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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
COMMISSION FILE NUMBER 1-12551
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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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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 / / No /X/
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 February 14, 2007 the registrant had 53,670,182 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.
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 1
Item 1A. Risk Factors................................................ 6
Item 1B. Unresolved Staff Comments................................... 10
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities......... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 25
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 61
Item 9A. Controls and Procedures..................................... 61
Item 9B. Other Information........................................... 64
PART III
Item 10. Directors, Executive Officers and Corporate Governance...... 64
Item 11. Executive Compensation...................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters................ 66
Item 13. Certain Relationships and Related Transactions, and Director
Independence.............................................. 66
Item 14. Principal Accountant Fees and Services...................... 66
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 67
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PART I
ITEM 1. BUSINESS
THE COMPANY
We are a leading provider of print and visual communications, with
one-stop services from design through fulfillment. According to Printing
Impressions, we are the fifth largest diversified printing company in North
America. During 2006, we substantially completed the major restructuring
program that we initiated in September 2005. We operate our businesses in
two complimentary operating segments: Envelopes, Forms and Labels and
Commercial Printing. Our broad portfolio of services and products includes
envelopes, forms and labels, packaging, business documents and commercial
printing, provided through a network of 46 production, fulfillment and
distribution facilities, which we refer to as manufacturing facilities,
throughout North America.
Our envelopes, forms and labels segment operates 22 manufacturing
facilities and 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 and office-products retail chains.
Envelopes, forms and labels had net sales of $780.7 million, $767.4 million
and $754.6 million, in 2006, 2005 and 2004, respectively. Total assets for
envelopes, forms and labels were $484.4 million and $613.6 million, as of
December 31, 2006 and 2005, respectively.
In March 2006, we sold our Canadian envelope operations and certain
other assets to the Supremex Income Fund, which we refer to as the Fund, a
Canadian open-ended trust (see Sale and Closure of Non-Strategic or
Underperforming Assets).
Our commercial printing segment operates 20 manufacturing facilities
and specializes in the printing of annual reports, car brochures, brand
marketing collateral, specialty packaging, and general commercial printing.
Commercial printing had net sales of $730.5 million, $827.4 million and
$843.0 million, in 2006, 2005 and 2004, respectively. Total assets for
commercial printing were $394.0 million and $438.9 million, as of December
31, 2006 and 2005, respectively.
See Note 18 of our consolidated financial statements included in Item 8
of this Annual Report on Form 10-K.
OUR STRATEGY
The key elements of our strategy are:
FOCUS ON QUALITY AND ACCOUNTABILITY. We have taken several actions to
improve the quality and accountability of our management and employees. Our
senior management team has extensive experience in the printing industry
and in turning around underperforming businesses. We also realigned our
employee compensation and performance incentives with shareholder
objectives.
COST REDUCTIONS. Since 2005, we have implemented cost savings
programs including the consolidation of our purchasing activities and
manufacturing platform, the reduction of corporate and field human
resources, streamlining information technology infrastructure and
eliminating all discretionary spending. As a result of these and prior
actions, we reduced headcount by approximately 2,800 employees and
consolidated 11 manufacturing facilities during 2006 and 2005. We believe
that these programs, once fully implemented by the end of 2007, will
eliminate at least $100 million in annual costs.
SALE AND CLOSURE OF NON-STRATEGIC OR UNDERPERFORMING ASSETS. We have
assessed our operations with a view toward eliminating operations that are
not aligned with our core operations or are underperforming. For example,
on March 31, 2006, we sold our Canadian envelope business, Supremex, and
certain other assets to the Fund. In addition, in 2006 and 2005, we sold
three and six operations, respectively, that were small and not strategic
to us, and closed three facilities in both years
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that were underperforming. We continue to evaluate the sale or closure of
facilities that no longer meet our strategic goals or performance targets.
STRATEGIC ACQUISITIONS. We continuously review acquisition
opportunities and pursue acquisitions to diversify our product offerings,
and increase our economies of scale, which we believe will favorably impact
our margins and profitability. We focus on opportunities that permit us to
expand our product and service offerings or achieve operating efficiencies
such as increased utilization of our assets. In July 2006, we acquired Rx
Technology Corporation, which we refer to as Rx Technology, a leading
manufacturer of prescription drug labels to supplement our existing labels
platform. During 2006, we fully integrated Rx Technology into our
envelopes, forms and labels segment. On February 12, 2007, we acquired PC
Ink Corp., which we refer to as Printegra, a leading producer of printed
business communication documents, labels and envelopes regularly used by
small and large businesses. With the acquisition of Printegra, we have
increased our offering of products to our existing base of customers, by
including short run documents, labels, and envelope products. At the same
time, customers of Printegra are now able to access our broad offering of
products and services. In December 2006, we entered into a definitive
merger agreement with Cadmus Communications Corporation, which we refer to
as Cadmus. We believe that when fully integrated, the addition of Cadmus
will create significant benefits for us. For example, we expect to realize
significant economies of scale resulting from the increased volume of
business and believe that this will enable us to purchase raw materials,
primarily paper and ink and other supplies, on more favorable terms and
ensure better availability of these materials in tight markets. The
purchase of Cadmus is subject to customary closing conditions that include,
among other things, approval from Cadmus shareholders and closing of our
required financing. We expect the purchase of Cadmus to close in March
2007, subject to the above closing conditions.
REDUCTION OF DEBT AND DEBT REFINANCING. As of December 31, 2006, we
reduced our total outstanding debt by $136.8 million as compared to December
31, 2005. We accomplished this by using a significant amount of the $212
million of proceeds from the sale of Supremex, and certain other assets, to
pay down the entire outstanding balance of the senior secured credit facility
and another credit facility, and from our debt refinancing in June 2006. In
June 2006, we entered into a new credit facility agreement that provides for
$525 million of senior secured credit facilities consisting of a $200 million,
six-year revolving credit facility and a $325 million seven-year term loan
facility, which we refer to as the Credit Facilities. Proceeds from the Credit
Facilities and other available cash were used to fund the tender offer and
extinguish approximately $339.5 million in aggregate principal amount of the 9
5/8% Senior Notes due 2012 or 97% of the amount outstanding, and to retire the
Company's existing senior secured credit facility (which had no amounts
outstanding). The Cadmus and Printegra acquisitions are expected to increase
our revenue, earnings and cash flow along with our asset base; however, these
transactions will also increase our debt levels. The Printegra acquisition was
financed using our revolving credit facility. The Cadmus acquisition is
expected to be financed through an increase to our term loan, additional
revolving credit facility borrowing, and the assumption of some of Cadmus'
debt, offset in part by our cash on hand, which will include $67 million of
estimated net proceeds from the sale of our remaining units in the Fund. See
Liquidity and Capital Resources in Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 of this
Annual Report on Form 10-K.
PARTNERING WITH OUR SUPPLIERS TO REDUCE COSTS AND INCREASE EFFICIENCY.
We continue to partner with our key suppliers to improve our pricing,
payment terms, and inventory management, as well as to ensure a stable
source of supply.
OUR PRODUCTS AND SERVICES
ENVELOPES, FORMS AND LABELS. We serve two primary envelope markets: (1)
customized envelopes and packaging products, including Tyvek mailers used
by the U.S. Postal Service, sold directly to end users or to independent
distributors who sell to end users; and (2) envelopes and other products
sold to wholesalers, paper merchants, printers, contract stationers,
independent retailers and office products superstores. In the customized
envelope market, we offer printed customized conventional envelopes for use
with billing and remittance, direct mail marketers, catalog orders to end
2
users such as banks, brokerage firms and credit card companies. In the
wholesale envelope market, we manufacture and print a broad line of stock
and custom envelopes that are featured in national catalogs for the office
products market, offered through office products retailers or contract
stationers. For our small and mid-size business forms and labels customers,
we print a diverse line of custom products, including both traditional and
specialty forms and labels for use with desktop PCs and laser printers.
Through Rx Technology, we produce and sell pressure sensitive prescription
labels to the U.S. retail pharmacy market. Our printed office products
include business documents, specialty documents and short-run secondary
labels, which are made of paper or film affixed with pressure sensitive
adhesive and are used for mailing, messaging, bar coding and other
applications. These products are generally sold through independent
value-added resellers of office products.
COMMERCIAL PRINTING. We serve two primary commercial printing markets
as well as the growing market for visual communications products and
services other than print. Our general commercial printing markets are: (1)
high-end color printed materials, such as annual reports and car brochures,
which are longer run premium products for major national and regional
companies; and (2) general commercial printing products such as advertising
and promotional materials for local markets. Our printing products also
include advertising literature, corporate identity materials, calendars,
greeting cards, brand marketing materials, catalogs, maps, CD packaging,
and direct mail. Additionally, we offer our customers services such as
design, fulfillment, eCommerce, inventory management and other enterprise
solutions for companies seeking strategic partners for their branding and
other communications priorities.
OUR INDUSTRIES
Envelope printing and manufacturing combined constitute an estimated $4
billion market in North America according to the Envelope Manufacturer's
Association. Products in the envelope industry include customized envelopes
for direct mail, transactional envelopes, non-custom envelopes for resale,
and specialty envelopes and filing products.
The printing industry in the U.S. is highly fragmented with over 34,000
printing businesses and total estimated sales of $90 billion, according to
the U.S. Census Bureau. The printing industry includes general commercial
printing, financial and legal printing, greeting cards, labels and
wrappers, magazines, newspapers, books, other specialty and quick printing
and related services such as prepress and finishing. We estimate that the
market in which we primarily compete has total annual sales of
approximately $50 billion serviced by over 15,000 printing businesses.
RAW MATERIALS
The primary materials used in our businesses are paper, ink, film,
offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a number
of key suppliers and have not experienced any difficulties in obtaining the
raw materials necessary for our operations. We believe that we purchase our
materials and supplies at competitive prices due to our volume leverage.
The printing industry continues to experience some pricing pressure
related to increases in the cost of materials used in the manufacture of
our products. During 2005 and 2006, the industry experienced increases in
the price of materials, however, for 2007 we expect to see some changes in
materials pricing but not to the degree we saw in the previous two years.
Costs for uncoated paper, which is the primary raw material used in
envelope manufacturing, increased in early 2005 as well as the first and
second quarters of 2006. Industry prices for certain grades of coated
paper, the primary raw material used by our commercial print operations,
increased twice in 2005 and once in the first quarter of 2006. One coated
paper supplier has announced an increase in the first quarter of 2007. We
expect pricing to be somewhat uncertain for the first half of the year
since we believe that the recently announced increase would not appear to
be supportable given current paper market conditions.
3
In 2006, we also saw industry price increases in other materials that
we use in the manufacturing of envelopes and commercial printed materials.
These price increases were primarily driven by the surging costs of energy
and petrochemical-based products. Window film, used in envelope production,
experienced two increases in 2005 and one in 2006. The increases in 2005
were due to availability of polystyrene resin and the effects of U.S. gulf
region hurricanes. In the fourth quarter of 2006, another increase took
effect due to the rising costs of polystyrene resin and benzene. Prices for
ink, used in both of our segments, rose in the first quarters of both 2006
and 2007.
Adhesives, used in the manufacturing of envelopes, are another
petrochemical-based product that has experienced price increases. There
were two adhesive price increases in 2005 and two in 2006, caused primarily
by the rising price of corn and vinyl acetate monomer. In 2005, the major
printing plate manufacturers announced increases primarily due to the
increased price of aluminum, caused by supply shortages and an energy
intensive production process.
We expect to pass on a substantial portion of the price increases we
receive for raw materials through the pricing of our products.
PATENTS, TRADEMARKS AND TRADE NAMES
We market products under a number of trademarks and trade names. We
also hold or have rights to use various patents relating to our businesses.
Our patents and trademarks expire at various times through 2023. Our sales
do not materially depend upon any single patent or group of related
patents.
