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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, 20032004
COMMISSION FILE NUMBER 1-12551
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MAIL-WELL,CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
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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, $0.01 par value per share The New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X// /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 24, 200422, 2005 was $101,753,845.$87,220,338.
As of February 24, 200322, 2005 the Registrant had 48,384,12348,711,979 shares of Common
Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part II (Item 5) and Part III of this
form (Items 11, 12, 13 and 14, and part of Item 10) is incorporated by
reference from the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A with respect to the Registrant's Annual Meeting of
Stockholders to be held on or about April 29, 2004.27, 2005.
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 1
The Company................................................. 1
Commercial.................................................. 1
Resale...................................................... 1
The Printing and Envelope Industries........................Our Industries.............................................. 1
Our Products................................................ 1
Our Services................................................ 2
Our Marketing, Distribution and Customers.......................Customers................... 3
Printing and Manufacturing.................................. 4
Materials and Supply Arrangements...........................Raw Materials............................................... 4
Patents, Trademarks and Brand Names......................... 54
Competition................................................. 5
Backlog..................................................... 5
Employees................................................... 5
Environmental............................................... 65
Available Information....................................... 6
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity, and Related Stockholder
Matters.......................................Matters and Issuer Purchases of Equity Securities......... 7
Item 6. Selected Financial Data..................................... 78
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 78
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 2622
Item 8. Financial Statements and Supplementary Data................. 2723
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 7057
Item 9A. Controls and Procedures..................................... 7057
Item 9B. Other Information........................................... 57
PART III
Item 10. Directors and Executive Officers of Registrant.............. 7158
Item 11. Executive Compensation...................................... 7461
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 7461
Item 13. Certain Relationships and Related Transactions.............. 7561
Item 14. Principal Accountant Fees and Services...................... 7562
PART IV
Item 15. Exhibits and Financial Statement Schedules and Reports on
Form 8-K.................................................. 76
Schedules.................. 62
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PART I
ITEM 1. BUSINESS
THE COMPANY
We areCenveo is one of North America's leadinglargest providers of printingvisual
communication solutions delivered through print and printing relatedelectronic media. Our
products include offset and value added services. We produce general
commercial printing, high impact premiumdigital printing, custom and stock envelopes,
printedand business formsdocuments and labels. We believe we are the world's
largest manufacturer of envelopes, the leading printer of envelopes in the
United Statesalso provide communications
consulting, end-to-end project management and Canada, and the premier printer of high impact color
printing in the United States and the largest US manufacture of business
forms and labels sold through distributors. We operate 86 printing and
manufacturingeServices. Our operational
footprint spans North America with 84 production facilities and five
fulfillment and distribution and fulfillment centers.centers strategically located in or near major
urban centers throughout North America.
COMMERCIAL
Our commercial business had sales of $1.3$1.33 billion in 2003.2004. This
business segment operates 6664 manufacturing facilities and specializes in
the printing of annual reports, car brochures, brand marketing collateral,
financial communications, general commercial printing and the manufacturemanufacturing
and printing of customized envelopes for billing and remittance and direct
mail advertising. In addition, we operate five distribution and fulfillment
centers and provide our customers with other value added services such as
ecommerce.eCommerce.
RESALE
Our resale business had sales of $399$413 million in 2003.2004. This business
segment operates 20 manufacturing facilities and produces business forms
and labels, custom and stock envelopes and specialty packaging and mailers
generally sold to third-party dealers such as print distributors, forms
suppliers and office-products retail chains.
Refer to Note 1719 of our consolidated financial statements included
elsewhere in this report for additional information concerning theour
operating and geographic segments.
OUR INDUSTRIES
The printing industry is one of the largest and most fragmented
industries in the United States with total estimated sales of $155.5$157 billion
in 20022003 generated by more than 45,00044,500 companies, according to the Printing
Industries of America, Inc. The printing industry includes general
commercial printing, financial and legal printing, greeting cards, labels
and wrappers, magazines, newspapers, books, other specialty and quick
printing and related services such as prepress and finishing. We estimate
that the market in which we primarily compete has total annual sales of
approximately $52.2$49 billion serviced by over 20,000 printing businesses.
Envelope printing and manufacturing combined constitutes a $4.1an estimated
$3.6 billion market in North America according to the Envelope
Manufacturer's Association. Products in the envelope industry include
customized envelopes for direct mail, transactional envelopes, non-custom
envelopes for resale, and specialty envelopes and filing products.
Printed office products constitutes an estimated $15 billion market,
with the short-run indirect segment of the market in which we compete
estimated at $3.4 billion.
OUR PRODUCTS
Commercial Printing. We serve two primary commercial printing markets
and the growing market for visual communications products and services
other than print. Our general commercial printing markets are: (1) high end
color printed materials, such as annual reports and car brochures, which
are longer run premium products for major national and regional companies
and (2) general commercial printing products such as advertising and
promotional materials for local markets. Our printing products also include
advertising literature, corporate identity materials, calendars, greeting
1
cards, brand marketing materials, catalogs, maps, CD packaging and direct
mail. We also offer our
1
customers services such as design, fulfillment, ecommerce,eCommerce, inventory
management and other enterprise solutions for companies seeking strategic
partners for their branding and other communications priorities.
Envelope.Envelopes. We serve two primary markets: (1) customized envelopes and
packaging products, including Tyvek(R) mailers used by the USU.S. Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (2) envelopes and other products sold to wholesalers,
paper merchants, printers, contract stationers, independent retailers and
office products superstores. In the customized envelope market, we offer
printed customized conventional envelopes for billing and remittance,
direct mail marketers, catalog orders and other end-users,end users, such as banks,
brokerage firms and credit card companies. In the wholesale envelope
market, we manufacture and print a broad line of stock and custom envelopes
that are featured in national catalogs for the office products market or
offered through office products retailers includingand contract stationers.
Printed Office Products.Business Forms and Labels. We print a diverse line of custom products
for small and mid-size businesses including both traditional and specialty
forms and labels for use with desktop PCs and laser printers and pressure sensitive
labels.printers. Our printed
office products include business documents, specialty documents produced
through VersaSeal(R), Hi-Reply(TM) and Pro-card(TM) brands and short-run
secondary labels, which are made of paper or film affixed with pressure
sensitive adhesive and are used for mailing, messaging, bar coding and
other applications. These products are generally sold through independent
value-added resellers of office products.
OUR SERVICES
We offer our customers a wide variety of related services to enhance
the value of our printed products and assist them in using digital
technologies to improve the effectiveness of their visual communications.
Among our services are:
Cenveo ColorScience(TM). Cenveo ColorScience is our remote customer
proofing solution. It is the first supply chain end-to-end process control
solution that measures and controls color quality throughout the printing
process from digital file creation to printed output. ColorScience offers
the digital delivery of a hardcopy contract proof at the customer's
location.
Delivery systems.Systems. We offer a flexible "just-in-time" delivery program
which allows customers to receive their products just prior to when they
are needed.
Digital archiving.Archiving. We offer customers the option to store digitally
rendered artwork on our file servers. The artwork can then be accessed and
retrieved at any time for use by any authorized design or production group
via high speed transmission links.
Direct-to-Plate and Direct Imaging Technology. We have both
direct-to-plate and direct imaging technologies, which eliminate several
manual functionslabor and
material costs in the prepress stage.stage of a printing job. Both technologies
support a completely digital workflow, providing a better printed product,
faster turnaround and in the case of direct imaging, reduced inventory,
capability to print-on-demandprint on demand and lower distribution costs.
E-commerce. We haveeCENergy(TM). eCENergy is the capabilityCenveo web portal providing access to providea
suite of eSolutions designed to our customers a full
range of e-commerce services to obtain estimates, doautomate and streamline transactions with
customers. Current applications include an online ordering and fulfillment
system called eCatalog, soft and remote proofing and order printing or other products through their web page. Included, at
customer request, are a variety of reporting, marketing and service
functions designed to increase on-line sales.digital asset
management.
Electronic Prepress. We offer a fully automated electronic prepress
services that allowsallow the customer to submit artwork and other data in
hardcopy or digitally either on disk, CD or via high speed transmission
line. Hardcopy artwork is digitally scanned and mastered to create a file
for use either in direct-to-plate or direct-to-press applications. We also
provide traditional prepress services to customers who require graphics and
artwork to be photographed, composed and incorporated into files for plate
or direct-to-press applications.
Fulfillment. Strategically located throughout the United States we
have full-service fulfillment centers with online order assembly and bar
coding. Many of these centers have digital presses to reduce the costs of
inventory and obsolescence.
2
Inventory management systems. Large national organizations with
centralized purchasing and supply departments serving multiple locations
use our inventory management services. Included in these services are
reports on usage by inventory unit (SKU) and/or available warehouse supply
and summary billing.
E-Solutions. We offer a full range of robust and dynamic
Internet-based print procurement, print management and print distribution
solutions. We also work with leading service providers to improve the
effectiveness and speed of internet-based processes for our customers.
Warehousing Services. For customers who prefer to contract out the
management of their printed product storage and distribution we have the
expertise and space to store finished product and drop ship in bulk or ship
on an "as needed" basis.
Enterprise solutions.Solutions. Large national organizations looking for
integrated, managed supply chain solutions can avail themselves of flexible
solutions that connect them to their internal departments and external
customers and suppliers. We have the supply chain management processes,
techniques, systems and resources to manage, produce and deliver their
products from our facilities strategically located across the US.U.S.
Fulfillment. We have full-service fulfillment centers with on-line
order assembly and bar coding strategically located throughout the U.S.
Many of these centers have digital presses to reduce the costs of inventory
and obsolescence.
Inventory Management Systems. Large national organizations with
centralized purchasing and supply departments serving multiple locations
use our inventory management services. Included in these services are
reports on usage by inventory unit (SKU), available warehouse supply and
summary billing.
Warehousing Services. For customers who prefer to outsource the
management of their printed product, storage and distribution we have the
expertise and capacity to store finished product and drop ship in bulk or
ship on an "as needed" basis.
OUR MARKETING, DISTRIBUTION AND CUSTOMERS
Because of the highly fragmented nature of the general commercial
printing and envelope businesses, and the diversity in customer needs and
preferences, we market most of our general commercial printing and
envelopes locally and regionally. Given the project-oriented nature of
these markets, sales to particular customers may vary significantly from
year to year depending upon the number and size of their communications
plans. Our customer supply agreements are typically on an order-by-order
basis or for a specified period of time. TheOur sales forceteam is supported by a
technical service team that provides customers with highly customized
printing solutions. Most of our facilities have customer service
representatives that work with the sales team and the customers to manage
orders efficiently and effectively. In some cases, the customer service
representatives have direct responsibility for accounts.
Our marketing efforts for commercial printing differ between two broad
product areas: high impact color products, such as auto brochures, annual
reports and high-end catalogs, and general commercial work. We market high
impact printing primarily on a regional basis, through sales
representatives working out of sales offices across the United States. We
utilize a team approach to customer service relationships that we believe
is unique in the printing industry.
We believe our commercial segment has one of the largest sales forces
in the industry, with approximately 600700 sales representatives as of
December 31, 2003.2004. Most of our commercial printing and envelope products
are sold through sales representatives who work closelydirectly with customers
from the initial concept through prepress, proofing, production and
production.delivery. Because our sales representatives are our primary contacts with
our customers, our goal is to attract, train and retain an experienced,
qualified sales force in each of our businesses. Sales representatives
typically are compensated by commission, which generally depends on order
size and type, prepress work, reruns or rework and overall profitability of
the job. For our growing list of enterprise customers we have account
teams, some members of which are situatedlocated on the customer's premises.
We market the majority ofThrough our envelopes and packaging products through
sales representatives, who generally work with customers from the initial
product design stage through product delivery to ensure that finished
products meet the customers' applications and marketing needs. Products not
marketed by our own sales representatives are sold through distributors to
better serve selected wholesale markets, geographic regions without direct
sales representation and certain specialty markets.
Our reorganization into two business segments supports our "Total
Customer Solutions""Strategic Sales" initiative, through which we offer our customers aour full
spectrum of products and services fromsuch as design, through fulfillment, including
e-services, direct maileCommerce
and digital printing capabilities.inventory management. Our Total
Customer
3
Solutions sales and service teams areStrategic Sales team is organized to focus on
vertical markets including travel and leisure, health services, financial
services and technology and to offer customers in these markets customized
solutions to their visual communications needs.
In our resale segment, our products are marketed primarily under the
"PrintXcel" brand through distributors who act as intermediaries between us
and the end-users of its products. We also market our office products under
the "Quality Park" brand to office products retailers..
The resale segment sells most of its products through five5 major channels;
independent
solution providers, outsource for "direct" solution providers, commercial printers, ad specialty dealers,
quick printers and quick printers.office products distributors. Our resale segment sells
its products
3
primarily through catalogs, telemarketing and the Internet to over 20,00022,000
value-added resellers who distribute our products to end-users.end users.
We coordinate sales efforts among geographic regions within our
operating segments, and among the operating businesses themselves, in order
to compete for national account business, enhance the internal
dissemination of successful new product ideas, efficiently allocate our
production equipment, share technical expertise and increase company-wide
selling of specialty products manufactured at selected facilities.
Our direct customer base totals approximately 40,000.30,000. The customers of
our commercial segment include Fortune 500 companies, graphic designers and
advertising agencies, regional and local businesses, insurance and finance
companies, government agencies and not-for-profit organizations. The
customers of our resale segment total over 20,000 office products22,000 distributors and office
products retail businesses as well as the U.S. Postal Service. None of our
customers accounted for more than 4%5% of revenue in 2003.2004.
PRINTING AND MANUFACTURING
Our commercial segment operates 6664 manufacturing facilities throughout
the USUnited States and Canada. Our 36 commercial printing plants combine
advanced prepress technology with high-quality web and sheet-fed
lithographic presses, digital presses and extensive binding and finishing
operations. Our 3028 envelope plants produce envelopes from either flat sheets
which are die-cut into pre-shaped blanks or rolls of paper.paper which are run on
our web machines. The paper is folded into an envelope whichand is glued at the
seams and on the flap, and thenflap. Flat sheets are often printed as required.before the envelope is
produced. Printing can also occur during the folding process or after the
envelope is produced. Web machines are typically used for larger runs with
multiple colors and numerous features. Die cut machines, which require a
preliminary step to provide die cut envelope blanks from paper sheets, are
used primarily for smaller orders typically including customized value-added
features. The manufacturing process used is dependent upon the size of a
particular order, custom features required, machine availability and
delivery requirements. ManySome of our commercial facilities operate seven days
a week, 24 hours a day to meet customer requirements.
In our resale segement,segment, we operate twenty20 facilities in the United States.
We design and print business forms and labels and envelopes for a wide
range of businesses. A majority of the orders for these products orders are deliveredsent
to us "camera ready," and weelectronically. We perform prepress and plate making functions and
print on webproprietary presses. TenSix of our resale facilities manufacture
stock envelopes that are sold to paper merchants and office products retail
chains.
RAW MATERIALS AND SUPPLY ARRANGEMENTS
The primary materials used in each of our businesses are paper, ink,
film, offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a number
of suppliers and have not experienced any significant difficulties in
obtaining the raw materials necessary for our operations. We have
implemented an inventory management system in which a limited number of
paper suppliers supplyprovide all of our paper needs. These suppliers are
responsible for delivering paper on a "just-in-time" basis directly to our
facilities. We believe that this system has allowed us to enhance the
flexibility and speed with which we can serve customers, improve pricing on
paper purchases, eliminate a significant amount of paper inventory and
reduce costs by reducing warehousing capacity. We believe that we purchase
our materials and supplies at very competitive prices due to our volume
leverage.
4
PATENTS, TRADEMARKS AND BRAND NAMES
We market products under a number of trademarks and brand names. We
also hold or have rights to use various patents relating to our envelope
business,businesses,
which expire at various times through 2012. Our sales do not materially
depend upon any single or group of related patents.
4
COMPETITION
Commercial printing is highly competitive and fragmented. We compete
against a diminishing number of large, diversified and financially strong
printing companies, as well as regional and local commercial printers, many
of which are capable of competing with us in both volume and production
quality. Although there are a significant number of buyers who are price
sensitive, we also believe that customer service and high quality products
are important competitive factors, especially to companies seeking
enterprise solutions and high impact color products. We believe we provide
premium quality and superior customer service while maintaining competitive
prices through stringent cost control efforts. The main competitive factors
in our markets are customer service, product quality, reliability,
flexibility, technical capabilitiescapability and price. We believe we compete
effectively in each of these areas.
In selling our envelope products, we compete with a few multi-plant and
many single-plant companies that primarily service regional and local
markets. We also face competition from alternative sources of communication
and information transfer such as facsimile machines, electronic mail, the Internet, interactive
videodisks, interactive television, electronic retailing and electronic
retailing.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 (i)(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, (ii)(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
USU.S. Postal Service and the Canada Post Corporation and (iii)(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 printersand labels print facilities with nationwide
manufacturing locations and regional/regional and local printers, which typically
sell within a 100100- to 300-mile radius of their plants. To a limited extent we compete with much larger
direct selling forms manufacturers. We compete mainly on
the breadthquick turn customization of our
product offeringsproducts and close customer relationships.unparalled service levels.
BACKLOG
At December 31, 20032004 and 2002,2003, the backlog of customer orders to be
produced or shipped in the next 120 days was approximately $113.0$127.0 million
and $98.8$113.0 million, respectively.
EMPLOYEES
We employed approximately 10,000 people as of December 31, 2003,2004, and
approximately 1,800 of our employees at the various facilities are
represented by unions affiliated with the AFL-CIO or Affiliated National
Federation of Independent Unions. Collective bargaining agreements, each of
which cover the workers at a particular facility, expire from time to time
and are negotiated separately. Accordingly, we believe that no single
collective bargaining agreement is material to our operations as a whole.
We are committed to employee development and increased organizational
effectiveness. We operate Mail-WellCenveo University, our an in-house training program,
which provides courses in process improvement, quality control, supervisory
and management skills and increasing employee 5
empowerment. Complementing
our in-house initiatives, Mail-WellCenveo contracts leading industry experts to
provide skill-building courses to our sales representatives and managers.
ENVIRONMENTAL
Our operations are subject to federal, state and local environmental
laws and regulations including those relating to air emissions, waste
generation, handling, management and disposal, and remediation of
contaminated sites. We have implemented environmental programs designed to
ensure that we
5
operate in compliance with the applicable laws and regulations governing
environmental protection. Our policy is that management at all levels be
aware of the environmental impact of operations and direct such operations
in compliance with applicable standards. We believe that we are in
substantial compliance with applicable laws and regulations relating to
environmental protection. We do not anticipate that material capital
expenditures will be required to achieve or maintain compliance with
environmental laws and regulations. However, there can be no assurance that
newly discovered conditions or new or stricter interpretations of existing
laws and regulations will not result in material expenses.
AVAILABLE INFORMATION
Our Internet address is: www.mail-well.com.www.cenveo.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13 (a) or 15 (d) of the Exchange Act as
soon as reasonably practicable after such documents are filed
electronically with the Securities and Exchange Commission. In addition,
our earnings conference calls are web cast live viaarchived for replay on our website and
presentations to securities analysts are also included on our website.
ITEM 2. PROPERTIES
We occupy 8684 printing and manufacturing facilities in the United States
and Canada and five print fulfillment and distribution centers, of which 3836
are owned and 53 are leased. In addition to on-site storage at these
facilities, we store products in 19 warehouses, of which four are owned,
and we lease 21 sales offices. We also lease 47,153 square feet of office
space in Englewood, Colorado for our corporate headquarters. We believe
that we have adequate facilities for the conduct of our current and future
operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and
estimable. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on the Company. In the case of administrative proceedings related to
environmental matters involving governmental authorities, management does
not believe that any imposition of monetary damages or fines would be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "MWL."CVO." At February 19, 2004,22, 2005, there were approximately 451458
shareholders of record and, as of that date, we estimate that there were
more than 9,7027,534 beneficial owners holding stock in nominee or "street"
name. The following table sets forth, for the periods indicated, the range
of the high and low sales prices for our common stock as reported by the
NYSE.NYSE:
2004 HIGH LOW
----- --------- ---
First Quarter........................................... $5.00 $3.53
Second Quarter.......................................... $4.52 $2.60
Third Quarter........................................... $3.70 $2.40
Fourth Quarter.......................................... $3.70 $2.60
2003 HIGH LOW
---- ---
First Quarter........................................... $2.55 $1.85
Second Quarter.......................................... $3.13 $2.05
Third Quarter........................................... $3.60 $2.76
Fourth Quarter.......................................... $4.61 $3.58
HIGH LOW
----- ---
2002
First Quarter........................................... $6.28 $4.42
Second Quarter.......................................... $6.80 $5.02
Third Quarter........................................... $5.14 $0.99
Fourth Quarter.......................................... $2.64 $1.03
We have not paid a dividend on common stock since our incorporation and
do not anticipate paying dividends in the foreseeable future because our
senior secured credit facility, senior notes and senior subordinated notes
limit our ability to pay common stock dividends.
No purchases of our common stock were made by or on behalf of the
Company or any affiliated purchaser during the fourth quarter of 2004.
The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Equity
Compensation Plan Information" appearing in the Company's Proxy Statement
filed pursuant to Regulation 14A in connection with the 2005 Annual Meeting
of Stockholders is incorporated herein by reference.
7
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived
from the historical audited financial statements of the Company. The
financial data presented reflect the restatement of all historical data for
discontinued operations and Statement of Financial Accounting Standards No.
145. The results of acquisitions accounted for under the purchase method have been included in the income statement data of
the Company from their respective acquisition dates.dates in accordance with
purchase method accounting for acquisitions. The data presented below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated
financial statements and the related notes included elsewhere herein.
