Cash flows used in discontinued operations................. -- -- (10,827)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... 489 (2,343) 1,756
Cash and cash equivalents at beginning of year............. 307 2,650 894
----------- ----------- -----------
Cash and cash equivalents at end of year................... $ 796 $ 307 $ 2,650
=========== =========== ===========
See notes to consolidated financial statements.
28
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
ACCUMULATED
RETAINED OTHER TOTAL
COMMON PAID-IN EARNINGS DEFERRED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) COMPENSATION INCOME (LOSS) EQUITY
------ -------- --------- ------------ ------------- -------------
BALANCE AT DECEMBER 31, 2001.................. $483 $214,138 $ 46,623 $(3,359) $(16,008) $ 241,877
Comprehensive income (loss):
Net loss...................................... (202,104) (202,104)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $744............................ (1,190) (1,190)
Currency translation adjustment............. 3,609 3,609
---------
Other comprehensive income................ 2,419
---------
Total comprehensive loss................ (199,685)
Cancellation of restricted shares............. (1) (451) 452 --
Issuance of restricted shares................. 1 121 (122) --
Exercise of stock options..................... 18 18
Amortization of unearned compensation......... 558 558
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2002.................. 483 213,826 (155,481) (2,471) (13,589) 42,768
Comprehensive income (loss):
Net income.................................... 5,150 5,150
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $1,996.......................... (3,188) (3,188)
Currency translation adjustment............. 22,507 22,507
---------
Other comprehensive income................ 19,319
---------
Total comprehensive income.............. 24,469
Cancellation of restricted shares............. (1) (199) 102 (98)
Issuance of restricted shares................. 1 149 (150) --
Exercise of stock options..................... 1 74 75
Amortization of unearned compensation......... 805 805
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2003.................. 484 213,850 (150,331) (1,714) 5,730 68,019
Comprehensive income (loss):
Net loss...................................... (19,708) (19,708)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $1,186.......................... (1,892) (1,892)
Currency translation adjustment............. 10,169 10,169
---------
Other comprehensive income................ 8,277
---------
Total comprehensive loss................ (11,431)
Issuance of restricted shares................. 3 1,004 (1,007) --
Exercise of stock options..................... 48 48
Amortization of unearned compensation......... 718 718
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2004.................. $487 $214,902 $(170,039) $(2,003) $ 14,007 $ 57,354
==== ======== ========= ======= ======== =========
See notes to consolidated financial statements.
29
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Cenveo, Inc. and subsidiaries (collectively,
the "Company") are engaged in commercial printing, the printing and
manufacturing of envelopes and the printing and manufacturing of business
forms and labels. On April 29, 2004, the shareholders of the Company
approved the change of the Company's name from Mail-Well, Inc. to Cenveo,
Inc. The Company, headquartered in Englewood, Colorado, is organized under
Colorado law, and its common stock is traded on the New York Stock Exchange
under the symbol "CVO".
The consolidated financial statements include the accounts of Cenveo,
Inc. and its wholly-owned subsidiaries. The Company has also consolidated a
variable interest entity pursuant to Financial Accounts Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). All
significant intercompany accounts and transactions have been eliminated and
all amounts and disclosures reflect the Company's continuing operations.
The Company's reporting periods for 2004, 2003 and 2002 in this report
consist of 53-, 52- and 52-week periods, respectively, ending on the Saturday
closest to the last day of the calendar month. The reporting periods for
2004, 2003 and 2002 ended January 1, 2005, December 28, 2003 and December
27, 2002, respectively. For convenience, the accompanying financial
statements have been shown as ending on December 31.
USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Estimates
and assumptions are used for, but not limited to, establishing the
allowance for doubtful accounts, inventory valuation reserves, depreciation
and amortization, asset impairment evaluations, tax assets and liabilities,
self-insurance accruals and other contingencies. Actual results could
differ from the estimates made by management.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on
deposit and investments with original maturities of three months or less.
Cash and cash equivalents are stated at cost, which approximates fair
value.
ACCOUNTS RECEIVABLE. Trade accounts receivable are recorded at the
invoiced amount. The Company maintains a valuation allowance based upon the
expected collectibility of accounts receivable. Uncollected account
balances are charged to the allowance after all means of collection have
been exhausted and the potential for recovery is remote. Allowances for
losses on accounts receivable of $4.7 million and $4.0 million have been
applied as reductions of accounts receivable at December 31, 2004 and 2003,
respectively.
INVENTORIES. Inventories are carried at the lower of cost or market,
with cost determined on a first-in, first-out basis. Cost includes
materials, labor and overhead. The estimates of reserves for unsaleable
inventory are based on management's judgment of future realization.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated
at cost. When assets are retired or otherwise disposed of, the related
costs and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations. Expenditures for repairs
and maintenance are charged to expense as incurred, and expenditures that
increase the capacity, efficiency or useful lives of existing assets are
capitalized.
Depreciation is calculated using the straight-line method based on the
estimated useful lives of 15 to 45 years for buildings and building
improvements, 10 to 15 years for machinery and equipment and three to 10
years for furniture and fixtures.
30
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE. The Company develops and purchases software for
internal use. Software development costs incurred during the application
development stage are capitalized. Once the software has been installed and
tested and is ready for use, additional costs incurred in connection with
the software are expensed as incurred. Capitalized computer software costs
are amortized over the estimated useful life of the software, usually
between three and seven years. Net computer software costs included in
property, plant and equipment were $11.6 million and $8.7 million at
December 31, 2004 and 2003, respectively.
DEBT ISSUANCE COSTS. Direct expenses such as legal, accounting and
underwriting fees incurred to issue debt, are included in other assets in
the consolidated balance sheets. The debt issuance costs were $16.3 million
and $15.6 million at December 31, 2004 and 2003, respectively, net of
accumulated amortization, and are amortized over the term of the related
debt as interest expense. Interest expense includes $4.4 million, $4.0
million and $5.4 million of debt issuance costs amortized in 2004, 2003 and
2002, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of
acquisition costs over the fair value of net assets of businesses acquired.
Goodwill is reviewed annually to determine if there is an impairment, or
more frequently, if an indication of possible impairment exists. The Company
performs its annual impairment assessments in the fourth quarter of the
year. The transitional impairment recognized in 2002 upon the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets was $111.7 million. No additional impairment
charges were recorded in 2004 or 2003.
Other intangible assets primarily arise from the purchase price
allocations of businesses acquired and are based on independent appraisals
or internal estimates. Intangible assets with determinable lives are
amortized on a straight-line basis over the estimated useful life assigned
to these assets. Intangible assets that are expected to generate cash flows
indefinitely are not amortized but are evaluated for impairment similarly
to goodwill.
LONG-LIVED ASSETS. Long-lived assets, including property, plant and
equipment, and intangible assets with determinable lives, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be fully recoverable. An impairment is
assessed when the undiscounted expected future cash flows derived from an
asset are less than its carrying amount. Impairment losses are recognized
for the amount by which the carrying value of an asset exceeds its fair
value. The estimated useful lives of all long-lived assets are periodically
reviewed and revised if necessary.
SELF-INSURANCE. The Company is self-insured for the majority of its
workers' compensation costs and group health insurance costs, subject to
specific retention levels. The Company records its liability for workers'
compensation claims on a fully-developed basis. The Company's liability for
health insurance claims includes an estimate for claims incurred but not
reported.
REVENUE RECOGNITION. The Company recognizes revenue when persuasive
evidence of an arrangement exists, product delivery has occurred or
services have been rendered, pricing is fixed or determinable, and
collection is reasonably assured. The Company records revenue to a lesser
extent on a bill and hold basis when requested by the customer. Revenue is
recognized on bill and hold transactions when the customer is invoiced for
goods that have been produced, packaged and made ready for shipment. These
goods are segregated from inventory which is available for sale, the risk
of ownership of the goods is assumed by the customer, and the terms and
collection experience on the related billings are consistent with all other
sales.
31
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Since a significant portion of the Company's products are customer
specific, it is common for customers to inspect the quality of the product
at the Company's facility prior to its shipment. Products shipped are not
subject to contractual right of return provisions.
The Company has rebate agreements with certain customers. These rebates
are recorded as reductions of sales and are accrued using sales data and
rebate percentages specific to each customer agreement.
FREIGHT COSTS. The costs of delivering finished goods to customers are
recorded as freight costs and included in cost of sales. Freight costs that
are included in the price of the product are included in net sales.
ADVERTISING COSTS. All advertising costs are expensed as incurred.
Advertising costs were $5.5 million, $5.7 million and $6.0 million in 2004,
2003 and 2002, respectively.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of subsidiaries
operating outside the United States with a functional currency other than
the U.S. dollar are translated at year-end exchange rates. The effects of
translation are included as a component of other comprehensive income.
Income and expense items are translated at the average monthly rate.
Foreign currency transaction gains and losses are recorded in income.
STOCK-BASED COMPENSATION. Stock options and other stock-based
compensation awards are accounted for using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. This method requires compensation expense to be
recognized for the excess of the quoted market price of the stock at the
grant date or the measurement date over the amount an employee must pay to
acquire the stock.
If the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, the Company's pro forma
net income (loss) and earnings (loss) per share would have been as follows
(in thousands, except per share data):
2004 2003 2002
-------- ------ ---------
Net income (loss), as reported......................... $(19,708) $5,150 $(202,104)
Add: stock-based compensation expense included in
reported net income, net of related tax
benefits in 2003 and 2002...................... 718 420 410
Less: stock-based compensation expense determined
under fair value method for all awards, net of
related tax benefit in 2003 and 2002........... 4,952 3,620 4,053
-------- ------ ---------
Pro forma net income (loss)............................ $(23,942) $1,950 $(205,747)
======== ====== =========
Earnings (loss) per share--basic and diluted:
As reported...................................... $ (0.41) $ 0.11 $ (4.24)
Pro forma........................................ $ (0.50) $ 0.04 $ (4.32)
32
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the fair value per share information,
including related assumptions, used to determine stock-based compensation
expense consistent with the requirements of SFAS No. 123. The estimated
fair value per share was determined on the date of grant using the
Black-Scholes option-pricing model.