COMPETITION
In selling our envelope products, we compete with a few multi-plant and
many single-plant companies that primarily service regional and local
markets. We also face competition from alternative sources of communication
and information transfer such as electronic mail, the internet, interactive
video disks, interactive television, electronic retailing and facsimile
machines. Although these sources of communication and advertising may
eliminate some domestic envelope sales in the future, we believe that we
will experience continued demand for envelope products due to (1) the
ability of our customers to obtain a relatively low-cost information
delivery vehicle that may be customized with text, color, graphics and
action devices to achieve the desired presentation effect, (2) the ability
of our direct-mail customers to penetrate desired markets as a result of
the widespread delivery of mail to residences and businesses through the
U.S. Postal Service and (3) the ability of our direct mail customers to
include return materials in their mail-outs. Principal competitive factors
in the envelope business are quality, service and price. Although all three
are equally important, various customers may emphasize one or more over the
others. We believe we compete effectively in each of these areas.
In selling our printed business forms and labels products, we compete
with other document and label print facilities with nationwide
manufacturing locations, and regional and local printers, which typically
sell within a 100-to 300-mile radius of their plants. We compete mainly on
quick-turn customization of products and service levels.
We principally operate in the commercial print portion of the print
industry, with related service offerings designed to provide customers
complete solutions for communicating their messages to targeted audiences.
The environment is highly competitive in most of our product categories and
geographic regions. Competition is based largely on price, quality and
servicing the special needs of customers. Management believes that
overcapacity exists in most commercial printing markets. Therefore,
competition is intense. In this competitive pricing environment, companies
have focused on reducing costs in order to preserve operating margins.
Management believes this environment will continue to lead to more
consolidation within the commercial print industry as companies seek
economies of scale, broader customer relationships, geographic coverage and
product breadth to overcome or offset excess industry capacity and pricing
pressures.
4
BACKLOG
At December 31, 2006 and 2005, the backlog of customer orders to be
produced or shipped was approximately $78 million and $100 million,
respectively.
EMPLOYEES
We employed approximately 6,600 people as of December 31, 2006,
including approximately 1,300 union employees affiliated with the AFL-CIO
or Affiliated National Federation of Independent Unions. Collective
bargaining agreements, each of which cover the workers at a particular
facility, expire from time to time and are negotiated separately.
Accordingly, we believe that no single collective bargaining agreement is
material to our operations as a whole.
ENVIRONMENTAL REGULATIONS
Our operations are subject to federal, state and local environmental
laws and regulations including those relating to air emissions; waste
generation, handling, management and disposal; and remediation of
contaminated sites. We have implemented environmental programs designed to
ensure that we operate in compliance with the applicable laws and
regulations governing environmental protection. Our policy is that
management at all levels be aware of the environmental impact of operations
and direct such operations in compliance with applicable standards. We
believe that we are in substantial compliance with applicable laws and
regulations relating to environmental protection. We do not anticipate that
material capital expenditures will be required to achieve or maintain
compliance with environmental laws and regulations. However, there can be
no assurance that newly discovered conditions, new or more stringent
interpretations of existing laws and regulations will not result in
material expenses.
CAUTIONARY STATEMENTS
Certain statements in this report, particularly statements found in
"Risk Factors," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements generally can be
identified by the use of terminology such as "may," "will," "expect,"
"intend," "estimate," "anticipate," "plan," "foresee," "believe" or
"continue" and similar expressions, or as other statements that do not
relate solely to historical facts. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that
are difficult to predict. Management believes these statements to be
reasonable when made. However, actual outcomes and results may differ
materially from what is expressed or forecasted in these forward-looking
statements. As a result, these statements speak only as of the date they
were 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. In view of such uncertainties, investors should not
place undue reliance on our forward-looking statements.
Such forward-looking statements involve known and unknown risks,
including, but not limited to, those identified in Item 1A. Risk Factors
and changes in general economic, business and labor conditions. More
information regarding these and other risks can be found below under "Risk
Factors," "Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other sections of this report.
AVAILABLE INFORMATION
Our Internet address is: www.cenveo.com. References to our website
address do not constitute incorporation by reference of the information
contained on the website, and the information contained on the website is
not part of this document. We make available free of charge through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed pursuant
to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably
practicable after such documents are filed electronically with the
Securities and Exchange
5
Commission. Our Code of Business Conduct and Ethics is also posted on our
website. In addition, our earnings conference calls are archived for replay on
our website, and presentations to securities analysts are also included on our
website. In August 2006, we submitted to the New York Stock Exchange a
certificate of our Chief Executive Officer certifying that he is not aware of
any violation by us of New York Stock Exchange corporate governance listing
standards. We also filed as exhibits to our annual report on Form 10-K for the
fiscal year ended December 31, 2005 certificates of the Chief Executive
Officer and Chief Financial Officer as required under Section 302 of the
Sarbanes-Oxley Act.
ITEM 1A. RISK FACTORS
Many of the factors that affect our business and operations involve
risks and uncertainties. The factors described below are some of the risks
that could materially harm our business, financial conditions, results of
operations or prospects.
OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD IMPAIR OUR FINANCIAL CONDITION,
OUR ABILITY TO FULFILL OBLIGATIONS UNDER OUR INDEBTEDNESS, AND OUR ABILITY
TO INCUR ADDITIONAL DEBT TO FUND FUTURE NEEDS.
We have incurred substantial amounts of debt, and our level of debt may
affect our operations and our ability to make payments required by our debt
agreements. As of December 31, 2006, our total indebtedness was
approximately $675.3 million.
Our level of indebtedness could affect our future operations. For
example:
* our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or other corporate purposes in the
future may be limited;
* a substantial portion of our cash flow from operations will be
dedicated to the payment of principal and interest on indebtedness,
and will not be available to fund working capital, capital
expenditures, acquisitions and other business purposes;
* we may be more vulnerable to economic downturns or other adverse
developments than less leveraged competitors; and
* borrowings under a portion of our debt facilities bear interest at
short-term market rates, which could result in higher interest
expense in the event of increases in interest rates.
Our ability to make scheduled payments of principal or interest on, or
to reduce or refinance, indebtedness will depend on our future operating
performance and resulting cash flow. To a certain extent, our future
performance will be subject to prevailing economic conditions and
financial, competitive and other factors beyond our control. We cannot be
certain that our business, or businesses that we may acquire in the future,
will generate sufficient cash flow from operations to enable us to service
all of our debt. We may need additional funding from either debt or equity
offerings in the future in order to refinance our existing debt or to
continue to grow our business. We cannot be sure that we will have access
to any such sources of funding on satisfactory terms or on a timely basis
or at all.
THE TERMS OF OUR INDEBTEDNESS IMPOSE SIGNIFICANT RESTRICTIONS ON OUR
OPERATING AND FINANCIAL FLEXIBILITY.
The indentures governing our outstanding senior subordinated notes and
the agreement governing our credit facility contain various covenants that
limit our ability, to, among other things:
* incur or guarantee additional indebtedness;
* make restricted payments, including dividends;
* create or permit to exist certain liens;
* enter into business combinations and asset sale transactions;
* make investments;
* enter into transactions with affiliates; and
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* enter into new businesses.
These restrictions could limit our ability to obtain future financing,
make acquisitions or needed capital expenditures, withstand a future
downturn in our business or the economy in general, conduct operations or
otherwise take advantage of business opportunities that may arise. Our
credit facility also contains maximum leverage and minimum interest
coverage financial ratios that we must comply with on a quarterly basis.
Our ability to meet these financial ratios may be affected by events beyond
our control, such as general economic conditions. Our failure to maintain
applicable financial ratios, in certain circumstances, would prevent us
from borrowing additional amounts under our credit facility, and could
result in a default under that facility. A default could cause the
indebtedness outstanding under the facility and, by reason of
cross-acceleration or cross-default provisions, the senior subordinated
notes and any other indebtedness we may then have, to become immediately
due and payable. If we are unable to repay those amounts, the lenders under
our credit facility could initiate a bankruptcy proceeding or liquidation
proceeding or proceed against the collateral granted to them which secures
that indebtedness. If the lenders under our credit facility were to
accelerate the repayment of outstanding borrowings, we might not have
sufficient assets to repay our indebtedness.
THERE ARE ADDITIONAL BORROWINGS AVAILABLE TO US THAT COULD FURTHER
EXACERBATE THE RISKS DESCRIBED ABOVE.
Despite current indebtedness levels, we may incur substantial
additional indebtedness in the future. The credit facility agreement and
the terms of the indenture governing the senior subordinated notes limit,
but do not prohibit us from doing so. After funding the Printegra
acquisition on February 12, 2007, our revolving credit facility would
permit additional borrowings of up to $92 million, after considering
letters of credit issued against our revolving credit facility, the
majority of which support our workers compensation programs. We expect to
fund the acquisition of Cadmus by incurring approximately $440 million of
additional debt, including assuming a portion of existing Cadmus debt. If
this additional debt is added to our current debt levels, the related risks
that we now face could intensify.
THE INSTRUMENTS GOVERNING OUR CURRENT DEBT CONTAIN CROSS-DEFAULT PROVISIONS
THAT MAY CAUSE ALL OF THE DEBT ISSUED UNDER SUCH INSTRUMENTS TO BECOME
IMMEDIATELY DUE AND PAYABLE AS A RESULT OF A DEFAULT UNDER AN UNRELATED
DEBT INSTRUMENT.
Our credit facility and the indenture pursuant to which our existing
senior subordinated notes were issued contain several financial and
operating covenants and require us to meet certain financial ratios and
tests.
Our failure to comply with the obligations contained in the credit
facility or the indenture governing the senior subordinated notes could
result in an event of default under our credit facility, or the senior
subordinated notes indenture, which could result in the related debt and
the debt issued under other instruments to become immediately due and
payable. In such event, we would need to raise funds through any number of
alternative available sources, which funds may not be available to us on
favorable terms, on a timely basis, or at all. Alternatively, such a
default would require us to sell our assets and otherwise curtail
operations in order to pay our creditors.
TO THE EXTENT THAT WE MAKE SELECT ACQUISITIONS, WE MAY NOT BE ABLE TO
SUCCESSFULLY INTEGRATE THE ACQUIRED BUSINESSES INTO OUR BUSINESS.
In the past, we have grown rapidly through acquisitions. In July 2006,
we acquired Rx Technology and in February 2007, we acquired Printegra. We
expect to close the purchase of Cadmus in March 2007. In addition, we
intend to pursue additional favorable acquisition opportunities. Although
we believe that our experience in making acquisitions is an important
capability, the terms governing our current indebtedness limit the
acquisitions that we may currently pursue. In addition, to the extent that
we pursue additional acquisitions, we cannot be certain that we will be
able to identify and acquire other businesses on favorable terms or that,
if we are able to acquire businesses on favorable terms, we will be able to
successfully integrate the acquired businesses into our current business,
or profitably manage them.
7
OUR INDUSTRY IS HIGHLY COMPETITIVE.
The printing industry in which we compete is extremely fragmented and
highly competitive. In the commercial printing market, we compete against
large, diversified and financially stronger printing companies, as well as
regional and local commercial printers, many of which are capable of
competing with us on volume, price and production quality. In the envelope
market, we compete primarily with a few multi-plant and many single-plant
companies servicing regional and local markets. In the printed office
products market, we compete primarily with document printers with
nationwide manufacturing locations and regional or local printers. We
believe there currently is excess capacity in the printing industry, which
has resulted in excessive price competition that may continue. We are
constantly seeking ways to reduce our costs, become more efficient and
attract customers. However, we cannot be certain that these efforts will be
successful, or that our competitors will not be more successful in their
similar efforts. If we fail to reduce costs and increase productivity, or
to meet customer demand for new value-added products, services or
technologies, we may face decreased revenues and profit margins in markets
where we encounter price competition, which in turn could reduce our cash
flow and profitability.