YEAR ENDED DECEMBER 31
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2003 2002 20012004 2003(1) 2002(2) 2001(3) 2000 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................ $1,742,914 $1,671,664 $1,728,705 $1,868,768 $2,044,350 $1,699,222
Income (loss) from continuing
operations..................... $ (20,938) $ 3,924 $ (73,488) $ (45,213) $ 36,193 61,997
Income (loss) per diluted share
from continuing operations..... $ (0.44) $ 0.08 $ (1.54) $ (0.95) $ 0.73 1.16
Total assets..................... 1,107,393 1,107,367 1,476,867 1,683,592 1,310,260$1,174,747 $1,111,446 $1,107,367 $1,476,867 $1,683,592
Total long-term debt, including
current maturities............. $ 769,769 $ 748,961 $ 763,899 $ 855,221 $ 922,351
666,397
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(1) In 2003, reported net income was $5.2 million, or earnings of $0.11 per
share, which included a $0.3 million charge for a cumulative effect of
change in accounting principle and a $1.5 million gain on a disposal of
discontinued operations.
(2) In 2002, reported net loss was $202.1 million, or a loss of $4.24
per share, which included a charge of $111.7 million for a cumulative
effect of change in accounting principle and a $16.9 million for the
loss on a disposal of discontinued operations.
(3) In 2001, reported net loss was $136.2 million, or a loss of $2.86
per share, which included a charge of $91.0 million for the loss on a
disposal of discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATEBUSINESS OVERVIEW
We areCenveo is one of North America's leadinglargest providers of visual
communication solutions delivered through print and electronic media. Our
products include offset and digital printing, printing-related productscustom and value added services to meet the visualstock envelopes
and business documents and labels. We also provide communications
needs of customers. Our mission is to produce
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productsconsulting, end-to-end project management and provide services that help our customers deliver their
messages more effectively. In October 2003, we reorganized Mail-WelleServices. We have production
facilities and fulfillment and distribution centers strategically located
throughout North America. We are organized into two business segments:segments--
commercial and resale.
This reorganization aligns
our structure with our principal strategic goals: to operate as one
company; to provide our customers with one point of entry into Mail-Well;
and to go to market with all of our products and services.
TheOur commercial segment combines our commercial printing plants and the
custom portion of our envelope business into a single business that
generally sells directly to national and local customers. The commercial
segment consists of 66 manufacturing facilities and five distribution and
fulfillment centers and specializes in the printing of annual reports, car
brochures, brand marketing collateral, financial communications and general
commercial printing and in the manufacturing and printing of customized
envelopes for billing and remittance and direct mail advertising. The
commercial segment also offers services such as design, fulfillment,
eCommerce and inventory management. These products and services are
provided directly to national and local customers. Our commercial segment
consists of 36 printing plants, 28 envelope plants and five distribution
and fulfillment centers.
Our resale segment combines all of our operations that sell to
third-party dealers such as print distributors, forms suppliers and
office-products retail chains. This business consists of 20 plants that
produce a variety of products includingproduces business forms businessand labels, custom and stock
envelopes and specialty packaging and mailers. BUSINESS IMPROVEMENT INITIATIVES. Our reorganization wasThese products are generally
sold through print distributors, business forms suppliers, office products
retail chains and the Internet. The resale segment operates 20
manufacturing facilities.
REVIEW OF RESULTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations includes an overview of our consolidated results from
2002 through 2004 followed by a continuationdiscussion of the evolutionresults of Mail-Welleach of our
business segments for the same period.
8
It is important to consider the economic environment for the printing
industry when evaluating our results from 2002 to 2004. The recession that
began in June 2001 when we announced
plans to divest certain businesses we had identified as non-strategic. In
addition to these divestitures, we initiated a restructuring program to
consolidatewas more severe in the printing industry than in the general
economy and many of our manufacturing facilities to reduce excess capacity
and improve our competitive position. We also initiated other programs to
significantly improve operations, reduce costs and increase marketing
effectiveness.markets lagged the overall economy in recovering
from the recession. In February 2002, we sold Curtis 1000, the distribution business
included in our printed office products business. In May 2002, we sold
Mail-Well Label, our prime label business. In August 2002, we sold our
filing products division, and in March 2003, we sold certain2004, most of our digital
graphics operations. Our divesture program is complete.
We have substantially completed our other restructuring programs, which
included the following:
* The consolidationmarkets had not yet returned to
pre-recession growth rates. Excess capacity in concert with declining or
weak volume growth in many of our best envelope equipment, expertise and
operational capabilities into 39 facilities, down from 50markets resulted in 2000.
* The consolidation of our printing operations inextreme competitive
pricing pressures. In addition, the Philadelphia
market into one facility, the closure of our printing operation in
New York City, and the consolidation of our web printing plant in
Indianapolis, Indiana into our web printing plants in St. Louis,
Missouri and Baltimore, Maryland.
* The consolidation of the Denver, Colorado and Clearwater, Florida
business forms manufacturing facilities into our plants in Girard,
Kansas, Fairhope, Alabama and Marshall, Texas.
* The restructuring of our debt.
RAW MATERIALS. Paper is our most significant raw material. We purchase
approximately 470,000 tonscost of paper, annually to meet our production
requirements. Historical changesfilm and other raw
materials increased significantly in 2004. The cost of uncoated paper,
pricing generally have not
affectedwhich is the marginsprimary raw material used in manufacturing envelopes, declined
slightly in 2002 and 2003 and increased approximately 17% in 2004. Our
paper suppliers also increased uncoated paper prices approximately 9% in
early 2005. The prices of coated paper, the primary raw material used by
our commercial printing products because we have
been able to pass on paper price increases to our customers. Paper pricing
has, however, impacted the margins of our envelope products. When paper
prices are rising, operating margins on our envelope products tend to be
lower because we generally are not able to increase our prices as quickly
as paper prices increase. Prices of coated papers, which are used
principally in commercial printing, increased approximately 3% in 2000,
decreased approximately 8% in 2001 and remained flatoperations, were relatively stable in 2002 and
2003. Prices of uncoated papers, which are the principalCertain grades of coated paper used to
manufacture envelopes, increased 10%as much as 18% in the fourth quarter of 2002. The
cost of uncoated papers had declined approximately 10% during 2001 after a
year of stable prices2004. Our
paper suppliers have not announced increases in 2000. Margins of our envelope products were
negatively impacted by higher uncoated paper prices in the first half of
2003; however, the market for
8
uncoated papers softened in the third quarter of 2003. As a result, the
price of uncoated papers no longer negatively impacted operating margins of
our envelope operations in the second half of 2003.
In early 2004, we received notifications from several paper companies
announcing a 10% increase in the price of uncoated paper. We believe the
current market conditions do not support this price increase. However, if
this price increase takes effect in 2004, the margins of our envelope
products will be negatively impacted in 2004 to the extent we are unable to
increase the prices of our envelope products.
OUTLOOK. The economic slowdown that begancoated papers
in 2001 continued to
adversely affect the sales and margins of our businesses in 2002 and 2003.
Demand for many of our products, especially printed advertising and direct
mail promotions, remained depressed at the end of 2003. The market for
traditional business forms, which has been declining for several years,
continues to decline. These market conditions have led to overcapacity in
our industry and significant competitive pricing pressures. We do not
expect internal growth or increases in margins until the markets we serve,
particularly advertising and direct mail, recover. Our restructuring and
other cost reduction initiatives have mitigated the impact of the downturn
in our markets and we believe these actions have positioned us to benefit
from improvements in our markets when they occur.2005.
In the meantime, we have
continued to manage our costs and balance production with the needs of our
customers.
In October 2003, Congress instituted a federal "Do Not Call" program,
which our industry believes will increase demand for printed advertising
and direct mail as our customers shift promotional spending from
telemarketing to direct mail to reach their prospective customers. The
Federal Trade Commission continues to operate the registry despite
litigation brought to challenge its legality on regulatory and
constitutional grounds. If the challenge to the Do Not Call program is
successful, our sales could be adversely affected.
Our reorganization into two business segments supports our "Total
Customer Solutions" initiative, through which we offer our customers a full
spectrum of products and services from design through fulfillment including
e-services, direct mail and digital printing capabilities. By offering the
full breadth of our products and services as one company organized around
the types of customers we serve, we believe we will be an easier company
with which to do business. We believe this new structure will greatly
improve our ability to deliver our quality products and services with the
speed, reliability and efficiency that our customers demand. We also expect
our customers to benefit as a result of a decrease in their total cost of
procuring our products and services. Our Total Customer Solutions sales and
service teams are organized to focus on vertical markets including travel
and leisure, health services, financial services and technology and to
offer customers in these markets customized solutions to their visual
communications needs.
In early 2003, we launched a major initiative we refer to as
"Mobilization". Mobilization is a comprehensive program to actively involve
all of our employees in improving service, quality, efficiency and
innovation. We believe this initiative has improved teamwork, communication
and accountability throughout our business and has resulted in many ideas
which have improved operations, safety, customer service and reduced costs.
We believe the national Do Not Call program and our Total Customer
Solutions and Mobilization initiatives have had a positive impact on our
business during 2003 and will continue to do so in the future.
CONSOLIDATED RESULTS OF OPERATIONS
The financial statements for all periods presented have been restated
as required by generally accepted accounting principles to report the
results of our prime label and Curtis 1000 businesses as discontinued
operations. In analyzing our year-over-year financial results, it is
important to recognize
9
the following items that have had a significant impact on the comparability
of our results over the last several years.
* In August 2002, we acquired the in-house printing and fulfillment
operations of American Express Company. This acquisition has been
accounted for as a purchase transaction and the results of this
operation are included in our consolidated results from the date
acquired.
* Consolidated results also include the results of the filing products
division sold in August 2002 and the digital graphics operations sold
in March 2003 until the dates those operations were sold.
* Consolidated results include significant restructuring and other
expenses related to the execution of our strategic plans and other
initiatives as well as other operating charges.
* The results of our Canadian operations were positively impacted by
the strength of the Canadian dollar during 2003.
The impacts of these items are specifically noted when significant in
the following discussions of our consolidated results and the results of
our business segments.
NET SALES
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS)
Commercial.............................. $1,272,525 $1,268,367 $1,357,430
Resale.................................. 399,139 460,338 511,338
---------- ---------- ----------
Total net sales..................... $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
Consolidated net sales decreased $57.0 million, or 3.3%, in 2003
compared to sales in 2002. Included in this sales decline was an $11.2
million decrease in sales from the digital graphics operations that we sold
in March 2003. In addition, the filing products division that we sold in
August 2002 had sales of $42.3 million in 2002 prior to its divestiture.
* Sales of our commercial segment, increased $4.2 million despite the
sale of the digital graphics operations which resulted in a sales
decline of $11.2 million. Sales of the in-house printing and
fulfillment operations acquired in August 2002 were $38.8 million
higher for the full year 2003 than in 2002. Sales of our Canadian
operations increased approximately $16.7 million in 2003 due to the
impact of foreign currency exchange rates. Sales of the commercial
segment in 2003 were lower on a comparable basis than in 2002 due to
lower sales volume and lower selling prices.
* Sales of our resale segment declined $61.2 million in 2003 compared
to 2002 due to the sale of the filing products division and a decline
of $18.9 million primarily driven by lower sales volume of business
forms to distributors of office products, lower sales volume to
office-products retail chains and lower average selling prices.
Consolidated net sales decreased $140.1 million, or 7.5%, in 2002
compared to sales in 2001. The explanation of this sales decline by segment
is as follows:
* Sales of our commercial segment declined $89.1 million, or 6.6%, in
2002. Approximately 50% of our commercial printing
sales and approximately 40% of our custom envelope sales are related to
advertising and direct mail promotions. In responseSpending by our customers on
printed advertising materials and direct mail promotions has increased over
the last three years; however, our customers are not spending as they did
prior to the economic slowdown in 2002, many of our
customers significantly reduced promotional spending which had a
significant impact on the sales of our commercial segment.
* Sales ofrecession.
In our resale segment, declined $51.0 million in 2002. Sales of
the filing products division were $32.0 million lower in 2002 than in
2001 due to our divestiture of this division in August
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2002. In addition, sales ofdemand for traditional business forms,
to office products distributorsespecially continuous and sales to office products retail chainsmulti-part forms, has declined approximately
$19.0 million.
RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES
We have responded to the impact of the current economic environment on
our businesses by continuing to evaluate our operations for improvement
opportunities. Because of the significant decline in sales experiencedsignificantly over
the last several years by manyas businesses have acquired laser-printing
capabilities. Many of our operations,customers have consolidated and pricing has been
extremely competitive.
To meet the challenges presented by the economic environment in which we
operate and the markets we serve, we have taken actionssignificant actions. We do
not expect our markets to consolidate facilities, optimizereturn to pre-recession growth rates over the next
several years. We believe that our success in this environment will be
dependent on offering products and services that provide customers with
solutions to reduce cycle time and total cost of ownership. We believe that
if we offer our customers "one-stop shopping" with efficiency and quality,
we will succeed by growing market share. In 2003, we reorganized Cenveo to
operate as one company and to make it easier for customers to purchase our
products and services. As we are now organized, we offer customers products
and services and production capabilities that clearly differentiate us from
our competition. In addition, we have created a strategic sales team to
service those customers that purchase a broader range of multiple products
and services and utilize our national manufacturing capabilities. In 2004,
sales managed by this team increased $43 million. In 2002, we expanded our
service offering by acquiring an operation with national distribution and
fulfillment capabilities. In 2004, we strengthened our market position in
two key local markets by acquiring Valco Graphics in Seattle, Washington and
Waller Press in San Francisco, California.
To compete effectively in an environment of excess capacity and otherwise reduce costs.rising
costs, we have focused on improving productivity and creating operating
leverage. In late 2000, we began aligning our capacity and costs with the
demands of our customers, and we consolidated 12 envelope facilities, 8
printing operations and 6 business forms plants. Over the last three years
we replaced 13 offset presses with 6 newer, more productive presses without
reducing our revenue generating capacity. These actions enabled us to
mitigate much of the impact of lower margins due to lower selling prices
and increased costs. The announced 2005 price increase of uncoated paper
will increase our costs by approximately $10.0 million. Our margins in 2005
will be reduced to the extent we are unable to recover this cost through
higher selling prices or other cost reduction measures.
We are defending our share of the business forms market by improving
customer service, on-time deliveries and quality. We began to see success
from this strategy in 2004. The sales of our documents division declined
only 4% in 2004 compared to a decline of 7% in 2003.
In 2003, sales of office products to our wholesale customers and office
products superstores were 7% lower than in 2002. Much of this sales decline
was due to a shift by consumers to the office products superstores where our
market position was weak. Our strategy in 2004 was to strengthen our
position with key office products superstores and regain our share of the
office products market. We
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have resultedbeen successful executing this strategy. Our sales in this channel were
13% higher in 2004 than in 2003.
In 2001, we recognized the need to reduce and restructure our debt. We
sold our prime label business and our office products distribution business
in 2002. We sold the filing products division of our resale segment and the
photo envelope business of our commercial segment in 2002. We also sold
certain digital graphics operations of our commercial segment in 2003. The
net proceeds from these divestitures, which totaled $122.3 million, were
applied to our outstanding debt. In 2002, we replaced bank term debt with
$350 million of 9 5/8% senior notes due 2012. In 2004, we refinanced our
8 3/4% senior subordinated notes due 2008 with 7 7/8% senior subordinated
notes due 2013 and extended our senior secured credit facility to 2008.
Other than our credit agreement which expires in 2008, we have no
significant liquidity events before 2012.
A summary of our consolidated statement of operations is presented
below. The summary presents reported net sales and operating income as well
as the net sales and operating income of our business segments used
internally to assess operating performance. Division sales exclude sales of
divested operations and division operating income excludes unallocated
corporate expenses, restructuring, impairment and other charges, the profits
of divested operations and charges related to divestitures. Our fiscal year
ends on the Saturday closest to the last day of the calendar year, and as a
result, 2004 was a 53-week year. Because our business tends to be slow
during the holiday season, we do not believe that 53rd week had a
significant impact, unless otherwise noted, on the comparability of our
results in 2004 with 2003 and 2002 which were 52-week years.
DECEMBER 31
--------------------------------------------
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
Division net sales................................. $1,742,914 $1,668,792 $1,672,260
Divested operations........................... -- 2,872 56,445
---------- ---------- ----------
Net sales.......................................... $1,742,914 $1,671,664 $1,728,705
========== ========== ==========
Division operating income.......................... $ 97,797 $ 104,770 $ 93,042
Unallocated corporate expenses................. (19,655) (17,979) (18,970)
Restructuring, impairment and other charges.... (5,407) (6,860) (74,551)
Divested operations............................ -- 167 3,301
Gain (loss) on operations held for sale........ -- 117 (19,278)
---------- ---------- ----------
Operating income (loss)............................ 72,735 80,215 (16,456)
Interest expense............................... 73,125 71,891 70,461
Loss from the early extinguishment of debt..... 17,748 -- 16,463
Other non-operating expenses................... 2,459 1,819 1,754
---------- ---------- ----------
Income (loss) before income taxes.................. (20,597) 6,505 (105,134)
Income tax expense (benefit)................... 341 2,581 (31,646)
---------- ---------- ----------
Income (loss) from continuing operations........... (20,938) 3,924 (73,488)
Gain (loss) on disposal of discontinued
operations................................... 1,230 1,548 (16,868)
Cumulative effect of change in accounting
principle.................................... -- (322) (111,748)
---------- ---------- ----------
Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104)
========== ========== ==========
Earnings (loss) per share--basic and diluted....... $ (0.41) $ 0.11 $ (4.24)
========== ========== ==========
NET SALES
Net sales increased 4% in 2004 reflecting growth in the national
accounts of our commercial segment and higher sales of office products in
our resale segment. Net sales decreased 3% in 2003.
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Sales in 2002 included sales of $42.3 million for the filing products
division of our resale segment that was sold in August 2002 and sales of
$14.1 million for the digital graphics operations of our commercial segment
that were sold in February 2003.
OPERATING INCOME
Operating income in 2004 declined $7.5 million, or 9%. This decline was
due to lower operating performance of our two business segments which was
7% lower in 2004 than 2003. In 2003, operating income improved
significantly over results in 2002 which included significant restructuring
and impairment charges. The operating performance of our two business
segments increased 13% in 2003.
UNALLOCATED CORPORATE EXPENSES. Unallocated corporate expenses include
the costs of our corporate headquarters and certain expenses not allocated
to our segments. The increase in unallocated corporate expenses in 2004 was
due, in part, to an increase of $0.6 million in the cost of workers'
compensation claims incurred prior to 2004. Over the last three years, it
has been our practice to allocate the cost of current year claims to our
segments but not to allocate the cost of changes in the development of
claims incurred in prior years. The other major increase in unallocated
corporate expenses was our cost to comply with the Sarbanes- Oxley Act of
2002. Our out-of-pocket cost of compliance was approximately $0.8 million.
Unallocated corporate expenses were lower in 2003 than 2002 due to lower
workers' compensation expense on claims incurred in prior years partially
offset by the costs associated with training programs initiated in 2003 to
actively involve our employees in improving service, quality, efficiency and
innovation.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES. We continually evaluate
our operations for opportunities to optimize capacity and reduce costs.
Since 2000, we have rationalized and realigned capacity to operate fewer
facilities without sacrificing revenue capability. We have taken other
actions to reduce the cost structures of our operations to mitigate the
impact of lower margins. This process is ongoing due to continuing changes inas our industry and
markets and we expectcontinue to take the actions we believe
necessary to react to these changes.evolve. We anticipate additional restructuring charges
in 2005.
2004: During 2004, restructuring and impairment charges totaled $5.4
million. We closed our envelope plant in Bensalem, Pennsylvania and moved
most of its equipment into our printing operation in Philadelphia. The cost
of this plant closure was $1.2 million, net of a $1.4 million gain on the
sale of the plant building and inclusive of impairment charges of $1.0
million.
We acquired printing operations in Seattle, Washington and San
Francisco, California during 2004. 2003 ACTIVITYA key aspect of our strategy in
acquiring these operations was to consolidate our existing operations in
these two cities with the newly acquired operations. The cost incurred
during 2004 to merge these operations was $1.1 million, including asset
impairment charges of $0.8 million.
In December 2004, we negotiated the termination of a lease on a
building in New York City that had been used by an operation that was
closed in 2002. The cost to terminate the lease and write off the
unamortized value of leasehold improvements was $1.2 million.
During the development of our operating plans for 2005, we made a
decision to close a small printing operation in the first quarter of 2005
and consolidate its production into another facility. Accordingly, we
recorded an impairment charge of $1.4 million on the equipment that will be
taken out of service and $0.1 million of lease termination fees. We expect
to incur expenses of approximately $0.8 million to complete this closure in
2005.
Other asset impairments recorded in 2004 totaled $0.4 million.
2003: In 2003, we substantially completed the restructuring programs
described above under "Business Improvement Initiatives."and other charges totaled $6.9 million. We
incurred
expenses related to these programs in 2003 that could not be accrued and
were the result of our continuing initiatives to optimize capacity.
Restructuring expenses recorded during 2003 were $1.5 million. The
following table and discussion present the details of these charges (in
thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Employee separation and related expenses............ $ 815 $ 660 $ 1,475
Equipment moves..................................... 1,002 -- 1,002
Other costs......................................... 94 (10) 84
Reversal of unused accruals......................... (713) (318) (1,031)
------ ----- -------
Total restructuring charges..................... $1,198 $ 332 $ 1,530
====== ===== =======
Continued efforts in 2003 to adjust the operations of both segments to
reflect lower sales volumes, resulted in additional employee separation
expenses of $1.5 million in 2003.
COMMERCIAL. In the fourth quarter of 2002, we announced the closure ofclosed our web printing operation in Indianapolis, Indiana and the redeployment ofredeployed
its two web presses and related equipment to our facilities in St. Louis,
Missouri and Baltimore. A substantial
portion of theBaltimore, Maryland. The cost to dismantle, move and reinstall this equipment was incurred during 2003.
We were able to sub-lease a facility that was idled as a result of the
consolidation of our envelope plant in the Northeast sooner than estimated
when the liability under the lease contract was established. Accordingly,
$0.5 million of the reserve recorded for this lease was reversed. In
addition, we reversed the remaining expenses that had been accrued to cover
the costs of maintaining a building that was sold in 2003.
