10-Q 1 cenveo10q.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 SEPTEMBER 30, 2004 COMMISSION FILE NUMBER 1-12551 ------------------------ CENVEO, INC. (Exact name of Registrant as specified in its charter.) COLORADO 84-1250533 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8310 S. VALLEY HIGHWAY, #400 ENGLEWOOD, CO 80112 (Address of principal executive offices) (Zip Code) 303-790-8023 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes /X/ No / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of October 29, 2004 was $89,690,010. As of October 28, 2004 the Registrant had 48,702,832 shares of Common Stock, $0.01 par value, outstanding. ----------------------------------------------------------------------------- ============================================================================= TABLE OF CONTENTS PART I--FINANCIAL INFORMATION
PAGE ---- Item 1. Condensed Consolidated Financial Statements............ 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................. 30 Item 4. Controls and Procedures................................ 30 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................... 31
i PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
SEPTEMBER 30, 2004 (UNAUDITED) DECEMBER 31, 2003 ------------------ ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................... $ 379 $ 307 Accounts receivable, net............................ 252,230 223,541 Inventories, net.................................... 115,547 91,402 Other current assets................................ 45,711 48,135 ---------- ---------- TOTAL CURRENT ASSETS............................ 413,867 363,385 Property, plant and equipment, net...................... 372,327 388,240 Goodwill................................................ 306,097 299,392 Other intangible assets, net............................ 15,863 19,687 Other assets, net....................................... 40,563 36,689 ---------- ---------- TOTAL ASSETS............................................ $1,148,717 $1,107,393 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................... $ 178,452 $ 140,468 Accrued compensation and related liabilities........ 59,960 53,209 Other current liabilities........................... 59,442 64,360 Current maturities of long-term debt................ 2,264 2,575 ---------- ---------- TOTAL CURRENT LIABILITIES....................... 300,118 260,612 Long-term debt, less current maturities................. 767,719 746,386 Deferred income taxes................................... -- 6,717 Other liabilities....................................... 25,995 25,659 ---------- ---------- TOTAL LIABILITIES....................................... 1,093,832 1,039,374 Commitments and contingencies SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value; 25,000 shares authorized, none issued........................... -- -- Common stock, $0.01 par value; 100,000,000 shares authorized, 48,701,832 and 48,380,457 shares issued and outstanding as of September 30, 2004 and December 31, 2003, respectively............... 487 484 Paid-in capital..................................... 214,900 213,850 Retained deficit.................................... (166,442) (150,331) Deferred compensation............................... (2,205) (1,714) Accumulated other comprehensive income.............. 8,145 5,730 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY...................... 54,885 68,019 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,148,717 $1,107,393 ========== ========== See notes to condensed consolidated financial statements.
1 CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except earnings per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------------- 2004 2003 2004 2003 -------- -------- ---------- ---------- Net sales.............................. $428,099 $412,218 $1,261,238 $1,247,363 Cost of sales.......................... 343,596 330,341 1,004,682 1,002,441 -------- -------- ---------- ---------- Gross profit........................... 84,503 81,877 256,556 244,922 Operating expenses: Selling, general and administrative................... 62,315 59,278 196,728 185,433 Amortization of intangibles........ 1,313 500 4,114 1,363 Restructuring charges.............. (269) 76 851 1,201 -------- -------- ---------- ---------- Operating income....................... 21,144 22,023 54,863 56,925 Other expense: Interest expense................... 17,859 17,831 53,771 54,163 Loss from the early extinguishment of debt.......................... -- -- 17,748 -- Other.............................. 787 574 1,755 1,063 -------- -------- ---------- ---------- Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle................. 2,498 3,618 (18,411) 1,699 Income tax expense (benefit)........... 8 1,446 (1,070) 679 -------- -------- ---------- ---------- Income (loss) from continuing operations before cumulative effect of a change in accounting principle............................ 2,490 2,172 (17,341) 1,020 Gain on disposal of discontinued operations, net of taxes of $770 in 2004................................. -- -- (1,230) (1,919) Cumulative effect of a change in accounting principle................. -- -- -- 322 -------- -------- ---------- ---------- Net income (loss)...................... $ 2,490 $ 2,172 $ (16,111) $ 2,617 ======== ======== ========== ========== Earnings (loss) per share--basic: Continuing operations.............. $ 0.05 $ 0.05 $ (0.36) $ 0.02 Discontinued operations............ -- -- 0.02 0.04 Cumulative effect of a change in accounting principle............. -- -- -- (0.01) -------- -------- ---------- ---------- Earnings (loss) per share--basic....... $ 0.05 $ 0.05 $ (0.34) $ 0.05 ======== ======== ========== ========== Earnings (loss) per share--diluted: Continuing operations.............. $ 0.05 $ 0.04 $ (0.36) $ 0.02 Discontinued operations............ -- -- 0.02 0.04 Cumulative effect of a change in accounting principle............. -- -- -- (0.01) -------- -------- ---------- ---------- Earnings (loss) per share--diluted..... $ 0.05 $ 0.04 $ (0.34) $ 0.05 ======== ======== ========== ========== Weighted average shares--basic......... 47,753 47,689 47,742 47,677 Weighted average shares--diluted....... 48,504 48,406 47,742 48,268 See notes to condensed consolidated financial statements.
2 CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2004 2003 ----------- ----------- Cash flows from operating activities: Income (loss) from continuing operations.................. $ (17,341) $ 1,020 Adjustments to reconcile loss from continuing operations to net cash provided by operating activities: Depreciation......................................... 35,014 34,852 Amortization......................................... 7,513 4,393 Write-off of deferred financing fees................. 4,220 -- Deferred income tax.................................. (9,718) (7,826) Loss on disposal of assets........................... 438 891 Other noncash charges, net........................... (1,958) 590 Changes in operating assets and liabilities, excluding the effects of acquired businesses: Accounts receivable.................................. (23,941) (3,886) Inventories.......................................... (21,893) 7,431 Accounts payable and accrued compensation............ 40,863 242 Income taxes payable................................. (2,830) 10,888 Other working capital changes........................ 3,762 (14,717) Other, net........................................... (132) (244) ----------- ----------- Net cash provided by operating activities.......... 13,997 33,634 Cash flows from investing activities: Acquisitions, net of cash acquired................... (9,803) -- Capital expenditures................................. (20,246) (19,722) Proceeds from divestitures, net...................... 2,000 3,864 Proceeds from sales of property, plant and equipment........................................... 1,475 658 ----------- ----------- Net cash used in investing activities.............. (26,574) (15,200) Cash flows from financing activities: Proceeds from issuance of long-term debt............. 2,129,193 1,384,781 Repayments of long-term debt......................... (2,108,171) (1,405,239) Proceeds from issuance of common stock............... 1,053 16 Capitalized loan fees................................ (9,076) (484) ----------- ----------- Net cash provided by (used in) financing activities........................................ 12,999 (20,926) Effect of exchange rate changes on cash and cash equivalents................................................ (350) 936 ----------- ----------- Net increase (decrease) in cash and cash equivalents....................................... 72 (1,556) Cash and cash equivalents at beginning of year.............. 307 2,650 ----------- ----------- Cash and cash equivalents at end of period.................. $ 379 $ 1,094 =========== =========== See notes to condensed consolidated financial statements.
