============================================================================== ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 COMMISSION FILE NUMBER 1-12551 ------------------------ CENVEO, INC. (Exact name of Registrant as specified in its charter.) COLORADO 84-1250533 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8310 S. VALLEY HIGHWAY, #400 ENGLEWOOD, CO 80112 (Address of principal executive offices) (Zip Code) 303-790-8023 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of October 31, 2005 the Registrant had 52,849,769 shares of Common Stock, $0.01 par value, outstanding. ------------------------------------------------------------------------------ ============================================================================== CENVEO, INC. AND SUBSIDIARIES INDEX PAGE ---- Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets-- September 30, 2005 (unaudited) and December 31, 2004.............. 1 Condensed Consolidated Statements of Operations (unaudited)-- Three and nine months ended September 30, 2005 and 2004........... 2 Condensed Consolidated Statements of Cash Flows (unaudited)-- Nine months ended September 30, 2005 and 2004..................... 3 Notes to Condensed Consolidated Financial Statements (unaudited)... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 23 Item 4. Controls and Procedures........................................ 24 Part II. Other Information Item 2. Issuer Purchases of Equity Securities.......................... 25 Item 6. Exhibits....................................................... 25 Signatures................................................................. 29 i PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2005 DECEMBER 31, 2004 ------------------ ----------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................... $ 883 $ 796 Accounts receivable................................. 259,756 252,711 Inventories......................................... 125,006 112,219 Other current assets................................ 43,706 46,019 ---------- ---------- TOTAL CURRENT ASSETS............................ 429,351 411,745 Property, plant and equipment, net...................... 339,154 367,260 Goodwill................................................ 311,697 308,938 Other intangible assets, net............................ 25,232 28,788 Other assets............................................ 40,219 58,016 ---------- ---------- TOTAL ASSETS............................................ $1,145,653 $1,174,747 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................... $ 173,086 $ 172,731 Accrued compensation and related liabilities........ 59,624 58,639 Other current liabilities........................... 66,785 64,714 Current maturities of long-term debt................ 2,821 2,270 ---------- ---------- TOTAL CURRENT LIABILITIES....................... 302,316 298,354 Long-term debt, less current maturities................. 789,613 767,499 Deferred income taxes................................... 27,214 10,971 Other liabilities....................................... 38,655 40,569 ---------- ---------- TOTAL LIABILITIES............................... 1,157,798 1,117,393 Commitments and contingencies SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value; 25,000 shares authorized, none issued........................... -- -- Common stock, $0.01 par value; 100,000,000 shares authorized, 52,758,052 and 48,702,832 shares issued and outstanding as of September 30, 2005 and December 31, 2004, respectively............... 530 487 Paid-in capital..................................... 236,083 214,902 Accumulated deficit................................. (267,285) (170,039) Deferred compensation............................... -- (2,003) Accumulated other comprehensive income.............. 18,527 14,007 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY...................... (12,145) 57,354 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,145,653 $1,174,747 ========== ========== See notes to condensed consolidated financial statements. 1 CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share amounts) (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------------- 2005 2004 2005 2004 -------- -------- ---------- ---------- Net sales................................ $430,823 $428,099 $1,302,161 $1,261,238 Cost of sales............................ 347,610 343,596 1,048,885 1,004,682 -------- -------- ---------- ---------- Gross profit......................... 83,213 84,503 253,276 256,556 Selling, general and administrative expenses............................... 62,615 62,315 197,741 196,728 Amortization of intangible assets........ 1,272 1,313 3,878 4,114 Loss on sale of non-strategic businesses............................. 759 -- 2,019 -- Restructuring and other charges.......... 24,378 (269) 39,467 851 -------- -------- ---------- ---------- Operating income (loss).............. (5,811) 21,144 10,171 54,863 Interest expense......................... 18,079 17,859 55,074 53,771 Loss from the early extinguishment of debt................................... -- -- -- 17,748 Other.................................... 768 787 1,203 1,755 -------- -------- ---------- ---------- Income (loss) from continuing operations before income taxes.................... (24,658) 2,498 (46,106) (18,411) Income tax expense (benefit)............. 39,420 8 51,140 (1,070) -------- -------- ---------- ---------- Loss from continuing operations before discontinued operations................ (64,078) 2,490 (97,246) (17,341) Gain on disposal of discontinued operations, net of $770 in income taxes.................................. -- -- -- 1,230 -------- -------- ---------- ---------- Net income (loss)........................ $(64,078) $ 2,490 $ (97,246) $ (16,111) ======== ======== ========== ========== Earnings (loss) per share--basic: Continuing operations................ $ (1.28) $ 0.05 $ (1.99) $ (0.36) Discontinued operations.............. -- -- -- 0.02 -------- -------- ---------- ---------- Net income (loss)........................ $ (1.28) $ 0.05 $ (1.99) $ (0.34) Weighted average shares--basic........... 50,212 47,753 48,932 47,742 Earnings (loss) per share--diluted: Continuing operations................ $ (1.28) $ 0.05 $ (1.99) $ (0.36) Discontinued operations.............. -- -- -- 0.02 -------- -------- ---------- ---------- Net income (loss)........................ $ (1.28) $ 0.05 $ (1.99) $ (0.34) Weighted average shares--diluted......... 50,212 48,504 48,932 47,742 See notes to condensed consolidated financial statements. 2 CENVEO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2005 2004 ---------- ----------- Cash flows from operating activities: Net loss from continuing operations....................... $ (97,246) $ (17,341) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Depreciation......................................... 34,900 35,014 Amortization......................................... 6,864 7,513 Deferred income tax expense (benefit)................ 35,970 (9,718) Impairment charges................................... 9,801 -- Loss on sale of non-strategic businesses............. 2,019 -- Write-off of deferred financing fees................. -- 4,220 Other non-cash charges, net.......................... 3,247 (1,520) Changes in operating assets and liabilities, excluding the effects of operations acquired and sold: Accounts receivable.................................. (5,423) (23,941) Inventories.......................................... (11,861) (21,893) Accounts payable..................................... (712) 40,863 Other, net........................................... (4,860) 800 ---------- ----------- Net cash provided by (used in) operating activities........................................ (27,301) 13,997 Cash flows from investing activities: Aquisitions, net of cash acquired..................... (3,980) (9,803) Capital expenditures.................................. (19,698) (20,246) Proceeds from divestitures............................ 6,514 2,000 Proceeds from sales of property, plant and equipment........................................... 724 1,475 ---------- ----------- Net cash used in investing activities............... (16,440) (26,574) Cash flows from financing activities: Increase in borrowings under credit facility.......... 25,200 4,666 Proceeds from issuance of long-term debt.............. -- 320,000 Repayments of long-term debt.......................... (2,535) (303,644) Proceeds from issuance of common stock................ 21,087 1,053 Capitalized loan fees................................. -- (9,076) ---------- ----------- Net cash provided by financing activities........... 43,752 12,999 Effect of exchange rate changes on cash and cash equivalents................................................ 76 (350) ---------- ----------- Net increase in cash and cash equivalents........... 87 72 Cash and cash equivalents at beginning of year.............. 796 307 ---------- ----------- Cash and cash equivalents at end of quarter................. $ 883 $ 379 ========== =========== See notes to condensed consolidated financial statements. 