-----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, OoF7HyBRGCQEo7j8xH/8JTi0aEZmQUlqny/v3F9tgz2xKdarxbgfbrT7zkUHz3RR wHkPEiToXDtMrGDXM8Nuvg== 0001068800-07-001348.txt : 20070627 0001068800-07-001348.hdr.sgml : 20070627 20070627172329 ACCESSION NUMBER: 0001068800-07-001348 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070627 DATE AS OF CHANGE: 20070627 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12551 FILM NUMBER: 07944491 BUSINESS ADDRESS: STREET 1: ONE CANTERBURY GREEN STREET 2: 201 BROAD STREET CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2035953000 MAIL ADDRESS: STREET 1: ONE CANTERBURY GREEN STREET 2: 201 BROAD STREET CITY: STAMFORD STATE: CT ZIP: 06901 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/A 1 cenveo10ka.txt - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A AMENDMENT NO. 1 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 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) ONE CANTERBURY GREEN 201 BROAD STREET STAMFORD, CT 06901 (Address of principal executive offices) (Zip Code) 203-595-3000 (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, par value $0.01 per share The New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes /X/ No / / Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes / / No /X/ 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer /X/ Accelerated filer / / Non-accelerated filer / / Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of June 30, 2006, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $960,610,100 based on the closing sale price as reported on the New York Stock Exchange. As of June 15, 2007 the registrant had 53,687,107 shares of common stock, par value $0.01 per share, 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 Shareholders to be held on or about May 3, 2007. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CENVEO, INC. FORM 10-K/A AMENDMENT NO. 1 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 Cenveo, Inc. ("Cenveo") hereby amends Item 8, Financial Statements and Supplementary Data and Item 15, Exhibits and Financial Statement Schedules, of its Annual Report on Form 10-K for the year ended December 31, 2006, which was originally filed by Cenveo with the SEC on February 27, 2007 (the "Original 10-K"), by including the separate audited Canadian GAAP financial statements of its significant equity investee as required under Rule 3-09 of Regulation S-X and a reconciliation of the investees net earnings to the equity income reflected in its consolidated financial statements. EXPLANATORY NOTE This Form 10-K/A is being filed in order to provide the audited Canadian GAAP financial statements of the Supremex Income Fund (the "Fund"), which qualified as a significant equity investee of Cenveo and a reconciliation of the Fund's audited Canadian GAAP net earnings for the nine-months ended December 31, 2006 to the $6.2 million of equity income reflected in Cenveo's consolidated financial statements. The reconciliation is presented in Note 3 Discontinued Operations and the audited Canadian GAAP financial statements of the Fund are included in Exhibit 99.1. The audited Canadian GAAP financial statements of the Fund are being filed as an amendment to Cenveo's Annual Report on Form 10-K within six months of the Fund's fiscal year end, as permitted by Rule 3-09 of Regulation S-X. Item 8 of the Original 10-K is amended to read in its entirety as follows: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Cenveo, Inc. We have audited the accompanying consolidated balance sheets of Cenveo, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule included in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cenveo, Inc. and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Notes 1, 12 and 13 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statements of Financial Accounting Standards No. 123(R), "Share-Based Payment", and No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)." 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, 2006, 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, 2007 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Stamford, Connecticut February 28, 2007 except for the fourth paragraph of Note 3, as to which the date is June 26, 2007 1 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except par values)
DECEMBER 31, --------------------------- 2006 2005 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................... $ 10,558 $ 1,035 Accounts receivable, net................................ 230,098 247,277 Inventories............................................. 92,406 108,704 Assets held for sale.................................... 51,966 -- Prepaid and other current assets........................ 41,413 25,767 ---------- ---------- Total current assets................................ 426,441 382,783 Property, plant and equipment, net.......................... 251,103 317,606 Goodwill.................................................... 258,136 311,146 Other intangible assets, net................................ 31,985 23,961 Other assets, net........................................... 34,285 44,068 ---------- ---------- Total assets............................................ $1,001,950 $1,079,564 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt.................... $ 7,513 $ 2,791 Accounts payable........................................ 116,067 124,901 Accrued compensation and related liabilities............ 40,242 53,765 Other current liabilities............................... 63,609 79,051 ---------- ---------- Total current liabilities........................... 227,431 260,508 Long-term debt.............................................. 667,782 809,345 Deferred income taxes....................................... 4,356 10,045 Other liabilities........................................... 40,640 49,216 Commitments and contingencies Shareholders' equity (deficit): Preferred stock, $0.01 par value; 25 shares authorized, none issued........................................... -- -- Common stock, $0.01 par value; 100,000 shares authorized, 53,515 and 53,025 shares issued and outstanding as of December 31, 2006 and 2005, respectively.......................................... 535 530 Paid-in capital......................................... 244,894 239,432 Retained deficit........................................ (186,436) (305,091) Unearned compensation................................... -- (1,825) Accumulated other comprehensive income.................. 2,748 17,404 ---------- ---------- Total shareholders' equity (deficit)................ 61,741 (49,550) ---------- ---------- Total liabilities and shareholders' equity (deficit).... $1,001,950 $1,079,564 ========== ==========
See notes to consolidated financial statements. 2 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
YEARS ENDED DECEMBER 31, -------------------------------------------- 2006 2005 2004 ---------- ---------- ---------- Net sales.......................................... $1,511,224 $1,594,781 $1,597,652 Cost of sales...................................... 1,208,500 1,319,950 1,313,275 Selling, general and administrative................ 189,476 218,740 236,161 Amortization of intangible assets.................. 5,473 5,147 5,381 Restructuring, impairment and other charges........ 41,096 77,254 5,407 ---------- ---------- ---------- Operating income (loss).......................... 66,679 (26,310) 37,428 Loss on sale of non-strategic businesses........... 2,035 4,479 -- Interest expense, net.............................. 60,980 73,821 73,208 Loss from the early extinguishment of debt......... 32,744 -- 17,748 Other (income) expense, net........................ (78) 1,143 2,459 ---------- ---------- ---------- Loss from continuing operations before income taxes.......................................... (29,002) (105,753) (55,987) Income tax (benefit) expense....................... (7,177) 42,348 (11,279) ---------- ---------- ---------- Loss from continuing operations.................. (21,825) (148,101) (44,708) Income from discontinued operations, net of taxes............................................ 140,480 13,049 25,000 ---------- ---------- ---------- Net income (loss)................................ $ 118,655 $ (135,052) $ (19,708) ========== ========== ========== Income (loss) per share--basic and diluted: Continuing operations.......................... $ (0.41) $ (2.96) $ (0.94) Discontinued operations........................ 2.64 0.26 0.53 ---------- ---------- ---------- Net income (loss).............................. $ 2.23 $ (2.70) $ (0.41) ========== ========== ========== Weighted average shares--basic and diluted......... 53,288 50,038 47,750
See notes to consolidated financial statements. 3 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, ---------------------------------------- 2006 2005 2004 --------- --------- -------- Cash flows from operating activities: Net income (loss)......................................... $ 118,655 $(135,052) $(19,708) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of discontinued operations, net of taxes................................................ (127,438) -- (1,230) Income from discontinued operations, net of taxes..... (13,042) (13,049) (23,770) Depreciation.......................................... 35,220 43,101 44,148 Amortization of other intangible assets............... 5,473 5,147 5,381 Amortization of deferred financing costs.............. 1,728 3,603 4,578 Deferred income taxes................................. (10,881) 35,665 (12,657) Non-cash restructuring, impairment and other charges, net.................................................. 10,346 32,010 3,228 Loss on early extinguishment of debt.................. 32,744 -- 17,748 Loss on sale of non-strategic businesses.............. 2,035 4,479 -- Provisions for bad debts.............................. 4,345 3,427 3,196 Provisions for inventory obsolescence................. 1,900 2,936 1,127 Deferred compensation provision....................... 5,954 2,505 718 Loss (gain) on disposal of assets..................... 379 (555) 670 Changes in operating assets and liabilities, excluding the effects of acquired businesses: Accounts receivable................................... (6,508) 341 (27,383) Inventories........................................... 2,212 (139) (18,124) Accounts payable and accrued compensation and related liabilities.......................................... (15,905) (59,386) 33,203 Other working capital changes......................... (23,790) 8,652 (2,648) Other, net............................................ (2,688) 2,312 3,620 --------- --------- -------- Net cash provided by (used in) continuing operating activities......................................... 20,739 (64,003) 12,097 Net cash provided by discontinued operating activities......................................... 2,617 25,330 25,894 Cash flows from investing activities: Cost of business acquisitions, net of cash acquired... (49,425) (3,552) (9,926) Capital expenditures.................................. (19,930) (28,154) (26,240) Acquisition payments.................................. (4,653) (4,053) (3,248) Proceeds from divestitures, net....................... 3,189 8,377 2,000 Proceeds from sale of property, plant and equipment... 11,475 3,796 2,949 --------- --------- -------- Net cash used in investing activities of continuing operations......................................... (59,344) (23,586) (34,465) Proceeds from the sale of discontinued operations..... 211,529 -- -- Proceeds from the sale of property, plant and equipment of discontinued operations................. -- 211 63 Capital expenditures for discontinued operations...... (632) (2,603) (1,195) --------- --------- -------- Net cash provided by (used in) investing activities of discontinued operations......................... 210,897 (2,392) (1,132) --------- --------- -------- Net cash provided by (used in) investing activities......................................... 151,553 (25,978) (35,597) Cash flows from financing activities: Repayment of 9 5/8% senior notes...................... (339,502) -- -- (Repayments) borrowings under senior secured revolving credit facility, net................................. (123,931) 45,490 5,131 Repayments of term loan............................... (813) -- -- Repayments of other long-term debt.................... (13,095) (3,123) (304,323) Payment of redemption premiums and expenses........... (26,142) -- (13,528) Payment of debt issuance costs........................ (3,770) -- (9,077) Purchase and retirement of common stock and cancellation of RSUs................................. (1,786) (187) -- Proceeds from issuance of term loan................... 325,000 -- -- Borrowings under new revolving credit facility, net... 15,500 -- -- Proceeds from issuance of long-term debt.............. -- -- 320,000 Proceeds from exercise of stock options............... 1,956 22,433 48 Proceeds from excess tax benefit from stock based compensation......................................... 1,168 -- -- --------- --------- -------- Net cash (used in) provided by financing activities......................................... (165,415) 64,613 (1,749) Effect of exchange rate changes on cash and cash equivalents of continuing operations....................... 14 107 (16) Effect of exchange rate changes on cash and cash equivalents of discontinued operations..... ........................... 15 170 (140) --------- --------- -------- Net increase in cash and cash equivalents........... 9,523 239 489 Cash and cash equivalents at beginning of year.............. 1,035 796 307 --------- --------- -------- Cash and cash equivalents at end of year.................... $ 10,558 $ 1,035 $ 796 ========= ========= ========
See notes to consolidated financial statements. 4 CENVEO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (in thousands)
ACCUMULATED TOTAL OTHER SHAREHOLDERS' COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE EQUITY STOCK CAPITAL (DEFICIT) COMPENSATION INCOME (LOSS) (DEFICIT) ------ -------- --------- ------------ ------------- ------------- 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 deferred compensation......... 718 718 ---- -------- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 2004.................. 487 214,902 (170,039) (2,003) 14,007 57,354 Comprehensive income (loss): Net loss...................................... (135,052) (135,052) Other comprehensive income (loss): Pension liability adjustment, net of tax benefit of $743............................ (1,187) (1,187) Currency translation adjustment............. 4,584 4,584 --------- Other comprehensive income................ 3,397 --------- Total comprehensive loss................ (131,655) Cancellation of restricted shares............. (4) (1,993) 795 (1,202) Issuance of restricted shares................. 5 4,030 (4,035) -- Exercise of stock options..................... 42 22,391 22,433 Purchase and retirement of common stock....... (187) (187) Amortization of deferred compensation and restricted stock units....................... 289 3,418 3,707 ---- -------- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 2005.................. 530 239,432 (305,091) (1,825) 17,404 (49,550) Comprehensive income (loss): Net income.................................... 118,655 118,655 Other comprehensive income (loss): Pension liability adjustment, net of tax expense of $429............................ 6,326 6,326 Unrealized loss on cash flow hedges......... (2,992) (2,992) Currency translation adjustment............. (3,603) (3,603) Reclassifications to earnings on sale of discontinued operations: Currency translation adjustment........... (14,387) (14,387) --------- Other comprehensive loss.................. (14,656) --------- Total comprehensive income.............. 103,999 Reversal of unamortized deferred compensation on adoption of SFAS 123(R)................... (1,825) 1,825 -- Exercise of stock options..................... 5 1,951 1,956 Purchase and retirement of common stock and cancellation of RSUs......................... (1,786) (1,786) Amortization of stock based compensation...... 5,954 5,954 Excess tax benefit from stock based compensation................................. 1,168 1,168 ---- -------- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 2006.................. $535 $244,894 $(186,436) $ -- $ 2,748 $ 61,741 ==== ======== ========= ======= ======== =========
See notes to consolidated financial statements. 5 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" or "Cenveo") are engaged in the printing and manufacturing of envelopes, business forms and labels and commercial printing. The Company is headquartered in Stamford, Connecticut, is organized under Colorado law, and its common stock is traded on the New York Stock Exchange under the symbol "CVO". The Company's reporting periods for 2006, 2005 and 2004 in this report consist of 52, 52, and 53-week periods, respectively, ending on the Saturday closest to the last day of the calendar month and ended on December 30, 2006, December 31, 2005, and January 1, 2005, respectively. The accompanying consolidated financial statements are presented as ending on December 31, since the effect of reporting periods not ending on that date are not material. The consolidated financial statements include the accounts of Cenveo, Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. On March 31, 2006, the Company sold to Supremex Income Fund, a new open-ended trust formed under the laws of the Province of Quebec (the "Fund"), all of the shares of Supremex Inc. ("Supremex"), a Canadian subsidiary of the Company, and certain other assets of the envelopes, forms and labels segment. Beginning in the fourth quarter of 2006, the financial results of Supremex and the other assets sold have been accounted for as a discontinued operation resulting in the Company's historical consolidated statements of operations and statements of cash flows being reclassified to reflect such discontinued operations separately from continuing operations (Notes 3, 13, 15 and 20). 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 obsolescence, depreciation and amortization lives, asset impairment evaluations, tax assets and liabilities, self-insurance accruals and other contingencies. Actual results could differ from estimates. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on deposit and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are stated at cost, which approximates fair value. ACCOUNTS RECEIVABLE. Accounts receivable are recorded at invoiced amounts. As of December 31, 2006 and 2005, accounts receivable were reduced by an allowance for doubtful accounts of $4.8 million and $5.2 million, respectively. INVENTORIES. Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out or average cost basis. Cost includes materials, labor and overhead related to the purchase and production of inventories. As of December 31, 2006 and 2005, inventory was reduced by an allowance for obsolescence of $4.9 million and $5.9 million, respectively. 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. 6 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation is provided 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. 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 $7.9 million and $10.1 million as of December 31, 2006 and 2005, respectively. DEBT ISSUANCE COSTS. Direct expenses such as legal, accounting and underwriting fees incurred to issue or extend debt, are included in other assets, net in the consolidated balance sheets. Debt issuance costs were $8.4 million and $13.0 million as of December 31, 2006 and 2005, respectively, net of accumulated amortization, and are amortized over the term of the related debt as interest expense. In June of 2006, the Company refinanced certain of its long-term debt and wrote off approximately $6.6 million of debt issuance costs associated with the debt retired and capitalized $3.8 million of costs related to the Company's new debt (Note 9). Interest expense includes $1.7 million, $3.6 million and $4.6 million of debt issuance costs amortized in 2006, 2005 and 2004, 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 in the fourth quarter to determine if there is impairment, or more frequently if an indication of possible impairment exists. No impairment charges for goodwill or other intangible assets were recorded in 2006, 2005 or 2004. 