10-Q 1 cen10q.txt ============================================================================ ---------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 COMMISSION FILE NUMBER 1-12551 ------------------------ CENVEO, INC. (Exact name of Registrant as specified in its charter.) COLORADO 84-1250533 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8310 S. VALLEY HIGHWAY, #400 ENGLEWOOD, CO 80112 (Address of principal executive offices) (Zip Code)
303-790-8023 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes /X/ No / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 29, 2004 was $73,109,398. As of July 29, 2004 the Registrant had 48,413,044 shares of Common Stock, $0.01 par value, outstanding. ---------------------------------------------------------------------------- ============================================================================ TABLE OF CONTENTS PART I--FINANCIAL INFORMATION PAGE ---- Item 1. Condensed Consolidated Financial Statements................. 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 29 Item 4. Controls and Procedures..................................... 29 PART II--OTHER INFORMATION Item 5. Submission of Matters to a Vote of Securities Holders....... 30 Item 6. Exhibits and Reports on Form 8-K............................ 30 i PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
JUNE 30, 2004 (UNAUDITED) DECEMBER 31, 2003 ------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 165 $ 307 Accounts receivable, net................................ 218,588 223,541 Inventories, net........................................ 111,278 91,402 Other current assets.................................... 44,349 48,135 ---------- ---------- TOTAL CURRENT ASSETS................................ 374,380 363,385 Property, plant and equipment, net.......................... 374,419 388,240 Goodwill.................................................... 297,585 299,392 Other intangible assets, net................................ 17,140 19,687 Other assets, net........................................... 40,504 36,689 ---------- ---------- TOTAL ASSETS................................................ $1,104,028 $1,107,393 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 146,507 $ 140,468 Accrued compensation and related liabilities............ 54,421 53,209 Other current liabilities............................... 59,379 64,360 Current maturities of long-term debt.................... 2,584 2,575 ---------- ---------- TOTAL CURRENT LIABILITIES........................... 262,891 260,612 Long-term debt, less current maturities..................... 770,372 746,386 Deferred income taxes....................................... -- 6,717 Other liabilities........................................... 26,140 25,659 ---------- ---------- TOTAL LIABILITIES........................................... 1,059,403 1,039,374 Commitments and contingencies SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value; 25,000 shares authorized, none issued............................... -- -- Common stock, $0.01 par value; 100,000,000 shares authorized, 48,413,044 and 48,380,457 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively.................................... 484 484 Paid-in capital......................................... 213,896 213,850 Retained deficit........................................ (168,933) (150,331) Deferred compensation................................... (1,424) (1,714) Accumulated other comprehensive income.................. 602 5,730 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY.......................... 44,625 68,019 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,104,028 $1,107,393 ========== ========== See notes to condensed consolidated financial statements.
1 CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except earnings per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net sales................................. $409,396 $407,826 $833,138 $835,146 Cost of sales............................. 325,762 328,705 661,084 672,098 -------- -------- -------- -------- Gross profit.............................. 83,634 79,121 172,054 163,048 Operating expenses: Selling, general and administrative... 66,415 62,722 134,413 126,157 Amortization of intangibles........... 1,396 418 2,801 863 Restructuring charges................. 1,018 356 1,121 1,125 -------- -------- -------- -------- Operating income.......................... 14,805 15,625 33,719 34,903 Other expense: Interest expense...................... 17,513 18,119 35,912 36,333 Loss from the early extinguishment of debt................................ -- -- 17,748 -- Other................................. 527 355 968 487 -------- -------- -------- -------- Loss from continuing operations before income taxes and cumulative effect of a change in accounting principle.......... (3,235) (2,849) (20,909) (1,917) Income tax expense (benefit).............. 61 (1,168) (1,078) (767) -------- -------- -------- -------- Loss from continuing operations before cumulative effect of a change in accounting principle.................... (3,296) (1,681) (19,831) (1,150) Loss (gain) on disposal of discontinued operations, net of taxes of $770 in 2004.................................... (1,230) 581 (1,230) (1,919) Cumulative effect of a change in accounting principle.................... -- -- -- 322 -------- -------- -------- -------- Net income (loss)......................... $ (2,066) $ (2,262) $(18,601) $ 447 ======== ======== ======== ======== Earnings (loss) per share--basic and diluted: Continuing operations................. $ (0.07) $ (0.04) $ (0.42) $ (0.02) Discontinued operations............... 0.03 (0.01) 0.03 0.04 Cumulative effect of a change in accounting principle................ -- -- -- (0.01) -------- -------- -------- -------- Earnings (loss) per share--basic and diluted................................. $ (0.04) $ (0.05) $ (0.39) $ 0.01 ======== ======== ======== ======== Weighted average shares--basic............ 47,740 47,679 47,737 47,672 Weighted average shares--diluted.......... 47,740 47,679 47,737 48,207 See notes to condensed consolidated financial statements.
2 CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
SIX MONTHS ENDED JUNE 30, ----------------------------- 2004 2003 ----------- --------- Cash flows from operating activities: Loss from continuing operations........................... $ (19,831) $ (1,150) Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: Depreciation.......................................... 22,841 23,347 Amortization.......................................... 5,093 2,815 Write-off of deferred financing fees.................. 4,220 -- Deferred income tax benefit........................... (7,949) (6,270) Loss on disposal of assets............................ 240 581 Other noncash charges, net............................ (366) 846 Changes in operating assets and liabilities, excluding the effects of operations sold: Accounts receivable................................... 4,210 26,150 Inventories........................................... (20,011) 4,070 Accounts payable and accrued compensation............. 7,686 (37,009) Income taxes payable.................................. (991) 8,808 Other working capital changes......................... 211 (2,634) Other, net............................................ (76) 605 ----------- --------- Net cash provided by (used in) operating activities........................................ (4,723) 20,159 Cash flows from investing activities: Capital expenditures.................................. (12,460) (13,010) Proceeds from divestitures, net....................... 2,000 3,864 Proceeds from sales of property, plant and equipment.. 346 627 ----------- --------- Net cash used in investing activities............... (10,114) (8,519) Cash flows from financing activities: Proceeds from issuance of long-term debt.............. 1,677,071 947,205 Repayments of long-term debt.......................... (1,653,074) (960,947) Proceeds from issuance of common stock................ 46 16 Capitalized loan fees................................. (8,936) (437) ----------- --------- Net cash provided by (used in) financing activities........................................ 15,107 (14,163) Effect of exchange rate changes on cash and cash equivalents............................................... (412) 619 ----------- --------- Net decrease in cash and cash equivalents........... (142) (1,904) Cash and cash equivalents at beginning of year.............. 307 2,650 ----------- --------- Cash and cash equivalents at end of quarter................. $ 165 $ 746 =========== ========= See notes to condensed consolidated financial statements.