RESALE SEGMENT. In the fourth quarter of 2002, we closed our business
forms plant in Clearwater, Florida and consolidated its production in
plants located in Fairhope, Alabama and Marshall, Texas. The employee
separation expenses and other costs incurred as a result of this
consolidation were less than originally estimated.
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2002 ACTIVITY
Restructuring, impairment and other related charges recorded in 2002
were $74.6 million. The following table and discussion present the details
of these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses............ $ 4,090 $1,404 $ -- $ 5,494
Employee training expenses.......................... 6,647 396 -- 7,043
Project management expenses......................... 8,101 1,145 -- 9,246
Asset impairment charges, net....................... 12,178 1,650 -- 13,828
Other costs......................................... 7,685 1,883 -- 9,568
Reversal of unused accruals......................... (500) -- -- (500)
------- ------ ------- -------
Total restructuring costs....................... 38,201 6,478 -- 44,679
Other charges....................................... 6,693 161 23,018 29,872
------- ------ ------- -------
Total restructuring and other charges........... $44,894 $6,639 $23,018 $74,551
======= ====== ======= =======
COMMERCIAL. We completed the consolidation of our envelope
manufacturing facilities in 2002. We began this consolidation in 2001 in
order to reduce excess internal capacity and improve utilization of the
equipment and resources at our other envelope plants in the United States
and Canada. The costs incurred during 2002 related to this consolidation
were as follows:
* Employee training expenses of $6.6 million were incurred to train the
employees hired at the plants that absorbed the production of the
plants that were closed. The training programs for these employees
were between three and nine months in duration.
* We incurred project management expenses of $8.1 million which were
primarily consulting fees and related expenses incurred to assist
management in managing the consolidation project. Consultants were
used to assist in such tasks as capacity planning, workflow planning,
production scheduling and change management.
* Impairment charges of $8.9 million were recorded for property and
equipment taken out of service or sold as a result of the plant
consolidations, net of $5.9 million received from the sales of those
assets.
* Other costs of $3.0 million include the expenses incurred to
dismantle, move and reinstall equipment, and the costs incurred to
restore buildings to the condition required by lease agreements or to
maintain them while they are held for sale.
* In 2001, we accrued employee separation expenses to cover the 766
employees we expected would be affected over the course of the
project to consolidate our envelope manufacturing facilities. At the
completion of the project, 722 employees had been separated and we
reduced the accrual by $0.5$1.1
million. We closed our commercial printing operation in New York City in
September 2002. We recordedalso incurred employee separation expenses of $1.0 million
covering 80 employees, asset impairment charges of $1.0 million and lease
commitment and other expenses of $2.2$1.5 million in
connection with this plant
closure.
We moved a web press from our plant in Portland, Oregon to our plant in
St. Louis and began the consolidationworkforce reductions across most of our web printing operation in
Indianapolis with our web plants in St. Louis and Baltimore. We recorded
employee separation expenses of $0.3 million to cover the cost of 52
employees affected by these actions, impairment chargesoperations.
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The 2003 restructuring charge included credits of $1.0 million on
equipment taken outfor the
reversals of service and $1.8 million to cover the expenses
associated with terminating lease commitments and the costs incurred in
2002 to dismantle, move and reinstall equipment.
Additionally, the commercial segment reduced the size of many of its
operations during 2002 in response to the significant decline in sales. The
costs associated with these actions included $2.8 million to cover the cost
of the elimination of 331 jobs, impairment charges of $1.3 million for
equipment
12
taken out of service and $0.7 million for expenses associated with lease
commitments and the cost incurred to dismantle, move and reinstall
equipment.
RESALE. During 2002, the documents division of our resale segment
closed its business forms plant in Clearwater, Florida and its plant in
Denver, Colorado which had been curtailed in 2001. The employee separation
expenses covering 64 employees were $0.7 million. Impairment charges
related to equipment taken out of service as a result of these closures
totaled $0.6 million. Other expenses of $0.7 million primarily related to
expenses incurred to maintain the two buildings held for sale.
The resale segment completed the closure of its envelope operations in
Hattiesburg, Mississippi. The costs in 2002 were $2.4 million, which were
primarily additional impairment charges, consulting fees, the costs
incurred to dismantle, move and reinstall equipment and expenses incurred
to clean up the building.
Additionally, the resale segment incurred $2.1 million in expenses to
reduce the size of several of its other operations. Employee separation
expenses incurred to cover the elimination of 193 jobs were $0.7 million,
asset impairments were $0.5 million and training, project management and
other costs were $0.9 million.
OTHER CHARGES. Other charges include the following items:
* In 2001, we initiated several programs to significantly improve
operations and marketing effectiveness. These programs included the
implementation of best practices, the standardization of costing and
pricing systems in our commercial segment and the alignment of
equipment and services to better serve our customers and markets. We
used outside assistance in the implementation of these programs which
cost $4.4 million in 2002.
* In connection with the refinancing of our bank credit facility in
June 2002, we were required to refinance an operating lease stemming
from a sale/leaseback arrangement executed in 1997 and amended in
2000. The value of the equipment subject to the lease was reduced
from $34.9 million to $19.1 million, and we were required to pay the
difference of $15.8 million. In addition, we wrote off deferred costs
of $6.1 million associated with the lease prior to this refinancing.
* Wereserves recorded an impairment charge of $1.8 million related to the
write-down of idle equipment in our commercial business to net
realizable value.
* We incurred severance payments unrelated to the restructure plans of
$1.1 million.
* We incurred consulting fees of $0.7 million related to tax matters
that arose as a result of our divestitures.
2001 ACTIVITY
The restructuring, impairment and other related charges totaled $43.1
million in 2001. The following table and discussion present the details of
these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses............ $ 7,276 $2,769 $ -- $10,045
Employee training expenses.......................... 2,414 214 -- 2,628
Project management expenses......................... 4,985 419 -- 5,404
Asset impairment charges, net....................... 4,897 2,582 -- 7,479
Other costs......................................... 7,524 1,655 -- 9,179
Strategic assessment costs.......................... -- -- 2,677 2,677
------- ------ ------ -------
Total restructuring costs....................... 27,096 7,639 2,677 37,412
Other charges....................................... 2,842 -- 1,600 4,442
------- ------ ------ -------
Total restructuring and other charges........... $29,938 $7,639 $4,277 $41,854
======= ====== ====== =======
13
COMMERCIAL. Our commercial segment announced the consolidation of eight
envelope plants in 2001 and recorded employee separation expenses of $6.9
million covering 766 employees that were expected to be affected over the
course of the consolidation project. In 2001, we incurred training costs of
$2.4 million and project management fees of $5.0 million, and recorded
impairment charges of $4.3 million on the equipment that was taken out of
service and $5.5 million to cover lease termination costs, the costs of
equipment moves and building clean-up expenses.
We closed a printing plant in Philadelphia, Pennsylvania and
consolidated two other printing operations in the Philadelphia area. We
took these actions to improve our cost effectiveness and our competitive
position in the Philadelphia market. The costs associated with the
consolidation included employee separation expenses of $0.4 million
covering the elimination of 25 jobs, impairment charges of $0.6 million on
equipment taken out of service and other costs of $2.0 million to cover the
lease termination costs and costs to dismantle, move and reinstall
equipment.
RESALE. Our resale segment began the closure of its envelope
manufacturing facility in Mississippi. The cost recorded in 2001 was $6.5
million and included employee separation expenses of $1.6 million covering
142 employees, impairments on equipment taken out of service of $3.9
million and $1.0 million of training, project management and other costs.
The documents division of our resale segment substantially curtailed
its business forms plant in Denver, Colorado in 2001. The employee
separation expenses of $0.6 million related to the elimination of 62 jobs.
Other costs of $0.7 million were incurred to dismantle, move and reinstall
equipment. Additionally, we reversed an impairment charge of $1.3 million
taken in 2000 to write down a building to its estimated fair market value.
This building was sold for more than its original carrying value.
Our resale segment closed a warehouse and distribution center in Santa
Fe Springs, California. The cost associated with this closure was $0.9
million which was primarily employee separation expenses covering 17
employees and lease termination costs.
CORPORATE. In developing our strategic plan, we engaged outside
advisors to research and evaluate our markets, survey our customers and
assess existing strategies. In addition, we engaged financial advisors to
evaluate options for improving our capital structure. The cost of these
advisors was $2.7 million in 2001.
OTHER CHARGES. Other charges include the following items:
* The outside assistance used in the implementation of initiatives in
our commercial segment to establish best practices, standardize our
costing and pricing systems, and align equipment and services to
better serve our customers and markets totaled $2.1 million in 2001.
* We wrote off costs of $0.7 million incurred by our commercial segment
for a human resource information system that was not implemented.
* We wrote off a $1.6 million investment in a company that was
developing a service, which would enable online collaborative design
and management of a printing job.
OTHER SIGNIFICANT OPERATING EXPENSES
The table below summarizes other significant charges we have recorded
over the last three years related to the restructuring of our debt and the
divestitures announced in June 2001.
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Loss from the early extinguishment of debt............... $ -- $ 16,463 $ --
Impairment loss (gain) on assets held for sale........... $ (117) $ 6,436 $ --
Impairment on operations formerly held for sale.......... $ -- $ 12,842 $ 36,523
Settlement of litigation................................. $ 5,330 $ -- $ 1,231
14
LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT. In 2002, we wrote off the
deferred financing fees of $16.5 million related to our bank credit
facility that was refinanced in June 2002.
IMPAIRMENT LOSS (GAIN) ON ASSETS HELD FOR SALE. In August 2002, we
completed the sale of the filing products division of our resale segment,
which had been held for sale since June 2001. The impairment loss on assets
held for sale recorded in 2002 included a $6.1 million impairment in
connection with this divestiture.
The impairment loss on assets held for sale also includes a $0.3
million impairment charge related to the digital graphics assets of our
commercial segment held for sale at December 31, 2002 and sold in March
2003. No additional impairment on these assets was required as a result of
the sale.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE. PrintXcel, part of our
former printed office products segment, was held for sale at the end of
2001 and during the first half of 2002. In 2001, we reduced the carrying
amount of the net assets of PrintXcel by $33.6 million to reflect its
expected net realizable value. PrintXcel's net realizable value was based
on estimated sales proceeds, net of expenses and a tax benefit of $11.5
million that would have resulted from the sale. This charge was reported as
an impairment on operations formerly held for sale in 2001.
Due to our decision in June 2002 not to sell PrintXcel, we reversed the
tax benefit because it would not be realized and $1.1 million of expenses
related to the sale that had been accrued but not incurred. The net amount
of $10.4 million was reported as an impairment on operations formerly held
for sale in 2002. PrintXcel is now an important part of our resale segment.
In October 2002, we discontinued our efforts to sell one of our digital
graphics operations. The impairment on operations formerly held for sale in 2001 and 2002 includes $2.9 million and $2.5 million, respectively, related
to the digital graphics operationthat were no longer
held for sale.
SETTLEMENT OF LITIGATION. In 2003, we accruedrequired.
We recorded a charge of $5.3 million in 2003 to cover the cost of
settling a lawsuit after an unfavorable award was granted by a jury in Los
Angeles County, California on February 20, 2004 to an ex-employee who had contested his
termination. OPERATING INCOMEWe elected to settle this dispute in order to avoid the
expense and risk of further litigation and appeals.
2002: During 2002, restructuring, impairment and other charges totaled
$74.6 million. In 2001, we began a major consolidation of the envelope
manufacturing facilities in our commercial segment to reduce excess
internal capacity and improve the utilization of the equipment and
resources at our other envelope plants in the United States and Canada.
This consolidation was completed in 2002 and the cost incurred in 2002
totaled $26.6 million.
We closed a commercial printing operation in New York City at a cost of
$4.2 million; business forms plants in Clearwater, Florida and Denver,
Colorado at a cost of $2.0 million; and an envelope operation of our resale
segment in Hattiesburg, Mississippi at a cost of $2.4 million. In addition,
we began the realignment of our web presses in Indianapolis that was
completed in 2003. The cost incurred in 2002 was $3.1 million.
Other charges include $21.9 million incurred in connection with the
refinancing of an operating lease, consulting fees of $4.4 million incurred
in connection with business improvement initiatives, severance expenses of
$4.8 million, asset impairments of $3.6 million and $1.6 million for other
restructuring activities including the reversal of a $0.5 million excess
accrual.
A further discussion of restructuring, impairment and other charges
can be found in Note 14 to the consolidated financial statements.
GAIN (LOSS) ON OPERATIONS HELD FOR SALE
The table below summarizes charges we recorded in 2003 and 2002 related
to operations that had been held for sale.
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002
2001
-------- ------------ --------
(IN THOUSANDS)
Commercial..................................Gain (loss) on assets held for sale......................... $117 $ 60,816 $ 3,076 $ 42,305
Resale...................................... 45,711 44,317 44,588
Corporate................................... (26,312) (80,312) (72,069)(6,436)
Impairment on operations formerly held for sale............. -- (12,842)
---- --------
-------- --------
Total operating income (loss)........... $ 80,215 $(32,919) $ 14,824
======== ========$117 $(19,278)
==== ========
Consolidated operating income increased $113.1 million in 2003 compared
toIMPAIRMENT LOSS ON ASSETS HELD FOR SALE. In 2002, we completed the loss recorded in 2002. This improvement in operating income was due
to the following:
* The operating income of the commercial segment improved $57.7 million
in 2003. This improvement was due primarily to lower restructuring
expenses of $43.7 million and a reduction in fixed costs of $11.4
million.
* The operating income of the resale segment increased $1.4 million in
2003. This improvement was due primarily to lower restructuring
expenses of $6.3 million and $3.0 million in reductions in fixed
costs partially offset by the impact of lower sales volume and lower
selling prices and the loss of the operating incomesale
of the filing products division that wasdivision. We incurred a $6.1 million loss in
connection with this divestiture. We also reduced the value of the digital
graphics assets held for sale at the end of 2002 by $0.3 million. These
assets were sold in August 2002.
* Corporate2003.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE. In 2001, an operation
that is now an important part of our resale segment was held for sale. In
2002, we made the decision not to sell this business. Accordingly, we
reversed the tax benefit of $11.5 million expected to be realized upon the
sale that had been recorded in 2001 and expenses were $54.0of $1.1 million lower in 2003 due primarilythat had
been accrued but not incurred. We also discontinued our efforts to restructuring and other significant operating charges which were
$53.5 million lower in 2003 than in 2002.
15
Consolidated operating income decreased $47.7 million in 2002. This
decrease in operating income was due to the following:
* The operating incomesell one
of the commercial segment declined $39.2 million
in 2002. Restructuring expenses were $15.0 million higherdigital graphics operations that had been held for sale at the end
of 2001 and the
impact on operating income of the sales decline was approximately
$48.0 million. Reduced benefit expenses, lower fixed manufacturing
and administrative expenses realized from our restructuring and other
cost reductions programs totaled $22.5 million.
* The operating income of the resale segment decreased $0.3 million in
2002. Operating income in 2002 included $2.8 million of operating
income from the filing products division which was $5.3 million lower
than the full year of 2001. In addition, restructuring expenses were
$2.2 million lower in 2002, and fixed manufacturing costs and
administrative expenses were reduced $7.1 million in 2002 as a result
of our restructuring and other cost reduction initiatives. These
reductions more than offset the impact on operating income of lower
sales.
* Corporate expenses were $8.2 million higher in 2002. Corporate
expenses increased due to higher restructuring and other charges of
$18.7 million, the $16.5 million loss on the early extinguishment of
debt and therecorded an impairment charge of $6.4 million on assets held for
sale. Also in 2002, we recorded a $4.4 million charge to cover the
cost of workers' compensation claims estimated by our insurance
actuary. The impairment charge of $12.8 million on operations
formerly held for sale was $23.7 million lower than the charge
recorded in 2001. Amortization expense was $14.8 million lower in
2002 than in 2001 due to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002, which eliminated the amortization of
goodwill.$2.4 million.
12
INTEREST EXPENSE
Interest expense in 2004, 2003 and 2002 was as follows:
YEAR ENDED DECEMBER 31
------------------------------------2004 2003 2002
2001
------- ------- ---------------
(IN THOUSANDS)
Total interest expense............................expense..................................... $73,125 $71,891 $76,031 $ 78,891
Less: Allocated to discontinued operations........operations................. -- -- (5,570)
(15,577)
------- ------- ---------------
Reported interest expense.........................expense.................................. $73,125 $71,891 $70,461
$ 63,314
======= ======= ===============
Interest expense increased $1.2 million in 2004 compared to 2003. In
2004, interest expense reflected our average outstanding debt of $811.4
million during the year and a weighted average interest rate of 8.2%
compared to our average outstanding debt of $792.7 million in 2003 and a
weighted average interest rate of 8.4% for 2003. Our average outstanding
debt and weighted average interest rate in 2004 reflect the issuance in
January of $320 million of 7 7/8% senior subordinated notes due 2013, the
proceeds of which were used to redeem the $300 million of 8 3/4% senior
subordinated notes due in 2008. The increase in interest expense in 2004
was due primarily to an extra week of interest.
Interest expense in 2002 excluded the interest expense that was
allocated to discontinued operations. Total interest expense declined 5.4%
in 2003 compared to 2002. In 2003, total interest expense reflectsreflected our
average outstanding debt of $792.7 million during the year and a weighted
average interest rate of 8.4% compared to theour average outstanding debt of
$890.6 million and a weighted average interest rate of 7.9% for 2002. The
average outstanding debt decreased in 2003 primarily due to the application
of the proceeds from our divestitures to the repayment of debt in 2002.debt. Our
weighted average interest rate increased in 2003 as a result of the
issuance of $350 million of 9 5/8% senior notes in March 2002, the proceeds
of which were used primarily to repay bank debt that accrued interest at a
lower variable rate. In November 2002, we redeemed our 5% convertible
subordinated notes.
LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT
In addition, total interest expense
inJanuary 2004, we sold $320 million of 7 7/8% senior subordinated
notes due 2013. The proceeds from the sale of these notes were used to
redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to
redeem the 8 3/4% notes and the unamortized debt issuance costs on the
8 3/4% notes, which were written off, totaled $17.7 million.
In 2002, was higher as a resultwe wrote off $16.5 million of the write-off of the deferred financing
fees associated withunamortized debt issuance costs
related to the bank credit facility that was refinanced in June
of that year.
Total interest expense declined 3.6% in 2002 compared to 2001. In 2002,
total interest expense reflects average outstanding debt of $890.6 million
in 2002 compared to $978.8 million in 2001. The reduction in the
outstanding debt in 2002 was due to the use of proceeds from our
divestitures to repay debt. Our weighted average interest rate was 7.9% in
2002 compared to 7.3% in 2001. The increase in the weighted average
interest rate was primarily due to the issuance of $350 million of 9 5/8%
senior notes in March 2002, the proceeds of which were used to repay bank
debt, which accrued interest at a lower variable rate, and redeem our 5%
convertible notes.
16
Reported interest expense excludes the allocation of interest expense
to discontinued operations which was based on the net assets of those
operations relative to the net assets of the Company. Reported interest
expense in 2003 and 2002 was substantially higher than in 2001 because the
net asset amounts used to allocate interest expense exceeded the actual net
proceeds received from the dispositions of the discontinued operations.refinanced.
INCOME TAXES
YEAR ENDED DECEMBER 31
-----------------------------------2004 2003 2002
2001
------ -------- ------- (DOLLARS IN--------
(IN THOUSANDS)
ProvisionIncome tax benefit for U.S. operations.................... $(12,302) $(8,890) $(42,171)
Income tax expense for foreign operations................. 12,643 11,471 10,525
-------- ------- --------
Income tax expense (benefit) for............................ $ 341 $ 2,581 $(31,646)
======== ======= ========
Effective income taxes......... $2,581 $(31,646) $(5,200)
Effective tax rate...........................rate............................... (1.7)% 39.7% 30.1%
10.3%======== ======= ========
The income tax expense reported in 2004 on the loss before income taxes
was primarily the result of establishing valuation allowances on certain
deferred tax assets and the tax expense recorded for foreign operations
that generated taxable income in 2004.
13
The effective tax rate in 2003 was 39.7%. Theapproximates the statutory effective tax
rates forrate considering the tax jurisdictions in which we operate. In 2002, and 2001 were lower than 2003 primarily due to the
pre-tax losseslow effective tax rate was the result of significant nondeductible charges
included in 2002 and 2001 that increased the impact of nondeductible permanent
differences on the overall effective rate.
LOSS FROMincome from continuing operations before income taxes.
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS
In September 2000, we sold the extrusion coating and laminating
business segment of American Business Products, Inc., a company we acquired
in February 2000. The $1.5 millionconsideration received for this business included an
unsecured note which was fully reserved at the time of the sale. This note
was redeemed by the issuer in 2004 for $2.0 million. The proceeds, net of
tax, have been recorded as a gain on disposal of discontinued operations forin
2004.
The gain on the disposal of discontinued operations recorded in 2003
was primarily an adjustmentthe result of adjustments made to the tax impact of the dispositionsale
of our prime label business which was sold in May 2002. Further adjustments
to the overall losses incurred on the disposals of Curtis 1000 and our
prime label business are possible if expenses accrued in connection with
the sales of these operations are different than those estimated or if
there are further revisions to the tax impacts of these dispositions.
The loss from discontinued operations for 2002 was $16.9 million, or
$0.35 per share.
The loss on the disposal of discontinued operations recorded in 2002
reflects the proceeds
received from ouradditional loss on the divestitures of Curtis 1000 and our prime label business,
net of related selling expenses and tax benefits.
The loss fromthe two businesses
reported as discontinued operations forin 2001 was $91.0 million, or
$1.91 per share and included the following:
* A write-down of our prime label business and Curtis 1000 to net
realizable valuesold in the amount of $88.0 million, net of a tax benefit
of $35.4 million, based on estimated sales proceeds.