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 similar 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 if 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. 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. 7 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Accrued customer rebates are included in other current liabilities in the consolidated balance sheets (Note 8). 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 $2.6 million, $4.0 million and $5.2 million in 2006, 2005 and 2004, 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 accumulated other comprehensive income in shareholders' equity (deficit) in the consolidated balance sheet. Income and expense items are translated at the average monthly rate. Foreign currency transaction gains and losses are recorded in income. STOCK-BASED COMPENSATION. Effective January 1, 2006, the Company adopted the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), which revised SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As a result, the Company now measures the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the date of grant rather than its intrinsic value, the method the Company previously used (Note 12). INCOME TAXES. Deferred income taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying statutory tax rates in effect for the year during which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent it is more likely than not that the deferred tax assets will not be realized (Note 10). In addition, the Company's policy is to establish tax contingency liabilities for potential tax issues. The tax contingency liabilities are based on our estimate of the probable amount of additional taxes that may be due in the future. Any additional taxes due would be determined only upon completion of current and future federal, state and international tax audits. At December 31, 2006 and 2005, the Company had $12.6 million and $9.5 million, respectively, of tax contingency liabilities included in other liabilities in the consolidated balance sheets. NEW ACCOUNTING PRONOUNCEMENTS. Effective January 1, 2006, the Company adopted SFAS No. 154, Accounting Changes and Error Corrections, ("SFAS 154"). SFAS 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principles and to changes required by an accounting pronouncement in the unusual case when specific transition provisions are not provided by the accounting pronouncement. SFAS 154 requires retrospective application to prior periods' financial statements for a change in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Under SFAS 154, a change in the method of applying an accounting principle would also be considered a change in accounting principle. The adoption of SFAS 154 did not have any immediate effect on the Company's 8 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) consolidated financial position or results of operations, except for the adoption of SFAS 123(R), which provides specific transition provisions. In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--An Amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158") (Note 13). In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) ("FIN 48"), which was effective for the Company on January 1, 2007. FIN 48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact of this interpretation. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. SFAS 157 is effective for the Company beginning on January 1, 2008. The Company is currently evaluating the potential impact SFAS 157 will have on its consolidated financial statements. 2. 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 (Note 20). On July 12, 2006, the Company completed the acquisition of all of the common stock of Rx Label Technology Corporation, with annual sales of approximately $35 million. This new subsidiary of the Company operates under the name Rx Technology Corporation ("Rx Technology"). Rx Technology specializes in providing pharmacies with labels used to dispense prescription drugs to consumers. The aggregate purchase price paid for Rx Technology by the Company was approximately $49.4 million, which included $0.6 million of fees and expenses. The fair values of property, plant and equipment and other intangible assets were determined in accordance with independent appraisals. The Rx Technology acquisition has preliminarily resulted in $29.1 million of goodwill, of which approximately $8.9 million is deductible for income tax purposes. The other identifiable intangible assets determined by the independent appraisal were $12.9 million of customer relationships which is being amortized over their estimated weighted average useful life of 19 years and $0.6 million of patent technology which is being amortized over six years (Note 7). Rx Technology's operations are included within the Company's envelopes, forms and labels segment results. In May 2005, the Company purchased the assets of Digidel, Inc., a provider of pre-press services to commercial printing companies in Philadelphia, Pennsylvania with annual sales of approximately $3.0 million. The purchase price was $4.6 million ($3.6 million paid in 2005 and $1.0 million paid in 2006) of which $0.7 million was allocated to tangible net assets, $0.3 million to intangible assets and $3.6 million to goodwill. The Company consolidated this operation with its commercial printing plant in Philadelphia, Pennsylvania. 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. 9 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) Valco Graphics Inc. was consolidated with the Company's existing commercial printing plant in Seattle, Washington. 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 ($1.4 million paid in each of 2004 and 2005) 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 plant in San Francisco, California and is operating the combined entity as Cenveo, San Francisco. The results of the acquired businesses have been included in the Company's consolidated results from their respective acquisition dates. Pro forma results for 2006 and 2005, assuming the acquisitions had been made at the beginning of the applicable period, have not been presented since they would not be materially different from the Company's reported results. 3. DISCONTINUED OPERATIONS Supremex On March 31, 2006, the Company sold to the Fund all of the shares of Supremex, which operated the Company's Canadian envelope operations, and certain other assets. At closing, the Company received cash proceeds of approximately $119.4 million, net of transaction expenses and subject to the finalization of a working capital adjustment, and approximately 11.4 million units of the Fund (representing a 36.5% economic and voting interest in the Fund). The March 31, 2006 sale resulted in a pre-tax gain of approximately $124.1 million in the first quarter of 2006, after the allocation of $55.8 million of goodwill to the business as required by SFAS 142, Goodwill and Other Intangible Assets. In addition, after closing, in April 2006 the Company received approximately (1) $71.4 million of proceeds relating to the March 31, 2006 sale and recorded a pre-tax gain of approximately $1.4 million as a result of the Canadian dollar strengthening against the U.S. dollar, and (2) $20.7 million from the sale of 2.5 million units in the Fund relating to an over-allotment option to the underwriters and recorded a pre-tax gain of approximately $9.3 million, which reduced the Company's economic and voting interest in the Fund to 28.6%. The Company used a significant portion of the above proceeds received to repay amounts outstanding under its senior secured credit facility on March 31, 2006 and to repay another credit facility in April 2006. In December 2006, the Company decided to sell its remaining units in the Fund prior to the end of the first quarter of 2007 and determined it would not have any significant influence over its investment after the planned sale (Note 20). Accordingly, the operating revenues and expenses of these assets through March 31, 2006 have been classified as discontinued operations under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for all periods presented, beginning in the fourth quarter of 2006. Discontinued operations also includes equity income of $6.2 million before withholding taxes of $0.9 million related to the Company's retained investment in the Fund after the March 31, 2006 sale through December 31, 2006. From April 2006 through December 2006, the Company received $6.2 million of distributions from the Fund. As a result of the finalization of the working capital adjustment in December 2006, the Company recorded an additional pre-tax gain on the sale of $3.5 million and a reduction to the gain on sale of $2.7 million as a result of finalization of 2005 tax returns. As of December 31, 2006, the Company's investment in the Fund was $46.2 million, which is classified in assets held for sale on the consolidated balance sheet. In 2006, the operating results of the discontinued operations are for the period from January 1, 2006 to March 31, 2006, the date of the sale, and includes equity income from April 1, 2006 through 10 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. DISCONTINUED OPERATIONS (CONTINUED) December 31, 2006. The following table summarizes certain statement of operations data for discontinued operations (in thousands):
2006 2005 2004 -------- -------- -------- Net sales............................................... $ 41,391 $154,600 $145,262 Operating income........................................ 8,838 34,208 35,306 Income tax expense...................................... (1,373) (19,948) (11,620) Gain on sale of discontinued operations, net of taxes of $8,495 and $770 in 2006 and 2004, respectively........ 127,438 -- 1,230 Income from discontinued operations, net of tax......... 140,480 13,049 25,000
Reconciliation of net earnings of the Fund to equity income The table below presents a reconciliation of the audited Canadian GAAP net earnings of the Fund for the nine months ended December 31, 2006 to the $6.2 million of equity income before withholding taxes reflected in discontinued operations in the Company's consolidated financial statements (in thousands). The adjustments relate to the difference between the basis of the assets in the Fund's financial statements which were recorded at fair value at the inception of the Fund and the historical cost basis of the assets in Cenveo's consolidated financial statements. Net earnings of the Fund in Canadian dollars......................................... $19,431 Adjustments to earnings of the Fund resulting from the reversal of fair value adjustments in Canadian dollars: Amortization of intangibles...................................................... 4,232 Increased cost of sales on inventory step-up..................................... 4,304 Decreased amortization of property, plant & equipment............................ (549) Income tax effect of above adjustments........................................... (2,492) Income tax recovery from change in tax rates relating to assets revaluations..... (489) ------- Net earnings of the Fund adjusted to reflect Cenveo's carrying value under U.S. GAAP........................................................................... $24,437 Equity income in Fund at 28.6% in Canadian dollars................................... $ 6,989 Canadian/U.S. exchange rate.......................................................... 1.13147 Equity income in Fund in U.S. dollars................................................ $ 6,177
Other In June 2004, the Company collected $2.0 million of an unsecured note receivable from the sale of its extrusion coating and laminating business segment of American Business Products, Inc. in 2000, which was fully reserved at the time of the sale. The proceeds of $2.0 million, net of tax of $0.8 million, are recorded as a gain on disposal of discontinued operations in 2004. 11 4. OTHER DIVESTITURES During 2006, the Company sold three small non-strategic commercial printing businesses in Somerville, Massachusetts, Bloomfield Hills, Michigan and Memphis, Tennessee for net proceeds of $3.2 million and recorded losses on sale of non-strategic businesses of $2.0 million. During 2005, the Company sold six small non-strategic businesses, including a fine papers business in Ontario, Canada, a mailing supplies business in Dekalb, Illinois, printing operations in Riviera Beach, Florida, Jacksonville, Illinois and Osage Beach, Missouri and a jet printing operation in Vancouver, Canada for net proceeds of $8.4 million and recorded losses on sale of non-strategic businesses of $4.5 million. The following table summarizes the net sales and operating income (loss) of the businesses that were sold for the years ended December 31, (in thousands):
2006 2005 2004 ------- ------- ------- Net sales............................................ $ 9,355 $43,773 $75,626 Operating income..................................... (1,375) 345 205
The dispositions of these non-strategic businesses have not been accounted for as discontinued operations in the consolidated financial statements, because either the Company has continuing involvement with these entities, migration of cash flows to other Cenveo locations has occurred or the operations are not material. 12 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INVENTORIES Inventories by major category are as follows (in thousands):
DECEMBER 31 ---------------------- 2006 2005 ------- -------- Raw materials.......................................... $28,247 $ 32,586 Work in process........................................ 21,638 28,115 Finished goods......................................... 42,521 48,003 ------- -------- $92,406 $108,704 ======= ========
6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (Note 11) are as follows (in thousands):
DECEMBER 31 ------------------------- 2006 2005 --------- --------- Land and land improvements............................. $ 13,562 $ 18,460 Buildings and improvements............................. 80,740 108,229 Machinery and equipment................................ 437,910 500,535 Furniture and fixtures................................. 10,771 11,579 Construction in progress............................... 6,974 14,532 --------- --------- 549,957 653,335 Accumulated depreciation............................... (298,854) (335,729) --------- --------- $ 251,103 $ 317,606 ========= =========
7. GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill for 2006 and 2005 by reportable segment (Note 18) are as follows (in thousands):
ENVELOPES, FORMS COMMERCIAL AND LABELS PRINTING TOTAL ---------------- ---------- -------- Balance as of December 31, 2004................... $217,465 $91,473 $308,938 Acquisitions.................................... -- 2,725 2,725 Dispositions.................................... (1,127) (1,260) (2,387) Foreign currency translation.................... 1,700 170 1,870 -------- ------- -------- Balance as of December 31, 2005................... $218,038 $93,108 $311,146 Acquisitions.................................... 29,122 -- 29,122 Dispositions.................................... (55,739) (747) (56,486) Reclassified to assets held for sale............ (25,749) -- (25,749) Foreign currency translation.................... -- 103 103 -------- ------- -------- Balance as of December 31, 2006................... $165,672 $92,464 $258,136 ======== ======= ========
13 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Other intangible assets are as follows (in thousands):
DECEMBER 31 ---------------------------------------------------------------------------- 2006 2005 ------------------------------------ ------------------------------------ GROSS NET GROSS NET CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT -------- ------------ -------- -------- ------------ -------- INTANGIBLE ASSETS WITH DETERMINABLE LIVES: Customer relationship......... $29,906 $(13,001) $16,905 $17,006 $ (8,336) $ 8,670 Trademarks and tradenames..... 14,551 (2,487) 12,064 14,551 (2,092) 12,459 Patents....................... 3,028 (1,218) 1,810 2,428 (1,004) 1,424 Non-compete agreements........ 1,640 (1,591) 49 2,415 (2,196) 219 Other......................... 768 (331) 437 768 (299) 469 ------- -------- ------- ------- -------- ------- 49,893 (18,628) 31,265 37,168 (13,927) 23,241 INTANGIBLE ASSETS WITH INDEFINITE LIVES: Pollution credits............. 720 -- 720 720 -- 720 ------- -------- ------- ------- -------- ------- Total..................... $50,613 $(18,628) $31,985 $37,888 $(13,927) $23,961 ======= ======== ======= ======= ======== =======
As of December 31, 2006, the weighted average remaining amortization period for customer relationships was 13 years, trademarks and tradenames was 33 years, patents was seven years and other was 27 years. Total pre-tax amortization expense for the five years ending December 31, 2011 is estimated to be as follows: $5.8 million, $1.4 million, $1.4 million, $1.4 million and $1.4 million, respectively. 8. OTHER CURRENT LIABILITIES Other current liabilities are as follows (in thousands):
DECEMBER 31 --------------------- 2006 2005 ------- ------- Accrued customer rebates............................... $19,135 $18,639 Accrued taxes.......................................... 11,282 9,542 Accrued interest....................................... 5,267 16,003 Restructuring liabilities.............................. 4,521 7,964 Other accrued liabilities.............................. 23,404 26,903 ------- ------- $63,609 $79,051 ======= =======
14 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LONG-TERM DEBT Long-term debt is as follows (in thousands):
DECEMBER 31 ----------------------- 2006 2005 -------- -------- Term Loan, due 2013..................................... $324,188 $ -- 7 7/8% Senior Subordinated Notes, due 2013.............. 320,000 320,000 9 5/8% Senior Notes, due 2012........................... 10,498 350,000 Revolving Credit Facility, due 2012..................... 15,500 -- Senior Secured Credit Facility.......................... -- 123,931 Other................................................... 5,109 18,205 -------- -------- 675,295 812,136 Less current maturities................................. (7,513) (2,791) -------- -------- Long-term debt.......................................... $667,782 $809,345 ======== ========
On June 23, 2006, the Company completed a tender offer and consent solicitation (the "Tender Offer") for any and all of its 9 5/8% Senior Notes due 2012 and extinguished approximately $339.5 million in aggregate principal amount (approximately 97% of the outstanding amount) that were tendered and accepted for purchase under the terms of the Tender Offer. The Company may redeem the remaining outstanding 9 5/8% 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. On June 21, 2006, the Company entered into a credit agreement that provides for $525 million of senior secured credit facilities with a syndicate of lenders (the "Credit Facilities"). The Credit Facilities consist of a $200 million six-year revolving credit facility ("Revolving Credit Facility") and a $325 million seven-year term loan facility ("Term Loan"). The Credit Facilities contain customary financial covenants, including maintenance of a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. Borrowing rates under the Credit Facilities are determined at the Company's option at the time of each borrowing and are based on the London Interbank Offered Rate ("LIBOR") or the prime rate publicly announced from time to time, in each case plus a specified interest rate margin (see "Interest rate swaps"). The Credit Facilities are secured by substantially all of the Company's assets. Proceeds from the Credit Facilities and other available cash were used to fund the Tender Offer, to retire the Company's existing Senior Secured Credit Facility due 2008 (which had no amounts outstanding), and for $3.8 million of debt issuance costs, which are being amortized over the maturities of the Credit Facilities. In connection with the debt refinancing in June 2006, the Company incurred a $32.7 million loss on early extinguishment of debt related to the Tender Offer and the retirement of the Senior Secured Credit Facility, which consisted of Tender Offer premiums of $25.2 million, the write-off of previously unamortized deferred financing costs of $6.6 million and Tender Offer expenses of $0.9 million. In January 2004, the Company issued $320 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 note which were due to mature in 2008. The loss recorded on the early extinguishment of 15 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LONG-TERM DEBT (CONTINUED) 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 of $7.2 million are being amortized over the term of the notes. The interest rate on other long-term debt was 8.6% and 8.1% at December 31, 2006 and 2005, respectively. The aggregate annual maturities for long-term debt are as follows (in thousands): 2007................................. $ 7,513 2008................................. 4,082 2009................................. 4,158 2010................................. 4,243 2011................................. 4,176 Thereafter........................... 651,123 -------- $675,295 ========