THE PRINTING BUSINESS WE COMPETE IN GENERALLY DOES NOT HAVE LONG-TERM
CUSTOMER AGREEMENTS, AND OUR PRINTING OPERATIONS MAY BE SUBJECT TO
QUARTERLY AND CYCLICAL FLUCTUATIONS.
The printing industry in which we compete is generally characterized by
individual orders from customers or short-term contracts. Most of our
customers are not contractually obligated to purchase products or services
from us. Most customer orders are for specific printing jobs, and repeat
business largely depends on our customers' satisfaction with the work we
do. Although our business does not depend on any one customer or group of
customers, we cannot be sure that any particular customer will continue to
do business with us for any period of time. In addition, the timing of
particular jobs or types of jobs at particular times of year may cause
significant fluctuations in the operating results of our various printing
operations in any given quarter. We depend to some extent on sales to
certain industries, such as the advertising and automotive industries and a
sizeable percentage of our commercial printing sales are related to
advertising. To the extent these industries experience downturns; the
results of our operations are adversely affected.
FACTORS AFFECTING THE UNITED STATES (U.S.) POSTAL SERVICE CAN IMPACT DEMAND
FOR OUR PRODUCTS.
Most envelopes used in the U.S. are sent through the mail and, as a
result, postal rates can significantly affect envelope usage. Historically,
increases in postal rates, relative to changes in the cost of alternative
delivery means and/or advertising media, have resulted in temporary
reductions in the growth rate of mail sent, including direct mail, which is
a meaningful portion of our envelope volume. A postal rate increase is
expected in 2007. We cannot be sure that direct mail marketers will not
reduce their volume as a result of any such increases. Because postal rate
increases in the U.S. are outside our control, we can provide no assurance
that any increases in U.S. postal rates will not have a negative effect on
the level of mail sent, or the volume of envelopes purchased. In such
event, we may experience a decrease in cash flow, profitability or
financial position.
Factors other than postal rates that detrimentally affect the volume of
mail sent through the U.S. postal system may also negatively affect our
business. Congress enacted a federal "Do Not Call" registry in response to
consumer backlash against telemarketers and is contemplating enacting so-
called "anti-spam" legislation in response to consumer complaints about
unsolicited e-mail advertisements. If similar legislation becomes directed
at direct mail advertisers, our business could be negatively affected.
INCREASES IN PAPER COSTS AND ANY DECREASES IN THE AVAILABILITY OF PAPER
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Paper costs represent a significant portion of our cost of materials.
Changes in paper pricing generally do not affect the operating margins of
our commercial printing business because the
8
transactional nature of the business provides the ability to pass on any
announced paper price increases, dependent upon the competitive
environment. Paper pricing does, however, impact the operating margins of
our envelope business as price increases for those paper grades
traditionally have not been as easy to pass on due to the contractual
nature of the relationships with that customer base and the market
expectations surrounding that business. Moreover, rising paper costs and
their consequent impact on our pricing could lead to a decrease in our
volume of units sold. Although we have been successful in negotiating
favorable pricing terms with paper vendors, we cannot be certain we will be
successful in negotiating favorable pricing terms in the future. This may
result in decreased sales volumes as well as decreased cash flow and
profitability.
We depend on the availability of paper in manufacturing most of our
products. During periods of tight paper supply, many paper producers
allocate shipments of paper based on the historical purchase levels of
customers. As a result of our large volume paper purchases from several
paper producers, we generally have not experienced difficulty in obtaining
adequate quantities of paper, although we have occasionally experienced
minor delays in delivery. Although we believe that our attractiveness to
vendors as a large volume paper purchaser will continue to enable us to
receive adequate supplies of paper in the future, unforeseen developments
in world paper markets coupled with shortages of raw paper could result in
a decrease in supply, which in turn would cause a decrease in the volume of
products we could produce and sell and a corresponding decrease in our cash
flow and profitability.
WE REPORTED LOSSES FROM CONTINUING OPERATIONS IN 2006, 2005 AND 2004, AND
IT IS UNCERTAIN WHETHER OUR RETURN TO PROFITABILITY CAN BE ASSURED.
We reported a loss in 2006 from continuing operations primarily as a
result of expenses related to our restructuring initiatives and our loss on
early extinguishment of debt, in 2005 primarily as a result of expenses
related to our restructuring initiatives, as well as the change in the
composition of our board of directors in September 2005, and in 2004,
primarily as a result of the loss on early extinguishment of debt. Our
ability to return to profitability depends on the continued realization of
the benefits of our restructuring initiatives and our ability to implement
our current strategic plan.
THE AVAILABILITY OF THE INTERNET AND OTHER ELECTRONIC MEDIA MAY ADVERSELY
AFFECT OUR BUSINESS.
Our business is highly dependent upon the demand for envelopes sent
through the mail. Such demand comes from utility companies, banks and other
financial institutions, among other companies. Our printing business also
depends upon demand for printed advertising and business forms, among other
products. Consumers increasingly use the internet and other electronic
media to purchase goods and services, and for other purposes such as paying
utility and credit card bills. Advertisers use the internet and other
electronic media for targeted campaigns directed at specific electronic
user groups. Large and small businesses use electronic media to conduct
business, send invoices and collect bills. As a result, we expect the
demand for envelopes and other printed materials for these purposes to
decline over time. In addition, companies have begun to deliver annual
reports electronically rather than in printed form, which could reduce
demand for our high impact color printing.
Although we expect other trends, such as the growth of targeted direct
mail campaigns based upon mailing lists generated by electronic purchases,
to cause overall demand for envelopes and other printed materials to
continue growing at rates comparable to recent historical levels, we cannot
be certain that the acceleration of the trend towards electronic media will
not cause a decrease in the demand for our products. If demand for our
products decreases, our cash flow or profitability could materially
decrease.
WE DEPEND ON GOOD LABOR RELATIONS.
As of December 31, 2006, we had approximately 6,600 employees, of which
approximately 1,300 were members of various local labor unions. If our
unionized employees were to engage in a concerted strike or other work
stoppage, or if other employees were to become unionized, we could
experience a
9
disruption of operations, higher labor costs or both. A lengthy strike
could result in a material decrease in our cash flow or profitability.
ENVIRONMENTAL LAWS MAY AFFECT OUR BUSINESS.
Our operations are subject to federal, state, local and foreign
environmental laws and regulations, including those relating to air
emissions, wastewater discharge, waste generation, handling, management and
disposal, and remediation of contaminated sites. In addition, some of the
sellers from which we have bought businesses in the past have been
designated as potentially responsible parties under the federal
Comprehensive Environmental Response, Compensation and Liability Act of
1980, or CERCLA, or similar legislation in Canada. CERCLA imposes strict,
and in certain circumstances joint and several liability for response
costs. Liability may also include damages to natural resources. We believe
that we have minimal exposure as a result of such designations, either
because indemnities were obtained in the course of acquisitions or because
of the de minimis nature of the claims, or both. We also believe that our
current operations are in compliance with applicable environmental laws and
regulations. We cannot be certain, however, that available indemnities will
be adequate to cover all costs or that currently unknown conditions or
matters, new laws and regulations, or stricter interpretations of existing
laws and regulations will not have a material adverse effect on our
business or operations in the future.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL.
Our success will continue to depend to a significant extent on our
executive officers and other key management personnel. We cannot be certain
that we will be able to retain our executive officers and key personnel, or
attract additional qualified management in the future. In addition, the
success of any acquisitions we may pursue may depend, in part, on our
ability to retain management personnel of the acquired companies. We do not
carry key person insurance on any of our managerial personnel.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We currently occupy 42 printing and manufacturing facilities in the
United States and in Canada and four print fulfillment and distribution
centers, of which 24 are owned and 22 are leased. In addition to on-site
storage at these facilities, we store products in 11 warehouses, of which
two are owned and nine are leased, and we have nine sales offices. We have
10 facilities that have ceased operations; four of which are on the market
for sale, four that are available for sublease and two currently being
sublet. We lease 46,474 square feet of office space in Stamford,
Connecticut, for our corporate headquarters. We believe that we have
adequate facilities for the conduct of our current and future operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and
estimable. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on us. In the case of administrative proceedings related to
environmental matters involving governmental authorities, we do not believe
that any imposition of monetary damages or fines would be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
three months ended December 31, 2006.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CVO." As of February 14, 2007, there were 326
shareholders of record and, as of that date, we estimate that there were
12,500 beneficial owners holding stock in nominee or "street" name. The
following table sets forth, for the periods indicated, the range of the
intraday high and low sales prices for our common stock as reported by the
NYSE:
HIGH LOW
2006 ------ ---
First Quarter......................................... $16.58 $12.75
Second Quarter........................................ 19.96 15.01
Third Quarter......................................... 21.70 17.32
Fourth Quarter........................................ 21.86 17.79
HIGH LOW
2005 ------ ---
First Quarter.......................................... $ 5.86 $2.85
Second Quarter......................................... 10.00 5.25
Third Quarter.......................................... 10.50 7.37
Fourth Quarter......................................... 14.23 9.31
We have not paid a dividend on our common stock since our incorporation
and do not anticipate paying dividends in the foreseeable future as our
credit facility and senior subordinated notes limit our ability to pay
common stock dividends.
11
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data has been derived
from, and should be read in conjunction with, the related consolidated
financial statements, either elsewhere in this report or in reports we have
previously filed with the Securities and Exchange Commission.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales..................... $1,511,224 $1,594,781 $1,597,652 $1,531,486 $1,601,529
Restructuring, impairment and
other charges............... (41,096) (77,254) (5,407) (6,860) (87,393)
Operating income (loss)....... 66,679 (26,310) 37,428 47,798 (43,098)
Loss on early extinguishment
of debt..................... (32,744) -- (17,748) -- (16,463)
Loss from continuing
operations.................. (21,825) (148,101) (44,708) (17,884) (91,810)
Income from discontinued
operations, net of taxes.... 140,480(1) 13,049 25,000 23,356 1,454 (2)
Cumulative effect of change in
accounting principle........ -- -- -- (322) (111,748)
Net income (loss)............. 118,655(1) (135,052) (19,708) 5,150 (202,104)(2)
Basic and diluted loss per
share from continuing
operations.................. (0.41) (2.96) (0.94) (0.38) (1.93)
Basic and diluted income per
share from discontinued
operations.................. 2.64 0.26 0.53 0.49 0.03
Basic and diluted income
(loss) per share............ 2.23 (2.70) (0.41) 0.11 (4.24)
Total assets.................. 1,001,950 1,079,564 1,174,747 1,111,446 1,107,367
Total long-term debt,
including current
maturities.................. 675,295 812,136 769,769 748,961 763,899
----------------------------------------------------------------------------------------------------------------
(1) Includes a $127.4 million gain on a disposal of discontinued operations, net of taxes of $8.5 million.
(2) Includes a $16.9 million loss on a disposal of discontinued operations, net of taxes of $0.4 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations of Cenveo, Inc., which we refer to as Cenveo, and its
subsidiaries should be read in conjunction with our consolidated financial
statements included elsewhere herein. Certain statements we make under this
Item 7 constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. See Cautionary Statements regarding
forward-looking statements in Item 1 and Risk Factors in Item 1A.
INTRODUCTION AND EXECUTIVE OVERVIEW
We are a leading provider of print and visual communications, with
one-stop services from design through fulfillment. Our broad portfolio of
services and products include commercial printing, envelopes, labels,
packaging, and business documents, delivered through a network of 46
production, fulfillment and distribution facilities throughout North
America. We operate in two complementary segments: Envelopes, Forms and
Labels and Commercial Printing.
ENVELOPES, FORMS AND LABELS. Our 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.
12
COMMERCIAL PRINTING. Our 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.
BUSINESS STRATEGY. The key elements of our strategy are:
* Take actions to improve the quality and accountability of our
management and employees. Our senior management team has extensive
experience in the printing industry and in turning around
underperforming businesses. We also realigned our employee
compensation and performance incentives with shareholder objectives.