3 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Cenveo, Inc. (formerly known as Mail-Well, Inc.) and subsidiaries (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2003. The Company's reporting periods in this report consist of thirteen and thirty-nine week periods, respectively, ending on the Saturday closest to the last day of the calendar month. The reporting periods for 2004 and 2003 ended September 25, 2004 and September 27, 2003, respectively. For convenience, the accompanying financial statements have been shown as ending on the last day of the calendar month. On April 29, 2004, the shareholders of the Company approved the change of the Company's name from Mail-Well, Inc. to Cenveo, Inc. 2. STOCK-BASED COMPENSATION Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the measurement date over the amount an employee must pay to acquire the stock. The exercise price for stock options is the quoted market price of the stock on the day granted; accordingly, no compensation expense is recognized for its fixed stock option grants. The compensation expense for restricted stock issued is recognized ratably over the vesting period of the restricted stock. Compensation expense was $0.2 million and $0.5 million for the three and nine months ended September 30, 2004, respectively, and $0.1 million and $0.4 million for the three months and nine months ended September 30, 2003, respectively. 4 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. STOCK-BASED COMPENSATION (CONTINUED) If the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the stock based compensation expense that would have been included in the determination of net income would have been $1.0 million and $3.2 million for the three and nine months ended September 30, 2004, respectively, and $1.2 million and $3.9 million for the three and nine months ended September 30, 2003, respectively. The Company's reported and pro forma net income (loss) and earnings (loss) per share would have been as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- ---------------------- 2004 2003 2004 2003 ------- ------- -------- ------- Net income (loss): As reported........................... $ 2,490 $ 2,172 $(16,111) $ 2,617 Pro forma............................. $ 1,294 $ 1,131 $(17,745) $ (74) Earnings (loss) per share--basic: As reported........................... $ 0.05 $ 0.05 $ (0.34) $ 0.05 Pro forma............................. $ 0.03 $ 0.01 $ (0.37) $ 0.02 Earnings (loss) per share--diluted: As reported........................... $ 0.05 $ 0.04 $ (0.34) $ 0.05 Pro forma............................. $ 0.03 $ 0.02 $ (0.37) $ (0.01)
The effect on pro forma net income (loss), earnings (loss) per share--basic and earnings (loss) per share--diluted of expensing the estimated fair value of stock options is not necessarily representative of the effect on reported earnings for future periods due to the vesting periods of the stock options and the potential for issuance of additional stock options. At the annual meeting of stockholders on April 29, 2004, an amendment to the 2001 Long-Term Equity Incentive Plan, (the "Incentive Plan") was approved. The amendment increased the number of shares that can be granted under the Incentive Plan to 7,450,000 from 4,425,000. On August 3, 2004, the Board issued 288,787 restricted shares and 335,688 stock options. The restricted shares vest five years from the date granted and the stock options generally vest 20% per year and expire 7 years from the grant date. On April 29, 2004, members of the Board of Directors received 14,922 restricted shares that vested over a six-month period. The Company has 2,807,000 stock options available for issuance under the Incentive Plan. 3. SUPPLEMENTAL INFORMATION INVENTORIES The Company's inventories by major category were as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ Raw materials.......................................... $ 38,749 $28,344 Work in process........................................ 28,422 21,483 Finished goods......................................... 53,314 46,570 -------- ------- 120,485 96,397 Reserves............................................... (4,938) (4,995) -------- ------- $115,547 $91,402 ======== =======
5 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUPPLEMENTAL INFORMATION (CONTINUED) PROPERTY, PLANT AND EQUIPMENT The Company's investment in property, plant and equipment consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ Land and land improvements............................. $ 19,237 $ 20,043 Buildings and building improvements.................... 109,344 109,563 Machinery and equipment................................ 526,338 511,820 Furniture and fixtures................................. 16,589 15,986 Construction in progress............................... 9,645 9,696 --------- --------- 681,153 667,108 Accumulated depreciation............................... (308,826) (278,868) --------- --------- $ 372,327 $ 388,240 ========= =========
COMPREHENSIVE INCOME (LOSS) A summary of the comprehensive income (loss) is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ---------------------- 2004 2003 2004 2003 ------ ------ -------- ------- Net income (loss)........................... $2,490 $2,172 $(16,111) $ 2,617 Other comprehensive income (loss): Currency translation adjustment........ 7,495 (655) 2,415 17,832 ------ ------ -------- ------- Comprehensive income (loss)................. $9,985 $1,517 $(13,696) $20,449 ====== ====== ======== =======
AMORTIZATION EXPENSE Amortization expense reported in the condensed statements of cash flows includes the following:
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2004 2003 ------ ------ Amortization of intangibles............................ $4,114 $1,363 Amortization of deferred financing fees................ 3,269 3,030 Other.................................................. 130 -- ------ ------ Total amortization.................................. $7,513 $4,393 ====== ======
The amortization of deferred financing fees is included in interest expense in the condensed consolidated statements of operations. 4. ACQUISITIONS On July 6, 2004 the Company purchased the stock of Valco Graphics Inc., a commercial printing company in Seattle, Washington with annual sales of approximately $18.0 million, for $9.6 million. The Company plans to consolidate Valco Graphics Inc. with its existing commercial printing operation in Seattle and operate the combined entity as Cenveo, Seattle. 6 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACQUISITIONS (CONTINUED) On August 27, 2004 the Company purchased the assets of WWP Property Management, Inc., a commercial printing company in San Francisco, California with annual sales of approximately $14.0 million, for $2.8 million. The Company plans to consolidate this operation with its existing commercial printing operation in San Francisco and operate the combined entity as Cenveo, San Francisco. Revenues and expenses of the acquired businesses have been included in the accompanying condensed consolidated financial statements beginning on their respective dates of acquisition. The allocation of purchase price to the acquired assets and liabilities is based on estimated fair market value and may be revised if additional information concerning the asset and liability valuations is obtained, provided such information is received no later than one year after the date of acquisition. The purchase prices of the two businesses acquired were allocated as follows: $7.4 million to current assets, $3.4 million to machinery and equipment, and $0.5 million to other assets. Current liabilities assumed were $5.1 million. Goodwill recorded totaled $5.3 million. 5. LONG-TERM DEBT At September 30, 2004 and December 31, 2003, long-term debt consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ Senior Secured Credit Facility, due 2008............... $ 77,976 $ 73,310 Senior Notes, due 2012................................. 350,000 350,000 Senior Subordinated Notes, due 2008.................... -- 300,000 Senior Subordinated Notes, due 2013.................... 320,000 -- Other.................................................. 22,007 25,651 -------- -------- 769,983 748,961 Less current maturities................................ (2,264) (2,575) -------- -------- Long-term debt...................................... $767,719 $746,386 ======== ========
Current maturities consist of scheduled payments on other long-term debt. In January 2004, the Company sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem the $300 million of 8 3/4% senior subordinated notes due 2008. The Company incurred costs of $7.2 million to issue the 7 7/8% senior subordinated notes. These costs have been deferred and will be amortized over the term of the notes. A loss of $17.7 million was recorded on the early extinguishment of the 8 3/4% senior subordinated notes consisting of redemption premiums of $13.5 million and unamortized debt issuance costs of $4.2 million. In March 2004, the Company amended its $300 million senior secured credit facility due 2005 to extend its term to June 2008. The cost incurred to amend the credit facility was $1.9 million. These debt issuance costs will be amortized over the extended term of the facility. As of September 30, 2004, the Company was in compliance with all of the covenants of its various debt agreements. 7 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) GUARANTEES On May 21, 2002, the Company sold its prime label business. The Company continues to guarantee a lease obligation of this former business. The guarantee requires the lessor to pursue collection and other remedies against the buyer of this business before demanding payment from the Company. The remaining payment under the lease term, which expires April 2008, totals approximately $5.3 million. If the Company were required to honor its obligation under the guarantee, any loss would be reduced by the amount generated from the liquidation of the equipment. The senior notes due 2012 and the senior subordinated notes due 2013 are guaranteed by Cenveo, Inc. (the "Parent Guarantor") and all of its wholly-owned operating subsidiaries (the "Guarantor Subsidiaries"). The guarantees are joint and several, full, complete and unconditional. There are no material restrictions on the ability of the Guarantor Subsidiaries to transfer funds to the issuing subsidiary in the form of cash dividends, loans or advances, other than ordinary legal restrictions under corporate law, fraudulent transfer and bankruptcy laws. 6. INCOME TAXES The income tax benefit recorded on the loss before income taxes was based on the projected annual effective tax rate of 19%. The Company's effective tax rate was negatively impacted by the establishment of additional valuation allowances on certain deferred tax assets. Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS 109") requires the evaluation of the realizability of deferred tax assets on a quarterly basis. SFAS 109 requires a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence with respect to the realizability of deferred tax assets, establishment of a valuation allowance must be considered. Under provisions of SFAS 109, the substantial losses incurred by the Company over the most recent three-year period represent sufficient negative evidence. Accordingly, the Company has provided an additional valuation allowance to cover the estimated impairment of the U.S. related deferred tax asset arising from operating losses generated in 2004. 7. RESTRUCTURING CHARGES In February 2004, the commercial segment began the closure of its envelope manufacturing plant in Bensalem, Pennsylvania and its integration into the Company's Philadelphia printing facility. The expenses incurred in connection with this plant closure during the nine months ended September 30, 2004 were as follows (in thousands): Employee separation and related expenses................ $ 708 Equipment write-downs................................... 774 Equipment moving expenses............................... 157 Building clean-up and other expenses.................... 608 Net gain from the sale of building...................... (1,396) ------- Total............................................... $ 851 =======