3 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Cenveo, Inc. (formerly known as Mail-Well, Inc.) and subsidiaries (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2003. The Company's reporting periods in this report consist of thirteen and twenty-six week periods, respectively, ending on the Saturday closest to the last day of the calendar month. The reporting periods for 2004 and 2003 ended June 26, 2004 and June 28, 2003, respectively. For convenience, the accompanying financial statements have been shown as ending on the last day of the calendar month. On April 29, 2004, the shareholders of the Company approved the change of the Company's name from Mail-Well, Inc. to Cenveo, Inc. 2. STOCK-BASED COMPENSATION Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the measurement date over the amount an employee must pay to acquire the stock. If the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's reported and pro forma net income (loss) and earnings (loss) per share would have been as follows (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ---------------------- 2004 2003 2004 2003 ------- ------- -------- ------- Net income (loss): As reported............................ $(2,066) $(2,262) $(18,601) $ 447 Pro forma.............................. $(2,706) $(3,139) $(19,666) $(1,274) Earnings (loss) per share--basic and diluted: As reported............................ $ (0.04) $ (0.05) $ (0.39) $ 0.01 Pro forma.............................. $ (0.06) $ (0.07) $ (0.41) $ (0.03)
The effect on pro forma net income (loss), earnings (loss) per share--basic and earnings (loss) per share--diluted of expensing the estimated fair value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of the stock options and the potential for issuance of additional stock options. 4 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. STOCK-BASED COMPENSATION (CONTINUED) Upon the issuance of restricted stock, the Company records deferred compensation as a charge to shareholders' equity for the market value of the restricted stock on the grant date. This deferred compensation is being recognized as compensation expense ratably over the vesting period. The Company recorded compensation expense in the amount of $0.1 million and $0.3 million for the three and six months ended June 30, 2004 and $0.2 million and $0.3 million for the three and six months ended June 30, 2003. 3. SUPPLEMENTAL INFORMATION INVENTORIES The Company's inventories by major category were as follows (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ Raw materials........................................... $ 34,410 $ 28,344 Work in process......................................... 26,910 21,483 Finished goods.......................................... 54,862 46,570 -------- -------- 116,182 96,397 Reserves................................................ (4,904) (4,995) -------- -------- $111,278 $ 91,402 ======== ========
PROPERTY, PLANT AND EQUIPMENT The Company's investment in property, plant and equipment consisted of the following (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 --------- ------------ Land and land improvements............................. $ 19,684 $ 20,043 Buildings and building improvements.................... 109,621 109,563 Machinery and equipment................................ 518,865 511,820 Furniture and fixtures................................. 16,115 15,986 Construction in progress............................... 11,392 9,696 --------- --------- 675,677 667,108 Accumulated depreciation............................... (301,258) (278,868) --------- --------- $ 374,419 $ 388,240 ========= =========
COMPREHENSIVE INCOME (LOSS) A summary of the comprehensive income (loss) was as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ---------------------- 2004 2003 2004 2003 ------- ------- -------- ------- Net income (loss)......................... $(2,066) $(2,262) $(18,601) $ 447 Other comprehensive income (loss): Currency translation adjustment, net................................. (3,150) 11,099 (5,128) 18,487 ------- ------- -------- ------- Comprehensive income (loss)............... $(5,216) $ 8,837 $(23,729) $18,934 ======= ======= ======== =======
5 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUPPLEMENTAL INFORMATION (CONTINUED) AMORTIZATION EXPENSE Amortization expense reported in the condensed statements of cash flows includes the following:
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2004 JUNE 30, 2003 ---------------- ---------------- Amortization of intangibles........................ $2,801 $ 863 Amortization of deferred financing fees............ 2,192 1,952 Other.............................................. 100 -- ------ ------ Total amortization............................. $5,093 $2,815 ====== ======
The amortization of deferred financing fees is included in interest expense in the condensed consolidated statements of operations. 4. LONG-TERM DEBT At June 30, 2004 and December 31, 2003, long-term debt consisted of the following (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ Senior Secured Credit Facility, due 2008............... $ 80,116 $ 73,310 Senior Notes, due 2012................................. 350,000 350,000 Senior Subordinated Notes, due 2008.................... -- 300,000 Senior Subordinated Notes, due 2013.................... 320,000 -- Other.................................................. 22,840 25,651 -------- -------- 772,956 748,961 Less current maturities................................ (2,584) (2,575) -------- -------- Long-term debt..................................... $770,372 $746,386 ======== ========
Current maturities consist of scheduled payments on other long-term debt. In January 2004, the Company sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem the $300 million of 8 3/4% senior subordinated notes due 2008. The Company incurred costs of $7.1 million to issue the 7 7/8% senior subordinated notes. These costs have been deferred and will be amortized over the term of the notes. A loss of $17.7 million was recorded on the early extinguishment of the 8 3/4% senior subordinated notes consisting of redemption premiums of $13.5 million and unamortized debt issuance costs of $4.2 million. In March 2004, the Company amended its $300 million senior secured credit facility due 2005 to extend its term to June 2008. The cost incurred to amend the credit facility was $1.8 million. These debt issuance costs will be amortized over the extended term of the facility. As of June 30, 2004, the Company was in compliance with all of the covenants of its various debt agreements. GUARANTEES On May 21, 2002, the Company sold its prime label business. The Company continues to guarantee a lease obligation of this former business. The guarantee requires the lessor to pursue 6 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT (CONTINUED) collection and other remedies against the buyer of this business before demanding payment from the Company. The remaining payment under the lease term, which expires April 2008, totals approximately $5.4 million. If the Company were required to honor its obligation under the guarantee, any loss would be reduced by the amount generated from the liquidation of the equipment. The senior notes due 2012 and the senior subordinated notes due 2013 are guaranteed by Cenveo, Inc. (the "Parent Guarantor") and all of its wholly-owned operating subsidiaries (the "Guarantor Subsidiaries"). The guarantees are joint and several, full, complete and unconditional. There are no material restrictions on the ability of the Guarantor Subsidiaries to transfer funds to the issuing subsidiary in the form of cash dividends, loans or advances, other than ordinary legal restrictions under corporate law, fraudulent transfer and bankruptcy laws. 5. INCOME TAXES The income tax benefit recorded on the loss before income taxes was based on the effective tax rate of 5.2% for the six months ended June 30, 2004. The Company's effective tax rate was negatively impacted by the establishment of additional valuation allowances on certain deferred tax assets. Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS 109") requires the evaluation of the realizability of deferred tax assets on a quarterly basis. SFAS 109 requires a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence with respect to the realizability of deferred tax assets, establishment of a valuation allowance must be considered. Under provisions of SFAS 109, the substantial losses incurred by the Company over the most recent three-year period represent sufficient negative evidence. Accordingly, the Company is providing an additional valuation allowance to cover the estimated impairment of the U.S. related deferred tax asset arising from operating losses generated in 2004. In the second quarter of 2004, $6.4 million of tax contingency reserves established in prior years were deemed no longer necessary. Also in the second quarter of 2004, the Company added $6.0 million to its valuation allowance to cover the estimated impairment of certain capital loss carryforwards. This adjustment was necessary because of changes made to the assumptions used in the tax planning strategies available to the Company to fully utilize its capital loss carryforwards. 6. RESTRUCTURING CHARGES In February 2004, the commercial segment announced the closure of its envelope manufacturing plant in Bensalem, Pennsylvania and its integration into the Company's Philadelphia printing facility. The expenses incurred during the six months ended June 30, 2004 were $1.1 million and were primarily employee separation and related expenses; expenses incurred incidental to equipment moves; and preparing the building in Bensalem for sale. The total cost of the closure is expected to be approximately $2.2 million consisting of the following (in thousands): Employee separation and related expenses................ $ 875 Equipment write-downs, net.............................. 500 Equipment moving expenses............................... 225 Building clean-up and other expenses.................... 570 ------ Total............................................... $2,170 ======
The Company has substantially completed the restructuring programs initiated in June 2001 and 2002. 7 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. RESTRUCTURING CHARGES (CONTINUED) A summary of the activity charged to the 2002 restructuring liability during the six months ended June 30, 2004 is as follows (in thousands):