Cash interest payments on long-term debt were $68.0 million in 2006, $68.9 million in 2005 and $67.4 million in 2004. The estimated fair value of the Company's long-term debt was $665.9 million and $828.4 million at December 31, 2006 and 2005, respectively. The Credit Facilities 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 also required to comply with maximum consolidated leverage ratio and minimum consolidated interest coverage ratio financial covenants pertaining to the Credit Facilities. As of December 31, 2006, the Company was in compliance with all debt agreements. Interest rate swaps During June 2006, the Company entered into interest rate swap agreements to hedge interest rate exposure for $220 million notional amount of floating rate debt. This hedge of interest rate risk was designated and documented at inception as a cash flow hedge and is evaluated for effectiveness at least quarterly. Effectiveness of this hedge is calculated by comparing the fair value of the derivative to a hypothetical derivative that would be a perfect hedge of floating rate debt. There was no ineffectiveness from this hedge through December 31, 2006. At December 31, 2006, the Company has recorded a liability of $2.8 million, which represents the decrease in the current fair value of floating rate cash inflows that are less than the fixed cash outflows over the remaining term of the hedges. The decrease of cash inflows largely reflects the decrease in LIBOR as of December 31, 2006, as compared to LIBOR at the time that the Company entered into the swap agreements. The liability is included in other liabilities and the offsetting amount is included in accumulated other comprehensive income in the consolidated balance sheet as of December 31, 2006. The accounting for gains and losses associated with changes in the fair value of cash flow hedges and the effect on the Company's consolidated financial statements will depend on whether the hedge is highly effective in achieving offsetting changes in fair value of cash flows of the liability hedged. As of December 31, 2006, the Company does not anticipate reclassifying any ineffectiveness into its results of operations for the next twelve months. 16 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LONG-TERM DEBT (CONTINUED) Guarantees In conjunction with the sale of the prime label business in 2002, the Company guarantees 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 in April 2008, are approximately $3.5 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. 10. INCOME TAXES Loss from continuing operations before income taxes for the years ended December 31, was as follows (in thousands):
2006 2005 2004 -------- --------- -------- Domestic............................................ $(30,691) $(105,403) $(59,239) Foreign............................................. 1,689 (350) 3,252 -------- --------- -------- $(29,002) $(105,753) $(55,987) ======== ========= ========
Income tax (benefit) expense on loss from continuing operations for the years ended December 31, consisted of the following (in thousands):
2006 2005 2004 -------- ------- -------- Current tax expense (benefit): Federal.......................................... $ 3,082 $ 5,839 $ (43) Foreign.......................................... 247 595 965 State............................................ 375 249 456 -------- ------- -------- 3,704 6,683 1,378 Deferred (benefit) expense: Federal.......................................... (9,392) 31,853 (11,141) Foreign.......................................... 33 (239) 58 State............................................ (1,522) 4,051 (1,574) -------- ------- -------- (10,881) 35,665 (12,657) -------- ------- -------- Income tax (benefit) expense......................... $ (7,177) $42,348 $(11,279) ======== ======= ========
17 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) A reconciliation of the expected tax (benefit) based on the federal statutory tax rate to the Company's actual income tax (benefit) expense for the years ended December 31, is summarized as follows(in thousands):
2006 2005 2004 -------- -------- -------- Expected tax benefit at federal statutory income tax rate................................................... $(10,150) $(37,013) $(19,595) State and local income tax benefit....................... (1,015) (3,701) (1,960) Change in valuation allowance............................ 1,108 79,951 20,275 Change in contingency reserves........................... -- 2,073 (6,369) Utilization of foreign tax credits, net.................. -- (91) (4,718) Non-U.S. tax rate differences............................ (306) 524 (1,023) Non-deductible expenses.................................. 868 709 970 Non-deductible investment expense........................ 1,248 254 313 Expiration of net operating losses....................... 565 516 -- Other.................................................... 505 (874) 828 -------- -------- -------- Income tax (benefit) expense............................. $ (7,177) $ 42,348 $(11,279) ======== ======== ========
18 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) Deferred taxes are recorded to give recognition to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The tax effects of these temporary differences are recorded as deferred tax assets and 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 to reduce deferred tax assets when it is not more likely than not that a tax benefit will be realized. The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities of the Company at December 31, are as follows (in thousands):
2006 2005 -------- --------- Deferred tax assets: Net operating loss carryforwards.................... $ 72,830 $ 127,436 Capital loss carryforwards.......................... -- 20,950 Compensation and benefit related accruals........... 15,986 19,580 Foreign tax credit carryforwards.................... 16,662 16,662 Alternative minimum tax credit carryforwards........ 9,180 4,650 Accounts receivable................................. 1,288 1,858 Restructuring accruals.............................. 4,769 4,896 Gain on discontinued operations..................... 13,879 -- Other............................................... 7,996 4,185 Valuation allowance................................. (54,482) (113,854) -------- --------- Total deferred tax assets............................... 88,108 86,363 Deferred tax liabilities: Property, plant and equipment....................... (48,697) (70,788) Goodwill and other intangible assets................ (26,954) (20,641) Inventory........................................... (2,659) (2,372) Other............................................... (2,425) (2,607) -------- --------- Total deferred tax liabilities.......................... (80,735) (96,408) -------- --------- Net deferred tax asset (liability)...................... $ 7,373 $ (10,045) ======== =========
The net deferred tax asset (liability) as of December 31, includes the following (in thousands):
2006 2005 ------- -------- Current deferred tax asset (included in other current assets)............................................... $ 4,070 $ -- Long-term deferred tax asset (included in other assets, net).................................................. 7,659 -- Long-term deferred tax liability........................ (4,356) (10,045) ------- -------- Total............................................... $ 7,373 $(10,045) ======= ========
The Company has federal and state net operating loss carryforwards. The tax effect of these attributes was $72.8 million as of December 31, 2006. The Company utilized all of its capital loss carryforwards in 2006. Net operating loss carryforwards of $189.2 million will expire in 2023 through 19 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) 2025, foreign tax credit carryforwards of $16.7 million will expire in 2012 through 2015 and alternative minimum tax credit carryforwards of $9.2 million do not have an expiration date. The Company assesses the recoverability of its deferred tax assets and, to the extent recoverability does not satisfy the "more likely than not" recognition criteria under SFAS 109, records a valuation allowance against its deferred tax assets. The Company considered its recent operating results and anticipated 2007 taxable income in assessing the need for its valuation allowance. As a result, in the fourth quarter of 2006, the Company adjusted its valuation allowance to reflect the realizability of deferred tax assets. In 2006, the Company decreased its valuation allowance by approximately $59.4 million, primarily as a result of utilizing its net operating loss carryforwards, principally against the gain on sale of Supremex and certain other assets, which is reflected in discontinued operations (Note 3). During 2005, due to insufficient positive evidence substantiating recoverability, the Company increased its valuation allowance against its net U.S. deferred tax assets by $87.1 million, which included $7.1 million relating to the tax benefit from stock-based compensation. This resulted from management determining that it would no longer implement prior identified tax planning strategies. During 2004, the Company increased its valuation allowance by $20.3 million. This increase resulted from the Company's belief that it would not be able to realize certain U.S. deferred tax assets through the reversal of taxable temporary differences and the execution of available tax planning strategies given the net operating losses from its U.S. operations. The remaining portion of the Company's valuation allowance as of December 31, 2006 will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the remaining deferred tax assets will be realized. When sufficient positive evidence exists, the Company's income tax expense will be reduced by the decrease in its valuation allowance. An increase or reversal of the Company's valuation allowance could have a significant negative or positive impact on the Company's future earnings. Any reversal of the valuation allowance related to stock-based compensation will be reflected as paid-in capital and will not affect the Company's future effective income tax rate. The Company establishes tax contingency liabilities for potential tax issues, which are based on estimates of whether it is probable additional taxes will be due in the future. As of December 31, 2006 and 2005, the Company had tax contingency liabilities of $12.6 million and $9.5 million, respectively, which were included in other liabilities on its consolidated balance sheets. During 2004, the Internal Revenue Service ("IRS") completed the examination of the Company's tax years 1996 through 2002. The outcome of the tax audit resulted in the issuance of a "no change" letter by the IRS. As a result, the Company determined that tax contingency liabilities reserves of $6.4 million were no longer necessary and released these reserves in 2004. Net cash payments for income taxes were $2.7 million in 2006, $1.5 million in 2005 and $4.3 million in 2004. 20 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES 2006 ACTIVITY During 2006, the senior management team of Cenveo substantially completed the implementation of its cost savings programs that it initiated in September 2005, including the consolidation of the Company's purchasing activities and manufacturing platform, corporate and field human resources reductions, streamlining information technology infrastructure and eliminating all discretionary spending. As a result of these actions in 2006, the Company reduced headcount by approximately 900 employees, consolidated seven manufacturing facilities and closed three printing operations in 2006. Restructuring and impairment charges in 2006 are as follows (in thousands):
ENVELOPES, FORMS AND COMMERCIAL LABELS PRINTING CORPORATE TOTAL ---------- ---------- --------- ------- Employee separation costs.................... $ 6,746 $11,663 $1,438 $19,847 Asset impairments, net of gains on sale...... 2,697 935 -- 3,632 Equipment moving expenses.................... 4,972 1,398 -- 6,370 Lease termination expense (income), net...... 2,187 2,104 (276) 4,015 Building clean-up and other expenses......... 1,734 5,460 38 7,232 ------- ------- ------ ------- Total restructuring and impairment charges................................ $18,336 $21,560 $1,200 $41,096 ======= ======= ====== =======
ENVELOPES, FORMS AND LABELS. In 2006, the envelopes, forms and labels segment closed plants in Denver, Colorado, Chestertown, Maryland, Kankakee, Illinois, Phoenix, Arizona, Terre Haute, Indiana and Atlanta, Georgia and consolidated their activities into other plants and closed an office location. As a result of these activities, the segment recorded employee separation costs of $4.9 million related to workforce reductions, impairment charges of $1.8 million, net of the gain on sale of a facility of $1.9 million, and equipment moving expenses of $4.2 million for the redeployment of equipment. In addition, the segment recorded lease termination expenses of $2.2 million, representing the net present value of costs that are not expected to be recovered over the remaining terms of three leased facilities no longer in use and building clean-up and other expenses of $1.3 million. The segment incurred impairment charges of $0.9 million related to equipment taken out of service, equipment moving expenses of $0.8 million for the redeployment of equipment, and building clean-up and other expenses of $0.4 million related to locations closed in the fourth quarter of 2005. The segment incurred employee separation costs of $1.8 million related to workforce reductions at other locations relating to the Company's cost savings programs. COMMERCIAL PRINTING. In 2006, the commercial printing segment closed plants in Denver, Colorado, Phoenix, Arizona, Cambridge, Maryland, Glen Burnie, Maryland and Fenton, Missouri. As a result of these activities, the segment recorded employee separation costs of $4.2 million related to workforce reductions, asset impairment charges of $1.8 million related to equipment taken out of service at these locations, net of the gain on sale of a facility of $1.3 million, equipment moving expenses of $1.1 million for the redeployment of equipment, lease termination expenses of $2.1 million representing the net present value of costs that are not expected to be recovered over the remaining terms of three leased facilities no longer in use and building clean-up and other expenses of $3.3 million. The segment incurred employee separation costs of $2.4 million related to workforce reductions, equipment moving expenses of $0.3 million, building clean-up and other expenses of $2.2 million, and a 21 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) reduction of asset impairment charges of $0.9 million, relating to changes in its estimate of assets to be taken out of service for three plants to be closed or downsized in the fourth quarter of 2005. The segment incurred employee separation costs of $5.1 million related to workforce reductions at other locations relating to the Company's cost savings initiatives. CORPORATE. The Company incurred employee separation costs of $1.4 million and recorded lease termination income of $0.3 million resulting from adjusting its estimate of the net present value of the cost of the lease that is not expected to be recovered over its remaining life, upon subleasing its former corporate headquarters. 2005 ACTIVITY The following table and discussion present the details of the expenses recognized in 2005 as a result of new senior management's cost savings plan, as well as, restructuring expenses incurred as a result of programs initiated by the Company prior to September 2005. As a result of these actions in 2005, the Company reduced headcount by approximately 1,900 employees, consolidated three manufacturing facilities and closed three printing facilities. In addition, the Company incurred charges during 2005 related to a special meeting of shareholders and the changes made to the board of directors and management. These expenses are also included in the table and the discussion that follow: Restructuring, impairment and other charges in 2005 were as follows (in thousands):
ENVELOPES, FORMS AND COMMERCIAL LABELS PRINTING CORPORATE TOTAL ---------- ---------- --------- ------- Employee separation costs.................... $ 6,487 $ 9,348 $10,572 $26,407 Asset impairments............................ 5,066 20,340 853 26,259 Equipment moving expenses.................... 338 454 -- 792 Lease termination expenses................... 41 1,586 4,124 5,751 Multi-employer pension withdrawal expenses... 541 409 -- 950 Building clean-up and other expenses......... 67 313 -- 380 ------- ------- ------- ------- Total restructuring charges.................. 12,540 32,450 15,549 60,539 Other charges................................ -- 3,917 12,798 16,715 ------- ------- ------- ------- Total restructuring, impairment and other charges................................ $12,540 $36,367 $28,347 $77,254 ======= ======= ======= =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment closed plants in Philadelphia, Pennsylvania, Eugene, Oregon and Marshall, Texas. As a result of these plant closures, the segment recorded impairment charges of $2.3 million for equipment taken out of service, employee separation costs of $0.9 million, a pension withdrawal liability of $0.5 million and equipment moving expenses of $0.3 million to redeploy equipment. For additional plant closures planned for 2006, the segment incurred $0.1 million in employee separation costs, recorded impairment charges of $2.8 million related to equipment at these plants that it expected to take out of service in 2006 and equipment moving expenses of $0.1 million. 22 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) The segment incurred employee separation costs of $5.5 million at other locations relating to the Company's cost savings programs. COMMERCIAL PRINTING. The commercial printing segment completed the merger of its two plants in Seattle, Washington and its two plants in San Francisco, California. The cost to complete these mergers was $0.3 million. The segment closed two plants in Atlanta, Georgia and a plant in Waterbury, Connecticut and a small operation in Phoenix, Arizona. The segment recorded impairment charges of $3.8 million for equipment taken out of service or sold for less than its carrying value. Employee separation costs incurred for these four plant closures were $1.9 million. The cost incurred to redeploy equipment was $0.4 million. In addition, during 2005, the segment ceased use of three leased buildings and recorded lease termination expenses of $1.5 million. For additional plant closures planned for 2006, the segment recorded impairment charges of $12.5 million related to the equipment at the plants that it expected to take out of service or sell in 2006. The segment also incurred withdrawal liabilities of $0.4 million from several multi-employer pension plans in 2005. The segment incurred employee separation costs of $7.4 million at other locations relating to the Company's cost savings programs. In addition, new senior management terminated the implementation of a segment wide information system, for which a portion of the investment and other related information technology projects of $3.9 million was written-off. Other charges recorded by the segment include the settlement of a legal matter and the cost of legal matters that were settled in 2006. CORPORATE. In 2005, the Company made significant changes to its corporate management team and staff and moved its corporate headquarters from Denver, Colorado to Stamford, Connecticut. As a result, the Company incurred employee separation costs of $10.6 million. In addition, in December 2005, the Company ceased use of office space in Denver and recorded a $4.1 million charge representing the net present value of the cost of the lease that was not expected to be recovered over its remaining term and a $0.9 million charge for the net book value of leasehold improvements and furniture and fixtures. Other charges include the following: * In April 2005, the Company engaged an investment banking firm as a financial advisor to assist the then current board of directors in its evaluation of the Company's strategic alternatives and incurred fees of $3.2 million. * Legal and other fees incurred in connection with the special meeting of shareholders of $4.9 million. * In January 2005, the Company's Chief Executive Officer resigned and the cost incurred as a result of this resignation was $2.1 million. * Under the Company's Long-Term Incentive Plan, the change in the board of directors in September 2005 constituted a change of control and accelerated the vesting of the restricted stock issued to certain executives. The compensation expense recognized by the Company as a result of the vesting of this restricted stock totaled $2.6 million. 23 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) 2004 ACTIVITY Restructuring and impairment charges in 2004 were as follows (in thousands):