The Company has substantially completed the restructuring programs initiated in 2001 and 2002. 8 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. RESTRUCTURING CHARGES (CONTINUED) A summary of the activity charged to the 2002 restructuring liability during the nine months ended September 30, 2004 is as follows (in thousands):
COMMERCIAL RESALE TOTAL ---------- ------ ------ Balance, December 31, 2003............................. $1,279 $ 30 $1,309 Payments for lease termination and property exit costs............................................ (366) (16) (382) Payments for other exit costs...................... (125) -- (125) ------ ---- ------ Balance, September 30, 2004............................ $ 788 $ 14 $ 802 ====== ==== ======
A summary of the activity charged to the 2001 restructuring liability during the nine months ended September 30, 2004 is as follows (in thousands):
COMMERCIAL ---------- Balance, December 31, 2003.............................. $688 Payments for lease termination and property exit costs............................................. (242) ---- Balance, September 30, 2004............................. $446 ====
8. PENSION PLANS The components of the Company's net periodic pension cost were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------------- 2004 2003 2004 2003 ----- ----- ------- ------- Service cost................................. $ 670 $ 362 $ 1,735 $ 1,085 Interest cost................................ 529 834 2,006 2,501 Expected return on plan assets............... (557) (906) (2,212) (2,717) Net amortization and deferral................ 167 (47) 268 (141) Other........................................ -- 83 -- 248 ----- ----- ------- ------- Net periodic pension expense.............. $ 809 $ 326 $ 1,797 $ 976 ===== ===== ======= =======
As previously disclosed in its financial statements for the year ended December 31, 2003, the Company expects to contribute $2.8 million to its pension plans in 2004. As of September 30, 2004, contributions of $0.4 million have been made. 9 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share exclude dilution and are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. A reconciliation of the amounts included in the computation of basic and diluted earnings (loss) per share from continuing operations is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2004 2003 2004 2003 -------- ------- -------- ------- Numerator: Numerator for basic and diluted earnings (loss) per share--earnings (loss) from continuing operations....................... $ 2,490 $ 2,172 $(17,341) $ 1,020 ======== ======= ======== ======= Denominator: Denominator for basic earnings (loss) per share--weighted average shares.............. 47,753 47,689 47,742 47,677 Effects of dilutive securities: Stock options and restricted stock........ 751 717 -- 591 -------- ------- -------- ------- Denominator for diluted earnings (loss) per share--adjusted weighted average shares..... 48,504 48,406 47,742 48,268 ======== ======= ======== ======= Earnings (loss) from continuing operations per share: Basic..................................... $ 0.05 $ 0.05 $ (0.36) $ 0.02 ======== ======= ======== ======= Diluted................................... $ 0.05 $ 0.04 $ (0.36) $ 0.02 ======== ======= ======== =======
In the three months ended September 30, 2004 and 2003, outstanding options and shares of restricted stock in the amount of 7,533,000 and 6,181,000, respectively, were excluded from the calculation of diluted earnings per share because the effect would be antidilutive. In the nine months ended September 30, 2004 and 2003, outstanding options and shares of restricted stock in the amount of 7,477,000 and 6,310,000, respectively, were excluded from the calculation of diluted earnings (loss) per share because the effect would be antidilutive. 10. DISCONTINUED OPERATIONS In September 2000, the Company sold the extrusion coating and laminating business segment of American Business Products, Inc., a company acquired in February 2000. The consideration received for this business included an unsecured note which was fully reserved at the time of the sale. This note was redeemed by the issuer in June 2004 for $2.0 million. The proceeds, net of tax, have been recorded as a gain on disposal of discontinued operations. The gain on disposal of discontinued operations as of September 30, 2003 reflects a change in the tax impact of the disposition of the Company's prime label business, which was sold in May 2002. 11. SEGMENT INFORMATION In October 2003, the Company reorganized into two operating segments: commercial and resale. This reorganization aligned the Company's structure with the way its products are sold. Segment information for the three and nine months ended September 30, 2003 has been restated to reflect the new operating segments. 10 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SEGMENT INFORMATION (CONTINUED) The commercial segment specializes in printing annual reports, car brochures, brand marketing collateral, financial communications and general commercial printing and in the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. The commercial segment also offers services such as design, fulfillment, e-commerce and inventory management. The products and services of the commercial segment are sold directly to national and local customers. The resale segment produces business forms and labels, custom and stock envelopes and specialty packaging and mailers. These products are generally sold through professional print distributors, business forms suppliers, office-products retail chains and the Internet. Operating income of each segment includes all costs and expenses directly related to the segment's operations. Corporate expenses include corporate general and administrative expenses. Inter-company sales for the three months ended September 30, 2004 and 2003 were $44.7 million and $42.4 million, respectively. Inter-company sales for the nine months ended September 30, 2004 and 2003 were $146.5 million and $113.5 million, respectively. These amounts were eliminated in consolidation and excluded from reported net sales. The following tables present certain segment information for the three and nine months ended September 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------------- 2004 2003 2004 2003 -------- -------- ---------- ---------- Net sales: Commercial....................... $327,365 $315,029 $ 958,797 $ 945,699 Resale........................... 100,734 97,189 302,441 301,664 -------- -------- ---------- ---------- Total............................ $428,099 $412,218 $1,261,238 $1,247,363 ======== ======== ========== ========== Operating income (expense): Commercial....................... $ 16,366 $ 16,877 $ 38,281 $ 39,643 Resale........................... 9,469 9,946 33,291 32,256 Corporate........................ (4,691) (4,800) (16,709) (14,974) -------- -------- ---------- ---------- Total............................ $ 21,144 $ 22,023 $ 54,863 $ 56,925 ======== ======== ========== ========== Restructuring charges: Commercial....................... $ (269) $ 94 $ 851 $ 1,305 Resale........................... -- (18) -- (104) -------- -------- ---------- ---------- Total............................ $ (269) $ 76 $ 851 $ 1,201 ======== ======== ========== ========== Net sales by product line: Commercial printing.............. $207,181 $194,597 $ 594,301 $ 580,419 Envelopes........................ 172,636 167,824 515,942 515,740 Business forms and labels........ 48,282 49,797 150,995 151,204 -------- -------- ---------- ---------- Total............................ $428,099 $412,218 $1,261,238 $1,247,363 ======== ======== ========== ==========
