-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EA6rkfFqg/hKAPpmEfxUZwg9Bpo2kj07/IjiAvhHY2IVIYc7hkiuc/hxPs50nw6h UFwxVf3aPhy1oWXnWsm8SQ== 0001068800-05-000140.txt : 20050228 0001068800-05-000140.hdr.sgml : 20050228 20050228171026 ACCESSION NUMBER: 0001068800-05-000140 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050228 DATE AS OF CHANGE: 20050228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENVEO, INC CENTRAL INDEX KEY: 0000920321 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 841250533 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12551 FILM NUMBER: 05646565 BUSINESS ADDRESS: STREET 1: 8310 S VALLEY HWY #400 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037908023 MAIL ADDRESS: STREET 1: 8310 S VALLEY HWY #400 CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: MAIL WELL INC DATE OF NAME CHANGE: 19950817 FORMER COMPANY: FORMER CONFORMED NAME: MAIL WELL HOLDINGS INC DATE OF NAME CHANGE: 19940328 10-K 1 form10k.txt ============================================================================== - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMMISSION FILE NUMBER 1-12551 ------------------------ CENVEO, INC. (Exact name of Registrant as specified in its charter.) COLORADO 84-1250533 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8310 S. VALLEY HIGHWAY, #400 80112 ENGLEWOOD, CO (Address of principal executive offices) (Zip Code)
303-790-8023 (Registrant's telephone number, including area code) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $0.01 par value per share The New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes /X/ No / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 22, 2005 was $87,220,338. As of February 22, 2005 the Registrant had 48,711,979 shares of Common Stock, $0.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part II (Item 5) and Part III of this form (Items 11, 12, 13 and 14, and part of Item 10) is incorporated by reference from the Registrant's Proxy Statement to be filed pursuant to Regulation 14A with respect to the Registrant's Annual Meeting of Stockholders to be held on or about April 27, 2005. - ------------------------------------------------------------------------------ ============================================================================== TABLE OF CONTENTS PART I PAGE ---- Item 1. Business.................................................... 1 The Company................................................. 1 Commercial.................................................. 1 Resale...................................................... 1 Our Industries.............................................. 1 Our Products................................................ 1 Our Services................................................ 2 Our Marketing, Distribution and Customers................... 3 Printing and Manufacturing.................................. 4 Raw Materials............................................... 4 Patents, Trademarks and Brand Names......................... 4 Competition................................................. 5 Backlog..................................................... 5 Employees................................................... 5 Environmental............................................... 5 Available Information....................................... 6 Item 2. Properties.................................................. 6 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......... 6 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities......... 7 Item 6. Selected Financial Data..................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 22 Item 8. Financial Statements and Supplementary Data................. 23 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................. 57 Item 9A. Controls and Procedures..................................... 57 Item 9B. Other Information........................................... 57 PART III Item 10. Directors and Executive Officers of Registrant.............. 58 Item 11. Executive Compensation...................................... 61 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................ 61 Item 13. Certain Relationships and Related Transactions.............. 61 Item 14. Principal Accountant Fees and Services...................... 62 PART IV Item 15. Exhibits and Financial Statement Schedules.................. 62 This page intentionally left blank PART I ITEM 1. BUSINESS THE COMPANY Cenveo is one of North America's largest providers of visual communication solutions delivered through print and electronic media. Our products include offset and digital printing, custom and stock envelopes, and business documents and labels. We also provide communications consulting, end-to-end project management and eServices. Our operational footprint spans North America with 84 production facilities and five fulfillment and distribution centers strategically located in or near major urban centers throughout North America. COMMERCIAL Our commercial business had sales of $1.33 billion in 2004. This business segment operates 64 manufacturing facilities and specializes in the printing of annual reports, car brochures, brand marketing collateral, financial communications, general commercial printing and the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. In addition, we operate five distribution and fulfillment centers and provide our customers with other value added services such as eCommerce. RESALE Our resale business had sales of $413 million in 2004. This business segment operates 20 manufacturing facilities and produces business forms and labels, custom and stock envelopes and specialty packaging and mailers generally sold to third-party dealers such as print distributors, forms suppliers and office-products retail chains. Refer to Note 19 of our consolidated financial statements included elsewhere in this report for additional information concerning our operating and geographic segments. OUR INDUSTRIES The printing industry is one of the largest and most fragmented industries in the United States with total estimated sales of $157 billion in 2003 generated by more than 44,500 companies, according to Printing Industries of America, Inc. The printing industry includes general commercial printing, financial and legal printing, greeting cards, labels and wrappers, magazines, newspapers, books, other specialty and quick printing and related services such as prepress and finishing. We estimate that the market in which we primarily compete has total annual sales of approximately $49 billion serviced by over 20,000 printing businesses. Envelope printing and manufacturing combined constitutes an estimated $3.6 billion market in North America according to the Envelope Manufacturer's Association. Products in the envelope industry include customized envelopes for direct mail, transactional envelopes, non-custom envelopes for resale, and specialty envelopes and filing products. Printed office products constitutes an estimated $15 billion market, with the short-run indirect segment of the market in which we compete estimated at $3.4 billion. OUR PRODUCTS Commercial Printing. We serve two primary commercial printing markets and the growing market for visual communications products and services other than print. Our general commercial printing markets are: (1) high end color printed materials, such as annual reports and car brochures, which are longer run premium products for major national and regional companies and (2) general commercial printing products such as advertising and promotional materials for local markets. Our printing products also include advertising literature, corporate identity materials, calendars, greeting cards, brand marketing materials, catalogs, maps, CD packaging and direct mail. We also offer our 1 customers services such as design, fulfillment, eCommerce, inventory management and other enterprise solutions for companies seeking strategic partners for their branding and other communications priorities. Envelopes. We serve two primary markets: (1) customized envelopes and packaging products, including Tyvek(R) mailers used by the U.S. Postal Service, sold directly to end users or to independent distributors who sell to end users; and (2) envelopes and other products sold to wholesalers, paper merchants, printers, contract stationers, independent retailers and office products superstores. In the customized envelope market, we offer printed customized conventional envelopes for billing and remittance, direct mail marketers, catalog orders and other end users, such as banks, brokerage firms and credit card companies. In the wholesale envelope market, we manufacture and print a broad line of stock and custom envelopes that are featured in national catalogs for the office products market or offered through office products retailers and contract stationers. Business Forms and Labels. We print a diverse line of custom products for small and mid-size businesses including both traditional and specialty forms and labels for use with desktop PCs and laser printers. Our printed office products include business documents, specialty documents produced through VersaSeal(R), Hi-Reply(TM) and Pro-card(TM) brands and short-run secondary labels, which are made of paper or film affixed with pressure sensitive adhesive and are used for mailing, messaging, bar coding and other applications. These products are generally sold through independent value-added resellers of office products. OUR SERVICES We offer our customers a wide variety of related services to enhance the value of our printed products and assist them in using digital technologies to improve the effectiveness of their visual communications. Among our services are: Cenveo ColorScience(TM). Cenveo ColorScience is our remote customer proofing solution. It is the first supply chain end-to-end process control solution that measures and controls color quality throughout the printing process from digital file creation to printed output. ColorScience offers the digital delivery of a hardcopy contract proof at the customer's location. Delivery Systems. We offer a flexible "just-in-time" delivery program which allows customers to receive their products just prior to when they are needed. Digital Archiving. We offer customers the option to store digitally rendered artwork on our file servers. The artwork can then be accessed and retrieved at any time for use by any authorized design or production group via high speed transmission links. Direct-to-Plate and Direct Imaging Technology. We have both direct-to-plate and direct imaging technologies, which eliminate labor and material costs in the prepress stage of a printing job. Both technologies support a completely digital workflow, providing a better printed product, faster turnaround and in the case of direct imaging, reduced inventory, capability to print on demand and lower distribution costs. eCENergy(TM). eCENergy is the Cenveo web portal providing access to a suite of eSolutions designed to automate and streamline transactions with customers. Current applications include an online ordering and fulfillment system called eCatalog, soft and remote proofing and digital asset management. Electronic Prepress. We offer fully automated electronic prepress services that allow the customer to submit artwork and other data in hardcopy or digitally either on disk, CD or via high speed transmission line. Hardcopy artwork is digitally scanned and mastered to create a file for use either in direct-to-plate or direct-to-press applications. We also provide traditional prepress services to customers who require graphics and artwork to be photographed, composed and incorporated into files for plate or direct-to-press applications. 2 Enterprise Solutions. Large national organizations looking for integrated, managed supply chain solutions can avail themselves of flexible solutions that connect them to their internal departments and external customers and suppliers. We have the supply chain management processes, techniques, systems and resources to manage, produce and deliver their products from our facilities strategically located across the U.S. Fulfillment. We have full-service fulfillment centers with on-line order assembly and bar coding strategically located throughout the U.S. Many of these centers have digital presses to reduce the costs of inventory and obsolescence. Inventory Management Systems. Large national organizations with centralized purchasing and supply departments serving multiple locations use our inventory management services. Included in these services are reports on usage by inventory unit (SKU), available warehouse supply and summary billing. Warehousing Services. For customers who prefer to outsource the management of their printed product, storage and distribution we have the expertise and capacity to store finished product and drop ship in bulk or ship on an "as needed" basis. OUR MARKETING, DISTRIBUTION AND CUSTOMERS Because of the highly fragmented nature of the general commercial printing and envelope businesses, and the diversity in customer needs and preferences, we market most of our general commercial printing and envelopes locally and regionally. Given the project-oriented nature of these markets, sales to particular customers may vary significantly from year to year depending upon the number and size of their communications plans. Our customer supply agreements are typically on an order-by-order basis or for a specified period of time. Our sales team is supported by a technical service team that provides customers with highly customized printing solutions. Most of our facilities have customer service representatives that work with the sales team and the customers to manage orders efficiently and effectively. In some cases, the customer service representatives have direct responsibility for accounts. Our marketing efforts for commercial printing differ between two broad product areas: high impact color products, such as auto brochures, annual reports and high-end catalogs, and general commercial work. We market high impact printing primarily on a regional basis, through sales representatives working out of sales offices across the United States. We utilize a team approach to customer service relationships that we believe is unique in the printing industry. We believe our commercial segment has one of the largest sales forces in the industry, with approximately 700 sales representatives as of December 31, 2004. Most of our commercial printing and envelope products are sold through sales representatives who work directly with customers from the initial concept through prepress, proofing, production and delivery. Because our sales representatives are our primary contacts with our customers, our goal is to attract, train and retain an experienced, qualified sales force in each of our businesses. Sales representatives typically are compensated by commission, which generally depends on order size and type, prepress work, reruns or rework and overall profitability of the job. For our growing list of enterprise customers we have account teams, some members of which are located on the customer's premises. Through our "Strategic Sales" initiative, we offer customers our full spectrum of products and services such as design, fulfillment, eCommerce and inventory management. Our Strategic Sales team is organized to focus on vertical markets including travel and leisure, health services, financial services and technology and to offer customers in these markets customized solutions to their visual communications needs. In our resale segment, our products are marketed under "Quality Park". The resale segment sells most of its products through 5 major channels; independent solution providers, commercial printers, ad specialty dealers, quick printers and office products distributors. Our resale segment sells its products 3 primarily through catalogs, telemarketing and the Internet to over 22,000 value-added resellers who distribute our products to end users. We coordinate sales efforts among geographic regions within our operating segments, and among the operating businesses themselves, in order to compete for national account business, enhance the internal dissemination of successful new product ideas, efficiently allocate our production equipment, share technical expertise and increase company-wide selling of specialty products manufactured at selected facilities. Our direct customer base totals approximately 30,000. The customers of our commercial segment include Fortune 500 companies, graphic designers and advertising agencies, regional and local businesses, insurance and finance companies, government agencies and not-for-profit organizations. The customers of our resale segment total over 22,000 distributors and office products retail businesses as well as the U.S. Postal Service. None of our customers accounted for more than 5% of revenue in 2004. PRINTING AND MANUFACTURING Our commercial segment operates 64 manufacturing facilities throughout the United States and Canada. Our 36 commercial printing plants combine advanced prepress technology with high-quality web and sheet-fed lithographic presses, digital presses and extensive binding and finishing operations. Our 28 envelope plants produce envelopes from either flat sheets which are die-cut into pre-shaped blanks or rolls of paper which are run on our web machines. The paper is folded into an envelope and is glued at the seams and on the flap. Flat sheets are often printed before the envelope is produced. Printing can also occur during the folding process or after the envelope is produced. Web machines are typically used for larger runs with multiple colors and numerous features. Die cut machines, which require a preliminary step to provide die cut envelope blanks from paper sheets, are used primarily for smaller orders typically including customized value-added features. The manufacturing process used is dependent upon the size of a particular order, custom features required, machine availability and delivery requirements. Some of our commercial facilities operate seven days a week, 24 hours a day to meet customer requirements. In our resale segment, we operate 20 facilities in the United States. We design and print business forms and labels and envelopes for a wide range of businesses. A majority of the orders for these products are sent to us electronically. We perform prepress and plate making functions and print on proprietary presses. Six of our resale facilities manufacture stock envelopes that are sold to paper merchants and office products retail chains. RAW MATERIALS The primary materials used in each of our businesses are paper, ink, film, offset plates, chemicals and cartons, with paper accounting for the majority of total material costs. We purchase these materials from a number of suppliers and have not experienced any significant difficulties in obtaining the raw materials necessary for our operations. We have implemented an inventory management system in which a limited number of paper suppliers provide all of our paper needs. These suppliers are responsible for delivering paper on a "just-in-time" basis directly to our facilities. We believe that this system has allowed us to enhance the flexibility and speed with which we can serve customers, improve pricing on paper purchases, eliminate a significant amount of paper inventory and reduce costs by reducing warehousing capacity. We believe that we purchase our materials and supplies at competitive prices due to our volume leverage. PATENTS, TRADEMARKS AND BRAND NAMES We market products under a number of trademarks and brand names. We also hold or have rights to use various patents relating to our businesses, which expire at various times through 2012. Our sales do not materially depend upon any single or group of related patents. 4 COMPETITION Commercial printing is highly competitive and fragmented. We compete against a diminishing number of large, diversified and financially strong printing companies, as well as regional and local commercial printers, many of which are capable of competing with us in both volume and production quality. Although there are a significant number of buyers who are price sensitive, we also believe that customer service and high quality products are important competitive factors, especially to companies seeking enterprise solutions and high impact color products. We believe we provide premium quality and superior customer service while maintaining competitive prices through stringent cost control efforts. The main competitive factors in our markets are customer service, product quality, reliability, flexibility, technical capability and price. We believe we compete effectively in each of these areas. In selling our envelope products, we compete with a few multi-plant and many single-plant companies that primarily service regional and local markets. We also face competition from alternative sources of communication and information transfer such as electronic mail, the Internet, interactive videodisks, interactive television, electronic retailing and facsimile machines. Although these sources of communication and advertising may eliminate some domestic envelope sales in the future, we believe that we will experience continued demand for envelope products due to (1) the ability of our customers to obtain a relatively low-cost information delivery vehicle that may be customized with text, color, graphics and action devices to achieve the desired presentation effect, (2) the ability of our direct mail customers to penetrate desired markets as a result of the widespread delivery of mail to residences and businesses through the U.S. Postal Service and the Canada Post Corporation and (3) the ability of our direct mail customers to include return materials in their mail-outs. Principal competitive factors in the envelope business are quality, service and price. Although all three are equally important, various customers may emphasize one or more over the others. We believe we compete effectively in each of these areas. In selling our printed business forms and labels products, we compete with other document and labels print facilities with nationwide manufacturing locations and regional and local printers, which typically sell within a 100- to 300-mile radius of their plants. We compete mainly on quick turn customization of products and unparalled service levels. BACKLOG At December 31, 2004 and 2003, the backlog of customer orders to be produced or shipped in the next 120 days was approximately $127.0 million and $113.0 million, respectively. EMPLOYEES We employed approximately 10,000 people as of December 31, 2004, and approximately 1,800 of our employees at the various facilities are represented by unions affiliated with the AFL-CIO or Affiliated National Federation of Independent Unions. Collective bargaining agreements, each of which cover the workers at a particular facility, expire from time to time and are negotiated separately. Accordingly, we believe that no single collective bargaining agreement is material to our operations as a whole. We are committed to employee development and increased organizational effectiveness. We operate Cenveo University, our in-house training program, which provides courses in process improvement, quality control, supervisory and management skills and increasing employee empowerment. Complementing our in-house initiatives, Cenveo contracts leading industry experts to provide skill-building courses to our sales representatives and managers. ENVIRONMENTAL Our operations are subject to federal, state and local environmental laws and regulations including those relating to air emissions, waste generation, handling, management and disposal, and remediation of contaminated sites. We have implemented environmental programs designed to ensure that we 5 operate in compliance with the applicable laws and regulations governing environmental protection. Our policy is that management at all levels be aware of the environmental impact of operations and direct such operations in compliance with applicable standards. We believe that we are in substantial compliance with applicable laws and regulations relating to environmental protection. We do not anticipate that material capital expenditures will be required to achieve or maintain compliance with environmental laws and regulations. However, there can be no assurance that newly discovered conditions or new or stricter interpretations of existing laws and regulations will not result in material expenses. AVAILABLE INFORMATION Our Internet address is: www.cenveo.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission. In addition, our earnings conference calls are archived for replay on our website and presentations to securities analysts are also included on our website. ITEM 2. PROPERTIES We occupy 84 printing and manufacturing facilities in the United States and Canada and five print fulfillment and distribution centers, of which 36 are owned and 53 are leased. In addition to on-site storage at these facilities, we store products in 19 warehouses, of which four are owned, and we lease 21 sales offices. We also lease 47,153 square feet of office space in Englewood, Colorado for our corporate headquarters. We believe that we have adequate facilities for the conduct of our current and future operations. ITEM 3. LEGAL PROCEEDINGS From time to time we may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent that losses are deemed probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on the Company. In the case of administrative proceedings related to environmental matters involving governmental authorities, management does not believe that any imposition of monetary damages or fines would be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "CVO." At February 22, 2005, there were approximately 458 shareholders of record and, as of that date, we estimate that there were more than 7,534 beneficial owners holding stock in nominee or "street" name. The following table sets forth, for the periods indicated, the range of the high and low sales prices for our common stock as reported by the NYSE:
2004 HIGH LOW ---- --- First Quarter........................................... $5.00 $3.53 Second Quarter.......................................... $4.52 $2.60 Third Quarter........................................... $3.70 $2.40 Fourth Quarter.......................................... $3.70 $2.60 2003 HIGH LOW ---- --- First Quarter........................................... $2.55 $1.85 Second Quarter.......................................... $3.13 $2.05 Third Quarter........................................... $3.60 $2.76 Fourth Quarter.......................................... $4.61 $3.58
We have not paid a dividend on common stock since our incorporation and do not anticipate paying dividends in the foreseeable future because our senior secured credit facility, senior notes and senior subordinated notes limit our ability to pay common stock dividends. No purchases of our common stock were made by or on behalf of the Company or any affiliated purchaser during the fourth quarter of 2004. The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Equity Compensation Plan Information" appearing in the Company's Proxy Statement filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting of Stockholders is incorporated herein by reference. 7 ITEM 6. SELECTED FINANCIAL DATA The summary of historical financial data presented below is derived from the historical audited financial statements of the Company. The results of acquisitions have been included in the income statement data of the Company from their respective acquisition dates in accordance with purchase method accounting for acquisitions. The data presented below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the related notes included elsewhere herein.
YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------- 2004 2003(1) 2002(2) 2001(3) 2000 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales........................ $1,742,914 $1,671,664 $1,728,705 $1,868,768 $2,044,350 Income (loss) from continuing operations..................... $ (20,938) $ 3,924 $ (73,488) $ (45,213) $ 36,193 Income (loss) per diluted share from continuing operations..... $ (0.44) $ 0.08 $ (1.54) $ (0.95) $ 0.73 Total assets..................... $1,174,747 $1,111,446 $1,107,367 $1,476,867 $1,683,592 Total long-term debt, including current maturities............. $ 769,769 $ 748,961 $ 763,899 $ 855,221 $ 922,351 - --------------- (1) In 2003, reported net income was $5.2 million, or earnings of $0.11 per share, which included a $0.3 million charge for a cumulative effect of change in accounting principle and a $1.5 million gain on a disposal of discontinued operations. (2) In 2002, reported net loss was $202.1 million, or a loss of $4.24 per share, which included a charge of $111.7 million for a cumulative effect of change in accounting principle and a $16.9 million for the loss on a disposal of discontinued operations. (3) In 2001, reported net loss was $136.2 million, or a loss of $2.86 per share, which included a charge of $91.0 million for the loss on a disposal of discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW Cenveo is one of North America's largest providers of visual communication solutions delivered through print and electronic media. Our products include offset and digital printing, custom and stock envelopes and business documents and labels. We also provide communications consulting, end-to-end project management and eServices. We have production facilities and fulfillment and distribution centers strategically located throughout North America. We are organized into two business segments-- commercial and resale. Our commercial segment specializes in printing annual reports, car brochures, brand marketing collateral, financial communications and general commercial printing and in the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. The commercial segment also offers services such as design, fulfillment, eCommerce and inventory management. These products and services are provided directly to national and local customers. Our commercial segment consists of 36 printing plants, 28 envelope plants and five distribution and fulfillment centers. Our resale segment produces business forms and labels, custom and stock envelopes and specialty packaging and mailers. These products are generally sold through print distributors, business forms suppliers, office products retail chains and the Internet. The resale segment operates 20 manufacturing facilities. REVIEW OF RESULTS Management's Discussion and Analysis of Financial Condition and Results of Operations includes an overview of our consolidated results from 2002 through 2004 followed by a discussion of the results of each of our business segments for the same period. 8 It is important to consider the economic environment for the printing industry when evaluating our results from 2002 to 2004. The recession that began in 2001 was more severe in the printing industry than in the general economy and many of our markets lagged the overall economy in recovering from the recession. In 2004, most of our markets had not yet returned to pre-recession growth rates. Excess capacity in concert with declining or weak volume growth in many of our markets resulted in extreme competitive pricing pressures. In addition, the cost of paper, film and other raw materials increased significantly in 2004. The cost of uncoated paper, which is the primary raw material used in manufacturing envelopes, declined slightly in 2002 and 2003 and increased approximately 17% in 2004. Our paper suppliers also increased uncoated paper prices approximately 9% in early 2005. The prices of coated paper, the primary raw material used by our commercial printing operations, were relatively stable in 2002 and 2003. Certain grades of coated paper increased as much as 18% in 2004. Our paper suppliers have not announced increases in the prices of coated papers in 2005. In our commercial segment, approximately 50% of our commercial printing sales and approximately 40% of our custom envelope sales are related to advertising and direct mail promotions. Spending by our customers on printed advertising materials and direct mail promotions has increased over the last three years; however, our customers are not spending as they did prior to the recession. In our resale segment, the demand for traditional business forms, especially continuous and multi-part forms, has declined significantly over the last several years as businesses have acquired laser-printing capabilities. Many of our customers have consolidated and pricing has been extremely competitive. To meet the challenges presented by the economic environment in which we operate and the markets we serve, we have taken significant actions. We do not expect our markets to return to pre-recession growth rates over the next several years. We believe that our success in this environment will be dependent on offering products and services that provide customers with solutions to reduce cycle time and total cost of ownership. We believe that if we offer our customers "one-stop shopping" with efficiency and quality, we will succeed by growing market share. In 2003, we reorganized Cenveo to operate as one company and to make it easier for customers to purchase our products and services. As we are now organized, we offer customers products and services and production capabilities that clearly differentiate us from our competition. In addition, we have created a strategic sales team to service those customers that purchase a broader range of multiple products and services and utilize our national manufacturing capabilities. In 2004, sales managed by this team increased $43 million. In 2002, we expanded our service offering by acquiring an operation with national distribution and fulfillment capabilities. In 2004, we strengthened our market position in two key local markets by acquiring Valco Graphics in Seattle, Washington and Waller Press in San Francisco, California. To compete effectively in an environment of excess capacity and rising costs, we have focused on improving productivity and creating operating leverage. In late 2000, we began aligning our capacity and costs with the demands of our customers, and we consolidated 12 envelope facilities, 8 printing operations and 6 business forms plants. Over the last three years we replaced 13 offset presses with 6 newer, more productive presses without reducing our revenue generating capacity. These actions enabled us to mitigate much of the impact of lower margins due to lower selling prices and increased costs. The announced 2005 price increase of uncoated paper will increase our costs by approximately $10.0 million. Our margins in 2005 will be reduced to the extent we are unable to recover this cost through higher selling prices or other cost reduction measures. We are defending our share of the business forms market by improving customer service, on-time deliveries and quality. We began to see success from this strategy in 2004. The sales of our documents division declined only 4% in 2004 compared to a decline of 7% in 2003. In 2003, sales of office products to our wholesale customers and office products superstores were 7% lower than in 2002. Much of this sales decline was due to a shift by consumers to the office products superstores where our market position was weak. Our strategy in 2004 was to strengthen our position with key office products superstores and regain our share of the office products market. We 9 have been successful executing this strategy. Our sales in this channel were 13% higher in 2004 than in 2003. In 2001, we recognized the need to reduce and restructure our debt. We sold our prime label business and our office products distribution business in 2002. We sold the filing products division of our resale segment and the photo envelope business of our commercial segment in 2002. We also sold certain digital graphics operations of our commercial segment in 2003. The net proceeds from these divestitures, which totaled $122.3 million, were applied to our outstanding debt. In 2002, we replaced bank term debt with $350 million of 9 5/8% senior notes due 2012. In 2004, we refinanced our 8 3/4% senior subordinated notes due 2008 with 7 7/8% senior subordinated notes due 2013 and extended our senior secured credit facility to 2008. Other than our credit agreement which expires in 2008, we have no significant liquidity events before 2012. A summary of our consolidated statement of operations is presented below. The summary presents reported net sales and operating income as well as the net sales and operating income of our business segments used internally to assess operating performance. Division sales exclude sales of divested operations and division operating income excludes unallocated corporate expenses, restructuring, impairment and other charges, the profits of divested operations and charges related to divestitures. Our fiscal year ends on the Saturday closest to the last day of the calendar year, and as a result, 2004 was a 53-week year. Because our business tends to be slow during the holiday season, we do not believe that 53rd week had a significant impact, unless otherwise noted, on the comparability of our results in 2004 with 2003 and 2002 which were 52-week years.
DECEMBER 31 -------------------------------------------- 2004 2003 2002 ---------- ---------- ---------- (IN THOUSANDS) Division net sales................................. $1,742,914 $1,668,792 $1,672,260 Divested operations........................... -- 2,872 56,445 ---------- ---------- ---------- Net sales.......................................... $1,742,914 $1,671,664 $1,728,705 ========== ========== ========== Division operating income.......................... $ 97,797 $ 104,770 $ 93,042 Unallocated corporate expenses................. (19,655) (17,979) (18,970) Restructuring, impairment and other charges.... (5,407) (6,860) (74,551) Divested operations............................ -- 167 3,301 Gain (loss) on operations held for sale........ -- 117 (19,278) ---------- ---------- ---------- Operating income (loss)............................ 72,735 80,215 (16,456) Interest expense............................... 73,125 71,891 70,461 Loss from the early extinguishment of debt..... 17,748 -- 16,463 Other non-operating expenses................... 2,459 1,819 1,754 ---------- ---------- ---------- Income (loss) before income taxes.................. (20,597) 6,505 (105,134) Income tax expense (benefit)................... 341 2,581 (31,646) ---------- ---------- ---------- Income (loss) from continuing operations........... (20,938) 3,924 (73,488) Gain (loss) on disposal of discontinued operations................................... 1,230 1,548 (16,868) Cumulative effect of change in accounting principle.................................... -- (322) (111,748) ---------- ---------- ---------- Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104) ========== ========== ========== Earnings (loss) per share--basic and diluted....... $ (0.41) $ 0.11 $ (4.24) ========== ========== ==========
NET SALES Net sales increased 4% in 2004 reflecting growth in the national accounts of our commercial segment and higher sales of office products in our resale segment. Net sales decreased 3% in 2003. 10 Sales in 2002 included sales of $42.3 million for the filing products division of our resale segment that was sold in August 2002 and sales of $14.1 million for the digital graphics operations of our commercial segment that were sold in February 2003. OPERATING INCOME Operating income in 2004 declined $7.5 million, or 9%. This decline was due to lower operating performance of our two business segments which was 7% lower in 2004 than 2003. In 2003, operating income improved significantly over results in 2002 which included significant restructuring and impairment charges. The operating performance of our two business segments increased 13% in 2003. UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include the costs of our corporate headquarters and certain expenses not allocated to our segments. The increase in unallocated corporate expenses in 2004 was due, in part, to an increase of $0.6 million in the cost of workers' compensation claims incurred prior to 2004. Over the last three years, it has been our practice to allocate the cost of current year claims to our segments but not to allocate the cost of changes in the development of claims incurred in prior years. The other major increase in unallocated corporate expenses was our cost to comply with the Sarbanes- Oxley Act of 2002. Our out-of-pocket cost of compliance was approximately $0.8 million. Unallocated corporate expenses were lower in 2003 than 2002 due to lower workers' compensation expense on claims incurred in prior years partially offset by the costs associated with training programs initiated in 2003 to actively involve our employees in improving service, quality, efficiency and innovation. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. We continually evaluate our operations for opportunities to optimize capacity and reduce costs. Since 2000, we have rationalized and realigned capacity to operate fewer facilities without sacrificing revenue capability. We have taken other actions to reduce the cost structures of our operations to mitigate the impact of lower margins. This process is ongoing as our industry and markets continue to evolve. We anticipate additional restructuring charges in 2005. 2004: During 2004, restructuring and impairment charges totaled $5.4 million. We closed our envelope plant in Bensalem, Pennsylvania and moved most of its equipment into our printing operation in Philadelphia. The cost of this plant closure was $1.2 million, net of a $1.4 million gain on the sale of the plant building and inclusive of impairment charges of $1.0 million. We acquired printing operations in Seattle, Washington and San Francisco, California during 2004. A key aspect of our strategy in acquiring these operations was to consolidate our existing operations in these two cities with the newly acquired operations. The cost incurred during 2004 to merge these operations was $1.1 million, including asset impairment charges of $0.8 million. In December 2004, we negotiated the termination of a lease on a building in New York City that had been used by an operation that was closed in 2002. The cost to terminate the lease and write off the unamortized value of leasehold improvements was $1.2 million. During the development of our operating plans for 2005, we made a decision to close a small printing operation in the first quarter of 2005 and consolidate its production into another facility. Accordingly, we recorded an impairment charge of $1.4 million on the equipment that will be taken out of service and $0.1 million of lease termination fees. We expect to incur expenses of approximately $0.8 million to complete this closure in 2005. Other asset impairments recorded in 2004 totaled $0.4 million. 2003: In 2003, restructuring and other charges totaled $6.9 million. We closed our web printing operation in Indianapolis, Indiana and redeployed its two web presses and related equipment to our facilities in St. Louis, Missouri and Baltimore, Maryland. The cost to move this equipment was $1.1 million. We also incurred employee separation expenses of $1.5 million in connection with workforce reductions across most of our operations. 11 The 2003 restructuring charge included credits of $1.0 million for the reversals of reserves recorded in 2001 and 2002 that were no longer required. We recorded a charge of $5.3 million in 2003 to cover the cost of settling a lawsuit after an unfavorable award was granted by a jury in Los Angeles County, California to an ex-employee who had contested his termination. We elected to settle this dispute in order to avoid the expense and risk of further litigation and appeals. 2002: During 2002, restructuring, impairment and other charges totaled $74.6 million. In 2001, we began a major consolidation of the envelope manufacturing facilities in our commercial segment to reduce excess internal capacity and improve the utilization of the equipment and resources at our other envelope plants in the United States and Canada. This consolidation was completed in 2002 and the cost incurred in 2002 totaled $26.6 million. We closed a commercial printing operation in New York City at a cost of $4.2 million; business forms plants in Clearwater, Florida and Denver, Colorado at a cost of $2.0 million; and an envelope operation of our resale segment in Hattiesburg, Mississippi at a cost of $2.4 million. In addition, we began the realignment of our web presses in Indianapolis that was completed in 2003. The cost incurred in 2002 was $3.1 million. Other charges include $21.9 million incurred in connection with the refinancing of an operating lease, consulting fees of $4.4 million incurred in connection with business improvement initiatives, severance expenses of $4.8 million, asset impairments of $3.6 million and $1.6 million for other restructuring activities including the reversal of a $0.5 million excess accrual. A further discussion of restructuring, impairment and other charges can be found in Note 14 to the consolidated financial statements. GAIN (LOSS) ON OPERATIONS HELD FOR SALE The table below summarizes charges we recorded in 2003 and 2002 related to operations that had been held for sale.
2003 2002 ---- -------- (IN THOUSANDS) Gain (loss) on assets held for sale......................... $117 $ (6,436) Impairment on operations formerly held for sale............. -- (12,842) ---- -------- $117 $(19,278) ==== ========
IMPAIRMENT LOSS ON ASSETS HELD FOR SALE. In 2002, we completed the sale of the filing products division. We incurred a $6.1 million loss in connection with this divestiture. We also reduced the value of the digital graphics assets held for sale at the end of 2002 by $0.3 million. These assets were sold in 2003. IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE. In 2001, an operation that is now an important part of our resale segment was held for sale. In 2002, we made the decision not to sell this business. Accordingly, we reversed the tax benefit of $11.5 million expected to be realized upon the sale that had been recorded in 2001 and expenses of $1.1 million that had been accrued but not incurred. We also discontinued our efforts to sell one of the digital graphics operations that had been held for sale at the end of 2001 and recorded an impairment charge of $2.4 million. 12 INTEREST EXPENSE Interest expense in 2004, 2003 and 2002 was as follows:
2004 2003 2002 ------- ------- ------- (IN THOUSANDS) Total interest expense..................................... $73,125 $71,891 $76,031 Less: Allocated to discontinued operations................. -- -- (5,570) ------- ------- ------- Reported interest expense.................................. $73,125 $71,891 $70,461 ======= ======= =======
Interest expense increased $1.2 million in 2004 compared to 2003. In 2004, interest expense reflected our average outstanding debt of $811.4 million during the year and a weighted average interest rate of 8.2% compared to our average outstanding debt of $792.7 million in 2003 and a weighted average interest rate of 8.4% for 2003. Our average outstanding debt and weighted average interest rate in 2004 reflect the issuance in January of $320 million of 7 7/8% senior subordinated notes due 2013, the proceeds of which were used to redeem the $300 million of 8 3/4% senior subordinated notes due in 2008. The increase in interest expense in 2004 was due primarily to an extra week of interest. Interest expense in 2002 excluded the interest expense that was allocated to discontinued operations. Total interest expense declined 5.4% in 2003 compared to 2002. In 2003, total interest expense reflected our average outstanding debt of $792.7 million during the year and a weighted average interest rate of 8.4% compared to our average outstanding debt of $890.6 million and a weighted average interest rate of 7.9% for 2002. The average outstanding debt decreased in 2003 primarily due to the application of the proceeds from our divestitures to the repayment of debt. Our weighted average interest rate increased in 2003 as a result of the issuance of $350 million of 9 5/8% senior notes in March 2002, the proceeds of which were used primarily to repay bank debt that accrued interest at a lower variable rate. In November 2002, we redeemed our 5% convertible subordinated notes. LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to redeem the 8 3/4% notes and the unamortized debt issuance costs on the 8 3/4% notes, which were written off, totaled $17.7 million. In 2002, we wrote off $16.5 million of unamortized debt issuance costs related to the bank credit facility that was refinanced. INCOME TAXES
2004 2003 2002 -------- ------- -------- (IN THOUSANDS) Income tax benefit for U.S. operations.................... $(12,302) $(8,890) $(42,171) Income tax expense for foreign operations................. 12,643 11,471 10,525 -------- ------- -------- Income tax expense (benefit)............................ $ 341 $ 2,581 $(31,646) ======== ======= ======== Effective income tax rate............................... (1.7)% 39.7% 30.1% ======== ======= ========
The income tax expense reported in 2004 on the loss before income taxes was primarily the result of establishing valuation allowances on certain deferred tax assets and the tax expense recorded for foreign operations that generated taxable income in 2004. 13 The effective tax rate in 2003 approximates the statutory effective tax rate considering the tax jurisdictions in which we operate. In 2002, the low effective tax rate was the result of significant nondeductible charges included in income from continuing operations before income taxes. GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS In September 2000, we sold the extrusion coating and laminating business segment of American Business Products, Inc., a company we acquired in February 2000. The consideration received for this business included an unsecured note which was fully reserved at the time of the sale. This note was redeemed by the issuer in 2004 for $2.0 million. The proceeds, net of tax, have been recorded as a gain on disposal of discontinued operations in 2004. The gain on the disposal of discontinued operations recorded in 2003 was primarily the result of adjustments made to the tax impact of the sale of our prime label business in 2002. The loss on the disposal of discontinued operations recorded in 2002 reflects the additional loss on the divestitures of the two businesses reported as discontinued operations in 2001 and sold in 2002. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). The implementation of FIN 46 required us to consolidate a trust that is leasing equipment to us under an operating lease. In addition to the equipment and the debt of the trust, we recorded an after-tax charge of $0.3 million as the effect of this accounting change in 2003. We adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), on January 1, 2002. SFAS No. 142 required an impairment test of the goodwill recorded for each of our reporting units as of that date. We determined that $111.7 million of the goodwill associated with our commercial printing operations (formerly the commercial printing segment) was impaired. This impairment loss was reported as the effect of a change in accounting principle in 2002. SEGMENT OPERATIONS Our chief executive officer monitors the performance of the ongoing operations of each of our business segments. We assess performance based on division net sales and division operating income. The summaries of sales and operating income of our two segments have been presented to show each segment without the sales of divested operations ("Division net sales") and to show the operating income of each segment without the results of divested operations and excluding restructuring, impairment and other charges ("Division operating income"). Sales and operating income of operations divested and restructuring, impairment and other charges are included in the tables below to reconcile segment sales and operating income reported in Note 19 to our consolidated financial statements to division net sales and division operating income on which our segments are evaluated. 14 COMMERCIAL
2004 2003 2002 ---------- ---------- ---------- (IN THOUSANDS) Segment sales...................................... $1,329,778 $1,272,525 $1,268,367 Divested operations............................ -- (2,872) (14,105) ---------- ---------- ---------- Division net sales................................. $1,329,778 $1,269,653 $1,254,262 ========== ========== ========== Segment operating income........................... $ 50,538 $ 58,704 $ 1,513 Restructuring, impairment and other charges.... 4,158 1,198 44,894 Divested operations............................ -- (167) (598) ---------- ---------- ---------- Division operating income.......................... $ 54,696 $ 59,735 $ 45,809 ========== ========== ========== Division operating income margin................... 4% 5% 4%
Division net sales of our commercial segment increased $60.1 million, or 5%, in 2004 compared to net sales in 2003. This increase was due to the following: * Sales to the customers managed by our strategic sales team increased $42.7 million, or 28%. Sales in our local markets declined $11.2 million in 2004. * In 2004, our newly acquired operations in Seattle and San Francisco contributed sales of $15.6 million including $1.9 million of sales managed by our strategic sales team. * The favorable impact of the strength of the Canadian dollar on the sales of our Canadian operations was $14.2 million. Division operating income of our commercial segment declined $5.0 million, or 8%, in 2004 compared to 2003. Excluding the impact of acquisitions and foreign currency, gross profit increased $11.0 million as a result of the increase in sales and lower fixed manufacturing expenses. The increase in gross profit, however, was offset by the following: * Selling expenses increased $9.9 million. In 2003, we formed a strategic sales team to build sales with large customers that purchase multiple products and services from multiple facilities. The incremental cost of this team in 2004 was approximately $4.9 million. Increased expenses associated with our local market sales were approximately $5.0 million. * Administrative expenses increased $6.9 million. Included in this increase were higher information technology costs of $3.5 million and expenses of $1.2 million associated with changing our name to Cenveo. * In 2004, we recorded the remaining contingent purchase price of $14.2 million for an acquisition we completed in 2002. This contingent purchase price was recorded as a customer-related intangible asset that is being amortized over the remaining four-year life of a service agreement. As a result, amortization expense increased $3.6 million in 2004. Division operating income in 2004 increased $4.4 million as a result of the foreign currency impact of the strength of the Canadian dollar, the results of our acquisitions and lower losses on dispositions of assets. Division net sales of our commercial segment increased $15.4 million in 2003 compared to net sales in 2002. This increase was due to the following: * Accounts designated as strategic sales accounts increased $42.2 million in 2003. Most of this increase was due to the acquisition in August 2002 of the in-house printing and fulfillment operations of American Express Company. * Sales in our local markets declined $47.3 million. Lower average selling prices for our envelope products contributed significantly to this decline. 15 * The favorable impact of the strength of the Canadian dollar on the sales of our Canadian operations was $20.5 million. Division operating income of the commercial segment increased $13.9 million, or 30%, in 2003 compared to 2002. The increase in operating income was due to the following: * Excluding the impact of acquisitions and foreign currency, gross profit declined $7.8 million. This was due primarily to lower volume in our local markets and lower selling prices of our envelope products partially offset by lower manufacturing overhead. * Selling and administrative expenses were $15.5 million lower in 2003. These reductions were the result of lower sales, the closure of our printing operation in New York City in the fourth quarter of 2002, the closure of our web printing operation in Indianapolis in the first quarter of 2003 and other initiatives to reduce costs. * The favorable impact on operating income of the strength of the Canadian dollar and the results of the acquisition completed in 2002 totaled approximately $6.2 million. RESALE
2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Segment sales........................................... $413,136 $399,139 $460,338 Divested operations................................. -- -- (42,340) -------- -------- -------- Division net sales...................................... $413,136 $399,139 $417,998 ======== ======== ======== Segment operating income................................ $ 43,102 $ 44,703 $ 43,298 Restructuring, impairment and other charges......... -- 332 6,639 Divested operations................................. -- -- (2,703) -------- -------- -------- Division operating income............................... $ 43,102 $ 45,035 $ 47,234 ======== ======== ======== Division operating income margin........................ 10% 11% 11%