COMMERCIAL RESALE TOTAL ---------- ------ ------ Balance, December 31, 2003............................. $1,279 $ 30 $1,309 Payments for lease termination and property exit costs............................................ (261) (13) (274) Payments for other exit costs...................... (86) -- (86) ------ ---- ------ Balance, June 30, 2004................................. $ 932 $ 17 $ 949 ====== ==== ======
A summary of the activity charged to the 2001 restructuring liability during the six months ended June 30, 2004 is as follows (in thousands):
COMMERCIAL ---------- Balance, December 31, 2003.............................. $688 Payments for lease termination and property exit costs............................................. (153) ---- Balance, June 30, 2004.................................. $535 ====
7. PENSION PLANS The components of the net periodic pension cost for the Company's pension plans and the supplemental executive retirement plans were as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 2004 2003 2004 2003 ----- ----- ------- ------- Service cost................................. $ 521 $ 362 $ 1,065 $ 724 Interest cost................................ 765 833 1,476 1,667 Expected return on plan assets............... (812) (905) (1,656) (1,811) Net amortization and deferral................ 50 (47) 103 (93) Other........................................ -- 82 -- 165 ----- ----- ------- ------- Net periodic pension expense................. $ 524 $ 325 $ 988 $ 652 ===== ===== ======= =======
The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expects to contribute $2.8 million to its pension plans in 2004. As of June 30, 2004, contributions of $0.2 million have been made. 8 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LOSS PER SHARE Basic earnings per share exclude dilution and are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. A reconciliation of the amounts included in the computation of basic and diluted loss per share from continuing operations is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2004 2003 2004 2003 -------- ------- -------- ------- Numerator: Numerator for basic and diluted loss per share--loss from continuing operations...... $ (3,296) $(1,681) $(19,831) $(1,150) ======== ======= ======== ======= Denominator: Denominator for basic loss per share--weighted average shares.............................. 47,740 47,679 47,737 47,672 Effects of dilutive securities: Stock options and restricted stock........ -- -- -- 535 -------- ------- -------- ------- Denominator for diluted loss per share-- adjusted weighted average shares............ 47,740 47,679 47,737 48,207 ======== ======= ======== ======= Loss from continuing operations per share: Basic and diluted......................... $ (0.07) $ (0.04) $ (0.42) $ (0.02) ======== ======= ======== =======
In the three months ended June 30, 2004 and 2003, outstanding options and shares of restricted stock in the amount of 7,330,000 and 6,887,000, respectively, were excluded from the calculation of diluted loss per share because the effect would be antidilutive. In the six months ended June 30, 2004 and 2003, outstanding options and shares of restricted stock in the amount of 7,330,000 and 6,352,000, respectively, were excluded from the calculation of diluted loss per share because the effect would be antidilutive. 9. 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. During the first quarter of 2003, the Company recorded a gain on the disposal of discontinued operations in the amount of $2.5 million. This gain was the result of a change in the estimated tax impact of the disposition of its prime label business, which was sold in May 2002. The gain was reduced by $0.6 million in the second quarter of 2003 based on the completion of the tax return. 10. SEGMENT INFORMATION In October 2003, the Company reorganized into two operating segments: commercial and resale. This reorganization aligned the Company's structure with its strategic goals. Segment information for the three and six months ended June 30, 2003 has been restated to reflect the new operating segments. The commercial segment specializes in printing annual reports, car brochures, brand marketing collateral, financial communications, general commercial printing and the manufacturing and printing 9 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SEGMENT INFORMATION (CONTINUED) of customized envelopes for billing and remittance and direct mail advertising. The commercial segment also offers services such as design, fulfillment, e-commerce and inventory management. The products and services of the commercial segment are sold directly to national and local customers. The resale segment produces business forms and labels, custom and stock envelopes and specialty packaging and mailers. These products are generally sold through professional print distributors, business forms suppliers, office-products retail chains and the Internet. Operating income of each segment includes all costs and expenses directly related to the segment's operations. Corporate expenses include corporate general and administrative expenses. Inter-company sales for the three months ended June 30, 2004 and 2003 were $53.3 million and $34.5 million, respectively. Inter-company sales for the six months ended June 30, 2004 and 2003 were $102.1 million and $71.4 million, respectively. These amounts were eliminated in consolidation and excluded from reported net sales. The following tables present certain segment information for the three and six months ended June 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net sales: Commercial.......................... $307,583 $306,608 $631,432 $630,670 Resale.............................. 101,813 101,218 201,706 204,476 -------- -------- -------- -------- Total............................... $409,396 $407,826 $833,138 $835,146 ======== ======== ======== ======== Operating income (expense): Commercial.......................... $ 9,920 $ 10,285 $ 21,914 $ 22,765 Resale.............................. 12,359 10,455 23,822 22,309 Corporate........................... (7,474) (5,115) (12,017) (10,171) -------- -------- -------- -------- Total............................... $ 14,805 $ 15,625 $ 33,719 $ 34,903 ======== ======== ======== ======== Restructuring charges: Commercial.......................... $ 1,018 $ 410 $ 1,121 $ 1,320 Resale.............................. -- (54) -- (195) -------- -------- -------- -------- Total............................... $ 1,018 $ 356 $ 1,121 $ 1,125 ======== ======== ======== ======== Net sales by product line: Commercial printing................. $186,873 $185,638 $385,073 $382,468 Envelopes........................... 172,077 171,845 346,180 352,035 Business forms and labels........... 50,446 50,343 101,885 100,643 -------- -------- -------- -------- Total............................... $409,396 $407,826 $833,138 $835,146 ======== ======== ======== ========
11. SUBSEQUENT EVENT On July 6, 2004 the Company purchased the stock of Valco Graphics Inc., a commercial printing company in Seattle, Washington with annual sales of approximately $18 million, for $9.5 million in cash. The Company plans to combine its existing commercial printing operation in Seattle with Valco Graphics and operate the combined entity as Cenveo, Seattle. 10 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Cenveo Corporation (formerly known as Mail-Well I Corporation) ("Issuer"), the Company's wholly-owned subsidiary, and the only direct subsidiary of the Company, has issued $350 million aggregate principal amount of 9 5/8% Senior Notes ("Senior Notes") due in 2012 and $320 million aggregate principal amount of 7 7/8% Senior Subordinated Notes ("Senior Subordinated Notes") due in 2013. The Senior Notes and Senior Subordinated Notes are guaranteed by the Guarantor Subsidiaries and the Parent Guarantor. The guarantees are joint and several, full, complete and unconditional. There are no material restrictions on the ability of the Guarantor Subsidiaries to transfer funds to the issuer in the form of cash dividends, loans or advances, other than ordinary legal restrictions under corporate law, fraudulent transfer and bankruptcy laws. The following condensed consolidating financial information illustrates the composition of the Parent Guarantor, Issuer, and Guarantor Subsidiaries. The Issuer and the Guarantor Subsidiaries comprise all of the direct and indirect subsidiaries of the Parent Guarantor. Management has determined that separate complete financial statements would not provide additional material information that would be useful in assessing the financial composition of the Guarantor Subsidiaries. Investments in subsidiaries are accounted for under the equity method, wherein the investor company's share of earnings and income taxes applicable to the assumed distribution of such earnings are included in net income. In addition, investments increase in the amount of permanent contributions to subsidiaries and decrease in the amount of distributions from subsidiaries. The elimination entries remove the equity method investment in subsidiaries and the equity in earnings of subsidiaries, intercompany payables and receivables and other transactions between subsidiaries. 11 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED) June 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- ---------- ------------ ----------- ------------ Current assets: Cash and cash equivalents......... $ -- $ -- $ 165 $ -- $ 165 Accounts receivable, net.......... -- 54,196 164,392 -- 218,588 Inventories, net.................. -- 46,767 64,511 -- 111,278 Note receivable from subsidiaries..................... -- 603,100 -- (603,100) -- Other current assets.............. -- 26,266 18,083 -- 44,349 ------- ---------- -------- ----------- ---------- Total current assets............ -- 730,329 247,151 (603,100) 374,380 Investment in subsidiaries.......... 44,625 407,949 -- (452,574) -- Property, plant and equipment, net................................ -- 89,278 285,141 -- 374,419 Goodwill and other intangible assets, net........................ -- 67,289 247,436 -- 314,725 Deferred tax asset (liability)...... -- 12,402 (9,777) -- 2,625 Other assets, net................... -- 33,635 4,244 -- 37,879 ------- ---------- -------- ----------- ---------- Total assets........................ $44,625 $1,340,882 $774,195 $(1,055,674) $1,104,028 ======= ========== ======== =========== ========== Current liabilities: Accounts payable.................. $ -- $ 42,266 $104,241 $ -- $ 146,507 Other current liabilities......... -- 51,159 62,641 -- 113,800 Intercompany payable (receivable)..................... -- 417,637 (417,637) -- -- Note payable to Issuer............ -- -- 603,100 (603,100) -- Current maturities of long-term debt............................. -- 1,784 800 -- 2,584 ------- ---------- -------- ----------- ---------- Total current liabilities....... -- 512,846 353,145 (603,100) 262,891 Long-term debt, less current maturities......................... -- 766,037 4,335 -- 770,372 Other liabilities................... -- 17,374 8,766 -- 26,140 ------- ---------- -------- ----------- ---------- Total liabilities............... -- 1,296,257 366,246 (603,100) 1,059,403 Shareholders' equity................ 44,625 44,625 407,949 (452,574) 44,625 ------- ---------- -------- ----------- ---------- Total liabilities and shareholders' equity............................. $44,625 $1,340,882 $774,195 $(1,055,674) $1,104,028 ======= ========== ======== =========== ==========