2004 2003 2002
----- ----- -----
Weighted average fair value per share of options
granted during the year............................... $2.22 $1.39 $1.16
Assumptions:
Dividend yield.................................... 0.0% 0.0% 0.0%
Volatility........................................ 69.6% 73.0% 71.0%
Risk-free rate of return.......................... 3.1% 2.6% 3.0%
Expected life (years)............................. 5 5 5
The effect on reported net income (loss), earnings (loss) per share of
expensing the estimated fair value of stock options is not necessarily
representative of the effect on reported earnings for future years due to
the vesting period of the stock options and the potential for issuance of
additional stock options in future years.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS. In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory
Costs--an amendment of ARB No. 43 Chapter 4. This statement requires
abnormal production costs such as idle facility expense, excessive
spoilage, rehandling costs and abnormal freight to be excluded from
inventory costing and treated as period expenses. In addition, this
standard requires the allocation of fixed production overhead to be based
on normal capacity of the production facility. The Company does not expect
the adoption of this standard in 2005 to have a significant effect on its
results.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment: an amendment of FASB Statements No. 123 and 95 ("SFAS
No. 123R"). SFAS No. 123R requires all share-based payments to employees,
including grants of stock options, to be recognized in the financial
statements based on their fair value. The Company expects to implement SFAS
123R in the third quarter of 2005 and use the modified-prospective
transition method of implementation. Under the modified-prospective
transition method, the Company will recognize compensation expense in the
financial statements issued subsequent to the date of adoption, which will
be July 1, 2005, for all share-based payments granted, modified or settled
after July 1, 2005 as well as for any awards that were granted prior to
July 1, 2005 for which the requisite service has not been provided as of
July 1, 2005. The Company will recognize compensation expense on awards
granted subsequent to July 1, 2005 using the fair values determined by a
valuation model prescribed by SFAS 123R. The compensation expense on awards
granted prior to July 1, 2005 will be recognized using the fair values
determined for the pro forma disclosures on stock-based compensation. The
amount of compensation expense that will be recognized on awards that have
not fully vested will exclude the compensation expense cumulatively
recognized in the pro forma disclosures on stock-based compensation. The
Company's preliminary estimate of the compensation expense that will be
recorded in 2005 on unvested awards at July 1, 2005 will be approximately
$2.0 million.
33
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted FIN 46 on January 1, 2003. FIN 46 required the
consolidation of a trust that was leasing equipment to the Company. The
Company is the primary beneficiary of this trust since it is subject to the
majority of the risk of loss from the activities of the trust. The Company
consolidated equipment valued at $18.1 million, net of accumulated
depreciation, and debt of $18.5 million and recorded a non-cash after-tax
charge of $0.3 million as a cumulative effect of a change in accounting
principle in the consolidated statement of operations for 2003. The
consolidation of the debt and equipment of the trust did not impact the
cash flows of the Company.
The Company adopted SFAS No. 142 on January 1, 2002. Under SFAS No.
142, goodwill and intangible assets that have indefinite useful lives are
no longer required to be amortized. Goodwill and intangible assets that
have indefinite useful lives, however, must be tested annually for
impairment.
In the year of its adoption, SFAS No. 142 required a transitional
goodwill impairment evaluation, which was a two-step process. The first
step was to determine whether there was an indication that goodwill was
impaired on January 1, 2002. SFAS No. 142 required a separate impairment
evaluation of each of the Company's reporting units, which the Company
determined to be the same as its operating segments. To perform the first
step, the fair value of each reporting unit was estimated by discounting
the expected future cash flows and using market multiples of comparable
companies. The fair value of each reporting unit was compared to its
carrying value, including goodwill. This first step evaluation indicated an
impairment of the goodwill recorded by the Company's commercial printing
operations (formerly the commercial printing segment).
Since the first step indicated an impairment of the goodwill of the
commercial printing operations, SFAS No. 142 required a second step to
determine the amount of the impairment. The amount of the impairment was
determined by comparing the implied fair value of this goodwill to its
carrying value. The implied fair value of the goodwill was determined by
allocating the fair value of the combined assets and liabilities of the
commercial printing operations as if these operations had been acquired and
the fair value was the purchase price. The excess "purchase price" over the
amounts assigned to the assets and liabilities was the implied value of
goodwill. The carrying amount of the goodwill exceeded the implied value by
$111.7 million, which was recorded as a cumulative effect of a change in
accounting principle in the consolidated statement of operations for 2002.
The impairment loss on the goodwill recorded by the commercial printing
operations was due to the significant decline in the performance of these
operations in 2001 and the impact of that decline on expected future cash
flows.
3. ACQUISITIONS
Acquisitions are accounted for under the purchase method of accounting;
accordingly, the assets and liabilities of the acquired businesses have
been recorded at estimated fair value at the date acquired with the excess
of the purchase price over the estimated fair value recorded as goodwill.
In July 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. The purchase price was $9.6 million with $5.1
million allocated to tangible net assets and $4.5 million allocated to
goodwill. The Company is consolidating Valco Graphics Inc. with its
existing commercial printing operation in Seattle and will operate the
combined entity as Cenveo, Seattle.
In August 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. The purchase
price was $2.8 million with $2.7 million allocated to tangible net assets
and $0.1 million allocated to goodwill. The Company has consolidated this
operation with its existing commercial printing operation in San Francisco
and is operating the combined entity as Cenveo, San Francisco.
34
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
In August 2002, the Company acquired the in-house printing and
fulfillment operations of American Express Company. The purchase price was
$19.1 million of which $1.3 million was paid in 2002, $2.8 million in 2003
and $3.2 million in 2004. The remaining purchase price, which was accrued
in 2004, will be paid in annual amounts through 2007 and reflected in the
statements of cash flows when paid. The purchase price was allocated as
follows: $1.3 million to tangible net assets, $0.8 million to goodwill and
$17.0 million to a customer-related intangible asset that is being
amortized over the term of a service agreement that expires at the end of
2007.
The results of these acquired businesses have been included in the
consolidated results of the Company from their respective acquisition dates.
Pro forma results for 2004 and 2002, assuming these acquisitions had been
made at the beginning of the applicable year, would not be materially
different from results reported.
4. 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 in 2004.
The gain on disposal of discontinued operations recorded for 2003
reflects a change in the tax impact of the disposition of the Company's
prime label business, which was sold in May 2002. This gain was partially
offset by the accrual of additional expenses related to the sale.
In 2002, the Company sold Curtis 1000 for $40.0 million, including the
assumption of debt, and the prime label operating segment for $75.0 million.
Curtis 1000 and the prime label business were segregated from continuing
operations and reported as discontinued operations in 2001. The loss of
$16.9 million on disposal of discontinued operations recorded in 2002 was
based on actual proceeds which were less than expected, actual expenses
which were greater than originally estimated and the tax benefit of the
losses which was less than originally estimated.
Interest expense was allocated to the operating results and included in
the calculation of the loss on disposal of discontinued operations based
upon the relative net assets of the prime label business and Curtis 1000.
This allocation of interest expense totaled $5.6 million in 2002. Tax
benefits allocated to discontinued operations based on the losses of these
operations was $1.6 million in 2002.
Operating results of the discontinued operations are summarized as
follows (in thousands):
2004 2003 2002
-------- -------- ---------
Net sales:
Prime label........................................ $ -- $ -- $ 84,758
Curtis 1000........................................ -- -- 22,788
-------- -------- ---------
$ -- $ -- $ 107,546
======== ======== =========
Gain (loss) on disposal of discontinued operations:
Prime label........................................ $ -- $ (830) $ (16,299)
Curtis 1000........................................ -- 139 (1,028)
Jen Coat........................................... 2,000 -- --
-------- -------- ---------
2,000 (691) (17,327)
Income tax benefit (expense)....................... (770) 2,239 459
-------- -------- ---------
$ 1,230 $ 1,548 $ (16,868)
======== ======== =========
35
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER DIVESTITURES
The Company sold the filing products division of the resale segment in
August 2002 and certain digital graphics operations of the commercial
segment in March 2003. The following table presents the sales and operating
income of these operations (in thousands):
2003 2002
------- -------
Net sales............................................... $ 2,872 $56,445
Operating income........................................ $ 167 $ 3,301
The Company recorded a loss of $6.1 million in 2002 as a result of the
sale of the filing products division and an impairment charge of $0.3
million on the digital graphics operations that were held for sale at
December 31, 2002.
6. IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE
In 2001, a business that is now part of the resale segment, was held
for sale and reported as a discontinued operation. In 2002, the Company
discontinued its efforts to sell this business. Accordingly, the tax
benefit of $11.5 million expected to be realized upon the sale that had
been recorded in 2001 was written off and expenses of $1.1 million that had
been accrued but not incurred were reversed. In 2002, the Company also
discontinued its efforts to sell a digital graphics operation that was held
for sale at the end of 2001 and recorded an impairment charge of $2.4
million.
