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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
COMMISSION FILE NUMBER 1-12551
------------------------
CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE CANTERBURY GREEN
201 BROAD STREET
STAMFORD, CT 06901
(Address of principal executive offices) (Zip Code)
203-595-3000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is a 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 / / Accelerated filer /X/
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 April 28, 2006 the registrant had 53,227,490 shares of common
stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, 2006 DECEMBER 31, 2005(A)
-------------- --------------------
(UNAUDITED)
-----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,394 $ 1,035
Accounts receivable, net............................. 223,701 247,277
Inventories, net..................................... 96,183 108,704
Receivables from sale of business.................... 72,559 --
Prepaid and other current assets..................... 22,440 25,767
---------- ----------
Total current assets............................. 416,277 382,783
Property, plant and equipment, net....................... 281,750 317,606
Goodwill................................................. 255,632 311,146
Investment in affiliate.................................. 34,444 --
Other intangible assets, net............................. 22,664 23,961
Other assets, net........................................ 33,779 44,068
---------- ----------
Total assets......................................... $1,044,546 $1,079,564
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt................. $ 2,822 $ 2,791
Accounts payable..................................... 140,381 124,901
Accrued compensation and related liabilities......... 42,473 53,765
Other current liabilities............................ 73,904 79,051
---------- ----------
Total current liabilities........................ 259,580 260,508
Long-term debt........................................... 684,947 809,345
Deferred income taxes.................................... 4,692 10,045
Other liabilities........................................ 39,758 49,216
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock...................................... -- --
Common stock......................................... 532 530
Paid-in capital...................................... 239,940 239,432
Retained deficit..................................... (192,889) (305,091)
Deferred compensation................................ -- (1,825)
Accumulated other comprehensive income............... 7,986 17,404
---------- ----------
Total shareholders' equity (deficit)............. 55,569 (49,550)
---------- ----------
Total liabilities and shareholders' equity (deficit)..... $1,044,546 $1,079,564
========== ==========
(A) Derived from the audited consolidated financial statements as of December 31, 2005.
See notes to condensed consolidated financial statements.
1
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2006 2005
-------- --------
Net sales................................................... $426,678 $449,602
Cost of sales............................................... 337,623 364,150
Selling, general and administrative......................... 55,586 69,410
Amortization of intangible assets........................... 1,298 1,330
Restructuring, impairment and other charges................. 13,476 10,019
-------- --------
Operating income........................................ 18,695 4,693
(Gain) loss on sale of non-strategic businesses............. (123,352) 722
Interest expense............................................ 18,037 18,192
Other (income) expense...................................... 222 (11)
-------- --------
Income (loss) from continuing operations before income
taxes................................................. 123,788 (14,210)
Income tax expense.......................................... 11,586 8,346
-------- --------
Net income (loss)....................................... $112,202 $(22,556)
======== ========
Income (loss) per share:
Income (loss) per share--basic...................... $ 2.11 $ (0.47)
======== ========
Income (loss) per share--diluted.................... $ 2.10 $ (0.47)
======== ========
Weighted average shares--basic...................... 53,109 47,780
Weighted average shares--diluted.................... 53,536 47,780
See notes to condensed consolidated financial statements.
2
CENVEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2006 2005
--------- --------
Cash flows from operating activities:
Net income (loss)......................................... $ 112,202 $(22,556)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 12,213 14,088
Non-cash charges, net............................... 10,151 5,610
(Gain) loss on sale of non-strategic businesses..... (123,352) 722
Changes in operating assets and liabilities:
Accounts receivable................................. 2,877 (5,522)
Inventories......................................... (2,601) (6,417)
Accounts payable and accrued compensation and
related liabilities............................... 7,929 (7,304)
Other working capital changes....................... (6,085) (30)
Other, net.......................................... 1,348 (1,437)
--------- --------
Net cash provided by (used in) operating
activities.................................... 14,682 (22,846)
Cash flows from investing activities:
Proceeds from divestitures, net..................... 119,380 3,058
Capital expenditures................................ (6,134) (6,478)
Acquisition payments................................ (4,653) (3,653)
Proceeds from sale of property, plant and
equipment......................................... 326 21
--------- --------
Net cash provided by (used in) investing
activities.................................... 108,919 (7,052)
Cash flows from financing activities:
Repayments under senior secured revolving credit
facility, net..................................... (123,931) --
Borrowings under senior secured revolving credit
facility, net..................................... -- 32,469
Repayments of long-term debt........................ (436) (565)
Proceeds from exercise of stock options............. 1,110 28
--------- --------
Net cash provided by (used in) financing
activities.................................... (123,257) 31,932
Effect of exchange rate changes on cash and cash
equivalents............................................... 15 67
--------- --------
Net increase in cash and cash equivalents....... 359 2,101
Cash and cash equivalents at beginning of year.............. 1,035 796
--------- --------
Cash and cash equivalents at end of quarter................. $ 1,394 $ 2,897
========= ========
See notes to condensed consolidated financial statements.
3
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
(the "Financial Statements") of Cenveo, Inc. and subsidiaries
(collectively, "Cenveo" or the "Company") have been prepared in accordance
with Rule 10-01 of Regulation S-X promulgated by the Securities and
Exchange Commission (the "SEC") and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of the Company, however, the Financial Statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position and results of
operations and its cash flows as of and for the three-month period ended
March 31, 2006. The results of operations for the three-month period ended
March 31, 2006 are not indicative of the results to be expected for the
full year primarily due to the effect of the March 31, 2006 sale of
Supremex, Inc. and certain other assets (see Notes 3, 6 and 9) and
seasonality (see "Item 2. Management's Discussion and Analysis of Financial
Consolidation and Results of Operations - Seasonality"). These Financial
Statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005 (the "Form
10-K").
It has been the Company's practice to close its quarters on the
Saturday closest to the last day of the calendar quarter so that each
quarter has the same number of days and 13 full weeks. The financial
statements and other financial information in this report are presented
using a calendar convention. The reporting periods, which consist of 13
weeks ending on April 1, 2006 and April 2, 2005, are reported as ending on
March 31, 2006 and 2005, respectively, since the effect is not material.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current year presentation.
2. STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards 123 (revised 2004), Share-Based Payment
("SFAS 123R"), which requires the recognition of expense related to the
fair value of the Company's stock-based compensation awards (including
grants of employee stock options and restricted stock), using an
appropriate fair value option-pricing model. The Company elected to use the
modified prospective transition method as permitted by SFAS 123R and,
therefore, has not restated its financial results for prior periods. The
Company selected the Black-Scholes-Merton option-pricing model as the most
appropriate fair-value method for its non-vested grants outstanding and is
recognizing compensation cost on a straight-line basis over the vesting
periods of the grants. Under this transition method, stock-based
compensation expense for the three months ended March 31, 2006 includes
compensation expense for all stock-based compensation awards granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of Statement of
Financial Accounting Standards 123, Share-Based Payment ("SFAS 123"). The
effect of the change from applying the original provisions of SFAS 123
during the three-month period ended March 31, 2006 is as follows (in
millions, except per share data):
Income from continuing operations, income before taxes
and net income......................................... $ (0.6)
======
Cash flow from operations and financing activities...... $ --
======
Earnings per share basic and diluted.................... $(0.01)
======
4
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCK-BASED COMPENSATION (CONTINUED)
The Company did not issue any form of stock-based compensation in the
first quarter of 2006. In addition, none of the Company's stock-based
compensation awards vested in the first quarter of 2006. The only change to
the Company's stock based compensation awards from the amounts presented as
of December 31, 2005, was the exercise of approximately 183,000 stock
options for shares of the Company's common stock and the cancellation of
approximately 35,000 stock options. See Notes 1 and 15 in the Form 10-K.
Prior to January 1, 2006, the Company accounted for stock-based
compensation awards using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). This method required compensation expense to be
recognized for the excess of the quoted market price of the stock at the
grant date or the measurement date over the amount an employee must pay to
acquire the stock.
The following table illustrates the effect on net loss and net loss per
common share as if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based compensation during the three-month
period ended March 31, 2005 (in thousands, except per share data):
Loss as reported........................................ $(22,556)
Add: stock-based compensation expense determined
under the intrinsic value method included in net
loss, net of related taxes........................ 192
Less: stock-based compensation expense determined
under fair value method, net of related taxes..... (1,304)
--------
Pro forma net loss...................................... $(23,668)
========
Loss per share--basic and diluted:
As reported......................................... $ (0.47)
========
Pro forma........................................... $ (0.50)
========
In November 2005, the Financial Accounting Standards Board ("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 No.
123(R). This election is available for adoption until January 1, 2007. The
Company is currently evaluating this transition method.
3. SALE OF NON-STRATEGIC BUSINESSES
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. At closing, the Company received proceeds of
approximately $187 million, net of transaction expenses and subject to the
finalization of a working capital adjustment and 11.4 million units of the
Fund valued at approximately $98 million, based upon the Fund's initial
public offering share price of $10.00 Canadian dollars per unit ($8.56 US
per unit). The proceeds to the Company included approximately $72.6 million
which are reported as receivables from sale of business on the condensed
consolidated balance sheet as of March 31, 2006 of which approximately $70
million was received by the Company on April 20, 2006. The units in the
Fund owned by the Company represented a 36.5% economic and voting interest
in the Fund. The transaction resulted in a pre-tax gain of approximately
$124 million in the first quarter of 2006, after the allocation of $55.8
million of goodwill
5
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SALE OF NON-STRATEGIC BUSINESSES (CONTINUED)
to the business as required by Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
The Company's investment in the Fund was $34.4 million as of March 31,
2006, based on its historical cost. Beginning with the second quarter of
2006, the Company's ownership interest in the Fund is being accounted for
under the equity method. On April 28, 2006, the Company sold 2.5 million
units of the Fund relating to an over-allotment option to the underwriters
for approximately $21 million. The sale resulted in a reduction to the
Company's economic and voting interest in the Fund to 28.6%.
During the first quarter of 2005, the Company sold three non-strategic
businesses for $3.1 million, and recognized a loss on sale of $0.7 million.
From April 1, 2005 through December 31, 2005, the Company sold three
additional businesses. The following table summarizes the net sales and
operating income of all businesses that have been sold during 2005 and the
first quarter of 2006, which are included in the condensed consolidated
statements of operations (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
------- -------
Net sales.................................. $41,763 $49,716
Operating income........................... $ 7,975 $ 8,151
Subsequent to these sales, the Company has continuing involvement with
the entities; accordingly, the dispositions of these non-strategic
businesses have not been accounted for as discontinued operations in the
condensed consolidated financial statements.
4. INVENTORIES
Inventories by major category are as follows (in thousands):
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
Raw materials.............................. $ 29,335 $ 33,970
Work in process............................ 28,973 28,313
Finished goods............................. 43,849 52,320
-------- --------
102,157 114,603
Reserves................................... (5,974) (5,899)
-------- --------
Inventories, net........................... $ 96,183 $108,704
======== ========
6
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows (in thousands):
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
Land and land improvements............................. $ 15,885 $ 18,460
Buildings and improvements............................. 94,838 108,229
Machinery and equipment................................ 462,103 500,535
Furniture and fixtures................................. 10,164 11,579
Construction in progress............................... 5,145 14,532
--------- ---------
588,135 653,335
Accumulated depreciation................................ (306,385) (335,729)
--------- ---------
Property, plant and equipment, net...................... $ 281,750 $ 317,606
========= =========
6. COMPREHENSIVE INCOME (LOSS)
A summary of comprehensive income (loss) is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------------
2006 2005
--------- ------------
Net income (loss)........................................... $ 112,202 $ (22,556)
Other comprehensive income (loss):
Pension liability adjustment........................... (6,006) --
Currency translation adjustment........................ 15,421 (1,604)
--------- ---------
Comprehensive income (loss)................................. $ 121,617 $ (24,160)
========= =========
In connection with the sale of Supremex and certain other assets (Notes
3 and 9), the Company reversed the pension liability adjustment of $6.0
million and 63.5% of the currency translation adjustment of $14.3 million
relating to the business sold.
7. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
Senior Secured Credit Facility, due 2008................ $ -- $123,931
Senior 9 5/8% Notes, due 2012........................... 350,000 350,000
Senior 7 7/8% Subordinated Notes, due 2013.............. 320,000 320,000
Other................................................... 17,769 18,205
-------- --------
687,769 812,136
Less current maturities................................. (2,822) (2,791)
-------- --------
Long-term debt.......................................... $684,947 $809,345
======== ========
As of March 31, 2006, the Company was in compliance with all covenants
under its debt agreements.
7
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
2006 ACTIVITY
Restructuring and impairment charges for the three months ended March
31, 2006 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -------
Employee separation costs.............. $2,238 $3,938 $ 555 $ 6,731
Asset impairments...................... 1,865 45 -- 1,910
Equipment moving expenses.............. 770 1,103 -- 1,873
Lease termination expenses............. 1,877 -- -- 1,877
Building clean-up and other expenses... 175 910 -- 1,085
------ ------ ------ -------
Total restructuring and impairment
charges.......................... $6,925 $5,996 $ 555 $13,476
====== ====== ====== =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
closed manufacturing plants in Denver, Colorado, and Kankakee, Illinois and
an office location in Chicago, Illinois in the first quarter of 2006. As a
result of these closures, the segment recorded impairment charges of $0.6
million related to equipment taken out of service at these locations,
employee separation costs of $1.3 million related to workforce reductions,
and equipment moving and other related expenses of $0.6 million. In
addition, the segment recorded lease termination expenses of $1.9 million
representing the net present value of the cost of an office and two building
leases that are not expected to be recovered over their remaining terms
which are no longer being used.
The segment has plans for additional plant closures in 2006 and has
recorded impairment charges of $0.6 million related to equipment that it
expects to take out of service and has incurred $0.1 million in equipment
moving expenses related to these plant closures.
The segment incurred additional impairment charges of $0.7 million
related to equipment taken out of service and equipment moving and other
expenses of $0.2 million related to two plants closed in the fourth quarter
of 2005.
The segment incurred employee separation costs of $0.9 million related
to workforce reductions at other locations relating to the Company's cost
savings programs.
COMMERCIAL PRINTING. The commercial printing segment closed a plant in
Denver, Colorado and a plant in Phoenix, Arizona in the first quarter of
2006. In connection with the closures, the segment recorded employee
separation costs of $1.2 million, moving expenses of $0.2 million and
building clean-up and other expenses of $0.2 million.
The commercial printing segment incurred employee separation costs of
$1.3 million, moving expenses of $0.9 million for the redeployment of
equipment and building cleaning and other expenses of $0.7 million for
three plants closed in the fourth quarter of 2005.
The commercial printing segment incurred employee separation costs of
$1.4 million at other locations relating to the Company's cost savings
initiatives.
CORPORATE. In the fourth quarter of 2005, the Company made significant
changes to its corporate management team and staff and moved its corporate
headquarters from Denver, Colorado to Stamford, Connecticut. During the
first quarter of 2006, the Company incurred additional employee separation
costs of $0.6 million related to these changes.
8
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
2005 ACTIVITY
Restructuring, impairment and other charges for the three months ended
March 31, 2005 are as follows (in thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -------
Employee separation costs.............. $ -- $ 396 $ -- $ 396
Asset impairments...................... -- 7,137 -- 7,137
Building clean-up and other expenses... (14) 549 -- 535
------ ------ ------ -------
Total restructuring charges............ (14) 8,082 -- 8,068
Other charges.......................... -- -- 1,951 1,951
------ ------ ------ -------
Total restructuring, impairment and
other charges.................... $ (14) $8,082 $1,951 $10,019
====== ====== ====== =======
COMMERCIAL PRINTING. The asset impairment charges relate to operations
in the commercial printing segment that operated at a loss throughout 2004
and continued to perform poorly in the first quarter of 2005. During the
three months ended March 31, 2005, management determined that the carrying
value of the equipment at these plants would not be recoverable from the
cash flows generated from their continued use.
During the three months ended March 31, 2005, the commercial printing
segment began the closure of a small printing operation located in Phoenix,
Arizona and the consolidation of its production into its Los Angeles,
California printing plant. The Company accrued employee separation costs of
$0.4 million to cover the separation of 45 employees, and $0.4 million of
building clean-up and other expenses associated with the shut-down of this
plant.
The Company substantially completed the consolidation of its printing
operations in Seattle, Washington and San Francisco, California during the
three months ended March 31, 2005. The restructuring expenses incurred
during the three months ended March 31, 2005 were $0.2 million.
CORPORATE. In January 2005, the Company's Chief Executive Officer
resigned. The cost accrued during the three months ended March 31, 2005 as
a result of this resignation was $2.0 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 TOTAL
----------- ---------- ----------- --------
Balance at December 31, 2005.......... $6,067 $ 3,734 $950 $ 10,751
Accruals.......................... 1,877 6,731 -- 8,608
Payments.......................... (707) (9,411) -- (10,118)
------ ------- ---- --------
Balance at March 31, 2006............. $7,237 $ 1,054 $950 $ 9,241
====== ======= ==== ========
9
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION PLANS
The components of the net periodic pension expense for the pension
plans and the supplemental executive retirement plans are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
------- -----
Service cost........................................... $ 714 $ 659
Interest cost on projected benefit obligation.......... 887 829
Expected return on plan assets......................... (1,177) (928)
Net amortization and deferral.......................... 209 175
------- -----
Net periodic pension expense........................... $ 633 $ 735
======= =====
The Company expects to contribute $1.1 million to its pension plans in
2006. As of March 31, 2006, contributions of $0.6 million had been made. In
connection with the sale of Supremex on March 31, 2006 (Notes 3 and 6), the
Company has no further obligation relating to Supremex's pension plans.
10. 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, restricted stock and restricted stock units to issue common stock
were exercised computed using the treasury stock method. The only Company
securities as of March 31, 2006 that could dilute basic income per share for
periods subsequent to March 31, 2006 are: (1) outstanding stock options
which are exercisable into 2,147,315 shares of the Company's common stock
and (2) 436,600 shares of restricted stock and restricted stock units
("Restricted Stock") of the Company's common stock.