12 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION December 31, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ --------- ------------ Current assets: Cash and cash equivalents............ $ -- $ -- $ 307 $ -- $ 307 Accounts receivable, net............. -- 50,125 173,416 -- 223,541 Inventories, net..................... -- 35,509 55,893 -- 91,402 Note receivable from subsidiaries.... -- 603,100 -- (603,100) -- Other current assets................. -- 32,109 16,026 -- 48,135 ------- -------- -------- --------- ---------- Total current assets............... -- 720,843 245,642 (603,100) 363,385 Investment in subsidiaries............. 68,019 12,364 -- (80,383) -- Property, plant and equipment, net..... -- 90,956 297,284 -- 388,240 Goodwill and other intangible assets, net................................... -- 67,474 251,605 -- 319,079 Other assets, net...................... -- 29,322 7,367 -- 36,689 ------- -------- -------- --------- ---------- Total assets........................... $68,019 $920,959 $801,898 $(683,483) $1,107,393 ======= ======== ======== ========= ========== Current liabilities: Accounts payable..................... $ -- $ 29,092 $111,376 $ -- $ 140,468 Other current liabilities............ -- 58,868 58,701 -- 117,569 Intercompany payable (receivable).... -- 9,059 (9,059) -- -- Note payable to Issuer............... -- -- 603,100 (603,100) -- Current maturities of long-term debt................................ -- 1,776 799 -- 2,575 ------- -------- -------- --------- ---------- Total current liabilities.......... -- 98,795 764,917 (603,100) 260,612 Long-term debt, less current maturities............................ -- 741,589 4,797 -- 746,386 Deferred income taxes.................. -- (4,040) 10,757 -- 6,717 Other long-term liabilities............ -- 16,596 9,063 -- 25,659 ------- -------- -------- --------- ---------- Total liabilities.................. -- 852,940 789,534 (603,100) 1,039,374 Shareholders' equity................... 68,019 68,019 12,364 (80,383) 68,019 ------- -------- -------- --------- ---------- Total liabilities and shareholders' equity................................ $68,019 $920,959 $801,898 $(683,483) $1,107,393 ======= ======== ======== ========= ==========
13 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended June 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ ------ ------------ Net sales................................. $ -- $100,793 $308,603 $ -- $409,396 Cost of sales............................. -- 82,734 243,028 -- 325,762 ------- -------- -------- ------ -------- Gross profit.............................. -- 18,059 65,575 -- 83,634 Operating expenses: Selling, general and administrative..... -- 17,269 50,542 -- 67,811 Restructuring charges................... -- -- 1,018 -- 1,018 ------- -------- -------- ------ -------- Operating income.......................... -- 790 14,015 -- 14,805 Other expense: Interest expense........................ -- 17,461 52 -- 17,513 Intercompany interest expense (income)............................... -- (12,713) 12,713 -- -- Other................................... -- 638 (111) -- 527 ------- -------- -------- ------ -------- Income (loss) from continuing operations, before income taxes and undistributed earnings of subsidiaries................. -- (4,596) 1,361 -- (3,235) Income tax expense (benefit).............. -- (239) 300 -- 61 ------- -------- -------- ------ -------- Income (loss) from continuing operations, before undistributed earnings of subsidiaries............................. -- (4,357) 1,061 -- (3,296) Gain on disposal of discontinued operations, net of taxes of $770......... -- (1,230) -- -- (1,230) Equity in undistributed earnings of subsidiaries............................. (2,066) 1,061 -- 1,005 -- ------- -------- -------- ------ -------- Net income (loss)......................... $(2,066) $ (2,066) $ 1,061 $1,005 $ (2,066) ======= ======== ======== ====== ========
14 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended June 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ -------- ------------ Net sales............................... $ -- $101,904 $305,922 $ -- $407,826 Cost of sales........................... -- 85,035 243,670 -- 328,705 ------- -------- -------- -------- -------- Gross profit............................ -- 16,869 62,252 -- 79,121 Other operating expenses................ -- 18,054 45,086 -- 63,140 Restructuring and other charges......... -- -- 356 -- 356 ------- -------- -------- -------- -------- Operating income (loss)................. -- (1,185) 16,810 -- 15,625 Other expense (income): Interest expense...................... -- 18,172 13,650 (13,703) 18,119 Other expense (income)................ -- (13,724) 376 13,703 355 ------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries........................... -- (5,633) 2,784 -- (2,849) Income tax expense (benefit)............ -- (2,206) 1,038 -- (1,168) ------- -------- -------- -------- -------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries........................ -- (3,427) 1,746 -- (1,681) Equity in undistributed earnings of subsidiaries........................... (2,262) 1,746 -- 516 -- ------- -------- -------- -------- -------- Income (loss) from continuing operations............................. (2,262) (1,681) 1,746 516 (1,681) Loss on disposal........................ -- 581 -- -- 581 ------- -------- -------- -------- -------- Net income (loss)....................... $(2,262) $ (2,262) $ 1,746 $ 516 $ (2,262) ======= ======== ======== ======== ========
15 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Six Months Ended June 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ -------- ------------ Net sales............................... $ -- $201,383 $631,755 $ -- $833,138 Cost of sales........................... -- 163,878 497,206 -- 661,084 -------- -------- -------- -------- -------- Gross profit............................ -- 37,505 134,549 -- 172,054 Other operating expenses................ -- 33,700 103,514 -- 137,214 Restructuring and other charges......... -- -- 1,121 -- 1,121 -------- -------- -------- -------- -------- Operating income........................ -- 3,805 29,914 -- 33,719 Other expense (income): Interest expense...................... -- 35,794 118 -- 35,912 Intercompany interest expense (income)............................. -- (26,275) 26,275 -- -- Loss on early extinguishment of debt................................. -- 17,748 -- -- 17,748 Other expense (income)................ -- 956 12 -- 968 -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries........................... -- (24,418) 3,509 -- (20,909) Income tax expense (benefit)........... -- (1,270) 192 -- (1,078) -------- -------- -------- -------- -------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries........................ -- (23,148) 3,317 -- (19,831) Equity in undistributed earnings of subsidiaries........................... (18,601) 3,317 -- 15,284 -- -------- -------- -------- -------- -------- Income (loss) from continuing operations............................. (18,601) (19,831) 3,317 15,284 (19,831) Gain on disposal of discontinued operations, net of taxes of $770....... -- (1,230) -- -- (1,230) -------- -------- -------- -------- -------- Net income (loss)....................... $(18,601) $(18,601) $ 3,317 $ 15,284 $(18,601) ======== ======== ======== ======== ========
16 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Six Months Ended June 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ -------- ------------ Net sales............................... $ -- $209,547 $625,599 $ -- $835,146 Cost of sales........................... -- 175,019 497,079 -- 672,098 ------ -------- -------- -------- -------- Gross profit............................ -- 34,528 128,520 -- 163,048 Other operating expenses................ -- 33,884 93,136 -- 127,020 Restructuring and other charges......... -- -- 1,125 -- 1,125 ------ -------- -------- -------- -------- Operating income (loss)................. -- 644 34,259 -- 34,903 Other expense (income): Interest expense...................... -- 36,259 27,430 (27,356) 36,333 Other expense (income)................ -- (27,381) 512 27,356 487 ------ -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries........................... -- (8,234) 6,317 -- (1,917) Income tax expense (benefit)............ -- (3,294) 2,527 -- (767) ------ -------- -------- -------- -------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries........................ -- (4,940) 3,790 -- (1,150) Equity in undistributed earnings of subsidiaries........................... 447 3,790 -- (4,237) -- ------ -------- -------- -------- -------- Income (loss) from continuing operations............................. 447 (1,150) 3,790 (4,237) (1,150) Gain on disposal........................ -- (1,919) -- -- (1,919) Cumulative effect of a change in accounting principle................... -- 322 -- -- 322 ------ -------- -------- -------- -------- Net income (loss)....................... $ 447 $ 447 $ 3,790 $ (4,237) $ 447 ====== ======== ======== ======== ========