7. INVENTORIES
The Company's inventories by major category were as follows (in
thousands):
DECEMBER 31
----------------------
2004 2003
-------- -------
Raw materials........................................... $ 36,440 $28,344
Work in process......................................... 30,357 21,483
Finished goods.......................................... 50,122 46,570
-------- -------
116,919 96,397
Reserves................................................ (4,700) (4,995)
-------- -------
Inventories, net........................................ $112,219 $91,402
======== =======
36
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consisted of
the following (in thousands):
DECEMBER 31
-------------------------
2004 2003
--------- ---------
Land and land improvements.............................. $ 19,457 $ 20,043
Buildings and improvements.............................. 109,889 109,563
Machinery and equipment................................. 532,470 511,820
Furniture and fixtures.................................. 13,997 15,986
Construction in progress................................ 9,806 9,696
--------- ---------
685,619 667,108
Accumulated depreciation................................ (318,359) (278,868)
--------- ---------
Property, plant and equipment, net...................... $ 367,260 $ 388,240
========= =========
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for 2004 and 2003 by
reportable segment were as follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- --------- ---------
Balance as of January 1, 2003......................... $ 189,889 $ 100,472 $ 290,361
Purchase price adjustments.......................... -- (302) (302)
Foreign currency translation........................ 9,333 -- 9,333
--------- --------- ---------
Balance as of December 31, 2003....................... 199,222 100,170 299,392
Acquisitions........................................ 4,583 -- 4,583
Foreign currency translation........................ 4,963 -- 4,963
--------- --------- ---------
Balance as of December 31, 2004....................... $ 208,768 $ 100,170 $ 308,938
========= ========= =========
37
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Other intangible assets consisted of the following (in thousands):
DECEMBER 31,
----------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
GROSS NET GROSS NET WEIGHTED
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING AVERAGE
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT LIFE (YEARS)
-------- ------------ -------- -------- ------------ -------- ------------
INTANGIBLE ASSETS
WITH DETERMINABLE
LIVES:
Trademarks and
tradenames....... $14,238 $ (1,736) $12,502 $14,238 $ (1,377) $12,861 40
Non-compete
agreements....... 4,366 (4,194) 172 7,562 (6,581) 981 8
Customer
relationship..... 17,006 (4,000) 13,006 2,800 -- 2,800 4
Patents............ 2,428 (836) 1,592 2,438 (669) 1,769 12
Other.............. 1,049 (566) 483 1,250 (694) 556 26
------- -------- ------- ------- -------- -------
39,087 (11,332) 27,755 28,288 (9,321) 18,967
INTANGIBLE ASSETS
WITH INDEFINITE
LIVES:
Pollution
Credits.......... 720 -- 720 720 -- 720
Trademark.......... 313 -- 313 -- -- --
------- -------- ------- ------- -------- -------
1,033 -- 1,033 720 -- 720
------- -------- ------- ------- -------- -------
Total................ $40,120 $(11,332) $28,788 $29,008 $ (9,321) $19,687
======= ======== ======= ======= ======== =======
The estimated amortization expense for each of the succeeding five
years is as follows: $5.4 million, $5.4 million, $5.4 million, $1.0 million
and $1.0 million.
10. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following (in thousands):
DECEMBER 31
---------------------
2004 2003
------- -------
Accrued rebates......................................... $19,914 $ 9,000
Accrued interest........................................ 15,350 14,461
Accrued taxes........................................... 8,360 9,827
Accrued legal settlement................................ -- 5,330
Customer deposits....................................... 3,540 3,550
Other accrued liabilities............................... 17,550 22,192
------- -------
Other current liabilities............................... $64,714 $64,360
======= =======
38
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in
thousands):
DECEMBER 31
---------------------
2004 2003
------- -------
Currency translation adjustments........................ $21,351 $11,182
Pension liability adjustments, net of tax benefit....... (7,344) (5,452)
------- -------
Accumulated other comprehensive income.................. $14,007 $ 5,730
======= =======
12. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
DECEMBER 31
-------------------------
2004 2003
-------- --------
Senior Secured Credit Facility, due 2008................ $ 78,441 $ 73,310
Senior 9 5/8% Notes, due 2012........................... 350,000 350,000
Senior 7 7/8% Subordinated Notes, due 2013.............. 320,000 --
Senior 8 3/4% Subordinated Notes, due 2008.............. -- 300,000
Other................................................... 21,328 25,651
-------- --------
769,769 748,961
Less current maturities................................. (2,270) (2,575)
-------- --------
Long-term debt.......................................... $767,499 $746,386
======== ========
Current maturities consist of scheduled payments on other long-term
debt.
In 2002, the Company entered into a three-year $300.0 million Senior
Secured Credit Facility with a group of banks ("Credit Facility"). Under
the Credit Facility, loans may be made and letters of credit issued on a
revolving basis in each case subject to availability and subject to a
borrowing base. Loans made under the Credit Facility bear interest at a
base rate or LIBOR, plus a margin. The interest rate at December 31, 2004
was 4.7%. The Credit Facility is secured by substantially all of the assets
of the Company. In March 2004, the Company amended the 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 Credit Facility.
In January 2004, the Company issued $320.0 million of 7 7/8% senior
subordinated notes due 2013 ("Senior Subordinated Notes"). The interest on
these notes is payable semi-annually. The Company may redeem these notes,
in whole or in part, on or after December 1, 2008, at redemption prices
from 103.9% to 100%, plus accrued and unpaid interest. The net proceeds
from the sale of the Senior Subordinated Notes were used to fund the tender
offer and redemption of the Company's 8 3/4% senior subordinated notes
which were due to mature in 2008. The loss recorded on the early
extinguishment of the 8 3/4% senior subordinated notes consisted of
redemption premiums of $13.5 million and unamortized debt issuance costs of
$4.2 million. The debt issuance costs for the Senior Subordinated Notes
totaled $7.2 million which will be amortized over the term of the notes.
The Company's $350.0 million 9 5/8% Senior Notes due 2012 ("Senior
Notes") were issued in 2002 and pay interest semi-annually. The Company may
redeem the Senior Notes, in whole or in part, on or after March 15, 2007,
at redemption prices from 104.8% to 100%, plus accrued and unpaid interest.
39
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LONG-TERM DEBT (CONTINUED)
Other long-term debt includes debt of $14.0 million and $17.0 million
at December 31, 2004 and 2003, respectively, of a variable interest entity
that was consolidated on January 1, 2003 as a result of the adoption of FIN
46. The interest on this debt was 5.8% at December 31, 2004. The remaining
balance in other long-term debt is primarily term debt with banks with
interest rates, which range from 2.3% to 10.1%, and capital lease
obligations.
The aggregate annual maturities for long-term debt are as follows (in
thousands):
2005................................. $ 2,270
2006................................. 2,325
2007................................. 13,530
2008................................. 79,402
2009................................. 1,022
Thereafter........................... 671,220
--------
$769,769
========
Cash interest payments on long-term debt were $67.4 million in 2004,
$68.1 million in 2003 and $63.0 million in 2002.
The estimated fair value of the Company's Credit Facility, Senior
Notes, Senior Subordinated Notes and other long-term debt was $783.9
million and $784.5 million at December 31, 2004 and 2003, respectively.
The Credit Facility, Senior Notes and Senior Subordinated Notes contain
certain restrictions that, among other things and with certain exceptions,
limit the ability of the Company to incur additional indebtedness, prepay
subordinated debt, transfer assets outside of the Company, pay dividends or
repurchase shares of common stock. The Company is only required to maintain
certain levels of fixed charge coverage under the Credit Facility in the
event that availability falls below a certain amount. As of December 31,
2004, the Company was in compliance with all debt agreements.
GUARANTEES
In conjunction with the sale of the prime label business in 2002, the
Company continued to guarantee a lease obligation assumed by the buyer of
this business. The guarantee requires the lessor to pursue collection and
other remedies against the buyer before demanding payment from the Company.
The remaining payments under the lease term, which expires April 2008,
total approximately $5.5 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.
13. INCOME TAXES
Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principle was as follows (in
thousands):
2004 2003 2002
-------- -------- ---------
Domestic............................................ $(59,239) $(29,532) $(136,409)
Foreign............................................. 38,642 36,037 31,275
-------- -------- ---------
$(20,597) $ 6,505 $(105,134)
======== ======== =========
40
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
Income tax expense (benefit) on income from continuing operations
before taxes and cumulative effect of change in accounting principle
consisted of the following (in thousands):
2004 2003 2002
-------- -------- --------
Current tax expense (benefit):
Federal.......................................... $ (43) $ 1,482 $(12,747)
Foreign.......................................... 12,464 11,805 10,050
State............................................ 456 148 (1,273)
-------- -------- --------
12,877 13,435 (3,970)
Deferred expense (benefit):
Federal.......................................... (11,141) (9,564) (26,168)
Foreign.......................................... 179 (334) 475
State............................................ (1,574) (956) (1,983)
-------- -------- --------
(12,536) (10,854) (27,676)
-------- -------- --------
Income tax expense (benefit)......................... $ 341 $ 2,581 $(31,646)
======== ======== ========
A reconciliation of the expected tax expense (benefit) based on the
federal statutory tax rate to the Company's actual income tax expense is
summarized below (in thousands):
2004 2003 2002
-------- ------- --------
Expected tax expense (benefit) at federal statutory income
tax rate................................................ $ (7,209) $ 2,277 $(36,797)
State and local income tax expense (benefit).............. (721) 293 (4,731)
Increase in valuation allowance........................... 20,275 2,625 1,123
Reduction in contingency reserves......................... (6,369) -- --
Utilization of foreign tax credits........................ (4,718) (1,158) --
Non-U.S. tax rate differences............................. (2,959) (678) (2,055)
Non-deductible expenses................................... 970 843 1,197
Non-taxable investment benefit............................ 313 (881) (333)
Non-deductible goodwill impairment........................ -- -- 9,262
Other..................................................... 759 (740) 688
-------- ------- --------
Income tax expense (benefit).............................. $ 341 $ 2,581 $(31,646)
======== ======= ========
41
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
Deferred taxes are recorded to give recognition to temporary differences
between the tax basis of assets or liabilities and their reported amounts in
the financial statements. The tax effects of these temporary differences are
recorded as deferred tax assets or deferred tax liabilities. Deferred tax
assets generally represent items that can be used as a tax deduction or
credit in future years. Deferred tax liabilities generally represent items
that have been deducted for tax purposes, but have not yet been recorded in
the consolidated statements of operations. Valuation allowances are recorded
in expense to reduce deferred tax assets when it is more likely than not
that a tax benefit will not be realized. The tax effects of temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2004 and 2003 are
presented below (in thousands):
2004 2003
--------- ---------
Deferred tax assets:
Net operating loss carryforwards.................... $ 95,786 $ 74,834
Capital loss carryforwards.......................... 20,950 23,180
Compensation and benefit related accruals........... 19,867 21,394
Foreign tax credit carryforwards.................... 10,015 4,090
Alternative minimum tax credit carryforwards........ 5,015 4,650
Accounts receivable................................. 1,421 1,416
Restructuring accruals.............................. 969 804
Other............................................... 3,493 6,209
Valuation allowance................................. (26,775) (6,500)
--------- ---------
Total deferred tax assets............................... 130,741 130,077
Deferred tax liabilities:
Property, plant and equipment....................... (83,542) (90,744)
Goodwill and other intangibles...................... (20,352) (19,488)
Inventory........................................... (2,335) (2,565)
Other............................................... 158 (5,345)
--------- ---------
Total deferred tax liabilities.......................... (106,071) (118,142)
--------- ---------
Net deferred tax asset.................................. $ 24,670 $ 11,935
========= =========
The net deferred income tax asset includes the following components (in
thousands):
2004 2003
--------- ---------
Current deferred tax asset.............................. $ 15,911 $ 18,652
Non-current deferred tax asset.......................... 19,730 4,053
Non-current deferred tax liability...................... (10,971) (10,770)
--------- ---------
Total............................................... $ 24,670 $ 11,935
========= =========
During 2004, the Internal Revenue Service ("IRS") completed the
examination of the tax years 1996 through 2002. The outcome of this tax
audit resulted in the issuance of a "no change" letter by the IRS. As a
result, the Company determined that tax contingency reserves totaling $6.4
million were no longer necessary and these reserves were reversed.