Division net sales of our resale segment increased $14.0 million, or 4%, in 2004 compared to 2003. Sales of office products to our retail, wholesale and trade customers were up 13% from the prior year. Lower net pricing, however, reduced our overall revenue growth from these customers to 4%. Sales of business forms, labels and envelopes to our distribution customers increased 4%. This increase was driven by strong sales of business labels which were up 12%. Division operating income of our resale segment declined $1.9 million, or 4%, in 2004 compared to 2003. Gross profit declined $4.8 million driven by lower selling prices of office products, and higher paper costs and higher manufacturing overhead. Lower selling, general and administrative expenses partially offset the decline in gross profit. Division net sales in 2003 decreased $18.9 million, or 5%, compared to 2002. Sales of office products to our wholesale and trade customers declined 7% in 2003. Sales of business forms, labels and envelopes sold to distributors in 2003 were 3% lower than 2002. A 7% decrease in sales of business forms drove this decline. Division operating income declined $2.2 million, or 5%, in 2003 compared to 2002. Because of the decline in sales, gross profit was $3.8 million lower than in 2003. Lower administrative expenses in 2003 partially offset the impact of the decline in gross profit. 16 LIQUIDITY AND CAPITAL RESOURCES Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized as follows:
2004 2003 2002 -------- -------- --------- (IN THOUSANDS) Cash provided by (used in): Operating activities................................ $ 37,991 $ 59,459 $ 22,971 Investing activities................................ (35,597) (29,856) 100,819 Financing activities................................ (1,749) (33,256) (110,222) Effect of exchange rate changes on cash............. (156) 1,310 (985) Discontinued operations............................. -- -- (10,827) -------- -------- --------- Net increase (decrease) in cash and cash equivalents.... $ 489 $ (2,343) $ 1,756 ======== ======== =========
OPERATING ACTIVITIES. In 2004, cash provided by our operations was $21.5 million lower than cash provided in 2003. This decrease was due primarily to our loss from continuing operations and the increase in working capital of $11.0 million compared to the $12.9 million decrease in working capital in 2003. In 2003, cash provided by our operations increased $36.5 million. This increase was due primarily to income from continuing operations and reductions in working capital in 2003 compared to 2002. INVESTING ACTIVITIES. Acquisition spending was $13.2 million in 2004, $2.8 million in 2003 and $2.6 million in 2002. In 2004, we purchased Valco Graphics in Seattle and Waller Press in San Francisco. In 2002, we purchased the in-house printing and fulfillment operations of American Express Company. Acquisition spending includes contingent purchase price of $3.2 million in 2004 and $2.8 million in 2003 paid to American Express Company. Capital expenditures were $27.4 million in 2004, $31.6 million in 2003 and $30.9 million in 2002. We anticipate spending $20.0 million to $25.0 million on capital investments in 2005. In 2004, the purchaser of a business we sold in 2000 redeemed a note issued in connection with the sale for $2.0 million. In 2003, we received net proceeds of $3.9 million from the sale of certain digital graphics operations of our commercial segment. In 2002, we received net proceeds of $31.5 million from the sale of our filing products division, $67.0 million from the sale of our prime label business, $20.5 million from the sale of Curtis 1000 and $3.3 million from the sale of our photo envelope business. Proceeds from the sales of property and equipment were $3.0 million in 2004, $0.7 million in 2003 and $12.0 million in 2002. FINANCING ACTIVITIES. At December 31, 2004, our outstanding debt was $769.8 million, an increase of $20.8 million from December 31, 2003. In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds of these notes were used to purchase the $300 million of 8 3/4% senior subordinated notes due 2008. The redemption premiums incurred to purchase the 8 3/4% notes totaled $13.5 million. The cost incurred to issue the new notes was $7.2 million. In March 2004, we amended our $300 million senior secured credit facility to extend its term to June 2008. The cost of this amendment was $1.9 million. At December 31, 2003, our outstanding debt was $749.0 million which included the $17.0 million of debt held by a trust that was consolidated in accordance the requirements of FIN 46. In 2003, we used $32.8 million of our cash flow to reduce outstanding debt. 17 In 2002, we reduced outstanding debt by $91.6 million using proceeds from divestitures. We incurred debt issuance cost of $18.6 million in connection with the sale of our 9 5/8% senior notes due 2012 and the refinancing of our senior secured credit facility. At December 31, 2004, we had outstanding letters of credit of approximately $25.2 million related to performance and payment guarantees. In addition, we had outstanding letters of credit of $1.0 million issued as credit enhancements in conjunction with other debt. Based on our experience with these arrangements, we do not believe that any obligations that may arise will be significant. Our current credit ratings are as follows:
SENIOR SENIOR SECURED CREDIT SENIOR SUBORDINATED REVIEW AGENCY FACILITY NOTES NOTES LAST CHANGE ------------- -------------- ------ ------------ ------------- Standard & Poor's.................. BB- B+ B- December 2004 Moody's............................ Ba3 B1 B3 April 2004
The terms of our existing debt do not have any rating triggers, and we do not believe that our current ratings will impact our ability to raise additional capital. We expect internally generated cash flow and the financing available under our senior secured credit facility will be sufficient to fund our working capital needs and long-term growth; however, this cannot be assured. Based on the certificate filed January 21, 2005, we had $110.8 million of unused credit available under our senior secured credit facility. CONTRACTUAL OBLIGATIONS AND PROBABLE LIABILITY PAYMENTS. The following table is a summary of our significant contractual obligations and probable liability payments at December 31, 2004 (in thousands):
OTHER LONG- LONG- PURCHASE TERM OPERATING TERM COMMITMENTS TOTAL CASH PAYMENTS DUE DEBT LEASES LIABILITIES AND OTHER OBLIGATIONS ------------ --------- --------- ----------- ----------- ----------- 2005........................ $ 2,270 $ 33,765 $ -- $35,353 $ 71,388 2006........................ 2,325 27,931 8,449 4,200 42,905 2007........................ 13,530 23,902 6,793 3,700 47,925 2008........................ 79,402 15,395 6,248 1,483 102,528 2009........................ 1,022 8,958 2,225 -- 12,205 Thereafter.................. 671,220 4,189 16,854 -- 692,263 -------- -------- ------- ------- -------- Total....................... $769,769 $114,140 $40,569 $44,736 $969,214 ======== ======== ======= ======= ========
Purchase commitments and other consists primarily of payments for equipment that has been ordered but not received, obligations to be paid pursuant to an employment agreement, required pension contributions and incentive payments to customers. OFF-BALANCE SHEET ARRANGEMENTS. It is not our business practice to enter into off-balance sheet arrangements. GUARANTEES. In conjunction with the sale of the prime label business in May 2002, we guaranteed a certain lease obligation. At December 31, 2004, the contingent liability under the guarantee was $5.5 million. We have not made, nor do we expect to make any payments under this guarantee. In connection with the disposition of certain operations, we have indemnified the purchasers for certain contingencies as of the date of disposition. We have accrued the estimated probable cost of these contingencies. 18 CRITICAL ACCOUNTING ESTIMATES In preparing our consolidated financial statements, we are required to make estimates based on assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates on an ongoing basis. We base our estimates on historical experience and various other assumptions that are considered reasonable in view of relevant facts and circumstances. The accounting estimates and assumptions discussed in this section are those that inherently involve significant judgments and the most uncertainty. The nature of these accounting estimates and assumptions are important to understanding our financial statements. Because future events rarely develop exactly as anticipated, even the best estimates routinely require adjustment. ALLOWANCE FOR LOSSES ON ACCOUNTS RECEIVABLE. We maintain a valuation allowance based on the expected collectibility of accounts receivable. The allowance includes an estimate of accounts that may become uncollectible based on the age of amounts due and specific amounts for customer collection issues that we have identified. The valuation allowance provided for potentially uncollectible accounts receivable at December 31, 2004 was $4.7 million. In 2004, 2003 and 2002, our actual loss experience was in line with our expectations. We wrote off uncollectible accounts, net of recoveries, of $2.0 million in 2004, $3.3 million in 2003 and $4.5 million in 2002. While credit losses have historically been within our expectations, we cannot guarantee that our credit losses will be consistent with those in the past. These estimates may prove to be inaccurate, in which case we may have overstated or understated the allowance for losses required for uncollectible accounts receivable. IMPAIRMENT OF LONG-LIVED ASSETS. We evaluate long-lived assets, including property, plant and equipment and intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amounts of specific assets or group of assets may not be recoverable. When an evaluation is required, we estimate the future undiscounted cash flows associated with the specific asset or group of assets. If the cost of the asset or group of assets cannot be recovered by these undiscounted cash flows, then an impairment exists. Our estimates of future cash flows are based on experience and our internal business plans. Our internal business plans require judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of the asset or group of assets may materially affect our evaluation of the recoverability of the asset values currently recorded. Additional impairment charges may be necessary in future years. GOODWILL. We evaluate the carrying value of our goodwill in the fourth quarter each year and whenever events or circumstances make it more likely than not that an impairment may have occurred. Determining whether an impairment has occurred requires the valuation of each of our reporting units, which we estimate using a discounted cash flow methodology. In addition, we use comparative market multiples to corroborate the discounted cash flow results. In preparing projected future cash flows, we use our judgment in projecting the profitability of our reporting units, their growth in future years, investment and working capital requirements and the selection of an appropriate discount rate. In our comparisons to market multiples of other similar companies, we use judgment in the selection of the companies included in the analysis. While we believe there is no further impairment of our goodwill, if our estimates of future discounted cash flows prove to be inaccurate, an impairment charge could be necessary in future years. SELF-INSURANCE. We are self-insured for the majority of our workers' compensation costs and group health insurance costs, subject to specific retention levels. We rely on claims experience and the advice of consulting actuaries and administrators in determining an adequate liability for self-insurance claims. Our self-insurance workers' compensation liability is estimated based on reserves for claims that are established by a third-party administrator. The estimate of these reserves is increased to reflect the estimated future development of the claims. Our liability for workers' compensation claims is the estimated total cost of the claims on a fully-developed basis discounted based on anticipated payment patterns. The undiscounted liability at December 31, 2004 was $11.4 million. The discounted liability 19 was $9.9 million determined using a 4% discount rate. Workers' compensation expense for claims incurred in 2004 was $4.8 million and was based on an actuarial estimate. In 2004, we recorded $2.4 million of additional expense due to the negative development of claims incurred prior to 2004. In 2003, we recorded additional expense of $1.8 million due to the negative development of claims incurred prior to 2003. Our self-insurance healthcare liability represents our estimate of claims that have been incurred but not reported as of December 31, 2004. This liability, which totaled $7.4 million at December 31, 2004, was estimated based on our claims experience. We determine the actual average daily claims cost and the number of days between the incurrence of a claim and the date it is paid. The estimate of our liability for employee healthcare represents 72 days of unreported claims. While we believe that the estimates of our self-insurance liabilities are reasonable, significant differences in our experience or a significant change in any of our assumptions could materially affect the amount of workers' compensation and healthcare expenses we have recorded. ACCOUNTING FOR INCOME TAXES. We are required to estimate our income taxes in each jurisdiction in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the expense in our financial statements. Deferred tax liabilities generally represent tax items that have been deducted for tax purposes, but have not yet been recorded as expenses in our financial statements. At December 31, 2004, our net deferred tax asset, the future tax benefit arising from net deductible differences and tax carryforwards from U.S. operations, was $35.6 million. Our net deferred tax liability of $11.0 million reflects our deferred foreign tax liabilities. We are required by generally accepted accounting principles to assess the likelihood that the future tax benefit represented by our net deferred tax asset will be realized. To the extent we believe that the use of the future tax asset in any jurisdiction is not likely, we must establish a valuation allowance. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including estimates of taxable income in each jurisdiction in which we operate, tax planning strategies and the period over which our deferred tax assets will be recoverable. In circumstances where there is sufficient negative evidence with respect to the realizability of deferred tax assets, establishment of a valuation allowance must be considered. Under provisions of SFAS No. 109, Accounting for Income Taxes, the substantial losses we have incurred in our U.S. operations over the most recent three-year period represent sufficient negative evidence with respect to the realizability of the U.S. deferred tax asset recorded as a result of our operating losses. Accordingly, a portion of the U.S. deferred tax asset arising from these operating losses is potentially impaired. In addition, we believe that it is not likely that we will be able to use all of our U.S. capital loss carryforwards. To provide for these impairments, we have recorded a valuation allowance of $26.8 million against the U.S. net deferred tax asset. This valuation allowance was increased $20.3 million in 2004 primarily due to the generation of additional U.S. net operating losses and foreign tax credits. We believe our remaining deferred tax assets will be realized through the reversal of our existing temporary differences and the execution of available tax planning strategies. Additional valuation allowances may be required if we are unable to execute our tax planning strategies or generate future taxable income. The valuation allowance that has been established will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that our deferred tax assets will be realized. When sufficient positive evidence occurs, our income tax expense will be reduced to the extent we decrease the amount of our valuation allowance. The increase or reversal of all or a portion of our tax valuation allowance could have a significant negative or positive impact on future earnings. 20 NEW ACCOUNTING STANDARDS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43 Chapter 4. This statement requires abnormal production costs such as idle facility expense, excessive spoilage, rehandling costs and abnormal freight to be excluded from inventory costing and treated as period expenses. In addition, this standard requires the allocation of fixed production overhead to be based on normal capacity of the production facility. We do not expect the adoption of this standard in 2005 to have a significant effect on our results. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment: an amendment of FASB Statements No. 123 and 95 ("SFAS No. 123R"). SFAS No. 123R requires all share-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair value. We expect to implement SFAS 123R in the third quarter of 2005 and use the modified-prospective transition method of implementation. Under the modified-prospective transition method, we will recognize compensation expense in the financial statements issued subsequent to the date of adoption, which will be July 1, 2005, for all share-based payments granted, modified or settled after July 1, 2005 as well as for any awards that were granted prior to July 1, 2005 for which the requisite service has not been provided as of July 1, 2005. We will recognize compensation expense on awards granted subsequent to July 1, 2005 using the fair values determined by a valuation model prescribed by SFAS 123R. The compensation expense on awards granted prior to July 1, 2005 will be recognized using the fair values determined for use in our pro forma disclosures on stock-based compensation. The amount of compensation expense that will be recognized on awards granted prior to July 1, 2005 that have not fully vested will exclude the compensation expense cumulatively recognized in our pro forma disclosures on stock-based compensation. Our preliminary estimate of the compensation expense that will be recorded in 2005 on unvested awards at July 1, 2005 will be approximately $2.0 million. CAUTIONARY STATEMENTS Certain statements in this report, and in particular, statements found in Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe these forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of Cenveo. All such statements involve risks and uncertainties, and as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including but not limited to, general economic, business and labor conditions; the ability to implement our strategic initiatives; the ability to be profitable on a consistent basis; dependence on sales that are not subject to long-term contracts; dependence on suppliers; the ability to recover the rising cost of key raw materials in markets that are highly price competitive; the ability to meet customer demand for additional value-added products and services; the ability to timely or adequately respond to technological changes in the industry; the impact of the Internet and other electronic media on the demand for envelopes and printed material; postage rates; the ability to manage operating expenses; the ability to manage financing costs and interest rate risk; a decline in business volume and profitability could result in a further impairment of goodwill; the ability to retain key management personnel; the ability to identify, manage or integrate future acquisitions; the costs associated with and the outcome of outstanding and future litigation; and changes in government regulations. In view of such uncertainties, investors should not place undue reliance on our forward-looking statements since such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks such as changes in interest and foreign currency exchange rates, which may adversely affect results of operations and financial position. Risks from interest rate fluctuations and changes in foreign currency exchange rates are managed through normal operating and financing activities. We do not utilize derivatives for speculative purposes, nor do we hedge interest rate exposure through the use of swaps and options or foreign exchange exposure through the use of forward contracts. Exposure to market risk from changes in interest rates relates primarily to our variable rate debt obligations. The interest on this debt is the London Interbank Offered Rate ("LIBOR") plus a margin. At December 31, 2004, we had variable rate debt outstanding of $93.4 million. A 1% increase in LIBOR on the maximum amount of debt subject to variable interest rates, which was $314.9 million, would increase our interest expense and reduce our net income by approximately $3.1 million. We have operations in Canada, and thus are exposed to market risk for changes in foreign currency exchange rates of the Canadian dollar. In 2004, a uniform 10% strengthening of the U.S. dollar relative to the Canadian dollar would have resulted in a decrease in sales and net income of approximately $21.0 million and $2.8 million, respectively. The effects of foreign currency exchange rates on future results would also be impacted by changes in sales levels or local currency prices. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Shareholders and Board of Directors Cenveo, Inc. We have audited the accompanying consolidated balance sheets of Cenveo, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules for each of the three years in the period ended December 31, 2004 listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cenveo, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cenveo, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Denver, Colorado February 28, 2005 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Shareholders and Board of Directors Cenveo, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Cenveo, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cenveo, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Cenveo, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Cenveo, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004 of Cenveo, Inc. and our report dated February 28, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Denver, Colorado February 28, 2005 24 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Management has conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2004 is effective. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by Ernst and Young LLP, an independent registered public accounting firm, as stated in their report appearing on page 24. 25 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
DECEMBER 31 --------------------------- 2004 2003 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 796 $ 307 Accounts receivable, net................................ 252,711 223,541 Inventories, net........................................ 112,219 91,402 Deferred income taxes................................... 15,911 18,652 Prepaids and other current assets....................... 30,108 29,483 ---------- ---------- TOTAL CURRENT ASSETS................................ 411,745 363,385 Property, plant and equipment, net.......................... 367,260 388,240 Goodwill.................................................... 308,938 299,392 Other intangible assets, net................................ 28,788 19,687 Deferred income taxes....................................... 19,730 4,053 Other assets, net........................................... 38,286 36,689 ---------- ---------- TOTAL ASSETS............................................ $1,174,747 $1,111,446 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 172,731 $ 140,468 Accrued compensation and related liabilities............ 58,639 53,209 Other current liabilities............................... 64,714 64,360 Current maturities of long-term debt.................... 2,270 2,575 ---------- ---------- TOTAL CURRENT LIABILITIES........................... 298,354 260,612 Long-term debt.............................................. 767,499 746,386 Deferred income taxes....................................... 10,971 10,770 Other liabilities........................................... 40,569 25,659 ---------- ---------- TOTAL LIABILITIES....................................... 1,117,393 1,043,427 Commitments and contingencies SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value; 25,000 shares authorized, none issued............................... -- -- Common stock, $0.01 par value; 100,000,000 shares authorized, 48,702,832 and 48,380,457 shares issued and outstanding as of December 31, 2004 and 2003, respectively.......................................... 487 484 Paid-in capital......................................... 214,902 213,850 Retained deficit........................................ (170,039) (150,331) Deferred compensation................................... (2,003) (1,714) Accumulated other comprehensive income.................. 14,007 5,730 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY.......................... 57,354 68,019 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,174,747 $1,111,446 ========== ========== See notes to consolidated financial statements.
26 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
YEAR ENDED DECEMBER 31 -------------------------------------------- 2004 2003 2002 ---------- ---------- ---------- Net sales.......................................... $1,742,914 $1,671,664 $1,728,705 Cost of sales...................................... 1,393,521 1,337,118 1,385,361 ---------- ---------- ---------- Gross profit....................................... 349,393 334,546 343,344 Operating expenses: Selling, general and administrative............ 265,870 245,689 263,734 Amortization of intangibles.................... 5,381 1,899 2,237 Loss (gain) on assets held for sale............ -- (117) 6,436 Impairment on operations formerly held for sale......................................... -- -- 12,842 Restructuring, impairment and other charges.... 5,407 6,860 74,551 ---------- ---------- ---------- Operating income (loss)............................ 72,735 80,215 (16,456) Other expenses: Interest expense............................... 73,125 71,891 70,461 Loss from the early extinguishment of debt..... 17,748 -- 16,463 Other.......................................... 2,459 1,819 1,754 ---------- ---------- ---------- Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle............................. (20,597) 6,505 (105,134) Income tax expense (benefit)....................... 341 2,581 (31,646) ---------- ---------- ---------- Income (loss) from continuing operations before cumulative effect of change in accounting principle........................................ (20,938) 3,924 (73,488) Gain (loss) on disposal of discontinued operations....................................... 1,230 1,548 (16,868) Cumulative effect of change in accounting principle........................................ -- (322) (111,748) ---------- ---------- ---------- Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104) ========== ========== ========== Earnings (loss) per share--basic and diluted: Continuing operations.......................... $ (0.44) $ 0.08 $ (1.54) Discontinued operations........................ 0.03 0.04 (0.35) Cumulative effect of change in accounting principle.................................... -- (0.01) (2.35) ---------- ---------- ---------- Earnings (loss) per share--basic and diluted... $ (0.41) $ 0.11 $ (4.24) ========== ========== ========== Weighted average shares--basic................. 47,750 47,687 47,665 Weighted average shares--diluted............... 47,750 48,315 47,665 See notes to consolidated financial statements.
27 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31 ----------------------------------------------- 2004 2003 2002 ----------- ----------- ----------- Cash flows from operating activities: Income (loss) from continuing operations................. $ (20,938) $ 3,924 $ (73,488) Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Depreciation........................................ 47,602 46,069 47,818 Amortization (including amortization of deferred financing fees included in interest)............. 9,959 5,883 7,635 Debt refinancing costs.............................. 17,748 -- 16,463 Non-cash portion of restructuring, impairment and other charges.................................... 3,228 -- 42,282 Loss on assets held for sale........................ -- -- 6,436 Deferred income tax benefit......................... (12,536) (10,854) (27,726) Loss on disposal of assets.......................... 686 1,221 346 Other non-cash expenses, net........................ 198 435 91 Changes in operating assets and liabilities, excluding the effects of acquired businesses: Accounts receivable................................. (23,283) 3,414 12,756 Inventories......................................... (18,122) 14,647 8,906 Accounts payable and accrued compensation........... 32,784 (15,417) (11,036) Income taxes payable................................ (1,663) 12,212 4,193 Other working capital changes....................... (711) (1,952) (7,130) Other, net.......................................... 3,039 (123) (4,575) ----------- ----------- ----------- Net cash provided by operating activities.......... 37,991 59,459 22,971 Cash flows from investing activities: Acquisitions, net of cash acquired.................. (13,174) (2,800) (2,610) Capital expenditures................................ (27,435) (31,602) (30,896) Proceeds from divestitures, net..................... 2,000 3,864 122,330 Proceeds from sales of property, plant and equipment.......................................... 3,012 682 11,995 ----------- ----------- ----------- Net cash provided by (used in) investing activities....................................... (35,597) (29,856) 100,819 Cash flows from financing activities: Proceeds from exercise of stock options............. 48 75 18 Proceeds from issuance of long-term debt............ 2,724,655 1,915,452 1,635,102 Repayments of long-term debt........................ (2,703,847) (1,948,299) (1,726,718) Payment of redemption premiums...................... (13,528) -- -- Debt issuance costs................................. (9,077) (484) (18,624) ----------- ----------- ----------- Net cash used in financing activities.............. (1,749) (33,256) (110,222) Effect of exchange rate changes on cash and cash equivalents............................................... (156) 1,310 (985) Cash flows used in discontinued operations................. -- -- (10,827) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents...................................... 489 (2,343) 1,756 Cash and cash equivalents at beginning of year............. 307 2,650 894 ----------- ----------- ----------- Cash and cash equivalents at end of year................... $ 796 $ 307 $ 2,650 =========== =========== =========== See notes to consolidated financial statements.