The following table sets forth the computation of basic and diluted
income (loss) per share (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
-------- --------
Numerator for basic and diluted income (loss) per share:
Net income (loss)................................... $112,202 $(22,556)
======== ========
Denominator weighted average common shares outstanding:
Basic shares........................................ 53,109 47,780
Dilutive effect of stock options and Restricted
Stock.......................................... 427 --
-------- --------
Diluted shares...................................... 53,536 47,780
======== ========
Basic income (loss) per share........................... $ 2.11 $ (0.47)
======== ========
Diluted income (loss) per share......................... $ 2.10 $ (0.47)
======== ========
11. SEGMENT INFORMATION
In the third quarter of 2005, the Company changed its management
structure and realigned its manufacturing operations into two operating
segments--the envelope, forms and labels segment and the commercial
printing segment. The envelope, forms and labels segment is in the business
of manufacturing customized envelopes and packaging products, stock
envelopes, traditional and specialty business forms, and labels used for
such applications as mailing, messaging and bar coding. The commercial
printing segment is in the business of designing, manufacturing and
distributing printed products which include advertising literature,
corporate identity materials, financial printing, calendars,
10
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION (CONTINUED)
greeting cards, brand marketing materials, catalogs, maps, CD packaging and
direct mail. Segment data for 2005 has been restated to reflect the new
operating segments.
Operating income of each segment includes all costs and expenses
directly related to the segment's operations. Corporate expenses include
corporate general and administrative expenses.
The following tables present certain segment information (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2006 2005
---------- ------------
Net sales:
Envelopes, forms and labels......................... $ 233,747 $ 233,883
Commercial printing................................. 192,931 215,719
---------- ----------
Total............................................... $ 426,678 $ 449,602
========== ==========
Operating income (loss):
Envelopes, forms and labels......................... $ 24,980 $ 20,153
Commercial printing................................. (40) (8,428)
Corporate........................................... (6,245) (7,032)
---------- ----------
Total............................................... $ 18,695 $ 4,693
========== ==========
Restructuring, asset impairment and other charges:
Envelopes, forms and labels......................... $ 6,925 $ (14)
Commercial printing................................. 5,996 8,082
Corporate........................................... 555 1,951
---------- ----------
Total............................................... $ 13,476 $ 10,019
========== ==========
Net sales by product line:
Commercial printing................................. $ 191,893 $ 214,846
Envelopes........................................... 187,931 186,386
Business forms and labels........................... 46,854 48,370
---------- ----------
Total............................................... $ 426,678 $ 449,602
========== ==========
MARCH 31, DECEMBER 31,
2006 2005
---------- ------------
Identifiable assets:
Envelopes, forms and labels......................... $ 468,568 $ 613,580
Commercial printing................................. 431,556 438,938
Corporate........................................... 144,422 27,046
---------- ----------
Total............................................... $1,044,546 $1,079,564
========== ==========
11
ITEM 2. 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. and its subsidiaries, which we refer
to as Cenveo should be read in conjunction with the accompanying
consolidated financial statements and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2005. Item 7 of
our 2005 Form 10-K describes our contractual obligations and the
application of our critical accounting policies. There have been no
significant changes as of March 31, 2006 pertaining to these topics, other
than the repayment of all amounts outstanding of our senior secured credit
facility primarily from the proceeds from the sale of our former subsidiary
Supremex, Inc. ("Supremex") and certain other assets. See "Gain on Sale of
Non-Strategic Businesses" below.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. We believe these
forward-looking statements are based upon reasonable assumptions within the
bounds of our knowledge of Cenveo. All such statements involve risks and
uncertainties, and as a result, actual results could differ materially from
those projected, anticipated or implied by these statements. Such
forward-looking statements involve known and unknown risks. Risk Factors
include general economic, business and labor conditions, particularly as
affect the commercial printing, envelopes, labels and packaging businesses;
adverse developments in the value of collateral securing financings; an
adverse development in rating agency credit ratings or assessments; our
substantial level of indebtedness, which imposes significant restrictions
on the ability to implement our strategic initiatives; the ability to
return to profitability on a consistent basis; the cyclical nature of our
industry; dependence on sales that are not subject to long-term contracts;
dependence on suppliers; the ability to recover the rising cost of key raw
materials in markets that are highly price sensitive; the ability to meet
customer demand for additional value-added products and services; the
ability to timely or adequately respond to technological changes in the
industry; the impact of the Internet and other electronic media on the
demand for envelopes and printed material; postage rates; the ability to
manage operating expenses; the ability to manage financing costs and
interest rate risk; a decline in business volume and profitability that
could result in a further impairment of goodwill; the ability to retain key
management personnel; the ability to identify, manage or integrate future
acquisitions; the costs associated with and the outcome of outstanding and
future litigation; and changes in government regulations.
In view of such uncertainties, investors should not place undue
reliance on our forward-looking statements since such statements speak only
as of the date when made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
BUSINESS 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 production,
fulfillment and distribution facilities throughout North America. In
September 2005, we initiated a major restructuring program that we expect
to continue throughout 2006. We operate in two 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
sold to third-party dealers such as print distributors, office products
suppliers and office-products retail chains.
12
COMMERCIAL PRINTING. Our commercial printing segment specializes in the
printing of annual reports, car brochures, brand marketing collateral,
financial communications, specialty packaging and general commercial
printing.
CONSOLIDATED OPERATING RESULTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations includes an overview of our consolidated results for the
three months ended March 31, 2006, followed by a discussion of the results
of each of our business segments for the same period.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income (loss)
as well as the net sales and operating income (loss) of our operating
segments that we use internally to assess our operating performance.
Division sales exclude sales of divested operations and division operating
income (loss) excludes corporate expenses, restructuring, impairment and
other charges and the results of divested operations. It has been the
Company's practice to close its quarters on the Saturday closest to the last
day of the calendar month so that each quarter has the same number of days
and 13 full weeks. The financial statements and other financial information
in this report are presented using a calendar convention. The reporting
periods, which consist of 13 weeks ending on April 1, 2006 and April 2,
2005, are reported as ending on March 31, 2006 and 2005, respectively, since
the effect is not material.