The Company has federal and state net operating loss and capital loss
carryforwards. The tax effect of these attributes is $116.7 million at
December 31, 2004. The capital loss carryforwards are due
42
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
to expire in 2007 and the net operating loss carryforwards will expire in
2021 through 2024. The Company's valuation allowance increased $20.3 million
in 2004, $2.6 million in 2003 and $1.1 million in 2002. The increase in 2004
was primarily due to the additional net operating losses incurred in the
U.S. in 2004. Since the Company has had three consecutive years of U.S. net
operating losses, the increase in the valuation allowance was provided to
cover the impairment of the deferred tax asset the Company believes more
likely than not will not be realized through the reversal of taxable
temporary differences and the execution of available tax planning
strategies.
Net cash payments for income taxes were $14.7 million in 2004, $2.5
million in 2003 and $6.0 million in 2002.
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
2004 ACTIVITY
Restructuring and impairment charges recorded in 2004 totaled $5.4
million. The following table and discussion present the details of these
charges (in thousands):
COMMERCIAL CORPORATE TOTAL
---------- --------- -------
Employee separation and related expenses................ $ 708 $ -- $ 708
Write-downs of equipment and leasehold improvements..... 3,706 295 4,001
Equipment moving expenses............................... 326 -- 326
Building clean-up and other expenses.................... 684 -- 684
Lease termination expenses.............................. 130 954 1,084
Net gain from the sale of building...................... (1,396) -- (1,396)
------- ------ -------
Total restructuring, impairment and other
charges........................................... $ 4,158 $1,249 $ 5,407
======= ====== =======
COMMERCIAL. The commercial segment closed its envelope plant in
Bensalem, Pennsylvania and moved much of its equipment into its printing
operation in Philadelphia. The cost of this plant closure was $1.2 million,
net of a $1.4 million gain on the sale of the plant building. The
restructure charge included employee separation and related expenses for 63
employees of $0.7 million, costs of $0.2 million incurred to move equipment
and an impairment charge of $1.0 million for equipment taken out of
service.
The cost incurred during 2004 to merge operations in Seattle and San
Francisco into the newly acquired operations in those cities was $0.3
million. Asset impairment charges for equipment taken out of service
totaled $0.8 million.
The commercial segment will close a small printing operation in the
first quarter of 2005 and consolidate its production into another facility.
An impairment charge of $1.4 million on the equipment to be taken out of
service and $0.1 million of lease termination fees were recorded in 2004.
Other asset impairments recorded in 2004 totaled $0.4 million.
CORPORATE. The Company negotiated the termination of a lease on a
building in New York City that had been used by an operation that was
closed in 2002. The cost to terminate the lease and write off the
unamortized value of leasehold improvements was $1.2 million.
43
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
2003 ACTIVITY
Restructuring expenses and other charges were $6.9 million in 2003. The
following table and discussion present the details of these charges (in
thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses....... $ 815 $ 660 $ -- $ 1,475
Equipment moving expenses...................... 1,002 -- -- 1,002
Other costs.................................... 94 (10) -- 84
Reversal of unused accruals.................... (713) (318) -- (1,031)
------ ----- ------ -------
Total restructuring charges................ 1,198 332 -- 1,530
Other charges.................................. -- -- 5,330 5,330
------ ----- ------ -------
Total restructuring and other charges...... $1,198 $ 332 $5,330 $ 6,860
====== ===== ====== =======
The Company incurred employee separation expenses of $1.5 million in
connection with workforce reductions in both segments.
COMMERCIAL. The commercial segment announced the closure of the web
printing operation in Indianapolis, Indiana and the redeployment of its two
web presses and related equipment to St. Louis, Missouri and Baltimore,
Maryland in 2002. A substantial portion of the cost to dismantle, move and
reinstall this equipment was incurred during 2003.
The Company was able to sub-lease a facility which was idled as a
result of the consolidation of its envelope plant in the Northeast sooner
than estimated when the liability under the lease contract was established.
Accordingly, $0.5 million of the reserve recorded for this lease was
reversed. In addition, the remaining expenses that had been accrued to
cover the cost of maintaining a building that was sold in 2003 were
reversed.
RESALE. In 2002, the resale segment closed its business forms plant in
Clearwater, Florida and consolidated its production in its plants in
Fairhope, Alabama and Marshall, Texas. The employee separation expenses and
other costs incurred as a result of this consolidation were less than
originally estimated.
CORPORATE. In February 2004, a jury in Los Angeles County, California
returned a verdict in favor of an ex-employee who had sued the Company
alleging wrongful dismissal. In order to avoid the expense and risk of
further litigation and appeals, the Company settled the dispute. The amount
of the settlement and the costs of the litigation recorded in 2003 totaled
$5.3 million.
44
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
2002 ACTIVITY
Restructuring, impairment and other charges recorded in 2002 were
$74.6 million. The following table and discussion present the details of
these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses...... $ 4,090 $1,404 $ -- $ 5,494
Employee training expenses.................... 6,647 396 -- 7,043
Project management expenses................... 8,101 1,145 -- 9,246
Write-downs of property and equipment......... 12,178 1,650 -- 13,828
Other costs................................... 7,685 1,883 -- 9,568
Reversal of unused accrual.................... (500) -- -- (500)
------- ------ ------- -------
Total restructuring charges............... 38,201 6,478 -- 44,679
Other charges................................. 6,693 161 23,018 29,872
------- ------ ------- -------
Total restructuring, impairment and other
charges................................. $44,894 $6,639 $23,018 $74,551
======= ====== ======= =======
COMMERCIAL. The consolidation of envelope manufacturing facilities of
the commercial segment which began in 2001, was completed in 2002. The
objective of this consolidation was to reduce excess internal capacity and
improve utilization of the equipment and resources at the other envelope
plants in the United States and Canada. The costs incurred during 2002
related to this consolidation were as follows:
* Employee training expenses of $6.6 million were incurred to train new
employees hired at the plants that absorbed the production of the
plants that were closed. The training programs for these employees
were between three and nine months in duration.
* Project management expenses of $8.1 million that were primarily
consulting fees and related expenses were incurred to assist
management in managing the consolidation project. Consultants were
used to assist in such tasks as capacity planning, workflow planning,
production scheduling and change management.
* Impairment charges of $8.9 million were recorded for property and
equipment taken out of service or sold as a result of the plant
consolidations, net of proceeds of $5.9 million received from the
sales of those assets.
* Other costs of $3.0 million include the expenses incurred to
dismantle, move and reinstall equipment, and the costs incurred to
restore buildings to the condition required by lease agreements or to
maintain them while they were held for sale.
* In 2001, employee separation expenses were accrued to cover the 766
employees expected to be affected over the course of this project. At
the completion of the project, 722 employees had been separated and
the accrual was reduced by $0.5 million.
The Company's commercial printing operation in New York City was closed
in September 2002. Employee separation expenses of $1.0 million were
recorded covering 80 employees. Asset impairment charges of $1.0 million
and lease commitment and other expenses of $2.2 million were also recorded
in connection with this plant closure.
A web press was moved from Portland, Oregon to the web printing plant
in St. Louis and the consolidation of the web printing operation in
Indianapolis with the web plants in St. Louis and
45
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
Baltimore was announced. Employee separation expenses of $0.3 million were
recorded to cover the cost of 52 employees affected by these actions. Other
restructuring expenses included impairment charges of $1.0 million on
equipment taken out of service and $1.8 million to cover the expenses
associated with terminating lease commitments and the costs incurred in
2002 to dismantle, move and reinstall equipment.
Additionally, the commercial segment reduced the size of many of its
operations during 2002. The costs associated with these actions included
$2.8 million to cover the cost of the elimination of 331 jobs, impairment
charges of $1.3 million for equipment taken out of service and $0.7 million
for expenses associated with lease commitments and the cost incurred to
dismantle, move and reinstall equipment.
RESALE. During 2002, the resale segment closed its business forms plant
in Clearwater, Florida and its plant in Denver, Colorado. The employee
separation expenses covering 64 employees were $0.6 million. Impairment
charges related to equipment taken out of service as a result of these
closures totaled $0.6 million. Other expenses of $0.7 million primarily
related to expenses incurred to maintain two buildings held for sale.
The resale segment completed the closure of its envelope operations in
Hattiesburg, Mississippi. The costs in 2002 were $2.4 million which were
primarily impairment charges, consulting fees, the costs incurred to
dismantle, move and reinstall equipment and expenses incurred to clean up
the building.
The resale segment also incurred $2.2 million in expenses to reduce the
size of several of its other operations. Employee separation expenses
covering 193 employees were $0.8 million, asset impairments were $0.5
million and training, project management and other costs were $0.9 million.
OTHER CHARGES. Other charges include the following items:
* In connection with the refinancing of the bank credit facility in
June 2002, an operating lease stemming from a sale/leaseback
arrangement executed in 1997 and amended in 2000 had to be
refinanced. The value of the equipment subject to the lease was
reduced from $34.9 million to $19.1 million, requiring a payment of
the difference of $15.8 million. In addition, deferred costs of $6.1
million associated with the lease prior to this refinancing were
written off.
* The Company used outside assistance to implement best practices and
standardize costing and pricing systems. The cost of this assistance
was $4.4 million.