28 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands)
ACCUMULATED RETAINED OTHER TOTAL COMMON PAID-IN EARNINGS DEFERRED COMPREHENSIVE SHAREHOLDERS' STOCK CAPITAL (DEFICIT) COMPENSATION INCOME (LOSS) EQUITY ------ -------- --------- ------------ ------------- ------------- BALANCE AT DECEMBER 31, 2001.................. $483 $214,138 $ 46,623 $(3,359) $(16,008) $ 241,877 Comprehensive income (loss): Net loss...................................... (202,104) (202,104) Other comprehensive income (loss): Pension liability adjustment, net of tax benefit of $744............................ (1,190) (1,190) Currency translation adjustment............. 3,609 3,609 --------- Other comprehensive income................ 2,419 --------- Total comprehensive loss................ (199,685) Cancellation of restricted shares............. (1) (451) 452 -- Issuance of restricted shares................. 1 121 (122) -- Exercise of stock options..................... 18 18 Amortization of unearned compensation......... 558 558 ---- -------- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 2002.................. 483 213,826 (155,481) (2,471) (13,589) 42,768 Comprehensive income (loss): Net income.................................... 5,150 5,150 Other comprehensive income (loss): Pension liability adjustment, net of tax benefit of $1,996.......................... (3,188) (3,188) Currency translation adjustment............. 22,507 22,507 --------- Other comprehensive income................ 19,319 --------- Total comprehensive income.............. 24,469 Cancellation of restricted shares............. (1) (199) 102 (98) Issuance of restricted shares................. 1 149 (150) -- Exercise of stock options..................... 1 74 75 Amortization of unearned compensation......... 805 805 ---- -------- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 2003.................. 484 213,850 (150,331) (1,714) 5,730 68,019 Comprehensive income (loss): Net loss...................................... (19,708) (19,708) Other comprehensive income (loss): Pension liability adjustment, net of tax benefit of $1,186.......................... (1,892) (1,892) Currency translation adjustment............. 10,169 10,169 --------- Other comprehensive income................ 8,277 --------- Total comprehensive loss................ (11,431) Issuance of restricted shares................. 3 1,004 (1,007) -- Exercise of stock options..................... 48 48 Amortization of unearned compensation......... 718 718 ---- -------- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 2004.................. $487 $214,902 $(170,039) $(2,003) $ 14,007 $ 57,354 ==== ======== ========= ======= ======== ========= See notes to consolidated financial statements.
29 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. Cenveo, Inc. and subsidiaries (collectively, the "Company") are engaged in commercial printing, the printing and manufacturing of envelopes and the printing and manufacturing of business forms and labels. On April 29, 2004, the shareholders of the Company approved the change of the Company's name from Mail-Well, Inc. to Cenveo, Inc. The Company, headquartered in Englewood, Colorado, is organized under Colorado law, and its common stock is traded on the New York Stock Exchange under the symbol "CVO". The consolidated financial statements include the accounts of Cenveo, Inc. and its wholly-owned subsidiaries. The Company has also consolidated a variable interest entity pursuant to Financial Accounts Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). All significant intercompany accounts and transactions have been eliminated and all amounts and disclosures reflect the Company's continuing operations. The Company's reporting periods for 2004, 2003 and 2002 in this report consist of 53-, 52- and 52-week periods, respectively, ending on the Saturday closest to the last day of the calendar month. The reporting periods for 2004, 2003 and 2002 ended January 1, 2005, December 28, 2003 and December 27, 2002, respectively. For convenience, the accompanying financial statements have been shown as ending on December 31. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates and assumptions are used for, but not limited to, establishing the allowance for doubtful accounts, inventory valuation reserves, depreciation and amortization, asset impairment evaluations, tax assets and liabilities, self-insurance accruals and other contingencies. Actual results could differ from the estimates made by management. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on deposit and investments with original maturities of three months or less. Cash and cash equivalents are stated at cost, which approximates fair value. ACCOUNTS RECEIVABLE. Trade accounts receivable are recorded at the invoiced amount. The Company maintains a valuation allowance based upon the expected collectibility of accounts receivable. Uncollected account balances are charged to the allowance after all means of collection have been exhausted and the potential for recovery is remote. Allowances for losses on accounts receivable of $4.7 million and $4.0 million have been applied as reductions of accounts receivable at December 31, 2004 and 2003, respectively. INVENTORIES. Inventories are carried at the lower of cost or market, with cost determined on a first-in, first-out basis. Cost includes materials, labor and overhead. The estimates of reserves for unsaleable inventory are based on management's judgment of future realization. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. Expenditures for repairs and maintenance are charged to expense as incurred, and expenditures that increase the capacity, efficiency or useful lives of existing assets are capitalized. Depreciation is calculated using the straight-line method based on the estimated useful lives of 15 to 45 years for buildings and building improvements, 10 to 15 years for machinery and equipment and three to 10 years for furniture and fixtures. 30 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPUTER SOFTWARE. The Company develops and purchases software for internal use. Software development costs incurred during the application development stage are capitalized. Once the software has been installed and tested and is ready for use, additional costs incurred in connection with the software are expensed as incurred. Capitalized computer software costs are amortized over the estimated useful life of the software, usually between three and seven years. Net computer software costs included in property, plant and equipment were $11.6 million and $8.7 million at December 31, 2004 and 2003, respectively. DEBT ISSUANCE COSTS. Direct expenses such as legal, accounting and underwriting fees incurred to issue debt, are included in other assets in the consolidated balance sheets. The debt issuance costs were $16.3 million and $15.6 million at December 31, 2004 and 2003, respectively, net of accumulated amortization, and are amortized over the term of the related debt as interest expense. Interest expense includes $4.4 million, $4.0 million and $5.4 million of debt issuance costs amortized in 2004, 2003 and 2002, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of acquisition costs over the fair value of net assets of businesses acquired. Goodwill is reviewed annually to determine if there is an impairment, or more frequently, if an indication of possible impairment exists. The Company performs its annual impairment assessments in the fourth quarter of the year. The transitional impairment recognized in 2002 upon the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets was $111.7 million. No additional impairment charges were recorded in 2004 or 2003. Other intangible assets primarily arise from the purchase price allocations of businesses acquired and are based on independent appraisals or internal estimates. Intangible assets with determinable lives are amortized on a straight-line basis over the estimated useful life assigned to these assets. Intangible assets that are expected to generate cash flows indefinitely are not amortized but are evaluated for impairment similarly to goodwill. LONG-LIVED ASSETS. Long-lived assets, including property, plant and equipment, and intangible assets with determinable lives, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairment losses are recognized for the amount by which the carrying value of an asset exceeds its fair value. The estimated useful lives of all long-lived assets are periodically reviewed and revised if necessary. SELF-INSURANCE. The Company is self-insured for the majority of its workers' compensation costs and group health insurance costs, subject to specific retention levels. The Company records its liability for workers' compensation claims on a fully-developed basis. The Company's liability for health insurance claims includes an estimate for claims incurred but not reported. REVENUE RECOGNITION. The Company recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. The Company records revenue to a lesser extent on a bill and hold basis when requested by the customer. Revenue is recognized on bill and hold transactions when the customer is invoiced for goods that have been produced, packaged and made ready for shipment. These goods are segregated from inventory which is available for sale, the risk of ownership of the goods is assumed by the customer, and the terms and collection experience on the related billings are consistent with all other sales. 31 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Since a significant portion of the Company's products are customer specific, it is common for customers to inspect the quality of the product at the Company's facility prior to its shipment. Products shipped are not subject to contractual right of return provisions. The Company has rebate agreements with certain customers. These rebates are recorded as reductions of sales and are accrued using sales data and rebate percentages specific to each customer agreement. FREIGHT COSTS. The costs of delivering finished goods to customers are recorded as freight costs and included in cost of sales. Freight costs that are included in the price of the product are included in net sales. ADVERTISING COSTS. All advertising costs are expensed as incurred. Advertising costs were $5.5 million, $5.7 million and $6.0 million in 2004, 2003 and 2002, respectively. FOREIGN CURRENCY TRANSLATION. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the U.S. dollar are translated at year-end exchange rates. The effects of translation are included as a component of other comprehensive income. Income and expense items are translated at the average monthly rate. Foreign currency transaction gains and losses are recorded in income. STOCK-BASED COMPENSATION. Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the measurement date over the amount an employee must pay to acquire the stock. If the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net income (loss) and earnings (loss) per share would have been as follows (in thousands, except per share data):
2004 2003 2002 -------- ------ --------- Net income (loss), as reported......................... $(19,708) $5,150 $(202,104) Add: stock-based compensation expense included in reported net income, net of related tax benefits in 2003 and 2002...................... 718 420 410 Less: stock-based compensation expense determined under fair value method for all awards, net of related tax benefit in 2003 and 2002........... 4,952 3,620 4,053 -------- ------ --------- Pro forma net income (loss)............................ $(23,942) $1,950 $(205,747) ======== ====== ========= Earnings (loss) per share--basic and diluted: As reported...................................... $ (0.41) $ 0.11 $ (4.24) Pro forma........................................ $ (0.50) $ 0.04 $ (4.32)
32 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table presents the fair value per share information, including related assumptions, used to determine stock-based compensation expense consistent with the requirements of SFAS No. 123. The estimated fair value per share was determined on the date of grant using the Black-Scholes option-pricing model.
2004 2003 2002 ----- ----- ----- Weighted average fair value per share of options granted during the year............................... $2.22 $1.39 $1.16 Assumptions: Dividend yield.................................... 0.0% 0.0% 0.0% Volatility........................................ 69.6% 73.0% 71.0% Risk-free rate of return.......................... 3.1% 2.6% 3.0% Expected life (years)............................. 5 5 5
The effect on reported net income (loss), earnings (loss) per share of expensing the estimated fair value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of the stock options and the potential for issuance of additional stock options in future years. RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform with the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS. In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory Costs--an amendment of ARB No. 43 Chapter 4. This statement requires abnormal production costs such as idle facility expense, excessive spoilage, rehandling costs and abnormal freight to be excluded from inventory costing and treated as period expenses. In addition, this standard requires the allocation of fixed production overhead to be based on normal capacity of the production facility. The Company does not expect the adoption of this standard in 2005 to have a significant effect on its results. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment: an amendment of FASB Statements No. 123 and 95 ("SFAS No. 123R"). SFAS No. 123R requires all share-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair value. The Company expects to implement SFAS 123R in the third quarter of 2005 and use the modified-prospective transition method of implementation. Under the modified-prospective transition method, the Company will recognize compensation expense in the financial statements issued subsequent to the date of adoption, which will be July 1, 2005, for all share-based payments granted, modified or settled after July 1, 2005 as well as for any awards that were granted prior to July 1, 2005 for which the requisite service has not been provided as of July 1, 2005. The Company will recognize compensation expense on awards granted subsequent to July 1, 2005 using the fair values determined by a valuation model prescribed by SFAS 123R. The compensation expense on awards granted prior to July 1, 2005 will be recognized using the fair values determined for the pro forma disclosures on stock-based compensation. The amount of compensation expense that will be recognized on awards that have not fully vested will exclude the compensation expense cumulatively recognized in the pro forma disclosures on stock-based compensation. The Company's preliminary estimate of the compensation expense that will be recorded in 2005 on unvested awards at July 1, 2005 will be approximately $2.0 million. 33 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. CHANGES IN ACCOUNTING PRINCIPLES The Company adopted FIN 46 on January 1, 2003. FIN 46 required the consolidation of a trust that was leasing equipment to the Company. The Company is the primary beneficiary of this trust since it is subject to the majority of the risk of loss from the activities of the trust. The Company consolidated equipment valued at $18.1 million, net of accumulated depreciation, and debt of $18.5 million and recorded a non-cash after-tax charge of $0.3 million as a cumulative effect of a change in accounting principle in the consolidated statement of operations for 2003. The consolidation of the debt and equipment of the trust did not impact the cash flows of the Company. The Company adopted SFAS No. 142 on January 1, 2002. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives are no longer required to be amortized. Goodwill and intangible assets that have indefinite useful lives, however, must be tested annually for impairment. In the year of its adoption, SFAS No. 142 required a transitional goodwill impairment evaluation, which was a two-step process. The first step was to determine whether there was an indication that goodwill was impaired on January 1, 2002. SFAS No. 142 required a separate impairment evaluation of each of the Company's reporting units, which the Company determined to be the same as its operating segments. To perform the first step, the fair value of each reporting unit was estimated by discounting the expected future cash flows and using market multiples of comparable companies. The fair value of each reporting unit was compared to its carrying value, including goodwill. This first step evaluation indicated an impairment of the goodwill recorded by the Company's commercial printing operations (formerly the commercial printing segment). Since the first step indicated an impairment of the goodwill of the commercial printing operations, SFAS No. 142 required a second step to determine the amount of the impairment. The amount of the impairment was determined by comparing the implied fair value of this goodwill to its carrying value. The implied fair value of the goodwill was determined by allocating the fair value of the combined assets and liabilities of the commercial printing operations as if these operations had been acquired and the fair value was the purchase price. The excess "purchase price" over the amounts assigned to the assets and liabilities was the implied value of goodwill. The carrying amount of the goodwill exceeded the implied value by $111.7 million, which was recorded as a cumulative effect of a change in accounting principle in the consolidated statement of operations for 2002. The impairment loss on the goodwill recorded by the commercial printing operations was due to the significant decline in the performance of these operations in 2001 and the impact of that decline on expected future cash flows. 3. ACQUISITIONS Acquisitions are accounted for under the purchase method of accounting; accordingly, the assets and liabilities of the acquired businesses have been recorded at estimated fair value at the date acquired with the excess of the purchase price over the estimated fair value recorded as goodwill. In July 2004, the Company purchased the stock of Valco Graphics Inc., a commercial printing company in Seattle, Washington with annual sales of approximately $18.0 million. The purchase price was $9.6 million with $5.1 million allocated to tangible net assets and $4.5 million allocated to goodwill. The Company is consolidating Valco Graphics Inc. with its existing commercial printing operation in Seattle and will operate the combined entity as Cenveo, Seattle. In August 2004, the Company purchased the assets of WWP Property Management, Inc., a commercial printing company in San Francisco, California with annual sales of approximately $14.0 million. The purchase price was $2.8 million with $2.7 million allocated to tangible net assets and $0.1 million allocated to goodwill. The Company has consolidated this operation with its existing commercial printing operation in San Francisco and is operating the combined entity as Cenveo, San Francisco. 34 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) In August 2002, the Company acquired the in-house printing and fulfillment operations of American Express Company. The purchase price was $19.1 million of which $1.3 million was paid in 2002, $2.8 million in 2003 and $3.2 million in 2004. The remaining purchase price, which was accrued in 2004, will be paid in annual amounts through 2007 and reflected in the statements of cash flows when paid. The purchase price was allocated as follows: $1.3 million to tangible net assets, $0.8 million to goodwill and $17.0 million to a customer-related intangible asset that is being amortized over the term of a service agreement that expires at the end of 2007. The results of these acquired businesses have been included in the consolidated results of the Company from their respective acquisition dates. Pro forma results for 2004 and 2002, assuming these acquisitions had been made at the beginning of the applicable year, would not be materially different from results reported. 4. DISCONTINUED OPERATIONS In September 2000, the Company sold the extrusion coating and laminating business segment of American Business Products, Inc., a company acquired in February 2000. The consideration received for this business included an unsecured note which was fully reserved at the time of the sale. This note was redeemed by the issuer in June 2004 for $2.0 million. The proceeds, net of tax, have been recorded as a gain on disposal of discontinued operations in 2004. The gain on disposal of discontinued operations recorded for 2003 reflects a change in the tax impact of the disposition of the Company's prime label business, which was sold in May 2002. This gain was partially offset by the accrual of additional expenses related to the sale. In 2002, the Company sold Curtis 1000 for $40.0 million, including the assumption of debt, and the prime label operating segment for $75.0 million. Curtis 1000 and the prime label business were segregated from continuing operations and reported as discontinued operations in 2001. The loss of $16.9 million on disposal of discontinued operations recorded in 2002 was based on actual proceeds which were less than expected, actual expenses which were greater than originally estimated and the tax benefit of the losses which was less than originally estimated. Interest expense was allocated to the operating results and included in the calculation of the loss on disposal of discontinued operations based upon the relative net assets of the prime label business and Curtis 1000. This allocation of interest expense totaled $5.6 million in 2002. Tax benefits allocated to discontinued operations based on the losses of these operations was $1.6 million in 2002. Operating results of the discontinued operations are summarized as follows (in thousands):
2004 2003 2002 -------- -------- --------- Net sales: Prime label........................................ $ -- $ -- $ 84,758 Curtis 1000........................................ -- -- 22,788 -------- -------- --------- $ -- $ -- $ 107,546 ======== ======== ========= Gain (loss) on disposal of discontinued operations: Prime label........................................ $ -- $ (830) $ (16,299) Curtis 1000........................................ -- 139 (1,028) Jen Coat........................................... 2,000 -- -- -------- -------- --------- 2,000 (691) (17,327) Income tax benefit (expense)....................... (770) 2,239 459 -------- -------- --------- $ 1,230 $ 1,548 $ (16,868) ======== ======== =========
35 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. OTHER DIVESTITURES The Company sold the filing products division of the resale segment in August 2002 and certain digital graphics operations of the commercial segment in March 2003. The following table presents the sales and operating income of these operations (in thousands):
2003 2002 ------- ------- Net sales............................................... $ 2,872 $56,445 Operating income........................................ $ 167 $ 3,301
The Company recorded a loss of $6.1 million in 2002 as a result of the sale of the filing products division and an impairment charge of $0.3 million on the digital graphics operations that were held for sale at December 31, 2002. 6. IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE In 2001, a business that is now part of the resale segment, was held for sale and reported as a discontinued operation. In 2002, the Company discontinued its efforts to sell this business. Accordingly, the tax benefit of $11.5 million expected to be realized upon the sale that had been recorded in 2001 was written off and expenses of $1.1 million that had been accrued but not incurred were reversed. In 2002, the Company also discontinued its efforts to sell a digital graphics operation that was held for sale at the end of 2001 and recorded an impairment charge of $2.4 million. 7. INVENTORIES The Company's inventories by major category were as follows (in thousands):
DECEMBER 31 ---------------------- 2004 2003 -------- ------- Raw materials........................................... $ 36,440 $28,344 Work in process......................................... 30,357 21,483 Finished goods.......................................... 50,122 46,570 -------- ------- 116,919 96,397 Reserves................................................ (4,700) (4,995) -------- ------- Inventories, net........................................ $112,219 $91,402 ======== =======
36 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. PROPERTY, PLANT AND EQUIPMENT The Company's investment in property, plant and equipment consisted of the following (in thousands):
DECEMBER 31 ------------------------- 2004 2003 --------- --------- Land and land improvements.............................. $ 19,457 $ 20,043 Buildings and improvements.............................. 109,889 109,563 Machinery and equipment................................. 532,470 511,820 Furniture and fixtures.................................. 13,997 15,986 Construction in progress................................ 9,806 9,696 --------- --------- 685,619 667,108 Accumulated depreciation................................ (318,359) (278,868) --------- --------- Property, plant and equipment, net...................... $ 367,260 $ 388,240 ========= =========
9. GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill for 2004 and 2003 by reportable segment were as follows (in thousands):
COMMERCIAL RESALE TOTAL ---------- --------- --------- Balance as of January 1, 2003......................... $ 189,889 $ 100,472 $ 290,361 Purchase price adjustments.......................... -- (302) (302) Foreign currency translation........................ 9,333 -- 9,333 --------- --------- --------- Balance as of December 31, 2003....................... 199,222 100,170 299,392 Acquisitions........................................ 4,583 -- 4,583 Foreign currency translation........................ 4,963 -- 4,963 --------- --------- --------- Balance as of December 31, 2004....................... $ 208,768 $ 100,170 $ 308,938 ========= ========= =========
37 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Other intangible assets consisted of the following (in thousands):