17 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- ----------- ------------ ------------ Cash flows provided by (used in) from operating activities......................... $ -- $ (12,064) $ 7,341 $ (4,723) Cash flows from investing activities: Capital expenditures........................ -- (3,549) (8,911) (12,460) Intercompany advances....................... (46) 92 (46) -- Proceeds from sales of property, plant & equipment.................................. -- -- 346 346 Proceeds on divestitures, net............... -- -- 2,000 2,000 --------- ----------- -------- ----------- Net cash used in investing activities....... (46) (3,457) (6,611) (10,114) Cash flows from financing activities: Proceeds from issuance of long-term debt.... -- 1,677,071 -- 1,677,071 Repayments of long-term debt................ -- (1,652,614) (460) (1,653,074) Proceeds from issuance of common stock...... 46 -- -- 46 Capitalized loan fees....................... -- (8,936) -- (8,936) --------- ----------- -------- ----------- Net cash provided by (used in) financing activities................................. 46 15,521 (460) 15,107 Effect of exchange rate changes on cash and cash equivalents............................. -- -- (412) (412) --------- ----------- -------- ----------- Net change in cash and cash equivalents....... -- -- (142) (142) Cash and cash equivalents at beginning of year......................................... -- -- 307 307 --------- ----------- -------- ----------- Cash and cash equivalents at end of period.... $ -- $ -- $ 165 $ 165 ========= =========== ======== ===========
18 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- --------- ------------ ------------ Cash flows from (used in) operating activities..................................... $ -- $ (17,035) $ 37,194 $ 20,159 Cash flows from investing activities: Capital expenditures.......................... -- (976) (12,034) (13,010) Proceeds from divestitures, net............... -- 3,864 -- 3,864 Intercompany advances......................... (16) 25,257 (25,241) -- Proceeds from the sale of assets.............. -- -- 627 627 --------- --------- -------- --------- Net cash provided by (used in) investing activities................................... (16) 28,145 (36,648) (8,519) Cash flows from financing activities: Proceeds from the issuance of common stock.... 16 -- -- 16 Proceeds from long-term debt.................. -- 947,205 -- 947,205 Repayments of long-term debt.................. -- (960,176) (771) (960,947) Capitalized loan fees......................... -- (437) -- (437) --------- --------- -------- --------- Net cash provided by (used in) financing activities................................... 16 (13,408) (771) (14,163) Effect of exchange rate changes on cash......... -- -- 619 619 --------- --------- -------- --------- Net increase (decrease) in cash and cash equivalents.................................... -- (2,298) 394 (1,904) Balance at beginning of year.................... -- 1,957 693 2,650 --------- --------- -------- --------- Balance at end of period........................ $ -- $ (341) $ 1,087 $ 746 ========= ========= ======== =========
19 CENVEO, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW We are one of North America's leading providers of visual communications. We produce a variety of products and provide services that help our customers deliver customized messages more effectively. In keeping with our strategy to unite all of our operations under one identity, our shareholders approved the change of the Company's name from Mail-Well, Inc. to Cenveo, Inc. on April 29, 2004. In October 2003, we reorganized Cenveo into two business segments. This reorganization aligned our structure with our principal strategic goals: to operate as one company; to provide our customers with one point of entry into Cenveo; and to provide our customers with a full spectrum of our products and services delivered with speed, reliability and efficiency. COMMERCIAL Our commercial segment specializes in printing annual reports, car brochures, brand marketing collateral, financial communications, general commercial printing and the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. We also offer our customers services such as design, fulfillment, e-commerce, inventory management and other enterprise solutions for companies seeking strategic partners for their branding and other communications priorities. These products and services are sold directly to national and local customers. Our commercial segment consists of 36 printing plants, 29 envelope plants and five distribution and fulfillment centers. MARKET AND OTHER FACTORS. Approximately 50% of our commercial printing sales and approximately 40% of our custom envelope sales are related to advertising and direct mail promotions. Beginning in 2001, many of our customers significantly reduced promotional spending in response to the economic slowdown. Advertising and promotional spending historically have not improved as quickly as the overall economy after a recession. Additionally, we expect growth in printed advertising and promotional spending to be slower than it was prior to the recession. While the volumes of certain of our products are beginning to increase and our margins are improving, there is overcapacity in our industry and significant competitive pricing pressures. We do not expect strong internal growth until capacity is reduced or the markets served by our commercial segment, particularly advertising and direct mail, fully recover from the recession. AREAS OF FOCUS. Because of the changes that have occurred in our markets we have two principal areas of focus: * It is important that we grow our share of the market. We have made a substantial investment in our sales and marketing organization to differentiate ourselves from our competitors and enable us to offer and deliver to our customers a full spectrum of our products and services with speed, reliability and efficiency. * We must continue to manage our capacity and operating leverage. In 2001, we began a restructuring program to consolidate many of our manufacturing facilities to reduce excess capacity and improve our competitive position. We have closed eleven of our envelope facilities and four printing operations to improve the utilization of our capacity. In the second quarter of 2004 we closed another envelope facility. RESALE Our resale segment produces business forms and labels, custom and stock envelopes and specialty packaging and mailers. These products are generally sold through professional print distributors, business forms suppliers, office-products retail chains and the Internet. The resale segment operates 20 manufacturing facilities. 20 CENVEO, INC. AND SUBSIDIARIES MARKET AND OTHER FACTORS. Demand for business forms has been declining for several years as businesses have acquired laser-printing capabilities. The resale market for office products has become extremely price competitive. Mass merchandisers, wholesalers and paper merchants are consolidating suppliers. Product offerings, competitive prices and service are keys to retaining business. AREAS OF FOCUS. In response to industry and market challenges, we are focusing on the following: * We are defending our share of the business forms market and our sales into the office products retail channel. We believe we have the national manufacturing capability and the cost structure to be successful in this effort. * We must grow our sales of business labels and specialty business documents. The markets for these products are growing and we have the production capability and products to benefit from this market growth. * We must match our manufacturing capacity of business forms to the demands of our customers. Since 2001, we have closed two of our business forms plants. CORPORATE In addition to the business improvement actions and areas of focus for each of our business segments, we have several important corporate-wide initiatives. * Our company was formed through a strategic roll-up of many acquisitions. The companies we acquired had different cultures, operating procedures and information systems. We have taken and will continue to take actions to integrate our operations into one company, build our own unique culture and standardize procedures and systems. * We have refinanced our debt over the last several years. Currently, we have no significant maturities on any of our long-term debt until 2008. Our focus is on generating sufficient internal cash flow to fund investments in capital equipment and acquisitions and reductions in our outstanding debt. * In 2003, we launched a major initiative we refer to as "Mobilization." Mobilization is a comprehensive program designed to actively involve all of our employees in improving service, quality, efficiency and innovation. We believe this initiative has and will continue to improve teamwork, communication and accountability throughout our business and thus improve operations, safety and customer service, and reduce costs. * The cost of coated and uncoated paper has increased in the first six months of 2004 and additional price increases have been announced. These increases in the cost of manufacturing our products will negatively impact the profit margins of both resale and commercial to the extent we are unable to increase our prices on these products. It will be important for us to mitigate the impact of this price increase. CONSOLIDATED RESULTS The summary financial data set forth in the tables that follow present reported amounts as well as comparable financial data for our commercial and resale operating segments. Division net sales are the sales of our operating segments and exclude sales of our digital graphics operations sold in March 2003. Division operating income is the operating income of our segments before considering restructuring expenses and the operating results of the digital graphics operations and excludes 21 CENVEO, INC. AND SUBSIDIARIES unallocated corporate expenses. We believe this presentation provides information useful to understanding of the performance of our two operating segments.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Division net sales.......................... $409,396 $407,826 $833,138 $832,273 Divested operations..................... -- -- -- 2,873 -------- -------- -------- -------- Net sales................................... 409,396 407,826 833,138 835,146 Division operating income................... 23,298 21,096 46,857 46,031 Unallocated corporate expense........... (7,475) (5,115) (12,017) (10,171) Restructuring expense................... (1,018) (356) (1,121) (1,125) Divested operations..................... -- -- -- 168 -------- -------- -------- -------- Operating income............................ 14,805 15,625 33,719 34,903 Interest expense........................ 17,513 18,119 35,912 36,333 Loss on early extinguishment of debt.... -- -- 17,748 -- Other................................... 527 355 968 487 -------- -------- -------- -------- Loss from continuing operations before income taxes.............................. (3,235) (2,849) (20,909) (1,917) Income tax benefit (expense)............ (61) 1,168 1,078 767 -------- -------- -------- -------- Loss from continuing operations............. (3,296) (1,681) (19,831) (1,150) Gain (loss) on disposal of discontinued operations............................ 1,230 (581) 1,230 1,919 Change in accounting principle.......... -- -- -- (322) -------- -------- -------- -------- Net income (loss)........................... $ (2,066) $ (2,262) $(18,601) $ 447 ======== ======== ======== ======== Earnings (loss) per share................... $ (0.04) $ (0.05) $ (0.39) $ 0.01 ======== ======== ======== ========