* Implement cost savings programs such as the consolidation of our
purchasing activities and manufacturing platform, corporate and field
human resources reductions, streamlining information technology
infrastructure and eliminating all discretionary spending. Since
2005, we reduced headcount by approximately 2,800 employees and
consolidated 11 manufacturing facilities. We believe that these
programs, once fully implemented by the end of 2007, will eliminate
at least $100 million in annual costs. We continue to evaluate our
business platform as we review acquisition opportunities.
* Assess our operations with a view toward eliminating operations that
are not aligned with our core domestic operations or are
underperforming. For example, on March 31, 2006, we sold our Canadian
envelope operations, Supremex, Inc., which we refer to as Supremex,
and certain other assets to the Supremex Income Fund, which we refer
to as the Fund, a Canadian open-ended trust. In addition, in 2006 and
2005, we sold three and six operations, respectively, that were small
and not strategic to us, and closed three facilities in both years
that were underperforming. We continue to evaluate the sale or
closure of facilities that no longer meet our strategic goals or
performance targets.
* Continuously review acquisition opportunities and pursue acquisitions
to diversify our product offerings and increase our economies of
scale, which we believe will favorably impact our margins and
profitability. We focus on opportunities that permit us to expand our
product and service offerings or achieve operating efficiencies such
as increased utilization of our assets. In July 2006, we acquired Rx
Technology Corporation, which we refer to as Rx Technology, a leading
manufacturer of prescription drug labels to supplement our existing
label platform. During 2006, we fully integrated Rx Technology into
our envelopes, forms and labels segment. On February 12, 2007, we
acquired PC Ink Corp., which we refer to as Printegra, a leading
producer of printed business communication documents, labels and
envelopes regularly used by small and large businesses. With the
acquisition of Printegra, we have increased our offering of product
to our existing base of customers, by including short run documents,
labels, and envelope products. At the same time, customers of
Printegra are now able to access our broad offering of products and
services. In December 2006, we entered into a definitive merger
agreement with Cadmus Communications Corporation, which we refer to
as Cadmus. We believe that when fully integrated, the addition of
Cadmus will create significant benefits for us. We expect to realize
significant economies of scale resulting from increased volume of
business and we believe that this will enable us to purchase raw
materials, primarily paper and ink and other supplies, on more
favorable terms and ensure better availability of these materials in
tight markets. The purchase of Cadmus is subject to customary closing
conditions that include, among other things, approval from Cadmus
shareholders and closing of our required financing. We expect the
purchase of Cadmus to close in March 2007, subject to the above
closing conditions.
* Reduce outstanding debt and related interest expense. As of December
31, 2006, we reduced our total outstanding debt by $136.8 million as
compared to December 31, 2005. We accomplished this by using a
significant amount of the $212 million of proceeds from the sale of
Supremex and certain other assets to pay down the entire outstanding
balance of the senior secured credit facility, and another credit
facility and from our debt refinancing in June 2006. In June 2006, we
entered into a new credit facility agreement that provides for $525
million of
13
senior secured credit facilities consisting of a $200 million, six-year
revolving credit facility and a $325 million seven-year term loan
facility, which we refer to as the Credit Facilities. Proceeds from the
Credit Facilities and other available cash were used to fund the tender
offer and extinguish approximately $339.5 million in aggregate principal
amount of the 9 5/8% Senior Notes due 2012 or 97% of the outstanding
amount, and to retire the Company's existing senior secured credit
facility (which had no amounts outstanding). The Cadmus and Printegra
acquisitions are expected to increase our revenue, earnings and cash
flow along with our asset base; however, they will also increase our debt
levels. The Printegra acquisition was financed using our revolving
credit facility. The Cadmus acquisition is expected to be financed
through an increase of our term loan, additional revolving credit
facility borrowing, and the assumption of some Cadmus debt, offset in
part by our cash on hand, which will include $67 million of estimated
net proceeds from the sale of our remaining units in the Fund. See
Liquidity and Capital Resources below.
* Partner with key suppliers to improve our pricing, payment terms, and
inventory management, as well as to ensure a stable source of supply.
See Part 1 Item 1 of this Annual Report on Form 10-K for a more complete
description of our business.
CONSOLIDATED OPERATING RESULTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations includes an overview of our consolidated results for 2006,
2005 and 2004 followed by a discussion of the results of each of our
business segments for the same period. Beginning in the fourth quarter of
2006, Supremex and certain other assets has been accounted for as a
discontinued operation resulting in our historical consolidated statements
of operations and statements of cash flows being reclassified to reflect
such discontinued operations separately from continuing operations. See
Note 3 to the consolidated financial statements included in Item 8 of this
Annual Report on Form 10-K. In addition, the Cadmus and Printegra
acquisitions are expected to increase our revenue, earnings and cash flow
in 2007.
In 2006, we continued to encounter competitive pricing pressures that
result from excess capacity in the industry in concert with declining or
weak volume growth in many of our markets. In addition, the cost of paper,
film and other raw materials for our products has increased. To compete
effectively in an environment of excess capacity and rising costs, we are
focused on improving productivity and creating operating leverage by
reducing our costs. In 2006, we sold three small non-core printing
operations, closed three printing operations and consolidated six envelope
plants and two printing operations. In 2005, we sold three small non-core
printing operations, two envelope facilities and a mailing supplies
business and closed three printing operations and consolidated two business
forms plants and one envelope plant. These consolidation activities have
assisted us in becoming more efficient at operating our plants at higher
levels of utilization. We also continue to redeploy our assets throughout
our manufacturing platform to reduce future capital expenditures. As a
result of these cost cutting initiatives, we expect our margins to continue
to improve in 2007.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income (loss).
See Segment Operations below for a summary of net sales and operating
income (loss) of our operating segments that we use internally to assess
our operating performance. Division net sales exclude sales of divested
operations, and division operating income (loss) excludes unallocated
corporate expenses, restructuring, impairment and other charges and the
results of divested operations. Our fiscal year ends on the Saturday
closest to the last day of the calendar year, and as a result, 2004 was a
53-week year. Because our business tends to be slower during the holiday
season, we do not believe the 53rd week had a significant impact, unless
otherwise noted, on the comparability of our results in 2004 with 2005,
which was a 52-week year. See Note 1 to the consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K.
14
YEARS ENDED DECEMBER 31,
--------------------------------------------
2006 2005 2004
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Division net sales................................. $1,501,869 $1,551,008 $1,522,026
Divested operations........................... 9,355 43,773 75,626
---------- ---------- ----------
Net sales.......................................... $1,511,224 $1,594,781 $1,597,652
========== ========== ==========
Division operating income.......................... $ 140,914 $ 69,717 $ 62,287
Corporate expenses............................. (31,764) (19,118) (19,657)
Restructuring, impairment and other charges.... (41,096) (77,254) (5,407)
Divested operations............................ (1,375) 345 205
---------- ---------- ----------
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 on early extinguishment of debt........... (32,744) -- (17,748)
Other (income) expense, net.................... 78 (1,143) (2,459)
---------- ---------- ----------
Loss 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)
========== ========== ==========
NET SALES
Net sales decreased $83.6 million in 2006 as compared to 2005,
primarily due to lower sales of $96.9 million from our commercial printing
segment, partially offset by an increase in sales of $13.3 million from our
envelopes, forms and labels segment. Net sales decreased $2.9 million in
2005 as compared to 2004 due to lower sales of $15.7 million for our
commercial printing segment, offset in part by sales growth of $12.8
million for our envelopes, forms and labels segment. See Segment Operations
below for a more detailed discussion of the primary factors for our net
sales changes.
OPERATING INCOME
Operating income increased $93.0 million in 2006 as compared to 2005.
This increase was primarily due to the positive results of implementing our
cost savings programs throughout our business and decreased restructuring
and impairment charges of $36.2 million, partially offset by an increase in
corporate expenses of $12.6 million. Our cost savings programs (see our
Business Strategy above), once fully implemented, are estimated to
eliminate at least $100 million in annual costs by the end of 2007.
Operating income decreased $63.7 million in 2005 as compared to 2004. This
decline was primarily due to the significant restructuring, impairment and
other charges incurred in 2005. See Segment Operations below for a more
detailed discussion of the primary factors for our operating income changes
for our segments.
CORPORATE EXPENSES. Corporate expenses include the costs of our
corporate headquarters. Corporate expenses were higher in 2006 as compared
to 2005, primarily due to certain back-office functions being assumed by
the corporate office in Stamford, Connecticut, and from increased
compensation expense, including the expense recorded under Statement of
Financial Accounting
15
Standards No. 123(R), Share-Based Payment. See Note 12 to the consolidated
financial statements included in Item 8 of this Annual Report on Form 10-K.
Corporate expenses were fairly consistent in 2005 as compared to 2004.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. Since September 2005, we
have implemented significant cost savings programs including the
consolidation of purchasing activities, the rationalization of our
manufacturing platform, corporate and field human resources reductions,
implementation of company-wide purchasing initiatives and streamlining
information technology infrastructure. See Note 11 to the consolidated
financial statements included in Item 8 of this Annual Report on Form 10-K.
As of December 31, 2006, our total restructuring liability was $7.6
million.
2006. During 2006, we incurred $41.1 million of restructuring and
impairment charges, which included $19.9 million of employee separation
costs, $3.6 million of asset impairments, net, equipment moving expenses of
$6.4 million, lease termination costs of $4.0 million and building clean-up
and other expenses of $7.2 million. We anticipate restructuring and
impairment charges to decrease significantly in 2007.
2005. During 2005, we incurred $77.3 million of restructuring,
impairment and other charges, which included $26.4 million for employee
separation costs, $26.3 million for asset impairments, $5.7 million for
lease termination costs and other exit costs of $2.2 million and $16.7
million of other charges primarily related to a special meeting of
shareholders and the accelerated vesting of equity awards resulting from
the change in the makeup of the board of directors.
2004. During 2004, we incurred $5.4 million of restructuring and
impairment charges, which included $2.6 million for asset impairments, $1.1
million for lease termination costs, $0.7 million for employee separation
costs, $0.3 million for equipment moving expenses and $0.7 million for
building clean-up and other expenses.
LOSS ON SALE OF NON-STRATEGIC BUSINESSES. During 2006, we sold three
small non-strategic businesses and recognized losses on those sales of $2.0
million. During 2005, we sold six small non-strategic businesses and
recognized losses on those sales of $4.5 million.
INTEREST EXPENSE. Interest expense decreased approximately $12.8
million to $61.0 million in 2006 from $73.8 million in 2005, primarily due
to lower average debt balances outstanding. Interest expense during 2006
reflects average outstanding debt of $721.5 million and a weighted average
interest rate of approximately 8.1%, compared to the average outstanding
debt of $820.9 million and a weighted average interest rate of 8.3% during
2005. As a result of the Printegra acquisition in February 2007 and the
Cadmus acquisition which is expected to close in March 2007, interest
expense will increase in 2007 as compared to 2006. See Long-term Debt below
and Note 9 to the consolidated financial statements included in Item 8 of
this Annual Report on Form 10-K.
Interest expense increased $0.6 million in 2005 to $73.8 million from
$73.2 million in 2004, due primarily to higher underlying market interest
rates on which our floating rate debt was based, offset in part by one less
week of interest expense in 2005. In 2005, interest expense reflected
average outstanding debt of $820.9 million during the year and a weighted
average interest rate of 8.3%, compared to average outstanding debt of
$811.4 million and a weighted average interest rate of 8.2% for 2004.
LOSS ON EARLY EXTINGUISHMENT OF DEBT. In June 2006, we incurred a $32.7
million loss on early extinguishment of debt related to our debt
refinancing. The loss from early extinguishment of debt in 2004 included
the premium paid of $13.5 million to redeem our 8 3/4% notes and the
write-off of the unamortized debt issuance costs of $4.2 million for these
notes. See Long-term Debt below and Note 9 to the consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K.