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Cenveo Corporation (formerly known as Mail-Well I Corporation) ("Issuer"), the Company's wholly-owned subsidiary, and the only direct subsidiary of the Company, has issued $350 million aggregate principal amount of 9 5/8% Senior Notes ("Senior Notes") due in 2012 and $320 million aggregate principal amount of 7 7/8% Senior Subordinated Notes ("Senior Subordinated Notes") due in 11 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) 2013. The Senior Notes and Senior Subordinated Notes are guaranteed by the Guarantor Subsidiaries and the Parent Guarantor. The guarantees are joint and several, full, complete and unconditional. There are no material restrictions on the ability of the Guarantor Subsidiaries to transfer funds to the issuer in the form of cash dividends, loans or advances, other than ordinary legal restrictions under corporate law, fraudulent transfer and bankruptcy laws. The following condensed consolidating financial information illustrates the composition of the Parent Guarantor, Issuer, and Guarantor Subsidiaries. The Issuer and the Guarantor Subsidiaries comprise all of the direct and indirect subsidiaries of the Parent Guarantor. Management has determined that separate complete financial statements would not provide additional material information that would be useful in assessing the financial composition of the Guarantor Subsidiaries. Investments in subsidiaries are accounted for under the equity method, wherein the investor company's share of earnings and income taxes applicable to the assumed distribution of such earnings are included in net income. In addition, investments increase in the amount of permanent contributions to subsidiaries and decrease in the amount of distributions from subsidiaries. The elimination entries remove the equity method investment in subsidiaries and the equity in earnings of subsidiaries, intercompany payables and receivables and other transactions between subsidiaries. 12 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED) September 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ --------- ------------ Current assets: Cash and cash equivalents............ $ -- $ -- $ 379 $ -- $ 379 Accounts receivable, net............. -- 63,385 188,845 -- 252,230 Inventories, net..................... -- 48,086 67,461 -- 115,547 Notes receivable from subsidiaries... -- 598,400 -- (598,400) -- Other current assets................. -- 24,938 20,773 -- 45,711 ------- -------- -------- --------- ---------- Total current assets............... -- 734,809 277,458 (598,400) 413,867 Investment in subsidiaries............. 54,885 24,617 -- (79,502) -- Property, plant and equipment, net..... -- 90,583 281,744 -- 372,327 Goodwill and other intangible assets, net................................... -- 86,465 235,495 -- 321,960 Deferred tax asset (liability)......... -- 13,856 (9,904) -- 3,952 Other assets, net...................... -- 31,834 4,777 -- 36,611 ------- -------- -------- --------- ---------- Total assets........................... $54,885 $982,164 $789,570 $(677,902) $1,148,717 ======= ======== ======== ========= ========== Current liabilities: Accounts payable..................... $ -- $ 47,417 $131,035 $ -- $ 178,452 Other current liabilities............ -- 48,857 70,545 -- 119,402 Intercompany payable (receivable).... -- 48,684 (48,684) -- -- Notes payable to Issuer.............. -- -- 598,400 (598,400) -- Current maturities of long-term debt................................ -- 1,789 475 -- 2,264 ------- -------- -------- --------- ---------- Total current liabilities.......... -- 146,747 751,771 (598,400) 300,118 Long-term debt, less current maturities............................ -- 763,448 4,271 -- 767,719 Other liabilities...................... -- 17,084 8,911 -- 25,995 ------- -------- -------- --------- ---------- Total liabilities.................. -- 927,279 764,953 (598,400) 1,093,832 Shareholders' equity................... 54,885 54,885 24,617 (79,502) 54,885 ------- -------- -------- --------- ---------- Total liabilities and shareholders' equity................................ $54,885 $982,164 $789,570 $(677,902) $1,148,717 ======= ======== ======== ========= ==========
13 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION December 31, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ --------- ------------ Current assets: Cash and cash equivalents............ $ -- $ -- $ 307 $ -- $ 307 Accounts receivable, net............. -- 50,125 173,416 -- 223,541 Inventories, net..................... -- 35,509 55,893 -- 91,402 Notes receivable from subsidiaries... -- 603,100 -- (603,100) -- Other current assets................. -- 32,109 16,026 -- 48,135 ------- -------- -------- --------- ---------- Total current assets............... -- 720,843 245,642 (603,100) 363,385 Investment in subsidiaries............. 68,019 12,364 -- (80,383) -- Property, plant and equipment, net..... -- 90,956 297,284 -- 388,240 Goodwill and other intangible assets, net................................... -- 67,474 251,605 -- 319,079 Other assets, net...................... -- 29,322 7,367 -- 36,689 ------- -------- -------- --------- ---------- Total assets........................... $68,019 $920,959 $801,898 $(683,483) $1,107,393 ======= ======== ======== ========= ========== Current liabilities: Accounts payable..................... $ -- $ 29,092 $111,376 $ -- $ 140,468 Other current liabilities............ -- 58,868 58,701 -- 117,569 Intercompany payable (receivable).... -- 9,059 (9,059) -- -- Notes payable to Issuer.............. -- -- 603,100 (603,100) -- Current maturities of long-term debt................................ -- 1,776 799 -- 2,575 ------- -------- -------- --------- ---------- Total current liabilities.......... -- 98,795 764,917 (603,100) 260,612 Long-term debt, less current maturities............................ -- 741,589 4,797 -- 746,386 Deferred income taxes.................. -- (4,040) 10,757 -- 6,717 Other long-term liabilities............ -- 16,596 9,063 -- 25,659 ------- -------- -------- --------- ---------- Total liabilities.................. -- 852,940 789,534 (603,100) 1,039,374 Shareholders' equity................... 68,019 68,019 12,364 (80,383) 68,019 ------- -------- -------- --------- ---------- Total liabilities and shareholders' equity................................ $68,019 $920,959 $801,898 $(683,483) $1,107,393 ======= ======== ======== ========= ==========
14 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended September 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ ------- ------------ Net sales................................ $ -- $113,171 $314,928 $ -- $428,099 Cost of sales............................ -- 93,946 249,650 -- 343,596 ------- -------- -------- ------- -------- Gross profit............................. -- 19,225 65,278 -- 84,503 Operating expenses: Selling, general and administrative and amortization.......................... -- 14,744 48,884 -- 63,628 Restructuring charges.................. -- -- (269) -- (269) ------- -------- -------- ------- -------- Operating income......................... -- 4,481 16,663 -- 21,144 Other expense: Interest expense....................... -- 17,841 18 -- 17,859 Intercompany interest expense (income).............................. -- (13,168) 13,168 -- -- Other.................................. -- 668 119 -- 787 ------- -------- -------- ------- -------- Income (loss) from continuing operations, before income taxes and undistributed earnings of subsidiaries................ -- (860) 3,358 -- 2,498 Income tax expense (benefit)............. -- (50) 58 -- 8 ------- -------- -------- ------- -------- Income (loss) from continuing operations, before undistributed earnings of subsidiaries............................ -- (810) 3,300 -- 2,490 Equity in undistributed earnings of subsidiaries............................ 2,490 3,300 -- (5,790) -- ------- -------- -------- ------- -------- Net income (loss)........................ $ 2,490 $ 2,490 $ 3,300 $(5,790) $ 2,490 ======= ======== ======== ======= ========
15 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended September 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ ------- ------------ Net sales................................ $ -- $100,697 $311,521 $ -- $412,218 Cost of sales............................ -- 83,173 247,168 -- 330,341 ------ -------- -------- ------- -------- Gross profit............................. -- 17,524 64,353 -- 81,877 Selling, general and administrative and amortization.......................... -- 15,388 44,390 -- 59,778 Restructuring and other charges........ -- (458) 534 -- 76 ------ -------- -------- ------- -------- Operating income......................... -- 2,594 19,429 -- 22,023 Other expense (income): Interest expense....................... -- 17,594 237 -- 17,831 Intercompany interest expense (income).............................. -- (13,422) 13,422 -- -- Other expense.......................... -- 440 134 -- 574 ------ -------- -------- ------- -------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries............................ -- (2,018) 5,636 -- 3,618 Income taxes expense (benefit)........... -- (746) 2,192 -- 1,446 ------ -------- -------- ------- -------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries......................... -- (1,272) 3,444 -- 2,172 Equity in undistributed earnings of subsidiaries............................ 2,172 3,444 -- (5,616) -- ------ -------- -------- ------- -------- Net income (loss)........................ $2,172 $ 2,172 $ 3,444 $(5,616) $ 2,172 ====== ======== ======== ======= ========
16 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Nine Months Ended September 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ -------- ------------ Net sales............................... $ -- $335,080 $926,158 $ -- $1,261,238 Cost of sales........................... -- 271,574 733,108 -- 1,004,682 -------- -------- -------- -------- ---------- Gross profit............................ -- 63,506 193,050 -- 256,556 Selling, general and administrative and amortization..................... -- 50,813 150,029 -- 200,842 Restructuring changes................. -- -- 851 -- 851 -------- -------- -------- -------- ---------- Operating income........................ -- 12,693 42,170 -- 54,863 Other expense (income): Interest expense (income)............. -- 53,846 (75) -- 53,771 Intercompany interest expense (income)............................. -- (39,443) 39,443 -- -- Loss on early extinguishment of debt................................. -- 17,748 -- -- 17,748 Other expense (income)................ -- 1,624 131 -- 1,755 -------- -------- -------- -------- ---------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries........................... -- (21,082) 2,671 -- (18,411) Income tax expense (benefit)............ -- (1,225) 155 -- (1,070) -------- -------- -------- -------- ---------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries........................ -- (19,857) 2,516 -- (17,341) Equity in undistributed earnings of subsidiaries........................... (16,111) 2,516 -- 13,595 -- -------- -------- -------- -------- ---------- Income (loss) from continuing operations............................. (16,111) (17,341) 2,516 13,595 (17,341) Gain on disposal of discontinued operations, net of taxes of $770....... -- (1,230) -- -- (1,230) -------- -------- -------- -------- ---------- Net income (loss)....................... $(16,111) $(16,111) $ 2,516 $ 13,595 $ (16,111) ======== ======== ======== ======== ==========