* The actual and forecasted results of our prime label business and
Curtis 1000 from the date of the announcement through the expected
date of disposal, including an allocation of interest expense and
income taxes.2002.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
WeIn 2003, we adopted Financial Accounting Standards Board Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("FIN 46"), effective January 1, 2003.. The implementation of FIN 46
required us to consolidate a trust that is leasing equipment to us under an
operating lease. The effectIn addition to the equipment and the debt of this
consolidation was to increase net property, plant and equipment by $18.1
million and total debt by $18.5 million on January 1, 2003. The cumulative
effect of this change in accounting principlethe trust, we
recorded January 1, 2003 was an after-tax charge of $0.3 million atas the timeeffect of adoption.this
accounting change in 2003.
We adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets ("SFAS No. 142142"), on January 1, 2002. SFAS No.
142 required an impairment test of the goodwill recorded for each of our
operating segmentsreporting units as of that date. Our testing indicated an impairment of the goodwill
recorded by the commercial printing operations in our commercial segment.
This impairment was due to the significant decline in the performance of
our commercial printing operations in 2001 and the impact of that decline
on expected future cash flows. We estimated the fair value of our
commercial printing operations by discounting the expected future cash
flows and
17
the use of market multiples. Using the estimated fair value of the business
and the application of the other provisions of SFAS No. 142, we determined that $111.7 million of the
goodwill associated with our commercial printing operations (formerly the
commercial printing segment) was impaired. This transitional impairment loss was
reported as a cumulativethe effect of a change in accounting principle in 2002.
SEGMENT OPERATIONS
Our annualchief executive officer monitors the performance of the ongoing
operations of each of our business segments. We assess performance based on
division net sales and division operating income. The summaries of sales
and operating income of our two segments have been presented to show each
segment without the sales of divested operations ("Division net sales") and
to show the operating income of each segment without the results of
divested operations and excluding restructuring, impairment testsand other
charges ("Division operating income"). Sales and operating income of
goodwill as of December 1, 2003operations divested and 2002
did not indicate any additional impairment.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTEDrestructuring, impairment and other charges are
included in the tables below to reconcile segment sales and operating
income reported in Note 19 to our consolidated financial statements to
division net sales and division operating income on which our segments are
evaluated.
14
COMMERCIAL
YEAR ENDED DECEMBER 31
--------------------------------------2004 2003 2002
2001
------ --------- ---------
(DOLLARS IN---------- ---------- ----------
(IN THOUSANDS)
NetSegment sales...................................... $1,329,778 $1,272,525 $1,268,367
Divested operations............................ -- (2,872) (14,105)
---------- ---------- ----------
Division net sales................................. $1,329,778 $1,269,653 $1,254,262
========== ========== ==========
Segment operating income........................... $ 50,538 $ 58,704 $ 1,513
Restructuring, impairment and other charges.... 4,158 1,198 44,894
Divested operations............................ -- (167) (598)
---------- ---------- ----------
Division operating income.......................... $ 54,696 $ 59,735 $ 45,809
========== ========== ==========
Division operating income (loss)........................... $5,150 $(202,104) $(136,217)
Net income (loss) per share--diluted........ $ 0.11 $ (4.24) $ (2.86)margin................... 4% 5% 4%
TheDivision net income and net income per share in 2003 reflect the
substantial improvement in operating results, the gain on disposal of
discontinued operations and no impairmentsales of our goodwillcommercial segment increased $60.1 million,
or 5%, in 2004 compared to net sales in 2003. This increase was due to the
following:
* Sales to the customers managed by our strategic sales team increased
$42.7 million, or 28%. Sales in our local markets declined $11.2
million in 2004.
* In 2004, our newly acquired operations in Seattle and San Francisco
contributed sales of $15.6 million including $1.9 million of sales
managed by our strategic sales team.
* The net loss and net loss per share in 2002 reflectfavorable impact of the substantial
loss from operations,strength of the lossCanadian dollar on the
disposalsales of discontinuedour Canadian operations was $14.2 million.
Division operating income of our commercial segment declined $5.0
million, or 8%, in 2004 compared to 2003. Excluding the impact of
acquisitions and the goodwill impairment charge recorded as a cumulative effect of a
change in accounting principleforeign currency, gross profit increased $11.0 million as
a result of the adoptionincrease in sales and lower fixed manufacturing expenses.
The increase in gross profit, however, was offset by the following:
* Selling expenses increased $9.9 million. In 2003, we formed a
strategic sales team to build sales with large customers that
purchase multiple products and services from multiple facilities. The
incremental cost of SFAS No. 142.
BUSINESS SEGMENTS
COMMERCIAL
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Sales............................. $1,272,525 $1,268,367 $1,357,430
Operating income.................. 60,816 3,076 42,305
Operating income margins.......... 4.8% 0.2% 3.1%
Salesthis team in 2004 was approximately $4.9 million.
Increased expenses associated with our local market sales were
approximately $5.0 million.
* Administrative expenses increased $6.9 million. Included in this
increase were higher information technology costs of $3.5 million and
expenses of $1.2 million associated with changing our name to Cenveo.
* In 2004, we recorded the remaining contingent purchase price of $14.2
million for an acquisition we completed in 2002. This contingent
purchase price was recorded as a customer-related intangible asset
that is being amortized over the remaining four-year life of a service
agreement. As a result, amortization expense increased $3.6 million
in 2004.
Division operating income in 2004 increased $4.4 million as a result of
the foreign currency impact of the strength of the Canadian dollar, the
results of our acquisitions and lower losses on dispositions of assets.
Division net sales of our commercial segment increased $4.2$15.4 million or 0.3%, in
2003 compared to net sales in 2002. The following factors influenced sales in
2003:
* TheThis increase in the saleswas due to the in-house printing and
fulfillment operations acquired from American Express Companyfollowing:
* Accounts designated as strategic sales accounts increased $42.2
million in 2003. Most of this increase was due to the acquisition in
August 2002 was $38.8 million in 2003.
* The sales of our Canadian operations were $16.7 million higher in
2003 primarily due to the strength of the Canadian dollar. Sales of
our Canadian operations in local currency were lower in 2003 than in
2002.
* Sales of envelope products were approximately $27.4 million lower in
2003 than in 2002. A significant portion of this sales decline was
due to lower average selling prices in 2003.
* Sales to our local printing customers were $12.4 million higher which
we believe reflects an improvement in demand in our local markets.
Sales of our high impact printing were $13.1 million lower primarily
due to work performed in 2002 that did not repeat in 2003.
* Sales of our digital graphics operations that were sold in March 2003
were $11.2 million lower in 2003.
* In September 2002, we closed our printing facility in New York City.
Sales of this operation were $12.0 million in 2002.
18
Sales declined $89.1 million, or 6.6%, in 2002 compared to sales in
2001. The following factors influenced sales in 2002:
* Approximately 50% of our commercial printing sales and 40% of our
custom envelope sales are related to advertising and direct mail
promotions. Many of our customers significantly reduced promotional
spending in 2002 in response to the economic slowdown. The impact on
the sales of our printing operations serving local markets was
approximately $21.1 million. Additionally, sales of envelopes
decreased approximately $10.9 million as a result of less spending by
our customers on direct mail promotions.
* Sales of commercial printing in the Philadelphia market were
approximately $24.0 million lower in 2002 than in 2001. This decline
was due in part to the closure of one of our plants in Philadelphia
in April 2001. Much of the work produced by this plant was marginal
work which could not be produced profitably at any of our other
facilities in the area. In October 2001, we consolidated our other
two plants serving this market, and many of our customers did not
move their printing to the new facility.
* The average selling price of our custom envelope products fell
approximately 2% in 2002 due to competitive pressures on the prices
of many of our products and lower sales of higher value added
products.
* The sales of the in-house printing and fulfillment operations acquired in August 2002 were $11.9 million.of
American Express Company.
* Sales atin our printing plant in Indianapolislocal markets declined $9.4 million
during 2002. In$47.3 million. Lower average
selling prices for our effortsenvelope products contributed significantly to
improvethis decline.
15
* The favorable impact of the profitabilitystrength of this
plant, we lost somethe Canadian dollar on the
sales of our low margin business. We have since closed
the web printing operation at the plant.
* In February 2002, we exited the domestic photo envelope market. Sales
of these envelopes were $5.4 million in 2001.
* Sales at our plant in New York City declined $4.7 million in 2002. We
ceased production at this plant in September 2002.
TheCanadian operations was $20.5 million.
Division operating income of the commercial segment increased $57.7$13.9
million, in 2003. Operating incomeor 30%, in 2003 compared to 2002. The increase in operating income
was impacted bydue to the following:
* Restructuring expenses and other charges incurred in 2003 were $1.2
million, $43.7 million lower than incurred in 2002.
* The operating income of the printing and fulfillment operations we
acquired in August 2002 andExcluding the impact of the strong Canadian dollar
offset much of the impact ofacquisitions and foreign currency, gross
profit declined $7.8 million. This was due primarily to lower sales volume
in our local markets and lower selling prices in 2003.of our envelope
products partially offset by lower manufacturing overhead.
* Fixed manufacturing costsSelling and administrative expenses were reduced
$11.4$15.5 million primarily due tolower in 2003.
These reductions were the result of lower sales, the closure of our
printing operation in New York City in the fourth quarter of 2002,
the closure of our web printing operation in Indianapolis in the
first quarter of 2003 and other cost control initiatives during
2003.
* Results in 2002 included a $3.2 million loss incurred by our printing
operation in New York City, which was closed in September 2002.
Operating income of the commercial segment declined $39.2 million in
2002. Operating income in 2002 was impacted by the following:
* Restructuring expenses and other charges incurred in 2002 were $44.9
million, $15.0 million higher than incurred in 2001.to reduce costs.
* The favorable impact on operating income of the sales decline wasstrength of the
Canadian dollar and the results of the acquisition completed in 2002
totaled approximately $48.0 million, of which approximately $18.6 million was related to
lower average selling prices.
19
* Fixed manufacturing costs and administrative expenses were reduced
$22.5 million, primarily due to the consolidation of eight envelope
facilities during 2001 and 2002, the closure and consolidation of our
printing operations in Philadelphia and lower employee benefit
expenses.$6.2 million.
RESALE
YEAR ENDED DECEMBER 31
--------------------------------------2004 2003 2002 2001
-------- -------- --------
(DOLLARS IN(IN THOUSANDS)
Sales...........................Segment sales........................................... $413,136 $399,139 $460,338
$511,338
Operating income................ 45,711 44,317 44,588
OperatingDivested operations................................. -- -- (42,340)
-------- -------- --------
Division net sales...................................... $413,136 $399,139 $417,998
======== ======== ========
Segment operating income................................ $ 43,102 $ 44,703 $ 43,298
Restructuring, impairment and other charges......... -- 332 6,639
Divested operations................................. -- -- (2,703)
-------- -------- --------
Division operating income............................... $ 43,102 $ 45,035 $ 47,234
======== ======== ========
Division operating income margin......... 11.5% 9.6% 8.7%margin........................ 10% 11% 11%
SalesDivision net sales of our resale segment declined $61.2increased $14.0 million, or 13.3%4%,
in 20032004 compared to sales in 2002. This decline in sales was due2003. Sales of office products to the following:
* Sales in 2002 included sales of $42.3 millionour retail, wholesale
and trade customers were up 13% from the filing
products division that was sold in August 2002.
* Approximately $6.4 million of the sales decline in 2003 was dueprior year. Lower net pricing,
however, reduced our overall revenue growth from these customers to lower selling prices driven by competitive pricing pressures in the
market.
* Sales to our merchant and office products customers were $5.2 million
lower in 2003 due to losses of certain customers and weak demand in
the office products retail market.
*4%.
Sales of our high strength mailing envelopes were $4.0 million lower
due in part to planned reductions of certain low margin business.
* Sales to our office products distribution customers were $3.2 million
lower due primarily to lower sales of traditional business forms.
Over the last few years demand for traditional business forms, has
declined as businesses have acquired laser printing capabilities.
Sales of labels and envelopes to our distribution customers
increased 4%. This increase was driven by strong sales of business labels
which were up 12%.
Division operating income of our resale segment declined $1.9 million,
or 4%, in 2004 compared to 2003. Gross profit declined $4.8 million driven
by lower selling prices of office products, and higher paper costs and
higher manufacturing overhead. Lower selling, general and administrative
expenses partially offset the decline in gross profit.
Division net sales in 2003 decreased $18.9 million, or 5%, compared to
2002. Sales of office products to our wholesale and trade customers
declined 7% in 2003. Sales of business forms, labels and envelopes sold to
distributors in 2003 were approximately the same as3% lower than 2002. A 7% decrease in 2002.
Salessales of
business forms drove this decline.
Division operating income declined $51.0$2.2 million, or 10.0%5%, in 20022003
compared to sales in
2001. This2002. Because of the decline in sales, gross profit was due to the following:
* Sales of the filing products division were $32.0 million lower in
2002 than for the full year of 2001.
* Sales to office products distribution customers declined $12.8
million due to lower sales of traditional business forms, lower sales
of our label products to quick printers and lower sales of envelopes.
* Sales to our merchant and office products customers declined
approximately $6.3 million due to inventory reductions by many of our
customers and planned reductions of certain low margin business.
The operating income of the resale segment increased 3.1% to $45.7
million in 2003 from operating income of $44.3 million in 2002. Operating
income in 2003 was impacted by the following factors:
* Restructuring expenses and other charges in 2003 were $0.3 million,
$6.3$3.8
million lower than in 2002.
* The2003. Lower administrative expenses in 2003 partially
offset the impact of lower sales volume and lower selling prices on
operating income was approximately $5.2 million.
20
* Fixed manufacturing and administrative expenses were reduced $3.0
million primarily due to the closure of our Clearwater, Florida
business forms plantdecline in 2002 and other cost control initiatives in
2003.
* Operating income in 2002 included operating income of $2.8 million
from the filing products division.
Operating income declined slightly in 2002 to $44.3 million from
operating income of $44.6 million in 2001. Operating income in 2002 was
impacted by the following:
* Restructuring expenses and other charges in 2002 were $2.2 million
lower than in 2001.
* The impact of lower sales volume and lower selling prices on
operating income was approximately $4.3 million.
* Fixed manufacturing and administrative expenses were reduced $7.1
million in 2002 primarily as a result of the curtailment of the
business forms plant in Denver, the closure of the envelope operation
in Hattiesburg, Mississippi and the closure of the warehouse and
distribution center in Santa Fe Springs, California.
* Operating income of the filing products division was $5.3 million
lower in 2002 than the full year of 2001.gross profit.
16
LIQUIDITY AND CAPITAL RESOURCES
At December 31,Our cash flows from operating, investing and financing activities, as
reflected in the consolidated statements of cash flows, are summarized as
follows:
2004 2003 2002
-------- -------- ---------
(IN THOUSANDS)
Cash provided by (used in):
Operating activities................................ $ 37,991 $ 59,459 $ 22,971
Investing activities................................ (35,597) (29,856) 100,819
Financing activities................................ (1,749) (33,256) (110,222)
Effect of exchange rate changes on cash............. (156) 1,310 (985)
Discontinued operations............................. -- -- (10,827)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents.... $ 489 $ (2,343) $ 1,756
======== ======== =========
OPERATING ACTIVITIES. In 2004, cash provided by our outstanding debtoperations was
$749.0 million, $14.9$21.5 million lower than at December 31, 2002. At December 31,cash provided in 2003. This decrease was due
primarily to our loss from continuing operations and the increase in
working capital of $11.0 million compared to the $12.9 million decrease in
working capital in 2003.
In 2003, cash provided by our revolving loan balanceoperations increased $36.5 million. This
increase was $28.6 million lower than at December 31, 2002.
Our outstanding debt at December 31, 2003 included $17.0 million of debt
held by a variable interest entity that was consolidated on January 1, 2003due primarily to income from continuing operations and
reductions in accordance with FIN 46.
CASH PROVIDED BY OPERATIONS. Our operations generated cash flow of
$59.5 millionworking capital in 2003 compared with $23.0 million in 2002 and $170.9
million in 2001. The increase in operating cash flow in 2003 from the
amount generated in 2002 was primarily due to earnings from continuing
operations compared to the loss in 2002.
INVESTING ACTIVITIES. Acquisition spending was $13.2 million in 2004,
$2.8 million in 2003 and $2.6 million in 20022002. In 2004, we purchased Valco
Graphics in Seattle and $3.8 millionWaller Press in 2001.San Francisco. In 2002, we
purchased the in-house printing and fulfillment operations of American
Express Company. The acquisitionAcquisition spending includes contingent purchase price of
$3.2 million in 2004 and $2.8 million in 2003 also relatespaid to this investment. In 2001,
we purchased a small printing and fulfillment operation in Denver,
Colorado.American Express
Company.
Capital expenditures were $27.4 million in 2004, $31.6 million in 2003
and $30.9 million in 2002
and $32.7 million in 2001.2002. We anticipate spending $20.0 million to $25.0
million on capital expendituresinvestments in 2005.
In 2004, to be
approximately $20.0 to $30.0the purchaser of a business we sold in 2000 redeemed a note
issued in connection with the sale for $2.0 million. In March 2003, we received
net proceeds of $3.9 million from the sale of thecertain digital graphics
operations.operations of our commercial segment. In 2002, we received net proceeds of
$31.5 million from the sale of theour filing products division, $67.0 million
from the sale of theour prime label business, and $20.5 million from the sale of
Curtis 1000.1000 and $3.3 million from the sale of our photo envelope business.
Proceeds from the sales of property and equipment were $3.0 million in
2004, $0.7 million in 2003 and $12.0 million in 2002.
FINANCING ACTIVITIES. DuringAt December 31, 2004, our outstanding debt was
$769.8 million, an increase of $20.8 million from December 31, 2003. In
January 2004, we sold $320 million of 7 7/8% senior subordinated notes due
2013. The proceeds of these notes were used to purchase the $300 million of
8 3/4% senior subordinated notes due 2008. The redemption premiums incurred
to purchase the 8 3/4% notes totaled $13.5 million. The cost incurred to
issue the new notes was $7.2 million. In March 2004, we amended our $300
million senior secured credit facility to extend its term to June 2008. The
cost of this amendment was $1.9 million.
At December 31, 2003, our outstanding debt was $749.0 million which
included the $17.0 million of debt held by a trust that was consolidated in
accordance the requirements of FIN 46. In 2003, we used $32.8 million of
our cash flow to reduce outstanding debt.
17
In 2002, we completed a significant
restructuringreduced outstanding debt by $91.6 million using proceeds
from divestitures. We incurred debt issuance cost of our outstanding debt. In March 2002, we sold $350$18.6 million in
connection with the sale of our 9 5/8% senior notes due 2012. We used the net proceeds from this
offering to repay $197.0 million of our bank term debt, $134.0 million of
our revolving credit facility,2012 and $9.2 million of other debt. The
remaining $2.0 million of net proceeds from the offering were used for
other working capital needs.
In June 2002, we entered into a three-year $300 million senior secured
credit facility with a syndicate of banks. The purpose of the new facility
was to enable the
refinancing of our existing bank term debt and secure
financing for ongoing working capital needs and other general corporate
purposes. Loans made under this facility are issued on a revolving basis
and are subject to availability and a borrowing base. Loans bear interest
at a base rate or LIBOR, plus a margin, and aresenior secured by substantially
all of our assets.
21
On November 1, 2002, we redeemed the $139.1 million convertible
subordinated notes due on that date.credit facility.
At December 31, 2003,2004, we had outstanding letters of credit of
approximately $25.1$25.2 million related to performance and payment guarantees.
In addition, we have issuedhad outstanding letters of credit of $1.9$1.0 million issued as
credit enhancements in conjunction with other debt. Based on our experience
with these arrangements, we do not believe that any obligations that may
arise will be significant.
Our current credit ratings are as follows:
SENIOR SENIOR
SECURED CREDIT SENIOR SUBORDINATED
REVIEW AGENCY CREDIT FACILITY NOTES DEBTNOTES LAST UPDATE
-CHANGE
------------- ----------------------------- ------ ------------ -------------------------
Standard & Poors.....Poor's.................. BB- BB- B May 2003
Moody's..............B+ B- December 2004
Moody's............................ Ba3 B1 B3 JanuaryApril 2004
The terms of our existing debt do not have any rating triggers, and we
do not believe that our current ratings will impact our ability to raise
additional capital.
On February 4, 2004,We expect internally generated cash flow and the financing available
under our senior secured credit facility will be sufficient to fund our
working capital needs and long-term growth; however, this cannot be
assured. Based on the certificate filed January 21, 2005, we sold $320had $110.8
million of 7 7/8%unused credit available under our senior subordinated
notes due 2013. The proceeds of these notes will be used to purchase the
$300 million of 8 3/4% senior subordinated notes due 2008. On February 3,
2004, we accepted tenders of $166.4 million of the 8 3/4% notes at a price
of $1,045 for each $1,000 of principal amount together with accrued
interest. The remaining outstanding notes were called for redemption at a
price of $1,043.75 for each $1,000 of principal amount plus accrued
interest to the redemption date. In the first quarter of 2004 we will
record a loss of approximately $17.8 million on the early extinguishment of
our 8 3/4% senior subordinated notes.secured credit
facility.
CONTRACTUAL OBLIGATIONS.OBLIGATIONS AND PROBABLE LIABILITY PAYMENTS. The following
table aggregates material
expectedis a summary of our significant contractual obligations and commitments as ofprobable
liability payments at December 31, 2003,
as adjusted for the new 7 7/8% senior subordinated notes sold on February
4, 2004 (in thousands):
OTHER
LONG-TERMLONG- LONG- PURCHASE
TERM OPERATING LONG-TERM PURCHASETERM COMMITMENTS TOTAL CASH
PAYMENTS DUE DEBT LEASES LIABILITIES COMMITMENTSAND OTHER OBLIGATIONS
------------ --------- --------- ----------- ----------- -----------
2004...............2005........................ $ 2,5752,270 $ 31,05733,765 $ -- $35,353 $ 720 $ 34,352
2005............... 75,834 26,308 3,521 420 106,083
2006............... 2,327 21,786 3,25971,388
2006........................ 2,325 27,931 8,449 4,200 42,905
2007........................ 13,530 23,902 6,793 3,700 47,925
2008........................ 79,402 15,395 6,248 1,483 102,528
2009........................ 1,022 8,958 2,225 -- 27,372
2007............... 13,532 16,301 2,22012,205
Thereafter.................. 671,220 4,189 16,854 -- 32,053
2008............... 300,964 14,777 2,042 -- 317,783
Thereafter......... 373,729 11,412 14,617 -- 399,758692,263
-------- -------- ------- ------------- --------
Total.............. $768,961 $121,641 $25,659 $1,140 $917,401Total....................... $769,769 $114,140 $40,569 $44,736 $969,214
======== ======== ======= ============= ========
EMPLOYMENT CONTRACTS. We havePurchase commitments and other consists primarily of payments for
equipment that has been ordered but not received, obligations to be paid
pursuant to an employment contract with Paul Reilly,
our CEO, providing for severanceagreement, required pension contributions and
incentive payments under certain circumstances. We
have also entered into change of control agreements with certain other
executives providing for severance payments in the event of a change of
control.to customers.