ENVELOPES, FORMS AND COMMERCIAL LABELS PRINTING CORPORATE TOTAL ---------- ---------- --------- ------ Employee separation costs..................... $ 683 $ 25 $ -- $ 708 Asset impairments (net of gain on sale)....... (360) 2,670 295 2,605 Equipment moving expenses..................... 157 169 -- 326 Lease termination expenses.................... -- 130 954 1,084 Building clean-up and other expenses.......... 684 -- -- 684 ------ ------ ------ ------ Total restructuring and impairment charges................................. $1,164 $2,994 $1,249 $5,407 ====== ====== ====== ======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment closed its envelope plant in Bensalem, Pennsylvania. The cost of this plant closure was $1.2 million and included employee separation costs of $0.7 million, expenses incurred to relocate equipment of $0.2 million, and building clean-up and other expenses of $0.7 million. The net gain recognized on the sale of the plant building exceeded the impairment charge recorded for assets taken out of service by $0.4 million. COMMERCIAL PRINTING. The commercial printing segment merged its two plants in Seattle, Washington and its two plants in San Francisco, California. The cost of these plant consolidations totaled $1.1 million and included impairment charges of $0.8 million for equipment taken out of service and other expenses of $0.3 million. At the end of 2004, the segment made the decision to close a small printing operation in Phoenix, Arizona and recorded a $1.4 million impairment charge for equipment taken out of service in 2005. The segment incurred other equipment impairments of $0.4 million recorded in 2004. 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. A summary of the activity charged to the restructuring liabilities is as follows (in thousands):
LEASE EMPLOYEE PENSION TERMINATION SEPARATION WITHDRAWAL COSTS COSTS LIABILITIES OTHER TOTAL ----------- ---------- ----------- ----- -------- Balance at December 31, 2004...... $ 1,079 $ -- $ -- $ 14 $ 1,093 Accruals..................... 5,751 26,407 950 -- 33,108 Payments..................... (763) (22,673) -- (4) (23,440) Reversal of unused accrual... -- -- -- (10) (10) ------- -------- ----- ---- -------- Balance at December 31, 2005...... 6,067 3,734 950 -- 10,751 Accruals, net................. 4,015 19,847 -- -- 23,862 Payments...................... (4,541) (22,154) (308) -- (27,003) ------- -------- ----- ---- -------- Balance at December 31, 2006...... $ 5,541 $ 1,427 $ 642 $ -- $ 7,610 ======= ======== ===== ==== ========
24 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK-BASED COMPENSATION The Company's 2001 Long-Term Incentive Plan (the "Plan") provides for the grant of stock options, restricted shares and stock appreciation rights of the Company's common stock and restricted share units ("RSUs") based on the Company's common stock to certain officers, other key employees, non-employee directors and consultants. The Company's outstanding nonvested stock options have maximum contractual terms of up to ten years, principally vest ratably over four years and were granted at exercise prices equal to the market price of the Company's common stock on the date of grant. The Company's outstanding stock options are exercisable into shares of the Company's common stock. The Company's outstanding restricted shares vest ratably over four years. The Company has no outstanding stock appreciation rights. The Company's outstanding restricted share units principally vest ratably over four years. Upon vesting, the restricted share units are convertible into shares of the Company's common stock. Effective January 1, 2006, the Company adopted SFAS 123(R). As a result, the Company now measures the cost of employee services received in exchange for an award of equity instruments, including grants of employee stock options, restricted stock and restricted share units, based on the fair value of the award at the date of grant rather than its intrinsic value, the method the Company previously used. The Company is using the modified prospective application method under SFAS 123(R) and has elected not to use the retrospective application method. Thus, amortization of the fair value of all nonvested grants as of January 1, 2006, as determined under the previous pro forma disclosure provisions of SFAS 123, except as adjusted for estimated forfeitures, is included in the Company's results of operations commencing January 1, 2006, and prior periods have not been restated. As required under SFAS 123(R), the Company has reversed the unearned compensation component of shareholders' equity (deficit) with an equal offsetting reduction of paid-in capital as of January 1, 2006 and is now increasing paid-in capital for share-based compensation costs recognized during the period. Additionally, effective with the adoption of SFAS 123(R), the Company recognizes share-based compensation expense net of estimated forfeitures, rather than as forfeitures occur as presented under the previous pro forma disclosure provisions of SFAS 123 subsequently set forth in this footnote. Employee stock compensation grants or grants modified, repurchased or cancelled on or after January 1, 2006 are valued in accordance with SFAS 123(R). Under SFAS 123(R), the Company has chosen (1) the Black-Scholes-Merton option pricing model (the "Black-Scholes Model") for purposes of determining the fair value of stock options granted commencing January 1, 2006 and (2) to continue recognizing compensation costs ratably over the requisite service period for each separately vesting portion of the award. Total share-based compensation expense recognized in selling, general and administrative expenses in the Company's consolidated statements of operations was $6.0 million, $2.5 million and $0.7 million in 2006, 2005 and 2004, respectively. Total share-based compensation expense recognized in restructuring, impairment and other charges in the Company's consolidated statements of operations was $2.7 million in 2005. As a result of adopting SFAS 123(R) on January 1, 2006, the Company's income from continuing operations before income taxes and net income in 2006 was $3.3 million lower than if it had continued to account for share based compensation under Accounting Principles Board Opinion 25 ("APB 25"). Basic and diluted income per share in 2006 was $0.06 lower than if the Company had to account for share-based compensation under APB 25. Net cash used in operating and financing activities in 2006 were the same as if the Company had continued to account for share-based compensation under APB 25. As of December 31, 2006, there was approximately $29.1 million of total unrecognized compensation cost related to nonvested share-based compensation grants, which is expected to be amortized over a weighted-average period of 2.2 years. 25 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK-BASED COMPENSATION (CONTINUED) Stock Options A summary of the Company's outstanding stock options as of and for the year ended December 31, 2006 is as follows:
WEIGHTED AVERAGE AGGREGATE WEIGHTED REMAINING INTRINSIC AVERAGE CONTRACTUAL VALUE(A) EXERCISE TERM (IN OPTIONS PRICE (IN YEARS) THOUSANDS) --------- -------- ----------- ---------- Outstanding at January 1, 2006....................... 2,365,961 $ 8.95 Granted.............................................. 1,570,000 20.55 Exercised............................................ (329,814) 6.03 $ 3,479 ======= Forfeited............................................ (279,367) 8.99 --------- Outstanding at December 31, 2006..................... 3,326,780 14.71 5.7 $21,589 ========= ======= Exercisable at December 31, 2006..................... 549,280 9.32 5.4 $ 6,529 ========= ======= - ---------------------------------------------------------------------------------------------------------------- (a) Intrinsic value for purposes of this table represents the amount by which the fair value of the underlying stock, based on the respective market prices at December 31, 2006 or, if exercised, the exercise dates, exceeds the exercise prices of the respective options which, for outstanding options, represents only those expected to vest.
The following table summarizes the activity of stock options for the years ended December 31, 2005 and 2004:
2005 2004 ------------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE ---------- -------- --------- -------- Options outstanding at beginning of year......... 6,868,100 $5.55 5,738,569 $6.16 Granted.......................................... 2,308,000 9.17 1,885,130 3.72 Exercised........................................ (4,661,854) 4.82 (19,331) 2.62 Expired/cancelled................................ (2,148,285) 7.06 (736,268) 7.26 ---------- --------- Options outstanding at end of year............... 2,365,961 8.97 6,868,100 5.55 ========== ========= Options exercisable at end of year............... 535,961 6.83 3,858,396 6.67 ========== =========
The total intrinsic value of stock options exercised during 2005 was approximately $19.5 million and during 2004 was approximately $19,000. 26 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK-BASED COMPENSATION (CONTINUED) The weighted-average grant date fair value of stock options granted during the three years ended December 31, 2006, at exercise prices equal to the market price of the stock on the grant dates, as calculated under the Black-Scholes Model with the weighted-average assumptions are as follows:
2006 2005 2004 ----- ----- ----- Weighted average fair value of option grants during the year...................................................... $9.56 $5.08 $2.22 Assumptions: Expected option life in years.......................... 4.27 4.81 5.00 Risk-free interest rate................................ 4.75% 4.40% 3.10% Expected volatility.................................... 51.6% 62.4% 69.6% Expected dividend yield................................ 0.0% 0.0% 0.0%
The risk-free interest rate represents the U.S. Treasury Bond constant maturity yield approximating the expected option life of stock options granted during the period. The expected option life represents the period of time that the stock options granted during the period are expected to be outstanding, based on the mid-point between the vesting date and contractual expiration date of the option. The expected volatility is based on the historical market price volatility of the Company's common stock for the expected term of the options, adjusted for expected mean reversion. Restricted Shares and RSUs A summary of the Company's nonvested restricted shares and RSUs as of and for 2004, 2005 and 2006 is as follows:
RESTRICTED GRANT DATE GRANT DATE SHARES FAIR VALUE RSUS FAIR VALUE ---------- ---------- -------- ---------- Outstanding at January 1, 2004............ 644,000 $4.90 -- -- Granted................................... 303,710 3.32 -- -- Vested.................................... (14,922) 4.02 -- -- -------- -------- Outstanding at December 31, 2004.......... 932,788 4.40 -- -- Granted................................... 485,680 8.47 236,600 $ 9.69 Vested.................................... (739,449) 5.48 -- -- Forfeited................................. (479,019) 4.72 -- -- -------- -------- Outstanding at December 31, 2005.......... 200,000 $9.52 236,600 $ 9.69 Granted................................... -- -- 532,150 20.55 Vested.................................... (50,000) 9.52 (141,600) 9.81 Forfeited................................. -- -- (20,000) 9.52 -------- -------- Outstanding at December 31, 2006.......... 150,000 $9.52 607,150 $19.19 ======== ========
The total fair value of restricted shares and RSUs which vested during 2006 was $1.0 million and $2.9 million, respectively, as of the respective vesting dates. 27 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK-BASED COMPENSATION (CONTINUED) The accompanying consolidated statements of operations for 2005 and 2004 were not restated since the Company elected not to use the retrospective application method under SFAS 123(R). A summary of the effect on net loss and net loss per share for 2005 and 2004 as if the Company had applied the fair value recognition provisions of SFAS 123 to share-based compensation for all outstanding and nonvested stock options (calculated using the Black-Scholes Model) and restricted shares is as follows (in thousands except per share data):
2005 2004 --------- -------- Net loss as reported........................................ $(135,052) $(19,708) Reversal of share-based compensation expense determined under the intrinsic value method included in net loss, net of taxes.................................................. 2,505 718 Recognition of share-based compensation expense determined under the fair value method, net of taxes................. (8,962) (4,952) --------- -------- Pro forma net loss.......................................... $(141,509) $(23,942) ========= ======== Net loss per share--basic and diluted: As reported............................................. $ (2.70) $ (0.41) ========= ======== Pro forma............................................... $ (2.83) $ (0.50) ========= ========
Under the Plan, the change in the Company's board of directors on September 12, 2005, triggered the change of control provision of the Plan. Accordingly, all outstanding stock options and restricted stock vested on September 12, 2005. The amount of stock-based compensation expense reflected in the pro forma calculation of net loss per share for 2005 is primarily the result of the acceleration in the vesting of the outstanding stock options and restricted stock. The Black-Scholes Model has limitations on its effectiveness including that it was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and that the model requires the use of highly subjective assumptions including expected stock price volatility. The Company's stock option awards to employees have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimates. In November 2005, the FASB issued FASB Staff Position ("FSP"), No. 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. FSP No. 123(R)-3 provides an elective alternative method that establishes a computational component to arrive at the beginning balance of the paid-in capital pool related to employee compensation and a simplified method to determine the subsequent impact on the paid-in capital pool of employee awards that are fully vested and outstanding upon the adoption of SFAS 123(R). This election is not available for adoption until January 1, 2007. The Company has determined not to use the alternative method. 13. 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. In 2006, the Company only matched certain union employee's voluntary contributions. In 2005 and 2004, the Company matched a certain percentage of each employee's voluntary contribution. All contributions made by the Company were made in cash and allocated pro-rata to the funds selected by the employee. Company contributions to the plan were approximately $0.4 million in 2006 28 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. RETIREMENT PLANS (CONTINUED) and $6.0 million in 2005 and 2004. The plan held 2,192,289 shares of the Company's common stock at December 31, 2006. PENSION PLANS. The Company currently maintains pension plans for certain of its employees in the U.S. 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 an acquisition in 2000, the Company assumed responsibility for a supplemental executive retirement plan ("SERP"), which provide benefits to certain former directors and executives. For accounting purposes, these plans are unfunded; however, the predecessor company had purchased annuities, which are included in other assets, net 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. In September 2006, the FASB issued SFAS 158. This standard requires an employer to: (i) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status; (ii) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. These changes will be reported in accumulated other comprehensive income. For the Company, the requirement to recognize the funded status of its benefit plans and the disclosure requirements are effective as of December 31, 2006 and are detailed below. The Company's current measurement date is the date of its fiscal year end; therefore, the measurement date requirement under SFAS 158 will have no impact on the Company. Beginning in 2007, the Company will recognize changes in the funded status in the year in which the change occurs through accumulated other comprehensive income on its consolidated balance sheet. The effect of applying SFAS 158 on the accompanying consolidated balance sheet as of December 31, 2006, was (in thousands):
BEFORE AFTER APPLICATION OF EFFECT OF APPLYING APPLICATION OF SFAS 158 SFAS 158 SFAS 158 -------------- ------------------ -------------- Other assets, net............................ $ 34,327 $ (42) $ 34,285 Total assets................................. 1,001,992 (42) 1,001,950 Other liabilities............................ 40,235 405 40,640 Accumulated other comprehensive income....... 3,111 (363) 2,748 Total shareholders' equity (deficit)......... 62,104 (363) 61,741 Total liabilities and shareholders' equity (deficit)................................... 1,001,992 (42) 1,001,950
29 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. RETIREMENT PLANS (CONTINUED) As a result of the sale of Supremex (Note 3), the Company has no further obligation relating to Supremex's pension plans. The following table sets forth the financial status of the Company's U.S. pension plans and the SERP and the amounts recognized in the consolidated balance sheets as of December 31, 2006 (in thousands). The amounts as of December 31, 2005 include Supremex's pension plans.