THREE MONTHS ENDED
MARCH 31,
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2006 2005
---------------------------------------- -------- --------
Division net sales.......................................... $384,915 $399,886
Divested operations..................................... 41,763 49,716
-------- --------
Net sales................................................... $426,678 $449,602
======== ========
Division operating income................................... $ 29,886 $ 11,642
Corporate expenses...................................... 5,690 5,081
Restructuring, impairment and other charges............. 13,476 10,019
Divested operations..................................... (7,975) (8,151)
-------- --------
Operating income............................................ 18,695 4,693
(Gain) loss on sale of non-strategic businesses......... (123,352) 722
Interest expense........................................ 18,037 18,192
Other non-operating (income) expense.................... 222 (11)
-------- --------
Income (loss) before income taxes........................... 123,788 (14,210)
Income tax expense...................................... 11,586 8,346
-------- --------
Net income (loss)........................................... $112,202 $(22,556)
======== ========
Income (loss) per share--basic.............................. $ 2.11 $ (0.47)
======== ========
Income (loss) per share--diluted............................ $ 2.10 $ (0.47)
======== ========
NET SALES
Net sales declined $22.9 million in the first quarter of 2006 compared
to the first quarter of 2005, primarily reflecting lower sales in our
commercial printing segment. Net sales in our envelopes, forms and labels
segment were consistent with the prior year. As a result of the sale of
Supremex, future net sales for our envelopes, forms and labels segment will
be lower. Excluding sales of operations that have been divested ("division
net sales"), division net sales were also lower primarily due to lower
commercial printing sales. Division net sales of envelopes, forms and
labels increased in the first
13
quarter of 2006, as compared to the first quarter of 2005. See "Segment
Operations" below for a more detailed discussion of the primary factors for
the change in our net sales for our segments.
OPERATING INCOME
Operating income increased $14.0 million in the first quarter of 2006,
as compared to the first quarter of 2005. The operating income of the
envelopes, forms and labels segment increased $4.8 million and the
operating loss of the commercial printing segment was reduced by $8.4
million.
Excluding restructuring, impairment and other charges and operating
income of divested operations, the operating income of our two segments
("division operating income") increased $18.2 million in the first quarter
of 2006 as compared to the first quarter of 2005. These results reflect the
benefits of our strategy of reducing fixed costs, improving the procurement
of raw materials, improving productivity through plant consolidations and
divesting or closing underperforming operations. See "Segment Operations"
below for a more detailed discussion of the primary factors for the change
in our operating income for our segments.
CORPORATE EXPENSES. Corporate expenses include the costs of our
corporate headquarters. These costs were higher in the first quarter of
2006, as compared to the first quarter of 2005, primarily due to additional
costs that were incurred in the transition of the corporate headquarters
from Denver, Colorado to Stamford, Connecticut and from stock option
expense due to the adoption of a new accounting standard on January 1,
2006. See Note 2 to our condensed consolidated financial statements
included herein.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. In September 2005, a new
senior management team 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 of our information technology infrastructure. As of March 31,
2006, our total liability for restructuring was approximately $9.2 million
(see Note 8 to the condensed consolidated financial statements included
herein).
During the first quarter of 2006, we incurred $13.5 million of
restructuring and impairment charges, which included $6.7 million for
employee separation costs, $1.9 million for asset impairments, $1.9 million
for lease termination costs and other exit costs of $3.0 million. We
anticipate additional restructuring and impairment charges during the
remainder of 2006.
During the first quarter of 2005, we incurred $10.0 million of
restructuring, impairment and other charges, which included $7.1 million
for asset impairments, $0.5 million for other exit costs, $0.4 million for
employee separation costs and $2.0 million of costs incurred as a result of
the resignation of the Company's former Chief Executive Officer.
GAIN ON SALE OF NON-STRATEGIC BUSINESSES. On March 31, 2006, the Company
recorded a pre-tax gain of approximately $124 million on the sale of all of
the shares of Supremex, a Canadian subsidiary of the Company, and certain
other assets to Supremex Income Fund, a new open-ended trust formed under
the laws of the Province of Quebec (the "Fund"). In connection with the sale
we received net proceeds of approximately $187 million and 11.4 million
units in the Fund, which represented a 36.5% economic and voting interest in
the Fund. On April 28, 2006, we sold 2.5 million units in the Fund to the
underwriters relating to an over-allotment option and received approximately
$21 million, which reduced our economic and voting interest in the Fund to
28.6% (see Note 3 to our condensed consolidated financial statements
included herein).
INTEREST EXPENSE
Interest expense decreased slightly to $18.0 million in the first
quarter of 2006, as compared to $18.2 million in the first quarter of 2005,
primarily due to decreased borrowings. Interest expense in the first
quarter of 2006 reflects average outstanding debt of $815.9 million and a
weighted average interest rate of 8.4%, compared to average outstanding
debt of $828.2 million during the first quarter of 2005 and a weighted
average interest rate of 8.2%.
14
INCOME TAXES
Income tax expense for the quarter ended March 31, 2006 was $11.6
million, which consisted of tax on our Canadian operations of $3.2 million
and income taxes of $8.4 million related to the sale of Supremex. During
the first quarter of 2006, we did not recognize any tax benefit from the
net operating losses of our domestic operations. In the first quarter of
2006, we provided income taxes for our Canadian operations at an effective
rate of approximately 34%, as these operations are expected to generate
taxable income in 2006. Income tax expense for the quarter ended March 31,
2005 was $8.3 million, which consisted of taxes on our Canadian operations
of $4.6 million and a valuation allowance against foreign tax credits of
$3.7 million.
The Company recognized a $220 million gain for US income tax purposes on
the sale of the Supremex and related assets. The utilization of our net
operating and capital losses allowed the release of valuation allowances on
deferred tax assets of $84.6 million in the first quarter of 2006, which
offset the tax expense on the gain on sale of Supremex, except for $8.4
million which was primarily alternative minimum tax.
We established valuation allowances of $6.6 million against tax benefits
of the net operating losses of our domestic operations and alternative
minimum tax credits generated in the first quarter of 2006, including $4.4
million relating to the gain on sale of Supremex.