16
INCOME TAXES
2006 2005 2004
------- ------- --------
(IN THOUSANDS)
Income tax (benefit) expense for U.S. operations.......... $(7,457) $41,992 $(12,302)
Income tax expense for foreign operations................. 280 356 1,023
------- ------- --------
Income tax (benefit) expense.......................... $(7,177) $42,348 $(11,279)
======= ======= ========
Effective income tax rate............................. (24.7)% 40.0% (20.1)%
======= ======= ========
In 2006, we had an income tax benefit of $7.2 million, which included $0.2
million of taxes on our Canadian operations, $3.2 million of taxes relating to
the deconsolidation of the Company's U.S. income tax group, $0.4 million of
state and local taxes and the recognition of deferred tax assets of $11.0
million. During 2006, we provided income taxes for our Canadian operations at
an effective rate of approximately 34%.
We assess the recoverability of our deferred tax assets and, based upon
this assessment, record a valuation allowance against the deferred tax assets
to the extent recoverability does not satisfy the "more likely than not"
recognition criteria in Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which we refer to as SFAS 109. We considered our
recent operating results and anticipated 2007 taxable income in assessing the
need for our valuation allowance. As a result, in the fourth quarter of 2006,
we adjusted our valuation allowance to reflect the realizability of deferred
tax assets. For 2006, we decreased the valuation allowance by
approximately $59.4 million, primarily as a result of utilizing our net
operating loss carryforwards principally against the gain on sale of Supremex
and certain other assets, which is reflected in discontinued operations. As of
December 31, 2006, the total valuation allowance on our net U.S. deferred tax
assets was $54.5 million.
Our income tax expense in 2005 on the loss from continuing operations
before income taxes results primarily from establishing valuation
allowances on our net U.S. deferred tax assets and the tax expense recorded
for foreign operations that generated taxable income. During 2005, we
increased our valuation allowance by $87.1 million as a result of
continuing operating losses from our U.S. operations. As a result, our
total valuation allowance on our net U.S. deferred tax assets was $113.9
million as of December 31, 2005. Our income tax benefit in 2004 reflects a
benefit from continuing operations net of an increase to our valuation
allowance of $20.3 million.
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES. Discontinued
operations primarily represents the revenues and expenses of Supremex and
certain other assets sold to the Fund on March 31, 2006 and does not
include an allocation of interest expense on our debt. The 2006 results
include the gain on the sale of Supremex and certain other assets of $127.4
million, net of taxes of $8.5 million. In 2006, the results of the
discontinued operations are for the period from January 1, 2006 to March
31, 2006, the date of the sale, and include equity income from April 1,
2006 through December 31, 2006 pertaining to our retained interest. See
Notes 3, 13, 15 and 20 to the financial statements included in Item 8 of
this Annual Report on Form 10-K.
In June 2004, we collected $2.0 million of an unsecured note receivable
from the sale of our extrusion coating and laminating business segment of
American Business Products, Inc. in 2000, which was fully reserved for at
the time of sale. The proceeds of $2.0 million, net of tax of $0.8 million,
were recorded as a gain on sale of discontinued operations in 2004.
SEGMENT OPERATIONS
Our chief executive officer monitors the performance of the ongoing
operations of our two operating segments. We assess performance based on
division net sales and division operating income
17
(loss). The summaries of sales and operating income (loss) of our two
segments have been presented to show each segment without the sales of
divested operations and to show the operating income (loss) of each segment
without the results of divested operations and excluding restructuring,
impairment and other charges. Sales and operating income (loss) of
operations divested and restructuring, impairment and other charges are
included in the tables below to reconcile segment sales and operating
income (loss) reported in Note 18 to the consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K to division net sales
and division operating income on which our segments are evaluated.
ENVELOPES, FORMS AND LABELS
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
Segment net sales....................................... $780,696 $767,403 $754,609
Divested operations................................ -- (8,502) (21,141)
-------- -------- --------
Division net sales...................................... $780,696 $758,901 $733,468
======== ======== ========
Segment operating income................................ $ 85,877 $ 51,830 $ 54,150
Restructuring and impairment charges................ 18,336 12,540 1,164
Divested operations................................. -- 341 (230)
-------- -------- --------
Division operating income............................... $104,213 $ 64,711 $ 55,084
======== ======== ========
Division operating income margin........................ 13.3% 8.5% 7.5%
DIVISION NET SALES
Division net sales for envelopes, forms and labels increased $21.8
million, or 2.9%, in 2006 as compared to 2005. The significant factors
contributing to this increase in 2006 were:
* Sales of label products increased $20.2 million, primarily as a
result of our acquisition of Rx Technology in July of 2006.
* Sales of envelopes and other products to the office products retail
customers increased approximately $8.3 million, which was primarily
due to increased unit volume.
* Sales of business forms, envelopes and labels to our distributor
channel declined approximately $7.0 million, primarily due to the
decline in our traditional documents business as a result of
customers' improved capabilities to print high quality documents on
their own, due to the closure of two of our plants in the second half
of 2005, and due to the decision not to retain certain low margin
business.
Division net sales of the segment increased $25.4 million, or 3.5%, in
2005 as compared to 2004. The significant factors contributing to this
increase in 2005 were:
* Sales for domestic envelopes increased $28.3 million. This was
primarily due to an increase in sales to our direct mail customers
and from higher prices for envelopes due to higher paper prices.
* Our strategy to strengthen our position with our office products
retail superstores increased sales by $5.9 million.
* The above increases were offset in part by a $7.2 million decrease in
sales of our traditional business documents. Demand for these
products has been decreasing for several years as a result of
customers acquiring technology that no longer requires continuous,
multi-part forms. To address market conditions we closed two of our
plants that produce these products in 2005.
18
DIVISION OPERATING INCOME
Division operating income of the envelopes, forms and labels segment
increased $39.5 million, or 61.0%, in 2006 as compared to 2005. This
increase was primarily due to improved margins and lower selling, general
and administrative expenses. Margins improved approximately $28.6 million,
primarily due to increased sales and reduced manufacturing costs. Plant
consolidations and other cost reduction programs also contributed to reduce
selling, general and administrative expenses by approximately $10.9
million.
Division operating income of the segment increased $9.6 million, or
17.5%, in 2005 as compared to 2004. This improvement was primarily due to
higher sales and lower selling, general and administrative expenses. Higher
sales in 2005 contributed approximately $4.5 million and savings from
programs implemented to reduce selling, general and administrative expenses
were approximately $6.7 million. These increases were offset in part by
higher rebates and distribution expenses to our office products customers
of $2.3 million, which resulted from higher sales.
COMMERCIAL PRINTING
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
Segment net sales....................................... $730,528 $827,378 $843,043
Divested operations................................ (9,355) (35,271) (54,485)
-------- -------- --------
Division net sales...................................... $721,173 $792,107 $788,558
======== ======== ========
Segment operating income (loss)......................... $ 13,766 $(30,675) $ 4,184
Restructuring and impairment charges................ 21,560 36,367 2,994
Divested operations................................. 1,375 (686) 25
-------- -------- --------
Division operating income............................... $ 36,701 $ 5,006 $ 7,203
======== ======== ========
Division operating income margin........................ 5.1% 0.6% 0.9%
DIVISION NET SALES
Division net sales of the commercial printing segment declined $70.9
million, or 9.0%, in 2006 as compared to 2005. This decline was due
primarily to the loss of sales from eight plants that we closed in 2006 and
in 2005.
Division net sales of the segment increased $3.5 million, or 0.5%, in
2005 as compared to 2004. This sales increase primarily resulted from
operations that we acquired in 2004 of $11.3 million. This increase was
partially offset by lower net sales in the Atlanta market of $8.6 million,
which was primarily due to the closure of our two printing operations in
Atlanta in the fourth quarter of 2005.
DIVISION OPERATING INCOME
Division operating income of the commercial printing segment increased
$31.7 million, or 633.1%, in 2006 as compared to 2005. This increase was
primarily due to improved margins of $6.1 million and lower selling,
general and administrative expenses of $17.3 million from our ongoing
printing operations, and net cost savings of $7.7 million from plants that
we closed. At our ongoing printing operations, margins improved primarily
due to increased sales, reduced manufacturing costs and from significantly
reducing the cost structure of this segment through headcount reductions
and lowering expenses.
Division operating income of the segment declined $2.2 million, or
30.5%, in 2005 as compared to 2004. Reductions in selling, general and
administrative expenses of $7.7 million in 2005 were more than offset by
the impact of lower sales and underperforming results at certain plants.
Plants that were closed or sold in 2005 and 2006 had lower operating income
of $8.9 million in 2005 as compared to 2004.
19
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES. Net
cash provided by continuing operating activities was $20.7 million in 2006,
which was primarily due to net income adjusted for non-cash items of $67.4
million, offset in part by the increase in our working capital of $44.0
million. The increase in our working capital primarily resulted from the
timing of payments to our vendors and interest payments on our debt,
increased accounts receivable due to strong December 2006 sales, and lower
accrued compensation and other current liabilities primarily resulting from
headcount reductions.
Net cash used in continuing operating activities was $64.0 million in
2005. This was primarily due to an increase in our working capital of $50.5
million, primarily resulting from the payment of accounts payable and the
net loss adjusted for non cash items of $15.8 million.
NET CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES. Represents the
net cash provided from the operations of Supremex and certain other assets
sold.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash provided
by investing activities was $151.6 million in 2006, primarily reflecting
cash proceeds from the sale of Supremex of $211.5 million and from the sale
of property, plant and equipment of $11.5 million, which was partially
offset by the acquisition cost of Rx Technology of $49.4 million and
capital expenditures of $20.6 million.
Net cash used in investing activities was $26.0 million in 2005,
primarily reflecting capital expenditures of $30.8 million and $3.6 million
for the purchase of the assets of a business and deferred payments of $4.1
million related to acquisitions in 2004 and 2002, offset in part by
proceeds from the divestitures of non-core operations of $8.4 million and
from the sale of property, plant and equipment of $3.8 million.
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES. Net cash used in
financing activities was $165.4 million in 2006, primarily resulting from:
(i) the repayment of $123.9 million of our senior secured credit facility
and another credit facility of $13.1 million with proceeds from the sale of
Supremex and certain other assets, (ii) the repayment of $339.5 million of
our 9 5/8% senior notes and the payment of $26.1 million of redemption
premiums and expenses and $3.8 million of debt issuance costs in connection
with our debt refinancing, which were offset in part by the proceeds from
issuance of our term loan of $325 million, see "Debt Refinancing" below and
(iii) net borrowings under our new revolving credit facility of $15.5
million. Our acquisition of Rx Technology was funded through borrowings
under our new revolving credit facility.
Net cash provided by financing activities was $64.6 million in 2005,
primarily due to net borrowings of debt of $42.4 million and $22.4 million
of proceeds from the exercise of stock options.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS. The following table details
our significant contractual obligations and commitments as of December 31,
2006 (in thousands):
OTHER
LONG- PURCHASE
LONG-TERM OPERATING TERM COMMITMENTS
PAYMENTS DUE DEBT(1) LEASES OBLIGATIONS(2) AND OTHER(3) TOTAL
------------ ---------- --------- -------------- ------------ ----------
2007.................... $ 58,264 $27,972 $12,378 $10,138 $ 108,752
2008.................... 55,374 19,208 8,460 -- 83,042
2009.................... 54,922 13,282 11,762 -- 79,966
2010.................... 54,470 8,254 3,051 -- 65,775
2011.................... 54,071 4,891 1,948 -- 60,910
Thereafter.............. 733,852 9,074 18,171 -- 761,097
---------- ------- ------- ------- ----------
Total................... $1,010,953 $82,681 $55,770 $10,138 $1,159,542
========== ======= ======= ======= ==========
----------------------------------------------------------------------------------------------------------------
(1) Includes estimated interest expense over the term of long-term debt.