OFF-BALANCE SHEET ARRANGEMENTS. We doIt is not have anyour business practice to
enter into off-balance sheet arrangementsarrangements.
GUARANTEES. In conjunction with unconsolidated entities or other persons.the sale of the prime label business in
May 2002, we guaranteed a certain lease obligation. At December 31, 2004,
the contingent liability under the guarantee was $5.5 million. We have not
made, nor do we expect to be able to fund ourmake any payments under this guarantee.
In connection with the disposition of certain operations, capital expenditures, debt
and other contractual commitments withinwe have
indemnified the next year from internally
generated cash flow and funds available under our senior secured credit
facility. The borrowing base certificate filed January 16, 2004, reflecting
assets included inpurchasers for certain contingencies as of the December 31, 2003 consolidated balance sheet,
reported $111.6 milliondate of
unused credit available under our senior secured
credit facility.
22
SEASONALITY AND ENVIRONMENT
Our commercial segment experiences 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 resultdisposition. We have accrued the estimated probable cost of these
seasonal
variations, some of our commercial printing operations are at or near
capacity at certain times during these periods.
In addition, several envelope market segments and certain segments of
the direct mail market, experience seasonality, with a higher percentage of
the volume of products sold to these markets occurring during the fourth
quarter of the year. This seasonality is due to the increase in sales to
the direct mail market due to holiday purchases.
The mailer operations of our resale segment are at or near capacity at
times during the fourth quarter.
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.contingencies.
18
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles.ESTIMATES
In preparing theseour consolidated financial statements, we are required to
make estimates andbased on assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate
these estimates and assumptions on an ongoing basis,
including those related to bad debts, property, plant and equipment,
intangible assets, income taxes, and contingencies.basis. We base our estimates on historical
experience and various other assumptions that are considered reasonable in
view of relevant facts and circumstances.
The accounting estimates and assumptions discussed in this section are
those that inherently involve significant judgments and the most
uncertainty. The nature of these accounting estimates and assumptions are
important to understanding our financial statements. Because offuture events
rarely develop exactly as anticipated, even the uncertainty inherent in suchbest estimates actual results may differ from our
estimates.
Critical accounting policies are defined as those policies that relate
to estimates thatroutinely
require assumptions about matters that are highly
uncertain at the time the estimate is made and could have a material impact
on our results due to changes in the estimate or the use of different
estimates that reasonably could have been used.
ALLOWANCESadjustment.
ALLOWANCE FOR LOSSES ON ACCOUNTS RECEIVABLE. We maintain a valuation
allowance based uponon the expected collectibility of accounts receivable. The
allowance includes specific amounts for customer collection issues we
have identified and an estimate of accounts that may become uncollectible
based on the age of the receivables. Ouramounts due and specific amounts for customer
collection issues that we have identified. The valuation allowance provided
for potentially uncollectible accounts receivable allowance at December 31, 20032004 was
$4.0$4.7 million. In 2004, 2003 we wrote-offand 2002, our actual loss experience was in
line with our expectations. We wrote off uncollectible accounts, of $4.0 million to the reserve net of
recoveries. In 2002, we
wrote-off uncollectible accountsrecoveries, of $4.7$2.0 million net of recoveries.in 2004, $3.3 million in 2003 and $4.5 million
in 2002. While credit losses have historically been within our
expectations, we cannot guarantee that weour credit losses will continue to experience the same credit loss rates
that we havebe consistent
with those in the past. These estimates may prove to be inaccurate, in
which case we may have overstated or understated the reserveallowance for losses
required for uncollectible accounts receivable.
GOODWILL. We evaluate the carrying value of our goodwill as of December
1 of each year, or if there are indications of impairment. Our evaluation
is based on discounting the future cash flows of each of our business
segments and comparisons to market multiples of other similar companies. In
preparing projected future cash flows, we use our judgment in projecting
the profitability of our segments, their growth in future years, the
capital spending required, the working capital requirements and the
selection of a discount rate. In our comparisons to market multiples of
other similar companies, we use our judgment in the selection of the
companies used in the analysis. While we believe there is no further
impairment of our goodwill, if our estimates of future cash flows prove to
be inaccurate, an impairment charge could be necessary in future years.
23
IMPAIRMENT OF LONG-LIVED ASSETS. We periodically evaluate long-lived assets,
including property, plant and equipment and other intangible assets other than
goodwill, for impairment whenever events or changes in conditionscircumstances
indicate that the carrying valueamounts of specific assets or group of assets
may not be recoverable. TheWhen an evaluation requires us tois required, we estimate the
future undiscounted cash flows associated with anthe specific asset or group
of assets. If the cost of the asset or group of assets cannot be recovered
by these undiscounted cash flows, then an impairment may exist. Estimatingexists. Our estimates
of future cash flows requiresare based on experience and our internal business
plans. Our internal business plans require judgments regarding future
economic conditions, product demand and pricing. Although we believe our
estimates are appropriate, significant differences in the actual
performance of the asset or group of assets may materially affect our
evaluation of the recoverability of the asset values currently recorded.
Additional impairment charges may be necessary in future years.
GOODWILL. We evaluate the carrying value of our goodwill in the fourth
quarter each year and requirewhenever events or circumstances make it more likely
than not that an impairment may have occurred. Determining whether an
impairment has occurred requires the valuation of each of our reporting
units, which we estimate using a discounted cash flow methodology. In
addition, we use comparative market multiples to corroborate the discounted
cash flow results. In preparing projected future cash flows, we use our
judgment in projecting the profitability of our reporting units, their
growth in future years, investment and working capital requirements and the
selection of an appropriate discount rate. In our comparisons to market
multiples of other similar companies, we use judgment in the selection of
the companies included in the analysis. While we believe there is no further
impairment of our goodwill, if our estimates of future discounted cash flows
prove to be inaccurate, an impairment charge tocould be necessary in future
results.years.
SELF-INSURANCE. We are self-insured for the majority of our workers'
compensation costs and group health insurance costs, subject to specific
retention levels. We rely on claims experience and the advice of consulting
actuaries and administrators in determining an adequate liability for
self-insurance claims. Our self-insuredself-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. Ourbasis discounted based on anticipated payment patterns. The
undiscounted liability for workers' compensation claims at December 31, 20032004 was $8.1$11.4 million. The
discounted liability
19
was $9.9 million determined using a 4% discount rate. Workers' compensation
expense for claims incurred in 2004 was $4.8 million and was based on an
actuarial estimateestimate. In 2004, we recorded $2.4 million of additional expense
due to the costnegative development of claims incurred in 2003 was $3.6 million and $5.1 million in 2002. In
addition, in 2002, we recorded a charge of $4.4 millionprior to adjust our
workers' compensation liability to a fully developed basis.2004. In 2003,
we recorded additional chargesexpense of $1.8 million due to the negative
development of old claims.claims incurred prior to 2003.
Our self-insured healthcare liability is estimated based on our actual
claims experience and multiplied by a lag factor. Ourself-insurance healthcare liability represents our estimate of
claims that have been incurred but have not been
reported. Thereported as of December 31, 2004.
This liability, which totaled $7.4 million at December 31, 20032004, was
$6.8 million.estimated based on our claims experience. We determine the actual average
daily claims cost and the number of days between the incurrence of a claim
and the date it is paid. The lag
factor used to estimate thisof our liability was approximately 75 days.for employee
healthcare represents 72 days of unreported claims.
While we believe that the estimates of our assumptionsself-insurance liabilities
are appropriate,reasonable, significant differences in our experience or a significant
change in any of our assumptions could materially affect ourthe amount of
workers' compensation costs and group health insurance costs.healthcare expenses we have recorded.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements weWe are required to estimate our income
taxes in each of the jurisdictionsjurisdiction in which we operate. This process involves
estimating our actual current tax exposure, together with assessing
temporary differences resulting from differing treatment of items for tax
and financial reporting purposes. The tax effects of these temporary
differences are recorded as deferred tax assets or deferred tax
liabilities. Deferred tax assets generally represent items that can be used
as a tax deduction or credit in our tax return in future years for which we
have already recorded the tax benefitexpense in the statement of operations.our financial statements. Deferred tax
liabilities generally represent tax items that have been deducted for tax
purposes, but have not yet been recorded as expenses in our financial
statements.
At December 31, 2004, our net deferred tax asset, the statementfuture tax benefit
arising from net deductible differences and tax carryforwards from U.S.
operations, was $35.6 million. Our net deferred tax liability of operations.$11.0
million reflects our deferred foreign tax liabilities. We must thenare required by
generally accepted accounting principles to assess the likelihood that the
future tax benefit represented by our net deferred tax assets support
the use of the future deduction or credit.asset will be
realized. To the extent we believe that the use of the future tax asset in
any jurisdiction is not likely, we must establish a valuation allowance. TheIn
assessing the need for a valuation allowance, is based on ourwe consider all available
positive and negative evidence, including estimates of taxable income byin
each jurisdiction in which we operate, tax planning strategies and the
period over which our deferred tax assets will be recoverable. In
circumstances where there is sufficient negative evidence with respect to
the event that actual results differrealizability of deferred tax assets, establishment of a valuation
allowance must be considered. Under provisions of SFAS No. 109, Accounting
for Income Taxes, the substantial losses we have incurred in our U.S.
operations over the most recent three-year period represent sufficient
negative evidence with respect to the realizability of the U.S. deferred tax
asset recorded as a result of our operating losses. Accordingly, a portion
of the U.S. deferred tax asset arising from these estimates,operating losses is
potentially impaired. In addition, we believe that it is not likely that we
will be able to use all of our U.S. capital loss carryforwards. To provide
for these impairments, we have recorded a valuation allowance of $26.8
million against the U.S. net deferred tax asset. This valuation allowance
was increased $20.3 million in 2004 primarily due to the generation of
additional U.S. net operating losses and foreign tax credits.
We believe our remaining deferred tax assets will be realized through
the reversal of our existing temporary differences and the execution of
available tax planning strategies. Additional valuation allowances may be
required if we are unable to implement certainexecute our tax planning strategies or
we adjust these estimates ingenerate future periods, we may need to establish an additionaltaxable income. The valuation allowance that has been
established will be maintained until there is sufficient positive evidence
to conclude that it is more likely than not that our deferred tax assets
will be realized. When sufficient positive evidence occurs, our income tax
expense will be reduced to the extent we decrease the amount of our
valuation allowance. The increase or reversal of all or a portion of our
tax valuation allowance could have a materialsignificant negative or positive
impact on our statement of operations
and our balance sheet.
Significant judgment is required in determining our effective tax rate
and in evaluating our tax positions. We establish reserves when, despite
our belief that our tax return positions are fully supportable, we believe
that certain positions are likely to be challenged and that we may not
succeed. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of reserve provisions and changes to reserves that we
consider appropriate, as well as related interest.
24
A company of our size is often under audit by various tax agencies in
the jurisdictions in which we operate. A number of years may elapse before
a particular matter, for which we have established a reserve, is audited
and finally resolved. The number of years with open tax audits varies
depending on the tax jurisdiction. We currently have no open audits for the
years prior to 1997. While it is difficult to predict the final outcome or
the timing of resolution of any particular tax matter, we believe that our
reserves reflect the probable outcome of known tax contingencies.future earnings.
20
NEW ACCOUNTING STANDARDS
In April 2003,November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 149, Amendment151, Inventory Costs - an amendment of StatementARB No. 133 on Derivative Instruments and
Hedging Activities.43 Chapter
4. This statement amends SFAS No. 133 to provide
clarification on the financial accountingrequires abnormal production costs such as idle facility
expense, excessive spoilage, rehandling costs and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristicsabnormal freight to be
accounted forexcluded from inventory costing and treated as period expenses. In
addition, this standard requires the allocation of fixed production
overhead to be based on a comparable basis. Thenormal capacity of the production facility. We do
not expect the adoption of SFAS No. 149, which is effective for contracts entered into or modified
after June 30, 2003, did notthis standard in 2005 to have an impacta significant
effect on our financial condition or
results of operations.results.
In May 2003,December 2004, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics123 (revised 2004),
Share-Based Payment: an amendment of both LiabilitiesFASB Statements No. 123 and Equity.
95 ("SFAS
No. 150 establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and equity.123R"). SFAS No. 150 is effective123R requires all share-based payments to employees,
including grants of stock options, to be recognized in the financial
statements based on their fair value. We expect to implement SFAS 123R in
the third quarter of 2005 and use the modified-prospective transition
method of implementation. Under the modified-prospective transition method,
we will recognize compensation expense in the financial statements issued
subsequent to the date of adoption, which will be July 1, 2005, for financial instruments entered intoall
share-based payments granted, modified or modifiedsettled after May 31, 2003, and otherwise is effective atJuly 1, 2005 as
well as for any awards that were granted prior to July 1, 2005 for which
the beginningrequisite service has not been provided as of July 1, 2005. We will
recognize compensation expense on awards granted subsequent to July 1, 2005
using the fair values determined by a valuation model prescribed by SFAS
123R. The compensation expense on awards granted prior to July 1, 2005 will
be recognized using the fair values determined for use in our pro forma
disclosures on stock-based compensation. The amount of compensation expense
that will be recognized on awards granted prior to July 1, 2005 that have
not fully vested will exclude the compensation expense cumulatively
recognized in our pro forma disclosures on stock-based compensation. Our
preliminary estimate of the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 did not have an impactcompensation expense that will be recorded in
2005 on our financial condition or results
of operations.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits,
that improves financial statement disclosures for defined benefit plans.
The change replaces existing SFAS No. 132 disclosure requirements for
pensions and other postretirement benefits and revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by
SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits. SFAS No. 132 retains the disclosure
requirements contained in the original SFAS No. 132, but requires
additional disclosures about the plan assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132 is effective for annual
and interim periods with fiscal years ending after December 15, 2003. We
have adopted the revised disclosure provisions as of December 31, 2003.
On December 17, 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which
supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB
No. 104's primary purpose is to rescind accounting guidance contained in
SAB No. 101 related to multiple element revenue arrangements. SAB No. 104unvested awards at July 1, 2005 will not have an impact on our recognition of revenue.
FORWARD-LOOKINGbe approximately $2.0 million.
CAUTIONARY STATEMENTS
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. TheseWe believe these
forward-looking statements are often identified bybased upon reasonable assumptions within the
words, "believe," "expect," "intend," "appear,"
"estimate," "anticipate," "project," "will" and other similar expressions.bounds of our knowledge of Cenveo. All such statements which address operating performance, events or
developments that we expect or anticipate will occur in the future and are
not historical in nature. All forward-looking statements reflect our
current views of Mail-Well with respect to future events and are subject toinvolve risks and
uncertainties. Actualuncertainties, and as a result, actual results maycould differ materially from
those expressedprojected, anticipated or implied inby these statements. As and when made, we believe that
theseSuch
forward-looking statements are reasonable; however, these statements involve known and unknown risks, including but
not limited to:
* Generalto, general economic, business and labor conditions
25
* Theconditions; the ability of the Company
to implement itsour strategic initiatives
* Theinitiatives; the ability to sustain profitability after substantial losses in 2002
and 2001
* The ability to successfully identify, manage or integrate possible
future acquisitions
* Salesbe profitable on a
consistent basis; dependence on sales that are not subject to long-term
contracts
* The industry is extremely competitive
* Thecontracts; dependence on suppliers; the ability to recover the rising cost
of key raw materials in markets that are highly price competitive; the
ability to meet customer demand for additional value-added products and
services; the ability to timely or adequately respond to technological
changes in the industry; the impact of the Internet and other electronic
media on the demand for envelopes and printed material
* Postage rates and other changes inmaterial; postage rates; the direct mail industry
* Environmental laws may affect our business
* The ability to retain key management personnel
* Compliance with recently enacted and proposed changes in laws and
regulations affecting public companies could be burdensome and
expensive
* Dependence on suppliers and the costs of paper and other raw
materials
* The ability of the company to meet customer demand for additional
value-added products and services
* Changes in interest rates and currency exchange rates of the Canadian
dollar
* The
ability to manage operating expenses
* The risk thatexpenses; the ability to manage financing costs
and interest rate risk; a decline in business volume orand profitability could
result in a further impairment of goodwill
* Thegoodwill; the ability to timelyretain key
management personnel; the ability to identify, manage or adequately respond to technologicalintegrate future
acquisitions; the costs associated with and the outcome of outstanding and
future litigation; and changes in our industry
* The ability to extend our current credit facility beyond 2005government regulations.
In view of such uncertainties, investors should not place undue
reliance on anyour forward-looking statements since such statements speak only
as of the date when made. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of operations
and financial position. Risks from interest rate fluctuations and changes
in foreign currency exchange rate fluctuationsrates are managed through normal operating and
financing activities. We do not utilize derivatives for speculative
purposes, nor do we hedge interest rate exposure through the use of swaps
and options or foreign exchange exposure through the use of forward
contracts.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At December
31, 2003 and 2002,2004, we had variable rate debt outstanding of $91.8 million
and $103.8 million, respectively.$93.4 million. A 1%
increase in LIBOR on the maximum amount of debt subject to variable
interest rates, which was $318.5$314.9 million,
in 2003 and $301.8 million in 2002, would increase our interest
expense by
$3.2 million in 2003 and $3.0 million in 2002 and reduce our net income by approximately $1.9 million in 2003 and 2002.$3.1 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar. 26
In 2004,
a uniform 10% strengthening of the U.S. dollar relative to the Canadian
dollar would have resulted in a decrease in sales and net income of
approximately $21.0 million and $2.8 million, respectively. The effects of
foreign currency exchange rates on future results would also be impacted by
changes in sales levels or local currency prices.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORSREGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
Mail-Well,Cenveo, Inc.
We have audited the accompanying consolidated balance sheets of Mail-Well,Cenveo,
Inc. and subsidiaries as of December 31, 20032004 and 2002,2003, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31,
2003.2004. Our audits also included the financial statement schedules for each
of the three years in the period ended December 31, 20032004 listed in the
Index at Item 15(a)(2). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States.Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Mail-Well,Cenveo, Inc. and subsidiaries at December 31, 20032004 and 2002,2003,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003,2004, in
conformity with accounting principlesU.S. generally accepted in the United
States.accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussedWe also have audited, in Note 2 toaccordance with the consolidatedstandards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Cenveo, Inc.'s internal control over financial statements,
effective January 1, 2002,reporting as of December 31,
2004, based on criteria established in Internal Control--Integrated
Framework issued by the Company adopted StatementCommittee of Financial
Accounting Standards No. 142, GoodwillSponsoring Organizations of the
Treadway Commission and Other Intangible Assets.our report dated February 28, 2005 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 4,28, 2005
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
Cenveo, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Cenveo, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, exceptbased 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 Note 19,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 whichprovide reasonable assurance regarding the datereliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Cenveo, Inc. maintained
effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Cenveo, Inc. maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31,
2004 of Cenveo, Inc. and our report dated February 23,28, 2005 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 28, 2005
24
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control
over financial reporting is a process designed under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of the Company's financial statements for external
reporting purposes in accordance with accounting principles generally
accepted in the United States.
Management has conducted an assessment of the effectiveness of the
Company's internal control over financial reporting based on the framework
established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2004 27
is effective.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of
assets; provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that
receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited
by Ernst and Young LLP, an independent registered public accounting firm,
as stated in their report appearing on page 24.
25
MAIL-WELL,CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------------
2004 2003 2002
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 307796 $ 2,650307
Accounts receivable, net................................ 252,711 223,541 219,924
Inventories, net........................................ 112,219 91,402
103,533
Net assets held for sale................................ -- 4,492
OtherDeferred income taxes................................... 15,911 18,652
Prepaids and other current assets.................................... 48,135 45,762assets....................... 30,108 29,483
---------- ----------
TOTAL CURRENT ASSETS................................ 411,745 363,385 376,361
Property, plant and equipment, net.......................... 367,260 388,240
379,624
Goodwill.................................................... 308,938 299,392 290,361
Other intangible assets, net................................ 28,788 19,687
18,586Deferred income taxes....................................... 19,730 4,053
Other assets, net........................................... 38,286 36,689 42,435
---------- ----------
TOTAL ASSETS............................................ $1,107,393 $1,107,367$1,174,747 $1,111,446
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 140,468172,731 $ 151,930140,468
Accrued compensation and related liabilities............ 58,639 53,209 53,292
Other current liabilities............................... 64,714 64,360 63,386
Current maturities of long-term debt.................... 2,270 2,575 2,961
---------- ----------
TOTAL CURRENT LIABILITIES........................... 298,354 260,612 271,569
Long-term debt.............................................. 767,499 746,386 760,938
Deferred income taxes....................................... 6,717 10,33610,971 10,770
Other liabilities........................................... 40,569 25,659 21,756
---------- ----------
TOTAL LIABILITIES....................................... 1,039,374 1,064,5991,117,393 1,043,427
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 25,000 shares
authorized, none issued............................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 48,380,45748,702,832 and 48,337,03148,380,457 shares issued
and outstanding as of December 31, 2004 and 2003,
and 2002,
respectively.......................................... 487 484 483
Paid-in capital......................................... 214,902 213,850 213,826
Retained deficit........................................ (170,039) (150,331) (155,481)
Deferred compensation................................... (2,003) (1,714) (2,471)
Accumulated other comprehensive income (loss)...........income.................. 14,007 5,730 (13,589)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......................... 57,354 68,019 42,768
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,107,393 $1,107,367$1,174,747 $1,111,446
========== ==========
See notes to consolidated financial statements.