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. The summaries of sales
and operating income of our two segments have been presented to show each
segment without the sales of divested operations and to show the operating
income of each segment without the results of divested operations and
excluding restructuring, impairment and other charges. Sales and operating
income of operations divested and restructuring, impairment and other
charges are included in the tables below to reconcile segment sales and
operating income reported in Note 11 to the condensed consolidated
financial statements to division net sales and division operating income on
which our segments are evaluated.
ENVELOPES, FORMS AND LABELS
THREE MONTHS ENDED
MARCH 31,
-----------------------
(IN THOUSANDS) 2006 2005
-------------- -------- --------
Segment net sales........................................... $233,747 $233,883
Divested operations..................................... (41,391) (44,012)
-------- --------
Division net sales.......................................... $192,356 $189,871
======== ========
Segment operating income.................................... $ 24,980 $ 20,153
Restructuring and impairment charges.................... 6,925 (14)
Divested operations..................................... (8,838) (8,607)
-------- --------
Division operating income................................... $ 23,067 $ 11,532
======== ========
Division operating income margin............................ 12% 6%
DIVISION NET SALES
Division net sales of our envelopes, forms and labels segment increased
$2.5 million, or 1%, in the first quarter of 2006, as compared to 2005. The
significant factors impacting division net sales in the first quarter of
2006 were as follows:
* Sales of envelopes to our transactional and direct mail customers
increased approximately $3.0 million. A significant portion of this
increase was attributable to the direct mail segment of the market.
15
* Sales of envelopes and other products to the office products retail
customers increased approximately $1.3 million.
* Sales to our distributor channel declined approximately $1.8
million, primarily due to the closure of two plants in the second
half of 2005 and not retaining certain low margin business.
DIVISION OPERATING INCOME
Division operating income of our envelopes, forms and labels segment
increased $11.5 million, or 100%, in the first quarter of 2006, as compared
to the first quarter of 2005. This increase in operating income was due to
higher division net sales, improved margins and significantly lower fixed
manufacturing, selling and administrative expenses. Higher sales and
improved margins contributed approximately $2.1 million. Plant
consolidations and aggressive cost reduction programs have reduced fixed
manufacturing costs by approximately $5.9 million and selling and
administrative expenses by approximately $3.5 million.
COMMERCIAL PRINTING
THREE MONTHS ENDED
MARCH 31,
-----------------------
(IN THOUSANDS) 2006 2005
-------------- -------- --------
Segment net sales........................................... $192,931 $215,719
Divested operations..................................... (372) (5,704)
-------- --------
Division net sales.......................................... $192,559 $210,015
======== ========
Segment operating loss...................................... $ (40) $ (8,428)
Restructuring and impairment charges.................... 5,996 8,082
Divested operations..................................... 863 456
-------- --------
Division operating income................................... $ 6,819 $ 110
======== ========
Division operating income margin............................ 4% 0%
DIVISION NET SALES
Division net sales of the commercial printing segment declined $17.5
million, or 8%, in the first quarter of 2006, as compared to the first
quarter of 2005. We anticipated lower sales at certain of our commercial
printing plants during the first quarter of 2006 based on sales trends at
the end of 2005. In addition, since the first quarter of 2005, we have
closed five commercial printing plants that had weak market positions and
eroding sales. Sales were approximately $7.5 million lower in the first
quarter of 2006 due to these plant closures. Net sales at our plant located
in the Boston market were $3.7 million lower in the first quarter of 2006
than in the prior year. This plant was sold on April 21, 2006.
DIVISION OPERATING INCOME
Despite the decline in sales, division operating income of our
commercial printing segment increased $6.7 million in the first quarter of
2006, as compared to the first quarter of 2005. The measures we have taken
to reduce the cost structure of this segment through plant closures,
headcount reductions and cost control have more than offset the impact of
lower sales. We have reduced fixed manufacturing costs of our ongoing
operations by approximately $1.2 million, fixed selling expenses by
approximately $2.6 million and administrative expenses by approximately
$3.1 million.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash provided
by operating activities was $14.7 million in the first quarter of 2006,
which was primarily due to the net income adjusted for non cash items of $11.2
million and a decrease in our working capital of $2.1 million.
16
Net cash used by operating activities was $22.8 million in first
quarter of 2005, which was primarily due to an increase in our working
capital of $19.3 million and the net loss adjusted for non cash items of
$2.1 million.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash provided
by investing activities was $108.9 million in the first quarter of 2006,
primarily reflecting cash proceeds of $119.4 million from the sale of
Supremex and certain other assets, offset in part by capital expenditures
of $6.1 million and deferred payments relating to acquisitions of $4.7
million.
Net cash used in investing activities was $7.1 million in the first
quarter of 2005, primarily reflecting capital expenditures of $6.5 million
and a deferred payment relating to an acquisition of $3.7 million, offset
in part by proceeds from the sale of non-strategic businesses of $3.1
million.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash used in
financing activities was $123.3 million in the first quarter of 2006,
primarily resulting from the repayment of our senior secured revolving
credit facility with proceeds from the sale of Supremex.
Net cash provided by financing activities was $31.9 million in the
first quarter of 2005, primarily due to the increase in borrowings under
our senior secured revolving credit facility of $32.5.
LONG-TERM DEBT. Our total outstanding debt was $687.8 million at March
31, 2006, following the repayment of all amounts outstanding under our
senior secured credit facility primarily with proceeds received on closing
from the sale of Supremex. On April 20, 2006, we received approximately $71
million of proceeds from the sale of Supremex that was held in escrow since
March 31, 2006 and used approximately $11 million of these proceeds to pay
off another credit facility on our balance sheet as of March 31, 2006. As of
April 28, 2006, we are investing approximately $54 million of the remaining
proceeds from the sale of Supremex in short-term instruments. Pursuant to
our indentures and following the pay down of amounts owed under our credit
facilities in March 2006, we have up to one year to use the remaining
proceeds to reinvest in our businesses or to tender for our outstanding
notes.