DECEMBER 31, ---------------------------------------------------------------------------- 2004 2003 ------------------------------------ ------------------------------------ GROSS NET GROSS NET WEIGHTED CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING AVERAGE AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT LIFE (YEARS) -------- ------------ -------- -------- ------------ -------- ------------ INTANGIBLE ASSETS WITH DETERMINABLE LIVES: Trademarks and tradenames....... $14,238 $ (1,736) $12,502 $14,238 $ (1,377) $12,861 40 Non-compete agreements....... 4,366 (4,194) 172 7,562 (6,581) 981 8 Customer relationship..... 17,006 (4,000) 13,006 2,800 -- 2,800 4 Patents............ 2,428 (836) 1,592 2,438 (669) 1,769 12 Other.............. 1,049 (566) 483 1,250 (694) 556 26 ------- -------- ------- ------- -------- ------- 39,087 (11,332) 27,755 28,288 (9,321) 18,967 INTANGIBLE ASSETS WITH INDEFINITE LIVES: Pollution Credits.......... 720 -- 720 720 -- 720 Trademark.......... 313 -- 313 -- -- -- ------- -------- ------- ------- -------- ------- 1,033 -- 1,033 720 -- 720 ------- -------- ------- ------- -------- ------- Total................ $40,120 $(11,332) $28,788 $29,008 $ (9,321) $19,687 ======= ======== ======= ======= ======== =======
The estimated amortization expense for each of the succeeding five years is as follows: $5.4 million, $5.4 million, $5.4 million, $1.0 million and $1.0 million. 10. OTHER CURRENT LIABILITIES Other current liabilities consisted of the following (in thousands):
DECEMBER 31 --------------------- 2004 2003 ------- ------- Accrued rebates......................................... $19,914 $ 9,000 Accrued interest........................................ 15,350 14,461 Accrued taxes........................................... 8,360 9,827 Accrued legal settlement................................ -- 5,330 Customer deposits....................................... 3,540 3,550 Other accrued liabilities............................... 17,550 22,192 ------- ------- Other current liabilities............................... $64,714 $64,360 ======= =======
38 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income consisted of the following (in thousands):
DECEMBER 31 --------------------- 2004 2003 ------- ------- Currency translation adjustments........................ $21,351 $11,182 Pension liability adjustments, net of tax benefit....... (7,344) (5,452) ------- ------- Accumulated other comprehensive income.................. $14,007 $ 5,730 ======= =======
12. LONG-TERM DEBT Long-term debt consisted of the following (in thousands):
DECEMBER 31 ------------------------- 2004 2003 -------- -------- Senior Secured Credit Facility, due 2008................ $ 78,441 $ 73,310 Senior 9 5/8% Notes, due 2012........................... 350,000 350,000 Senior 7 7/8% Subordinated Notes, due 2013.............. 320,000 -- Senior 8 3/4% Subordinated Notes, due 2008.............. -- 300,000 Other................................................... 21,328 25,651 -------- -------- 769,769 748,961 Less current maturities................................. (2,270) (2,575) -------- -------- Long-term debt.......................................... $767,499 $746,386 ======== ========
Current maturities consist of scheduled payments on other long-term debt. In 2002, the Company entered into a three-year $300.0 million Senior Secured Credit Facility with a group of banks ("Credit Facility"). Under the Credit Facility, loans may be made and letters of credit issued on a revolving basis in each case subject to availability and subject to a borrowing base. Loans made under the Credit Facility bear interest at a base rate or LIBOR, plus a margin. The interest rate at December 31, 2004 was 4.7%. The Credit Facility is secured by substantially all of the assets of the Company. In March 2004, the Company amended the Credit Facility to extend its term to June 2008. The cost incurred to amend the Credit Facility was $1.9 million. These debt issuance costs will be amortized over the extended term of the Credit Facility. In January 2004, the Company issued $320.0 million of 7 7/8% senior subordinated notes due 2013 ("Senior Subordinated Notes"). The interest on these notes is payable semi-annually. The Company may redeem these notes, in whole or in part, on or after December 1, 2008, at redemption prices from 103.9% to 100%, plus accrued and unpaid interest. The net proceeds from the sale of the Senior Subordinated Notes were used to fund the tender offer and redemption of the Company's 8 3/4% senior subordinated notes which were due to mature in 2008. The loss recorded on the early extinguishment of the 8 3/4% senior subordinated notes consisted of redemption premiums of $13.5 million and unamortized debt issuance costs of $4.2 million. The debt issuance costs for the Senior Subordinated Notes totaled $7.2 million which will be amortized over the term of the notes. The Company's $350.0 million 9 5/8% Senior Notes due 2012 ("Senior Notes") were issued in 2002 and pay interest semi-annually. The Company may redeem the Senior Notes, in whole or in part, on or after March 15, 2007, at redemption prices from 104.8% to 100%, plus accrued and unpaid interest. 39 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. LONG-TERM DEBT (CONTINUED) Other long-term debt includes debt of $14.0 million and $17.0 million at December 31, 2004 and 2003, respectively, of a variable interest entity that was consolidated on January 1, 2003 as a result of the adoption of FIN 46. The interest on this debt was 5.8% at December 31, 2004. The remaining balance in other long-term debt is primarily term debt with banks with interest rates, which range from 2.3% to 10.1%, and capital lease obligations. The aggregate annual maturities for long-term debt are as follows (in thousands): 2005................................. $ 2,270 2006................................. 2,325 2007................................. 13,530 2008................................. 79,402 2009................................. 1,022 Thereafter........................... 671,220 -------- $769,769 ======== Cash interest payments on long-term debt were $67.4 million in 2004, $68.1 million in 2003 and $63.0 million in 2002. The estimated fair value of the Company's Credit Facility, Senior Notes, Senior Subordinated Notes and other long-term debt was $783.9 million and $784.5 million at December 31, 2004 and 2003, respectively. The Credit Facility, Senior Notes and Senior Subordinated Notes contain certain restrictions that, among other things and with certain exceptions, limit the ability of the Company to incur additional indebtedness, prepay subordinated debt, transfer assets outside of the Company, pay dividends or repurchase shares of common stock. The Company is only required to maintain certain levels of fixed charge coverage under the Credit Facility in the event that availability falls below a certain amount. As of December 31, 2004, the Company was in compliance with all debt agreements. GUARANTEES In conjunction with the sale of the prime label business in 2002, the Company continued to guarantee a lease obligation assumed by the buyer of this business. The guarantee requires the lessor to pursue collection and other remedies against the buyer before demanding payment from the Company. The remaining payments under the lease term, which expires April 2008, total approximately $5.5 million. If the Company were required to honor its obligation under the guarantee, any loss would be reduced by the amount generated from the liquidation of the equipment. 13. INCOME TAXES Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle was as follows (in thousands):
2004 2003 2002 -------- -------- --------- Domestic............................................ $(59,239) $(29,532) $(136,409) Foreign............................................. 38,642 36,037 31,275 -------- -------- --------- $(20,597) $ 6,505 $(105,134) ======== ======== =========
40 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. INCOME TAXES (CONTINUED) Income tax expense (benefit) on income from continuing operations before taxes and cumulative effect of change in accounting principle consisted of the following (in thousands):
2004 2003 2002 -------- -------- -------- Current tax expense (benefit): Federal.......................................... $ (43) $ 1,482 $(12,747) Foreign.......................................... 12,464 11,805 10,050 State............................................ 456 148 (1,273) -------- -------- -------- 12,877 13,435 (3,970) Deferred expense (benefit): Federal.......................................... (11,141) (9,564) (26,168) Foreign.......................................... 179 (334) 475 State............................................ (1,574) (956) (1,983) -------- -------- -------- (12,536) (10,854) (27,676) -------- -------- -------- Income tax expense (benefit)......................... $ 341 $ 2,581 $(31,646) ======== ======== ========
A reconciliation of the expected tax expense (benefit) based on the federal statutory tax rate to the Company's actual income tax expense is summarized below (in thousands):
2004 2003 2002 -------- ------- -------- Expected tax expense (benefit) at federal statutory income tax rate................................................ $ (7,209) $ 2,277 $(36,797) State and local income tax expense (benefit).............. (721) 293 (4,731) Increase in valuation allowance........................... 20,275 2,625 1,123 Reduction in contingency reserves......................... (6,369) -- -- Utilization of foreign tax credits........................ (4,718) (1,158) -- Non-U.S. tax rate differences............................. (2,959) (678) (2,055) Non-deductible expenses................................... 970 843 1,197 Non-taxable investment benefit............................ 313 (881) (333) Non-deductible goodwill impairment........................ -- -- 9,262 Other..................................................... 759 (740) 688 -------- ------- -------- Income tax expense (benefit).............................. $ 341 $ 2,581 $(31,646) ======== ======= ========
41 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. INCOME TAXES (CONTINUED) Deferred taxes are recorded to give recognition to temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years. Deferred tax liabilities generally represent items that have been deducted for tax purposes, but have not yet been recorded in the consolidated statements of operations. Valuation allowances are recorded in expense to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below (in thousands):
2004 2003 --------- --------- Deferred tax assets: Net operating loss carryforwards.................... $ 95,786 $ 74,834 Capital loss carryforwards.......................... 20,950 23,180 Compensation and benefit related accruals........... 19,867 21,394 Foreign tax credit carryforwards.................... 10,015 4,090 Alternative minimum tax credit carryforwards........ 5,015 4,650 Accounts receivable................................. 1,421 1,416 Restructuring accruals.............................. 969 804 Other............................................... 3,493 6,209 Valuation allowance................................. (26,775) (6,500) --------- --------- Total deferred tax assets............................... 130,741 130,077 Deferred tax liabilities: Property, plant and equipment....................... (83,542) (90,744) Goodwill and other intangibles...................... (20,352) (19,488) Inventory........................................... (2,335) (2,565) Other............................................... 158 (5,345) --------- --------- Total deferred tax liabilities.......................... (106,071) (118,142) --------- --------- Net deferred tax asset.................................. $ 24,670 $ 11,935 ========= =========
The net deferred income tax asset includes the following components (in thousands):
2004 2003 --------- --------- Current deferred tax asset.............................. $ 15,911 $ 18,652 Non-current deferred tax asset.......................... 19,730 4,053 Non-current deferred tax liability...................... (10,971) (10,770) --------- --------- Total............................................... $ 24,670 $ 11,935 ========= =========
During 2004, the Internal Revenue Service ("IRS") completed the examination of the tax years 1996 through 2002. The outcome of this tax audit resulted in the issuance of a "no change" letter by the IRS. As a result, the Company determined that tax contingency reserves totaling $6.4 million were no longer necessary and these reserves were reversed. The Company has federal and state net operating loss and capital loss carryforwards. The tax effect of these attributes is $116.7 million at December 31, 2004. The capital loss carryforwards are due 42 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. INCOME TAXES (CONTINUED) to expire in 2007 and the net operating loss carryforwards will expire in 2021 through 2024. The Company's valuation allowance increased $20.3 million in 2004, $2.6 million in 2003 and $1.1 million in 2002. The increase in 2004 was primarily due to the additional net operating losses incurred in the U.S. in 2004. Since the Company has had three consecutive years of U.S. net operating losses, the increase in the valuation allowance was provided to cover the impairment of the deferred tax asset the Company believes more likely than not will not be realized through the reversal of taxable temporary differences and the execution of available tax planning strategies. Net cash payments for income taxes were $14.7 million in 2004, $2.5 million in 2003 and $6.0 million in 2002. 14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES 2004 ACTIVITY Restructuring and impairment charges recorded in 2004 totaled $5.4 million. The following table and discussion present the details of these charges (in thousands):
COMMERCIAL CORPORATE TOTAL ---------- --------- ------- Employee separation and related expenses................ $ 708 $ -- $ 708 Write-downs of equipment and leasehold improvements..... 3,706 295 4,001 Equipment moving expenses............................... 326 -- 326 Building clean-up and other expenses.................... 684 -- 684 Lease termination expenses.............................. 130 954 1,084 Net gain from the sale of building...................... (1,396) -- (1,396) ------- ------ ------- Total restructuring, impairment and other charges........................................... $ 4,158 $1,249 $ 5,407 ======= ====== =======
COMMERCIAL. The commercial segment closed its envelope plant in Bensalem, Pennsylvania and moved much of its equipment into its printing operation in Philadelphia. The cost of this plant closure was $1.2 million, net of a $1.4 million gain on the sale of the plant building. The restructure charge included employee separation and related expenses for 63 employees of $0.7 million, costs of $0.2 million incurred to move equipment and an impairment charge of $1.0 million for equipment taken out of service. The cost incurred during 2004 to merge operations in Seattle and San Francisco into the newly acquired operations in those cities was $0.3 million. Asset impairment charges for equipment taken out of service totaled $0.8 million. The commercial segment will close a small printing operation in the first quarter of 2005 and consolidate its production into another facility. An impairment charge of $1.4 million on the equipment to be taken out of service and $0.1 million of lease termination fees were recorded in 2004. Other asset impairments recorded in 2004 totaled $0.4 million. CORPORATE. The Company negotiated the termination of a lease on a building in New York City that had been used by an operation that was closed in 2002. The cost to terminate the lease and write off the unamortized value of leasehold improvements was $1.2 million. 43 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) 2003 ACTIVITY Restructuring expenses and other charges were $6.9 million in 2003. The following table and discussion present the details of these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL ---------- ------ --------- ------- Employee separation and related expenses....... $ 815 $ 660 $ -- $ 1,475 Equipment moving expenses...................... 1,002 -- -- 1,002 Other costs.................................... 94 (10) -- 84 Reversal of unused accruals.................... (713) (318) -- (1,031) ------ ----- ------ ------- Total restructuring charges................ 1,198 332 -- 1,530 Other charges.................................. -- -- 5,330 5,330 ------ ----- ------ ------- Total restructuring and other charges...... $1,198 $ 332 $5,330 $ 6,860 ====== ===== ====== =======
The Company incurred employee separation expenses of $1.5 million in connection with workforce reductions in both segments. COMMERCIAL. The commercial segment announced the closure of the web printing operation in Indianapolis, Indiana and the redeployment of its two web presses and related equipment to St. Louis, Missouri and Baltimore, Maryland in 2002. A substantial portion of the cost to dismantle, move and reinstall this equipment was incurred during 2003. The Company was able to sub-lease a facility which was idled as a result of the consolidation of its envelope plant in the Northeast sooner than estimated when the liability under the lease contract was established. Accordingly, $0.5 million of the reserve recorded for this lease was reversed. In addition, the remaining expenses that had been accrued to cover the cost of maintaining a building that was sold in 2003 were reversed. RESALE. In 2002, the resale segment closed its business forms plant in Clearwater, Florida and consolidated its production in its plants in Fairhope, Alabama and Marshall, Texas. The employee separation expenses and other costs incurred as a result of this consolidation were less than originally estimated. CORPORATE. In February 2004, a jury in Los Angeles County, California returned a verdict in favor of an ex-employee who had sued the Company alleging wrongful dismissal. In order to avoid the expense and risk of further litigation and appeals, the Company settled the dispute. The amount of the settlement and the costs of the litigation recorded in 2003 totaled $5.3 million. 44 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) 2002 ACTIVITY Restructuring, impairment and other charges recorded in 2002 were $74.6 million. The following table and discussion present the details of these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL ---------- ------ --------- ------- Employee separation and related expenses...... $ 4,090 $1,404 $ -- $ 5,494 Employee training expenses.................... 6,647 396 -- 7,043 Project management expenses................... 8,101 1,145 -- 9,246 Write-downs of property and equipment......... 12,178 1,650 -- 13,828 Other costs................................... 7,685 1,883 -- 9,568 Reversal of unused accrual.................... (500) -- -- (500) ------- ------ ------- ------- Total restructuring charges............... 38,201 6,478 -- 44,679 Other charges................................. 6,693 161 23,018 29,872 ------- ------ ------- ------- Total restructuring, impairment and other charges................................. $44,894 $6,639 $23,018 $74,551 ======= ====== ======= =======
COMMERCIAL. The consolidation of envelope manufacturing facilities of the commercial segment which began in 2001, was completed in 2002. The objective of this consolidation was to reduce excess internal capacity and improve utilization of the equipment and resources at the other envelope plants in the United States and Canada. The costs incurred during 2002 related to this consolidation were as follows: * Employee training expenses of $6.6 million were incurred to train new employees hired at the plants that absorbed the production of the plants that were closed. The training programs for these employees were between three and nine months in duration. * Project management expenses of $8.1 million that were primarily consulting fees and related expenses were incurred to assist management in managing the consolidation project. Consultants were used to assist in such tasks as capacity planning, workflow planning, production scheduling and change management. * Impairment charges of $8.9 million were recorded for property and equipment taken out of service or sold as a result of the plant consolidations, net of proceeds of $5.9 million received from the sales of those assets. * Other costs of $3.0 million include the expenses incurred to dismantle, move and reinstall equipment, and the costs incurred to restore buildings to the condition required by lease agreements or to maintain them while they were held for sale. * In 2001, employee separation expenses were accrued to cover the 766 employees expected to be affected over the course of this project. At the completion of the project, 722 employees had been separated and the accrual was reduced by $0.5 million. The Company's commercial printing operation in New York City was closed in September 2002. Employee separation expenses of $1.0 million were recorded covering 80 employees. Asset impairment charges of $1.0 million and lease commitment and other expenses of $2.2 million were also recorded in connection with this plant closure. A web press was moved from Portland, Oregon to the web printing plant in St. Louis and the consolidation of the web printing operation in Indianapolis with the web plants in St. Louis and 45 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) Baltimore was announced. Employee separation expenses of $0.3 million were recorded to cover the cost of 52 employees affected by these actions. Other restructuring expenses included impairment charges of $1.0 million on equipment taken out of service and $1.8 million to cover the expenses associated with terminating lease commitments and the costs incurred in 2002 to dismantle, move and reinstall equipment. Additionally, the commercial segment reduced the size of many of its operations during 2002. The costs associated with these actions included $2.8 million to cover the cost of the elimination of 331 jobs, impairment charges of $1.3 million for equipment taken out of service and $0.7 million for expenses associated with lease commitments and the cost incurred to dismantle, move and reinstall equipment. RESALE. During 2002, the resale segment closed its business forms plant in Clearwater, Florida and its plant in Denver, Colorado. The employee separation expenses covering 64 employees were $0.6 million. Impairment charges related to equipment taken out of service as a result of these closures totaled $0.6 million. Other expenses of $0.7 million primarily related to expenses incurred to maintain two buildings held for sale. The resale segment completed the closure of its envelope operations in Hattiesburg, Mississippi. The costs in 2002 were $2.4 million which were primarily impairment charges, consulting fees, the costs incurred to dismantle, move and reinstall equipment and expenses incurred to clean up the building. The resale segment also incurred $2.2 million in expenses to reduce the size of several of its other operations. Employee separation expenses covering 193 employees were $0.8 million, asset impairments were $0.5 million and training, project management and other costs were $0.9 million. OTHER CHARGES. Other charges include the following items: * In connection with the refinancing of the bank credit facility in June 2002, an operating lease stemming from a sale/leaseback arrangement executed in 1997 and amended in 2000 had to be refinanced. The value of the equipment subject to the lease was reduced from $34.9 million to $19.1 million, requiring a payment of the difference of $15.8 million. In addition, deferred costs of $6.1 million associated with the lease prior to this refinancing were written off. * The Company used outside assistance to implement best practices and standardize costing and pricing systems. The cost of this assistance was $4.4 million. * Idle equipment in the commercial segment was written down $1.8 million to its net realizable value. * Severance payments unrelated to the restructure plans were $1.1 million. * The Company incurred consulting fees of $0.7 million related to tax matters that arose as a result of the divestitures. 46 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) A summary of the activity charged to the 2002 restructuring liability follows (in thousands):
COMMERCIAL RESALE TOTAL ---------- ------ ------- Initial accrual............................................ $ 6,572 $1,019 $ 7,591 Payments for severance................................. (2,581) (353) (2,934) Payments for lease termination and property exit costs................................................ -- (3) (3) Payments for other costs............................... (1) (10) (11) ------- ------ ------- Balance at December 31, 2002............................... 3,990 653 4,643 Payments for severance................................. (189) (39) (228) Payments for lease termination and property exit costs................................................ (2,230) (47) (2,277) Payments for other costs............................... (238) (220) (458) Reversal of unused accrual............................. (54) (317) (371) ------- ------ ------- Balance at December 31, 2003............................... 1,279 30 1,309 Payments for lease termination and property exit costs................................................ (406) (16) (422) Payments for other costs............................... (220) -- (220) ------- ------ ------- Balance at December 31, 2004............................... $ 653 $ 14 $ 667 ======= ====== =======
A summary of the activity charged to the 2001 restructuring liability follows (in thousands):
COMMERCIAL RESALE TOTAL ---------- ------ ------- Balance at December 31, 2001............................... $10,899 $ 70 $10,969 Payments for severance................................. (5,026) -- (5,026) Payments for lease termination and property exit costs................................................ (2,406) (70) (2,476) Reversal of unused accrual............................. (500) -- (500) ------- ---- ------- Balance at December 31, 2002............................... 2,967 -- 2,967 Payments for severance................................. (452) -- (452) Payments for lease termination and property exit costs................................................ (1,167) -- (1,167) Reversal of unused accrual............................. (660) -- (660) ------- ---- ------- Balance at December 31, 2003............................... 688 -- 688 Payments for lease termination and property exit costs................................................ (262) -- (262) ------- ---- ------- Balance at December 31, 2004............................... $ 426 $ $ 426 ======= ==== =======