(2) Includes interest expense on lease terminations, which represents the difference between the net present
value of the remaining lease payments and the contractual cash payments.
(3) Purchase commitments and other consists primarily of payments for equipment, obligations for required
pension contributions and incentive payments to customers.
20
LONG-TERM DEBT. Our total outstanding long-term debt, including current
maturities, was $675.3 million at December 31, 2006, a decrease of $136.8
million from December 31, 2005. This decrease was primarily due to the
repayment of all amounts outstanding under our senior secured credit
facility and another credit facility primarily with proceeds received from
the sale of Supremex and from our debt refinancing in June 2006 (see Debt
Refinancing below), offset in part by an increase in our new revolving
credit facility which was used to fund the Rx Technology acquisition in
July 2006. See Note 2 to the consolidated financial statements included in
Item 8 of this Annual Report on Form 10-K. As of December 31, 2006,
approximately 82% of our outstanding debt was subject to fixed interest
rates. See Note 9 to the consolidated financial statements included in Item
8 of this Annual Report on
Form 10-K. As of February 12, 2007, we had $80 million outstanding under
our new revolving credit facility, of which approximately $78 million was
used to fund the acquisition of Printegra.
On June 23, 2006, we completed a tender offer and consent solicitation,
which we refer to as the Tender Offer, for any and all of our 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.
On June 21, 2006, we entered into a credit agreement that provides for
$525 million of senior secured credit facilities with a syndicate of
lenders, which we refer to as the Credit Facilities. The Credit Facilities
consist of a $200 million six-year revolving credit facility, which we
refer to as the Revolving Credit Facility, and a $325 million seven-year
term loan facility, which we refer to as the 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 our 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. The
Credit Facilities are secured by substantially all of our assets. We used
proceeds from the Credit Facilities and other available cash to fund the
Tender Offer, to retire our existing senior secured credit facility due
2008 (which had no amounts outstanding), and for $3.8 million of debt
issuance costs.
During June 2006, we entered into interest rate swap agreements to
hedge interest rate exposure for $220 million notional amount of our
floating rate debt. This hedge of the interest rate risk was designated and
documented at inception as a cash flow hedge. These interest rate swap
agreements provide a fixed interest rate on $220 million notional amount of
our floating rate debt.
As of December 31, 2006, we had outstanding letters of credit and
surety bonds of approximately $28.6 million related to performance and
payment guarantees. In addition, we had an outstanding letter of credit of
$0.8 million issued in support of 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
CORPORATE CREDIT SENIOR SUBORDINATED
RATING AGENCY RATING FACILITIES NOTES NOTES LAST UPDATE
------------- ------ ---------- ------ ------------ -------------
Standard & Poor's............. B+ B+ NR B- February 2007
Moody's....................... B1 Ba3 B2 B3 February 2007
In connection with Cenveo's December 2006 agreement to acquire Cadmus
for approximately $440 million, and the subsequent acquisition of
Printegra, the rating agencies identified above affirmed the corporate
rating of Cenveo in February 2007. Additionally, Moody's and S&P assigned
ratings of Ba3 and B+ respectively to the Credit Facilities that will be
used to finance the Cadmus acquisition.
The terms of our existing debt do not have any rating triggers that
impact our funding. We are currently engaged in obtaining debt financing,
the terms of which are still to be finalized, that will augment cash on
hand and proceeds from the sale of our remaining units in the Fund which
will be used to finance the acquisition of Cadmus. We do not believe that
our current ratings will impact our ability to raise the additional capital
needed to fund the acquisition.
21
We expect that internally generated cash flow following the
consummation of the Cadmus acquisition and the financing available under
our Credit Facilities will be sufficient to fund our working capital needs
and long-term growth; however, this cannot be assured.
As of December 31, 2006, the Company was in compliance with all
covenants under its debt agreements.
On February 12, 2007, we completed the acquisition of all of the common
stock of Printegra for approximately $78 million in cash, which was funded
through our revolving credit facility. Printegra generates annual revenues
of approximately $90 million and operates thirteen strategically located
facilities in the U.S. 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.
On December 26, 2006, Cenveo and Cadmus, signed a definitive merger
agreement whereby Cenveo will acquire 100% of the outstanding stock of Cadmus
for $24.75 per share. Cadmus is a provider of end-to-end integrated graphic
communications services to professional publishers, not-for-profit societies
and corporations as well as a leading provider of specialty packaging and
related marketing materials for corporations. The acquisition of Cadmus will
be financed with additional term loan facilities, incremental borrowings on
our existing revolving credit facility, assumption of some of Cadmus' existing
debt and cash on hand, which will include the proceeds from the sale of our
remaining units in the Fund. On February 22, 2007, we agreed to sell our
remaining units in the Fund and expect to receive net estimated proceeds of
$67 million in March 2007. The Company's existing Credit Facilities will be
amended in conjunction with the Cadmus acquisition and the related financing.
We expect to close the Cadmus acquisition in March 2007, pending Cadmus
shareholder approval. The acquisition of Cadmus will make Cenveo the third
largest diversified printing company in North America, which will allow us to
offer our respective customers a broader set of products and services in
attractive niche markets.
In December 2005, we amended our $300 million senior secured credit
facility at no cost to us, reducing borrowing spreads to the underlying
market rates and lowering associated facility fees. The amendment also
lowered the borrowing availability amount that would trigger the fixed
charge coverage ratio covenant.
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 then current board of directors approved a
reconstituted board of directors and simultaneously a new Chairman and
Chief Executive Officer was appointed effective September 12, 2005. In
light of the then current board of director's approval of the successor
members of the board, the transition did not constitute a change of control
under our debt agreements.
As of December 31, 2005, we had outstanding letters of credit and
surety bonds of approximately $28.7 million related to performance and
payment guarantees. In addition, we had an outstanding letter of credit of
$0.9 million issued in support of other debt.
OFF-BALANCE SHEET ARRANGEMENTS. It is not our business practice to
enter into off-balance sheet arrangements. Accordingly, as of December 31,
2006 and 2005, we do not have any off-balance sheet arrangements.
GUARANTEES. In conjunction with the sale of the prime label business in
May 2002, we guarantee a lease obligation that expires in April 2008. At
December 31, 2006, the contingent liability under the guarantee was $3.5
million. We have not made, nor do we expect to make, any payments under
this guarantee.
In connection with the disposition of certain operations, we have
indemnified the purchasers for certain contingencies as of the date of
disposition. We have accrued the estimated probable cost of these
contingencies.
22
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions in applying our
critical accounting policies that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amount of
revenues and expenses during the reporting period. We evaluate these
estimates and assumptions on an ongoing basis based on historical
experience and on various other factors which we believe are reasonable
under the circumstances.
We believe that the following represent our more critical estimates and
assumptions used in the preparation of our consolidated financial
statements:
ALLOWANCE FOR LOSSES ON ACCOUNTS RECEIVABLE. We maintain a valuation
allowance based on the expected collectibility of our accounts receivable,
which requires a considerable amount of judgment in assessing the current
creditworthiness of customers and related aging of past due balances. As of
December 31, 2006 and 2005, the allowance provided for potentially
uncollectible accounts receivable was $4.8 million and $5.2 million,
respectively. Charges for bad debts recorded to the statement of operations
were $4.3 million in 2006, $3.4 million in 2005 and $3.2 million in 2004.
We cannot guarantee that our current credit losses will be consistent with
those in the past. These estimates may prove to be inaccurate, in which
case we may have overstated or understated the allowance for losses
required for uncollectible accounts receivable.
PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS. We evaluate long-lived
assets, including property, plant and equipment and intangible assets other
than goodwill, for impairment whenever events or changes in circumstances
indicate that the carrying amounts of specific assets or group of assets
may not be recoverable. When an evaluation is required, we estimate the
future undiscounted cash flows associated with the specific asset or group
of assets. If the cost of the asset or group of assets cannot be recovered
by these undiscounted cash flows, an impairment charge would be recorded.
Our estimates of future cash flows are based on our experience and internal
business plans. Our internal business plans require judgments regarding
future economic conditions, product demand and pricing. During 2006, 2005
and 2004, in connection with our restructuring program, we recorded
impairment charges, net on long-lived assets of $3.6 million, $26.3 million
and $2.6 million, respectively. See Note 11 to the consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K. Although
we believe our estimates are appropriate, significant differences in the
actual performance of an asset or group of assets may materially affect our
evaluation of the recoverability of the asset values currently recorded.
Additional impairment charges may be necessary in future years.
PROVISION FOR IMPAIRMENT OF GOODWILL. We evaluate the carrying value of
our goodwill in the fourth quarter each year and whenever events or
circumstances make it more likely than not that an impairment may have
occurred. Determining whether an impairment has occurred requires the
valuation of each of our reporting units, which we estimate using either
discounted cash flows or comparative market multiples. In preparing
projected future cash flows, we use our judgment in projecting the
profitability of our reporting units, their growth in future years,
investment and working capital requirements and the selection of an
appropriate discount rate. In our comparisons to market multiples of other
similar companies, we use judgment in the selection of the companies
included in the analysis. We currently believe there is no impairment of
our goodwill; however, if our estimates of the valuations of our reporting
units prove to be inaccurate, an impairment charge could be necessary in
future years.
SELF-INSURANCE RESERVES. We are self-insured for the majority of our
workers' compensation costs and group health insurance costs, subject to
specific retention levels. We rely on claims experience and the advice of
consulting actuaries and administrators in determining an adequate
liability for self-insurance claims. Our self-insurance workers'
compensation liability is estimated based on reserves for claims that are
established by a third-party administrator. The estimate of these reserves
is increased to reflect the estimated future development of the claims. Our
liability for workers' compensation claims is the estimated total cost of
the claims on a fully-developed basis discounted based on anticipated
23
payment patterns. As of December 31, 2006, the undiscounted liability was
$13.0 million and the discounted liability was $11.1 million using a 4%
discount rate. Workers' compensation expense incurred in 2006, 2005 and
2004 was $5.3 million, $6.0 million and $7.2 million, respectively, and
were based on an actuarial estimates.
Our self-insured healthcare liability represents our estimate of claims
that have been incurred but not reported as of December 31, 2006. We rely
on claims experience and the advice of consulting actuaries to determine an
adequate liability for self-insured plans. This liability was $4.2 million
and $5.1 million as of December 31, 2006 and 2005, respectively, and was
estimated based on an analysis of actuarial completion factors that
estimated incurred but unreported liabilities derived from the historical
claims experience. Our liability as of December 31, 2006 decreased from the
prior year, primarily due to the significant reduction in our workforce.
The estimate of our liability for employee healthcare represents
approximately 45 days of unreported claims.
While we believe that the estimates of our self-insurance liabilities
are reasonable, significant differences in our experience or a significant
change in any of our assumptions could materially affect the amount of
workers' compensation and healthcare expenses we have recorded.
ACCOUNTING FOR INCOME TAXES. We are required to estimate our income
taxes in each jurisdiction in which we operate which includes the U.S. and
Canada. This process involves estimating our actual current tax exposure,
together with assessing temporary differences resulting from differing
treatment of items for tax and financial reporting purposes. The tax
effects of these temporary differences are recorded as deferred tax assets
or deferred tax liabilities. Deferred tax assets generally represent items
that can be used as a tax deduction or credit in our tax return in future
years for which we have already recorded an expense in our consolidated
financial statements. Deferred tax liabilities generally represent tax
items that have been deducted for tax purposes, but have not yet been
recorded as an expense in our consolidated financial statements. As of
December 31, 2006, we had net deferred tax assets of $11.7 million from our
U.S. operations. As of December 31, 2006 and 2005, we had foreign net
deferred tax liabilities of $4.4 million and $10.0 million, respectively.