PENSION PLANS SERP --------------------- -------------------- 2006 2005 2006 2005 ------- -------- ------- ------- Change in projected benefit obligation: Benefit obligation at beginning of year...... $11,888 $ 55,164 $ 8,023 $ 8,410 Service cost................................. 169 2,138 -- -- Interest cost................................ 668 3,212 1,393 571 Participant contributions.................... -- 531 -- -- Actuarial (gain) loss........................ (559) 2,710 -- -- Foreign currency translation................. -- 2,771 -- -- Benefits paid................................ (635) (2,761) (953) (958) ------- -------- ------- ------- Benefit obligation at end of year......... $11,531 $ 63,765 $ 8,463 $ 8,023 ------- -------- ------- ------- Change in plan assets: Fair value of plan assets at beginning of year........................................ $ 8,596 $ 45,102 $ -- $ -- Actual return on plan assets.................. 1,022 4,032 -- -- Participant contributions..................... -- 531 -- -- Employer contributions........................ 539 3,047 -- -- Foreign currency translation.................. -- 2,324 -- -- Benefits paid................................. (635) (2,761) -- -- ------- -------- ------- ------- Fair value of plan assets at end of year.................................... 9,522 52,275 -- -- ------- -------- ------- ------- Funded status............................. $(2,009) $(11,490) $(8,463) $(8,023) ======= ======== ======= ======= Amounts recognized in accumulated other comprehensive loss: Net actuarial loss............................ $(3,320) $ -- $ -- $ -- Prior service cost............................ (34) -- -- -- ------- -------- ------- ------- Total..................................... $(3,354) $ -- $ -- $ -- ======= ======== ======= =======
The components of the net periodic pension expense for the U.S. pension plans and the SERP for the years ended December 31, was as follows (in thousands):
2006 2005 2004 ------ ------ ------ Service cost........................................... $ 169 $ 173 $ 197 Interest cost on projected benefit obligation.......... 2,061 1,196 1,269 Expected return on plan assets......................... (703) (710) (742) Net amortization and deferral.......................... 8 8 8 Recognized actuarial loss.............................. 267 200 134 ------ ------ ------ Net periodic pension expense............................ $1,802 $ 867 $ 866 ====== ====== ======
30 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. RETIREMENT PLANS (CONTINUED) The assumptions used in computing the net pension expense and the funded status were as follows:
2006 2005 2004 ---------- ---------- ---------- Weighted average discount rate............. 6.00% 5.50-5.75% 5.75% Expected long-term rate of return on assets................................... 8.00% 8.00% 8.00% Rate of compensation increase.............. 4.00% 3.5-4% 3.5-4%
The discount rate assumption used to determine the Company's pension obligations at December 31, 2006, was based on the Hewitt Yield Curve ("HYC"), with the result rounded to the nearest 0.25%. The HYC was designed by Hewitt Associates to provide a means for plan sponsors to value the obligations of their pension plans or postretirement benefit plans. The HYC is a hypothetical double A yield curve represented by a series of annualized individual discount rates. Each bond issue underlying the HYC is required to have a rating of Aa or better by Moody's Investor Service, Inc. or a rating AA or better by Standard & Poor's. The discount rate assumptions for the pension expenses in 2006 and the obligations at December 31, 2006 and 2005 were also based on the HYC. 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 and the target allocations for the investments as of December 31, were as follows:
U.S. PLANS CANADIAN PLANS ---------------------------- ----------------- 2006 2005 TARGET 2005 TARGET ---- ---- ------ ---- ------ Equity securities............................ 67% 69% 68% 49% 50% Debt securities, including cash.............. 27% 26% 27% 51% 50% Real estate.................................. 6% 5% 5% 0% 0% --- --- --- --- --- 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 projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the plans with accumulated benefit obligations in excess of plan assets as of December 31, were as follows (in thousands):
U.S. PLANS CANADIAN PLANS --------------------- -------------- 2006 2005 2005 ------- ------- -------------- Projected benefit obligation............................ $11,531 $11,888 $51,877 Accumulated benefit obligation.......................... 11,202 11,529 45,427 Fair value of plan assets............................... 9,522 8,596 43,679
The Company expects to contribute $0.8 million to its pension plans and $0.2 million to SERP in 2007. 31 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. 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 2007 through 2011, and in the aggregate for the years 2012 through 2016, are as follows (in thousands):
PENSION PLANS SERP ------------- ------ 2007 ........... $ 594 $ 953 2008 ........... 604 953 2009 ........... 621 953 2010 ........... 646 953 2011 ........... 655 953 2012 - 2016 ........... 3,587 3,697
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 $3.1 million in 2006, $3.2 million in 2005 and $3.0 million in 2004. In 2005, the Company recorded withdrawal liabilities of $1.0 million from certain multi-employer pension plans that were incurred in connection with its restructuring program (Note 11). 14. COMMITMENTS AND CONTINGENCIES LEASES. The Company leases buildings and equipment under operating lease agreements expiring at various dates through 2018 (Note 11). Certain leases include renewal and purchase options. As of December 31, 2006, future minimum annual payments under non-cancelable lease agreements with original terms in excess of one year were as follows (in thousands): 2007.................................. $27,972 2008.................................. 19,208 2009.................................. 13,282 2010.................................. 8,254 2011.................................. 4,891 Thereafter............................ 9,074 ------- Total............................. $82,681 =======
Aggregate future minimum rentals to be received under non-cancelable subleases as of December 31, 2006 are approximately $0.3 million. Rent expense was $35.2 million in 2006, $39.3 million in 2005 and $35.7 million in 2004. 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 (Note 11). 32 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. 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 its results of operations (Note 10). 15. ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income was as follows (in thousands):
DECEMBER 31 --------------------- 2006 2005 ------- ------- Currency translation adjustments............................ $ 7,945 $25,935 Unrealized loss on cash flow hedges......................... (2,992) -- Pension liability adjustments, net of tax benefit........... (2,205) (8,531) ------- ------- Accumulated other comprehensive income...................... $ 2,748 $17,404 ======= =======
As a result of the sale of Supremex and certain other assets, the Company reclassified into the gain on sale of discontinued operations from accumulated other comprehensive income $6.0 million of a minimum pension liability adjustment (Note 3). 16. INCOME (LOSS) PER SHARE Basic income (loss) per share is computed based upon the weighted average number of common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution that could occur if options to issue common stock were exercised. The only Company securities as of December 31, 2006 that could dilute basic income per share for periods subsequent to December 31, 2006 are (1) outstanding stock options which are exercisable into 3,326,780 shares of the Company's common stock and (2) 757,150 shares of restricted stock and RSUs. The following table sets forth the computation of basic and diluted income (loss) per share for the years ended December 31, (in thousands, except per share data):
2006 2005 2004 -------- --------- -------- Numerator for basic and diluted income (loss) per share: Loss from continuing operations.................... $(21,825) $(148,101) $(44,708) Income from discontinued operations, net of taxes............................................ 140,480 13,049 25,000 -------- --------- -------- Net income (loss).................................. $118,655 $(135,052) $(19,708) ======== ========= ======== Denominator weighted average common shares outstanding: Basic shares....................................... 53,288 50,038 47,750 Dilutive effect of stock options............... -- -- -- -------- --------- -------- Diluted shares..................................... 53,288 50,038 47,750 ======== ========= ======== Income (loss) per share - basic and diluted: Continuing operations.............................. $ (0.41) $ (2.96) $ (0.94) Discontinued operations............................ 2.64 0.26 0.53 -------- --------- -------- Net income (loss).................................. $ 2.23 $ (2.70) $ (0.41) ======== ========= ========
33 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. RELATED PARTY TRANSACTIONS In 2005, a group of shareholders called for a special meeting of shareholders to elect a new board of directors. On September 9, 2005, the shareholder group and the board of directors of the Company reached an agreement pursuant to which the board of directors was reconstituted and a new Chairman and Chief Executive Officer was appointed effective September 12, 2005. In 2005, the Company reimbursed Burton Capital Management, LLC $0.8 million for expenses incurred in its efforts to elect a new board of directors. The Company's Chairman and Chief Executive Officer is also the Chairman, Chief Executive Officer and Managing Member of Burton Capital Management, LLC. 18. SEGMENT INFORMATION The Company operates in two segments--the envelope, forms and labels segment and the commercial printing segment. The envelopes, forms and labels segment specializes in the manufacturing and printing of customized envelopes for billing and remittance and direct mail advertising. This segment also produces business forms and labels, custom and stock envelopes and mailers generally sold to third-party dealers such as print distributors, office products suppliers, office-products retail chains and the U.S. retail pharmacy market. The commercial printing segment is in the business of designing, manufacturing and distributing printed products that include advertising literature, corporate identity materials, financial printing, calendars, greeting cards, brand marketing materials, catalogs, maps, CD packaging and direct mail. Operating income of each segment includes all costs and expenses directly related to the segment's operations. Corporate expenses include corporate general and administrative expenses (Note 11). Corporate identifiable assets consist primarily of cash and cash equivalents, miscellaneous receivables, deferred financing fees, deferred tax assets and other assets. 34 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SEGMENT INFORMATION (CONTINUED) Summarized financial information concerning the reportable segments as of and for the years ended December 31, is as follows (in thousands):
2006 2005 2004 ---------- ---------- ---------- Net sales: Envelopes, Forms and Labels................ $ 780,696 $ 767,403 $ 754,609 Commercial Printing........................ 730,528 827,378 843,043 ---------- ---------- ---------- Total...................................... $1,511,224 $1,594,781 $1,597,652 ========== ========== ========== Operating income (loss): Envelopes, Forms and Labels................ $ 85,877 $ 51,830 $ 54,150 Commercial Printing........................ 13,766 (30,675) 4,184 Corporate.................................. (32,964) (47,465) (20,906) ---------- ---------- ---------- Total...................................... $ 66,679 $ (26,310) $ 37,428 ========== ========== ========== Restructuring, asset impairment and other charges: Envelopes, Forms and Labels................ $ 18,336 $ 12,540 $ 1,164 Commercial Printing........................ 21,560 36,367 2,994 Corporate.................................. 1,200 28,347 1,249 ---------- ---------- ---------- Total...................................... $ 41,096 $ 77,254 $ 5,407 ========== ========== ========== Significant noncash charges (credits): Envelopes, Forms and Labels................ $ 6,880 $ 5,107 $ 1,036 Commercial Printing........................ 3,821 21,926 2,670 Corporate.................................. (355) 4,977 295 ---------- ---------- ---------- Total...................................... $ 10,346 $ 32,010 $ 4,001 ========== ========== ========== Depreciation and intangible asset amortization: Envelopes, Forms and Labels................ $ 16,438 $ 17,728 $ 19,010 Commercial Printing........................ 23,567 29,978 29,466 Corporate.................................. 688 542 1,053 ---------- ---------- ---------- Total...................................... $ 40,693 $ 48,248 $ 49,529 ========== ========== ========== Capital expenditures: Envelopes, Forms and Labels................ $ 4,837 $ 3,884 $ 5,748 Commercial Printing........................ 12,974 23,065 18,454 Corporate.................................. 2,119 1,205 2,038 ---------- ---------- ---------- Total...................................... $ 19,930 $ 28,154 $ 26,240 ========== ========== ========== Net sales by product line: Envelopes.................................. $ 582,460 $ 594,327 $ 574,203 Commercial Printing........................ 727,611 812,194 821,332 Labels and Business Forms.................. 201,153 188,260 202,117 ---------- ---------- ---------- Total...................................... $1,511,224 $1,594,781 $1,597,652 ========== ========== ========== Intercompany sales: Envelopes, Forms and Labels to Commercial Printing................................. $ 13,254 $ 12,629 $ 8,949 Commercial Printing to Envelopes, Forms and Labels................................... 15,855 19,977 13,453 ---------- ---------- ---------- Total...................................... $ 29,109 $ 32,606 $ 22,402 ========== ========== ==========
35 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31 --------------------------- 2006 2005 ---------- ---------- Identifiable assets: Envelopes, Forms and Labels......................... $ 484,366 $ 613,580 Commercial Printing................................. 393,954 438,938 Corporate........................................... 123,630 27,046 ---------- ---------- Total............................................... $1,001,950 $1,079,564 ========== ==========
Geographic information as of and for the years ended December 31, is as follows (in thousands):
2006 2005 2004 ---------- ---------- ---------- Net sales: U.S........................................ $1,452,453 $1,535,281 $1,536,578 Canada..................................... 58,771 59,500 61,074 ---------- ---------- ---------- Total...................................... $1,511,224 $1,594,781 $1,597,652 ========== ========== ========== 2006 2005 ---------- ---------- Long-lived assets (property plant and equipment and intangible assets): U.S........................................ $ 517,018 $ 540,332 Canada..................................... 29,918 112,381 ---------- ---------- Total...................................... $ 546,936 $ 652,713 ========== ==========
19. 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 -------- -------- -------- -------- YEAR ENDED 2006 Net sales........................................... $385,286 $357,895 $383,868 $384,175 Operating income.................................... 9,854 5,685 25,028 26,112 Income (loss) from continuing operations............ (8,848) (45,801) 9,290 23,534 Income from discontinued operations, net of taxes... 121,050 12,707 2,326 4,397 Net income (loss)................................... 112,202 (33,094) 11,616 27,931 Income (loss) per share from continuing operations-- basic(1).......................................... (0.17) (0.86) 0.18 0.44 Income (loss) per share from continuing operations-- diluted(1)........................................ (0.17) (0.86) 0.17 0.43 Income per share from discontinued operations--basic and diluted(1).................................... 2.28 0.24 0.04 0.08 Net income (loss) per share--basic(1)............... 2.11 (0.62) 0.22 0.52 Net income (loss) per share--diluted(1)............. 2.11 (0.62) 0.21 0.51
36 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- YEAR ENDED 2005 Net sales........................................... $409,738 $385,469 $392,148 $407,426 Operating income (loss)............................. (3,941) 4,739 (13,078) (14,030) Loss from continuing operations..................... (28,069) (16,159) (69,335) (34,538) Income (loss) from discontinued operations, net of taxes............................................. 5,513 5,550 5,257 (3,271) Net loss............................................ (22,556) (10,609) (64,078) (37,809) Basic and diluted income (loss) per share(1): Continuing operations........................... $ (0.59) $ (0.33) $ (1.38) $ (0.65) Discontinued operations......................... 0.12 0.11 0.10 (0.06) -------- -------- -------- -------- Net income (loss)............................... $ (0.47) $ (0.22) $ (1.28) $ (0.71) ======== ======== ======== ======== - -------------- (1) The quarterly earnings per share information is computed separately for each period. Therefore, the sum of such quarterly per share amounts may differ from the total for the year.