* Idle equipment in the commercial segment was written down $1.8
million to its net realizable value.
* Severance payments unrelated to the restructure plans were $1.1
million.
* The Company incurred consulting fees of $0.7 million related to tax
matters that arose as a result of the divestitures.
46
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
A summary of the activity charged to the 2002 restructuring liability
follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Initial accrual............................................ $ 6,572 $1,019 $ 7,591
Payments for severance................................. (2,581) (353) (2,934)
Payments for lease termination and property exit
costs................................................ -- (3) (3)
Payments for other costs............................... (1) (10) (11)
------- ------ -------
Balance at December 31, 2002............................... 3,990 653 4,643
Payments for severance................................. (189) (39) (228)
Payments for lease termination and property exit
costs................................................ (2,230) (47) (2,277)
Payments for other costs............................... (238) (220) (458)
Reversal of unused accrual............................. (54) (317) (371)
------- ------ -------
Balance at December 31, 2003............................... 1,279 30 1,309
Payments for lease termination and property exit
costs................................................ (406) (16) (422)
Payments for other costs............................... (220) -- (220)
------- ------ -------
Balance at December 31, 2004............................... $ 653 $ 14 $ 667
======= ====== =======
A summary of the activity charged to the 2001 restructuring liability
follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Balance at December 31, 2001............................... $10,899 $ 70 $10,969
Payments for severance................................. (5,026) -- (5,026)
Payments for lease termination and property exit
costs................................................ (2,406) (70) (2,476)
Reversal of unused accrual............................. (500) -- (500)
------- ---- -------
Balance at December 31, 2002............................... 2,967 -- 2,967
Payments for severance................................. (452) -- (452)
Payments for lease termination and property exit
costs................................................ (1,167) -- (1,167)
Reversal of unused accrual............................. (660) -- (660)
------- ---- -------
Balance at December 31, 2003............................... 688 -- 688
Payments for lease termination and property exit
costs................................................ (262) -- (262)
------- ---- -------
Balance at December 31, 2004............................... $ 426 $ $ 426
======= ==== =======
15. STOCK-BASED COMPENSATION
The Company has a Long-Term Equity Incentive Plan ("Incentive Plan").
The Incentive Plan is administered by the Compensation and Human Resources
Committee of the Board of Directors and allows the Company to grant stock
options, stock appreciation rights, restricted stock, and other stock-based
awards to officers, directors and employees. The Company has 3,042,315
shares available for issuance under the Incentive Plan.
STOCK OPTIONS
Stock options awarded under the Incentive Plan generally vest over five
years and expire in five to 10 years from the date of grant. Options are
granted at a price equal to the fair value of the Company's stock on the
date of grant.
47
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK-BASED COMPENSATION (CONTINUED)
The following table summarizes the activity of stock options for 2004,
2003 and 2002:
2004 2003 2002
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Options outstanding at beginning
of year........................ 5,738,569 $6.16 5,442,002 $6.96 6,128,637 $7.08
Granted.......................... 1,885,130 $3.72 1,021,044 $2.26 255,250 $4.63
Exercised........................ (19,331) $2.62 (30,831) $2.33 (11,230) $1.63
Expired/cancelled................ (612,993) $5.67 (693,646) $7.59 (930,655) $6.85
--------- --------- ---------
Options outstanding at end of
year........................... 6,991,375 $5.55 5,738,569 $6.16 5,442,002 $6.96
========= ========= =========
Options exercisable at end of
year........................... 3,858,396 $6.67 3,629,843 $6.49 2,458,607 $8.01
========= ========= =========
The following table summarizes information about stock options
outstanding at December 31, 2004:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------------- ----------- -------------- -------- ----------- --------
$ 1.32-$2.19.................. 679,282 3.0 $ 2.14 438,983 $ 2.13
$ 2.19-$4.37.................. 2,251,835 5.9 $ 3.70 330,075 $ 3.70
$ 4.37-$6.56.................. 2,600,600 1.8 $ 5.45 1,674,700 $ 5.44
$ 6.56-$8.74.................. 636,440 3.4 $ 7.71 592,020 $ 7.65
$ 8.74-$10.93................. 235,000 4.1 $ 9.71 234,400 $ 9.72
$ 10.93-$13.11................. 406,800 3.5 $12.33 406,800 $12.33
$ 13.11-$15.30................. 163,418 3.1 $13.78 163,418 $13.78
$ 21.86........................ 18,000 1.1 $21.86 18,000 $21.86
--------- ---------
$ 1.32-$21.86................. 6,991,375 3.6 $ 5.55 3,858,396 $ 6.67
========= =========
RESTRICTED STOCK
Restricted stock has been granted to certain key executives under the
Incentive Plan as a long-term incentive subject to continued employment.
These shares carry voting rights; however, the shares may not be sold prior
to vesting. Restricted stock granted in 2002 vests 50% after five years of
service and 100% after six years and had a fair value of $1.48. In 2004,
the Company granted 288,788 shares of restricted stock with a fair value of
$3.28 to key executives. These shares vest at the end of five years.
The Company has awarded restricted stock to the members of the Board of
Directors. Restricted stock granted to the directors totaled 14,922 shares
in 2004, 30,816 shares in 2003 and 9,582 in 2002. The fair value per share
was $4.02 in 2004, $2.92 in 2003 and $6.26 in 2002. All awards to the
directors were fully vested at December 31, 2004.
Upon the issuance of restricted stock, the Company records unearned
compensation as a charge to shareholders' equity for the fair value of the
restricted stock on the date of grant. This unearned compensation is
recognized as compensation expense ratably over the vesting period. The
Company recorded compensation expense related to restricted stock in the
amount of $0.7 million in 2004, $0.8 million in 2003 and $0.6 million in
2002.
48
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK-BASED COMPENSATION (CONTINUED)
The following table summarizes the activity for restricted stock for
2002, 2003 and 2004:
NUMBER OF SHARES
----------------
Outstanding at January 1, 2002.......... 669,000
Granted............................. 91,582
Vested.............................. (9,582)
Cancelled........................... (82,000)
-------
Outstanding at December 31, 2002........ 669,000
Granted............................. 30,816
Vested.............................. (30,816)
Cancelled........................... (25,000)
-------
Outstanding at December 31, 2003........ 644,000
Granted............................. 303,710
Vested.............................. (14,922)
-------
Outstanding at December 31, 2004........ 932,788
=======
16. RETIREMENT PLANS
SAVINGS PLAN. The Company sponsors a defined contribution plan to
provide substantially all U.S. salaried and certain hourly employees an
opportunity to accumulate personal funds for their retirement. The Company
matches a certain percentage of each employee's voluntary contribution. All
contributions made by the Company are made in cash and allocated to the
funds selected by the employee. Company contributions to the plan were
approximately $6.0 million in 2004, $6.0 million in 2003 and $6.5 million
in 2002. The plan held 4,594,544 shares of the Company's common stock at
December 31, 2004.
PENSION PLANS. The Company maintains pension plans for certain of its
employees in the U.S. and Canada under collective bargaining agreements
with unions representing these employees. The Company expects to continue
to fund these plans based on governmental requirements, amounts deductible
for income tax purposes and as needed to ensure that plan assets are
sufficient to satisfy plan liabilities.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS. As a result of the acquisition
of American Business Products ("ABP") in 2000, the Company assumed
responsibility for the ABP supplemental executive retirement plans ("SERP")
which provide benefits to certain former directors and executives of ABP.
For accounting purposes, these plans are unfunded; however, ABP had
purchased annuities, which are included in other assets in the consolidated
balance sheets. These annuities cover a portion of the liability to the
participants in these plans and the income from the annuities offsets a
portion of the cost of the plans.
49
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RETIREMENT PLANS (CONTINUED)
The following table sets forth the financial status of the pension
plans and the SERP and the amounts recognized in the Company's consolidated
balance sheets at December 31, 2004 and 2003 (in thousands):
PENSION PLANS SERP
--------------------- --------------------
2004 2003 2004 2003
-------- ------- ------- -------
Change in benefit obligation:
Benefit obligation at beginning of year......... $ 45,864 $34,810 $ 8,736 $ 9,051
Service cost.................................... 1,925 1,447 -- --
Interest cost................................... 2,787 2,664 652 670
Participant contributions....................... 495 461 -- --
Actuarial loss.................................. 3,677 3,997 -- --
Foreign currency translation.................... 3,093 5,057 -- --
Benefits paid................................... (2,677) (2,572) (978) (985)
-------- ------- ------- -------
Benefit obligation at end of year............. 55,164 45,864 8,410 8,736
-------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year.. $ 37,677 $31,188 $ -- $ --
Actual return on plan assets.................... 3,555 3,455 -- --
Participant contributions....................... 495 461 -- --
Employer contributions.......................... 2,841 595 -- --
Foreign currency translation.................... 3,211 4,859 -- --
Benefits paid................................... (2,677) (2,881) -- --
-------- ------- ------- -------
Fair value of plan assets at end of year...... 45,102 37,677 -- --
-------- ------- ------- -------
Funded status..................................... (10,062) (8,187) (8,410) (8,736)
Unrecognized actuarial loss....................... 21,450 18,540 -- --
Unrecognized prior service cost................... 510 239 -- --
Unrecognized transition asset..................... (3,606) (3,885) -- --
-------- ------- ------- -------
Net amount recognized............................. $ 8,292 $ 6,707 $(8,410) $(8,736)
======== ======= ======= =======
Amounts recognized in the consolidated balance
sheets:
Prepaid benefit cost.......................... $ 6,890 $ 5,100 $ -- $ --
Accrued benefit liability..................... (11,058) (7,507) (8,410) (8,736)
Intangible asset.............................. 517 250 -- --
Deferred tax asset............................ 4,599 3,412 -- --
Accumulated other comprehensive loss.......... 7,344 5,452 -- --
-------- ------- ------- -------
Net amount recognized............................. $ 8,292 $ 6,707 $(8,410) $(8,736)
======== ======= ======= =======
The components of the net periodic pension expense for the pension
plans and the SERP were as follows (in thousands):
2004 2003 2002
------- ------- -------
Service cost............................................ $ 1,925 $ 1,447 $ 1,185
Interest cost on projected benefit obligation........... 3,439 3,334 3,248
Expected return on plan assets.......................... (3,447) (3,622) (3,148)
Net amortization and deferral........................... (434) (482) (399)
Recognized actuarial loss............................... 826 295 179
------- ------- -------
Net periodic pension expense............................ $ 2,309 $ 972 $ 1,065
======= ======= =======
50
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RETIREMENT PLANS (CONTINUED)
The assumptions used in computing the net pension expense and the
funded status were as follows:
2004 2003 2002
-------- -------- -----
Weighted average discount rate........................ 5.75% 6.00% 6.75%
Expected long-term rate of return on assets........... 8.00% 8.00% 8.75%
Rate of compensation increase......................... 3.5-4% 3.5-4% 3-4%
The expected long-term rate of return on plan assets of 8.0% is based
on historical returns and the expectations for future returns for each
asset class in which plan assets are invested as well as the target asset
allocation of the investments of the plan assets. The asset allocations at
December 31, 2004 and 2003 and the target allocations for the investments
were as follows:
U.S. PLANS CANADIAN PLANS
---------------------------- ----------------------------
2004 2003 TARGET 2004 2003 TARGET
---- ---- ------ ---- ---- ------
Equity securities.................. 69% 70% 68% 47% 47% 50%
Debt securities, including cash.... 25% 25% 27% 53% 53% 50%
Real estate........................ 6% 5% 5% 0% 0% 0%
---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100%
The Company's investment objective is to maximize the long-term return
on the pension plan assets within prudent levels of risk. Investments are
diversified with a blend of equity and fixed income securities. Equity
investments are diversified by including U.S. and non-U.S. stocks, growth
stocks, value stocks and stocks of large and small companies.