NET SALES Net sales and division net sales increased $1.6 million in the second quarter of 2004 compared to net sales for the second quarter of 2003. Sales of our commercial segment increased $1.0 million, and sales of our resale segment increased $0.6 million. For the six months ended June 30, 2004, net sales declined $2.0 million compared to net sales for the comparable period of 2003. Sales in the first six months of 2003 included $2.9 million of the digital graphics operations divested in the first quarter of 2003. Division net sales for the six months ended June 30, 2004 increased $0.9 million. Sales of our commercial segment increased $3.6 million while sales of our resale segment decreased $2.8 million. OPERATING INCOME Operating income declined $0.8 million in the second quarter of 2004 and $1.2 million for the six months ended June 30, 2004 compared to operating income earned in the comparable periods of 2003. DIVISION OPERATING INCOME. Division operating income increased $2.2 million in the second quarter of 2004 compared to division operating income earned in the second quarter of 2003. Division operating income of our commercial segment improved $0.2 million. Division operating income of our resale segment improved $2.0 million. For the six months ended June 30, 2004, division operating income increased $0.8 million. The increase in division operating income was due to our resale segment which improved its operating 22 CENVEO, INC. AND SUBSIDIARIES income by $1.7 million. The division operating income of the commercial segment declined $0.9 million. UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include the costs of our corporate headquarters. The increase in corporate expenses in the second quarter of 2004 and for the six months ended June 30, 2004 is primarily due to an increase in the cost of workers' compensation claims. We did not allocate these expenses to our segments because the increased costs related to the development of claims incurred prior to 2004. RESTRUCTURING EXPENSES. We continue to evaluate our operations for opportunities to optimize capacity and reduce costs. In February 2004, we announced the closure of our envelope plant in Bensalem, Pennsylvania and its integration into our Philadelphia printing facility. The expenses incurred in connection with this closure, which were primarily employee separation and related expenses and expenses for equipment moves and preparing the building in Bensalem for sale, totaled $1.0 million in the second quarter of 2004 and $1.1 million for the six months ended June 30, 2004. The total cost of the closure is expected to be approximately $2.2 million consisting of the following (in thousands): Employee separation and related expenses................ $ 875 Equipment write-downs, net.............................. 500 Equipment moving expenses............................... 225 Building clean-up and other expenses.................... 570 ------ Total............................................... $2,170 ======
We anticipate incurring the remainder of these expenses prior to the end of 2004. DIVESTED OPERATIONS. Operating income in 2003 included operating income of $0.2 million from the digital graphics operations divested in March 2003. INTEREST EXPENSE Interest expense decreased by $0.6 million in the second quarter of 2004 compared to the second quarter of 2003. Interest expense incurred during the second quarter of 2004 reflected our average outstanding debt during the quarter of $807.1 million and a weighted average interest rate of 8.06% compared to the average outstanding debt of $801.9 million and a weighted average interest rate of 8.36% in the second quarter of 2003. For the six months ended June 30, 2004, interest expense was $0.4 million lower than the comparable period of 2003. Interest expense incurred during this period reflected our average outstanding debt of $812.4 million and a weighted average interest rate of 8.19% compared to the average outstanding debt of $807.5 million and a weighted average interest rate of 8.35% during the first six months of 2003. Our average outstanding debt and weighted average interest rate in 2004 reflect the issuance of the 7 7/8% senior subordinated notes in January, the proceeds of which were used to redeem our 8 3/4% senior subordinated notes and lower outstanding debt issued under our credit facility. 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. 23 CENVEO, INC. AND SUBSIDIARIES TAX BENEFIT The income tax benefit recorded on the loss before income taxes was based on the effective tax rate of 5.2% for the six months ended June 30, 2004. Our effective tax rate was negatively impacted by the establishment of additional valuation allowances on certain deferred tax assets. Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS 109") requires us to evaluate the realizability of our deferred tax assets on a quarterly basis. SFAS 109 requires us to provide a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence with respect to the realizability of deferred tax assets, establishment of a valuation allowance must be considered. Under provisions of SFAS 109, the substantial losses we incurred over the most recent three-year period represent sufficient negative evidence. Accordingly, we are providing an additional valuation allowance to cover the estimated impairment of the deferred tax asset arising from U.S. related operating losses that are expected to be generated in 2004. In the second quarter of 2004, we determined that $6.4 million of our tax contingency reserves established in prior years were no longer necessary. Also in the second quarter of 2004, we determined that certain assumptions in our tax planning strategies were no longer sufficient to utilize all of our capital loss carryforwards and added $6.0 million to our valuation allowance. 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 establishment or reversal of valuation allowances could have a significant negative or positive impact on future earnings. GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS In September 2000, we sold the extrusion coating and laminating business segment of American Business Products, Inc., a company we acquired in February 2000. The consideration received for this business included an unsecured note which was fully reserved at the time of the sale. This note was redeemed by the issuer in June 2004 for $2.0 million. The proceeds, net of tax, have been recorded as a gain on disposal of discontinued operations. The loss on the disposal of discontinued operations recorded in the second quarter of 2003 and the gain recorded for the six months ended June 30, 2003 were the results of adjustments made to the tax impact of the sale of the prime label business in 2002. NET LOSS AND LOSS PER SHARE--DILUTED The net loss and loss per share for the second quarter of 2004 reflect the improved performance of our operating segments and the gain on disposal of discontinued operations. These gains were offset by higher workers' compensation expense, higher amortization expense and higher restructuring expense. Operating income was not sufficient to cover interest expense. For the six month ended June 30, 2004, our net loss and net loss per share reflect operating income that was not sufficient to cover interest expense and the $17.7 million loss incurred on the early extinguishment of debt. 24 CENVEO, INC. AND SUBSIDIARIES BUSINESS SEGMENTS COMMERCIAL
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Division net sales.......................... $307,583 $306,608 $631,432 $627,797 Divested operations..................... -- -- -- 2,873 -------- -------- -------- -------- Net sales................................... 307,583 306,608 631,432 630,670 Division operating income................... 10,938 10,695 23,035 23,917 Restructuring expense................... (1,018) (410) (1,121) (1,320) Divested operations..................... -- -- -- 168 -------- -------- -------- -------- Operating income............................ 9,920 10,285 21,914 22,765 Operating income margin..................... 3.2% 3.4% 3.5% 3.6%