20. SUBSEQUENT EVENTS On February 12, 2007, the Company completed the acquisition of all of the common stock of PC Ink Corp., ("Printegra") for approximately $78 million in cash, which was funded through the Company's Revolving Credit Facility. Printegra generates annual revenues of approximately $90 million and operates thirteen strategically located facilities domestically. Printegra produces printed business communication documents, including laser cut sheets, envelopes, business forms, security documents, and labels, which are regularly consumed by small and large businesses. Printegra's results of operations and cash flows from the February 12, 2007 acquisition date will be included in the Company's consolidated results of operations and cash flows within the envelopes, forms and labels segment. On February 22, 2007, the Company entered into an agreement to sell its remaining 8,947,439 units in the Fund for estimated net proceeds of $67 million. The sale of the units in the Fund is expected to close in March 2007. 37 PART IV Item 15 of the Original 10-K is amended as follows: ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) FINANCIAL STATEMENTS Included in Part II, Item 8 of this Report. The separate audited Canadian GAAP financial statements of the Supremex Income Fund, the Company's significant equity investee as defined under Rule 3-09 of Regulation S-X, are included in Exhibit 99.1 of this report. (a)(13) Exhibits The exhibits listed in the Exhibit Index following the signature page hereto are filed herewith. 38 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 June 26, 2007. CENVEO, INC. By: /S/ ROBERT G. BURTON, SR. --------------------------------------- Robert G. Burton, Sr., Chairman and Chief Executive Officer (Principal Executive Officer) By: /S/ SEAN S. SULLIVAN --------------------------------------- Sean S. Sullivan, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ernst & Young LLP. 31.1 Certification by Robert G. Burton, Sr., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by Sean S. Sullivan, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to this report on Form 10-K/A. 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to this report on Form 10-K/A. 99.1 Audited Canadian GAAP financial statements of the Supremex Income Fund for the 276-day period ended December 31, 2006.
EX-23.1 2 ex23p1.txt EXHIBIT 23.1 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, 2007, except for the fourth paragraph of Note 3 as to which the date is June 26, 2007, 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/A) for the year ended December 31, 2006. /S/ ERNST & YOUNG LLP --------------------------------- Stamford, Connecticut June 26, 2007 EX-23.2 3 ex23p2.txt EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS 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 report dated February 2, 2007, with respect to the consolidated financial statements of Supremex Income Fund as at December 31, 2006 and for the 276-day period then ended, included in the Annual Report of Cenveo, Inc. (Form 10-K/A) for the year ended December 31, 2006. /S/ ERNST & YOUNG LLP --------------------------------- Montreal, Canada June 26, 2007 EX-31.1 4 ex31p1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert G. Burton, Sr., the Chairman and Chief Executive Officer of Cenveo, Inc., certify that: 1. I have reviewed this annual report on Form 10-K/A 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: June 26, 2007 /S/ ROBERT G. BURTON, SR. -------------------------------------- Robert G. Burton, Sr. Chairman and Chief Executive Officer EX-31.2 5 ex31p2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Sean S. Sullivan, the Chief Financial Officer of Cenveo, Inc., certify that: 1. I have reviewed this annual report on Form 10-K/A 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: June 26, 2007 /S/ SEAN S. SULLIVAN ------------------------------------------- Sean S. Sullivan Chief Financial Officer EX-32.1 6 ex32p1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert G. Burton, Sr., the Chairman 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/A of the Company for the fiscal year ended December 31, 2006 (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: June 26, 2007 /S/ ROBERT G. BURTON, SR. -------------------------------------- Robert G. Burton, Sr. Chairman and Chief Executive Officer EX-32.2 7 ex32p2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Sean S. Sullivan, the 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/A of the Company for the fiscal year ended December 31, 2006 (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: June 26, 2007 /S/ SEAN S. SULLIVAN ------------------------------------------- Sean S. Sullivan Chief Financial Officer EX-99.1 8 ex99p1.txt EXHIBIT 99.1 Consolidated Financial Statements SUPREMEX INCOME FUND For the 276-day period ended December 31, 2006 All amount expressed in Canadian dollars 1 AUDITORS' REPORT To the board of trustees of SUPREMEX INCOME FUND We have audited the accompanying consolidated balance sheet of SUPREMEX INCOME FUND (the "Fund") as at December 31, 2006 and the related consolidated statements of earnings and deficit and cash flows for the 276-day period then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Fund is not required to have nor were we engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Fund as at December 31, 2006 and the consolidated results of its operations and its cash flows for the 276-day period then ended in accordance with Canadian generally accepted accounting principles. /s/ Ernst & Young LLP Montreal, Canada February 2, 2007 Chartered Accountants 2 SUPREMEX INCOME FUND CONSOLIDATED BALANCE SHEET
As at December 31, 2006 $ - --------------------------------------------------------------------------------------------------------- ASSETS (NOTE 11) CURRENT Cash 14,251,559 Accounts receivable (note 4) 28,062,695 Income taxes receivable 860,622 Inventories (note 5) 15,193,161 Prepaid expenses 1,565,583 - --------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 59,933,620 - --------------------------------------------------------------------------------------------------------- Property, plant and equipment, net (note 6) 41,863,507 Accrued pension benefit asset (note 7) 5,723,700 Deferred financing costs, net (note 8) 420,114 Intangible assets, net (note 9) 51,988,032 Goodwill (note 2) 245,063,721 - --------------------------------------------------------------------------------------------------------- 404,992,694 ========================================================================================================= LIABILITIES AND UNITHOLDERS' EQUITY CURRENT Accounts payable and accrued liabilities (note 10) 24,574,117 Distribution payable (note 14) 2,999,658 Payable to Cenveo (note 2) 5,509,045 - --------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 33,082,820 - --------------------------------------------------------------------------------------------------------- Term credit facility (note 11) 75,000,000 Future income tax liabilities (note 12) 18,768,539 Other post-retirement benefits obligation (note 7) 736,200 - --------------------------------------------------------------------------------------------------------- UNITHOLDERS' EQUITY Funds units (note 13) 302,237,605 Deferred compensation (note 13) (17,266,761) Deficit (7,565,709) - --------------------------------------------------------------------------------------------------------- 277,405,135 - --------------------------------------------------------------------------------------------------------- 404,992,694 =========================================================================================================
Commitments, contingencies and guarantees (note 15) See accompanying notes On behalf of the Trustees: By: (Signed) L.G. Serge Gadbois By: (Signed) Gilles Cyr ------------------------------- ----------------------- Trustee Trustee 3 SUPREMEX INCOME FUND CONSOLIDATED STATEMENT OF EARNINGS AND DEFICIT
For the 276-day period ended December 31, 2006 $ - ---------------------------------------------------------------------------------------------------------------- REVENUE 147,223,009 Cost of good sold, selling, general and administrative expenses 114,714,676 - ---------------------------------------------------------------------------------------------------------------- Earnings before the following 32,508,333 - ---------------------------------------------------------------------------------------------------------------- Amortization of property, plant and equipment 2,678,500 Amortization of intangible assets 4,231,968 Amortization of deferred compensation 6,351,877 Gain on disposal of property, plant and equipment (35,442) Net financing charges (note 11) 3,055,470 - ---------------------------------------------------------------------------------------------------------------- 16,282,373 - ---------------------------------------------------------------------------------------------------------------- Earnings before income taxes 16,225,960 Provision for income taxes (recovery) (note 12) (3,205,253) - ---------------------------------------------------------------------------------------------------------------- NET EARNINGS FOR THE PERIOD 19,431,213 Deficit, beginning of period -- Distribution declared (note 14) (26,996,922) - ---------------------------------------------------------------------------------------------------------------- DEFICIT, END OF PERIOD (7,565,709) ================================================================================================================ BASIC AND DILUTED NET EARNINGS PER UNIT 0.6206 ================================================================================================================ WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING (note 13) 31,311,667 ================================================================================================================ See accompanying notes
4 SUPREMEX INCOME FUND CONSOLIDATED STATEMENT OF CASH FLOWS
For the 276-day period ended December 31, 2006 $ - --------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings for the period 19,431,213 Items not affecting cash and cash equivalents Amortization of property, plant and equipment 2,678,500 Amortization of intangible assets 4,231,968 Amortization of deferred compensation 6,351,877 Amortization of deferred financing costs 97,386 Gain on disposal of property, plant and equipment (35,442) Future income tax recovery (3,373,901) Change in other post-retirement benefits obligation (27,400) Change in accrued pension benefit assets (569,200) Net change in non-cash working capital balances 13,416,629 - --------------------------------------------------------------------------------------------------------- CASH FLOWS RELATED TO OPERATING ACTIVITIES 42,201,630 - --------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Business acquisitions, net of cash acquired (note 2) (207,752,714) Additions to property, plant and equipment (4,468,450) Proceeds from disposal of property, plant and equipment 389,182 - --------------------------------------------------------------------------------------------------------- CASH FLOWS RELATED TO INVESTING ACTIVITIES (211,831,982) - --------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of trust units on initial public offering (note 2) 175,000,000 Issuance of trust units at the exercise of the over-allotment option (note 2) 25,000,000 Issuance of trust units to management (note 2) 23,642 Expenses related to initial issuance of trust units (note 2) (16,309,640) Financing costs incurred (517,500) Term credit facility proceed 75,000,000 Repayment of the due to an entity under common control (26,692,327) Repayment of the note payable to Cenveo (note 2) (23,625,000) Distribution paid on Fund units (23,997,264) - --------------------------------------------------------------------------------------------------------- CASH FLOWS RELATED TO FINANCING ACTIVITIES 183,881,911 - --------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS AND PERIOD END BALANCE 14,251,559 ========================================================================================================= SUPPLEMENTAL INFORMATION Interest paid 4,180,572 Income taxes paid 12,039 ========================================================================================================= See accompanying notes
5 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION Supremex Income Fund (the "Fund") is an unincorporated open-ended trust established under the laws of the Province of Quebec pursuant to a declaration of Trust dated February 10, 2006, as may be amended, supplemented or restated from time to time. The Fund was created to indirectly acquire and hold all the shares of Supremex Inc. and the net assets of Cenveo Depew Division ("Supremex"). The Fund remained inactive until it indirectly acquired Supremex on March 31, 2006 (note 2). The statements of earnings and cash flows consist of the operations of the Fund for the 276-day period ended December 31, 2006. Supremex is a manufacturer and marketer of a broad range of stock and custom envelopes and related products. The business of Supremex follows seasonal patterns with the highest revenue occurring from August to February due to the seasonal advertising and mailing patterns of its customers whereby higher number of mailings related to events including the return to school, fund raisers and the holiday and tax seasons occurs during that period. As a result, revenue and financial performance for the 276-day period ended December 31, 2006 are not necessarily indicative of the revenue and financial performance that may be expected for a full year. 2. INITIAL PUBLIC OFFERING AND BUSINESS ACQUISITIONS On March 31, 2006, the Fund completed its initial public offering ("IPO") with the sale of 17,500,000 trust units (the "units") for $10.00 per unit, for total net proceeds of $165,029,947 after deducting $9,970,053 which represents the underwriters' total fees of $9,625,000 and other issuance expenses of $5,309,640 less related future income taxes of $4,964,587. On March 31, 2006, in conjunction with the IPO, the Fund indirectly acquired Supremex from Cenveo Corporation and/or its related companies ("Cenveo") for $331,532,962. Consideration paid to Cenveo for the acquisition was comprised of cash of $212,924,527, units of the Fund with a value of $89,474,390, a payable for acquired businesses of $5,509,045 for a working capital adjustment and a note payable of $23,625,000. 6 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 2. INITIAL PUBLIC OFFERING AND BUSINESS ACQUISITIONS - (CONTINUED) The acquisition was accounted for by the purchase method with the results of Supremex's operations included in the Fund's earnings from the date of acquisition. These consolidated financial statements reflect the allocation of the consideration to the assets acquired and liabilities assumed based on their fair values as follows:
CENVEO SUPREMEX DEPEW TOTAL DIVISION $ ------------------------------------------------------------------------------------------------------- Cash and cash equivalents 5,171,813 5,171,813 Accounts receivable 27,077,695 378,589 27,456,284 Inventories 20,539,428 467,509 21,006,937 Income taxes receivable 6,465,881 6,465,881 Prepaid expenses 1,138,130 28,925 1,167,055 Property, plant and equipment 40,253,650 173,647 40,427,297 Accrued pension benefit asset 5,154,500 5,154,500 Intangible assets 56,220,000 56,220,000 Goodwill 245,063,721 245,063,721 Accounts payable and accrued liabilities (21,371,322) (200,262) (21,571,584) Due to an entity under common control (26,692,327) (26,692,327) Future income tax liabilities (27,573,015) (27,573,015) Post-retirement benefits obligation (763,600) (763,600) ------------------------------------------------------------------------------------------------------- NET ASSETS ACQUIRED 330,684,554 848,408 331,532,962 ======================================================================================================= CONSIDERATION Cash 212,924,527 Units 89,474,390 Payable to Cenveo 5,509,045 Note payable to Cenveo 23,625,000 -------------------------------------------------------------------------------------------------------