17 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Nine Months Ended September 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ ------- ------------ Net sales................................ $ -- $310,244 $937,119 $ -- $1,247,363 Cost of sales............................ -- 257,396 745,045 -- 1,002,441 ------ -------- -------- ------- ---------- Gross profit............................. -- 52,848 192,074 -- 244,922 Operating expenses: Selling, general and administrative and amortization.......................... -- 49,426 137,370 -- 186,796 Restructuring charges.................. -- (458) 1,659 -- 1,201 ------ -------- -------- ------- ---------- Operating income......................... -- 3,880 53,045 -- 56,925 Other (income) expense: Interest expense....................... -- 53,852 311 -- 54,163 Intercompany interest (income) expense............................... -- (40,778) 40,778 -- -- Other expense.......................... -- 415 648 -- 1,063 ------ -------- -------- ------- ---------- Income (loss) from continuing operations, before income taxes and undistributed earnings of subsidiaries................ -- (9,609) 11,308 -- 1,699 Provision (benefit) for income taxes..... -- (3,844) 4,523 -- 679 ------ -------- -------- ------- ---------- Income (loss) from continuing operations, before cumulative effect of a change in accounting principle and undistributed earnings of subsidiaries................ -- (5,765) 6,785 -- 1,020 Equity in undistributed earnings of subsidiaries............................ 2,617 6,785 -- (9,402) -- ------ -------- -------- ------- ---------- Income from continuing operations before cumulative effect of a change in accounting principle.................... 2,617 1,020 6,785 (9,402) 1,020 Gain on disposal of discontinued operations.............................. -- (1,919) -- -- (1,919) Cumulative effect of a change in accounting principle.................... -- 322 -- -- 322 ------ -------- -------- ------- ---------- Net income (loss)........................ $2,617 $ 2,617 $ 6,785 $(9,402) $ 2,617 ====== ======== ======== ======= ==========
18 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 2004 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- ----------- ------------ ------------ Cash flows provided by (used in) from operating activities......................... $ -- $ (27,356) $ 41,353 $ 13,997 Cash flows from investing activities: Acquisitions, net of cash acquired.......... -- (9,803) -- (9,803) Capital expenditures........................ -- (4,671) (15,575) (20,246) Intercompany advances....................... (1,053) 25,559 (24,506) -- Proceeds from divestitures, net............. -- 2,000 -- 2,000 Proceeds from sales of assets............... -- 1,475 -- 1,475 --------- ----------- -------- ----------- Net cash provided by (used in) investing activities............................... (1,053) 14,560 (40,081) (26,574) Cash flows from financing activities: Proceeds from issuance of long-term debt.... -- 2,129,193 -- 2,129,193 Repayments of long-term debt................ -- (2,107,321) (850) (2,108,171) Proceeds from issuance of common stock...... 1,053 -- -- 1,053 Capitalized loan fees....................... -- (9,076) -- (9,076) --------- ----------- -------- ----------- Net cash provided by (used in) financing activities............................... 1,053 12,796 (850) 12,999 Effect of exchange rate changes on cash and cash equivalents............................. -- -- (350) (350) --------- ----------- -------- ----------- Net change in cash and cash equivalents... -- -- 72 72 Cash and cash equivalents at beginning of year......................................... -- -- 307 307 --------- ----------- -------- ----------- Cash and cash equivalents at end of period.... $ -- $ -- $ 379 $ 379 ========= =========== ======== ===========
19 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- ----------- ------------ ------------ Cash flows from (used in) operating activities................................... $ -- $ (1,057) $ 34,691 $ 33,634 Cash flows from investing activities: Capital expenditures........................ -- (1,111) (18,611) (19,722) Intercompany advances....................... (16) 15,848 (15,832) -- Proceeds from divestitures, net............. -- 3,864 -- 3,864 Proceeds from the sale of assets............ -- -- 658 658 --------- ----------- -------- ----------- Net cash provided by (used in) investing activities............................... (16) 18,601 (33,785) (15,200) Cash flows from financing activities: Proceeds from issuance of long-term debt.... -- 1,384,781 -- 1,384,781 Repayments of long-term debt................ -- (1,404,027) (1,212) (1,405,239) Proceeds from the issuance of common stock...................................... 16 -- -- 16 Capitalized loan fees....................... -- (484) -- (484) --------- ----------- -------- ----------- Net cash provided by (used in) financing activities............................... 16 (19,730) (1,212) (20,926) Effect of exchange rate changes on cash....... -- -- 936 936 --------- ----------- -------- ----------- Net change in cash and cash equivalents... -- (2,186) 630 (1,556) Balance at beginning of year.................. -- 1,957 693 2,650 --------- ----------- -------- ----------- Balance at end of year........................ $ -- $ (229) $ 1,323 $ 1,094 ========= =========== ======== ===========
20 CENVEO, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW We are one of North America's leading providers of visual communications. We produce a variety of products and provide services that help our customers deliver customized messages more effectively. In October 2003, we reorganized into two business segments. This reorganization aligned our structure with our principal strategic goals: to operate as one company, to provide our customers with one point of entry, and to provide our customers with a full spectrum of our products and services delivered with speed, reliability and efficiency. In keeping with our strategy to operate as one company and unite all of our operations under one identity, our shareholders approved the change of the Company's name from Mail-Well, Inc. to Cenveo, Inc. on April 29, 2004. COMMERCIAL Our commercial segment specializes in printing annual reports, car brochures, brand marketing collateral, financial communications and general commercial printing and in the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. We also offer our customers services such as design, fulfillment, e-commerce, inventory management and other enterprise solutions for companies seeking strategic partners for their branding and other communications priorities. These products and services are sold directly to national and local customers. Our commercial segment consists of 36 printing plants, 28 envelope plants and five distribution and fulfillment centers. MARKET AND OTHER FACTORS. Approximately 50% of our commercial printing sales and approximately 40% of our custom envelope sales are related to advertising and direct mail promotions. Beginning in 2001, many of our customers significantly reduced promotional spending in response to the economic slowdown. Advertising and promotional spending historically has not improved as quickly as the overall economy after a recession and this has affected our performance in 2004. Our sales, however, in the third quarter of 2004 were the highest third quarter sales we have had since 2001. While the volumes of certain of our products are beginning to increase and our margins are improving, there is overcapacity in our industry and significant competitive pricing pressures. AREAS OF FOCUS. Because of the changes that have occurred in our markets we have two principal areas of focus: * It is important that we grow our share of the market. We have made a substantial investment in our sales and marketing organization to differentiate ourselves from our competitors and enable us to offer and deliver to our customers a full spectrum of our products and services with speed, reliability and efficiency. Additionally, we have extended our product offering by investing in digital presses and our distribution and fulfillment capabilities. * We must continue to manage our capacity and operating leverage. In the third quarter of 2004, we strengthened our market position in Seattle, Washington and in San Francisco, California by purchasing two commercial printing companies. We will consolidate our existing operations in these two markets with the newly acquired companies. Since 2001 we have consolidated many of our manufacturing facilities to reduce excess capacity and improve our competitive position. We have closed eleven of our envelope facilities and four printing operations including an envelope facility closed in the second quarter of 2004. RESALE Our resale segment produces business forms and labels, custom and stock envelopes and specialty packaging and mailers. These products are generally sold through professional print distributors, 21 CENVEO, INC. AND SUBSIDIARIES business forms suppliers, office-products retail chains and the Internet. The resale segment operates 20 manufacturing facilities. MARKET AND OTHER FACTORS. Demand for business forms, especially continuous forms, has been declining for several years as businesses have acquired laser-printing capabilities. The resale market for office products has become extremely price competitive. Mass merchandisers, wholesalers and paper merchants are consolidating suppliers. Product offerings, competitive prices and service are key to retaining business. AREAS OF FOCUS. In response to industry and market challenges, we are focusing on the following: * We are defending our share of the business forms market and our sales into the office products retail channel. We believe we have the national manufacturing capability and the cost structure to be successful in this effort. * We must grow our sales of business labels and specialty business documents. The markets for these products are growing and we have the production capability and products to benefit from this market growth. * We must match our manufacturing capacity of business forms to the demands of our customers. Since 2001, we have closed two of our business forms plants. CORPORATE In addition to the business improvement actions and areas of focus for each of our business segments, we have several important corporate-wide initiatives. * Our company was formed through a strategic roll-up of many acquisitions. The companies we acquired had different cultures, operating procedures and information systems. We have taken and will continue to take actions to integrate our operations into one company, build a unique culture and standardize procedures and systems. As mentioned, we have changed the company's name to promote one identity. In addition, we are implementing a common information system and standard operating procedures in our printing facilities. This investment will result in more efficient manufacturing and consistency in our operations. It will also provide the information needed to serve our customers as one company. * We have refinanced our debt over the last several years. Currently, we have no significant maturities on any of our long-term debt until 2008. Our focus is on generating sufficient internal cash flow to fund investments in capital equipment and acquisitions and reductions in debt outstanding under our senior secured credit facility. * In 2003, we launched a major initiative we refer to as "Mobilization." Mobilization is a comprehensive program designed to actively involve all of our employees in improving service, quality, efficiency and innovation. We believe this initiative has and will continue to improve teamwork, communication and accountability throughout our business and thus improve operations, safety and customer service, and reduce costs. * Prices of coated and uncoated paper have increased in the first nine months of 2004. These increases in the cost of manufacturing our products have negatively impacted our profit margins to the extent we were unable to increase our prices. It will be important for us to mitigate the impact of the increased cost of our primary raw materials. CONSOLIDATED RESULTS The summary financial data set forth in the tables that follow present reported net sales and operating income amounts as well as division net sales and operating income. Division net sales exclude sales of our digital graphics operations sold in March 2003. Division operating income is the 22 CENVEO, INC. AND SUBSIDIARIES operating income of our two operating segments before considering restructuring expenses and the operating results of the digital graphics operations and excludes unallocated corporate expenses. We believe this presentation provides information useful to understanding our current operating performance.