We assess the recoverability of our deferred tax assets and, to the
extent recoverability does not satisfy the "more likely than not"
recognition criteria under SFAS 109, record a valuation allowance against
the deferred tax assets. We record valuation allowances to reduce our
deferred tax assets to an amount that is more likely than not to be
realized. We considered our recent operating results and anticipated 2007
taxable income in assessing the need for our valuation allowance. As a
result, in the fourth quarter of 2006, we adjusted our valuation allowance
to reflect the realizability of deferred tax assets. For 2006, we decreased
our valuation allowance by approximately $59.4 million, primarily as a result
of utilizing our net operating loss carryforwards principally against the
gain on sale of Supremex and certain other assets, which is reflected in
discontinued operations. During 2005, due to insufficient positive evidence
substantiating recoverability, we increased our valuation allowance against
our deferred tax assets to $113.9 million. This resulted from new
management determining that it would no longer implement prior identified
tax planning strategies. Accordingly, in 2005, we increased the valuation
allowance by $87.1 million, which included $7.1 million relating to the tax
benefit from stock-based compensation.
The remaining portion of our valuation allowance will be maintained
until there is sufficient positive evidence to conclude that it is more
likely than not that our remaining deferred tax assets will be realized.
When sufficient positive evidence occurs, our income tax expense will be
reduced to the extent we decrease the amount of our valuation allowance.
The increase or reversal of all or a portion of our tax valuation allowance
could have a significant negative or positive impact on future earnings.
Any reversal of the valuation allowance related to stock-based compensation
will be reflected as a component of shareholders' equity and will not
affect the future effective income tax rate.
Our policy is to establish a tax contingency liability for potential
tax issues. A tax contingency liability is based on our estimate of whether
it is probable additional taxes will be due in the future. As
24
of December 31, 2006 and 2005, we had future tax contingency liabilities of
$12.6 million and $9.5 million, respectively, recorded in other liabilities
on our consolidated balance sheets.
NEW ACCOUNTING PRONOUNCEMENTS
We are required to adopt certain new accounting pronouncements. See
Note 1 to the consolidated financial statements included in Item 8 in this
Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of operations
and financial position. Risks from interest rate fluctuations and changes
in foreign currency exchange rates are managed through normal operating and
financing activities. We do not utilize derivatives for speculative
purposes.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At December
31, 2006, we had variable rate debt outstanding of $120.4 million. A 1%
increase in LIBOR on debt outstanding subject to variable interest rates
would increase our annual interest expense and reduce our net income by
approximately $1.2 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar. For the
year ended December 31, 2006, a uniform 10% strengthening of the U.S.
dollar relative to the Canadian dollar would have resulted in a decrease in
sales and operating income of approximately $10.2 million and $1.1 million,
respectively. The effects of foreign currency exchange rates on future
results would also be impacted by changes in sales levels or local currency
prices.
25
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
26
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.
27
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.
28
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.
29
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.
30
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
envelope, 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.
31
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.
32
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 (see 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 (see 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
its
33
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.
34
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 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
35
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
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. ("Jen Coat") 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.
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.
36
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
======== ======= ========
37
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
======= =======
38
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
39
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.
40
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)
======== ======= ========
41
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)
======== ======== ========
42
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
43
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.
44
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
45
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.
46
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.
47
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
======= ======== ===== ==== ========
48
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 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.
49
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.
50
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.
51
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
52
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:
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
53
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
====== ====== ======
54
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.
55
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).
56
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)
======== ========= ========
57
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.
58
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
========== ========== ==========
59
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
60
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) $ (1.30) $ (0.65)
Discontinued operations......................... 0.12 0.11 0.10 (0.06)
-------- -------- -------- --------
Net income (loss)............................... $ (0.47) $ (0.22) $ (1.20) $ (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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended the ("Exchange Act") as of
December 31, 2006. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were sufficiently effective and designed to ensure that the
information required to be disclosed by us in our filings under the
Exchange Act were recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms.
61
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) of the Exchange Act. The Company's internal control over
financial reporting is a process designed under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of the Company's financial statements for external
reporting purposes in accordance with accounting principles generally
accepted in the United States.
Management has conducted an assessment of the effectiveness of the
Company's internal control over financial reporting based on the framework
established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2006 is effective.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of
assets; provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that
receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006 has been audited
by Ernst & Young LLP, an independent registered public accounting firm, as
stated in their report appearing on page 63.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
during the quarter ended December 31, 2006 that have materially affected or
are reasonably likely to materially affect, our internal control over
financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management, including our chief executive officer and our chief
financial officer, does not expect that our disclosure controls or our
internal control over financial reporting will prevent or detect all error
and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls
is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Projections of any evaluation of controls effectiveness to future periods
are subject to risks. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with
policies or procedures.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cenveo, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Cenveo, Inc. maintained effective internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Cenveo,
Inc.'s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express
an opinion on management's assessment and an opinion on the effectiveness
of the company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Cenveo, Inc. maintained
effective internal control over financial reporting as of December 31,
2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Cenveo, Inc. maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Cenveo, Inc. 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 and our report dated February 28, 2007 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
February 28, 2007
63
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Under the terms of the Company's Articles of Incorporation and Bylaws,
each of the Directors named below is to serve until the next annual meeting
of shareholders.
DIRECTOR
NAME AGE POSITION SINCE(1)
---- --- -------- ---------
Robert G. Burton, Sr.(5).......... 67 Chairman and Chief Executive Officer 2005
Patrice M. Daniels(2)(3)(4)(5).... 46 Director 2005
Leonard C. Green(3)(4)(5)......... 70 Director 2005
Mark J. Griffin(2)(3)(4).......... 58 Director 2005
Robert T. Kittel(2)(4)(5)......... 35 Director 2005
Robert Obernier(3)(4)(5).......... 69 Director 2005
Thomas W. Oliva................... 49 Director & President 2005
Sean S. Sullivan.................. 39 Chief Financial Officer
Timothy M. Davis.................. 52 Senior Vice President, General Counsel & Secretary
Harry R. Vinson................... 46 Senior Vice President, Purchasing & Logistics
--------------
(1) Directors serve one year terms.
(2) Member of the Nominating and Governance Committee.
(3) Member of the Compensation Committee.
(4) Member of the Audit Committee.
(5) Member of the Executive Committee.
ROBERT G. BURTON, SR. Mr. Burton, 67, has been Cenveo's Chairman and
Chief Executive Officer since September 2005. In January 2003, he formed
Burton Capital Management, LLC, a company that invests in middle market
manufacturing companies, and has been its Chairman, Chief Executive Officer
and sole managing member since its formation. From December 2000 through
December 2002, Mr. Burton was the Chairman, President and Chief Executive
Officer of Moore Corporation Limited, a leading printing company with over
$2.0 billion in revenue for fiscal year 2002. From April 1991 through
October 1999, he was the Chairman, President and Chief Executive Officer of
World Color Press, Inc., a leading commercial printing company. From 1981
through 1991, he held a series of senior executive positions at Capital
Cities/ABC, including President of ABC Publishing. Preceding his employment
at Moore, Mr. Burton was Chairman, President, and Chief Executive Officer
of Walter Industries, Inc., a diversified holding company. Mr. Burton
serves on our executive committee (Chair).
PATRICE M. DANIELS Ms. Daniels has been a director of Cenveo since
September 2005. She has been Senior Vice President--Corporate Lending at GE
Commercial Finance since June 2006. From November 2005 until June 2006, Ms.
Daniels served as Chief Operating Officer of International Education
Corporation, a private post-secondary education company. Since its founding
in 2001, Ms. Daniels has been a Partner of Onyx Capital Ventures, L.P., a
minority-owned private equity investment firm. She previously served as
Managing Director, Corporate and Leveraged Finance for CIBC World Markets
and Bankers Trust Company, investment-banking firms. Ms. Daniels serves as
board member and audit committee chair of real estate services firm CB
Richard Ellis Group and on the advisory council of the University of
Chicago Graduate School of Business. Ms. Daniels holds a B.S. from the
University of California, Berkeley and an M.B.A. from the University of
Chicago
64
Graduate School of Business. Ms. Daniels serves on our audit committee,
compensation committee (Chair), executive committee and nominating and
governance committee (Chair).
LEONARD C. GREEN Mr. Green, 70, has been a director of Cenveo since
September 2005. He has been President of The Green Group, a financial
services firm of CPAs, consultants and entrepreneurs, since 1976. Mr. Green
is a Professor of Entrepreneurship at Babson College in Wellesley,
Massachusetts. He is presently, and has served, on the board of directors
of a number of private companies. Mr. Green serves on our compensation
committee, audit committee (Chair) and executive committee.
MARK J. GRIFFIN Dr. Griffin, 58, has been a director of Cenveo since
September 2005. He is the founder of the Eagle Hill School, an independent
private school in Greenwich, Connecticut, and has been its headmaster since
1975. Since 1991, Dr. Griffin has served on the board of directors of the
National Center for Learning Disabilities, and he has been a member of its
Executive Committee since 2003. Dr. Griffin has also been on the board of
the Learning Disabilities Association of America since 1993. Dr. Griffin
served on the board of directors of World Color Press, Inc. from October
1996 to 1999, where he was a member of the audit and compensation
committees. Dr. Griffin serves on our audit committee, compensation
committee and nominating and governance committee.
ROBERT T. KITTEL Mr. Kittel, 35, has been a director of Cenveo since
September 2005. He has been a Partner of Goodwood, Inc., an investment
management firm, since June 2003, and with Goodwood since June 2002. From
June 2000 until February 2002, he was a Partner at Silvercreek Management
Inc., an investment management firm. From May 1997 until May 2000, Mr.
Kittel was employed by Cadillac Fairview Corporation, a commercial real
estate development company. Mr. Kittel is a Chartered Accountant and
Chartered Financial Analyst. Mr. Kittel serves on our audit committee,
executive committee and nominating and governance committee.
ROBERT OBERNIER Mr. Obernier, 69, has been a director of Cenveo since
September 2005. He has served as the Chairman and Chief Executive Officer
of Horizon Paper Company, Inc., a paper supply company, since 1991. Mr.
Obernier is Chairman of the Norwalk Hospital Foundation and a Trustee of
the Norwalk Hospital in Norwalk, Connecticut. Mr. Obernier also serves on
the audit committee of the Board of the Juvenile Diabetes Research
Foundation as a volunteer. Mr. Obernier serves on our audit committee,
compensation committee and executive committee.
THOMAS W. OLIVA Mr. Oliva, 49, has been a director of Cenveo since
September 2005 and has served as Cenveo's President since January 2006. He
served as President of Cenveo's Envelopes, Forms and Labels segment from
September 2005 until January 2006. From December 2002 until January 2004,
Mr. Oliva was the President and Chief Operating Officer of Moore Wallace
Inc., a commercial printing company. From June 2002 until December 2002, he
was the Group President of the outsourcing division of Moore Corporation
Limited (Moore acquired Wallace Computer Services, Inc. and changed its
name to Moore Wallace Inc. during 2003). From December 2000 until December
2002, he was the Group President of the Forms and Labels Division of Moore.
From 1998 until 2000, Mr. Oliva was the Group President for the Gravure
Catalog and Magazine Division of World Color Press, which became Quebecor
World following its acquisition by Quebecor Printing in 1999. Between 1979
and 1998, Mr. Oliva served in a number of sales and management positions at
R.R. Donnelley & Sons Company, Quebecor Printing Inc. and World Color
Press.
SEAN S. SULLIVAN Mr. Sullivan, 39, has served as Cenveo's Chief
Financial Officer since September 2005. He served as the Executive Vice
President--Chief Financial Officer of Spencer Press, Inc., a privately held
printer that produced catalogs, direct mail and general commercial print
products, from October 2004 until September 2005. Prior to that, he served
as the Executive Vice President of BCM from May 2003 to September 2004.