The accumulated benefit obligation and fair value of plan assets for
the plans with accumulated benefit obligations in excess of plan assets
were as follows (in thousands):
U.S. PLANS CANADIAN PLANS
--------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Projected benefit obligation..................... $11,124 $10,556 $44,041 $35,308
Accumulated benefit obligation................... $10,977 $10,366 $38,293 $30,786
Fair value of plan assets........................ $ 8,517 $ 8,347 $36,585 $29,330
The increase in the minimum liability included in other comprehensive
income was $3.1 million in 2004 and $5.2 million in 2003.
The Company expects to contribute $3.1 million to its pension plans in
2005. Contributions to the SERP in 2005 will not be significant.
51
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RETIREMENT PLANS (CONTINUED)
The estimated pension benefit payments expected to be paid by the
pension plans and the estimated SERP payments expected to be paid by the
Company for the years 2005 through 2009, and in the aggregate for the years
2010 through 2014, are as follows (in thousands):
PENSION PLANS SERP
------------- ------
2005 ..................................... $ 2,772 $ 985
2006 ..................................... $ 2,823 $ 985
2007 ..................................... $ 2,861 $ 985
2008 ..................................... $ 2,914 $ 985
2009 ..................................... $ 2,881 $ 985
2010 - 2014 ..................................... $15,410 $3,485
Certain other U.S. employees are included in multi-employer pension
plans to which the Company makes contributions in accordance with
contractual union agreements. Such contributions are made on a monthly
basis in accordance with the requirements of the plans and the actuarial
computations and assumptions of the administrators of the plans.
Contributions to multi-employer plans were $3.0 million in 2004, $3.0
million in 2003 and $3.1 million in 2002.
17. COMMITMENTS AND CONTINGENCIES
LEASES. The Company leases buildings and equipment under operating
lease agreements expiring at various dates through 2011. Certain leases
include renewal and purchase options. At December 31, 2004, future minimum
annual payments under non-cancelable lease agreements with original terms
in excess of one year were as follows (in thousands):
2005................................. $ 33,765
2006................................. 27,931
2007................................. 23,902
2008................................. 15,395
2009................................. 8,958
Thereafter........................... 4,189
--------
Total............................ $114,140
========
Aggregate future minimum rentals to be received under noncancelable
subleases as of December 31, 2004 are approximately $1.3 million.
Rent expense was $37.7 million in 2004, $37.2 million in 2003 and $40.5
million in 2002.
CONCENTRATIONS OF CREDIT RISK. The Company has limited concentrations
of credit risk with respect to financial instruments. Temporary cash
investments and other investments are placed with high credit quality
institutions, and concentrations within accounts receivable are limited due
to the Company's customer base and its dispersion across different
industries and geographic areas.
LITIGATION. The Company is party to various legal actions that are
ordinary and incidental to its business. While the outcome of pending legal
actions cannot be predicted with certainty, management believes the outcome
of these various proceedings will not have a material adverse effect on the
Company's consolidated financial condition or results of operations.
52
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
TAX AUDITS. The Company's income, sales and use, and other tax returns
are routinely subject to audit by various authorities. The Company believes
that the resolution of any matters raised during such audits will not have
a material adverse effect on the Company's financial position or results of
operations.
18. EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing
net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect the
potential dilution that could occur if options to issue common stock were
exercised. A reconciliation of the amounts included in the computation of
basic earnings (loss) per share and diluted earnings (loss) per share is as
follows (in thousands, except per share amounts):
2004 2003 2002
-------- -------- --------
Numerator:
Numerator for basic and diluted earnings (loss) per
share--income (loss) from continuing operations........ $(20,938) $ 3,924 $(73,488)
======== ======== ========
Denominator:
Denominator for basic earnings (loss) per share--weighted
average shares......................................... 47,750 47,687 47,665
Effect of dilutive securities:
Stock options........................................ -- 628 --
-------- -------- --------
Denominator for diluted earnings (loss) per
share--adjusted weighted average shares................ 47,750 48,315 47,665
======== ======== ========
Earnings (loss) from continuing operations per share:
Basic and diluted.................................... $ (0.44) $ 0.08 $ (1.54)
======== ======== ========
In 2004 and 2002, outstanding options to purchase 1,145,000 and 50,000
common shares, respectively, were excluded from the calculation of diluted
earnings per share because the effect would have been antidilutive. In
2004, 2003 and 2002, outstanding options to purchase approximately
5,847,000, 5,111,000 and 5,392,000 common shares were excluded from the
calculation of net income per diluted common share because their exercise
price exceeded the average market price of the common stock for the year.
19. SEGMENT INFORMATION
The Company operates two business segments. The commercial segment
consists of commercial printing facilities that specialize in printing of
annual reports, car brochures, brand marketing collateral, catalogs, maps
and guidebooks, calendars, financial communications, and facilities that
produce customized envelopes for billing and remittance and direct mail
advertising. The commercial segment also offers such services as design,
fulfillment, e-commerce and inventory management. The resale segment
includes facilities that produce specialty packaging, customized and stock
labels, envelopes, and printed business documents which are sold to
distributors and value-added resellers of office products.
Intercompany sales were $25.2 million in 2004, $16.4 million in 2003
and $20.1 million in 2002 and are eliminated in consolidation and excluded
from reported net sales.
Segment operating income includes all costs and expenses directly
related to the commercial or resale segment. Corporate expenses include
general corporate overhead and expenses not allocated to the segments.
Identifiable assets are accumulated by facility within each business
segment. Corporate assets consist primarily of cash and cash equivalents,
miscellaneous receivables, deferred financing fees, deferred tax assets and
other assets.
53
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENT INFORMATION (CONTINUED)
The following tables present certain business segment information (in
thousands):
2004 2003 2002
---------- ---------- ----------
Net sales:
Commercial................................. $1,329,778 $1,272,525 $1,268,367
Resale..................................... 413,136 399,139 460,338
---------- ---------- ----------
Total...................................... $1,742,914 $1,671,664 $1,728,705
========== ========== ==========
Operating income (loss):
Commercial................................. $ 50,538 $ 58,704 $ 1,513
Resale..................................... 43,102 44,703 43,298
Corporate(a)............................... (20,905) (23,192) (61,267)
---------- ---------- ----------
Total...................................... $ 72,735 $ 80,215 $ (16,456)
========== ========== ==========
Restructuring, asset impairment and other
charges:
Commercial................................. $ 4,158 $ 1,198 $ 44,894
Resale..................................... -- 332 6,639
Corporate.................................. 1,249 5,330 23,018
---------- ---------- ----------
Total...................................... $ 5,407 $ 6,860 $ 74,551
========== ========== ==========
Significant noncash charges:
Commercial................................. $ 3,706 $ -- $ 14,015
Resale..................................... -- -- 1,650
Corporate.................................. 295 -- 25,378
---------- ---------- ----------
Total...................................... $ 4,001 $ -- $ 41,043
========== ========== ==========
Depreciation and intangible amortization:
Commercial................................. $ 42,355 $ 36,428 $ 36,014
Resale..................................... 9,574 9,106 11,389
Corporate(b)............................... 1,054 2,434 2,652
---------- ---------- ----------
Total...................................... $ 52,983 $ 47,968 $ 50,055
========== ========== ==========
Capital expenditures:
Commercial................................. $ 22,032 $ 28,507 $ 22,949
Resale..................................... 3,365 3,076 7,668
Corporate.................................. 2,038 19 279
---------- ---------- ----------
Total...................................... $ 27,435 $ 31,602 $ 30,896
========== ========== ==========
Net sales by product line:
Commercial printing........................ $ 821,332 $ 777,639 $ 769,930
Envelopes.................................. 719,465 693,929 754,238
Business forms and labels.................. 202,117 200,096 204,537
---------- ---------- ----------
Total...................................... $1,742,914 $1,671,664 $1,728,705
========== ========== ==========
54
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31
---------------------------
2004 2003
---------- ----------
Identifiable assets:
Commercial........................................ $ 829,682 $ 785,649
Resale............................................ 271,217 261,619
Corporate......................................... 62,877 60,125
---------- ----------
Total............................................. $1,163,776 $1,107,393
========== ==========
- --------
(a) Includes $5.3 million for the settlement of a lawsuit in 2003. In
2002, corporate expenses includes the $6.4 million loss on assets held
for sale and the $12.8 million impairment on operations formerly held
for sale.
(b) Includes adjustments to depreciation for assets held for sale in 2002.