15. STOCK-BASED COMPENSATION The Company has a Long-Term Equity Incentive Plan ("Incentive Plan"). The Incentive Plan is administered by the Compensation and Human Resources Committee of the Board of Directors and allows the Company to grant stock options, stock appreciation rights, restricted stock, and other stock-based awards to officers, directors and employees. The Company has 3,042,315 shares available for issuance under the Incentive Plan. STOCK OPTIONS Stock options awarded under the Incentive Plan generally vest over five years and expire in five to 10 years from the date of grant. Options are granted at a price equal to the fair value of the Company's stock on the date of grant. 47 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. STOCK-BASED COMPENSATION (CONTINUED) The following table summarizes the activity of stock options for 2004, 2003 and 2002:
2004 2003 2002 ----------------------- ----------------------- ----------------------- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- -------- --------- -------- Options outstanding at beginning of year........................ 5,738,569 $6.16 5,442,002 $6.96 6,128,637 $7.08 Granted.......................... 1,885,130 $3.72 1,021,044 $2.26 255,250 $4.63 Exercised........................ (19,331) $2.62 (30,831) $2.33 (11,230) $1.63 Expired/cancelled................ (612,993) $5.67 (693,646) $7.59 (930,655) $6.85 --------- --------- --------- Options outstanding at end of year........................... 6,991,375 $5.55 5,738,569 $6.16 5,442,002 $6.96 ========= ========= ========= Options exercisable at end of year........................... 3,858,396 $6.67 3,629,843 $6.49 2,458,607 $8.01 ========= ========= =========
The following table summarizes information about stock options outstanding at December 31, 2004:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER REMAINING LIFE EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE - ------------------------------- ----------- -------------- -------- ----------- -------- $ 1.32-$2.19.................. 679,282 3.0 $ 2.14 438,983 $ 2.13 $ 2.19-$4.37.................. 2,251,835 5.9 $ 3.70 330,075 $ 3.70 $ 4.37-$6.56.................. 2,600,600 1.8 $ 5.45 1,674,700 $ 5.44 $ 6.56-$8.74.................. 636,440 3.4 $ 7.71 592,020 $ 7.65 $ 8.74-$10.93................. 235,000 4.1 $ 9.71 234,400 $ 9.72 $ 10.93-$13.11................. 406,800 3.5 $12.33 406,800 $12.33 $ 13.11-$15.30................. 163,418 3.1 $13.78 163,418 $13.78 $ 21.86........................ 18,000 1.1 $21.86 18,000 $21.86 --------- --------- $ 1.32-$21.86................. 6,991,375 3.6 $ 5.55 3,858,396 $ 6.67 ========= =========
RESTRICTED STOCK Restricted stock has been granted to certain key executives under the Incentive Plan as a long-term incentive subject to continued employment. These shares carry voting rights; however, the shares may not be sold prior to vesting. Restricted stock granted in 2002 vests 50% after five years of service and 100% after six years and had a fair value of $1.48. In 2004, the Company granted 288,788 shares of restricted stock with a fair value of $3.28 to key executives. These shares vest at the end of five years. The Company has awarded restricted stock to the members of the Board of Directors. Restricted stock granted to the directors totaled 14,922 shares in 2004, 30,816 shares in 2003 and 9,582 in 2002. The fair value per share was $4.02 in 2004, $2.92 in 2003 and $6.26 in 2002. All awards to the directors were fully vested at December 31, 2004. Upon the issuance of restricted stock, the Company records unearned compensation as a charge to shareholders' equity for the fair value of the restricted stock on the date of grant. This unearned compensation is recognized as compensation expense ratably over the vesting period. The Company recorded compensation expense related to restricted stock in the amount of $0.7 million in 2004, $0.8 million in 2003 and $0.6 million in 2002. 48 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. STOCK-BASED COMPENSATION (CONTINUED) The following table summarizes the activity for restricted stock for 2002, 2003 and 2004:
NUMBER OF SHARES ---------------- Outstanding at January 1, 2002.......... 669,000 Granted............................. 91,582 Vested.............................. (9,582) Cancelled........................... (82,000) ------- Outstanding at December 31, 2002........ 669,000 Granted............................. 30,816 Vested.............................. (30,816) Cancelled........................... (25,000) ------- Outstanding at December 31, 2003........ 644,000 Granted............................. 303,710 Vested.............................. (14,922) ------- Outstanding at December 31, 2004........ 932,788 =======
16. RETIREMENT PLANS SAVINGS PLAN. The Company sponsors a defined contribution plan to provide substantially all U.S. salaried and certain hourly employees an opportunity to accumulate personal funds for their retirement. The Company matches a certain percentage of each employee's voluntary contribution. All contributions made by the Company are made in cash and allocated to the funds selected by the employee. Company contributions to the plan were approximately $6.0 million in 2004, $6.0 million in 2003 and $6.5 million in 2002. The plan held 4,594,544 shares of the Company's common stock at December 31, 2004. PENSION PLANS. The Company maintains pension plans for certain of its employees in the U.S. and Canada under collective bargaining agreements with unions representing these employees. The Company expects to continue to fund these plans based on governmental requirements, amounts deductible for income tax purposes and as needed to ensure that plan assets are sufficient to satisfy plan liabilities. SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS. As a result of the acquisition of American Business Products ("ABP") in 2000, the Company assumed responsibility for the ABP supplemental executive retirement plans ("SERP") which provide benefits to certain former directors and executives of ABP. For accounting purposes, these plans are unfunded; however, ABP had purchased annuities, which are included in other assets in the consolidated balance sheets. These annuities cover a portion of the liability to the participants in these plans and the income from the annuities offsets a portion of the cost of the plans. 49 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. RETIREMENT PLANS (CONTINUED) The following table sets forth the financial status of the pension plans and the SERP and the amounts recognized in the Company's consolidated balance sheets at December 31, 2004 and 2003 (in thousands):
PENSION PLANS SERP --------------------- -------------------- 2004 2003 2004 2003 -------- ------- ------- ------- Change in benefit obligation: Benefit obligation at beginning of year......... $ 45,864 $34,810 $ 8,736 $ 9,051 Service cost.................................... 1,925 1,447 -- -- Interest cost................................... 2,787 2,664 652 670 Participant contributions....................... 495 461 -- -- Actuarial loss.................................. 3,677 3,997 -- -- Foreign currency translation.................... 3,093 5,057 -- -- Benefits paid................................... (2,677) (2,572) (978) (985) -------- ------- ------- ------- Benefit obligation at end of year............. 55,164 45,864 8,410 8,736 -------- ------- ------- ------- Change in plan assets: Fair value of plan assets at beginning of year.. $ 37,677 $31,188 $ -- $ -- Actual return on plan assets.................... 3,555 3,455 -- -- Participant contributions....................... 495 461 -- -- Employer contributions.......................... 2,841 595 -- -- Foreign currency translation.................... 3,211 4,859 -- -- Benefits paid................................... (2,677) (2,881) -- -- -------- ------- ------- ------- Fair value of plan assets at end of year...... 45,102 37,677 -- -- -------- ------- ------- ------- Funded status..................................... (10,062) (8,187) (8,410) (8,736) Unrecognized actuarial loss....................... 21,450 18,540 -- -- Unrecognized prior service cost................... 510 239 -- -- Unrecognized transition asset..................... (3,606) (3,885) -- -- -------- ------- ------- ------- Net amount recognized............................. $ 8,292 $ 6,707 $(8,410) $(8,736) ======== ======= ======= ======= Amounts recognized in the consolidated balance sheets: Prepaid benefit cost.......................... $ 6,890 $ 5,100 $ -- $ -- Accrued benefit liability..................... (11,058) (7,507) (8,410) (8,736) Intangible asset.............................. 517 250 -- -- Deferred tax asset............................ 4,599 3,412 -- -- Accumulated other comprehensive loss.......... 7,344 5,452 -- -- -------- ------- ------- ------- Net amount recognized............................. $ 8,292 $ 6,707 $(8,410) $(8,736) ======== ======= ======= =======
The components of the net periodic pension expense for the pension plans and the SERP were as follows (in thousands):
2004 2003 2002 ------- ------- ------- Service cost............................................ $ 1,925 $ 1,447 $ 1,185 Interest cost on projected benefit obligation........... 3,439 3,334 3,248 Expected return on plan assets.......................... (3,447) (3,622) (3,148) Net amortization and deferral........................... (434) (482) (399) Recognized actuarial loss............................... 826 295 179 ------- ------- ------- Net periodic pension expense............................ $ 2,309 $ 972 $ 1,065 ======= ======= =======
50 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. RETIREMENT PLANS (CONTINUED) The assumptions used in computing the net pension expense and the funded status were as follows:
2004 2003 2002 -------- -------- ----- Weighted average discount rate........................ 5.75% 6.00% 6.75% Expected long-term rate of return on assets........... 8.00% 8.00% 8.75% Rate of compensation increase......................... 3.5-4% 3.5-4% 3-4%
The expected long-term rate of return on plan assets of 8.0% is based on historical returns and the expectations for future returns for each asset class in which plan assets are invested as well as the target asset allocation of the investments of the plan assets. The asset allocations at December 31, 2004 and 2003 and the target allocations for the investments were as follows:
U.S. PLANS CANADIAN PLANS ---------------------------- ---------------------------- 2004 2003 TARGET 2004 2003 TARGET ---- ---- ------ ---- ---- ------ Equity securities.................. 69% 70% 68% 47% 47% 50% Debt securities, including cash.... 25% 25% 27% 53% 53% 50% Real estate........................ 6% 5% 5% 0% 0% 0% ---- ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% 100%
The Company's investment objective is to maximize the long-term return on the pension plan assets within prudent levels of risk. Investments are diversified with a blend of equity and fixed income securities. Equity investments are diversified by including U.S. and non-U.S. stocks, growth stocks, value stocks and stocks of large and small companies. The accumulated benefit obligation and fair value of plan assets for the plans with accumulated benefit obligations in excess of plan assets were as follows (in thousands):
U.S. PLANS CANADIAN PLANS --------------------- --------------------- 2004 2003 2004 2003 ------- ------- ------- ------- Projected benefit obligation..................... $11,124 $10,556 $44,041 $35,308 Accumulated benefit obligation................... $10,977 $10,366 $38,293 $30,786 Fair value of plan assets........................ $ 8,517 $ 8,347 $36,585 $29,330
The increase in the minimum liability included in other comprehensive income was $3.1 million in 2004 and $5.2 million in 2003. The Company expects to contribute $3.1 million to its pension plans in 2005. Contributions to the SERP in 2005 will not be significant. 51 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. RETIREMENT PLANS (CONTINUED) The estimated pension benefit payments expected to be paid by the pension plans and the estimated SERP payments expected to be paid by the Company for the years 2005 through 2009, and in the aggregate for the years 2010 through 2014, are as follows (in thousands):
PENSION PLANS SERP ------------- ------ 2005 ..................................... $ 2,772 $ 985 2006 ..................................... $ 2,823 $ 985 2007 ..................................... $ 2,861 $ 985 2008 ..................................... $ 2,914 $ 985 2009 ..................................... $ 2,881 $ 985 2010 - 2014 ..................................... $15,410 $3,485
Certain other U.S. employees are included in multi-employer pension plans to which the Company makes contributions in accordance with contractual union agreements. Such contributions are made on a monthly basis in accordance with the requirements of the plans and the actuarial computations and assumptions of the administrators of the plans. Contributions to multi-employer plans were $3.0 million in 2004, $3.0 million in 2003 and $3.1 million in 2002. 17. COMMITMENTS AND CONTINGENCIES LEASES. The Company leases buildings and equipment under operating lease agreements expiring at various dates through 2011. Certain leases include renewal and purchase options. At December 31, 2004, future minimum annual payments under non-cancelable lease agreements with original terms in excess of one year were as follows (in thousands): 2005................................. $ 33,765 2006................................. 27,931 2007................................. 23,902 2008................................. 15,395 2009................................. 8,958 Thereafter........................... 4,189 -------- Total............................ $114,140 ========
Aggregate future minimum rentals to be received under noncancelable subleases as of December 31, 2004 are approximately $1.3 million. Rent expense was $37.7 million in 2004, $37.2 million in 2003 and $40.5 million in 2002. CONCENTRATIONS OF CREDIT RISK. The Company has limited concentrations of credit risk with respect to financial instruments. Temporary cash investments and other investments are placed with high credit quality institutions, and concentrations within accounts receivable are limited due to the Company's customer base and its dispersion across different industries and geographic areas. LITIGATION. The Company is party to various legal actions that are ordinary and incidental to its business. While the outcome of pending legal actions cannot be predicted with certainty, management believes the outcome of these various proceedings will not have a material adverse effect on the Company's consolidated financial condition or results of operations. 52 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. COMMITMENTS AND CONTINGENCIES (CONTINUED) TAX AUDITS. The Company's income, sales and use, and other tax returns are routinely subject to audit by various authorities. The Company believes that the resolution of any matters raised during such audits will not have a material adverse effect on the Company's financial position or results of operations. 18. EARNINGS PER SHARE Basic earnings per share exclude dilution and are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if options to issue common stock were exercised. A reconciliation of the amounts included in the computation of basic earnings (loss) per share and diluted earnings (loss) per share is as follows (in thousands, except per share amounts):
2004 2003 2002 -------- -------- -------- Numerator: Numerator for basic and diluted earnings (loss) per share--income (loss) from continuing operations........ $(20,938) $ 3,924 $(73,488) ======== ======== ======== Denominator: Denominator for basic earnings (loss) per share--weighted average shares......................................... 47,750 47,687 47,665 Effect of dilutive securities: Stock options........................................ -- 628 -- -------- -------- -------- Denominator for diluted earnings (loss) per share--adjusted weighted average shares................ 47,750 48,315 47,665 ======== ======== ======== Earnings (loss) from continuing operations per share: Basic and diluted.................................... $ (0.44) $ 0.08 $ (1.54) ======== ======== ========
In 2004 and 2002, outstanding options to purchase 1,145,000 and 50,000 common shares, respectively, were excluded from the calculation of diluted earnings per share because the effect would have been antidilutive. In 2004, 2003 and 2002, outstanding options to purchase approximately 5,847,000, 5,111,000 and 5,392,000 common shares were excluded from the calculation of net income per diluted common share because their exercise price exceeded the average market price of the common stock for the year. 19. SEGMENT INFORMATION The Company operates two business segments. The commercial segment consists of commercial printing facilities that specialize in printing of annual reports, car brochures, brand marketing collateral, catalogs, maps and guidebooks, calendars, financial communications, and facilities that produce customized envelopes for billing and remittance and direct mail advertising. The commercial segment also offers such services as design, fulfillment, e-commerce and inventory management. The resale segment includes facilities that produce specialty packaging, customized and stock labels, envelopes, and printed business documents which are sold to distributors and value-added resellers of office products. Intercompany sales were $25.2 million in 2004, $16.4 million in 2003 and $20.1 million in 2002 and are eliminated in consolidation and excluded from reported net sales. Segment operating income includes all costs and expenses directly related to the commercial or resale segment. Corporate expenses include general corporate overhead and expenses not allocated to the segments. Identifiable assets are accumulated by facility within each business segment. Corporate assets consist primarily of cash and cash equivalents, miscellaneous receivables, deferred financing fees, deferred tax assets and other assets. 53 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SEGMENT INFORMATION (CONTINUED) The following tables present certain business segment information (in thousands):
2004 2003 2002 ---------- ---------- ---------- Net sales: Commercial................................. $1,329,778 $1,272,525 $1,268,367 Resale..................................... 413,136 399,139 460,338 ---------- ---------- ---------- Total...................................... $1,742,914 $1,671,664 $1,728,705 ========== ========== ========== Operating income (loss): Commercial................................. $ 50,538 $ 58,704 $ 1,513 Resale..................................... 43,102 44,703 43,298 Corporate(a)............................... (20,905) (23,192) (61,267) ---------- ---------- ---------- Total...................................... $ 72,735 $ 80,215 $ (16,456) ========== ========== ========== Restructuring, asset impairment and other charges: Commercial................................. $ 4,158 $ 1,198 $ 44,894 Resale..................................... -- 332 6,639 Corporate.................................. 1,249 5,330 23,018 ---------- ---------- ---------- Total...................................... $ 5,407 $ 6,860 $ 74,551 ========== ========== ========== Significant noncash charges: Commercial................................. $ 3,706 $ -- $ 14,015 Resale..................................... -- -- 1,650 Corporate.................................. 295 -- 25,378 ---------- ---------- ---------- Total...................................... $ 4,001 $ -- $ 41,043 ========== ========== ========== Depreciation and intangible amortization: Commercial................................. $ 42,355 $ 36,428 $ 36,014 Resale..................................... 9,574 9,106 11,389 Corporate(b)............................... 1,054 2,434 2,652 ---------- ---------- ---------- Total...................................... $ 52,983 $ 47,968 $ 50,055 ========== ========== ========== Capital expenditures: Commercial................................. $ 22,032 $ 28,507 $ 22,949 Resale..................................... 3,365 3,076 7,668 Corporate.................................. 2,038 19 279 ---------- ---------- ---------- Total...................................... $ 27,435 $ 31,602 $ 30,896 ========== ========== ========== Net sales by product line: Commercial printing........................ $ 821,332 $ 777,639 $ 769,930 Envelopes.................................. 719,465 693,929 754,238 Business forms and labels.................. 202,117 200,096 204,537 ---------- ---------- ---------- Total...................................... $1,742,914 $1,671,664 $1,728,705 ========== ========== ==========
54 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31 --------------------------- 2004 2003 ---------- ---------- Identifiable assets: Commercial........................................ $ 829,682 $ 785,649 Resale............................................ 271,217 261,619 Corporate......................................... 62,877 60,125 ---------- ---------- Total............................................. $1,163,776 $1,107,393 ========== ========== - -------- (a) Includes $5.3 million for the settlement of a lawsuit in 2003. In 2002, corporate expenses includes the $6.4 million loss on assets held for sale and the $12.8 million impairment on operations formerly held for sale. (b) Includes adjustments to depreciation for assets held for sale in 2002.
Geographic information for 2004, 2003 and 2002 and at December 31, 2004 and 2003, is presented below (in thousands):
2004 2003 2002 ---------- ---------- ---------- Net sales: U.S........................................ $1,548,080 $1,482,443 $1,561,859 Canada..................................... 194,834 189,221 166,846 ---------- ---------- ---------- Total...................................... $1,742,914 $1,671,664 $1,728,705 ========== ========== ========== Long-lived assets(a): U.S........................................ $ 589,389 $ 597,713 Canada..................................... 115,597 109,606 ---------- ---------- Total...................................... $ 704,986 $ 707,319 ========== ========== - -------- (a) Property, plant and equipment and intangible assets.
55 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 2004 Net sales........................................... $423,742 $409,396 $428,099 $481,677 Gross profit........................................ 88,420 83,634 84,503 92,836 Income (loss) from continuing operations............ (16,535) (3,296) 2,490 (3,597) Gain (loss) on discontinued operations.............. -- 1,230 -- -- -------- -------- -------- -------- Net income (loss)................................... $(16,535) $ (2,066) $ 2,490 $ (3,597) ======== ======== ======== ======== Earnings (loss) per share--basic and diluted: Income (loss) from continuing operations........ $ (0.35) $ (0.07) $ 0.05 $ (0.08) Discontinued operations......................... -- 0.03 -- -- -------- -------- -------- -------- Net income (loss) per share--basic and diluted.. $ (0.35) $ (0.04) $ 0.05 $ (0.08) ======== ======== ======== ======== FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 2003 Net sales........................................... $427,320 $407,826 $412,218 $424,300 Gross profit........................................ 83,920 79,121 81,877 89,628 Income (loss) from continuing operations............ 532 (1,681) 2,172 2,901 Gain (loss) on discontinued operations.............. 2,500 (581) -- (371) Cumulative effect of change in accounting principle......................................... (322) -- -- -- -------- -------- -------- -------- Net income (loss)................................... $ 2,710 $ (2,262) $ 2,172 $ 2,530 ======== ======== ======== ======== Earnings (loss) per share--basic and diluted: Income (loss) from continuing operations........ $ 0.01 $ (0.04) $ 0.05 $ 0.06 Discontinued operations......................... 0.05 (0.01) -- (0.01) Cumulative effect of change in accounting principle..................................... -- -- -- -- -------- -------- -------- -------- Net income (loss) per share--basic and diluted....................................... $ 0.06 $ (0.05) $ 0.05 $ 0.05 ======== ======== ======== ========
56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES The management of the Company, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were sufficiently effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and instructions for Form 10-K. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING No change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended), occurred during the fourth quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Management's Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth in Part II, Item 8 of the Annual Report on Form 10-K. ITEM 9B. OTHER INFORMATION None. 57 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Under the terms of the Company's Articles of Incorporation and Bylaws, each of the Directors named below is to serve until the next annual meeting of stockholders.
DIRECTOR NAME AGE POSITION SINCE(1) - ---- --- -------- --------- Paul V. Reilly.................... 52 Director, CEO and President 1998 Thomas E. Costello(3)(5).......... 65 Director 2003 Paul F. Kocourek(2)(4)............ 54 Director 2004 Martin J. Maloney(2)(4)........... 60 Director 2003 David M. Olivier(3)(5)............ 61 Director 2003 Jerome W. Pickholz(2)(4).......... 72 Director 1994 Alister W. Reynolds(3)(5)......... 47 Director 2002 Susan O. Rheney(2)(4)............. 45 Chairman 2003 Wellington E. Webb(3)(5).......... 64 Director 2004 Gordon A. Griffiths............... 62 President--Commercial Segment Allen C. Conway, Sr. ............. 47 President--Resale Segment Herbert H. Davis III.............. 57 Senior Vice President--Corporate Development and Chief Legal Officer Michel P. Salbaing................ 59 Senior Vice President--Finance and Chief Financial Officer Brian P. Hairston................. 47 Vice President--Human Resources William W. Huffman, Jr. .......... 56 Vice President--Corporate Controller D. Robert Meyer, Jr. ............. 48 Vice President--Treasurer Matthew H. Mitchell............... 40 Vice President--Chief Information Officer Keith T. Pratt.................... 58 Vice President--Purchasing and Supply Chain Management Wayne M. Wolberg.................. 55 Vice President--General Auditor Mark L. Zoeller................... 45 Vice President--General Counsel and Secretary - -------- (1) Directors serve one year terms. (2) Member of the Governance and Nominating committee. (3) Member of the Compensation and Human Resources committee. (4) Member of the Audit committee. (5) Member of the Employee Health and Safety committee.