As part of the acquisition 2,364,228 units valued at $23,642,280 were issued to management employees of Supremex for a cash consideration of $23,642 to amend the then existing Management profit sharing plan. These units are held in escrow and 50% will be released on March 31, 2008, 25% on March 31, 2009 and 25% on March 31, 2010, subject to earlier release under certain circumstances or sold to Supremex for a nominal consideration of $0.01 per unit in the event of the voluntary departure of the employee or termination by Supremex for cause prior the expiry of the four year escrow period. The initial value of such units, net of the cash consideration received, is recorded as deferred compensation and is recorded as compensation expense over the vesting period. 7 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 2. INITIAL PUBLIC OFFERING AND BUSINESS ACQUISITIONS - (CONTINUED) On April 28, 2006 the underwriters exercised in full their over-allotment option, resulting in the issuance by the Fund of 2,500,000 additional units at a price of $10 per unit for gross proceeds of $25,000,000 and net proceeds of $24,090,988 after deducting $909,012 which represents the underwriters' fees of $1,375,000 less related future income taxes of $465,988. The net cash proceeds were used by the Fund to repay the note payable to Cenveo. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. By their nature, these estimates are subject to measurement uncertainty. The effect on the financial statements of changes in such estimates in future periods could be material and would be accounted for in the period the change occurs. The financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Fund and its subsidiaries. All significant intercompany accounts and transactions are eliminated upon consolidation. The consolidated financial statements are for the 276-day period from March 31, 2006, the date of commencement of operations, to December 31, 2006 inclusive and accordingly no comparative information is provided. NET EARNINGS PER UNIT Net earnings per unit are calculated by dividing net earnings by the weighted average number of units outstanding during the period. For the purpose of the weighted average number of units outstanding, units are determined to be outstanding from the date they are issued. The units issued relating to the over-allotment option on April 28, 2006 have been considered issued since March 31, 2006 since there was no contingencies that would result in these units not being issued. 8 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash less amounts drawn under the operating revolving credit facility. INVENTORIES Raw materials are carried at the lower of cost, determined on a first-in, first-out basis, and replacement cost. Work in process and finished goods are carried at the lower of cost, including labour and overhead, determined on a first-in, first-out basis, and net realizable value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Amortization is computed under the straight-line method over the following estimated useful lives: Buildings and building improvements 10 to 40 years Leasehold improvements Over the terms of the leases Machinery and equipment 7 to 15 years Office equipment 3 to 5 years Computer equipment 3 years LONG-LIVED ASSETS Long-lived assets, including property plant and equipment, are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. 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. DEFERRED FINANCING COSTS Financing costs related to credit facilities are capitalized and amortized on a straight line basis over the four-year term of the credit facilities. 9 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) INTANGIBLE ASSETS Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for recognition apart from goodwill. Intangible assets acquired are comprised mainly of customer relationships and non-compete agreements which are amortized on a straight-line basis over ten years. The intangible assets are tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When the carrying value of customer relationships and the non-compete agreements is less than its net recoverable value as determined on an undiscounted basis, an impairment loss is recognized to the extent that fair values, measured as the discounted cash flows over the life of the assets when quoted market prices are not readily available, are below the asset carrying value. GOODWILL Goodwill represents the excess of the acquisition cost over the fair value of net assets of business acquired. Goodwill is tested for impairment annually or more often if events or changes in circumstances indicate that it might be impaired. The impairment test consists of a comparison of the fair value of the reporting unit to which goodwill is assigned with its carrying amount. Any impairment loss in the carrying amount compared with the fair value is charged to earnings in the year in which the impairment occurs. The Fund uses the discounted cash flows method to determine the fair value of its reporting unit. REVENUE RECOGNITION The Fund recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured. In addition, when the customer requests a bill and hold, revenue is recognized 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. The Fund has rebate agreements with certain customers. These rebates are recorded as reductions of revenue and are accrued using revenue data and rebate percentages specific to each customer agreement. 10 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) EMPLOYEE FUTURE BENEFITS The Fund maintains defined benefit pension plans, two of these plans are hybrid by also having a defined contribution component, covering substantially all of its employees. The acquired businesses have also provided in the past post retirement and post employment benefits plans to a limited number of employees covering health care, dental care and life insurance coverage. The Fund accrues its obligations for the defined benefits component of its pension plans and other post retirements and employment benefits and related costs, net of plan assets. The cost of pensions and other retirement benefits earned by employees is actuarially determined, at least every three years, using the projected benefit method prorated on service and management's best estimate of plan's investment performance, salary escalating, retirement age of employees and estimated health care costs. For the purpose of calculating the expected return on plan assets, those assets are valued at fair market value. The most recent actuarial valuations were performed on December 31, 2005. Past service costs are amortized on a straight-line basis over the remaining service period of active employees ("EARSL"), which is 15 years. The excess of net actuarial gain or loss over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the EARSL. For the defined contribution component of a pension plan, the pension expense is equal to the contributions paid by the Fund. INCOME TAXES The Fund's corporate subsidiaries are subject to corporate income taxes and use the liability method of accounting for income taxes. Under the liability method, future income tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using tax rates substantially enacted at the balance sheet date. The effect of changes in income tax rates on future income tax assets and liabilities is recognized in earnings in the period that the change becomes substantially enacted. 11 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) INCOME TAXES - (CONTINUED) Under the current terms of the Income Tax Act (Canada), the Fund is not subject to income taxes to the extent that its taxable income in a year is paid or payable to a unitholder. Accordingly, no provision for current income taxes for the Fund is made. In addition, the Fund is not subject to the recommendations of CICA Section 3465, as the Fund is contractually committed to distribute to its unitholders all or virtually all of its taxable income and taxable capital gains that would otherwise be taxable in the Fund. The Fund intends to continue to meet the requirements under the Income Tax Act (Canada) applicable to such trusts, and there is no indication that the Fund will fail to meet those requirements. On October 31, 2006, the Minister of Finance (Canada) announced proposed changes to the taxation of publicly traded income trusts. The proposed changes, if enacted, will result in the taxation, at the rate of 31.5%, of distributions made by the Fund beginning in the year 2011. Even though there is uncertainty as to the final precise legislation that could eventually be enacted, the possible impact of the proposed legislation has been taken into consideration in the year end review for impairment of goodwill and the Fund concluded that no goodwill impairment was required. However, the goodwill impairment test involves significant estimates and assumptions that, by nature, are subject to measurement uncertainty. The effect of changes in such estimates and assumptions in future periods could result in a goodwill impairment which could be significant. FOREIGN CURRENCY The Fund follows the temporal method to translate its foreign currency balances and transactions including its integrated foreign subsidiary. Under this method, monetary assets and liabilities are translated at the rates of exchange in effect at balance sheet date and the other items in the balance sheet and statement of earnings are translated at the exchange rates in effect at the date of transaction. Exchange gains and losses are included in net earnings for the year. FINANCIAL INSTRUMENTS The Fund uses interest rate swap to hedge the interest rate exposure. The Funds objective is to offset gains and losses resulting from interest rate exposure with losses and gains on the derivative contract used to hedge it. The Fund does not use derivative contracts for speculative purposes. To qualify as a hedge, the hedge relationship is designated and formally documented at inception detailing the particular risk management objective and strategy for the hedge, which includes the item and risk that is being hedged, as well as how effectives is being hedge. The derivative used must be highly effective in accomplishing the objective of offsetting changes in cash flows for the risk being hedged. If a hedge relationship is found to be ineffective, it not longer qualifies as a hedge and any excess gain or losses attributable to such ineffectiveness, as well as subsequent changes in fair value, are recognized in earnings. 12 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) FINANCIAL INSTRUMENTS - (CONTINUED) The Fund has designated its interest rate swap on its variable interest term credit facility as hedge against the fluctuation in interest expense due to change in the interest rate. Accordingly, the fair value of this financial instrument and any changes thereto has not been recorded in the consolidated financial statements. Gains and losses on financial instruments that qualify as hedge are recognized at the time the hedged expenses are incurred. The fair value of this financial instrument is disclosed in note 17. Such fair value estimates is not necessarily indicative of the amounts, the Fund might pay or receive in actual market transactions. Potential transaction costs have also not been considered in estimating fair value. 4. ACCOUNTS RECEIVABLE DECEMBER 31, 2006 $ ------------------------------------------------------------------------ Trade receivables 22,776,943 Receivable from Cenveo 4,000,000 Others 1,285,752 ------------------------------------------------------------------------ 28,062,695 ======================================================================== 5. INVENTORIES DECEMBER 31, 2006 $ ------------------------------------------------------------------------ Raw materials 4,047,692 Work in process 202,059 Finished goods 10,943,410 ------------------------------------------------------------------------ 15,193,161 ======================================================================== 13 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 2006 ------------------------------------------------- ACCUMULATED NET BOOK COST AMORTIZATION VALUE $ $ $ ------------------------------------------------------------------------------------------------------ Land 7,517,895 -- 7,517,895 Buildings and building improvements 10,978,670 262,265 10,716,405 Leasehold improvements 526,713 65,307 461,406 Machinery and equipment 24,913,913 2,228,013 22,685,900 Office equipment 214,225 42,422 171,803 Computer equipment 380,199 70,101 310,098 ------------------------------------------------------------------------------------------------------ 44,531,615 2,668,108 41,863,507 ======================================================================================================
7. POST-RETIREMENT BENEFITS (a) Pension Plans The Company maintains three defined benefit pension plans covering certain salaried and hourly employees who have bargained for such benefits. Two of these pension plans are hybrid because they also have a defined contribution component. The defined benefit and defined contribution plans expenses are as follows:
$ --------------------------------------------------------------------------------------- DEFINED BENEFIT PLANS Current service costs 2,066,100 Interest expense 2,534,800 Actual return on plan assets (4,583,100) Actuarial loss on benefit obligation 2,550,200 Difference between expected return and actual return on plan assets for the period 1,096,500 Difference between actuarial (gain) loss recognized for the period and actual actuarial (gain) loss on benefit obligation for the period (2,550,200) --------------------------------------------------------------------------------------- Defined benefit plans expense 1,114,300 Defined contribution plan expense 479,000 --------------------------------------------------------------------------------------- PENSION PLANS EXPENSE 1,593,300 =======================================================================================
14 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 7. POST-RETIREMENT BENEFITS - (CONTINUED) The following table presents the changes in the accrued benefit obligation and the fair value of plan assets, as well as the funded status of the defined benefit plans, for the 276-day period ended December 31, 2006. $ --------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Benefit obligation, beginning of the period 61,398,400 Service cost 2,528,800 Interest cost 2,534,800 Actuarial losses 2,550,200 Benefits paid (2,426,600) --------------------------------------------------------------------------- Benefit obligation, end of the period 66,585,600 =========================================================================== $ --------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of the period 66,552,900 Actual return on plan assets 4,583,100 Employees contribution 462,700 Employer contribution 1,683,500 Benefits paid (2,426,600) --------------------------------------------------------------------------- Fair value of plan assets, end of the period 70,855,600 =========================================================================== Funded status - Plan surplus 4,270,000 Unrecognized actuarial loss 1,453,700 --------------------------------------------------------------------------- Net amount recognized as accrued pension benefit asset 5,723,700 =========================================================================== The assumptions used in computing the net pension cost were as follows: % --------------------------------------------------------------------------- Discount rate for projected benefit obligation 5.25 Discount rate for net pension cost 5.50 Expected return on plan assets 7.00 Rate of compensation increase 3.50 --------------------------------------------------------------------------- 15 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 7. POST-RETIREMENT BENEFITS - (CONTINUED) The weighted average plan assets allocation as at December 31 is as follows: % --------------------------------------------------------------------------- Equity securities 53.2 Debt 38.3 Other 8.5 --------------------------------------------------------------------------- Total 100.0 =========================================================================== The pension plans have an investment policy that targets asset allocations to be as follows: 50% of plan assets to equity securities and 50% to debt securities with a tolerable variation of that allocation. (b) Post-retirement benefits other than pension The following tables provide a reconciliation of the change in the benefit obligation and a statement of the funded status of the plans. $ --------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Benefit obligation, beginning of period 920,400 Interest cost 36,400 Benefits paid (72,100) Amortization of experience losses 13,400 --------------------------------------------------------------------------- Benefit obligation, end of period 898,100 --------------------------------------------------------------------------- FUNDED STATUS Funded status - Plan deficit 898,100 Unrecognized net actuarial losses 161,900 --------------------------------------------------------------------------- NET LIABILITIES 736,200 =========================================================================== Post-employment and other retirement benefits plan are not funded. The components of post-retirement benefit cost included in the results of operations, were as follows: $ --------------------------------------------------------------------------- Interest cost on liability 36,400 Amortization of experience losses 8,300 --------------------------------------------------------------------------- Net periodic post-retirement benefit cost 44,700 =========================================================================== 16 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 7. POST-RETIREMENT BENEFITS - (CONTINUED) The assumptions used in the measurement of the Company's post-retirement benefit cost were as follows: % --------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS Discount rate for benefit obligation 5.25 Discount rate for net periodic benefit cost 5.50 --------------------------------------------------------------------------- As at December 31, 2006, the assumed health care trend rate for 2006 was 9% progressively declining to reach 4% in 2012. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: ONE-PERCENTAGE-POINT ---------------------------- INCREASE DECREASE $ $ --------------------------------------------------------------------------- 2006 Effect on total of service and interest cost components in 2006 1,500 (1,400) Effect on post-retirement benefit obligation as at December 31, 2006 38,100 (36,900) --------------------------------------------------------------------------- 8. DEFERRED FINANCING COSTS
DECEMBER 31, 2006 ----------------------------------------------------- ACCUMULATED NET BOOK COST AMORTIZATION VALUE $ $ $ ------------------------------------------------------------------------------------------------------ Deferred financing costs 517,500 97,386 420,114 ======================================================================================================
9. INTANGIBLE ASSETS