28
26
MAIL-WELL,CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share amounts)
YEAR ENDED DECEMBER 31
--------------------------------------------
2004 2003 2002 2001
---------- ---------- ----------
Net sales.......................................... $1,742,914 $1,671,664 $1,728,705 $1,868,768
Cost of sales...................................... 1,393,521 1,337,118 1,385,361 1,481,135
---------- ---------- ----------
Gross profit....................................... 349,393 334,546 343,344 387,633
Operating expenses:
Selling, general and administrative............ 265,870 245,689 263,734 277,004
Amortization of intangibles.................... 5,381 1,899 2,237
16,197
Loss from the early extinguishment of debt..... -- 16,463 --
Impairment loss (gain) on assets held for sale.........................................sale............ -- (117) 6,436 --
Impairment on operations formerly held for
sale......................................... -- -- 12,842
36,523
Settlement of litigation....................... 5,330 -- 1,231
Restructuring, impairmentsimpairment and other charges... 1,530charges.... 5,407 6,860 74,551 41,854
---------- ---------- ----------
Operating income (loss)............................ 72,735 80,215 (32,919) 14,824(16,456)
Other expense:expenses:
Interest expense............................... 73,125 71,891 70,461
63,314Loss from the early extinguishment of debt..... 17,748 -- 16,463
Other.......................................... 2,459 1,819 1,754 1,923
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change in
accounting principle............................. (20,597) 6,505 (105,134)
(50,413)
ProvisionIncome tax expense (benefit) for income taxes...................................... 341 2,581 (31,646) (5,200)
---------- ---------- ----------
Income (loss) from continuing operations before
cumulative effect of a change in accounting
principle........................................ (20,938) 3,924 (73,488) (45,213)
Loss from discontinued operations.................. -- -- (2,982)
Gain (loss) on disposal of discontinued
operations....................................... 1,230 1,548 (16,868) (88,022)
Cumulative effect of a change in accounting
principle........................................ -- (322) (111,748) --
---------- ---------- ----------
Net income (loss).................................. $ (19,708) $ 5,150 $ (202,104) $ (136,217)
========== ========== ==========
Earnings (loss) per share--basic and diluted:
Continuing operations.......................... $ (0.44) $ 0.08 $ (1.54)
$ (0.95)
Discontinued operations........................ 0.03 0.04 (0.35) (1.91)
Cumulative effect of a change in accounting
principle.................................... -- (0.01) (2.35) --
---------- ---------- ----------
Earnings (loss) per share--basic and diluted... $ (0.41) $ 0.11 $ (4.24) $ (2.86)
========== ========== ==========
Weighted average shares--basic................. 47,750 47,687 47,665 47,562
Weighted average shares--diluted............... 47,750 48,315 47,665 47,562
See notes to consolidated financial statements.
29
27
MAIL-WELL,CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------------
2004 2003 2002
2001
----------- ----------- --------------------
Cash flows from operating activities:
Income (loss) from continuing operations..................operations................. $ (20,938) $ 3,924 $ (73,488) $ (45,213)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Depreciation.........................................Depreciation........................................ 47,602 46,069 47,818
47,199
Amortization.........................................Amortization (including amortization of deferred
financing fees included in interest)............. 9,959 5,883 7,635
22,203
Loss from the early extinguishment of debt...........Debt refinancing costs.............................. 17,748 -- 16,463
--
NoncashNon-cash portion of restructuring, impairment and
other charges.....................................charges.................................... 3,228 -- 42,282 47,596
Loss on assets held for sale.........................sale........................ -- -- 6,436 --
Deferred income tax expense (benefit)................benefit......................... (12,536) (10,854) (27,726) 5,063
Loss on disposal of assets...........................assets.......................... 686 1,221 346
1,241
Other noncashnon-cash expenses, net..........................net........................ 198 435 91 958
Changes in operating assets and liabilities, excluding
the effects of acquired businesses:
Accounts receivable..................................receivable................................. (23,283) 3,414 12,756
57,135
Inventories..........................................Inventories......................................... (18,122) 14,647 8,906 20,160
Accounts payable and accrued compensation............compensation........... 32,784 (15,417) (11,036)
24,942
Income taxes payable.................................payable................................ (1,663) 12,212 4,193 (5,824)
Other working capital changes........................changes....................... (711) (1,952) (7,130)
(3,359)
Other, net...........................................net.......................................... 3,039 (123) (4,575)
(1,166)
----------- ----------- --------------------
Net cash provided by operating activities...........activities.......... 37,991 59,459 22,971 170,935
Cash flows from investing activities:
Acquisitions, net of cash acquired....................acquired.................. (13,174) (2,800) (2,610)
(3,838)
Capital expenditures..................................expenditures................................ (27,435) (31,602) (30,896) (32,742)
Proceeds from divestitures, net.......................net..................... 2,000 3,864 122,330 --
Proceeds from sales of property, plant and
equipment...........................................equipment.......................................... 3,012 682 11,995
3,782
Purchase of investment................................ -- -- (100)
----------- ----------- --------------------
Net cash provided by (used in) investing
activities........................................activities....................................... (35,597) (29,856) 100,819 (32,898)
Cash flows from financing activities:
Decrease in accounts receivable financing facility.... -- -- (75,000)
Proceeds from exercise of stock options...............options............. 48 75 18 413
Proceeds from issuance of long-term debt..............debt............ 2,724,655 1,915,452 1,635,102 634,404
Repayments of long-term debt..........................debt........................ (2,703,847) (1,948,299) (1,726,718)
(699,522)
Capitalized loan fees.................................Payment of redemption premiums...................... (13,528) -- --
Debt issuance costs................................. (9,077) (484) (18,624)
(4,439)
----------- ----------- --------------------
Net cash used in financing activities...............activities.............. (1,749) (33,256) (110,222) (144,144)
Effect of exchange rate changes on cash and cash
equivalents................................................equivalents............................................... (156) 1,310 (985)
(73)
Cash flows provided by (used in)used in discontinued operations....operations................. -- -- (10,827)
6,612
----------- ----------- --------------------
Net increase (decrease) in cash and cash
equivalents.......................................equivalents...................................... 489 (2,343) 1,756 432
Cash and cash equivalents at beginning of year..............year............. 307 2,650 894
462
----------- ----------- --------------------
Cash and cash equivalents at end of year....................year................... $ 796 $ 307 $ 2,650
$ 894
=========== =========== ====================
See notes to consolidated financial statements.
30
28
MAIL-WELL,CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
ACCUMULATED
RETAINED OTHER TOTAL
COMMON PAID-IN EARNINGS DEFERRED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) COMPENSATION INCOME (LOSS) EQUITY
------ -------- --------- ------------ ------------- -------------
BALANCE AT DECEMBER 31, 2000.................. $474 $210,0672001.................. $483 $214,138 $ 182,84046,623 $(3,359) $(16,008) $ -- $ (7,528) $ 385,853
Comprehensive income (loss):
Net loss.................................... (136,217) (136,217)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $581.......................... (928) (928)
Currency translation adjustment........... (8,467) (8,467)
Unrealized loss on investments, net of tax
of $119.................................. 915 915
---------
Other comprehensive loss................ (8,480)
---------
Total comprehensive loss.............. (144,697)
Exercise of stock options..................... 2 411 413
Issuance of restricted shares................. 7 3,679 (3,686) --
Amortization of deferred compensation......... 327 327
Other......................................... (19) (19)
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2001.................. 483 214,138 46,623 (3,359) (16,008) 241,877
Comprehensive income (loss):
Net loss...................................... (202,104) (202,104)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $744............................ (1,190) (1,190)
Currency translation adjustment............. 3,609 3,609
---------
Other comprehensive income................ 2,419
---------
Total comprehensive loss................ (199,685)
Cancellation of restricted shares............. (1) (451) 452 --
Issuance of restricted shares................. 1 121 (122) --
Exercise of stock options..................... 18 18
Amortization of deferredunearned compensation......... 558 558
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2002.................. 483 213,826 (155,481) (2,471) (13,589) 42,768
Comprehensive income (loss):
Net income.................................... 5,150 5,150
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $1,996.......................... (3,188) (3,188)
Currency translation adjustment............. 22,507 22,507
---------
Other comprehensive income................ 19,319
---------
Total comprehensive loss................income.............. 24,469
Cancellation of restricted shares............. (1) (199) 102 (98)
Issuance of restricted shares................. 1 149 (150) --
Exercise of stock options..................... 1 74 75
Amortization of deferredunearned compensation......... 805 805
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2003.................. $484 $213,850 $(150,331) $(1,714)484 213,850 (150,331) (1,714) 5,730 68,019
Comprehensive income (loss):
Net loss...................................... (19,708) (19,708)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $1,186.......................... (1,892) (1,892)
Currency translation adjustment............. 10,169 10,169
---------
Other comprehensive income................ 8,277
---------
Total comprehensive loss................ (11,431)
Issuance of restricted shares................. 3 1,004 (1,007) --
Exercise of stock options..................... 48 48
Amortization of unearned compensation......... 718 718
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2004.................. $487 $214,902 $(170,039) $(2,003) $ 5,73014,007 $ 68,01957,354
==== ======== ========= ======= ======== =========
See notes to consolidated financial statements.
31
MAIL-WELL,29
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Mail-Well,Cenveo, Inc. and subsidiaries (collectively,
the "Company") are engaged in commercial printing, the printing and
manufacturing of envelopes and the printing and manufacturing of business
forms and labels. On April 29, 2004, the shareholders of the Company
approved the change of the Company's name from Mail-Well, Inc. to Cenveo,
Inc. The Company, headquartered in Englewood, Colorado, is organized under
Colorado law, and its common stock is traded on the New York Stock Exchange
under the symbol "MWL""CVO".
The consolidated financial statements include the accounts of Mail-Well,Cenveo,
Inc. and its wholly-owned subsidiaries. In October 2003, theThe Company reorganized into two business segments: commercial and resale.
Priorhas also consolidated a
variable interest entity pursuant to this reorganization, the Company was organized into three business
segments based on product lines: commercial printing, envelope and printed
office products. Refer to Note 17 for disclosures related to the Company's
operating segments.Financial Accounts Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). All
significant intercompany accounts and transactions have been eliminated and
all amounts and disclosures reflect the Company's continuing operationsoperations.
The Company's reporting periods for 2004, 2003 and 2002 in this report
consist of 53-, 52- and 52-week periods, respectively, ending on the Company's new segment reporting.Saturday
closest to the last day of the calendar month. The reporting periods for
2004, 2003 and 2002 ended January 1, 2005, December 28, 2003 and December
27, 2002, respectively. For convenience, the accompanying financial
statements have been shown as ending on December 31.
USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Estimates
and assumptions are used for, but not limited to, establishing the
allowance for doubtful accounts, inventory valuation reserves, depreciation
and amortization, asset impairment evaluations, tax assets and liabilities,
self-insurance accruals and other contingencies. Actual results could
differ from those estimates.
REVENUE RECOGNITION. Revenue is recognized at the time product is
shipped or title passes pursuant to the terms of the agreement with the
customer, the amount due from the customer is fixed, and collectibility of
the related receivable is reasonably assured.
FREIGHT COSTS. The costs of delivering finished goods to the Company's
customers are recorded as freight costs and included in cost of sales. Any
freight costs billed to and paidestimates made by a customer are included in net sales.
ADVERTISING COSTS. All advertising costs are expensed as incurred.
Advertising costs were $5.7 million, $6.0 million and $6.5 million for the
years ended December 31, 2003, 2002 and 2001, respectively.management.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on
deposit and investments with original maturities of three months or less.
Cash and cash equivalents are stated at cost, which approximates fair
value.
ACCOUNTS RECEIVABLE. Trade accounts receivable are recorded at the
invoiced amount. The Company maintains a valuation allowance based upon the
expected collectibility of accounts receivable. AccountUncollected account
balances are charged to the allowance after all means of collection have
been exhausted and the potential for recovery is remote. Allowances for
losses on accounts receivable of $4.0$4.7 million and $4.7$4.0 million have been
applied as reductions of accounts receivable at December 31, 20032004 and 2002,2003,
respectively.
INVENTORIES. Inventories are carried at the lower of cost or market,
with cost determined on a first-in, first-out basis. Cost includes
materials, labor and overhead. The Company estimates of reserves for unsaleable
inventory are based on management's judgment of future realization.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated
at cost. When assets are retired or otherwise disposed of, the related
costs and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations. Expenditures for repairs
and maintenance are charged to expense as incurred, and expenditures that
increase the capacity, efficiency 32
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or useful lives of existing assets are
capitalized. The recoverability of
property, plant and equipment is periodically reviewed by management based
on current and anticipated conditions.
Depreciation is calculated using the straight-line method based on the
estimated useful lives of 15 to 45 years for buildings and building
improvements, 10 to 15 years for machinery and equipment and three to 10
years for furniture and fixtures.
30
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE. The Company develops and purchases software for
internal use. Software development costs incurred during the application
development stage are capitalized. Once the software has been installed and
tested and is ready for use, additional costs incurred in connection with
the software are expensed as incurred. Capitalized computer software costs
are amortized over the estimated useful life of the software, usually
between three and fiveseven years. Net computer software costs included in
property, plant and equipment were $8.7$11.6 million and $7.5$8.7 million at
December 31, 20032004 and 2002,2003, respectively.
DEBT ISSUANCE COSTS. Direct expenses such as legal, accounting and
underwriting fees incurred to issue debt, are reportedincluded in other assets in
the consolidated balance sheets as other assets. These deferred financing fees, whichsheets. The debt issuance costs were $15.6$16.3 million
and $18.9$15.6 million at December 31, 20032004 and 2002,2003, respectively, net of
accumulated amortization, and are amortized over the term of the related
debt as interest expense. Interest expense includes $4.4 million, $4.0
million and $5.4 million of debt issuance costs amortized in 2004, 2003 and
$6.0 million of amortized deferred financing fees
for the years ended December 31, 2003, 2002, and 2001, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of
acquisition costs over the fair value of net assets of businesses acquired.
Goodwill was amortized on a straight-line basis over 40 years prior to
2002. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is no longer amortized to earnings,
but instead is reviewed annually to determine if there is an impairment, or
more frequently, if an indication of possible impairment exits.exists. The Company
performedperforms its annual impairment assessments in the fourth quartersquarter of 2003 and
2002 and concluded that there was no impairment of goodwill other than the
year. The transitional impairment recognized in 2002 upon the adoption of
SFASStatement of Financial Accounting Standards ("SFAS") No. 142. Refer
to Note 2 for disclosures related to the adoption of SFAS No. 142.142, Goodwill and
Other Intangible Assets was $111.7 million. No additional impairment
charges were recorded in 2004 or 2003.
Other intangible assets primarily arise from the purchase price
allocations of businesses acquired and are based on independent appraisals
or internal estimates andestimates. Intangible assets with determinable lives are
amortized on a straight-line basis over appropriate periods.the estimated useful life assigned
to these assets. Intangible assets that are expected to generate cash flows
indefinitely are not amortized but are evaluated for impairment similarly
to goodwill.
LONG-LIVED ASSETS. Long-lived assets, including property, plant and
equipment, and intangible assets with determinable lives, are evaluated for
impairment on
the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable, as measured by comparing their net book value tofully recoverable. An impairment is
assessed when the estimatedundiscounted expected future undiscounted cash flows generatedderived from an
asset are less than its carrying amount. Impairment losses are recognized
for the amount by their use. Impaired assets are
written down to their estimated fair market value. Assets to be disposed of
are reported at the lower ofwhich the carrying value or theof an asset exceeds its fair
market value
less costs to sell.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 developedfully-developed basis. The Company's liability for
health insurance claims includes an estimate for claims incurred but not
reported.
REVENUE RECOGNITION. The Company recognizes revenue when persuasive
evidence of an arrangement exists, product delivery has occurred or
services have been rendered, pricing is fixed or determinable, and
collection is reasonably assured. The Company records revenue to a lesser
extent on a bill and hold basis when requested by the customer. Revenue is
recognized on bill and hold transactions when the customer is invoiced for
goods that have been produced, packaged and made ready for shipment. These
goods are segregated from inventory which is available for sale, the risk
of ownership of the goods is assumed by the customer, and the terms and
collection experience on the related billings are consistent with all other
sales.
31
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Since a significant portion of the Company's products are customer
specific, it is common for customers to inspect the quality of the product
at the Company's facility prior to its shipment. Products shipped are not
subject to contractual right of return provisions.
The Company has rebate agreements with certain customers. These rebates
are recorded as reductions of sales and are accrued using sales data and
rebate percentages specific to each customer agreement.
FREIGHT COSTS. The costs of delivering finished goods to customers are
recorded as freight costs and included in cost of sales. Freight costs that
are included in the price of the product are included in net sales.
ADVERTISING COSTS. All advertising costs are expensed as incurred.
Advertising costs were $5.5 million, $5.7 million and $6.0 million in 2004,
2003 and 2002, respectively.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of subsidiaries
operating outside the United States with a functional currency other than
the U.S. dollar are translated at year-end exchange rates. The effects of
translation are included as a component of other comprehensive income.
Income and expense items are translated at the average monthly rate.
Foreign currency transaction gains and losses are recorded in income when
realized.
33
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)income.
STOCK-BASED COMPENSATION. Stock options and other stock-based
compensation awards are accounted for using the intrinsic value method
prescribed by Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees. This method requires compensation expense to be
recognized for the excess of the quoted market price of the stock at the
grant date or the measurement date over the amount an employee must pay to
acquire the stock.
If the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, the Company's reported and pro forma
net income (loss) and earnings (loss) per share would have been as follows
(in thousands, except per share data):
DECEMBER 31
--------------------------------------2004 2003 2002
2001-------- ------ --------- ---------
Net income (loss):
As reported....................................., as reported......................... $(19,708) $5,150 $(202,104)
$(136,217)Add: stock-based compensation expense included in
reported net income, net of related tax
benefits in 2003 and 2002...................... 718 420 410
Less: stock-based compensation expense determined
under fair value method for all awards, net of
related tax benefit in 2003 and 2002........... 4,952 3,620 4,053
-------- ------ ---------
Pro forma.......................................forma net income (loss)............................ $(23,942) $1,950 $(205,747)
$(140,587)======== ====== =========
Earnings (loss) per share--basic and diluted:
As reported.....................................reported...................................... $ (0.41) $ 0.11 $ (4.24)
Pro forma........................................ $ (2.86)
Pro forma.......................................(0.50) $ 0.04 $ 0.04 $ (4.32) $ (2.96)(4.32)
32
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the fair value per share information,
including related assumptions, used to determine stock-based compensation
expense consistent with the requirements of SFAS No. 123. The estimated
fair value per share was determined on the date of grant using the
Black-Scholes option-pricing model.
2004 2003 2002
----- ----- -----
Weighted average fair value per share of options
granted during the year............................... $2.22 $1.39 $1.16
Assumptions:
Dividend yield.................................... 0.0% 0.0% 0.0%
Volatility........................................ 69.6% 73.0% 71.0%
Risk-free rate of return.......................... 3.1% 2.6% 3.0%
Expected life (years)............................. 5 5 5
The effect on reported net income (loss), earnings (loss) per share of
expensing the estimated fair value of stock options is not necessarily
representative of the effect on reported earnings for future years due to
the vesting period of the stock options and the potential for issuance of
additional stock options in future years.
Refer to Note 13 for the
assumptions used to compute the pro forma amounts.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS. The Company adopted SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, on January 1, 2003. The
provisions of SFAS No. 145 required the reclassification of the loss from
the early extinguishment of debt that was recorded as an extraordinary item
in 2002 into income from continuing operations and the restatement of the
consolidated statement of operations for the year ended December 31, 2002.
The table below is a reconciliation of loss per share for the year
ended December 31, 2002 as originally reported and the loss per share as
restated.
DECEMBER 31, 2002
AS ORIGINALLY IMPACT OF DECEMBER 31, 2002
REPORTED SFAS 145 RESTATED
----------------- --------- -----------------
Loss per share--basic and diluted:
Continuing operations.......................... $(1.33) $(0.21) $(1.54)
Discontinued operations........................ (0.35) -- (0.35)
Extraordinary items............................ (0.21) 0.21 --
Cumulative effect of a change in accounting
principle.................................... (2.35) -- (2.35)
------ ------ ------
Loss per share................................. $(4.24) $ -- $(4.24)
====== ====== ======
In April 2003,November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 149, Amendment151, Inventory
Costs--an amendment of Statement 133 on Derivative Instruments and
Hedging Activities.ARB No. 43 Chapter 4. This statement amends SFAS No. 133 to provide
clarification on the financial accountingrequires
abnormal production costs such as idle facility expense, excessive
spoilage, rehandling costs and reporting of derivative
34
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
instruments and hedging activities and requires contracts with similar
characteristicsabnormal freight to be accounted forexcluded from
inventory costing and treated as period expenses. In addition, this
standard requires the allocation of fixed production overhead to be based
on a comparable basis.normal capacity of the production facility. The Company does not expect
the adoption of SFAS No. 149, which is effective for contracts entered into or modified
after June 30, 2003, did notthis standard in 2005 to have an impacta significant effect on the Company's financial
condition or results of operations.its
results.
In May 2003,December 2004, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics123 (revised 2004),
Share-Based Payment: an amendment of both LiabilitiesFASB Statements No. 123 and Equity.