PAUL V. REILLY, age 52, served as our President, Chief Executive Officer and Chairman of the Board from 2001 until January 2005 when he announced his resignation. Mr. Reilly will continue to serve as Chief Executive Officer and President to assist with the transition to his successor. He has been a Director since 1998. Mr. Reilly was our President and Chief Operating Officer from 1998 to 2001 and was Senior Vice President--Finance and Chief Financial Officer from 1995 to 1998. Mr. Reilly spent 14 years with Polychrome Corporation, a prepress supplier to the printing industry, where he held a number of positions including Assistant Corporate Treasurer, Corporate Treasurer, Vice President and Chief Financial Officer and General Manager of United States operations. Mr. Reilly is a Certified Public Accountant. THOMAS E. COSTELLO, age 65, became a Director in 2003. From 1992 through retirement in 2002, Mr. Costello served as Chief Executive Officer of xpedx, a multi-billion dollar distributor of printing and packaging products, and Senior Vice President of International Paper Co. xpedx is a wholly owned 58 division of International Paper. He is also a Director of Cadmus Communications Corporation, a customized content management, publisher's fulfillment and custom packaging fulfillment company, Intertape Polymer Group, a manufacturer of tape for plastic packaging, and Eagle Hospitality Properties, Inc., a real estate investment trust. Mr. Costello is a member of the Compensation and Human Resources committee and Chairman of the Employee Health and Safety committee of the Board of Directors. PAUL F. KOCOUREK, age 54, became a Director in August 2004. Mr. Kocourek has been a Senior Partner with Booz/Allen/Hamilton, a global strategy and technology consulting firm since 1993. Mr. Kocourek serves as Senior Partner for the strategic leadership practice, and previously served as Global Managing Partner of the Asia Pacific region and Global Managing Partner of financial services. From 1993 through 1995, Mr. Kocourek served on the Board of Directors of Booz/Allen/Hamilton. He received an MBA in finance and accounting from the Wharton School of Business. Mr. Kocourek is a member of the Audit committee and the Governance and Nominating committee of the Board of Directors. MARTIN J. MALONEY, age 60, became a Director in 2003. Since 1984 Mr. Maloney has served as Chairman and Co-Founder of Broadford and Maloney, Inc., an agency specializing in public relations, advertising and marketing communications for graphic arts related companies. Since 1989 he has served on the Board of Advisors of the New York University Center for Graphic Arts Management. He is also a Director of the Association of Graphic Communications and serves on the Board of Governors of Legatus. Mr. Maloney served as Internal Auditor and prepared annual reports for companies for over 20 years. Mr. Maloney is Chairman of the Governance and Nominating committee and a member of the Audit committee of the Board of Directors. DAVID M. OLIVIER, age 61, became a Director in 2003. Mr. Olivier was with Wyeth Corporation, a pharmaceutical company, and its affiliated entities for over 35 years when he retired in 2002. He was a member of the executive and finance committees and a corporate senior vice president at the time of his retirement. He is a Director and advisor to Taratec Corp., a pharmaceutical compliance company, and chairman of Alterna, LLC, a private equity investment company. He received an MBA from the University of California at Berkeley. Mr. Olivier is a member of the Compensation and Human Resources committee and the Employee Health and Safety committee of the Board of Directors. JEROME W. PICKHOLZ, age 72, has been a Director since 1994. Mr. Pickholz is chairman emeritus of Ogilvy & Mather Direct Worldwide, a direct advertising agency, where he served as chief executive officer from 1978 until 1994, and as chairman in 1994 and 1995. Mr. Pickholz served as founder and chairman of Pickholz, Tweedy, Cowan, L.L.C., a marketing communications company, from 1996 until 2001 and he has been a direct marketing consultant since 2001. He also serves as a Director of Gift Certificates.com, Inc., a provider of gift certificate products and services. Mr. Pickholz is a Certified Public Accountant and serves as chairman of our Audit committee and a member of our Governance and Nominating committee of the Board of Directors. ALISTER W. REYNOLDS, age 47, has been a director since 2002. In 2004 Mr. Reynolds concluded a 22 year career with Quest Diagnostics, Inc., a provider of diagnostic laboratory testing services, and its former parent company, Corning Incorporated. Mr. Reynolds served in various positions including Senior Vice President of Operations and, most recently, Senior Advisor to the Office of the Chairman. Mr. Reynolds received an MBA in finance from Cornell University. He is also a Director of three privately held companies: SomaLogic Incorporated, Healthcare Waste Solutions, and Viecore Incorporated. Mr. Reynolds serves as Chairman of the Compensation and Human Resources committee and is a member of the Employee Health and Safety committee of the Board of Directors. SUSAN O. RHENEY, age 45, has been a Director since 2003 and was appointed Chairman of the Board in January 2005. Ms. Rheney previously served as a Director of Cenveo from 1993 to 1997. She was a principal in The Sterling Group, L.P., a private investment company, from 1992 to 2002. Ms. Rheney is a Director of Genesis Energy LP, an oil pipeline company, and Texas Petrochemical Holdings, Inc., a chemical manufacturer. Texas Petrochemical filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in July 2003. In connection 59 with this filing, the holder of discount notes issued by Texas Petrochemical filed a lawsuit against the Directors and officers of Texas Petrochemical in December 2003, which suit has been administratively terminated by the bankruptcy court. Ms. Rheney received an MBA from Harvard University. She is a Certified Public Accountant and was an auditor for the accounting firm of Deloitte & Touche. Ms. Rheney is a member of the Audit committee and the Governance and Nominating committee of the Board of Directors. WELLINGTON E. WEBB, age 64, has been a Director since August 2004. Former Mayor Webb was elected Mayor of Denver in 1991 and reelected in 1995 and 1999. In 2003 he established a consulting service, Webb Group International LLC, which assists cities with local economic projects and economic opportunities in Asia and Africa. He is also a Director of Maximus Corporation, which provides services to governmental agencies, the National Homebuyers Association and The Labor's Community Agency and is the Vice Chair of the Democratic National Committee. Former Mayor Webb is a member of the Compensation and Human Resources committee and the Employee Health and Safety committee of the Board of Directors. ALLEN C. CONWAY, SR. age 47, has served as Executive Vice President of Cenveo and President of our Resale Segment since September 2004. Mr. Conway has served Cenveo and its predecessor companies for over 26 years, including as Vice President of our Printxcel division from 2000 to 2003 and Executive Vice President of the Custom division of our Resale Segment from 2003 until September 2004 when he became President of our Resale Segment. GORDON A. GRIFFITHS, age 62, served as Senior Vice President since 2002 and as President of our Commercial Segment since our reorganization in October 2003. From April 2002 until October 2003, he served as President and Chief Executive Officer of our former Commercial Printing Division. From February 2000 until April 2002, Mr. Griffiths was Chairman and Chief Executive Officer of Pareto Corporation, a Canadian knowledge services provider. He continues to serve as Director of Pareto Corporation. In 2000, Mr. Griffiths co-founded the Caxton Group, a marketing services agency, which became a public company in 2001. He was President of St. Joseph Corporation, Canada's largest privately owned printer, from May 1997 until February 2000. HERBERT H. "WOODY" DAVIS III, age 57, has been Senior Vice President--Corporate Development and Chief Legal Officer since August 2001. Before that, Mr. Davis was in the private practice of law and was a partner at the Denver, Colorado law firm of Rothgerber Johnson & Lyons LLP for over 20 years. Mr. Davis remains "Of Counsel" at Rothgerber Johnson & Lyons LLP. MICHEL P. SALBAING, age 59, has been Senior Vice President--Finance and Chief Financial Officer since November 2000. From 1996 to November 2000, Mr. Salbaing was with Quebecor World, then the largest North American printer, where he held a number of positions including Chief Financial Officer of the overall corporation, President and Chief Executive Officer of Quebecor Printing Europe and Senior Vice President and Chief Financial Officer of Quebecor World North America. Before 1996 Mr. Salbaing held various senior financial positions with three large Canadian manufacturing firms and spent eight years with Ernst & Young LLP. Mr. Salbaing is a member of the Canadian Institute of Chartered Accountants. BRIAN P. HAIRSTON, age 47, has been Vice President--Human Resources since August 2002. From April 2001 through August 2002, he was a human resources consultant for a variety of firms. From October 1999 until April 2001, he was Senior Vice President--Human Resources for Kellogg Corporation, a cereal producer. From 1997 to 1999, he served as Vice President--Human Resources for CitiGroup, a financial institution. WILLIAM W. HUFFMAN, JR., age 56, has been Vice President--Corporate Controller since November 2000. From January 1999 to November 2000, he was Vice President--Chief Financial Officer of the Company's commercial printing division. In 1997 and 1998, he was a financial consultant. Mr. Huffman began his career with the accounting firm of Coopers & Lybrand and is a Certified Public Accountant. 60 D. ROBERT MEYER, JR., age 48, has been Vice President--Treasurer since 1998. From 1994 to 1998, Mr. Meyer was a partner in the tax department of the accounting firm of Deloitte & Touche LLP. Mr. Meyer is a licensed attorney, Certified Public Accountant and Certified Financial Planner. MATTHEW H. MITCHELL, age 40, has been Vice President--Chief Information Officer since December 2003. From 1996 to November 2003, he served as Vice President--Information Services with Aramark Educational Resources, Inc., an educational service provider. KEITH T. PRATT, age 58, has been Vice President--Purchasing and Supply Chain Management since 1998. From 1994 to 1998, Mr. Pratt was Vice President of Material Sourcing and Logistics of Ply Gem Industries, a subsidiary of Nortek, Inc., a building products manufacturer. WAYNE M. WOLBERG, age 55, has been Vice President--General Auditor since October 2001. From June 2000 to April 2001, he served as Vice President--Finance of AT&T Broadband. Mr. Wolberg was Vice President and General Auditor of MediaOne from 1996 to 2000. He is a Certified Management Accountant. MARK L. ZOELLER, age 45, has been Vice President--General Counsel and Secretary since January 2003. He joined the Company in 1997 as Corporate Counsel, was Assistant General Counsel from May 2000 to May 2001 and was Vice President--Corporate Development from May 2001 until January 2003. He is a licensed attorney. The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD COMPENSATION--Corporate Governance, --Nomination of Directors, and --Board Procedures and Committees," and "OTHER INFORMATION--Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy Statement filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting of Stockholders are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD COMPENSATION--Board Compensation," and "--Compensation and Human Resources Committee Interlocks and Insider Participation," "COMPENSATION OF EXECUTIVE OFFICERS," appearing in the Company's Proxy Statement filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting of Stockholders are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The sections captioned "OWNERSHIP OF VOTING SECURITIES" and "COMPENSATION OF EXECUTIVE OFFICERS--Equity Compensation Plan Information" appearing in the Company's Proxy Statement filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting of Stockholders are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Executive Agreements--Loan to Mr. Salbaing" appearing in the Company's Proxy Statement filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The sections captioned "INDEPENDENT PUBLIC AUDITORS" and "REPORT OF THE AUDIT COMMITTEE" appearing in the Company's Proxy Statement filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting of Stockholders are incorporated herein by reference. 61 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) FINANCIAL STATEMENTS Included in Part II, Item 8 of this Report. (a)(2) FINANCIAL STATEMENT SCHEDULES Included in Part IV of this Report:
PAGE ---- Schedule I Valuation and Qualifying Accounts for the Years Ended December 31, 2004, 2003, and 2002......................... 66
(a)(3) EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Articles of Incorporation of the Company--incorporated by reference from Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1997. 3.2 Articles of Amendment to the Articles of Incorporation of the Company dated May 17, 2004--incorporated by reference to Exhibit 3.2 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 3.3* Bylaws of the Company--as amended February 24, 2005. 3.4 Certificate of Amendment of Certificate of Incorporation of Cenveo Corporation (formerly known as Mail-Well I Corporation) dated May 14, 2004 --incorporated by reference to Exhibit 3.4 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 3.5 Bylaws of Mail-Well I Corporation--incorporated by reference from Mail-Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No. 333-74409). 4.1 Indenture dated as of March 13, 2002 between Mail-Well I Corporation and State Street Bank and Trust Company, as Trustee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.30 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.2 Form of Senior Note and Guarantee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount 9 5/8% due 2012--incorporated by reference to Exhibit 10.31 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.3 Indenture dated as of February 4, 2004 between Mail-Well I Corporation and U.S. Bank National Association, as Trustee, and Form of Senior Subordinated Note and Guarantee relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.5 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 4.4 Registration Rights Agreement dated February 4, 2004, between Mail-Well I Corporation and Credit Suisse First Boston, as Initial Purchaser, relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.6 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 62 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of its officers and directors--incorporated by reference from Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.2 Form of Indemnity Agreement between Mail-Well I Corporation and each of its officers and directors--incorporated by reference from Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of February 23, 1994 and related Employee Stock Ownership Plan Trust Agreement--incorporated by reference from Exhibit 10.19 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated by reference from Exhibit 10.20 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.5 Form of Mail-Well, Inc. Incentive Stock Option Agreement--incorporated by reference from Exhibit 10.22 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.6 Form of Mail-Well, Inc. Nonqualified Stock Option Agreement--incorporated by reference from Exhibit 10.23 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.7 1997 Non-Qualified Stock Option Agreement--incorporated by reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q for the quarter ended March 31, 1997. 10.8 Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive Stock Option Agreement--incorporated by reference from Exhibit 10.59 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.9 Mail-Well, Inc. 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.10 Form of Non-Qualified Stock Option Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.11 Form of Incentive Stock Option Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.12 Form of Restricted Stock Award Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.13 Second Amended and Restated Equipment Lease dated as of August 6, 2002 between Wells Fargo Bank Northwest, National Association, as trustee under MW 1997-1 Trust, and Mail-Well I Corporation--incorporated by reference to Exhibit 10.26 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.14 Second Amended and Restated Guaranty Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.15 Second Amended and Restated Participation Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet Capital Corporation as Arranger and Agent, and 63 EXHIBIT NUMBER DESCRIPTION - ------- ----------- the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.16 Amendment Agreement No. 1 dated as of September 25, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.29 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.17 Employment and Executive Severance Agreement dated as of March 10, 2003, between the Company and Paul V. Reilly--incorporated by reference to Exhibit 10.26 of the Company's Annual Form 10-K filed March 31, 2003. 10.18 Form of Executive Severance Agreement entered into between the Company and each of the following: Michel Salbaing, Gordon Griffiths, Brian Hairston, Keith Pratt, William Huffman, D. Robert Meyer and Mark Zoeller--incorporated by reference to Exhibit 10.27 of the Company's Annual Form 10-K filed March 31, 2003. 10.19 Amendment Agreement No. 2 dated as of March 25, 2004 among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantor, Fleet Capital Corporation as Agent, and the Trust Purchasers named therein--incorporated by reference to Exhibit 10.21 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.20 Second Amended and Restated Credit Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.22 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.21 Second Amended and Restated Security Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.23 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.22 Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as amended --incorporated by reference to Exhibit 10.24 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 10.23* Amendment No. 1 to Second Amended and Restated Credit Agreement dated February 8, 2005 among Cenveo, Inc., Cenveo Corporation, certain subsidiaries of Cenveo Corporation, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders. 21* Subsidiaries of the Company. 23* Consent of Ernst & Young LLP. 24 Power of Attorney--incorporated by reference to page 68. 31.1* Certification of Periodic Report by Paul V. Reilly, Chief Executive Officer and President, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 64 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 32.1** Certification of Periodic Report by Paul V. Reilly, Chief Executive Officer and President, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Periodic Report by Michel P. Salbaing, Senior Vice President--Finance and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ------- * Filed herewith. ** Furnished herewith. (b) EXHIBITS FILED Included in Item 15(a)(3) of this Report. (c) FINANCIAL STATEMENT SCHEDULES FILED Included in Item 15(a)(2) of this Report. 65 SCHEDULE I CENVEO, INC. AND SUBSIDIARIES SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (amounts in thousands)
FOR THE YEAR ENDED DECEMBER 31 --------------------------------------- 2004 2003 2002 ------- ------- ------- ACCOUNTS RECEIVABLE ALLOWANCES Balance at beginning of year......................... $ 3,984 $ 4,673 $ 5,385 Charged to costs and expenses........................ 3,335 3,276 4,026 Recoveries and other charges(2)...................... (133) (72) 552 Deductions(1)........................................ (2,448) (3,893) (5,290) ------- ------- ------- Balance at end of year............................... $ 4,738 $ 3,984 $ 4,673 ======= ======= ======= INVENTORY RESERVES Balance at beginning of year......................... $ 4,995 $ 5,668 $ 4,636 Charged to costs and expenses........................ 1,127 2,072 2,830 Recoveries and other charges(2)...................... (1,051) (1,511) (602) Deductions(1)........................................ (371) (1,234) (1,196) ------- ------- ------- Balance at end of year............................... $ 4,700 $ 4,995 $ 5,668 ======= ======= ======= - -------- (1) Accounts and inventories written off. (2) Other charges includes acquired balances in 2004 and changes attributable to foreign currency translation.
66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Englewood, state of Colorado, on February 28, 2004. CENVEO, INC. By: /s/ Paul V. Reilly ------------------------------------------- Paul V. Reilly, Director, Chief Executive Officer and President (Principal Executive Officer) By: /s/ Michel P. Salbaing ------------------------------------------- Michel P. Salbaing, Senior Vice President-- Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 67 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Herbert H. Davis III as attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Paul V. Reilly ---------------------------- Paul V. Reilly Director, Chief Executive February 28, 2005 Officer & President /s/ Thomas E. Costello ---------------------------- Thomas E. Costello Director February 28, 2005 /s/ Paul F. Kocourek ---------------------------- Paul F. Kocourek Director February 28, 2005 /s/ Martin J. Maloney ---------------------------- Martin J. Maloney Director February 28, 2005 /s/ David M. Olivier ---------------------------- David M. Olivier Director February 28, 2005 /s/ Jerome W. Pickholz ---------------------------- Jerome W. Pickholz Director February 28, 2005 /s/ Alister W. Reynolds ---------------------------- Alister W. Reynolds Director February 28, 2005 /s/ Susan O. Rheney ---------------------------- Susan O. Rheney Director, Chairman February 28, 2005 /s/ Wellington E. Webb ---------------------------- Wellington E. Webb Director February 28, 2005
68 EX-3.3 2 exh3p3.txt Exhibit 3.3 BYLAWS OF CENVEO, INC. (A COLORADO CORPORATION) AS AMENDED EFFECTIVE FEBRUARY 25, 2005 TABLE OF CONTENTS Page ---- ARTICLE I OFFICES Section 1.1. Registered Office and Agent........................ 1 Section 1.2. Offices............................................ 1 ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1. Annual Meetings.................................... 1 Section 2.2. Special Meetings................................... 1 Section 2.3. Notice of Meetings................................. 2 Section 2.4. Quorum............................................. 2 Section 2.5. Adjournments....................................... 2 Section 2.6. Voting; Proxies.................................... 2 Section 2.7. Action by Consent of Stockholders.................. 2 Section 2.8. List of Stockholders Entitled to Vote.............. 3 Section 2.9. Fixing Record Date................................. 3 Section 2.10. Business to be Brought Before the Annual Meeting... 3 ARTICLE III BOARD OF DIRECTORS Section 3.1. Number; Qualifications............................. 4 Section 3.2. Vacancies.......................................... 4 Section 3.3. Powers............................................. 4 Section 3.4. Resignations....................................... 4 Section 3.5. Regular Meetings................................... 5 Section 3.6. Special Meetings................................... 5 Section 3.7. Notice of Meetings................................. 5 Section 3.8. Quorum; Vote Required for Action................... 5 Section 3.9. Action by Consent of Directors..................... 5 Section 3.10. Telephonic Meetings Permitted...................... 5 Section 3.11. Compensation....................................... 6 Section 3.12. Removal............................................ 6 Section 3.13. Committees......................................... 6 Section 3.14. Nomination of Directors............................ 6 Section 3.15. Director Emeritus.................................. 7 -i- ARTICLE IV NOTICES Section 4.1. Notices............................................ 7 Section 4.2. Waiver of Notice................................... 8 ARTICLE V OFFICERS Section 5.1. Election; Qualifications; Term of Office; Resignation; Removal; Vacancies.................... 8 Section 5.2. Powers and Duties.................................. 8 ARTICLE VI STOCK Section 6.1. Certificates....................................... 8 Section 6.2. Certificates Issued for Partly Paid Shares......... 9 Section 6.3. Facsimile Signatures............................... 9 Section 6.4. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates....................... 9 Section 6.5. Transfer of Stock.................................. 9 ARTICLE VII GENERAL PROVISIONS Section 7.1. Dividends.......................................... 9 Section 7.2. Fiscal Year........................................ 9 Section 7.3. Seal............................................... 10 Section 7.4. Amendments......................................... 10 ARTICLE VIII INDEMNIFICATION -ii- * * * * * BYLAWS OF CENVEO, INC. * * * * * ARTICLE I OFFICES Section 1.1. Registered Office and Agent. The initial ----------- --------------------------- registered office shall be 23 Inverness Way East, Englewood, Colorado 80112, and the name of the initial registered agent of the corporation at such address shall be Roger Wertheimer, Vice-President, General Counsel and Secretary. Section 1.2. Offices. The corporation may also have ----------- ------- offices at such other places both within and without the State of Colorado as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1. Annual Meetings. Annual meetings of ----------- --------------- stockholders shall be held at such date, time and place, either within or without the State of Colorado, as may be designated from time to time by the Board of Directors and stated in the notice of the meeting, for the purpose of electing a Board of Directors, and transacting such other business as may properly be brought before the meeting. Section 2.2. Special Meetings. Special meetings of the ----------- ---------------- stockholders, for any purpose or purposes, unless otherwise provided by statute or by the Articles of Incorporation, may be called at any time by the President and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. 1 Section 2.3. Notice of Meetings. Whenever stockholders are ----------- ------------------ required or permitted to take action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 2.4. Quorum. Except as otherwise provided by law ----------- ------ or by the Articles of Incorporation or these Bylaws, the presence in person or by proxy of the holders of a majority of the outstanding shares of stock of the corporation entitled to vote thereat shall constitute a quorum at each meeting of the stockholders and all questions shall be decided by a majority of the shares so represented in person or by proxy at the meeting and entitled to vote thereat. The stockholders present at any duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 2.5. Adjournments. Notwithstanding any other ----------- ------------ provisions of the Articles of Incorporation or these Bylaws, the holders of a majority of the shares of stock of the corporation entitled to vote at any meeting, present in person or represented by proxy, whether or not a quorum is present, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting originally called; provided, however, that if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. Section 2.6. Voting; Proxies. Unless otherwise provided in ----------- --------------- the Articles of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable or unless otherwise made irrevocable by law. The notice of every meeting of the stockholders may be accompanied by a form of proxy approved by the Board of Directors in favor of such person or persons as the Board of Directors may select. Section 2.7. Action by Consent of Stockholders. Unless ----------- --------------------------------- otherwise provided in the Articles of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all of the holders of outstanding stock entitled to vote thereon. 2 Section 2.8. List of Stockholders Entitled to Vote. The ----------- ------------------------------------- officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.9. Fixing Record Date. In order that the ----------- ------------------ corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. The Board of Directors shall not close the books of the corporation against transfer of shares during the whole or any part of such period. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 2.10. Business to be Brought Before the Annual ------------ ---------------------------------------- Meeting. To be properly brought before the annual meeting of stockholders, - ------- business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in this Section 2.10 of Article II, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 2.10 of Article II. In addition to any other applicable requirements, for business to be brought before an annual meeting by a stockholder of the corporation, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation in the case of each subsequent annual meeting of stockholders. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the acquisition date, the class and the number of shares of voting stock of the corporation which are owned beneficially by the stockholder, (iv) any material interest of the stockholder in such business, and (v) a representation that the stockholder intends to appear in person or by proxy at the meeting to bring the proposed business before the meeting. 3 Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.10. The chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.10 of Article II, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 2.10 of Article II, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 2.10. ARTICLE III BOARD OF DIRECTORS Section 3.1. Number; Qualifications. The number of ----------- ---------------------- directors shall be as fixed in such a manner as may be determined by the vote of not less than a majority of the directors then in office, but shall not be less than one. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3.2, and each director elected shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. A director need not be a stockholder of the corporation. A majority of the directors may elect from its members a chairman, who shall also serve as chairman of any annual or special meeting of the stockholders. The chairman, if any, shall hold this office until his successor shall have been elected and qualified. Section 3.2. Vacancies. Any vacancy in the Board of ----------- --------- Directors, including vacancies resulting from any increase in the authorized number of directors may be filled by a majority of the remaining directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual meeting of stockholders and their successors are duly elected and qualified, or until their earlier death, resignation or removal. Section 3.3. Powers. The business affairs and property of ----------- ------ the corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 3.4. Resignations. Any director may resign at any ----------- ------------ time by written notice to the corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 4 Section 3.5. Regular Meetings. Regular meetings of the ----------- ---------------- Board of Directors shall be held at such place or places within or without the State of Colorado, at such hour and on such day as may be fixed by resolution of the Board of Directors, without further notice of such meetings. Section 3.6. Special Meetings. Special meetings of the ----------- ---------------- Board of Directors may be held whenever called by (i) the Chairman of the Board; (ii) the President; (iii) the President or Secretary on the written request of a majority of the Board of Directors; or (iv) resolution adopted by the Board of Directors. Special meetings may be held within or without the State of Colorado as may be stated in the notice of the meeting. Section 3.7. Notice of Meetings. Written notice of the ----------- ------------------ time, place and general nature of the business to be transacted at all special meetings of the Board of Directors must be given to each director at least one day prior to the day of the meeting; provided, however, that notice of any meeting need not be given to any director if waived by him in writing, or if he shall be present at such meeting, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the grounds that the meeting is not lawfully called or convened. Section 3.8. Quorum; Vote Required for Action. At all ----------- -------------------------------- meetings of the Board of Directors, a majority of directors then in office shall constitute a quorum for the transaction of business and, except as otherwise provided by law or these Bylaws, the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors; but a lesser number may adjourn the meeting from day to day, without notice other than announcement at the meeting, until a quorum shall be present. Directors may participate in any meeting of the directors, and members of any committee of directors may participate in any meeting of such committee, by means of conference telephone or similar communications equipment by means of which all persons participating in such meeting can hear each other, and such participation shall constitute presence in person at such meeting. Section 3.9. Action by Consent of Directors. Any action ----------- ------------------------------ required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the board or the committee of the board, as the case may be, consent thereto in writing, which may be in counterparts, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or the committee thereof. Such writing(s) shall be manually executed if practicable, but if circumstances so require, effect shall be given to written consent transmitted by telegraph, telex, telecopy or similar means of visual data transmission. Section 3.10. Telephonic Meetings Permitted. Members of ------------ ----------------------------- the Board of Directors, or any committee designated by the board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Bylaw shall constitute presence in person at such meeting. 5 Section 3.11. Compensation. Directors shall be entitled to ------------ ------------ such compensation for their services as may be approved by the Board of Directors, including, if so approved by resolution of the Board of Directors, a fixed sum and expenses of attendance at each regular or special meeting or any committee thereof. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 3.12. Removal. Except as provided in the Articles ------------ ------- of Incorporation or by law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. The notice calling such meeting shall state the intention to act upon such matter, and, if the notice so provides, the vacancy or vacancies caused by such removal may be filled at such meeting by a vote of the majority of the shares entitled to vote at an election of directors. Section 3.13. Committees. The Board of Directors may, by ------------ ---------- resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee. The alternate members of any committee may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have such power or authority in reference to amending the Articles of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Articles of Incorporation expressly so provide, no committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Members of special or standing committees shall be entitled to receive such compensation for serving on such committees as the Board of Directors shall determine. Section 3.14. Nomination of Directors. Only persons who ------------ ----------------------- are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in this Section 3.14 of Article III, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 3.14 of Article III. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation (i) with respect to an election to be held at the annual meeting of the stockholders of 6 the corporation, not later than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation, and (ii) with respect to an election to be held at a special meeting of stockholders of the corporation for the election of directors, not later than the closing of business on the 10th day following the day on which such notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to the person that is required to be disclosed in solicitations for proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder, and (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. In the event that a person is validly designated as nominee to the Board and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee. No person shall be eligible to serve as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 3.14 of Article III. The chairman of the meeting of stockholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3.14 of Article III, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3.14 of Article III. Section 3.15. Director Emeritus. The Board of Directors ------------ ----------------- may, from time to time, by majority vote, elect one or more of its former directors to serve as director emeritus for one or more consecutive one-year terms or until earlier resignation or removal by a majority of the Board of Directors. Directors emeritus may be asked to serve as consultants to the Board of Directors and may be appointed by the Board of Directors to serve as consultants to committees of the Board of Directors. Directors emeritus may be invited to attend meetings of the Board of Directors or any committee of the Board of Directors for which they have been appointed to serve as consultants. Directors emeritus shall not be permitted to vote on matters brought before the Board of Directors or any committee thereof and shall not be counted for the purpose of determining whether a quorum of the Board or a committee is present. Directors emeritus will be entitled to receive fees and reimbursement for expenses of meeting attendance, and to participate in the long-term incentive programs offered to directors, as recommended by the Chairman and approved by the Compensation Committee of the Board of Directors. Directors emeritus may be removed at any time by the Board of Directors. A director emeritus (whether or not a former employee) shall not be considered an officer, employee or agent of the Company for any purpose, and shall not have any of the responsibilities or liabilities of a director, nor any of a director's rights, powers or privileges. Reference in these bylaws of "directors" shall not mean or include emeritus directors. ARTICLE IV NOTICES Section 4.1. Notices. Whenever any notice is required to ----------- ------- be given under the provisions of these Bylaws or of the Articles of Incorporation to any director or stockholder, such notice must be in writing and may be given in person, in writing or by mail, telegram, telecopy or other similar means of visual communication, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage or other transmittal charges thereon prepaid. Such notice shall be deemed to be given (i) if by mail, at the time when the same shall be deposited in the United States mail and (ii) otherwise, when such notice is transmitted. 7 Section 4.2. Waiver of Notice. Whenever any notice is ----------- ---------------- required to be given under the provisions of the Bylaws or of the Articles of Incorporation to any director or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 5.1. Election; Qualifications; Term of Office; ----------- ----------------------------------------- Resignation; Removal; Vacancies. The officers of the corporation shall be - ------------------------------- elected or appointed by the Board of Directors and may include, at the discretion of the Board, a Chairman of the Board, a President, a Secretary, a Treasurer and such Executive, Senior or other Vice Presidents and other officers as may be determined by the Board of Directors. Any number of offices may be held by the same person. The officers of the corporation shall hold office until their successors are chosen and qualified, except that any officer may resign at any time by written notice to the corporation and the Board of Directors may remove any officer at any time at its discretion with or without cause. Any vacancies occurring in any office of the corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. Section 5.2. Powers and Duties. The officers of the ----------- ----------------- corporation shall have such powers and duties as generally pertain to their offices, except as modified herein or by the Board of Directors, as well as such powers and duties as shall be determined from time to time by the Board of Directors. The Chairman of the Board, if one is elected, and otherwise the President, shall preside at all meetings of the Board. The President shall preside at all meetings of the Stockholders. ARTICLE VI STOCK Section 6.1. Certificates. Every holder of stock in the ----------- ------------ corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, (i) the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice President and (ii) the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8 Section 6.2. Certificates Issued for Partly Paid Shares. ----------- ------------------------------------------ Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. Section 6.3. Facsimile Signatures. Any of or all the ----------- -------------------- signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 6.4. Lost, Stolen or Destroyed Stock Certificates; ----------- --------------------------------------------- Issuance of New Certificates. The Board of Directors may direct a new - ---------------------------- certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 6.5. Transfer of Stock. Upon surrender to the ----------- ----------------- corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, and subject to applicable federal and state securities laws and contractual obligations, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. ARTICLE VII GENERAL PROVISIONS Section 7.1. Dividends. Dividends upon the capital stock ----------- --------- of the corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 7.2. Fiscal Year. The fiscal year of the ----------- ----------- corporation shall be fixed by resolution of the Board of Directors. 9 Section 7.3. Seal. The seal of the corporation shall be in ----------- ---- such form as the Board of Directors shall prescribe. Section 7.4. Amendments. These Bylaws may be altered, ----------- ---------- amended or repealed or new Bylaws may be adopted by the stockholders or, unless expressly prohibited by a particular Bylaw, by the Board of Directors (i) at any regular meeting of the stockholders or of the Board of Directors (ii) or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws shall be contained in the notice of such special meeting. The power to adopt, amend or repeal Bylaws conferred upon the Board of Directors shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws. ARTICLE VIII INDEMNIFICATION The corporation shall be authorized to indemnify any person entitled to indemnity under the Colorado Business Corporation Act, as the same exists or may hereafter be amended (the "Act"), to the fullest extent permitted by the Act; provided, however, that the corporation shall not be permitted to indemnify any person in connection with any proceeding initiated by such person, unless such proceeding is authorized by a majority of the directors of the corporation. 10 EX-10.23 3 exh10p23.txt Exhibit 10.23 AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT This Amendment No. 1 to Second Amended and Restated Credit Agreement (this "Amendment"), dated as of February 8, 2005, amends that --------- certain Second Amended and Restated Credit Agreement, dated as of March 25, 2004 (as amended, the "Agreement"), among the financial institutions from --------- time to time parties hereto (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), Bank of ------ ------- America, N.A., with an office at 55 South Lake Avenue, Suite 900, Pasadena, California 91101, as administrative agent for the Lenders (in its capacity as agent, the "Agent"), Cenveo, Inc. (f/k/a Mail-Well, Inc.), a Colorado ----- corporation ("Parent"), Cenveo Corporation (f/k/a Mail-Well I Corporation), ------ a Delaware corporation ("Cenveo"), and certain subsidiaries of Cenveo ------ (Cenveo and each such subsidiary, individually, a "Borrower", and, -------- collectively, the "Borrowers"). Capitalized terms used and not otherwise --------- defined herein shall have the meanings ascribed to such terms in the Agreement. R E C I T A L S WHEREAS, Parent, the Borrowers, the Lenders and the Agent have entered into the Agreement; WHEREAS, Parent and the Borrowers desire to amend the Agreement in order to amend Section 9.1(q) of the Agreement; and WHEREAS, the Agent and the Lenders are willing to do so, subject to the terms and conditions stated herein. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Agent, the Lenders, Parent and the Borrowers hereby agree as follows. A G R E E M E N T Section 1. Amendment to the Agreement. The Agent, the Lenders, -------------------------- Parent and the Borrowers agree that the Agreement shall be amended as follows: A. Section 9.1 (q) of the Agreement is hereby amended and restated in its entirety to read as follows: (q) an event having a Material Adverse Effect occurs, or continues to exist, during an Availability Trigger Period. For purposes of this Section 9.1 (q), "Availability Trigger ----------- Period" means the period commencing upon the date, if any, upon which Availability has been less than $75,000,000 for 5 consecutive Business Days, and 1 continuing until the first day of any fiscal month on which the following is true: Availability has not been less than $75,000,000 at any time during the 30 day period ending on the immediately preceding fiscal month end. Section 2. Waiver/Consent to Stock Sale. The Lenders hereby consent ---------------------------- to the sale by Supremex, Inc. ("Supremex") of all of the issued and outstanding common stock of its wholly owned subsidiary Classic Envelope Plus, Ltd. ("Classic"), on or before February 28, 2005, for a purchase price equal to the net book value of Classic less C$25,000 (approximately C$500,000). The Lenders agree that upon the consummation of such sale, (i) Classic shall be released as a Canadian Guarantor; (ii) the proceeds of such sale need not be applied to the Revolving Loans but may be retained by Supremex subject to the terms of Sections 7.25 and 7.26 of the Agreement. Section 3. Conditions. The effectiveness of this Amendment is subject ---------- to the satisfaction of the following conditions precedent: A. Amendment. A fully executed copy of this Amendment signed --------- by Parent, the Borrowers, and the Majority Lenders shall be delivered to the Agent; B. Other Documents. Parent and the Borrowers shall have --------------- executed and delivered to the Agent such other documents and instruments as the Agent may reasonably require in furtherance of this Amendment. Section 4. Miscellaneous. ------------- A. Survival of Representations and Warranties. All ------------------------------------------ representations and warranties made in the Agreement or any other document or documents relating thereto, including, without limitation, any Loan Document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Agent or Lenders or any closing shall affect the representations and warranties or the right of Agent or Lenders to rely thereon; B. Reference to Agreement. The Agreement, each of the Loan ---------------------- Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof, or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference therein to the Agreement shall mean a reference to the Agreement as amended hereby; C. Agreement Remains in Effect. The Agreement and the Loan --------------------------- Documents, as amended hereby, remain in full force and effect and the Borrowers ratify and confirm their agreements and covenants contained therein. Parent and the Borrowers hereby confirm that, after giving effect to this Amendment, no Event of Default or Default exists as of such date; D. Severability. Any provision of this Amendment held by a ------------ court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder 2 of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable; E. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND -------------- CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS PROVIDED THAT ISSUES WITH RESPECT TO THE CREATION, PERFECTION, AND ENFORCEMENT OF LIENS UNDER DIVISION 9 OF THE UCC MAY GIVE EFFECT TO APPLICABLE CHOICE OR CONFLICT OF LAW RULES SET FORTH IN ARTICLE 9 OF THE UCC) OF THE STATE OF CALIFORNIA; PROVIDED, THAT THE AGENT AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW; F. Successors and Assigns. This Amendment is binding upon ---------------------- and shall inure to the benefit of Agent, the Lenders, Parent and the Borrowers and their respective successors and assigns; provided, however, -------- ------- that Parent and the Borrowers may not assign or transfer any of their rights or obligations hereunder without the prior written consent of the Lenders; G. Counterparts. This Amendment may be executed in one or ------------ more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument; H. Headings. The headings, captions and arrangements used -------- in this Amendment are for convenience only and shall not affect the interpretation of this Amendment; I. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE ------------------ OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT AMONG THE AGENT, THE LENDERS, PARENT AND THE BORROWERS AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE AGENT, THE LENDERS, PARENT AND THE BORROWERS; ***** 3 IN WITNESS WHEREOF, the parties have executed this Amendment on the date first above written. "PARENT" CENVEO, INC. (F/K/A MAIL-WELL, INC.), a Colorado corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- "BORROWERS" CENVEO CORPORATION (F/K/A MAIL-WELL I CORPORATION), a Delaware corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CENVEO SERVICES, L.L.C. (F/K/A MAIL-WELL SERVICES, L.L.C.), a Colorado limited liability company By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- DISCOUNT LABELS, INC., an Indiana corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-1 Amendment No. 1 to Second Amended and Restated Credit Agreement CENVEO WEST, INC. (F/K/A MAIL-WELL WEST, INC.), a Delaware corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CENVEO GOVERNMENT PRINTING, INC. (F/K/A MAIL-WELL GOVERNMENT PRINTING, INC.), a Colorado corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-2 Amendment No. 1 to Second Amended and Restated Credit Agreement The undersigned (the "U.S. Guarantors"), (i) consent to and approve --------------- the execution and delivery of this Amendment by the parties hereto, (ii) agree that this Amendment does not and shall not limit or diminish in any manner the obligations of each of the U.S. Guarantors pursuant to the guarantees delivered in connection with the Agreement (the "U.S. ---- Guarantees") by each of the undersigned and that such obligations would not - ---------- be limited or diminished in any manner even if the U.S. Guarantors had not executed this Amendment, (iii) agree that this Amendment shall not be construed as requiring the consent of the U.S. Guarantors in any other circumstance, (iv) reaffirm each of their obligations under the U.S. Guarantees, and (v) agree that the U.S. Guarantees remains in full force and effect and each is hereby ratified and confirmed. "U.S. GUARANTORS" CENVEO INTERNATIONAL HOLDINGS, INC. (F/K/A MAIL-WELL MEXICO HOLDINGS, INC.), a Colorado corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CENVEO TEXAS FINANCE, L.P. (F/K/A MAIL-WELL TEXAS FINANCE, L.P.), a Texas limited partnership By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- MMTP HOLDINGS, INC., a Colorado corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-3 Amendment No. 1 to Second Amended and Restated Credit Agreement The undersigned (the "Canadian Guarantors"), (i) consent to and ------------------- approve the execution and delivery of this Amendment by the parties hereto, (ii) agree that this Amendment does not and shall not limit or diminish in any manner the obligations of each of the Canadian Guarantors pursuant to the guarantees delivered in connection with the Agreement (the "Canadian -------- Guarantees") by each of the undersigned and that such obligations would not - ---------- be limited or diminished in any manner even if the Canadian Guarantors had not executed this Amendment, (iii) agree that this Amendment shall not be construed as requiring the consent of the Canadian Guarantors in any other circumstance, (iv) reaffirm each of their obligations under the Canadian Guarantees, and (v) agree that the Canadian Guarantees remains in full force and effect and each is hereby ratified and confirmed. "CANADIAN GUARANTORS" SUPREMEX INC., a company organized under the laws of Canada By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CENVEO CANADA LEASING COMPANY INC. (F/K/A MAIL-WELL CANADA LEASING COMPANY INC.), a company organized under the laws of the Province of Nova Scotia By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- PNG INC., a company organized under the laws of the Province of Ontario By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-4 Amendment No. 1 to Second Amended and Restated Credit Agreement CLASSIC ENVELOPE PLUS LTD., a company organized under the laws of the Province of British Columbia By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- INNOVA ENVELOPE INC. - ENVELOPE INNOVA INC., a company organized under the laws of the Province of Ontario By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CENVEO ALBERTA FINANCE, LIMITED PARTNERSHIP (F/K/A MAIL-WELL ALBERTA FINANCE LIMITED PARTNERSHIP), a limited partnership organized under the laws of the Province of Alberta By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CENVEO MCLAREN, MORRIS AND TODD COMPANY (F/K/A MCLAREN, MORRIS AND TODD COMPANY), a company organized under the laws of the Province of Nova Scotia By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-5 Amendment No. 1 to Second Amended and Restated Credit Agreement CENVEO MM&T PACKAGING COMPANY (F/K/A MM&T PACKAGING COMPANY), a company organized under the laws of the Province of Nova Scotia By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- PRECISION FINE PAPERS, INC. a company organized under the laws of Ontario By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-6 Amendment No. 1 to Second Amended and Restated Credit Agreement "AGENT" BANK OF AMERICA, N.A., as the Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-7 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" BANK OF AMERICA, N.A., as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-8 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-9 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" WACHOVIA BANK, NATIONAL ASSOCIATION, as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-10 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" JPMORGAN CHASE BANK, as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-11 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" WELLS FARGO FOOTHILL, INC., formerly known Foothill Capital Corporation, as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-12 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" WASHINGTON MUTUAL BANK, as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-13 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" PNC BANK, NATIONAL ASSOCIATION, as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-14 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-15 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" U.S. BANK, NATIONAL ASSOCIATION, as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-16 Amendment No. 1 to Second Amended and Restated Credit Agreement "LENDERS" MERRILL LYNCH CAPITAL, a division of Merrill Lynch Business Financial Services Inc., as a Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-17 Amendment No. 1 to Second Amended and Restated Credit Agreement EX-21 4 exh21.txt Exhibit 21 SUBSIDIARIES OF REGISTRANT Cenveo Alberta Finance LP (Canada) Cenveo Canada Leasing Company Inc. (Canada) Cenveo Commercial Ohio, LLC (Colorado) Cenveo Corporation (Delaware) Cenveo Government Printing, Inc. (Colorado) Cenveo International Holdings, Inc. (Colorado) Cenveo McLaren Morris & Todd Company (Canada) Cenveo Resale Ohio, LLC (Colorado) Cenveo Services, LLC (Colorado) Cenveo Texas Finance, LP (Texas) Cenveo West, Inc. (Delaware) Colorhouse China, Inc. (Colorado) Discount Labels, Inc. (Indiana) Graphic Arts Center de Mexico (Mexico) Innova Envelope Inc. Enveloppe Innova Inc. (Canada) MM&T Packaging Company (Canada) MMTP Holdings, Inc. (Colorado) PNG Inc. (Canada) Precision Fine Papers Inc. (Canada) Supremex, Inc. (Canada) EX-23 5 exh23.txt EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (Form S-8 No.'s 333-26743, 333-61467, 333-74490 and 333-118861) of Cenveo, Inc. of our reports dated February 28, 2005, with respect to the consolidated financial statements and schedule of Cenveo, Inc., Cenveo, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Cenveo, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2004. /s/ ERNST & YOUNG LLP Denver, Colorado February 28, 2005 EX-31.1 6 exh31p1.txt Exhibit 31.1 CERTIFICATION I, Paul V. Reilly, certify that: 1. I have reviewed this annual report on Form 10-K of Cenveo, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 28, 2005 /s/ Paul V. Reilly ----------------------- Chief Executive Officer EX-31.2 7 exh31p2.txt Exhibit 31.2 CERTIFICATION I, Michel P. Salbaing, certify that: 1. I have reviewed this annual report on Form 10-K of Cenveo, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 28, 2005 /s/ Michel P. Salbaing ----------------------------- Chief Financial Officer EX-32.1 8 exh32p1.txt Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, Paul V. Reilly, president and chief executive officer of Cenveo, Inc. (the "Company"), certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 28, 2005 /s/ Paul V. Reilly -------------------------------- Paul V. Reilly President and CEO EX-32.2 9 exh32p2.txt Exhibit 32.2 CERTIFICATION OF PERIODIC REPORT -------------------------------- I, Michel P. Salbaing, senior vice president and chief financial officer of Cenveo, Inc. (the "Company"), certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 28, 2005 /s/ Michel P. Salbaing -------------------------------- Michel P. Salbaing Senior Vice President and CFO -----END PRIVACY-ENHANCED MESSAGE-----