Geographic information for 2004, 2003 and 2002 and at December 31, 2004
and 2003, is presented below (in thousands):
2004 2003 2002
---------- ---------- ----------
Net sales:
U.S........................................ $1,548,080 $1,482,443 $1,561,859
Canada..................................... 194,834 189,221 166,846
---------- ---------- ----------
Total...................................... $1,742,914 $1,671,664 $1,728,705
========== ========== ==========
Long-lived assets(a):
U.S........................................ $ 589,389 $ 597,713
Canada..................................... 115,597 109,606
---------- ----------
Total...................................... $ 704,986 $ 707,319
========== ==========
- --------
(a) Property, plant and equipment and intangible assets.
55
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
2004
Net sales........................................... $423,742 $409,396 $428,099 $481,677
Gross profit........................................ 88,420 83,634 84,503 92,836
Income (loss) from continuing operations............ (16,535) (3,296) 2,490 (3,597)
Gain (loss) on discontinued operations.............. -- 1,230 -- --
-------- -------- -------- --------
Net income (loss)................................... $(16,535) $ (2,066) $ 2,490 $ (3,597)
======== ======== ======== ========
Earnings (loss) per share--basic and diluted:
Income (loss) from continuing operations........ $ (0.35) $ (0.07) $ 0.05 $ (0.08)
Discontinued operations......................... -- 0.03 -- --
-------- -------- -------- --------
Net income (loss) per share--basic and diluted.. $ (0.35) $ (0.04) $ 0.05 $ (0.08)
======== ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
2003
Net sales........................................... $427,320 $407,826 $412,218 $424,300
Gross profit........................................ 83,920 79,121 81,877 89,628
Income (loss) from continuing operations............ 532 (1,681) 2,172 2,901
Gain (loss) on discontinued operations.............. 2,500 (581) -- (371)
Cumulative effect of change in accounting
principle......................................... (322) -- -- --
-------- -------- -------- --------
Net income (loss)................................... $ 2,710 $ (2,262) $ 2,172 $ 2,530
======== ======== ======== ========
Earnings (loss) per share--basic and diluted:
Income (loss) from continuing operations........ $ 0.01 $ (0.04) $ 0.05 $ 0.06
Discontinued operations......................... 0.05 (0.01) -- (0.01)
Cumulative effect of change in accounting
principle..................................... -- -- -- --
-------- -------- -------- --------
Net income (loss) per share--basic and
diluted....................................... $ 0.06 $ (0.05) $ 0.05 $ 0.05
======== ======== ======== ========
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The management of the Company, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended) as of December 31,
2004. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures
were sufficiently effective to ensure that the information required to be
disclosed by us in this Annual Report on Form 10-K was recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and instructions for Form 10-K.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in the Company's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended), occurred during the fourth quarter of 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting. Management's Report on Internal
Control over Financial Reporting and the Report of Independent Registered
Public Accounting Firm thereon are set forth in Part II, Item 8 of the
Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Under the terms of the Company's Articles of Incorporation and Bylaws,
each of the Directors named below is to serve until the next annual meeting
of stockholders.
DIRECTOR
NAME AGE POSITION SINCE(1)
- ---- --- -------- ---------
Paul V. Reilly.................... 52 Director, CEO and President 1998
Thomas E. Costello(3)(5).......... 65 Director 2003
Paul F. Kocourek(2)(4)............ 54 Director 2004
Martin J. Maloney(2)(4)........... 60 Director 2003
David M. Olivier(3)(5)............ 61 Director 2003
Jerome W. Pickholz(2)(4).......... 72 Director 1994
Alister W. Reynolds(3)(5)......... 47 Director 2002
Susan O. Rheney(2)(4)............. 45 Chairman 2003
Wellington E. Webb(3)(5).......... 64 Director 2004
Gordon A. Griffiths............... 62 President--Commercial Segment
Allen C. Conway, Sr. ............. 47 President--Resale Segment
Herbert H. Davis III.............. 57 Senior Vice President--Corporate Development and Chief
Legal Officer
Michel P. Salbaing................ 59 Senior Vice President--Finance and Chief Financial
Officer
Brian P. Hairston................. 47 Vice President--Human Resources
William W. Huffman, Jr. .......... 56 Vice President--Corporate Controller
D. Robert Meyer, Jr. ............. 48 Vice President--Treasurer
Matthew H. Mitchell............... 40 Vice President--Chief Information Officer
Keith T. Pratt.................... 58 Vice President--Purchasing and Supply Chain Management
Wayne M. Wolberg.................. 55 Vice President--General Auditor
Mark L. Zoeller................... 45 Vice President--General Counsel and Secretary
- --------
(1) Directors serve one year terms.
(2) Member of the Governance and Nominating committee.
(3) Member of the Compensation and Human Resources committee.
(4) Member of the Audit committee.
(5) Member of the Employee Health and Safety committee.
PAUL V. REILLY, age 52, served as our President, Chief Executive Officer
and Chairman of the Board from 2001 until January 2005 when he announced his
resignation. Mr. Reilly will continue to serve as Chief Executive Officer
and President to assist with the transition to his successor. He has been a
Director since 1998. Mr. Reilly was our President and Chief Operating
Officer from 1998 to 2001 and was Senior Vice President--Finance and Chief
Financial Officer from 1995 to 1998. Mr. Reilly spent 14 years with
Polychrome Corporation, a prepress supplier to the printing industry, where
he held a number of positions including Assistant Corporate Treasurer,
Corporate Treasurer, Vice President and Chief Financial Officer and General
Manager of United States operations. Mr. Reilly is a Certified Public
Accountant.
THOMAS E. COSTELLO, age 65, became a Director in 2003. From 1992
through retirement in 2002, Mr. Costello served as Chief Executive Officer
of xpedx, a multi-billion dollar distributor of printing and packaging
products, and Senior Vice President of International Paper Co. xpedx is a
wholly owned
58
division of International Paper. He is also a Director of Cadmus
Communications Corporation, a customized content management, publisher's
fulfillment and custom packaging fulfillment company, Intertape Polymer
Group, a manufacturer of tape for plastic packaging, and Eagle Hospitality
Properties, Inc., a real estate investment trust. Mr. Costello is a member
of the Compensation and Human Resources committee and Chairman of the
Employee Health and Safety committee of the Board of Directors.
PAUL F. KOCOUREK, age 54, became a Director in August 2004. Mr.
Kocourek has been a Senior Partner with Booz/Allen/Hamilton, a global
strategy and technology consulting firm since 1993. Mr. Kocourek serves as
Senior Partner for the strategic leadership practice, and previously served
as Global Managing Partner of the Asia Pacific region and Global Managing
Partner of financial services. From 1993 through 1995, Mr. Kocourek served
on the Board of Directors of Booz/Allen/Hamilton. He received an MBA in
finance and accounting from the Wharton School of Business. Mr. Kocourek is
a member of the Audit committee and the Governance and Nominating committee
of the Board of Directors.
MARTIN J. MALONEY, age 60, became a Director in 2003. Since 1984 Mr.
Maloney has served as Chairman and Co-Founder of Broadford and Maloney,
Inc., an agency specializing in public relations, advertising and marketing
communications for graphic arts related companies. Since 1989 he has served
on the Board of Advisors of the New York University Center for Graphic Arts
Management. He is also a Director of the Association of Graphic
Communications and serves on the Board of Governors of Legatus. Mr. Maloney
served as Internal Auditor and prepared annual reports for companies for
over 20 years. Mr. Maloney is Chairman of the Governance and Nominating
committee and a member of the Audit committee of the Board of Directors.
DAVID M. OLIVIER, age 61, became a Director in 2003. Mr. Olivier was
with Wyeth Corporation, a pharmaceutical company, and its affiliated
entities for over 35 years when he retired in 2002. He was a member of the
executive and finance committees and a corporate senior vice president at
the time of his retirement. He is a Director and advisor to Taratec Corp.,
a pharmaceutical compliance company, and chairman of Alterna, LLC, a
private equity investment company. He received an MBA from the University
of California at Berkeley. Mr. Olivier is a member of the Compensation and
Human Resources committee and the Employee Health and Safety committee of
the Board of Directors.
JEROME W. PICKHOLZ, age 72, has been a Director since 1994. Mr.
Pickholz is chairman emeritus of Ogilvy & Mather Direct Worldwide, a direct
advertising agency, where he served as chief executive officer from 1978
until 1994, and as chairman in 1994 and 1995. Mr. Pickholz served as
founder and chairman of Pickholz, Tweedy, Cowan, L.L.C., a marketing
communications company, from 1996 until 2001 and he has been a direct
marketing consultant since 2001. He also serves as a Director of Gift
Certificates.com, Inc., a provider of gift certificate products and
services. Mr. Pickholz is a Certified Public Accountant and serves as
chairman of our Audit committee and a member of our Governance and
Nominating committee of the Board of Directors.
ALISTER W. REYNOLDS, age 47, has been a director since 2002. In 2004
Mr. Reynolds concluded a 22 year career with Quest Diagnostics, Inc., a
provider of diagnostic laboratory testing services, and its former parent
company, Corning Incorporated. Mr. Reynolds served in various positions
including Senior Vice President of Operations and, most recently, Senior
Advisor to the Office of the Chairman. Mr. Reynolds received an MBA in
finance from Cornell University. He is also a Director of three privately
held companies: SomaLogic Incorporated, Healthcare Waste Solutions, and
Viecore Incorporated. Mr. Reynolds serves as Chairman of the Compensation
and Human Resources committee and is a member of the Employee Health and
Safety committee of the Board of Directors.
SUSAN O. RHENEY, age 45, has been a Director since 2003 and was
appointed Chairman of the Board in January 2005. Ms. Rheney previously
served as a Director of Cenveo from 1993 to 1997. She was a principal in The
Sterling Group, L.P., a private investment company, from 1992 to 2002. Ms.