Prior to BCM, Mr. Sullivan served as the Senior Vice President, Finance and
Corporate Development for Moore Corporation Limited from August 2001 to
June 2002. Prior to Moore Corporation Limited, Mr. Sullivan served as the
Vice President of Mergers and Acquisitions for Engage, Inc., an enterprise
marketing software and interactive media company. Mr. Sullivan began his
career at Ernst & Young and held various positions in the audit and M&A
groups from 1989 through 1998. Mr. Sullivan is a certified public
accountant.
65
TIMOTHY M. DAVIS Timothy Davis, 52, has served as Cenveo's Senior Vice
President, General Counsel and Secretary since January 2006. From July 1989
through December 2005, he was Senior Vice President, General Counsel and
Secretary of American Color Graphics, Inc., a commercial printing company.
HARRY R. VINSON Harry Vinson, 46, has served as Cenveo's Senior Vice
President, Purchasing and Logistics since September 2005. From October 2003
until September 2005 he was the General Manager of Central Region Sheetfed
Operations at MAN Roland, a printing press manufacturer. From February 2002
until July 2003, Mr. Vinson served as Senior Vice President and General
Manager of the Publication and Directory Group at Moore Wallace (formerly
Moore Corporation Limited). From February 1990 until February 2002, he
served in various senior sales positions at Quebecor World (formerly World
Color Press).
The information required by Items 405, 406 and 407(c)(3), (d)(4) and
(d)(5) of Regulation S-K are included in the Company's Proxy Statement to
be filed pursuant to Regulation 14A in connection with the 2007 Annual
Meeting of Stockholders (2007 Proxy Statement) under the captions "Section
16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance,"
"Nomination of Directors," and "Audit Committee," and such information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is included under the captions "Compensation of
Executive Officers," "Compensation of Directors," "Compensation Committee
Interlocks and Insider Participation" and "Compensation Committee Report"
in our 2007 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information is included under the captions "Ownership of Voting
Securities" and "Compensation of Executive Officers--Equity Compensation
Plan Information" in our 2007 Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
This information is included under the captions "Transactions with
Related Persons" and "Director Independence" in our 2007 Proxy Statement
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is included under the captions "Independent Public
Auditors" and "Report of the Audit Committee" in our 2007 Proxy Statement
and is incorporated herein by reference.
66
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
Included in Part II, Item 8 of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this Report:
PAGE
----
Schedule II Valuation and Qualifying Accounts for the Years Ended
December 31, 2006, 2005, and 2004......................... 71
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Acquisition Agreement, dated as of March 17, 2006, among Supremex Income Fund, Cenveo
Corporation and Cenveo, Inc.--incorporated by reference to Exhibit 2.1 to registrant's
quarterly report on Form 10-Q for the quarter ended March 31, 2006.
2.2 Agreement of Merger dated as of December 26, 2006 among Cenveo, Inc., Mouse Acquisition
Corp. and Cadmus Communications Corporation--incorporated by reference to Exhibit 2.1
to registrant's current report on Form 8-K dated (date of earliest event reported)
December 26, 2006 and filed with the SEC on December 27, 2006.
3.1 Articles of Incorporation--incorporated by reference to Exhibit 3(i) of the
registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1997.
3.2 Articles of Amendment to the Articles of Incorporation dated May 17, 2004--incorporated
by reference to Exhibit 3.2 to registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2004.
3.3 Amendment to Articles of Incorporation and Certificate of Designations of Series A
Junior Participating Preferred Stock of the Registrant dated April 20,
2005--incorporated by reference to Exhibit 3.1 to Cenveo Inc.'s current report on Form
8-K filed with the SEC on April 21, 2005.
3.4 Bylaws as amended and restated effective April 17, 2005--incorporated by reference to
Exhibit 3.2 to registrant's current report on Form 8-K filed with the SEC on April 18,
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 registrant'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 of 9 5/8% Senior Notes due 2012--incorporated by reference
to Exhibit 10.31 to registrant's quarterly report on Form 10-Q for the quarter ended
March 31, 2002.
67
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.3 Second Supplemental Indenture, dated June 1, 2006, by and among Cenveo Corporation, the
Guarantors named therein and U.S. Bank National Association, as trustee, to the
Indenture dated as of March 13, 2002 relating to the 9 5/8% Senior Notes due
2012--incorporated by reference to Exhibit 4.1 to registrant's current report on Form
8-K dated (date of earliest event reported) June 1, 2006 and filed with the SEC on June
2, 2006.
4.4 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
registrant's annual report on Form 10-K for the year ended December 31, 2003.
4.5 Registration Rights Agreement dated February 4, 2004, between Mail-Well I Corporation
and Credit Suisse First Boston, as Initial Purchaser, relating to Mail-Well I
Corporation's $320,000,000 aggregate principal amount of 7 7/8% Senior Subordinated
Notes due 2013--incorporated by reference to Exhibit 4.6 to registrant's annual report
on Form 10-K for the year ended December 31, 2003.
4.6 Supplemental Indenture, dated as of June 21, 2006 among Cenveo Corporation, the
Guarantors named therein and U.S. Bank National Association, as Trustee, to the
Indenture dated as of February 4, 2004 relating to the 7 7/8% Senior Subordinated Notes
due 2013--incorporated by reference to Exhibit 4.2 to registrant's current report on
Form 8-K dated (date of earliest event reported) June 21, 2006 and filed with the SEC
on June 27, 2006.
10.1 Underwriting Agreement dated March 17, 2006, among TD Securities Inc., CIBC World
Markets Inc. and the other Underwriters signatory thereto, Supremex Income Fund,
Supremex Inc., Cenveo Corporation and Cenveo, Inc.--incorporated by reference to
Exhibit 10.30 to registrant's quarterly report on Form 10-Q for the quarter ended March
31, 2006.
10.2 Form of Indemnity Agreement between Mail-Well, Inc. and each of its officers and
directors--incorporated by reference from Exhibit 10.17 of the registrant's
Registration Statement on Form S-1 dated March 25, 1994.
10.3 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated by reference from
Exhibit 10.20 of the registrant's Registration Statement on Form S-1 dated March 25,
1994.
10.4+ 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 the registrant'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 the registrant'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 the registrant'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 the registrant's quarterly report on 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 registrant's quarterly report on
Form 10-Q for the quarter ended March 31, 1998.
68
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.9+ Mail-Well, Inc. 2001 Long-Term Equity Incentive Plan--incorporated by reference from
the registrant'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 registrant'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 registrant'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 registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2001.
10.13+ Form of Restricted Share Unit Award Agreement under 2001 Long-Term Equity Incentive
Plan--incorporated by reference to Exhibit 10.13 of the registrant's annual report on
Form 10-K filed for the year ended December 31, 2005.
10.14+ Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as amended--incorporated by
reference to Exhibit 10.24 to registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2004.
10.15+ Form of Executive Severance Agreement entered into between the registrant and certain
of its executive officers--incorporated by reference to Exhibit 10.27 of registrant's
annual report on Form 10-K filed the year ended December, 2002.
10.16+ Form of Amended and Restated Severance Agreement between the registrant and certain of
its executives--incorporated by reference to Exhibit 10.2 to the registrant's current
report on Form 8-K dated (date of earliest event reported) September 9, 2005 and filed
with the SEC on September 15, 2005.
10.17 Settlement and Governance Agreement by and among the registrant, Burton Capital
Management and Robert G. Burton, Sr., dated September 9, 2005--incorporated by
reference to Exhibit 10.1 to the registrant's current report on Form 8-K dated (date of
earliest event reported) September 9, 2005 and filed with the SEC on September 12,
2005.
10.18+ Employment Agreement dated as of October 27, 2005 between the registrant and Robert G.
Burton, Sr.--incorporated by reference to Exhibit 10.29 of registrant's annual report
on Form 10-K filed for the year ended December 31, 2005.
10.19+* Amendment, dated November 8, 2006, to Employment Agreement dated as of October 27, 2005
between the registrant and Robert G. Burton, Sr.
10.20+ Employment Agreement dated as of June 22, 2006 between the registrant and Thomas Oliva--
incorporated by reference to Exhibit 10.19 to registrant's quarterly report on Form
10-Q for the quarter ended June 30, 2006.
10.21+ Employment Agreement dated as of June 22, 2006 between the registrant and Sean
Sullivan--incorporated by reference to Exhibit 10.20 to registrant's quarterly report
on Form 10-Q for the quarter ended June 30, 2006.
10.22+ Employment Agreement dated as of June 22, 2006 between the registrant and Harry Vinson--
incorporated by reference to Exhibit 10.21 to registrant's quarterly report on Form
10-Q for the quarter ended June 30, 2006.
69
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.23+ Employment Agreement dated as of June 22, 2006 between the registrant and Timothy
Davis--incorporated by reference to Exhibit 10.22 to registrant's quarterly report on
Form 10-Q for the quarter ended June 30, 2006.
10.24 Credit Agreement dated as of June 21, 2006 among Cenveo Corporation, Cenveo, Inc., Bank
of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the
other lenders party thereto--incorporated by reference to Exhibit 4.2 to registrant's
current report on Form 8-K dated (date of earliest event reported) June 21, 2006 and
filed with the SEC on June 27, 2006.
10.25 Voting Agreement and Irrevocable Proxy dated as of December 26, 2006 among Cenveo,
Inc., Clary Limited, Purico (IOM) Limited, Melham US Inc. and Bruce V. Thomas--
incorporated by reference to Exhibit 99.1 to registrant's current report on Form 8-K
dated (date of earliest event reported) December 26, 2006 and filed with the SEC on
December 27, 2006.
21.1* Subsidiaries of the registrant.
23.1* Consent of Ernst & Young LLP.
24.1 Power of Attorney--incorporated by reference to page 73.
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.
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.
--------------
+
Management contract or compensatory plan or arrangement.
* Filed herewith.
(b) EXHIBITS FILED
Included in Item 15(a)(3) of this Report.
(c) FINANCIAL STATEMENT SCHEDULES FILED
Included in Item 15(a)(2) of this Report.
70
SCHEDULE II
CENVEO, INC. AND SUBSIDIARIES
SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
------- ------- -------
ACCOUNTS RECEIVABLE ALLOWANCES
Balance at beginning of year......................... $ 5,236 $ 4,738 $ 3,984
Charged to costs and expenses........................ 4,345 3,427 3,196
Recoveries and other charges(2)...................... (735) 808 6
Deductions(1)........................................ (4,044) (3,737) (2,448)
------- ------- -------
Balance at end of year............................... $ 4,802 $ 5,236 $ 4,738
======= ======= =======
--------------
(1) Amounts written off.
(2) Other charges include acquired balances and changes attributable to
foreign currency translation.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Englewood, State of Colorado, on February 28, 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)
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons
in the capacities and on the dates indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Robert G. Burton, Sr. and Sean S. Sullivan as attorney-in-fact, each with
the power of substitution, for him or her in any and all capacities, to
sign any amendments to this report and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities
and Exchange Commission.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ ROBERT G. BURTON, SR. Chairman and Chief Executive Officer February 28, 2007
---------------------------- (Principal Executive Officer)
Robert G. Burton, Sr.
/S/ SEAN S. SULLIVAN Chief Financial Officer February 28, 2007
---------------------------- (Principal Financial Officer and
Sean S. Sullivan Principal Accounting Officer)
/S/ PATRICE M. DANIELS Director February 28, 2007
----------------------------
Patrice M. Daniels
/S/ LEONARD C. GREEN Director February 28, 2007
----------------------------
Leonard C. Green
/S/ MARK J. GRIFFIN Director February 28, 2007
----------------------------
Mark J. Griffin
/S/ ROBERT T. KITTEL Director February 28, 2007
----------------------------
Robert T. Kittel
/S/ ROBERT OBERNIER Director February 28, 2007
----------------------------
Robert Obernier
/S/ THOMAS W. OLIVA Director February 28, 2007
----------------------------
Thomas W. Oliva
73