DECEMBER 31, 2006 ----------------------------------------------------- ACCUMULATED NET BOOK COST AMORTIZATION VALUE $ $ $ ------------------------------------------------------------------------------------------------------ Customer relationships 55,465,000 4,175,136 51,289,864 Non-compete agreements 755,000 56,832 698,168 ------------------------------------------------------------------------------------------------------ 56,220,000 4,231,968 51,988,032 ======================================================================================================
17 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 10. ACCOUNTS PAYABLE AND ACCRUED LIABILITES DECEMBER 31, 2006 $ --------------------------------------------------------------------------- Trade payables 7,438,333 Trade payables to Cenveo 673,269 Accrued liabilities 16,462,515 --------------------------------------------------------------------------- 24,574,117 =========================================================================== The Fund has $4 million of third party accrued liability relating to transactions with Cenveo which is included in accrued liabilities as at December 31, 2006 and which will be reimbursed by Cenveo if and when it is required to be paid. Accordingly, a receivable of $4 million from Cenveo has been recorded in the Fund's financial statements and is included in accounts receivable. 11. SECURED CREDIT FACILITIES The Fund has senior secured credit facilities consisting of a revolving operating credit facility of up to $40 million and a term credit facility of $75 million. Both facilities bear interest at a floating rate based on the Canadian prime rate, U.S. base rate, LIBOR or bankers' acceptance rates plus an applicable margin to those rates. The revolving operating credit facility may be used for general corporate purposes, working capital requirements and permitted acquisitions. Both facilities mature on March 31, 2010 and there are no scheduled repayments of principal required prior to maturity. Amounts drawn under revolving and term credit facilities are as follows: DECEMBER 31, 2006 $ --------------------------------------------------------------------------- Revolving credit facility -- Term credit facility 75,000,000 --------------------------------------------------------------------------- 75,000,000 =========================================================================== As at December 31, 2006, the interest rates on the revolving and term credit facilities were 6.0% and 5.6% respectively. The Fund entered into an interest swap agreement for its term credit facility to pay a fixed rate of 5.426% until March 31, 2007, 5.663% form April 1, 2007 to March 31, 2008, 5.866% from April 1, 2008 to March 31, 2009 and 6.067% from April 1, 2009 to March 31, 2010 (see note 17). 18 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 11. SECURED CREDIT FACILITIES - (CONTINUED) Under the terms of the credit facilities, the Fund is required, amongst other conditions, to meet certain covenants. The Fund was in compliance of these covenants as at December 31, 2006. The credit facilities are collateralized by hypothec and security interest covering all present and future assets of the Fund and its subsidiaries. Net financing charges 276-DAY PERIOD ENDED DECEMBER 31, 2006 $ --------------------------------------------------------------------------- Interest on secured credit facilities 3,155,919 Other interest (197,835) Amortization of deferred financing costs 97,386 --------------------------------------------------------------------------- 3,055,470 =========================================================================== 12. INCOME TAXES (a) Future income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of future tax assets and liabilities are as follows: DECEMBER 31, 2006 $ --------------------------------------------------------------------------- FUTURE INCOME TAX LIABILITIES (ASSETS) Intangible assets 16,217,589 Property, plant and equipment 4,684,295 Accrued pension benefit asset 1,785,500 Other 1,514,707 Post-retirement benefits obligation (229,656) Non-capital losses (939,747) Initial public offering expenses (4,264,149) --------------------------------------------------------------------------- 18,768,539 =========================================================================== The goodwill related to Supremex acquisition is not deductible for tax purposes. 19 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 12. INCOME TAXES - (CONTINUED) (b) The income taxes expense differs from the expenses that would be obtained by applying the combined Canadian income tax (federal and provincial) as a results of the following: 276-DAY PERIOD ENDED DECEMBER 31, 2006 $ --------------------------------------------------------------------------- Earnings before income taxes 16,225,960 --------------------------------------------------------------------------- Income taxes at combined federal and provincial statuary rate of 33.43% 5,424,338 Impact of interest expense of Supremex paid to the Fund, eliminated on consolidation (9,320,208) Effect of change in enacted tax rates (1,422,122) Impact of amortization of deferred compensation not deductible for tax purposes 2,123,432 Non deductible expenses and other (10,693) --------------------------------------------------------------------------- Provision of income taxes (recovery) (3,205,253) =========================================================================== Provision for income taxes (recovery) is as follow: --------------------------------------------------------------------------- Current 168,648 Future (3,373,901) --------------------------------------------------------------------------- Provision for income taxes (recovery) (3,205,253) =========================================================================== On May 2, 2006, Canadian Federal budget announced several general corporate income tax rate reductions, which will gradually be reduced from 22.12% to 19% in 2010 which was enacted on June 22, 2006. In addition, during the second quarter of 2006 other provincial tax rate reductions became enacted. As a result, at the end of the second quarter, the Fund has reassessed its future income tax assets and liabilities in light of the new enacted tax rates. 20 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 13. UNITHOLDERS' EQUITY FUND UNITS The Fund Declaration of Trust provides that an unlimited number of units may be issued. Each unit is transferable and represents an equal undivided beneficial interest in any distributions from the Fund and in the net assets of the Fund. All units are of the same class with equal rights and privileges, except that Cenveo, pursuant to the Fund Declaration of Trust, may designate one trustee as long as they own not less than 10% of the total units issued. Each unit entitles the holder to participate equally in all allocations and distributions and to one vote at all meetings of unitholders for each whole unit held. The Fund units are redeemable at any time at the option of the holder at the lesser of 90% of the weighted average price of the Fund unit during the last ten trading days of the units on an open market and the closing market price on the redemption date. All redemptions are subject to a maximum of $50,000 in cash redemptions by the Fund at any particular month. Redemptions in excess of this amount will be paid by way of a distribution in specie of the assets of the Fund.
NUMBER AMOUNT $ ------------------------------------------------------------------------------------------------------ FUND UNITS Issued on IPO 17,500,000 175,000,000 Issued at the exercise of the over-allotment option 2,500,000 25,000,000 Issued to employees 2,364,228 23,642,280 Issued to Cenveo in consideration of businesses acquired 8,947,439 89,474,390 ------------------------------------------------------------------------------------------------------ 31,311,667 313,116,670 Issuance costs, net of future income taxes of $5,430,575 -- (10,879,065) ------------------------------------------------------------------------------------------------------ BALANCE AS AT DECEMBER 31, 2006 31,311,667 302,237,605 ======================================================================================================
EMPLOYEES UNITS As part of the acquisition 2,364,228 units valued at $23,642,280 were issued to management employees of Supremex for a cash consideration of $23,642 to amend the then existing Management profit sharing plan. These units are held in escrow and 50% will be released on March 31, 2008, 25% on March 31, 2009 and 25% on March 31, 2010, subject to earlier release under certain circumstances or sold to Supremex for a nominal consideration of $0.01 per unit in the event of the voluntary departure of the employee or termination by Supremex for cause prior the expiry of the four year escrow period. Employees are allowed to distribution declared on these units. The initial value of such units, net of the cash consideration received, is recorded as deferred compensation and is recorded as compensation expense over the vesting period. 21 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 13. UNITHOLDERS' EQUITY - (CONTINUED) OVER-ALLOTMENT OPTION On April 28, 2006, the underwriters exercised in full their over-allotment option, resulting in the issuance by the Fund of 2,500,000 additional units on the same terms as the initial public offering. In addition, as consideration for the business acquisitions, the Fund issued a note payable which was repaid with the net proceeds of the over-allotment option. BASIC AND DILUTED NET EARNINGS The number of units used in the determination of the basic weighted average number of units outstanding includes the 2,500,000 units relating to the over-allotment option as if they would have been issued since March 31, 2006 since there were no contingencies that would result in these units not being issued. 14. DISTRIBUTION The Fund makes monthly distributions of its available cash to unitholders of record on the last business day of each month, payable on or about the 15th day of the following month. Distributions to unitholders are recorded on an accrual basis. The December distribution in the amount of $2,999,658 was declared and accrued in December 2006 and paid to unitholders on January 15, 2007. Distributions for the period from April 1, 2006 to December 31, 2006 are as follows:
Per unit Distribution Period Record date Payment date $ $ ------------------------------------------------------------------------------------------------------- April 2006 April 28, 2006 May 15, 2006 0.0958 2,999,658 May 2006 May 31, 2006 June 15, 2006 0.0958 2,999,658 June 2006 June 30, 2006 July 17, 2006 0.0958 2,999,658 July 2006 July 31, 2006 August 15, 2006 0.0958 2,999,658 August 2006 August 31, 2006 September 15, 2006 0.0958 2,999,658 September 2006 September 30, 2006 October 16, 2006 0.0958 2,999,658 October 2006 October 31, 2006 November 15, 2006 0.0958 2,999,658 November 2006 November 30, 2006 December 15, 2006 0.0958 2,999,658 December 2006 December 31, 2006 January 15, 2007 0.0958 2,999,658 ------------------------------------------------------------------------------------------------------- 0.8622 26,996,922 -------------------------------------------------------------------------------------------------------
22 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 15. COMMITMENTS, CONTINGENCIES AND GUARANTEES (a) OPERATING LEASE AND OTHER COMMITMENTS The Fund has entered into operating leases mainly for buildings. The minimum lease payments required under such leases by fiscal years and thereafter are as follows: $ ----------------------------------------------------------------------- 2007 2,144,489 2008 1,684,682 2009 1,323,051 2010 1,049,524 2011 551,711 ----------------------------------------------------------------------- Total 6,753,457 ======================================================================= As at December 31, 2006, the Fund also had firm commitment to purchase machinery and equipment amounting to approximately $700,000 which will be paid in 2007. (b) CONTINGENCIES In the normal course of its operations, the Fund is exposed to various claims, disputes and legal proceedings. These disputes often involve numerous uncertainties and the outcome of the individual cases is unpredictable. According to management, their resolution should not have a significant negative impact on the Fund's financial position. One of the Fund's subsidiaries is being investigated by the Canadian Competition Bureau for alleged price maintenance by certain of its customers. Management believes that it is unlikely that this investigation would result in any material liability to the Fund. In addition to the price maintenance investigation, the Competition Bureau has also indicated its interest in broadening the inquiry, or starting a new inquiry, to investigate whether price fixing or market sharing took place in the 1980's and 1990's in respect of the supply of envelopes market in Canada. While Competition Bureau activity is continuing, management is presently not able to assess or predict the scope or outcome of the current inquiry or any new inquiry that may be commenced and the impact, if any, of such proceedings on the Fund's financial position. The Fund exposure toward the above matters is mitigated by the fact that the acquisition agreement of the Fund businesses contains representations and warranties and related indemnities for any liabilities arising before September 30, 2008 from Cenveo in favour of the Fund. 23 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 15. COMMITMENTS, CONTINGENCIES AND GUARANTEES - (CONTINUED) (c) GUARANTEES In the normal course of business, the Fund has entered into agreements that contain features which meet the definition of a guarantee. These agreements may require the Fund to compensate the counterparties for costs and losses incurred as a result of various events including breaches of representations and warranties, loss of or damages to property, claims that may arise while providing services and environmental liabilities. These agreements provide for indemnification and guarantees to counterparties as follows: OPERATING LEASES The Fund has general indemnity clauses in many of its real estate leases whereby it, as lessee, indemnifies the lessor against liabilities related to the use of the leased property. These leases mature at various dates through December 2011. The nature of the agreements varies based on the contracts and therefore prevents the Fund from estimating the total potential amount it would have to pay to lessors. Historically, Supremex has not made any significant payments under such agreements, has insurance coverage for certain of the obligations undertaken, and, as at December 31, 2006, the Fund has not recorded any liability associated with these indemnifications. BUSINESS DISPOSALS As a result of the sale of business operations, shares or net assets, Supremex may occasionally agree to provide indemnity against claims from previous business activities. The nature of these indemnifications prevents the Fund from estimating the maximum potential liability that it could be required to pay to guarantee parties. Historically, Supremex has not made any significant indemnification payments, and, as at December 31, 2006 the Fund has not recorded any liability associated with these indemnifications. 16. SEGMENTED INFORMATION The Fund currently operates in one business segment being the manufacturing and sale of envelopes. The Fund's net assets amounted to $402,750,989 in Canada and $2,241,705 in United States as at December 31, 2006. The Fund's revenue amounted to $124,269,011 in Canada and $22,953,998 in the United States for the 276-day period ended December 31, 2006. 24 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 17. FINANCIAL INSTRUMENTS Interest rate and foreign exchange risk The Fund is exposed to interest rate risk on its secured credit facilities. The Fund has entered into an interest swap agreement for the full amount of its term credit facility to pay a fixed rate of 5.426% until March 31, 2007, 5.663% from April 1, 2007 to March 31, 2008, 5.866% from April 1, 2008 to March 31, 2009, and 6.067% from April 1, 2009 to March 31, 2010. As described in note 3, the Fund accounts for this financial instrument as a hedge. As of December 31, 2006, the mark-to-market on the Fund's interest rate swap is a loss of $914,708. The Fund operates in Canada and in the United States which give rise to a risk that its earnings and cash flows may be adversely impacted by fluctuations in the exchange rate between the US and Canadian dollar. In the recent past, purchases and capital expenditures in US dollars were similar to the revenue earned in US dollars which have limited the Fund's foreign exchange exposure. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities include balances denominated in US dollars at the end of the period. Fair value The carrying value of the accounts receivable, accounts payable and accrued liabilities and payable to Cenveo are a reasonable estimate of their fair value because of their short maturity. The fair value of the secured credit facilities approximates their carrying value based on market rates available to the Fund for financial instruments with similar risks, term and maturity. Credit risk and customer concentration The Fund performs ongoing credit evaluation of customer and provisions have been set-up for potential credit losses. As at December 31, 2006, no customer accounted for over 10% of total accounts receivable or revenues. 25 SUPREMEX INCOME FUND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 18. RELATED PARTY TRANSACTIONS The Fund had the following transactions with Cenveo which were conducted in the normal course of business and recorded at the exchange value: 276-DAY PERIOD ENDED DECEMBER 31, 2006 $ -------------------------------------------------------------------------- Revenue 6,252,219 Purchases of raw materials 1,418,337 -------------------------------------------------------------------------- 26 -----END PRIVACY-ENHANCED MESSAGE-----