Net sales of our commercial segment for the second quarter of 2004 increased $1.0 million to $307.6 million compared to net sales in the second quarter of 2003. Sales of our commercial printing and envelope products in the second quarter of 2004 were comparable to the second quarter of 2003. The sales increase in the second quarter of 2004 was primarily due to the favorable impact of the strength of the Canadian dollar on the sales of our Canadian operations. Operating income for the second quarter of 2004 decreased slightly to $9.9 million from the $10.3 million earned in the second quarter of 2003. This decrease was due to the higher restructuring expenses incurred in the second quarter of 2004. Division operating income increased slightly to $10.9 million from the $10.7 million earned in the prior year. This improvement was due to a 140 basis point, or 7.8%, improvement in gross profit margin which more than covered higher sales and marketing expenses and higher amortization expense. Amortization expense was $1.0 million higher in the second quarter of 2004 due to the amortization of an intangible asset recorded in connection with the payment of contingent purchase price on an acquisition completed in 2002. Net sales of our commercial segment for the six months ended June 30, 2004 were slightly higher than net sales in the comparable period of 2003. Net sales in 2003 included sales of $2.9 million of the digital graphics operations that were sold in March 2003. Division net sales were $631.4, an increase of $3.6 million, in 2004 compared to division net sales in 2003. * Sales of our commercial printing products increased by $2.0 million. This increase was driven by higher sales of high impact printing products. * Envelope sales of our domestic operations were $5.8 million lower driven by lower volume in the first quarter and lower average selling prices. * The favorable impact of the strength of the Canadian dollar on the sales of our Canadian operations was $7.4 million. Operating income for the six months ended June 30, 2004 was $21.9 million, $0.9 million lower than the operating income earned in the comparable period of 2003. Division operating income of $23.0 million declined by a similar amount. A 120 basis point, or 6.8%, improvement in gross profit margin was offset by increases in sales and marketing expenses and a $2.0 million increase in amortization expense. 25 CENVEO, INC. AND SUBSIDIARIES RESALE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net sales................................... $101,813 $101,218 $201,706 $204,476 Division operating income................... 12,359 10,401 23,822 22,114 Restructuring income.................... -- 54 -- 195 -------- -------- -------- -------- Operating income............................ 12,359 10,455 23,822 22,309 Operating income margin..................... 12.1% 10.3% 11.8% 10.9%
Net sales of our resale segment for the second quarter of 2004 increased by $0.6 million, to $101.8 million, compared to net sales in the second quarter of 2003. Growth in sales of business labels which began in the first quarter of 2004 continued during the second quarter. Sales of business labels grew $2.3 million, or 9.2%, during the quarter; however, this sales growth was offset by lower sales of business forms and lower sales of office products. Demand for traditional business forms, especially continuous forms, continued to decline in the second quarter as users of these products acquire laser printing capabilities. Operating income for the second quarter of 2004 increased $1.9 million to $12.4 million compared to operating income earned in the second quarter of 2003. This improvement was due primarily to the sales growth of business labels and reductions in administrative expenses. Net sales for the six months ended June 30, 2004 were $2.8 million lower than net sales in the comparable period of 2003. For the first half of 2004, sales of business labels were $5.8 million higher than in 2003. This strong sales performance was offset by lower sales in the office products retail channel during the first quarter of 2004 and lower sales of business forms. Operating income for the six months ended June 30, 2004 was $1.5 million higher than operating income earned in the comparable period of 2003. The strong performance of our business labels products and lower fixed expenses more than offset the impact of lower sales. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. Cash used in operations was $4.7 million during the first six months of 2004 compared to $20.2 million provided by operations during the comparable period of 2003. During the first six months of 2004, we paid redemption premiums of $13.5 million to redeem our 8 3/4% senior subordinated notes. In addition, cash used for increases in working capital during the first six months of 2004 totaled $8.9 million compared to an increase of $0.6 million during the comparable period of 2003. This increase was primarily due to the payment of a $4.9 million legal settlement accrued at December 31, 2003 and increases in inventory needed to support new business. We do not expect the increase in inventories to be permanent. INVESTING ACTIVITIES. Capital expenditures were $12.5 million as of June 30, 2004 compared to $13.0 million as of June 30, 2003. We anticipate capital expenditures for all of 2004 to be approximately $25.0 million. On July 6, 2004, we purchased the stock of Valco Graphics Inc., a commercial printing company in Seattle, Washington. The cost of this acquisition was $9.5 million. FINANCING ACTIVITIES. In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem the $300 million of 8 3/4% senior subordinated notes due 2008. The cost incurred to issue the 7 7/8% senior subordinated notes was $7.1 million. These debt issuance costs have been deferred and will be amortized over the term of the notes. We recorded a loss of $17.7 million on the early extinguishment of the 8 3/4% senior subordinated notes 26 CENVEO, INC. AND SUBSIDIARIES which consisted of redemption premiums of $13.5 million and unamortized debt issuance costs of $4.2 million. In March 2004, we amended our $300 million senior secured credit facility to extend its term to June 2008. The cost incurred to amend the credit facility was $1.8 million. These debt issuance costs will be amortized over the extended term of the facility. The following table summarizes our cash payment obligations as of June 30, 2004 by year:
OTHER LONG- PURCHASE TOTAL CASH LONG-TERM DEBT OPERATING LEASES TERM LIABILITIES COMMITMENTS OBLIGATIONS -------------- ---------------- ---------------- ----------- ----------- Year 1............... $ 2,584 $ 31,508 $ -- $360 $ 34,452 Year 2............... 2,340 26,797 3,521 420 33,078 Year 3............... 2,358 23,220 3,259 -- 28,837 Year 4............... 92,917 17,139 2,220 -- 112,276 Year 5............... 1,033 9,833 2,042 -- 12,908 Thereafter........... 671,724 18,574 15,098 -- 705,396 -------- -------- ------- ---- -------- Total................ $772,956 $127,071 $26,140 $780 $926,947 ======== ======== ======= ==== ========
At June 30, 2004, we had outstanding letters of credit of approximately $24.9 million related to performance and payment guarantees. In addition, we have issued letters of credit of $1.6 million as credit enhancements in conjunction with other debt. Based on our experience with these arrangements, we do not believe that any obligations that may arise will be significant. In conjunction with the sale of the prime label business in May 2002, we guaranteed certain lease obligations. As of June 30, 2004, the contingent liability under the guarantee was $5.4 million. We have not made and do not expect to make any payments under this guarantee. See Note 4 to the condensed consolidated financial statements for additional information with respect to this guarantee. Our current credit ratings are as follows:
SENIOR SECURED SENIOR CREDIT SENIOR SUBORDINATED REVIEW AGENCY FACILITY NOTES DEBT LAST UPDATE ------------- -------- ------ ------------ ----------- Standard & Poor's......... BB BB- B April 2004 Moody's................... Ba3 B1 B3 April 2004
The terms of our existing debt agreements have no rating triggers, and we do not believe that our current ratings will impact our ability to raise additional capital. We expect to be able to fund our operations, capital expenditures, debt and other contractual commitments within the next year from internally generated cash flow and funds available under our senior secured credit facility. Based on the certificate filed for June 30, 2004 activity, we had $112.2 million of unused credit available under this credit facility. SEASONALITY AND ENVIRONMENT Our commercial segment experiences seasonal variations. Revenues from annual reports are generally concentrated from February through April. Revenues associated with holiday catalogs and automobile brochures tend to be concentrated from July through October. As a result of these seasonal variations, some of our commercial printing operations are at or near capacity at certain times during these periods. In addition, several envelope market segments and certain segments of the direct mail market experience seasonality, with a higher percentage of the volume of products sold to these markets 27 CENVEO, INC. AND SUBSIDIARIES occurring during the fourth quarter of the year. This seasonality is due to the increase in sales to the direct mail market due to holiday purchases. The mailer operations of our resale segment are at or near capacity at times during the fourth quarter. Seasonality is offset by the diversity of our other products and markets, which are not materially affected by seasonal conditions. Environmental matters have not had a material financial impact on our historical operations and are not expected to have a material impact in the future. AVAILABLE INFORMATION Our Internet address is: www.cenveo.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission. In addition, our earnings conference calls are web cast live via our website and presentations to securities analysts are included on our website. LEGAL PROCEEDINGS From time to time we may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent that losses are deemed probable and can be estimated. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on us. FORWARD-LOOKING INFORMATION Certain statements in this report, and in particular, statements found in Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, "believe," "expect," "intend," "appear," "estimate," "anticipate," "project," "will" and other similar expressions. All such statements address operating performance, events or developments that we expect or anticipate will occur in the future and are not historical in nature. All forward-looking statements reflect our current views of Cenveo with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. As and when made, we believe that these forward-looking statements are reasonable; however, these statements involve known and unknown risks, including, but not limited to: * General economic, business and labor conditions * The ability to implement our strategic initiatives * The ability to sustain profitability after substantial losses in 2002 and 2001 and in the first six months of 2004 * The majority of our sales are not subject to long-term contracts * The industry is extremely competitive due to over capacity in the industry * The impact of the Internet and other electronic media on the demand for envelopes and printed material * Postage rates and other changes in the direct mail industry 28 CENVEO, INC. AND SUBSIDIARIES * Environmental laws may affect our business * The ability to retain key management personnel * Compliance with recently enacted and proposed changes in laws and regulations affecting public companies could be burdensome and expensive * The ability to successfully identify, manage and integrate possible future acquisitions * Dependence on suppliers and the costs of paper and other raw materials and the ability to pass paper price increases onto customers * The ability to meet customer demand for additional value-added products and services * Changes in interest rates and currency exchange rates of the Canadian dollar * The ability to manage operating expenses * The risk that a decline in business volume or profitability could result in a further impairment of goodwill * The ability to timely or adequately respond to technological changes in our industry In view of such uncertainties, investors should not place undue reliance on any forward-looking statements since such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks such as changes in interest and foreign currency exchange rates, which may adversely affect results of our operations and our financial position. We have operations in Canada, and thus are exposed to market risk for changes in foreign currency exchange rates of the Canadian dollar. Risks from interest and foreign currency exchange rate fluctuations are managed through normal operating and financing activities. We do not utilize derivatives for speculative purposes, nor have we hedged interest rate exposure through the use of swaps and options or foreign exchange exposure through the use of forward contracts. Exposure to market risk from changes in interest rates relates primarily to our variable rate debt obligations. The interest on this debt is the London Interbank Offered Rate ("LIBOR") plus a margin. At June 30, 2004, we had variable rate debt outstanding of $100.3 million. A 1% increase in LIBOR on the maximum amount of debt subject to variable interest rates, which is $316.4 million, would increase our annual interest expense by $3.2 million. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal controls or procedures or in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. 29 PART II OTHER INFORMATION ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS On April 29, 2004, the Company held its Annual Meeting of Stockholders, at which the following matters were voted upon: ELECTION OF DIRECTORS--The following individuals were elected or re-elected to the Board of Directors by the following vote:
NAME FOR WITHHOLD ----------------------------------------- ---------- --------- Paul V. Reilly 42,151,726 3,016,492 Thomas E. Costello 42,202,747 2,965,471 Martin J. Maloney 42,157,190 3,011,027 David M. Olivier 42,238,168 2,930,049 Jerome W. Pickholz 42,404,619 2,763,599 Alister W. Reynolds 42,155,190 3,013,027 Susan O. Rheney 41,361,028 3,807,190
AMENDMENT OF ARTICLES OF INCORPORATION--A proposal to amend the articles of incorporation to change the Company's name to Cenveo, Inc., was approved by the following vote: 40,219,570 For, 4,765,497 Against, 183,149 Abstentions. AMENDMENT OF 2001 LONG TERM EQUITY INCENTIVE PLAN--A proposal to amend the Company's 2001 Long Term Equity Incentive Plan, increasing the number of shares reserved for issuance under the Plan to 7,450,000 and increasing the number of shares that may be granted as awards other than options, was approved by the following vote: 29,214,882 For, 7,548,684 Against, 668,145 Abstentions. SELECTION OF AUDITORS--The selection by the Audit Committee of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2004 was ratified by the following vote: 44,666,635 For, 311,452 Against, 175,628 Abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Articles of Incorporation of the Company--incorporated by reference from Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1997. 3.2* Articles of Amendment to the Articles of Incorporation of the Company dated May 17, 2004. 3.3 Bylaws of the Company--incorporated by reference from Exhibit 3(ii) of the Company's Form 10-Q for the quarter ended June 30, 1997. 3.4* Certificate of Amendment of Certificate of Incorporation of Cenveo Corporation (formerly known as Mail-Well I Corporation) dated May 14, 2004. 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. 30 EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.2 Form of Senior Note and Guarantee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount 9 5/8% due 2012--incorporated by reference to Exhibit 10.31 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.3 Indenture dated as of February 4, 2004 between Mail-Well I Corporation and U.S. Bank National Association, as Trustee, and Form of Senior Subordinated Note and Guarantee relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.5 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 4.4 Registration Rights Agreement dated February 4, 2004, between Mail-Well I Corporation and Credit Suisse First Boston, as Initial Purchaser, relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.6 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of its officers and directors--incorporated by reference from Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.2 Form of Indemnity Agreement between Mail-Well I Corporation and each of its officers and directors--incorporated by reference from Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of February 23, 1994 and related Employee Stock Ownership Plan Trust Agreement--incorporated by reference from Exhibit 10.19 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 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. 31 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.12 Form of Restricted Stock Award Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.13 Purchase Agreement dated March 8, 2002, between Mail-Well I Corporation, and Credit Suisse First Boston, UBS Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., First Union Securities, Inc., and Scotia Capital (USA) Inc., as Initial Purchasers, relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012-- incorporated by reference to Exhibit 10.30 to Mail-Well I Corporation's Registration Statement on Form S-4 filed June 11, 2002. 10.14 Registration Rights Agreement dated March 13, 2002, between Mail-Well I Corporation, and Credit Suisse First Boston, UBS Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., First Union Securities, Inc., and Scotia Capital (USA) Inc., as Initial Purchasers, relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.32 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.15 Second Amended and Restated Equipment Lease dated as of August 6, 2002 between Wells Fargo Bank Northwest, National Association, as trustee under MW 1997-1 Trust, and Mail-Well I Corporation-- incorporated by reference to Exhibit 10.26 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.16 Second Amended and Restated Guaranty Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.17 Second Amended and Restated Participation Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet Capital Corporation as Arranger and Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.18 Amendment Agreement No. 1 dated as of September 25, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.29 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.19 Employment and Executive Severance Agreement dated as of March 10, 2003, between the Company and Paul V. Reilly--incorporated by reference to Exhibit 10.26 of the Company's Annual Form 10-K filed March 31, 2003. 10.20 Form of Executive Severance Agreement entered into between the Company and each of the following: Michel Salbaing, Gordon Griffiths, Brian Hairston, Keith Pratt, William Huffman, D. Robert Meyer and Mark Zoeller--incorporated by reference to Exhibit 10.27 of the Company's Annual Form 10-K filed March 31, 2003. 10.21 Amendment Agreement No. 2 dated as of March 25, 2004 among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantor, Fleet Capital Corporation as Agent, and the Trust Purchasers named therein--incorporated by reference to Exhibit 10.21 of the Company's Form 10-Q for quarter ended March 31, 2004. 32 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22 Second Amended and Restated Credit Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.22 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.23 Second Amended and Restated Security Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.23 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.24* Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as amended. 31.1* Certification of Periodic Report by Paul V. Reilly, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. 31.2* Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Periodic Report by Paul V. Reilly, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 32.2** Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. --------------- * Filed herewith. ** Furnished herewith. (b) REPORTS ON FORM 8-K 1. Current report filed under Item 5 of Form 8-K dated as of May 17, 2004 in connection with the Company amending its articles of incorporation to change its name, and a change in the symbol under which the Company's common stock is traded. 2. Current report filed under Item 9 of Form 8-K dated as of May 6, 2004 in connection with the Company's earnings release. 3. Current report filed under Item 5 of Form 8-K dated as of May 6, 2004 in connection with the transcript of the Company's investor conference call held on May 3, 2004. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Englewood, state of Colorado, on July 30, 2004. CENVEO, INC. By: /s/ PAUL V. REILLY --------------------------------------------- Paul V. Reilly, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /s/ MICHEL P. SALBAING --------------------------------------------- Michel P. Salbaing, Senior Vice President-- Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 34