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------------- 2004 2003 2004 2003 -------- -------- ---------- ---------- Division net sales....................... $428,099 $412,218 $1,261,238 $1,244,490 Divested operations................. -- -- -- 2,873 -------- -------- ---------- ---------- Net sales................................ 428,099 412,218 1,261,238 1,247,363 Division operating income................ 25,566 26,899 72,423 72,932 Unallocated corporate expense........ (4,691) (4,800) (16,709) (14,974) Restructuring adjustment (expense)... 269 (76) (851) (1,201) Divested operations.................. -- -- -- 168 -------- -------- ---------- ---------- Operating income......................... 21,144 22,023 54,863 56,925 Interest expense..................... 17,859 17,831 53,771 54,163 Loss on early extinguishment of debt............................... -- -- 17,748 -- Other................................ 787 574 1,755 1,063 -------- -------- ---------- ---------- Income (loss) from continuing operations before income taxes.................... 2,498 3,618 (18,411) 1,699 Income tax expense (benefit)......... 8 1,446 (1,070) 679 Gain on disposal of discontinued operations......................... -- -- (1,230) (1,919) Change in accounting principle....... -- -- -- 322 -------- -------- ---------- ---------- Net income (loss)........................ $ 2,490 $ 2,172 $ (16,111) $ 2,617 ======== ======== ========== ========== Earnings (loss) per share - diluted...... $ 0.05 $ 0.04 $ (0.34) $ 0.05 ======== ======== ========== ==========
NET SALES Net sales and division net sales increased $15.9 million for the three months ended September 30, 2004 compared to net sales for the comparable period of 2003. Sales of our commercial segment increased $12.3 million and included sales of $4.7 million from operations acquired during the quarter. Sales of our resale segment increased $3.6 million. For the nine months ended September 30, 2004, net sales increased $13.9 million compared to net sales for the comparable period of 2003. Sales in the first nine months of 2003 included sales of $2.9 million of the digital graphics operations divested in the first quarter of 2003. Division net sales for the nine months ended September 30, 2004 increased $16.7 million. Sales of our commercial segment increased $15.9 million including the sales of operations acquired. Sales of our resale segment decreased $0.8 million. OPERATING INCOME Operating income declined $0.9 million and $2.1 million during the three and nine months ended September 30, 2004 compared to operating income earned in the comparable periods of 2003. DIVISION OPERATING INCOME. Division operating income decreased $1.3 million in the three months ended September 30, 2004 compared to division operating income earned during the comparable period of 2003. Division operating income of our commercial segment declined $0.8 million. Division operating income of our resale segment declined $0.5 million. 23 CENVEO, INC. AND SUBSIDIARIES For the nine months ended September 30, 2004, division operating income declined $0.5 million. The division operating income of our commercial business declined $1.6 million. The division operating income of our resale segment increased $1.1 million. UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include the costs of our corporate headquarters. The increase in corporate expenses for the nine months ended September 30, 2004 was primarily due to an increase in the cost of workers' compensation claims. We did not allocate these expenses to our segments because the increased costs related to the development of claims incurred prior to 2004. RESTRUCTURING EXPENSES. We continue to evaluate our operations for opportunities to optimize capacity and reduce costs. In February 2004, we began the closure of our envelope plant in Bensalem, Pennsylvania and its integration into our Philadelphia printing facility. The expenses incurred in connection with this closure totaled $0.9 million as of September 30, 2004. The total cost of the closure is expected to be approximately $1.5 million consisting of the following (in thousands): Employee separation and related expenses................ $ 800 Equipment write-downs................................... 1,175 Equipment moving expenses............................... 171 Building clean-up and other expenses.................... 750 Gain from sale of building.............................. (1,396) ------ Total............................................... $1,500 ======
We anticipate incurring the remainder of these expenses prior to the end of 2004. DIVESTED OPERATIONS. Operating income in 2003 included operating income of $0.2 million from the digital graphics operations divested in March 2003. INTEREST EXPENSE Interest expense increased slightly during the three months ended September 30, 2004 over the comparable period of 2003. Interest expense reflected our average outstanding debt during the quarter of $802.9 million and a weighted average interest rate of 8.10% compared to the average outstanding debt of $777.7 million and a weighted average interest rate of 8.44% in 2003. For the nine months ended September 30, 2004, interest expense was $0.4 million lower than the comparable period of 2003. Interest expense reflected our average outstanding debt of $809.2 million and a weighted average interest rate of 8.16% compared to the average outstanding debt of $797.6 million and a weighted average interest rate of 8.38% during the first nine months of 2003. Our average outstanding debt and weighted average interest rate in 2004 reflect the issuance of $320 million of 7 7/8% senior subordinated notes in January, the proceeds of which were used to redeem the $300 million of 8 3/4% senior subordinated notes. LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to redeem the 8 3/4% notes and the unamortized debt issuance costs on the 8 3/4% notes, which were written off, totaled $17.7 million. TAX BENEFIT Our effective tax rate in 2004 has been negatively impacted by the establishment of additional valuation allowances on certain deferred tax assets. Statement of Financial Accounting Standards No. 24 CENVEO, INC. AND SUBSIDIARIES 109, Accounting for Income Taxes, ("SFAS 109") requires us to evaluate the realizability of our deferred tax assets on a quarterly basis. SFAS 109 requires us to provide a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence with respect to the realizability of deferred tax assets, establishment of a valuation allowance must be considered. Under provisions of SFAS 109, the substantial losses we incurred over the most recent three-year period represent sufficient negative evidence. Accordingly, we have provided an additional valuation allowance to cover the estimated impairment of the deferred tax asset arising from U.S. related operating losses that are expected to be generated in 2004. We currently believe our remaining deferred tax assets will be realized through the reversal of our existing temporary differences and the execution of available tax planning strategies. Additional valuation allowances may be required if we are unable to execute our tax planning strategies or generate future taxable income. The valuation allowance that has been established will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that our deferred tax assets will be realized. When sufficient positive evidence occurs, our income tax expense will be reduced to the extent we decrease the amount of our valuation allowance. The establishment or reversal of valuation allowances could have a significant negative or positive impact on future earnings. GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS In September 2000, we sold the extrusion coating and laminating business segment of American Business Products, Inc., a company we acquired in February 2000. The consideration received for this business included an unsecured note which was fully reserved at the time of the sale. This note was redeemed by the issuer in June 2004 for $2.0 million. The proceeds, net of tax, have been recorded as a gain on disposal of discontinued operations. The gain on the disposal of discontinued operations recorded in 2003 was the result of adjustments made to the tax impact of the sale of our prime label business in 2002. NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE--DILUTED Net income was $2.5 million, or $0.05 per share, for the three months ended September 30, 2004 compared to $2.2 million, or $0.04 per share, for the three months ended September 30, 2003. The increase was due primarily to lower tax expense in 2004 compared to 2003. The net loss of $16.1 million, or $0.34 million, for the nine months ended September 30, 2004, compared to net income of $2.6 million, or $0.05 per share, for the nine months ended September 30, 2003 was due primarily to the $17.7 million loss incurred on the early extinguishment of debt. 25 CENVEO, INC. AND SUBSIDIARIES BUSINESS SEGMENTS COMMERCIAL
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Division net sales.......................... $327,365 $315,029 $958,797 $942,826 Divested operations.................... -- -- -- 2,873 -------- -------- -------- -------- Net sales................................... $327,365 $315,029 $958,797 $945,699 Division operating income................... 16,097 16,861 39,132 40,780 Restructuring adjustments (expense)..... 269 16 (851) (1,305) Divested operations..................... -- -- -- 168 -------- -------- -------- -------- Operating income............................ 16,366 16,877 38,281 39,643 Operating income margin..................... 5.0% 5.4% 4.0% 4.2%