3 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Cenveo, Inc. and subsidiaries (collectively, "Cenveo", or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Cenveo at September 30, 2005, the results of operations for the three and nine months ended September 30, 2005, and the cash flows for the nine months ended September 30, 2005. Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The condensed consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. It has been the Company's practice to close its quarters on the Saturday closest to the last day of the calendar month so that each quarter has the same number of days and 13 full weeks. The financial statements and other financial information in this report are presented using a calendar convention. The reporting periods, which consist of 13 and 39 weeks ending on October 1, 2005 and September 25, 2004, are reported as ending on September 30, 2005 and 2004, respectively. The effects of this practice are generally not significant. The financial statements and other financial information presented in this report should be read in conjunction with the financial statements contained in the Company's Annual Report on Form 10-K for 2004. 2. CHANGE IN BOARD OF DIRECTORS AND SENIOR MANAGEMENT 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 appointed effective September 12, 2005. As a result of the appointment of the new Chief Executive Officer, there have been significant changes in the management of the Company. The Company has reimbursed Burton Capital Management, LLC $0.8 million for expenses it incurred in its efforts to elect a new board of directors. The Company's newly appointed Chairman and Chief Executive Officer is also the Chairman, Chief Executive Officer and Managing Member of Burton Capital Management, LLC. 3. STOCK-BASED COMPENSATION The Company accounts for employee stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations, and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Since the Company awards stock options to its employees with an exercise price equal to the market value of the underlying stock on the grant date, the Company is not required by APB 25 to recognize compensation expense. 4 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. STOCK-BASED COMPENSATION (CONTINUED) SFAS 123 requires the Company to disclose on a pro forma basis the effect on net income (loss) and earnings (loss) per share of applying the fair value method of determining stock-based compensation. The following table represents the disclosure required by SFAS 123 (in thousands, except per share data): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ------------------------ 2005 2004 2005 2004 -------- ------- --------- -------- Net income (loss), as reported........... $(64,078) $ 2,490 $ (97,246) $(16,111) Add: Stock-based compensation expense included in reported net income (loss)...................... 2,885 226 2,138 515 Deduct: Stock-based compensation expense determined under fair value method....................... (8,853) (1,422) (10,233) (2,149) -------- ------- --------- -------- Pro forma net income (loss).............. $(70,046) $ 1,294 $(105,341) $(17,745) ======== ======= ========= ======== Earnings (loss) per share--basic and diluted: As reported.......................... $ (1.28) $ 0.05 $ (1.99) $ (0.34) Pro forma............................ $ (1.40) $ 0.03 $ (2.15) $ (0.37) Under the Company's 2001 Long-Term Incentive Plan (the "Plan"), the change in the Company's board of directors 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 loss per share for the three and nine months ended September 30, 2005 is primarily the result of the acceleration in the vesting of the outstanding stock-options and restricted stock. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments: an amendment of FASB Statements No. 123 and 95 ("SFAS 123R"). SFAS 123R requires all share-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair value. The Company expects to implement SFAS 123R in the first quarter of 2006 and use the modified-prospective transition method of implementation. Under the modified-prospective transition method, the Company will recognize compensation expense in the financial statements issued subsequent to the date of adoption, which will be January 1, 2006, for all share-based payments granted, modified or settled after January 1, 2006 as well as for any awards that were granted prior to January 1, 2006 for which the requisite service has not been provided as of January 1, 2006. The Company will recognize compensation expense on awards granted subsequent to January 1, 2006 using the fair values determined by a valuation model prescribed by SFAS 123R. As of September 30, 2005 there were no stock option grants that had not fully vested; however, should the Company grant additional stock option awards prior to January 1, 2006, the compensation expense on these awards will be determined using the fair values determined for the pro forma disclosures on stock-based compensation as prescribed by SFAS 123. The Company has not determined the impact of its adoption of SFAS 123R. 5 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVENTORIES Inventories consist of the following (in thousands): SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ Raw materials........................................... $ 34,965 $ 36,440 Work in process......................................... 39,344 30,357 Finished goods.......................................... 55,845 50,122 -------- -------- 130,154 116,919 Reserves................................................ (5,148) (4,700) -------- -------- $125,006 $112,219 ======== ======== 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands): SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ Land and land improvements.............................. $ 19,159 $ 19,457 Buildings and building improvements..................... 110,621 109,889 Machinery and equipment................................. 529,121 532,470 Furniture and fixtures.................................. 12,639 13,997 Construction in progress................................ 8,510 9,806 --------- --------- 680,050 685,619 Accumulated depreciation................................ (340,896) (318,359) --------- --------- $ 339,154 $ 367,260 ========= ========= 6. COMPREHENSIVE INCOME (LOSS) A summary of the comprehensive income (loss) is as follows (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ----------------------- 2005 2004 2005 2004 --------- --------- -------- -------- Net income (loss)...................... $ (64,078) $ 2,490 $(97,246) $(16,111) Other comprehensive income: Currency translation adjustment.. 8,961 7,495 4,520 2,415 --------- --------- -------- -------- Comprehensive income (loss)............ $ (55,117) $ 9,985 $(92,726) $(13,696) ========= ========= ======== ======== 6 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM DEBT Long-term debt consists of the following (in thousands): SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ Senior Secured Credit Facility, due 2008................ $103,641 $ 78,441 Senior Notes, due 2012.................................. 350,000 350,000 Senior Subordinated Notes, due 2013..................... 320,000 320,000 Other................................................... 18,793 21,328 -------- -------- 792,434 769,769 Less current maturities................................. (2,821) (2,270) -------- -------- Long-term debt...................................... $789,613 $767,499 ======== ======== As of September 30, 2005, the Company was in compliance with all currently operative covenants of its various debt agreements. In conjunction with the sale of the Company's prime label business in 2002, the Company continued to guarantee a lease obligation assumed by the buyer of this business. The guarantee requires the lessor to pursue collection and other remedies against the buyer before demanding payment from the Company. The remaining payments under the lease term, which expires April 2008, total approximately $5.0 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. 8. INCOME TAXES As required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS 109"), the Company evaluates the realizability of its deferred tax assets on a quarterly basis. SFAS 109 requires a valuation allowance to be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Because the Company's U.S. operations have incurred substantial net operating losses over the last four years, it established a valuation allowance of $26.8 million prior to 2005 to cover a portion of the deferred tax asset arising from the net operating losses in the U.S. and a portion of its U.S. capital loss carry forwards. The Company has increased the valuation allowance by $38.3 million during the nine months ended September 30, 2005 as a result of continuing losses by its U.S. operations during the period. As of December 31, 2004 and through June 30, 2005, the Company believed the remaining U.S. deferred tax assets would be realized through the reversal of existing temporary differences and the execution of available tax planning strategies. In September 2005, the Company determined that it would no longer implement the identified strategies that could have been used to realize the net deferred tax benefit. The Company recorded an additional valuation allowance of $35.3 million to eliminate the remaining net U.S. deferred tax asset. In addition, the Company provides income taxes for its operations in Canada which are expected to generate taxable income in 2005. 