Rheney is a Director of Genesis Energy LP, an oil pipeline company, and
Texas Petrochemical Holdings, Inc., a chemical manufacturer. Texas
Petrochemical filed a voluntary petition for reorganization under Chapter 11
of the United States Bankruptcy Code in July 2003. In connection
59
with this filing, the holder of discount notes issued by Texas Petrochemical
filed a lawsuit against the Directors and officers of Texas Petrochemical in
December 2003, which suit has been administratively terminated by the
bankruptcy court. Ms. Rheney received an MBA from Harvard University. She is
a Certified Public Accountant and was an auditor for the accounting firm of
Deloitte & Touche. Ms. Rheney is a member of the Audit committee and the
Governance and Nominating committee of the Board of Directors.
WELLINGTON E. WEBB, age 64, has been a Director since August 2004.
Former Mayor Webb was elected Mayor of Denver in 1991 and reelected in 1995
and 1999. In 2003 he established a consulting service, Webb Group
International LLC, which assists cities with local economic projects and
economic opportunities in Asia and Africa. He is also a Director of Maximus
Corporation, which provides services to governmental agencies, the National
Homebuyers Association and The Labor's Community Agency and is the Vice
Chair of the Democratic National Committee. Former Mayor Webb is a member
of the Compensation and Human Resources committee and the Employee Health
and Safety committee of the Board of Directors.
ALLEN C. CONWAY, SR. age 47, has served as Executive Vice President of
Cenveo and President of our Resale Segment since September 2004. Mr. Conway
has served Cenveo and its predecessor companies for over 26 years, including
as Vice President of our Printxcel division from 2000 to 2003 and Executive
Vice President of the Custom division of our Resale Segment from 2003 until
September 2004 when he became President of our Resale Segment.
GORDON A. GRIFFITHS, age 62, served as Senior Vice President since 2002
and as President of our Commercial Segment since our reorganization in
October 2003. From April 2002 until October 2003, he served as President
and Chief Executive Officer of our former Commercial Printing Division.
From February 2000 until April 2002, Mr. Griffiths was Chairman and Chief
Executive Officer of Pareto Corporation, a Canadian knowledge services
provider. He continues to serve as Director of Pareto Corporation. In 2000,
Mr. Griffiths co-founded the Caxton Group, a marketing services agency,
which became a public company in 2001. He was President of St. Joseph
Corporation, Canada's largest privately owned printer, from May 1997 until
February 2000.
HERBERT H. "WOODY" DAVIS III, age 57, has been Senior Vice
President--Corporate Development and Chief Legal Officer since August 2001.
Before that, Mr. Davis was in the private practice of law and was a partner
at the Denver, Colorado law firm of Rothgerber Johnson & Lyons LLP for over
20 years. Mr. Davis remains "Of Counsel" at Rothgerber Johnson & Lyons LLP.
MICHEL P. SALBAING, age 59, has been Senior Vice President--Finance and
Chief Financial Officer since November 2000. From 1996 to November 2000,
Mr. Salbaing was with Quebecor World, then the largest North American
printer, where he held a number of positions including Chief Financial
Officer of the overall corporation, President and Chief Executive Officer
of Quebecor Printing Europe and Senior Vice President and Chief Financial
Officer of Quebecor World North America. Before 1996 Mr. Salbaing held
various senior financial positions with three large Canadian manufacturing
firms and spent eight years with Ernst & Young LLP. Mr. Salbaing is a
member of the Canadian Institute of Chartered Accountants.
BRIAN P. HAIRSTON, age 47, has been Vice President--Human Resources
since August 2002. From April 2001 through August 2002, he was a human
resources consultant for a variety of firms. From October 1999 until April
2001, he was Senior Vice President--Human Resources for Kellogg
Corporation, a cereal producer. From 1997 to 1999, he served as Vice
President--Human Resources for CitiGroup, a financial institution.
WILLIAM W. HUFFMAN, JR., age 56, has been Vice President--Corporate
Controller since November 2000. From January 1999 to November 2000, he was
Vice President--Chief Financial Officer of the Company's commercial
printing division. In 1997 and 1998, he was a financial consultant. Mr.
Huffman began his career with the accounting firm of Coopers & Lybrand and
is a Certified Public Accountant.
60
D. ROBERT MEYER, JR., age 48, has been Vice President--Treasurer since
1998. From 1994 to 1998, Mr. Meyer was a partner in the tax department of
the accounting firm of Deloitte & Touche LLP. Mr. Meyer is a licensed
attorney, Certified Public Accountant and Certified Financial Planner.
MATTHEW H. MITCHELL, age 40, has been Vice President--Chief Information
Officer since December 2003. From 1996 to November 2003, he served as Vice
President--Information Services with Aramark Educational Resources, Inc.,
an educational service provider.
KEITH T. PRATT, age 58, has been Vice President--Purchasing and Supply
Chain Management since 1998. From 1994 to 1998, Mr. Pratt was Vice
President of Material Sourcing and Logistics of Ply Gem Industries, a
subsidiary of Nortek, Inc., a building products manufacturer.
WAYNE M. WOLBERG, age 55, has been Vice President--General Auditor
since October 2001. From June 2000 to April 2001, he served as Vice
President--Finance of AT&T Broadband. Mr. Wolberg was Vice President and
General Auditor of MediaOne from 1996 to 2000. He is a Certified Management
Accountant.
MARK L. ZOELLER, age 45, has been Vice President--General Counsel and
Secretary since January 2003. He joined the Company in 1997 as Corporate
Counsel, was Assistant General Counsel from May 2000 to May 2001 and was
Vice President--Corporate Development from May 2001 until January 2003. He
is a licensed attorney.
The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD
COMPENSATION--Corporate Governance, --Nomination of Directors, and --Board
Procedures and Committees," and "OTHER INFORMATION--Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy
Statement filed pursuant to Regulation 14A in connection with the 2005
Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD
COMPENSATION--Board Compensation," and "--Compensation and Human Resources
Committee Interlocks and Insider Participation," "COMPENSATION OF EXECUTIVE
OFFICERS," appearing in the Company's Proxy Statement filed pursuant to
Regulation 14A in connection with the 2005 Annual Meeting of Stockholders
are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The sections captioned "OWNERSHIP OF VOTING SECURITIES" and
"COMPENSATION OF EXECUTIVE OFFICERS--Equity Compensation Plan Information"
appearing in the Company's Proxy Statement filed pursuant to Regulation 14A
in connection with the 2005 Annual Meeting of Stockholders are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Executive
Agreements--Loan to Mr. Salbaing" appearing in the Company's Proxy
Statement filed pursuant to Regulation 14A in connection with the 2005
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The sections captioned "INDEPENDENT PUBLIC AUDITORS" and "REPORT OF THE
AUDIT COMMITTEE" appearing in the Company's Proxy Statement filed pursuant
to Regulation 14A in connection with the 2005 Annual Meeting of
Stockholders are incorporated herein by reference.
61
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
Included in Part II, Item 8 of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this Report:
PAGE
----
Schedule I Valuation and Qualifying Accounts for the Years Ended
December 31, 2004, 2003, and 2002......................... 66
(a)(3) EXHIBITS
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--as amended February 24, 2005.
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.
62
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.
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 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.
10.14 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.
10.15 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
63
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23* Amendment No. 1 to Second Amended and Restated Credit Agreement
dated February 8, 2005 among Cenveo, Inc., Cenveo Corporation,
certain subsidiaries of Cenveo Corporation, the lenders under
the Second Amended and Restated Credit Agreement, and Bank of
America, N.A., as administrative agent for the lenders.
21* Subsidiaries of the Company.
23* Consent of Ernst & Young LLP.
24 Power of Attorney--incorporated by reference to page 68.
31.1* Certification of Periodic Report by Paul V. Reilly, Chief Executive
Officer and President, 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.
64
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
32.1** Certification of Periodic Report by Paul V. Reilly, Chief Executive
Officer and President, 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.
(b) EXHIBITS FILED
Included in Item 15(a)(3) of this Report.
(c) FINANCIAL STATEMENT SCHEDULES FILED
Included in Item 15(a)(2) of this Report.
65
SCHEDULE I
CENVEO, INC. AND SUBSIDIARIES
SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(amounts in thousands)
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------
2004 2003 2002
------- ------- -------
ACCOUNTS RECEIVABLE ALLOWANCES
Balance at beginning of year......................... $ 3,984 $ 4,673 $ 5,385
Charged to costs and expenses........................ 3,335 3,276 4,026
Recoveries and other charges(2)...................... (133) (72) 552
Deductions(1)........................................ (2,448) (3,893) (5,290)
------- ------- -------
Balance at end of year............................... $ 4,738 $ 3,984 $ 4,673
======= ======= =======
INVENTORY RESERVES
Balance at beginning of year......................... $ 4,995 $ 5,668 $ 4,636
Charged to costs and expenses........................ 1,127 2,072 2,830
Recoveries and other charges(2)...................... (1,051) (1,511) (602)
Deductions(1)........................................ (371) (1,234) (1,196)
------- ------- -------
Balance at end of year............................... $ 4,700 $ 4,995 $ 5,668
======= ======= =======
- --------
(1) Accounts and inventories written off.
(2) Other charges includes acquired balances in 2004 and changes
attributable to foreign currency translation.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Englewood, state of Colorado, on February 28, 2004.
CENVEO, INC.
By: /s/ Paul V. Reilly
-------------------------------------------
Paul V. Reilly, Director,
Chief Executive Officer and President
(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)
67
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons
in the capacities and on the dates indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Herbert H. Davis III as attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any
amendments to this report and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Paul V. Reilly
----------------------------
Paul V. Reilly Director, Chief Executive February 28, 2005
Officer & President
/s/ Thomas E. Costello
----------------------------
Thomas E. Costello Director February 28, 2005
/s/ Paul F. Kocourek
----------------------------
Paul F. Kocourek Director February 28, 2005
/s/ Martin J. Maloney
----------------------------
Martin J. Maloney Director February 28, 2005
/s/ David M. Olivier
----------------------------
David M. Olivier Director February 28, 2005
/s/ Jerome W. Pickholz
----------------------------
Jerome W. Pickholz Director February 28, 2005
/s/ Alister W. Reynolds
----------------------------
Alister W. Reynolds Director February 28, 2005
/s/ Susan O. Rheney
----------------------------
Susan O. Rheney Director, Chairman February 28, 2005
/s/ Wellington E. Webb
----------------------------
Wellington E. Webb Director February 28, 2005
68