On March 31, 2006 we had outstanding letters of credit of approximately
$28.5 million and $0.5 million of surety bonds related to performance and
payment guarantees. In addition, we issued letters of credit of $0.9
million as credit enhancements in conjunction with other debt. Based on our
experience with these arrangements, we do not believe that any obligations
that may arise will be significant. Our current credit ratings are as
follows:
SENIOR SENIOR
SECURED CREDIT SENIOR SUBORDINATED
REVIEW AGENCY FACILITY NOTES NOTES LAST UPDATE
-------------------------------------- -------------- ------ ------------ ------------
Standard & Poor's..................... BB- B+ B- January 2006
Moody's............................... Ba3 B1 B3 April 2006
In March 2006, we amended our $300 million senior secured credit
facility at no cost to us, primarily to provide for the sale of certain
assets such as Supremex. The terms of our existing debt do not have any
rating triggers, and we do not believe that our current ratings will impact
our ability to raise additional capital, should such funds be needed.
We expect internally generated cash flow and the financing available
under our senior secured credit facility will be sufficient to fund our
working capital needs and long-term growth; however, this cannot be
assured.
SEASONALITY AND ENVIRONMENT
Our commercial printing plants experience seasonal variations. Revenues
from annual reports are generally concentrated from February through April.
Revenues associated with holiday catalogs and automobile brochures tend to
be concentrated from July through October. As a result of these seasonal
variations, some of our commercial printing operations are at or near
capacity at certain times during these periods.
17
In addition, several envelope market segments and certain segments of
the direct mail market experience seasonality, with a higher percentage of
the volume of products sold to these markets occurring during the fourth
quarter of the year. This seasonality is due to the increase in sales to
the direct mail market due to holiday purchases.
Seasonality is offset by the diversity of our other products and
markets, which are not materially affected by seasonal conditions.
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact in the
future.
NEW ACCOUNTING PRONOUNCEMENTS
We are required to adopt certain new accounting pronouncements. See
Note 2 to our condensed consolidated financial statements included herein.
AVAILABLE INFORMATION
Our Internet address is: www.cenveo.com. We make available free of
charge through our website our Annual Report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after such documents are
filed electronically with the Securities and Exchange Commission. In
addition, our earnings conference calls are archived for replay on our
website and presentations to securities analysts are also included on our
website.
LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and can be
estimated. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of operations
and financial position. Risks from interest rate fluctuations and changes
in foreign currency exchange rates are managed through normal operating and
financing activities. In conjunction with our sale of Supremex, we entered
into short-term foreign currency exchange forward contracts at varying
rates to convert the Canadian dollar proceeds received on March 31, 2006
into U.S. dollars. We do not utilize derivatives for speculative purposes,
nor do we hedge interest rate exposure through the use of swaps and
options.
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 March 31, 2006, we
had variable rate debt outstanding of $12.2 million. A 1% increase in LIBOR
on debt outstanding subject to variable interest rates would increase our
annual interest expense and reduce our annual net income by approximately
$0.1 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar. In the
three months ended March 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 net income of approximately $5.4 million and $0.9 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.
18
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and our Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this quarterly report. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that, as of the end of such period, our disclosure controls
and procedures were effective to provide reasonable assurance that
information required to be disclosed by us in the reports that we file or
submit under the Exchange Act was recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
made during our most recent fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
There are inherent limitations in the effectiveness of any control
system, including the potential for human error and the circumvention or
overriding of the controls and procedures. Additionally, judgments in
decision-making can be faulty and breakdowns can occur because of simple
error or mistake. An effective control system can provide only reasonable,
not absolute, assurance that the control objectives of the system are
adequately met. Accordingly, our management, including our Chairman and
Chief Executive Officer and our Chief Financial Officer, does not expect
that our control system can prevent or detect all error or fraud. Finally,
projections of any evaluation or assessment of effectiveness of a control
system to future periods are subject to the risks that, over time, controls
may become inadequate because of changes in an entity's operating
environment or deterioration in the degree of compliance with policies or
procedures.
19
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors"
in our Annual Report on Form 10-K for the year ended December 31, 2005,
which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the
only risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or
operating results.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* Acquisition Agreement, dated as of March 17, 2006, among Supremex
Income Fund, Cenveo Corporation and Cenveo, Inc.
3.1 Articles of Incorporation--incorporated by reference to Exhibit
3(i) of the registrant's quarterly report of 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 Company 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 9 5/8% 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.
4.3 Indenture dated as of February 4, 2004 between Mail-Well I
Corporation and U.S. Bank National Association, as Trustee, and
Form of Senior Subordinated Note and Guarantee relating to
Mail-Well I Corporation's $320,000,000 aggregate principal amount
of 7 7/8% Senior Subordinated Notes due 2013--incorporated by
reference to Exhibit 4.5 to registrant's annual report on Form 10-K
for the year ended December 31, 2003.
4.4 Registration Rights Agreement dated February 4, 2004, between
Mail-Well I Corporation and Credit Suisse First Boston, as Initial
Purchaser, relating to Mail-Well I Corporation's $320,000,000
aggregate principal amount of 7 7/8% Senior Subordinated Notes due
2013--incorporated by reference to Exhibit 4.6 to registrant's
annual report on Form 10-K for the year ended December 31, 2003.
4.5 Rights Agreement dated April 20, 2005 between registrant and
Computershare Trust Company, Inc.--incorporated by reference to
Exhibit 4.1 to registrant's current report on Form 8-K dated (date
of earliest event reported) April 17, 2005 filed with the SEC on
April 21, 2005.
10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of its
officers and directors--incorporated by reference from Exhibit
10.17 of Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.2 Form of Indemnity Agreement between Mail-Well I Corporation and
each of its officers and directors--incorporated by reference from
Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement on Form
S-1 dated March 25, 1994.
20
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.3+ Form of M-W Corp. Employee Stock Ownership Plan effective as
of February 23, 1994 and related Employee Stock Ownership
Plan Trust Agreement--incorporated by reference from Exhibit
10.19 of Mail-Well, Inc.'s Registration Statement on Form
S-1 dated March 25, 1994.