7 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges recorded during the three and nine months ended September 30, 2005 were $24.4 million and $39.5 million, respectively. The following table and discussion present the details of these charges. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2005 ------------------ ------------------ Employee termination and related expenses: Envelopes, Forms and Labels................... $ 1,460 $ 3,480 Commercial Printing........................... 3,064 5,065 Corporate..................................... 7,917 8,153 Impairments: Envelopes, Forms and Labels................... 2,111 2,663 Commercial Printing........................... -- 7,137 Exit costs: Envelopes, Forms and Labels................... -- (14) Commercial Printing........................... 17 488 ------- ------- Total restructuring charges............... 14,569 26,972 Other charges..................................... 9,809 12,495 ------- ------- Total restructuring and other charges..... $24,378 $39,467 ======= ======= In September 2005, as a result of significant changes in management and personnel reductions in the Company's corporate office, the Company recognized employee termination benefits of $8.4 million. Additional management changes and staff reductions are expected during the remainder of 2005 and additional severance expense will be incurred. In June 2005, the Company implemented a corporate-wide initiative to reduce selling, general and administrative expenses. The Company has recorded a charge of $7.4 million of which $3.4 million was recorded in the third quarter to cover the cost of 91 employees terminated in connection with this initiative. In March 2005, management began conducting a comprehensive evaluation of the Company's operations with the objective of rationalizing capacity and improving utilization. During the nine months ended September 30, 2005, the Company recorded impairment charges of $9.8 million, including $2.1 million recorded in the third quarter, as a result of this evaluation. The Company expects to recognize additional restructuring and impairment charges when this evaluation is completed. During the nine months ended September 30, 2005, the Company closed a small printing operation located in Phoenix, Arizona and consolidated its production into its Los Angeles, California printing plant, closed one of its printing operations in Atlanta, Georgia and consolidated its production into plants in Jacksonville, Illinois, St. Louis, Missouri and Cambridge, Maryland, and completed the consolidations of the printing operations in Seattle, Washington and San Francisco, California. Severance expenses of $0.9 million, including $0.6 million in the third quarter, and other exit costs of $0.5 million were recorded in connections with these plant consolidations. 8 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RESTRUCTURING AND OTHER CHARGES (CONTINUED) 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. The fees incurred were $3.2 million. * Legal and other fees incurred in connection with the special meeting of shareholders totaled $3.6 million. * The Company reimbursed the shareholder group that initiated the special meeting of shareholders $0.8 million for expenses incurred in connection with the special meeting. * In January 2005, the Company's Chief Executive Officer resigned. The cost incurred as a result of this resignation was $2.2 million. * Under the Company's Long-Term Incentive Plan, the change in the board of directors on September 12, 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 $2.7 million. The following is a summary of the activity recorded in the Company's restructuring liability during the nine months ended September 30, 2005: Balance, December 31, 2004.............................. $1,093 Payments for lease termination and property exit costs............................................. (617) Payments for other exit costs....................... (151) Reversal of unused accrual.......................... (14) Severance accrual................................... 1,769 ------ Balance, September 30, 2005............................. $2,080 ====== 10. LOSS ON SALE OF NON-STRATEGIC BUSINESSES The following is a summary of the losses incurred on sales of non-strategic businesses during 2005 (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2005 ------------------ ------------------ Printing operations in Riviera Beach, FL and Osage Beach, MO....................................... $ -- $ 868 Envelope operations in Ontario and British Columbia, Canada................................ 759 925 Mailing supplies business in Dekalb, IL........... -- 226 ---- ------ $759 $2,019 ==== ====== 9 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. LOSS ON SALE OF NON-STRATEGIC BUSINESSES (CONTINUED) The proceeds recorded as a result of these divestitures totaled $6.5 million. The following table summarizes the net sales and operating losses of these businesses that are included in the condensed consolidated statements of operations (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- --------------------- 2005 2004 2005 2004 ------ ------ ------- ------- Net sales..................................... $1,226 $7,834 $11,571 $23,277 Operating losses.............................. $ (71) $ (22) $ (650) $ (318) The Company has ongoing supply agreements with these entities; accordingly, the dispositions of these non-strategic businesses have not been accounted for as discontinued operations in the condensed consolidated statements of operations. 11. PENSION PLANS The components of the net periodic pension expense for the Company's pension plans and the supplemental executive retirement plans are as follows (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- --------------------- 2005 2004 2005 2004 ----- ----- ------- ------- Service cost.................................. $ 522 $ 670 $ 1,833 $ 1,735 Interest cost................................. 894 529 2,612 2,006 Expected return on plan assets................ (968) (557) (2,866) (2,212) Net amortization and deferral................. 160 167 459 268 ----- ----- ------- ------- Net periodic pension expense.................. $ 608 $ 809 $ 2,038 $ 1,797 ===== ===== ======= ======= The Company expects to contribute $2.8 million to its pension plans in 2005. As of September 30, 2005, contributions of $2.2 million had been made. 10 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. EARNING (LOSS) PER SHARE The computations of basic and diluted earnings (loss) per share from continuing operations are as follows (in thousands, except per share amounts): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ----------------------- 2005 2004 2005 2004 -------- ------- -------- -------- Numerator: Numerator for basic and diluted earnings (loss) per share from continuing operations................................. $(64,078) $ 2,490 $(97,246) $(17,341) ======== ======= ======== ======== Denominator: Denominator for basic earnings (loss) per share from continuing operations........... 50,212 47,753 48,932 47,742 Dilutive effect of stock options and restricted stock........................... -- 751 -- -- -------- ------- -------- -------- Denominator for diluted earnings (loss) per share from continuing operations........... 50,212 48,504 48,932 47,742 ======== ======= ======== ======== Earnings (loss) from continuing operations per share: Basic.................................... $ (1.28) $ 0.05 $ (1.99) $ (0.36) ======== ======= ======== ======== Diluted.................................. $ (1.28) $ 0.05 $ (1.99) $ (0.36) ======== ======= ======== ======== During the three and nine months ended September 30, 2005 and the nine months ended September 30, 2004, outstanding options to purchase approximately 1.8 million and 8.3 million shares of common stock, respectively, were excluded from the calculation of diluted loss from continuing operations per share because the effect would be antidilutive. During the three months ended September 30, 2004, outstanding options to purchase approximately 7.5 million shares of common stock were excluded from the calculation of diluted earnings per share because the exercise prices of these options exceeded the average market price of the stock during the period. 13. SEGMENT INFORMATION In September 2005, the Company changed its management structure and realigned its manufacturing operations into two operating segments--the Envelope, Forms and Labels Segment and the Commercial Printing Segment. The Envelope, Forms and Labels Segment is in the business of manufacturing customized envelopes and packaging products, stock envelopes, traditional and specialty business forms, and labels used for such applications as mailing, messaging and bar coding. The Commercial Printing Segment is in the business of designing, manufacturing and distributing printed products which include advertising literature, corporate identity materials, financial printing, calendars, greeting cards, brand marketing materials, catalogs, maps, CD packaging and direct mail. Segment data for 2004 has been restated to reflect the new operating segments. Operating income of each segment includes all costs and expenses directly related to the segment's operations. Corporate expenses include corporate general and administrative expenses. Inter-company sales for the three months ended September 30, 2005 and 2004 were $10.6 million and $8.0 million, respectively. Inter-company sales for the nine months ended September 30, 2005 and 2004 were $36.2 and $26.3 million, respectively. These amounts were eliminated in consolidation and excluded from reported net sales. 