Net sales of our commercial segment for the three months ended September 30, 2004 increased $12.3 million over the comparable period of 2003. * Sales of our commercial printing products increased $8.4 million. This increase was driven by growth in sales of our high impact printing products to our national and regional customers, higher sales to our local customers and sales contributed by operations acquired. During the third quarter, the two printing operations we acquired contributed sales of $4.7 million. * Sales of our envelope products declined approximately $0.7 million. The average unit selling prices of our envelope products were down slightly in the quarter compared to the prior year. * The favorable impact of the strength of the Canadian dollar on the sales of our Canadian operations was $2.1 million. Operating income for the three months ended September 30, 2004 decreased $0.5 million from the comparable period of 2003. Division operating income decreased $0.8 million. Pricing and manufacturing performance improved slightly during the quarter compared to 2003. The improvement in gross margin and the gross profit from the increase in sales, however, were not sufficient to offset higher selling expenses and higher amortization expense. Amortization expense was $1.0 million higher in the third quarter of 2004 due to the amortization of an intangible asset recorded in connection with the payment of contingent purchase price on an acquisition completed in 2002. Net sales of our commercial segment for the nine months ended September 30, 2004 increased $13.1 million over the comparable period of 2003. Net sales in 2003 included sales of $2.9 million of the digital graphics operations that were sold in March 2003. Division net sales increased $16.0 million. * Sales of our commercial printing products increased by $11.1 million. This increase was driven by growth in sales of high impact printing products and the sales contributed in the third quarter by the newly acquired operations. * Envelope sales were $5.1 million lower driven by lower average selling prices in 2004 compared to 2003. * The favorable impact of the strength of the Canadian dollar on the sales of our Canadian operations was $9.9 million. Operating income for the nine months ended September 30, 2004 was $1.4 million lower than the operating income earned in the comparable period of 2003. Division operating income declined by $1.6 million. Pricing and improved manufacturing performance during 2004 are reflected in a 90 basis point improvement in gross profit margin compared to 2003. Despite the improvement in gross margin and 26 CENVEO, INC. AND SUBSIDIARIES the gross profit from the increase in sales, division operating income declined primarily as a result of higher selling expenses and amortization expense which was $3.0 million higher than in the first nine months of 2003. RESALE
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net sales................................... $100,734 $ 97,189 $302,441 $301,664 Division operating income................... 9,469 10,038 33,291 32,152 Restructuring adjustments (expense).... -- (92) -- 104 -------- -------- -------- -------- Operating income............................ 9,469 9,946 33,291 32,256 Operating income margin..................... 9.4% 10.2% 11.0% 10.7%
Net sales of our resale segment for the three months ended September 30, 2004 increased by $3.5 million over the comparable period of 2003. Growth in sales of business labels continued during the third quarter, increasing $2.5 million, or 10.3%. Sales of office products increased $3.7 million, or 9.0%, as a result of market share gains in the office products retail channel. Sales of our traditional business forms, especially continuous forms, declined $2.7 million. The demand for these products is declining due to the increased use of laser printing by our customers. Operating income for the three months ended September 30, 2004 declined $0.5 million from the comparable period of 2003. This decline in operating income was due primarily to expenses incurred in connection with our market share gains in the office products retail channel. Net sales for the nine months ended September 30, 2004 were $0.8 million higher than net sales in the comparable period of 2003. This increase was due to sales of our business labels products, which have been strong all year, and strong sales of office products in the third quarter. Operating income for the nine months ended September 30, 2004 was $1.0 million higher than operating income earned in the comparable period of 2003. The increase in operating income was due to the strong performance of our business labels products and lower administrative expenses which offset the cost incurred in connection with our sales growth in the office products retail channel. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. Cash provided by operations was $14.0 million during the first nine months of 2004 compared to $33.6 million provided by operations during the comparable period of 2003. During the first nine months of 2004, we paid redemption premiums of $13.5 million to redeem our 8 3/4% senior subordinated notes. In addition, cash used for increases in working capital during the first nine months of 2004 totaled $4.3 million compared to an increase of $0.2 million during the comparable period of 2003. This increase was primarily due to the payment of a $4.9 million legal settlement accrued at December 31, 2003 and increases in receivables and inventory to support new business. INVESTING ACTIVITIES. Capital expenditures were $20.2 million as of September 30, 2004 compared to $19.7 million as of September 30, 2003. We anticipate capital expenditures for all of 2004 to be approximately $25.0 million. On July 6, 2004, we purchased the stock of Valco Graphics Inc., a commercial printing company in Seattle, Washington. On August 27, 2004, we purchased certain assets of WWP Property Management, Inc., a commercial printing company in San Francisco, California. Net cash used to purchase these two operations was $9.8 million. 27 CENVEO, INC. AND SUBSIDIARIES FINANCING ACTIVITIES. In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem the $300 million of 8 3/4% senior subordinated notes due 2008. The cost incurred to issue the 7 7/8% senior subordinated notes was $7.2 million. These debt issuance costs have been deferred and will be amortized over the term of the notes. In March 2004, we amended our $300 million senior secured credit facility to extend its term to June 2008. The cost incurred to amend the credit facility was $1.9 million. These debt issuance costs will be amortized over the extended term of the facility. The following table summarizes our cash payment obligations as of September 30, 2004 by year:
OTHER LONG- PURCHASE TOTAL CASH LONG-TERM DEBT OPERATING LEASES TERM LIABILITIES COMMITMENTS OBLIGATIONS -------------- ---------------- ---------------- ----------- ----------- Year 1............... $ 2,264 $ 31,929 $ -- $ 3,428 $ 37,621 Year 2............... 2,324 26,345 3,521 4,073 36,263 Year 3............... 13,893 22,266 3,252 3,653 43,064 Year 4............... 78,927 15,909 2,124 3,653 100,613 Year 5............... 1,021 9,165 1,945 -- 12,131 Thereafter........... 671,554 19,081 15,153 -- 705,788 -------- -------- ------- ------- -------- Total................ $769,983 $124,695 $25,995 $14,807 $935,480 ======== ======== ======= ======= ========
Purchase commitments include additional consideration of $14.2 million for an operation acquired in 2002. This additional consideration is payable if annual revenues total a specified amount each year through 2007. At September 30, 2004, we had outstanding letters of credit of approximately $24.1 million related to performance and payment guarantees. In addition, we have issued letters of credit of $1.0 million as credit enhancements in conjunction with other debt. Based on our experience with these arrangements, we do not believe that any obligations that may arise will be significant. In conjunction with the sale of the prime label business in May 2002, we guaranteed certain lease obligations. As of September 30, 2004, the contingent liability under the guarantee was $5.3 million. We have not made and do not expect to make any payments under this guarantee. Our current credit ratings are as follows:
SENIOR SECURED SENIOR CREDIT SENIOR SUBORDINATED REVIEW AGENCY FACILITY NOTES DEBT LAST UPDATE ------------- -------- ------ ------------ ----------- Standard & Poor's......... BB BB- B April 2004 Moody's................... Ba3 B1 B3 April 2004
The terms of our existing debt agreements have no rating triggers, and we do not believe that our current ratings will impact our ability to raise additional capital. We expect to be able to fund our operations, capital expenditures, debt and other contractual commitments within the next year from internally generated cash flow and funds available under our senior secured credit facility. Based on the certificate filed for September 30, 2004 activity, we had $132.4 million of unused credit available under this credit facility. SEASONALITY AND ENVIRONMENT Our commercial segment experiences seasonal variations. Revenues from annual reports are generally concentrated from February through April. Revenues associated with holiday catalogs and automobile brochures tend to be concentrated from July through October. As a result of these seasonal variations, some of our commercial printing operations are at or near capacity at certain times during these periods. 28 CENVEO, INC. AND SUBSIDIARIES In addition, several envelope market segments and certain segments of the direct mail market experience seasonality, with a higher percentage of the volume of products sold to these markets occurring during the fourth quarter of the year. This seasonality is due to the increase in sales to the direct mail market due to holiday purchases. The mailer operations of our resale segment are at or near capacity at times during the fourth quarter. Seasonality is offset by the diversity of our other products and markets, which are not materially affected by seasonal conditions. Environmental matters have not had a material financial impact on our historical operations and are not expected to have a material impact in the future. AVAILABLE INFORMATION Our Internet address is: www.cenveo.