10.4 Form of M-W Corp. 401(k) Savings Retirement
Plan--incorporated by reference from Exhibit 10.20 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.5+ Form of Mail-Well, Inc. Incentive Stock Option
Agreement--incorporated by reference from Exhibit 10.22 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.6+ Form of Mail-Well, Inc. Nonqualified Stock Option
Agreement--incorporated by reference from Exhibit 10.23 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.7+ 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from Exhibit 10.54 of Mail-Well, Inc.'s 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 Mail-Well, Inc.'s quarterly report on Form 10-Q for
the quarter ended March 31, 1998.
10.9+ Mail-Well, Inc. 2001 Long-Term Equity Incentive
Plan--incorporated by reference from the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 2001.
10.10+ Form of Non-Qualified Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
from Mail-Well, Inc.'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 Mail-Well, Inc.'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 Mail-Well, Inc.'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 registrant's annual report on Form 10-K
filed for the year ended December 31, 2005.
10.14 Second Amended and Restated Equipment Lease dated as of
August 6, 2002 between Wells Fargo Bank Northwest, National
Association, as trustee under MW 1997-1 Trust, and Mail-
Well I Corporation--incorporated by reference to Exhibit
10.26 of registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 2002.
10.15 Second Amended and Restated Guaranty Agreement dated as of
August 6, 2002, among Mail-Well I Corporation as Lessee,
certain of its subsidiaries and registrant as Guarantors,
Fleet Capital Corporation as Agent, and the Trust
Certificate Purchasers named therein--incorporated by
reference to Exhibit 10.27 of registrant's quarterly report
on Form 10-Q for the quarter ended September 30, 2002.
10.16 Second Amended and Restated Participation Agreement dated as
of August 6, 2002, among Mail-Well I Corporation as Lessee,
Fleet Capital Corporation as Arranger and Agent, and the
Trust Certificate Purchasers named therein--incorporated by
reference to Exhibit 10.28 of registrant's quarterly report
on Form 10-Q for the quarter ended September 30, 2002.
21
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.17 Amendment Agreement No. 1 dated as of September 25, 2002,
among Mail-Well I Corporation as Lessee, certain of its
subsidiaries and registrant as Guarantors, Fleet Capital
Corporation as Agent, and the Trust Certificate Purchasers
named therein--incorporated by reference to Exhibit 10.29 of
registrant's quarterly report on Form 10-Q for the quarter
ended September 30, 2002.
10.18+ Form of Executive Severance Agreement entered into between
the Company 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.
10.19 Amendment Agreement No. 2 dated as of March 25, 2004 among
Mail-Well I Corporation as Lessee, certain of its
subsidiaries and Mail-Well, Inc. as Guarantor, Fleet Capital
Corporation as Agent, and the Trust Purchasers named
therein--incorporated by reference to Exhibit 10.21 of
registrant's quarterly report on Form 10-Q for quarter ended
March 31, 2004.
10.20 Second Amended and Restated Credit Agreement dated March 25,
2004 among Mail-Well, Inc., Mail-Well I Corporation, certain
subsidiaries of Mail-Well I, the lenders under the Second
Amended and Restated Credit Agreement, and Bank of America,
N.A., as administrative agent for the lenders--incorporated
by reference to Exhibit 10.22 of the registrant's quarterly
report on Form 10-Q for quarter ended March 31, 2004.
10.21 Second Amended and Restated Security Agreement dated March
25, 2004 among Mail-Well, Inc., Mail-Well I Corporation,
certain subsidiaries of Mail-Well I, the lenders under the
Second Amended and Restated Credit Agreement, and Bank of
America, N.A., as administrative agent for the
lenders--incorporated by reference to Exhibit 10.23 of
registrant's quarterly report on Form 10-Q for quarter ended
March 31, 2004.
10.22+ Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as
amended--incorporated by reference to Exhibit 10.24 to
registrant's quarterly report on Form 10-Q for the quarter
ended June 30, 2004.
10.23 Amendment No. 1 to Second Amended and Restated Credit
Agreement dated February 8, 2005 among the registrant,
Cenveo Corporation, certain subsidiaries of Cenveo
Corporation, the lenders under the Second Amended and
Restated Credit Agreement, and Bank of America, N.A., as
administrative agent for the lenders--incorporated by
reference to Exhibit 10.23 to registrant's annual report on
Form 10-K filed for the year ended December 31, 2004.
10.24 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
filed with the SEC on September 12, 2005.
10.25+ 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 filed with the SEC on September 15, 2005.
10.26+ 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.
22
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.27 Amendment No. 2 to Second Amended and Restated Credit
Agreement dated December 23, 2005 among Cenveo, Inc., Cenveo
Corporation, certain subsidiaries of Cenveo Corporation, the
lenders under the Second Amended and Restated Credit
Agreement, and Bank of America, N.A., as administrative
agent for the lenders--incorporated by reference to Exhibit
10.30 of registrant's annual report on Form 10-K filed for
the year ended December 31, 2005.
10.28 Amendment No. 1 to Second Amended and Restated Security
Agreement dated December 23, 2005 among Cenveo, Inc., Cenveo
Corporation, certain subsidiaries of Cenveo Corporation, the
lenders under the Second Amended and Restated Security
Agreement, and Bank of America, N.A., as administrative
agent for the lenders--incorporated by reference to Exhibit
10.31 of registrant's annual report on Form 10-K filed for
the year ended December 31, 2005.
10.29 Amendment No. 3 to Second Amended and Restated Credit
Agreement dated January 20, 2006 among Cenveo, Inc., Cenveo
Corporation, certain subsidiaries of Cenveo Corporation, the
lenders under the Second Amended and Restated Credit
Agreement, and Bank of America, N.A., as administrative
agent for the lenders--incorporated by reference to Exhibit
10.32 of registrant's annual report on Form 10-K filed for
the year ended December 31, 2005.
10.30* 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.
10.31* Consent, Waiver and Amendment No. 4 to Second Amended and
Restated Credit Agreement dated March 24, 2006 among Cenveo,
Inc., Cenveo Corporation, certain subsidiaries of Cenveo
Corporation, the lenders under the Second Amended and
Restated Credit Agreement, and Bank of America, N.A., as
administrative agent for the lenders.
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 and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished as an exhibit to this
report on Form 10-Q.
-----------------------------------
+ Management contract or compensatory plan or arrangement.
* Filed herewith.
23
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 May 10, 2006.
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)