11 CENVEO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. SEGMENT INFORMATION (CONTINUED) The following tables present certain segment information for the three and nine months ended September 30, 2005 and 2004 (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net sales: Envelopes, Forms and Labels. $ 230,844 $ 217,769 $ 695,892 $ 650,165 Commercial Printing......... 199,979 210,330 606,269 611,073 ---------- ---------- ---------- ---------- Total....................... $ 430,823 $ 428,099 $1,302,161 $1,261,238 ========== ========== ========== ========== Operating income (expense): Envelopes, Forms and Labels. $ 17,313 $ 20,943 $ 53,785 $ 61,742 Commercial Printing......... (869) 4,890 (9,100) 9,831 Corporate................... (22,255) (4,689) (34,514) (16,710) ---------- ---------- ---------- ---------- Total....................... $ (5,811) $ 21,144 $ 10,171 $ 54,863 ========== ========== ========== ========== Restructuring and other charges included in operating income: Envelopes, Forms and Labels. $ 3,571 $ (294) $ 6,129 $ 826 Commercial Printing......... 3,081 25 12,690 25 Corporate................... 17,726 -- 20,648 -- ---------- ---------- ---------- ---------- Total....................... $ 24,378 $ (269) $ 39,467 $ 851 ========== ========== ========== ========== Net sales by product line: Envelopes................... $ 183,676 $ 170,507 $ 552,506 $ 503,922 Commercial Printing......... 199,979 210,330 606,269 611,073 Forms and Labels............ 47,168 47,262 143,386 146,243 ---------- ---------- ---------- ---------- Total....................... $ 430,823 $ 428,099 $1,302,161 $1,261,238 ========== ========== ========== ========== SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ Identifiable assets: Envelopes, Forms and Labels. $ 609,539 $ 615,347 Commercial Printing......... 484,885 486,187 Corporate................... 51,229 73,213 ---------- ---------- Total....................... $1,145,653 $1,174,747 ========== ========== 14. SUBSEQUENT EVENT On November 2, 2005, the Company announced that it was evaluating the potential sale of its Canadian operations. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW Cenveo is one of North America's leading providers of visual communication solutions delivered through print and electronic media. Our products include offset and digital printing, custom and stock envelopes, and business documents and labels. We also provide communications consulting, end-to-end project management and eServices. We have production facilities and fulfillment and distribution centers strategically located throughout North America. 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 appointed effective September 12, 2005. The new Chief Executive Officer has made significant changes in the senior management of the Company and has realigned the Company's manufacturing operations into two new operating segments--Envelopes, Forms and Labels and Commercial Printing. Our Envelopes, Forms and Labels Segment is in the business of manufacturing customized envelopes and packaging products, stock envelopes, traditional and specialty business forms, and labels used for such applications as mailing, messaging and bar coding. The segment operates 35 envelope plants, six business forms plants and three business labels plants. Our Commercial Printing Segment is in the business of designing, manufacturing and distributing printed products which include advertising literature, corporate identity materials, financial printing, calendars, greeting cards, brand marketing materials, catalogs, maps, CD packaging and direct mail. The segment operates 33 printing facilities and five distribution and fulfillment centers. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide an update on the financial condition of Cenveo since December 31, 2004 and to discuss operating trends to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2004. REVIEW OF RESULTS The discussion and analysis of the results of operations includes an overview of our consolidated results for the third quarter and the nine months ended September 30, 2005 followed by a discussion of the results of our two business segments. 13 A summary of our condensed consolidated statements of operations is presented below. The summary presents reported net sales and operating income as well as the net sales and operating income data of our business segments used internally to assess operating performance. Division sales exclude sales of divested operations and division operating income excludes the costs associated with our corporate headquarters, operating results of divested operations, losses incurred on the divestitures of non-strategic businesses, charges related to restructuring and expenses incurred that are unrelated to operations. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2005 2004 ---------------------------------------- -------- -------- ---------- ---------- Division net sales....................... $429,597 $420,265 $1,290,590 $1,237,961 Divested operations.................. 1,226 7,834 11,571 23,277 -------- -------- ---------- ---------- Net sales................................ $430,823 $428,099 $1,302,161 $1,261,238 ======== ======== ========== ========== Division operating income................ $ 23,925 $ 25,586 $ 66,173 $ 72,742 Less: Unallocated corporate expenses....... 4,528 4,689 13,866 16,710 Restructuring and other charges...... 24,378 (269) 39,467 851 Divested operations.................. 71 22 650 318 Loss on sale of non-strategic businesses......................... 759 -- 2,019 -- -------- -------- ---------- ---------- Operating income (loss).................. (5,811) 21,144 10,171 54,863 Interest expense..................... 18,079 17,859 55,074 53,771 Loss on early extinguishment of debt............................... -- -- -- 17,748 Other................................ 768 787 1,203 1,755 -------- -------- ---------- ---------- Income (loss) before income taxes........ (24,658) 2,498 (46,106) (18,411) Income tax expense (benefit)......... 39,420 8 51,140 (1,070) -------- -------- ---------- ---------- Income (loss) from continuing operations............................. (64,078) 2,490 (97,246) (17,341) Gain on disposal of discontinued operations......................... -- -- -- 1,230 -------- -------- ---------- ---------- Net income (loss)........................ $(64,078) $ 2,490 $ (97,246) $ (16,111) ======== ======== ========== ========== Income (loss) per share from continuing operations--diluted.................... $ (1.28) $ 0.05 $ (1.99) $ (0.36) ======== ======== ========== ========== NET SALES Consolidated net sales in the third quarter of 2005 were slightly higher than the third quarter of 2004. For the nine months ended September 30, 2005, consolidated net sales increased $40.9 million, or 3%, over the comparable period of 2004. Division net sales were 2% higher in the third quarter and 4% higher on a year-to-date basis. Sales growth in 2005 was primarily the result of strong sales of our envelope products. OPERATING INCOME (LOSS) We reported an operating loss of $5.8 million in the third quarter and operating income of $10.2 million for the nine months ended September 30, 2005. These results were significantly lower than those reported during the comparable periods of 2004 primarily due to significant restructuring and other charges that have been incurred during 2005. 14 DIVISION OPERATING INCOME. Division operating income was $1.7 million lower in the third quarter of 2005 and $6.6 million lower for the nine months ended September 30, 2005, than the comparable periods of 2004 due to the following: * The increase in the cost of paper and other materials used to produce envelopes has had a negative impact on the margins of our envelope products in 2005 as we have been unable to fully recover these higher costs. * As expected, the profits of our retail and wholesale office products business were lower in the first half of 2005 compared to 2004 due to pricing concessions made in the second half of 2004 to maintain our share in the office products retail and wholesale markets. * The performance of several of our commercial printing plants has deteriorated in 2005 relative to 2004. UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include the costs of our corporate headquarters and certain expenses not allocated to our segments. Unallocated corporate expenses in 2004 reflected a $2.0 million charge related to a change in our estimate of the cost of workers' compensation claims which is the primary reason unallocated corporate expenses are lower in 2005. RESTRUCTURING AND OTHER CHARGES. A summary of the restructuring and other charges recorded in the third quarter and nine months ended September 30, 2005 follows (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2005 ------------------ ------------------ Employee termination and related expenses: Envelopes, Forms and Labels................... $ 1,460 $ 3,480 Commercial Printing........................... 