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission. In addition, our earnings conference calls are web cast live via our website. Presentations to securities analysts are also included on our website. LEGAL PROCEEDINGS From time to time we may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent that losses are deemed probable and can be estimated. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on us. FORWARD-LOOKING INFORMATION Certain statements in this report, and in particular, statements found in Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, "believe," "expect," "intend," "appear," "estimate," "anticipate," "project," "will" and other similar expressions. All such statements address operating performance, events or developments that we expect or anticipate will occur in the future and are not historical in nature. All forward-looking statements reflect our current views of Cenveo with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. As and when made, we believe that these forward-looking statements are reasonable; however, these statements involve known and unknown risks, including, but not limited to: * General economic, business and labor conditions * The ability to implement our strategic initiatives * The ability to regain profitability after substantial losses in 2002 and 2001 and in the first quarter of 2004 * The majority of our sales are not subject to long-term contracts * The industry is extremely competitive due to over capacity * The impact of the Internet and other electronic media on the demand for envelopes and printed material * Postage rates and other changes in the direct mail industry 29 CENVEO, INC. AND SUBSIDIARIES * Environmental laws may affect our business * The ability to retain key management personnel * Compliance with recently enacted and proposed changes in laws and regulations affecting public companies could be burdensome and expensive * The ability to successfully identify, manage and integrate possible future acquisitions * Dependence on suppliers and the costs of paper and other raw materials and the ability to pass paper price increases onto customers * The ability to meet customer demand for additional value-added products and services * Changes in interest rates and currency exchange rates of the Canadian dollar * The ability to manage operating expenses * The risk that a decline in business volume or profitability could result in a further impairment of goodwill * The ability to timely or adequately respond to technological changes in our industry In view of such uncertainties, investors should not place undue reliance on any forward-looking statements since such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks such as changes in interest and foreign currency exchange rates, which may adversely affect results of our operations and our financial position. We have operations in Canada, and thus are exposed to market risk for changes in foreign currency exchange rates of the Canadian dollar. Risks from interest and foreign currency exchange rate fluctuations are managed through normal operating and financing activities. We do not utilize derivatives for speculative purposes, nor have we hedged interest rate exposure through the use of swaps and options or foreign exchange exposure through the use of forward contracts. Exposure to market risk from changes in interest rates relates primarily to our variable rate debt obligations. The interest on this debt is the London Interbank Offered Rate ("LIBOR") plus a margin. At September 30, 2004, we had variable rate debt outstanding of $93.3 million. A 1% increase in LIBOR on the maximum amount of debt subject to variable interest rates, which is $315.3 million, would increase our annual interest expense by $3.2 million. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal controls or procedures or in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. 30 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Articles of Incorporation of the Company--incorporated by reference from Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1997. 3.2 Articles of Amendment to the Articles of Incorporation of the Company dated May 17, 2004--incorporated by reference to Exhibit 3.2 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 3.3 Bylaws of the Company--incorporated by reference from Exhibit 3(ii) of the Company's Form 10-Q for the quarter ended June 30, 1997. 3.4 Certificate of Amendment of Certificate of Incorporation of Cenveo Corporation (formerly known as Mail-Well I Corporation) dated May 14, 2004 --incorporated by reference to Exhibit 3.4 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 3.5 Bylaws of Mail-Well I Corporation--incorporated by reference from Mail-Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No. 333-74409). 4.1 Indenture dated as of March 13, 2002 between Mail-Well I Corporation and State Street Bank and Trust Company, as Trustee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.30 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.2 Form of Senior Note and Guarantee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount 9 5/8% due 2012--incorporated by reference to Exhibit 10.31 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.3 Indenture dated as of February 4, 2004 between Mail-Well I Corporation and U.S. Bank National Association, as Trustee, and Form of Senior Subordinated Note and Guarantee relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.5 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 4.4 Registration Rights Agreement dated February 4, 2004, between Mail-Well I Corporation and Credit Suisse First Boston, as Initial Purchaser, relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.6 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of its officers and directors--incorporated by reference from Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.2 Form of Indemnity Agreement between Mail-Well I Corporation and each of its officers and directors--incorporated by reference from Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of February 23, 1994 and related Employee Stock Ownership Plan Trust Agreement--incorporated by reference from Exhibit 10.19 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 31 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated by reference from Exhibit 10.20 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.5 Form of Mail-Well, Inc. Incentive Stock Option Agreement--incorporated by reference from Exhibit 10.22 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.6 Form of Mail-Well, Inc. Nonqualified Stock Option Agreement--incorporated by reference from Exhibit 10.23 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.7 1997 Non-Qualified Stock Option Agreement--incorporated by reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q for the quarter ended March 31, 1997. 10.8 Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive Stock Option Agreement--incorporated by reference from Exhibit 10.59 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.9 Mail-Well, Inc. 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.10 Form of Non-Qualified Stock Option Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.11 Form of Incentive Stock Option Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.12 Form of Restricted Stock Award Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.13 Purchase Agreement dated March 8, 2002, between Mail-Well I Corporation, and Credit Suisse First Boston, UBS Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., First Union Securities, Inc., and Scotia Capital (USA) Inc., as Initial Purchasers, relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.30 to Mail-Well I Corporation's Registration Statement on Form S-4 filed June 11, 2002. 10.14 Registration Rights Agreement dated March 13, 2002, between Mail-Well I Corporation, and Credit Suisse First Boston, UBS Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., First Union Securities, Inc., and Scotia Capital (USA) Inc., as Initial Purchasers, relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.32 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.15 Second Amended and Restated Equipment Lease dated as of August 6, 2002 between Wells Fargo Bank Northwest, National Association, as trustee under MW 1997-1 Trust, and Mail- Well I Corporation--incorporated by reference to Exhibit 10.26 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.16 Second Amended and Restated Guaranty Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 32 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.17 Second Amended and Restated Participation Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet Capital Corporation as Arranger and Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.18 Amendment Agreement No. 1 dated as of September 25, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.29 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.19 Employment and Executive Severance Agreement dated as of March 10, 2003, between the Company and Paul V. Reilly--incorporated by reference to Exhibit 10.26 of the Company's Annual Form 10-K filed March 31, 2003. 10.20 Form of Executive Severance Agreement entered into between the Company and each of the following: Michel Salbaing, Gordon Griffiths, Brian Hairston, Keith Pratt, William Huffman, D. Robert Meyer and Mark Zoeller--incorporated by reference to Exhibit 10.27 of the Company's Annual Form 10-K filed March 31, 2003. 10.21 Amendment Agreement No. 2 dated as of March 25, 2004 among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantor, Fleet Capital Corporation as Agent, and the Trust Purchasers named therein--incorporated by reference to Exhibit 10.21 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.22 Second Amended and Restated Credit Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.22 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.23 Second Amended and Restated Security Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.23 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.24 Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as amended --incorporated by reference to Exhibit 10.24 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 31.1* Certification of Periodic Report by Paul V. Reilly, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Periodic Report by Paul V. Reilly, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. --------------- * Filed herewith. ** Furnished herewith.
33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Englewood, state of Colorado, on October 29, 2004. CENVEO, INC. By: /S/ PAUL V. REILLY ----------------------------------------------- Paul V. Reilly, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /S/ MICHEL P. SALBAING ----------------------------------------------- Michel P. Salbaing, Senior Vice President-- Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 34