95 ("SFAS
No. 150 establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and equity.123R"). SFAS No. 150 is effective123R requires all share-based payments to employees,
including grants of stock options, to be recognized in the financial
statements based on their fair value. The Company expects to implement SFAS
123R in the third quarter of 2005 and use the modified-prospective
transition method of implementation. Under the modified-prospective
transition method, the Company will recognize compensation expense in the
financial statements issued subsequent to the date of adoption, which will
be July 1, 2005, for financial instruments entered intoall share-based payments granted, modified or modifiedsettled
after May 31, 2003, and otherwise is effective atJuly 1, 2005 as well as for any awards that were granted prior to
July 1, 2005 for which the beginningrequisite service has not been provided as of
July 1, 2005. The Company will recognize compensation expense on awards
granted subsequent to July 1, 2005 using the fair values determined by a
valuation model prescribed by SFAS 123R. The compensation expense on awards
granted prior to July 1, 2005 will be recognized using the fair values
determined for the pro forma disclosures on stock-based compensation. The
amount of compensation expense that will be recognized on awards that have
not fully vested will exclude the compensation expense cumulatively
recognized in the pro forma disclosures on stock-based compensation. The
Company's preliminary estimate of the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 did not have an impact on the Company's financial condition or
results of operations.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits,compensation expense that improves financial statement disclosures for defined benefit plans.
The change replaces existing SFAS No. 132 disclosure requirements for
pensions and other postretirement benefits and revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by
SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits. SFAS No. 132 retains the disclosure
requirements contained in the original SFAS No. 132, but requires
additional disclosures about the plan assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132 is effective for annual
and interim periods with fiscal years ending after December 15, 2003. The
Company adopted the revised disclosure provisions as of December 31, 2003.
On December 17, 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which
supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB
No. 104's primary purpose is to rescind accounting guidance contained in
SAB No. 101 related to multiple element revenue arrangements. The adoption
of SAB No. 104 did not have an impact on the Company's recognition of
revenue.
2. CHANGES IN ACCOUNTING PRINCIPLES
FASB Interpretation No. 46 Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin No. 51, ("FIN 46") issued
in January 2003 introduced a new consolidation model, the variable interest
model, which determines control and whether an entity is to be consolidated
based on potential variability in gains and losses of the entity. Variable
interests are contractual, ownership or other interests in an entity that
expose its holders to the risks and rewards of the variable interest entity
("VIE"). Variable interests include equity investments, loans, leases,
derivatives, guarantees and other instruments whose values change with
changes in the VIE's assets.
The Company leases printing equipment from a bankruptcy-remote trust
(the "Trust") under an operating lease. At the end of the lease, the
Company has the option to purchase the equipment for the aggregate
outstanding loan balance of the Trust or to direct the sale of the
equipment to a third party. If the Company were to direct the sale of the
equipment, it has guaranteed the Trust that the proceeds from the sale will be
recorded in 2005 on unvested awards at least 60.9% of the original fair value of the leased assets which
couldJuly 1, 2005 will be as much as $11.6approximately
$2.0 million.
If the sales proceeds exceed the
guaranteed value of the leased assets, the Company retains the excess.
The Company is the primary beneficiary of this Trust, a VIE, and is
therefore required by FIN 46 to consolidate the Trust in its financial
statements. The Company adopted FIN 46 effective January 1, 2003 and
consolidated equipment valued at $18.1 million, net of accumulated
depreciation, and debt of
35
MAIL-WELL,33
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN ACCOUNTING PRINCIPLES
(CONTINUED)The Company adopted FIN 46 on January 1, 2003. FIN 46 required the
consolidation of a trust that was leasing equipment to the Company. The
Company is the primary beneficiary of this trust since it is subject to the
majority of the risk of loss from the activities of the trust. The Company
consolidated equipment valued at $18.1 million, net of accumulated
depreciation, and debt of $18.5 million and recorded a non-cash after-tax
charge of $0.3 million net of tax, as a cumulative effect of a change in accounting
principle in the consolidated statement of operations for 2003. The
consolidation of the year ended December 31, 2003.debt and equipment of the trust did not impact the
cash flows of the Company.
The Company adopted SFAS No. 142 on January 1, 2002. Under SFAS No.
142, goodwill and intangible assets that have indefinite useful lives are
no longer required to be amortized. Goodwill and intangible assets that
have indefinite useful lives, however, must be tested annually for
impairment.
In the year of its adoption, SFAS No. 142 required a transitional
goodwill impairment evaluation, which was a two-step process. The first
step was to determine whether there was an indication that goodwill was
impaired on January 1, 2002. SFAS No. 142 required a separate impairment
evaluation of each of the Company's reporting units, which the Company
determined to be the same as its operating segments. To perform the first
step, the fair value of each reporting unit was estimated by discounting
the expected future cash flows and using market multiples of comparable
companies. The fair value of each reporting unit was compared to its
carrying value, including goodwill. This first step evaluation indicated an
impairment of the goodwill recorded by the Company's commercial printing
operations.operations (formerly the commercial printing segment).
Since the first step indicated an impairment of the goodwill of the
commercial printing operations, SFAS No. 142 required a second step to
determine the amount of the impairment. The amount of the impairment was
determined by comparing the implied fair value of this goodwill to its
carrying value. The implied fair value of the goodwill was determined by
allocating the fair value of the combined assets and liabilities of the
commercial printing operations as if these operations had been acquired and
the fair value was the purchase price. The excess "purchase price" over the
amounts assigned to the assets and liabilities was the implied value of
goodwill. The carrying amount of the goodwill exceeded the implied value by
$111.7 million, which was recorded as a cumulative effect of a change in
accounting principle in the consolidated statement of operations for the
year ended December 31, 2002.
The impairment loss on the goodwill recorded by the commercial printing
operations (formerly the commercial printing
segment) was due to the significant decline in the performance of these
operations in 2001 and the impact of that decline on expected future cash
flows.
3. ACQUISITIONS
Acquisitions are accounted for under the purchase method of accounting;
accordingly, the assets and liabilities of the acquired businesses have
been recorded at estimated fair value at the date acquired with the excess
of the purchase price over the estimated fair value recorded as goodwill.
In July 2004, the Company purchased the stock of Valco Graphics Inc., a
commercial printing company in Seattle, Washington with annual sales of
approximately $18.0 million. The following table summarizespurchase price was $9.6 million with $5.1
million allocated to tangible net assets and $4.5 million allocated to
goodwill. The Company is consolidating Valco Graphics Inc. with its
existing commercial printing operation in Seattle and will operate the
Company's income (loss) from
continuing operations before cumulative effectcombined entity as Cenveo, Seattle.
In August 2004, the Company purchased the assets of WWP Property
Management, Inc., a changecommercial printing company in accounting
principleSan Francisco,
California with annual sales of approximately $14.0 million. The purchase
price was $2.8 million with $2.7 million allocated to tangible net assets
and earnings (loss) per share had$0.1 million allocated to goodwill. The Company has consolidated this
operation with its existing commercial printing operation in San Francisco
and is operating the provisions of SFAS No. 142
been in effect on January 1, 2001 (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31
------------------------------------
2003 2002 2001
------ -------- --------
Reported income (loss) from continuing operations before
cumulative effect of a change in accounting principle... $3,924 $(73,488) $(45,213)
Goodwill amortization, net of tax of $1.9 million in
2001.................................................... -- -- 12,923
------ -------- --------
Adjusted income (loss) from continuing operations
before cumulative effect of a change in accounting
principle........................................... $3,924 $(73,488) $(32,290)
====== ======== ========
Diluted earnings (loss) per share--as reported............ $ 0.08 $ (1.54) $ (0.95)
Diluted earnings (loss) per share--as adjusted............ $ 0.08 $ (1.54) $ (0.68)
36
MAIL-WELL,combined entity as Cenveo, San Francisco.
34
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
The following table summarizes the Company's net income (loss) and
earnings (loss) per share had the provisions of SFAS No. 142 been in effect
on January 1, 2001 (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
------ --------- ---------
Reported net income (loss).............................. $5,150 $(202,104) $(136,217)
Goodwill amortization, net of tax of $1.9 million in
2001.................................................. -- -- 12,923
------ --------- ---------
Adjusted net income (loss).......................... $5,150 $(202,104) $(123,294)
====== ========= =========
Diluted earnings (loss) per share--as reported.......... $ 0.11 $ (4.24) $ (2.86)
Diluted earnings (loss) per share--as adjusted.......... $ 0.11 $ (4.24) $ (2.59)
3. ACQUISITIONS (CONTINUED)
In August 2002, the Company acquired the in-house printing and
fulfillment operations of American Express Company, located in Minneapolis,
Minnesota, forCompany. The purchase price was
$19.1 million of which $1.3 million with additional consideration of up to $17.0
million payable if annual revenues during each year of the five-year period
commencing on January 1, 2003 total a specified amount. The Companywas paid additional consideration ofin 2002, $2.8 million in 2003. All additional
consideration paid2003
and $3.2 million in 2004. The remaining purchase price, which was accrued
in 2004, will be recorded as an identified intangible. This
acquisition has been accounted for as a purchase; accordingly, its assetspaid in annual amounts through 2007 and liabilities have been recorded at estimated fair value withreflected in the
excessstatements of thecash flows when paid. The purchase price was allocated as
follows: $1.3 million to tangible net assets, $0.8 million to goodwill and
$17.0 million to a customer-related intangible asset that is being
amortized over the estimated fair value recorded as goodwill.term of a service agreement that expires at the end of
2007.
The consolidated financial statements reflect the operationsresults of thethese acquired business since August 2002. The total amount of goodwill related
to this acquisition at December 31, 2003 was $0.8 million. Salesbusinesses have been included in the
years ended December 31, 2003consolidated results of the Company from their respective acquisition dates.
Pro forma results for 2004 and 2002, were $64.5 million and $11.9
million, respectively.
In January 2001,assuming these acquisitions had been
made at the Company acquired Communigraphics, Inc., a
commercial printing and fulfillment operation in Denver, Colorado for $3.8
million. This acquisition was also recorded as a purchase.beginning of the applicable year, would not be materially
different from results reported.
4. DISCONTINUED OPERATIONS
In June 2001, the Company announced plans to sell its prime label and
printed office products operating segments. The printed office products
segment was comprised of two separate businesses, Curtis 1000 and
PrintXcel. In June 2002, the Company decided that it would not sell
PrintXcel. The prime label segment and Curtis 1000 have been segregated
from continuing operations and reported as discontinued operations for all
periods presented. On February 22, 2002,September 2000, the Company sold the stockextrusion coating and
laminating business segment of Curtis 1000American Business Products, Inc., a company
acquired in February 2000. The consideration received for $40.0 million, includingthis business
included an unsecured note which was fully reserved at the assumptiontime of debt. On May 21,
2002, the
Company soldsale. This note was redeemed by the prime label operating segmentissuer in June 2004 for $75.0$2.0 million.
The lossproceeds, net of tax, have been recorded as a gain on disposal of
discontinued operations for the year ended
December 31, 2001 of $88.0 million included adjustments to record the prime
label segment and Curtis 1000 at net realizable value. These adjustments
were based on estimated sales proceeds, estimates of the expenses
associated with the sales of the two businesses and the estimated losses of
each business through the expected date of disposition. Management based
its estimates of the sales proceeds on data provided by its financial
advisors and indications of value received from prospective buyers.
The additional loss of $16.9 million on disposal of discontinued
operations recorded for the year ended December 31, 2002 was based on
actual proceeds which were less than expected, actual expenses which were
greater than originally estimated and the tax benefit of the losses which
was less than originally estimated. In addition, the cumulative translation
adjustment which related to the
37
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISCONTINUED OPERATIONS (CONTINUED)
investment in the foreign operations of the prime label segment in the
amount of $2.8 million was charged to the loss on disposal of discontinued
operations as a result of the sale of these foreign subsidiaries.2004.
The gain on disposal of discontinued operations recorded for the year
ended December 31, 2003
reflects a change in the tax impact of the disposition of the Company's
prime label business, which was sold in May 2002. This gain was partially
offset by the accrual of additional expenses related to the sale.
In 2002, the Company sold Curtis 1000 for $40.0 million, including the
assumption of debt, and the prime label operating segment for $75.0 million.
Curtis 1000 and the prime label business were segregated from continuing
operations and reported as discontinued operations in 2001. The loss of
$16.9 million on disposal of discontinued operations recorded in 2002 was
based on actual proceeds which were less than expected, actual expenses
which were greater than originally estimated and the tax benefit of the
losses which was less than originally estimated.
Interest expense was allocated to the operating results and included in
the calculation of the loss on disposal of discontinued operations based
upon the relative net assets of the prime label business and Curtis 1000.
This allocation of interest expense totaled $5.6 million and $15.6 million
for the years ended December 31, 2002 and 2001, respectively.in 2002. Tax
benefits allocated to discontinued operations based on the losses of these
operations werewas $1.6 million and $1.7 million for the years ended December
31, 2002 and 2001, respectively.in 2002.
Operating results of the discontinued operations are summarized as
follows (in thousands):
YEAR ENDED DECEMBER 31
---------------------------------------2004 2003 2002 2001
-------- -------- ---------
Net sales:
Prime label....................................... $ -- $ 84,758 $ 219,182
Curtis 1000....................................... -- 22,788 171,148
-------- -------- ---------
$ -- $107,546 $ 390,330
======== ======== =========
Loss from operations:
Prime label........................................ $ -- $ -- $ (1,028)84,758
Curtis 1000........................................ -- -- (3,588)
-------- -------- ---------
-- -- (4,616)
Income tax benefit................................. -- -- 1,63422,788
-------- -------- ---------
$ -- $ -- $ (2,982)107,546
======== ======== =========
Gain (loss) on disposal of discontinued operations:
Prime label........................................ $ -- $ (830) $(16,299) $ (87,062)(16,299)
Curtis 1000........................................ -- 139 (1,028)
(36,395)Jen Coat........................................... 2,000 -- --
-------- -------- ---------
2,000 (691) (17,327)
(123,457)
Income tax benefit.................................benefit (expense)....................... (770) 2,239 459 35,435
-------- -------- ---------
$ 1,230 $ 1,548 $(16,868) $ (88,022)(16,868)
======== ======== =========
In connection with the proposed divestiture of the Company's PrintXcel
business in 2001, the Company reduced the carrying amounts of the net
assets of PrintXcel by $33.6 million to the expected net realizable value
based on estimated proceeds, net of expenses associated with its sale and a
tax benefit of $11.5 million that would have resulted from the sale. As a
result of the Company's decision in June 2002 not to sell PrintXcel, it
reversed the tax benefit because it would not be realized and $1.1 million
of expenses related to the sale that had been accrued but not incurred. The
$33.6 million charge in 2001 and the $10.4 million charge in 2002 have been
included in "Impairment on operations formerly held for sale" in the
consolidated statements of operations.
38
MAIL-WELL,35
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ASSETS HELD FOR SALEOTHER DIVESTITURES
The Company sold the filing products division of the resale segment in
August 2002 and certain digital graphics operations of the commercial
segment in March 2003. The following table presents the sales and operating
income of these operations (in thousands):
YEAR ENDED DECEMBER 31
----------------------------------
2003 2002 2001
------
------- -------
Sales................................................. $2,872Net sales............................................... $ 2,872 $56,445
$89,950
Operating income......................................income........................................ $ 167 $ 3,304 $ 8,2383,301
The assets of operations held for sale at December 31, 2002 totaled
$5.9 million and are reported net of $1.4 million of related liabilities as
"Net assets held for sale" in the consolidated balance sheet.
In 2001, the digital graphics operations were written down $2.9
million to estimated fair market value based on sales proceeds anticipated
at the time. In 2002, the Company recorded another impairment chargea loss of $2.8 million based on a change in the estimated sales proceeds. Subsequent
to this write-down, management discontinued its efforts to sell one of the
digital graphics operations originally held for sale. The $2.9 million
impairment charge recorded in 2001 has been included in impairment on
operations formerly held for sale in the consolidated statement of
operations for the year ended December 31, 2001. The impairment on
operations formerly held for sale in the consolidated statement of
operations for the year ended December 31, 2002 includes $2.5 million of
the $2.8 million impairment charge recorded in 2002. The remaining $0.3
million of the write-down was recorded as an impairment of the operations
held for sale.
A $6.1 million impairment charge was recorded in 2002 as a result of the
sale of the filing products division.division and an impairment charge of $0.3
million on the digital graphics operations that were held for sale at
December 31, 2002.
6. IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE
In 2001, a business that is now part of the resale segment, was held
for sale and reported as a discontinued operation. In 2002, the Company
discontinued its efforts to sell this business. Accordingly, the tax
benefit of $11.5 million expected to be realized upon the sale that had
been recorded in 2001 was written off and expenses of $1.1 million that had
been accrued but not incurred were reversed. In 2002, the Company also
discontinued its efforts to sell a digital graphics operation that was held
for sale at the end of 2001 and recorded an impairment charge of $2.4
million.
7. INVENTORIES
The Company's inventories by major category arewere as follows (in
thousands):
DECEMBER 31
----------------------
2004 2003
2002-------- ------- --------
Raw materials......................materials........................................... $ 36,440 $28,344 $ 32,515
Work in process....................process......................................... 30,357 21,483
25,832
Finished goods.....................goods.......................................... 50,122 46,570
50,854-------- -------
116,919 96,397
Reserves................................................ (4,700) (4,995)
-------- 96,397 109,201
Reserves........................... (4,995) (5,668)
-------
--------Inventories, net........................................ $112,219 $91,402
$103,533======== ======= ========
39
MAIL-WELL,36
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.8. PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consistsconsisted of
the following (in thousands):
DECEMBER 31
-------------------------
2004 2003 2002
--------- ---------
Land and land improvements.............................. $ 20,04319,457 $ 19,52920,043
Buildings and improvements.............................. 109,889 109,563 105,646
Machinery and equipment................................. 532,470 511,820 463,896
Furniture and fixtures.................................. 13,997 15,986 15,178
Construction in progress................................ 9,806 9,696 5,510
--------- ---------
685,619 667,108 609,759
Accumulated depreciation................................ (318,359) (278,868) (230,135)
--------- ---------
Property, plant and equipment, net...................... $ 367,260 $ 388,240 $ 379,624
========= =========
8.9. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended
December 31,2004 and 2003 and 2002by
reportable segment were as follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ----------------- ---------
Balance as of January 1, 2002.........................2003......................... $ 299,233 $100,668189,889 $ 399,901
Goodwill acquired during the year................... 1,750 -- 1,750
Impairment losses................................... (111,748) -- (111,748)
Impairment on assets formerly held for sale......... (2,435) -- (2,435)
Other - primarily translation adjustments........... 3,110 (217) 2,893
--------- -------- ---------
Balance as of December 31, 2002....................... $ 189,910 $100,451100,472 $ 290,361
Purchase price adjustment...........................adjustments.......................... -- (302) (302)
Foreign currency translation........................ 9,333 -- 9,333
--------- ----------------- ---------
Balance as of December 31, 2003....................... 199,222 100,170 299,392
Acquisitions........................................ 4,583 -- 4,583
Foreign currency translation........................ 4,963 -- 4,963
--------- --------- ---------
Balance as of December 31, 2004....................... $ 199,243 $100,149208,768 $ 299,392100,170 $ 308,938
========= ================= =========
The following is a summary of other intangible assets (in thousands):
DECEMBER 31, 2003
---------------------------------------------
ACCUMULATED
LIFE (YEARS) GROSS AMOUNT AMORTIZATION NET
------------ ------------ ------------ -------
Trademarks and tradenames......... 40-43 $14,238 $1,377 $12,861
Non-compete agreements............ 5-7 7,562 6,581 981
Customer relationship............. 4 2,800 -- 2,800
Patents........................... 7-14 2,438 669 1,769
Other............................. 5-40 1,970 694 1,276
------- ------ -------
Total.......................... $29,008 $9,321 $19,687
======= ====== =======
40
MAIL-WELL,37
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.9. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Other intangible assets consisted of the following (in thousands):
DECEMBER 31,
2002
-------------------------------------------------------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
GROSS NET GROSS NET WEIGHTED
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING AVERAGE
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT LIFE (YEARS)
GROSS AMOUNT AMORTIZATION NET-------- ------------ -------- -------- ------------ -------- ------------ -------
INTANGIBLE ASSETS
WITH DETERMINABLE
LIVES:
Trademarks and
tradenames......... 40-43tradenames....... $14,238 $ 987 $13,251(1,736) $12,502 $14,238 $ (1,377) $12,861 40
Non-compete
agreements............ 5-7agreements....... 4,366 (4,194) 172 7,562 5,533 2,029
Patents........................... 7-14 2,408 479 1,929
Other............................. 5-40 1,841 464 1,377(6,581) 981 8
Customer
relationship..... 17,006 (4,000) 13,006 2,800 -- 2,800 4
Patents............ 2,428 (836) 1,592 2,438 (669) 1,769 12
Other.............. 1,049 (566) 483 1,250 (694) 556 26
------- -------------- ------- Total.......................... $26,049 $7,463 $18,586------- -------- -------
39,087 (11,332) 27,755 28,288 (9,321) 18,967
INTANGIBLE ASSETS
WITH INDEFINITE
LIVES:
Pollution
Credits.......... 720 -- 720 720 -- 720
Trademark.......... 313 -- 313 -- -- --
------- -------- ------- ------- -------- -------
1,033 -- 1,033 720 -- 720
------- -------- ------- ------- -------- -------
Total................ $40,120 $(11,332) $28,788 $29,008 $ (9,321) $19,687
======= ============== ======= ======= ======== =======
The estimated amortization expense for each of the succeeding five
years is as follows: $5.6$5.4 million, $0.7$5.4 million, $0.5$5.4 million, $0.5$1.0 million
and $0.5$1.0 million.