3,064 5,065 Corporate..................................... 7,917 8,153 Asset impairments: Envelopes, Forms and Labels................... 2,111 2,663 Commercial Printing........................... -- 7,137 Exit costs: Envelopes, Forms and Labels................... -- (14) Commercial Printing........................... 17 488 ------- ------- Total restructuring charges............... 14,569 26,972 Other charges..................................... 9,809 12,495 ------- ------- Total restructuring and other charges..... $24,378 $39,467 ======= ======= In September 2005, as a result of significant changes in management as well as personnel reductions in the Company's corporate office, the Company recorded $8.4 million in employee termination benefits. Additional changes in management and personnel reductions are expected during the remainder of 2005 and additional severance expenses will be incurred. In June 2005, the Company implemented a corporate-wide initiative to reduce selling, general and administrative expenses. The Company recorded a charge of $7.4 million of which $3.4 million was recorded in the third quarter to cover the cost of 91 employees terminated in connection with this initiative. In March 2005, management began a comprehensive evaluation of the Company's operations with the objective of rationalizing capacity and improving utilization. During the nine months ended September 30, 2005, the Company recorded impairment charges of $9.8 million, including $2.1 million recorded in the third quarter, as a result of this evaluation. The Company expects to recognize additional restructuring and impairment charges when this evaluation is completed. 15 During the nine months ended September 30, 2005, the Company closed a small printing operation located in Phoenix, Arizona and consolidated its production into its Los Angeles, California printing plant, closed one of its printing operations in Atlanta, Georgia and consolidated its production into plants in Jacksonville, Illinois, St. Louis, Missouri and Cambridge, Maryland, and completed the consolidations of the printing operations in Seattle, Washington and San Francisco, California. We have recorded severance expenses of $0.9 million, including $0.6 million in the third quarter, and other exit costs of $0.5 million in connections with these plant consolidations. 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. The fees incurred were $3.2 million. * Legal and other fees incurred in connection with the special meeting of shareholders totaled $3.6 million. * The Company reimbursed the shareholder group that initiated the special meeting of shareholders $0.8 million for expenses incurred in connection with the special meeting (see Note 2 to the condensed consolidated financial statements). * In January 2005, the Company's Chief Executive Officer resigned. The cost incurred as a result of this resignation was $2.2 million. * Under the Company's Long-Term Incentive Plan, the change in the board of directors on September 12, 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 $2.7 million. LOSS ON SALE OF NON-STRATEGIC BUSINESSES During 2005, we have sold five non-strategic businesses. In the third quarter, we sold a fine papers business in Ontario, Canada. Earlier in the year we sold our mailing supplies business in Dekalb, Illinois, printing operations in Riviera Beach, Florida and Osage Beach, Missouri and a jet printing operation in Canada. A summary of the net sales and operating income included in the condensed consolidated statements of operations for these businesses follows (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- --------------------- 2005 2004 2005 2004 ------ ------ ------- ------- Sales........................................ $1,226 $7,834 $11,571 $23,277 Operating income............................. $ (71) $ (22) $ (650) $ (318) The loss of $2.0 million for the nine months ended September 30, 2005 recorded as a result of the divestitures of these non-strategic businesses was primarily due to the write-off of the goodwill allocated to these businesses as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. INTEREST EXPENSE Interest expense increased slightly to $18.1 million in the third quarter of 2005 from $17.9 million in the third quarter of 2004. Interest expense in the third quarter reflects average outstanding debt of $812.5 million during the quarter and a weighted average interest rate of 8.4% compared to average outstanding debt of $802.9 million during the third quarter of 2004 and a weighted average interest rate of 8.10%. Interest expense increased $1.3 million to $55.1 million for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. Interest expense during this period 16 reflects our average outstanding debt of $819.5 million and a weighted average interest rate of 8.30% compared to the average outstanding debt of $809.2 million and a weighted average interest rate of 8.16% during 2004. LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT In January 2004, we sold $320 million of 7 7/8% senior subordinated notes due 2013. The proceeds from the sale of these notes were used to redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to redeem the 8 3/4% notes and the unamortized debt issuance costs on the 8 3/4% notes, which were written off, totaled $17.7 million. INCOME TAXES As required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS 109"), the Company evaluates the realizability of its deferred tax assets on a quarterly basis. SFAS 109 requires a valuation allowance to be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Because the Company's U.S. operations have incurred substantial net operating losses over the last four years, it established a valuation allowance of $26.8 million prior to 2005 to cover a portion of the deferred tax asset arising from the net operating losses in the U.S. and a portion of its U.S. capital loss carry forwards. The Company has increased the valuation allowance by $38.3 million during the nine months ended September 30, 2005 as a result of continuing losses by its U.S. operations. Through June 30, 2005, the Company believed the remaining U.S. deferred tax assets would be realized through the reversal of existing temporary differences and the execution of available tax planning strategies. In September 2005, the Company determined that it would no longer implement the identified strategies that could have been used to realize the net deferred tax benefit. The Company recorded an additional valuation allowance of $35.3 million to eliminate the remaining net U.S. deferred tax asset. In addition, the Company provides income taxes for its operations in Canada which are expected to generate taxable income in 2005. GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS In September 2000, we sold the extrusion coating and laminating business segment of American Business Products, Inc., a company we acquired in February 2000. The consideration received for this business included an unsecured note which was fully reserved at the time of the sale. This note was redeemed by the issuer in June 2004 for $2.0 million. The proceeds, net of tax, were recorded as a gain on disposal of discontinued operations. NET LOSS AND NET LOSS PER SHARE The net loss of $64.1 million, or $1.28 per share, for the third quarter of 2005 and the net loss of $97.2 million, or $1.99 per share, for the nine months ended September 30, 2005 reflect lower division operating income, significantly higher restructuring and other charges, and higher interest expense than during the comparable periods of 2004 as well as the $35.3 million increase in the deferred tax valuation allowance. 17 RELEVANT NON-GAAP MEASURE--EBITDA We use EBITDA, a non-GAAP measure, internally to monitor our overall performance and the performance of our segments. We define EBITDA as earnings before interest, taxes, depreciation and amortization, and we exclude the impact of restructuring and related charges, losses incurred on the dispositions of non-strategic businesses and the EBITDA of divested operations. In 2004, we excluded the loss incurred on the early extinguishment of debt. We believe EBITDA, as defined, provides useful supplemental information for comparative purposes since it excludes the impact of investing and financing transactions as well as the effect of restructuring, including dispositions, and related charges on our operating results. A reconciliation of net income to EBITDA, as defined, is presented below (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ----------------------- 2005 2004 2005 2004 -------- ------- -------- -------- Net income (loss)............................ $(64,078) $ 2,490 $(97,246) $(16,111) Interest................................. 18,079 17,859 55,074 53,771 Income taxes............................. 39,420 8 51,140 (1,070) Depreciation............................. 11,611 12,171 34,900 35,014 Amortization............................. 1,329 1,343 3,995 4,244 Retructuring and other charges........... 24,378 (269) 39,467 851 Loss on sale of non-strategic businesses............................. 759 -- 2,019 -- Divested operations...................... 28 (67) 320 (2,437) Loss from the early extinguishment of debt................................... -- -- -- 17,748 Tax on discontinued operations........... -- -- -- 770 -------- ------- -------- -------- EBITDA, as defined........................... $ 31,526 $33,535 $ 89,669 $ 92,780 ======== ======= ======== ======== EBITDA, as defined, by segment: Envelopes, Forms and Labels.............. $ 27,077 $25,996 $ 77,387 $ 78,602 Commercial Printing...................... 9,659 12,658 27,330 31,724 Corporate................................ (5,210) (5,119) (15,048) (17,546) -------- ------- -------- -------- $ 31,526 $33,535 $ 89,669 $ 92,780 ======== ======= ======== ======== SEGMENT OPERATIONS Our Chief Executive Officer monitors the performance of the ongoing operations of each of our business segments. The summaries of sales and operating income of our two segments have been presented to show each segment without the sales of divested operations ("Division net sales") and to show the operating income of each segment without the operating income of divested operations, restructuring charges and the losses incurred on divestitures ("Division operating income"). Net sales and operating income of the operations divested, restructuring charges and the losses incurred on divestitures have been included in the tables that follow to reconcile segment sales and segment operating income reported in Note 13 to our condensed consolidated financial statements to division net sales and division operating income on which our segments are evaluated. 18 ENVELOPES, FORMS AND LABELS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- (IN THOUSANDS) 2005 2004 2005 2004 -------------- -------- -------- -------- -------- Segment sales............................... $230,844 $217,769 $695,892 $650,165 Divested operations..................... (1,226) (5,128) (8,502) (15,129) -------- -------- -------- -------- Division net sales.......................... $229,618 $212,641 $687,390 $635,036 ======== ======== ======== ======== Segment operating income.................... $ 17,313 $ 20,943 $ 53,785 $ 61,742 Restructuring charges................... 3,571 (294) 6,129 826 Loss on sale of non-strategic businesses............................ 758 -- 1,151 -- Divested operations..................... 71 (198) 361 (230) -------- -------- -------- -------- Division operating income................... $ 21,713 $ 20,451 $ 61,426 $ 62,338 ======== ======== ======== ======== Division operating income margin............ 9% 10% 9% 10% Net sales of our Envelopes, Forms and Labels Segment were 6% higher in the third quarter and 7% higher during the nine months ended September 30, 2005 than the comparable periods of 2004. The strong sales performance of this segment in 2005 was driven by the following: * Envelope and related products sold to our strategic accounts were higher in the third quarter and on a year-to-date basis. * Envelopes and related products sold to our retail, wholesale and trade customers were lower in the third quarter, but were higher than the prior year on a year-to-date basis. We expected sales in these markets to be higher in the first half of the year since we increased our share of these markets during the second half of 2004. * Sales of business forms and labels were flat in the third quarter but were lower for the year. This decline was due to the continued erosion in sales of traditional business documents. * Sales have increased during the year due to the favorable impact foreign currency translation had on the sales of our Canadian envelope operations. The operating income of our Envelopes, Forms and Labels Segment declined $3.6 million, or 17%, in the third quarter of 2005. Division operating income increased $1.3 million, or 6%. For the nine months ended September 30, 2005 operating income declined $8.0 million, or 13%, while division operating income declined $0.9 million, or 2%. * The margins on our envelope products in 2005 are below 2004 due to the higher cost of paper and other materials. In the third quarter, the contribution from higher sales offset the impact of the lower margins. On a year-to-date basis, the impact of lower margins has exceeded the profits contributed by the increase in sales. * Profits of our business that sells into the retail and wholesale office products markets improved in the third quarter of 2005. In the third quarter of 2004, this business experienced operational problems in its preparations to serve several new large customers. Lower net selling prices and higher distribution expenses for products sold to retail and wholesale markets, however, have contributed to lower profits on a year-to-date basis than in 2004. 19 COMMERCIAL PRINTING THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- (IN THOUSANDS) 2005 2004 2005 2004 -------------- -------- -------- -------- -------- Segment sales............................... $199,979 $210,330 $606,269 $611,073 Divested operations..................... -- (2,706) (3,069) (8,148) -------- -------- -------- -------- Division net sales.......................... $199,979 $207,624 $603,200 $602,925 ======== ======== ======== ======== Segment operating income (loss)............. $ (870) $ 4,890 $ (9,100) $ 9,831 Restructuring charges................... 3,081 25 12,690 25 Loss on sale of non-strategic businesses............................ 1 -- 868 -- Divested operations..................... -- 220 289 548 -------- -------- -------- -------- Division operating income................... $ 2,212 $ 5,135 $ 4,747 $ 10,404 ======== ======== ======== ======== Division operating income margin............ 1% 2% 1% 2% Net sales of our Commercial Printing Segment were $10.3 million, or 5%, lower in the third quarter of 2005 and $4.8 million, or 1%, lower on a year-to-date basis compared to the corresponding periods of 2004. Division net sales were $7.6 million lower, or 4%, in the third quarter and up slightly on a year-to-date basis. The decline in division net sales in the third quarter of 2005 was due to the following: * As a result of the closure of one of our plants in Atlanta during the third quarter, we did not retain low margin business that could not be produced profitably at other operations. * Sales to several of our large customers were lower than in the third quarter of 2004. Operating income of the Commercial Printing Segment declined $5.8 million in the third quarter of 2005 and $18.9 million during the nine months ended September 30, 2005 compared to the corresponding periods of 2004. These declines were primarily the result of restructuring charges and losses related to the dispositions of non-strategic businesses. Division operating income declined $2.9 million in the third quarter and $5.7 million on a year-to-date basis. Performance at several of our commercial printing plants deteriorated during 2005 relative to 2004. As mentioned earlier, we are evaluating whether we should close, consolidate or sell these under-performing operations. In addition, lower sales contributed to the decline in profits in the third quarter. LIQUIDITY AND CAPITAL RESOURCES Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized as follows (in thousands): NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2005 2004 -------- -------- Cash provided by (used for): Operating activities.................................... $(27,301) $ 13,997 Investing activities.................................... (16,440) (26,574) Financing activities.................................... 43,752 12,999 Effect of exchange rate changes on cash................. 76 (350) -------- -------- Net increase in cash and cash equivalents................... $ 87 $ 72 ======== ======== OPERATING ACTIVITIES. During the nine months ended September 30, 2005, our operations consumed cash of $27.3 million. This use of cash was primarily due to the restructuring and other charges that have been incurred in 2005 and an increase in working capital. 20 INVESTING ACTIVITIES. Capital expenditures were $19.7 million during the nine months ended September 30, 2005 compared to $20.2 million during the nine months ended September 30, 2004. Proceeds from divestitures were $6.5 million in 2005 compared to $2.0 million in 2004. Acquisition spending in 2005 included a $1.4 million payment on an acquisition completed in 2004 and $2.6 million paid to acquire a small operation that has been consolidated with our printing operation in Philadelphia, Pennsylvania. FINANCING ACTIVITIES. Our outstanding debt was $792.4 million at September 30, 2005, an increase of $22.7 million from December 31, 2004. Proceeds received from the exercise of stock options during the nine months ended September 30, 2005 totaled $21.1 million. On September 30, 2005, we had outstanding letters of credit of approximately $27.6 million related to performance and payment guarantees. In addition, we have issued letters of credit of $1.0 million as credit enhancements in conjunction with other debt. Based on our experience with these arrangements, we do not believe that any obligations that may arise will be significant. Our current credit ratings are as follows: SENIOR SENIOR SECURED CREDIT SENIOR SUBORDINATED REVIEW AGENCY FACILITY NOTES NOTES LAST UPDATE ----------------------------------- -------------- ------ ------------ ------------- Standard & Poor's.................. BB- B+ B- August 2005 Moody's............................ Ba3 B1 B3 April 2004 The terms of our existing debt do not have any rating triggers, and we do not believe that our current ratings will impact our ability to raise additional capital. We expect internally generated cash flow and the financing available under our senior secured credit facility will be sufficient to fund our working capital needs and long-term growth; however, this cannot be assured. CRITICAL ACCOUNTING ESTIMATES In preparing the consolidated condensed financial statements, we make estimates based on assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates on an ongoing basis. We base our estimates on historical experience and various other assumptions that are considered reasonable in view of relevant facts and circumstances. Because these accounting estimates and assumptions inherently involve significant judgments and the most uncertainty, the nature of these accounting estimates and assumptions are important to an understanding of our financial statements. Because future events rarely develop exactly as anticipated, even the best estimates routinely require adjustment. We have engaged and will continue to engage in restructuring actions and activities associated with productivity improvement initiatives and expense reduction measures, which require us to make significant estimates in several areas including realizable values of assets and expenses for severance and other employee separation costs. The amounts we have accrued represent our best estimate as of September 30, 2005 of the obligations incurred as of that date in connection with these actions, but could be subject to change due to various factors. As of September 30, 2005, the Company had accrued a liability of $0.2 million for termination benefits that will be paid to certain employees that have been retained to render future service. This liability will be adjusted to the extent there is a change in the estimated future service period in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). In addition, the Company expects to record additional estimates of severance and other restructuring charges during the fourth quarter of 2005 as required by SFAS 146. 21 Except for the additional valuation allowance recorded to eliminate the Company's net U.S. deferred tax asset (see Note 8 to the condensed consolidated financial statements), there were no significant changes in the application of the critical accounting policies and estimates in preparing our consolidated condensed financial statements for the third quarter of 2005 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004. The critical accounting policies and estimates disclosed in the Management's Discussion and Analysis of Financial Condition and Results of Operations were allowances for losses on accounts receivable, impairment of long-lived assets, goodwill, self-insurance and accounting for income taxes. NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments: an amendment of FASB Statements No. 123 and 95 ("SFAS 123R"). SFAS 123R requires all share-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair value. The Company expects to implement SFAS 123R in the first quarter of 2006 and use the modified-prospective transition method of implementation. Under the modified-prospective transition method, the Company will recognize compensation expense in the financial statements issued subsequent to the date of adoption, which will be January 1, 2006, for all share-based payments granted, modified or settled after January 1, 2006 as well as for any awards that were granted prior to January 1, 2006 for which the requisite service has not been provided as of January 1, 2006. As of September 30, 2005, there were no stock option grants that had not fully vested; however, should the Company grant additional stock option awards prior to January 1, 2006, the compensation expense on these awards will be recognized using the fair values determined for the pro forma disclosures on stock-based compensation as prescribed by SFAS 123. The Company has not determined the impact of its adoption of SFAS 123R. SEASONALITY AND ENVIRONMENT Our commercial printing plants experience seasonal variations. Revenues from annual reports are generally concentrated from February through April. Revenues associated with holiday catalogs and automobile brochures tend to be concentrated from July through October. As a result of these seasonal variations, some of our commercial printing operations are at or near capacity at certain times during these periods. In addition, several envelope market segments and certain segments of the direct mail market experience seasonality, with a higher percentage of the volume of products sold to these markets occurring during the fourth quarter of the year. This seasonality is due to the increase in sales to the direct mail market due to holiday purchases. Seasonality is offset by the diversity of our other products and markets, which are not materially affected by seasonal conditions. Environmental matters have not had a material financial impact on our historical operations and are not expected to have a material impact in the future. AVAILABLE INFORMATION Our Internet address is: www.cenveo.com. We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission. In addition, our earnings conference calls are archived for replay on our website and presentations to securities analysts are also included on our website. 22 LEGAL PROCEEDINGS From time to time we may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent that losses are deemed probable and can be estimated. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on us. CAUTIONARY STATEMENTS Certain statements in this report, and in particular, statements found in Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe these forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of the Company. All such statements involve risks and uncertainties, and as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including but not limited to, general economic, business and labor conditions; the ability to be profitable on a consistent basis; the impact of a new CEO and changes in management and strategic direction that have been or will be made; the ability to effectively execute cost reduction programs and management reorganizations; dependence on sales that are not subject to long-term contracts; dependence on suppliers; the ability to recover the rising cost of key raw materials in markets that are highly price competitive; the ability to meet customer demand for additional value-added products and services; fluctuations in currency exchange rates, particularly with respect to the Canadian dollar; the ability to timely or adequately respond to technological changes in the industry; the impact of the Internet and other electronic media on the demand for envelopes and printed material; postage rates; the ability to manage operating expenses; the ability to manage financing costs and interest rate risk; a decline in business volume and profitability that could result in a further impairment of goodwill; the ability to retain key management personnel; the ability to identify, manage or integrate future acquisitions; the costs associated with and the outcome of outstanding and future litigation; and changes in government regulations. In view of such uncertainties, investors should not place undue reliance on our forward-looking statements since such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks such as changes in interest and foreign currency exchange rates, which may adversely affect results of our operations and our financial position. Risks from interest and foreign currency exchange rate fluctuations are managed through normal operating and financing activities. We do not utilize derivatives for speculative purposes, nor have we hedged interest rate exposure through the use of swaps and options or foreign exchange exposure through the use of forward contracts. Exposure to market risk from changes in interest rates relates primarily to our variable rate debt obligations. The interest on this debt is the London Interbank Offered Rate ("LIBOR") plus a margin. At September 30, 2005, we had variable rate debt outstanding of $115.7 million. A 1% increase in LIBOR on the maximum amount of debt subject to variable interest rates, which was $312.1 million, would increase our annual interest expense by $3.1 million. We have operations in Canada, and thus are exposed to market risk for changes in foreign currency exchange rates of the Canadian dollar. In the three and nine months ended September 30, 2005, a uniform 10% strengthening of the U.S. dollar relative to the Canadian dollar would have resulted in a decrease in sales of approximately $5.1 million and $15.1 million, respectively, and a decrease in net income of approximately $0.5 and $2.2 million, respectively. The effects of foreign 23 currency exchange rates on future results would also be impacted by changes in sales levels or local currency prices. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in timely alerting them to any material information relating to the Company and its subsidiaries required to be included in the Company's Exchange Act filings. CHANGES IN INTERNAL CONTROLS. During September 2005, the Company made changes in its senior financial management. There were, however, no changes made in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 24 PART II ITEM 2. ISSUER PURCHASES OF EQUITY SECURITIES (d) MAXIMUM NUMBER (OR APPROXIMATE (a) TOTAL (b) (c) TOTAL NUMBER OF DOLLAR VALUE) OF NUMBER OF AVERAGE PRICE SHARES (OR UNITS) SHARES (OR UNITS) THAT SHARES (OR PAID PER PURCHASED AS PART OF MAY YET BE PURCHASED UNITS) SHARE (OR PUBLICLY ANNOUNCED UNDER THE PLANS OR PERIOD PURCHASED* UNIT) PLANS OR PROGRAMS PROGRAMS ------ ---------- ------------- -------------------- ---------------------- 05/01/05 - 05/31/05 24,733 $7.56/share 06/01/2005 - 06/30/2005 07/01/2005 - 07/31/2005 ------ ----------- TOTAL 24,733 $7.56/SHARE ====== ===========-------- * All 24,733 shares were forfeited to the Company by certain executives in respect of certain withholding tax payments, made by the Company on the executives' behalf, that became due upon the vesting of certain restricted shares. ITEM 6. EXHIBITS EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Articles of Incorporation of the Company--incorporated by reference from Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1997. 3.2 Articles of Amendment to the Articles of Incorporation of the Company dated May 17, 2004--incorporated by reference to Exhibit 3.2 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 3.3 Bylaws of the Company as amended and restated effective April 17, 2005--incorporated by reference to Exhibit 3.2 of the Company's Form 8-K filed April 18, 2005. 3.4 Certificate of Amendment of Certificate of Incorporation of Cenveo Corporation (formerly known as Mail-Well I Corporation) dated May 14, 2004--incorporated by reference to Exhibit 3.4 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 3.5 Amendment to Articles of Incorporation and Certificate of Designations of Series A Junior Participating Preferred Stock of Cenveo, Inc. dated April 20, 2005--incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed April 21, 2005. 4.1 Indenture dated as of March 13, 2002 between Mail-Well I Corporation and State Street Bank and Trust Company, as Trustee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit 10.30 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.2 Form of Senior Note and Guarantee relating to Mail-Well I Corporation's $350,000,000 aggregate principal amount 9 5/8% due 2012--incorporated by reference to Exhibit 10.31 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 4.3 Indenture dated as of February 4, 2004 between Mail-Well I Corporation and U.S. Bank National Association, as Trustee, and Form of Senior Subordinated Note and Guarantee relating to Mail-Well I Corporation's $320,000,000 aggregate principal amount of 7 7/8 Senior Subordinated Notes due 2013--incorporated by reference to Exhibit 4.5 to Mail-Well, Inc.'s Annual Form 10-K filed February 27, 2004. 25 EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.4 Rights Agreement dated April 20, 2005 between Cenveo, Inc. and Computershare Trust Company, Inc.--incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filed April 21, 2005. 10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of its officers and directors--incorporated by reference from Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.2 Form of Indemnity Agreement between Mail-Well I Corporation and each of its officers and directors--incorporated by reference from Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of February 23, 1994 and related Employee Stock Ownership Plan Trust Agreement--incorporated by reference from Exhibit 10.19 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated by reference from Exhibit 10.20 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.5 Form of Mail-Well, Inc. Incentive Stock Option Agreement--incorporated by reference from Exhibit 10.22 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.6 Form of Mail-Well, Inc. Nonqualified Stock Option Agreement-- incorporated by reference from Exhibit 10.23 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated March 25, 1994. 10.7 1997 Non-Qualified Stock Option Agreement--incorporated by reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q for the quarter ended March 31, 1997. 10.8 Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive Stock Option Agreement--incorporated by reference from Exhibit 10.59 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.9 Mail-Well, Inc. 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.10 Form of Non-Qualified Stock Option Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.11 Form of Incentive Stock Option Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.12 Form of Restricted Stock Award Agreement under 2001 Long-Term Equity Incentive Plan--incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.13 Second Amended and Restated Equipment Lease dated as of August 6, 2002 between Wells Fargo Bank Northwest, National Association, as trustee under MW 1997-1 Trust, and Mail- Well I Corporation--incorporated by reference to Exhibit 10.26 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.14 Second Amended and Restated Guaranty Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named 26 EXHIBIT NUMBER DESCRIPTION ------- ----------- therein--incorporated by reference to Exhibit 10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.15 Second Amended and Restated Participation Agreement dated as of August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet Capital Corporation as Arranger and Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.16 Amendment Agreement No. 1 dated as of September 25, 2002, among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as Agent, and the Trust Certificate Purchasers named therein--incorporated by reference to Exhibit 10.29 of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30, 2002. 10.17 Employment and Executive Severance Agreement dated as of March 10, 2003, between the Company and Paul V. Reilly--incorporated by reference to Exhibit 10.26 of the Company's Annual Form 10-K filed March 31, 2003. 10.18 Form of Executive Severance Agreement entered into between the Company and each of the following: Michel Salbaing, Gordon Griffiths, Brian Hairston, Keith Pratt, William Huffman, D. Robert Meyer and Mark Zoeller--incorporated by reference to Exhibit 10.27 of the Company's Annual Form 10-K filed March 31, 2003. 10.19 Amendment Agreement No. 2 dated as of March 25, 2004 among Mail-Well I Corporation as Lessee, certain of its subsidiaries and Mail-Well, Inc. as Guarantor, Fleet Capital Corporation as Agent, and the Trust Purchasers named therein--incorporated by reference to Exhibit 10.21 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.20 Second Amended and Restated Credit Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.22 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.21 Second Amended and Restated Security Agreement dated March 25, 2004 among Mail-Well, Inc., Mail-Well I Corporation, certain subsidiaries of Mail-Well I, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.23 of the Company's Form 10-Q for quarter ended March 31, 2004. 10.22 Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as amended-- incorporated by reference to Exhibit 10.24 to Cenveo Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2004. 10.23 Amendment No. 1 to Second Amended and Restated Credit Agreement dated February 8, 2005 among Cenveo, Inc., Cenveo Corporation, certain subsidiaries of Cenveo Corporation, the lenders under the Second Amended and Restated Credit Agreement, and Bank of America, N.A., as administrative agent for the lenders--incorporated by reference to Exhibit 10.23 of the Company's Annual Form 10-K filed February 28, 2005. 10.24 Employment Agreement dated as of June 22, 2005 between the Company and James R. Malone--incorporated by reference to Exhibit 99.1 of the Company's Form 8-K filed June 24, 2005. 27 EXHIBIT NUMBER DESCRIPTION ------- ----------- 31.1* Certification of Periodic Report by Robert G. Burton, Sr., Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Periodic Report by Sean S. Sullivan, Executive Vice President--Finance and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Periodic Report by Robert G. Burton, Sr., Chairman and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Periodic Report by Sean S. Sullivan, Executive Vice President--Finance and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------- * Filed herewith. ** Furnished herewith. 28 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 November 3, 2005. 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 Executive Vice President-- Finance and Chief Financial Officer (Principal Financial Officer) 29