9. ACCUMULATED10. OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss)CURRENT LIABILITIES
Other current liabilities consisted of the following (in thousands):
DECEMBER 31
-------------------------------------------
2004 2003
2002
------- ---------------
Accrued rebates......................................... $19,914 $ 9,000
Accrued interest........................................ 15,350 14,461
Accrued taxes........................................... 8,360 9,827
Accrued legal settlement................................ -- 5,330
Customer deposits....................................... 3,540 3,550
Other accrued liabilities............................... 17,550 22,192
------- -------
Other current liabilities............................... $64,714 $64,360
======= =======
38
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in
thousands):
DECEMBER 31
---------------------
2004 2003
------- -------
Currency translation adjustment........................adjustments........................ $21,351 $11,182 $(11,325)
Pension liability adjustment...........................adjustments, net of tax benefit....... (7,344) (5,452)
(2,264)
------- ---------------
Accumulated other comprehensive income.................. $14,007 $ 5,730
$(13,589)
======= ===============
10.12. LONG-TERM DEBT
At December 31, 2003 and 2002, long-termLong-term debt consisted of the following (in thousands):
DECEMBER 31
-------------------------
2004 2003 2002
-------- --------
Senior Secured Credit Facility, due 2005...............2008................ $ 78,441 $ 73,310
$101,932
Senior 9 5/8% Notes, due 2012.................................2012........................... 350,000 350,000
Senior 7 7/8% Subordinated Notes, due 2008....................2013.............. 320,000 --
Senior 8 3/4% Subordinated Notes, due 2008.............. -- 300,000
300,000
Other..................................................Other................................................... 21,328 25,651 11,967
-------- --------
769,769 748,961 763,899
Less current maturities................................. (2,270) (2,575) (2,961)
-------- --------
Long-term debt.......................................... $767,499 $746,386 $760,938
======== ========
Current maturities consist of scheduled payments on other long-term
debt.
On February 4, 2004, the Company sold $320,000,000 of 7 7/8% senior
subordinated notes due 2013 ("New Senior Subordinated Notes"). The proceeds
of the New Senior Subordinated Notes will be used to purchase the
$300,000,000 of 8 3/4% Senior Subordinated Notes due 2008 which were issued
in December 1998. The Company purchased $166.4 million of the 8 3/4 Senior
Subordinated Notes pursuant to a tender offer to purchase the bonds at
$1,045 for each $1,000 of principal amount together plus accrued interest.
The remaining outstanding notes were called at a redemption price of
$1,043.75 for each $1,000 of principal amount plus accrued interest. The
Company will record a loss of approximately $17.8 million on the early
extinguishment of the 8 3/4% Senior Subordinated Notes in the first quarter
of 2004.
41
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM DEBT (CONTINUED)
In June 2002, the Company entered into a three year $300,000,000three-year $300.0 million Senior
Secured Credit Facility due in 2005 with a consortiumgroup of banks (the "Credit("Credit Facility"). The Credit Facility was used to refinance the Company's
$800,000,000 Senior Secured Credit Facility. Under
the Credit Facility, loans may be made and letters of credit issued on a
revolving basis in each case subject to availability and subject to a
borrowing base. At December
31, 2003, the Company had outstanding loans and letters of credit of $98.4
million and had $111.6 million of availability based on the borrowing base
certificate filed for the December 31, 2003 balance sheet. Loans made under the Credit Facility bear interest at a
base rate or LIBOR, plus a margin. The interest rate at December 31, 20032004
was 4.35%4.7%. The Credit Facility is secured by substantially all of the assets
of the Company. In March 2002,2004, the Company amended the Credit Facility to
extend its term to June 2008. The cost incurred to amend the Credit
Facility was $1.9 million. These debt issuance costs will be amortized over
the extended term of the Credit Facility.
In January 2004, the Company issued $350,000,000$320.0 million of 7 7/8% senior
subordinated notes due 2013 ("Senior Subordinated Notes"). The interest on
these notes is payable semi-annually. The Company may redeem these notes,
in whole or in part, on or after December 1, 2008, at redemption prices
from 103.9% to 100%, plus accrued and unpaid interest. The net proceeds
from the sale of the Senior Subordinated Notes were used to fund the tender
offer and redemption of the Company's 8 3/4% senior subordinated notes
which were due to mature in 2008. The loss recorded on the early
extinguishment of the 8 3/4% senior subordinated notes consisted of
redemption premiums of $13.5 million and unamortized debt issuance costs of
$4.2 million. The debt issuance costs for the Senior Subordinated Notes
totaled $7.2 million which will be amortized over the term of the notes.
The Company's $350.0 million 9 5/8% Senior Notes due 2012 ("Senior
Notes"). Interest is payable were issued in 2002 and pay interest semi-annually. The Company may
redeem the Senior Notes, in whole or in part, on or after March 15, 2007,
at redemption prices from 100%104.8% to 104.813%100%, plus accrued and unpaid interest.
In addition, the Company may redeem up to 35% of the Senior Notes
at 109.625% of the principal amount thereof, plus accrued and unpaid
interest, with the net cash proceeds from equity offerings prior to March
2005.
Deferred financing costs of $16.5 million incurred in connection with
the Senior Secured Credit Facility were written off as a result of the
refinancing in June 2002. The write-off is reported as a loss from the
early extinguishment of debt in the consolidated statement of operations
for the year ended December 31, 2002.39
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LONG-TERM DEBT (CONTINUED)
Other long-term debt includes debt of $14.0 million and $17.0 million
at December 31, 2004 and 2003, includes debt of $17.0
millionrespectively, of a variable interest entity
that was consolidated on January 1, 2003 as a result of the adoption of FIN
46. Refer to Note 2 for additional
disclosures related to the adoption of FIN 46. The interest on this debt was 4.89%5.8% at December 31, 2003.2004. The remaining
balance in other long-term debt is primarily term debt with banks with
interest rates, which range from 1.6%2.3% to 10.5%10.1%, and capital lease
obligations.
The aggregate annual maturities for long-term debt including the
issuance of the New Senior Subordinated Notes, are as follows (in
thousands):
2004................................. $ 2,575
2005................................. 75,834
2006................................. 2,327
2007................................. 13,532
2008................................. 300,964
Thereafter........................... 373,729
--------
$768,9612005................................. $ 2,270
2006................................. 2,325
2007................................. 13,530
2008................................. 79,402
2009................................. 1,022
Thereafter........................... 671,220
--------
$769,769
========
Cash paid for interest (including interest allocated to discontinued
operations)payments on long-term debt waswere $67.4 million in 2004,
$68.1 million in 2003 and $63.0 million and $71.5
million for the years ended December 31, 2003, 2002 and 2001, respectively.in 2002.
The estimated fair value of the Company's Credit Facility, Senior
Notes, Senior Subordinated Notes and other long-term debt based on current
rates available to the Company for debt of the same remaining maturity was $784.5$783.9
million and $610.0$784.5 million at December 31, 20032004 and 2002,2003, respectively.
The Credit Facility, Senior Notes and Senior Subordinated Notes contain
certain restrictive covenantsrestrictions that, among other things and with certain exceptions,
limit the ability of the Company to incur additional indebtedness, or issue capital stock, prepay
subordinated debt, transfer assets outside
42
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM DEBT (CONTINUED) of the Company, pay dividends or
repurchase shares of common stock. In
addition to these restrictions, theThe Company is only required to maintain
certain levels of net worth and fixed charge coverage.coverage under the Credit Facility in the
event that availability falls below a certain amount. As of December 31,
2003,2004, the Company was in compliance with all of these covenants.
The Senior Notes anddebt agreements.
GUARANTEES
In conjunction with the Senior Subordinated Notes are guaranteed by
Mail-Well, Inc. and its subsidiaries (the "Guarantor Subsidiaries") all of
which are wholly owned. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
abilitysale of the Guarantor Subsidiariesprime label business in 2002, the
Company continued to transfer fundsguarantee a lease obligation assumed by the buyer of
this business. The guarantee requires the lessor to pursue collection and
other remedies against the issuing
subsidiary inbuyer before demanding payment from the formCompany.
The remaining payments under the lease term, which expires April 2008,
total approximately $5.5 million. If the Company were required to honor its
obligation under the guarantee, any loss would be reduced by the amount
generated from the liquidation of cash dividends, loans or advances, other than
ordinary legal restrictions under corporate law, fraudulent transfer and
bankruptcy laws.
11.the equipment.
13. INCOME TAXES
Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principle was as follows (in
thousands):
YEAR ENDED DECEMBER 31
---------------------------------------2004 2003 2002
2001-------- -------- --------- --------
Domestic............................................ $(59,239) $(29,532) $(136,409)
$(78,472)
Foreign............................................. 38,642 36,037 31,275
28,059-------- -------- ---------
--------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change in
accounting principle..............................$(20,597) $ 6,505 $(105,134)
$(50,413)
======== ======== ========= ========
The provision for income taxes40
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
Income tax expense (benefit) on income from continuing operations
before taxes and cumulative effect of change in accounting principle
consisted of the following (in thousands):
YEAR ENDED DECEMBER 31
--------------------------------------2004 2003 2002 2001
-------- -------- --------
Current tax provisionexpense (benefit):
Federal.......................................... $ (43) $ 1,482 $(12,747)
$(18,052)
Foreign.......................................... 12,464 11,805 10,050
9,594
State............................................ 456 148 (1,273) (1,805)
-------- -------- --------
12,877 13,435 (3,970)
(10,263)
Deferred provisionexpense (benefit):
Federal.......................................... (11,141) (9,564) (26,168)
4,245
Foreign.......................................... 179 (334) 475
393
State............................................ (1,574) (956) (1,983) 425
-------- -------- --------
(12,536) (10,854) (27,676) 5,063
-------- -------- --------
ProvisionIncome tax expense (benefit) for income taxes.......................................... $ 341 $ 2,581 $(31,646) $ (5,200)
======== ======== ========
43
MAIL-WELL,A reconciliation of the expected tax expense (benefit) based on the
federal statutory tax rate to the Company's actual income tax expense is
summarized below (in thousands):
2004 2003 2002
-------- ------- --------
Expected tax expense (benefit) at federal statutory income
tax rate................................................ $ (7,209) $ 2,277 $(36,797)
State and local income tax expense (benefit).............. (721) 293 (4,731)
Increase in valuation allowance........................... 20,275 2,625 1,123
Reduction in contingency reserves......................... (6,369) -- --
Utilization of foreign tax credits........................ (4,718) (1,158) --
Non-U.S. tax rate differences............................. (2,959) (678) (2,055)
Non-deductible expenses................................... 970 843 1,197
Non-taxable investment benefit............................ 313 (881) (333)
Non-deductible goodwill impairment........................ -- -- 9,262
Other..................................................... 759 (740) 688
-------- ------- --------
Income tax expense (benefit).............................. $ 341 $ 2,581 $(31,646)
======== ======= ========
41
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11.13. INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory tax rate to the Company's
effective income tax rate is summarized below:
2003 2002 2001
---- ---- ----
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State tax, net of federal benefit....................... 4.5 4.5 3.5
Nontaxable investment benefit........................... (13.6) -- 4.3
Impairment on divestitures.............................. -- (10.5) (32.8)
Valuation allowance..................................... 34.1 (1.1) --
Utilization of foreign tax credits...................... (17.8) -- --
Other................................................... (2.5) 2.2 0.3
----- ----- -----
Effective income tax rate............................... 39.7% 30.1% 10.3%
===== ===== =====
Deferred taxes are recorded to give recognition to temporary differences
between the tax basis of assets or liabilities and their reported amounts in
the financial statements. The tax effects of these temporary differences are
recorded as deferred tax assets or deferred tax liabilities. Deferred tax
assets generally represent items that can be used as a tax deduction or
credit in future years. Deferred tax liabilities generally represent items
that have been deducted for tax purposes, but have not yet been recorded in
the consolidated statements of operations. Valuation allowances are recorded
in expense to reduce deferred tax assets when it is more likely than not
that a tax benefit will not be realized. The Company
has tax planning strategies available which will enable them to realize all
net tax assets. The tax effects of temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2004 and 2003 are
presented below (in thousands):
DECEMBER 31
-------------------------2004 2003 2002
--------- ---------
Deferred tax assets:
Net operating loss carryforwards.................... $ 95,786 $ 74,834
Capital loss carryforwards.......................... 20,950 23,180
Compensation and benefit related accruals........... 19,867 21,394
Foreign tax credit carryforwards.................... 10,015 4,090
Alternative minimum tax credit carryforwards........ $5,015 4,650
$ 4,608
Net operating loss carryforwards.................... 74,834 69,736
Capital loss carryforwards.......................... 23,180 15,977
Foreign tax credit carryforwards.................... 4,090 --
Compensation and benefit related accruals........... 21,394 17,870Accounts receivable................................. 1,421 1,416
Restructuring accruals.............................. 969 804
179
Accounts receivable................................. 1,416 1,704
Other............................................... 6,641 3,6483,493 6,209
Valuation allowance................................. (6,932) (570)(26,775) (6,500)
--------- ---------
Total deferred tax assets............................... 130,741 130,077 113,152
Deferred tax liabilities:
Property, plant and equipment....................... (83,542) (90,744) (84,516)
Goodwill and other intangibles...................... (20,352) (19,488)
(20,491)Inventory........................................... (2,335) (2,565)
Other............................................... (7,910) (7,536)158 (5,345)
--------- ---------
Total deferred tax liabilities.......................... (106,071) (118,142) (112,543)
--------- ---------
Net deferred tax asset.................................. $ 11,93524,670 $ 60911,935
========= =========
44
MAIL-WELL,The net deferred income tax asset includes the following components (in
thousands):
2004 2003
--------- ---------
Current deferred tax asset.............................. $ 15,911 $ 18,652
Non-current deferred tax asset.......................... 19,730 4,053
Non-current deferred tax liability...................... (10,971) (10,770)
--------- ---------
Total............................................... $ 24,670 $ 11,935
========= =========
During 2004, the Internal Revenue Service ("IRS") completed the
examination of the tax years 1996 through 2002. The outcome of this tax
audit resulted in the issuance of a "no change" letter by the IRS. As a
result, the Company determined that tax contingency reserves totaling $6.4
million were no longer necessary and these reserves were reversed.
The Company has federal and state net operating loss and capital loss
carryforwards. The tax effect of these attributes is $116.7 million at
December 31, 2004. The capital loss carryforwards are due
42
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11.13. INCOME TAXES (CONTINUED)
The net deferred income tax asset (liability) includesto expire in 2007 and the following
components (in thousands):
DECEMBER 31
-----------------------
2003 2002
-------- --------
Current deferred tax asset.................... $ 18,652 $ 10,945
Non-current deferred tax liability............ (6,717) (10,336)
-------- --------
Total..................................... $ 11,935 $ 609
======== ========
Net operating losses of $175.2 million are being carried forward and
are available to reduce future taxable income. These net operating lossesloss carryforwards will expire in
2021 through 2023.2024. The Company also has foreign tax credit
carryforwards of $4.1Company's valuation allowance increased $20.3 million
that will expire in 20072004, $2.6 million in 2003 and alternative
minimum tax credit carryforwards of $4.7$1.1 million at December 31, 2003. In
2002,in 2002. The increase in 2004
was primarily due to the additional net operating losses incurred in the
U.S. in 2004. Since the Company generated capital loss carryforwardshas had three consecutive years of U.S. net
operating losses, the increase in the amount of
$53.4 million. These capital losses will expire in 2007. The Company has
recorded a valuation allowance inwas provided to
cover the amount of $6.5 million at December
31, 2003 for the estimated future impairment of certain loss carryforwards.the deferred tax asset the Company believes more
likely than not will not be realized through the reversal of taxable
temporary differences and the execution of available tax planning
strategies.
Net cash payments for income taxes were $2.5$14.7 million $6.0 million and
$2.4in 2004, $2.5
million in 2003 2002 and 2001, respectively.
12.$6.0 million in 2002.
14. RESTRUCTURING, IMPAIRMENTSIMPAIRMENT AND OTHER CHARGES
2004 ACTIVITY
Restructuring and impairment charges recorded in 2004 totaled $5.4
million. The following table and discussion present the details of these
charges (in thousands):
COMMERCIAL CORPORATE TOTAL
---------- --------- -------
Employee separation and related expenses................ $ 708 $ -- $ 708
Write-downs of equipment and leasehold improvements..... 3,706 295 4,001
Equipment moving expenses............................... 326 -- 326
Building clean-up and other expenses.................... 684 -- 684
Lease termination expenses.............................. 130 954 1,084
Net gain from the sale of building...................... (1,396) -- (1,396)
------- ------ -------
Total restructuring, impairment and other
charges........................................... $ 4,158 $1,249 $ 5,407
======= ====== =======
COMMERCIAL. The commercial segment closed its envelope plant in
Bensalem, Pennsylvania and moved much of its equipment into its printing
operation in Philadelphia. The cost of this plant closure was $1.2 million,
net of a $1.4 million gain on the sale of the plant building. The
restructure charge included employee separation and related expenses for 63
employees of $0.7 million, costs of $0.2 million incurred to move equipment
and an impairment charge of $1.0 million for equipment taken out of
service.
The cost incurred during 2004 to merge operations in Seattle and San
Francisco into the newly acquired operations in those cities was $0.3
million. Asset impairment charges for equipment taken out of service
totaled $0.8 million.
The commercial segment will close a small printing operation in the
first quarter of 2005 and consolidate its production into another facility.
An impairment charge of $1.4 million on the equipment to be taken out of
service and $0.1 million of lease termination fees were recorded in 2004.
Other asset impairments recorded in 2004 totaled $0.4 million.
CORPORATE. The Company has respondednegotiated 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 impactlease and write off the
unamortized value of the current economic
environment on its businesses by continuing to evaluate its operations for
improvement opportunities. Because of the significant decline in sales
experienced over the last two years, actions to consolidate facilities,
rationalize and realign capacity, and otherwise reduce costs have been
implemented. These actions have resulted in significant restructuringleasehold improvements was $1.2 million.
43
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
2003 ACTIVITY
Restructuring expenses and other related charges.
2003 ACTIVITY
The Company completed most of the restructuring programs initiated in
June 2001 and continued during 2002 and 2003. Restructuring expenses
related to these programs that could not be accrued andcharges were the result of
continuing initiatives to optimize capacity were $1.5$6.9 million in 2003. The
following table and discussion present the details of these charges (in
thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses....... $ 815 $ 660 $ -- $ 1,475
Equipment moves................................moving expenses...................... 1,002 -- -- 1,002
Other costs.................................... 94 (10) -- 84
Reversal of unused accruals.................... (713) (318) -- (1,031)
------ ----- ------ -------
Total restructuring charges................ 1,198 332 -- 1,530
Other charges.................................. -- -- 5,330 5,330
------ ----- ------ -------
Total restructuring and other charges...... $1,198 $ 332 $5,330 $ 1,5306,860
====== ===== ====== =======
Continued efforts in 2003 to adjust the operations of both segments to
reflect lower sales volumes, resulted inThe Company incurred employee separation expenses of $1.5 million in
2003.connection with workforce reductions in both segments.
COMMERCIAL. In the fourth quarter of 2002, theThe commercial segment announced the closure of the web
printing operation in Indianapolis, Indiana and the redeployment of its two
web presses and related equipment to St. Louis, Missouri and Baltimore,
Maryland.Maryland in 2002. A substantial portion of the cost to dismantle, move and
reinstall this equipment was incurred during 2003.
The Company was able to sub-lease a facility which was idled as a
result of the consolidation of theits envelope plant in the Northeast sooner
than estimated when the liability under the lease contract
45
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED) was established.
Accordingly, $0.5 million of the reserve recorded for this lease was
reversed. In addition, the remaining expenses that had been accrued to
cover the cost of maintaining a building that has beenwas sold in 2003 were
reversed.
RESALE SEGMENT.RESALE. In the fourth quarter of 2002, the resale segment closed its business forms plant in
Clearwater, Florida and consolidated its production in its plants located in
Fairhope, Alabama and Marshall, Texas. The employee separation expenses and
other costs incurred as a result of this consolidation were less than
originally estimated.
A summaryCORPORATE. In February 2004, a jury in Los Angeles County, California
returned a verdict in favor of an ex-employee who had sued the Company
alleging wrongful dismissal. In order to avoid the expense and risk of
further litigation and appeals, the Company settled the dispute. The amount
of the activity charged tosettlement and the 2002 restructuring liability
during the year ended December 31, 2003 is as follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Balance, December 31, 2002............................ $ 3,990 $ 653 $ 4,643
Payments for severance............................ (189) (39) (228)
Payments for lease termination and property exit
costs........................................... (2,230) (47) (2,277)
Payments for other exit costs..................... (238) (220) (458)
Reversal of unused accrual........................ (54) (317) (371)
------- ----- -------
Balance, December 31, 2003............................ $ 1,279 $ 30 $ 1,309
======= ===== =======
A summarycosts of the activity charged to the 2001 restructuring liability
during the year ended December 31,litigation recorded in 2003 is as follows (in thousands):
COMMERCIAL
----------
Balance, December 31, 2002.............................. $ 2,967
Payments for severance.............................. (452)
Payments for lease termination and property exit
costs............................................. (1,167)
Reversal of unused accrual.......................... (660)
-------
Balance, December 31, 2003.............................. $ 688
=======
totaled
$5.3 million.
44
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
2002 ACTIVITY
Restructuring, impairment and other related charges recorded during the year ended
December 31,in 2002 were
$74.6 million. The following table and discussion present the details of
these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses...... $ 4,090 $1,404 $ -- $ 5,494
Employee training expenses.................... 6,647 396 -- 7,043
Project management expenses................... 8,101 1,145 -- 9,246
Asset impairment charges, net.................Write-downs of property and equipment......... 12,178 1,650 -- 13,828
Other exit costs..............................costs................................... 7,685 1,883 -- 9,568
Reversal of unused accrual.................... (500) -- -- (500)
------- ------ ------- -------
Total restructuring costs.................charges............... 38,201 6,478 -- 44,679
Other charges................................. 6,693 161 23,018 29,872
------- ------ ------- -------
Total restructuring, impairmentsimpairment and other
charges................................. $44,894 $6,639 $23,018 $74,551
======= ====== ======= =======
46
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
COMMERCIAL. The consolidation of envelope manufacturing facilities of
the commercial segment which began in 2001, was completed in 2002. The
objective of this consolidation was to reduce excess internal capacity and
improve utilization of the equipment and resources at the other envelope
plants in the United States and Canada. The costs incurred during 2002
related to this consolidation were as follows:
* Employee training expenses of $6.6 million were incurred to train new
employees hired at the plants that absorbed the production of the
plants that were closed. The training programs for these employees
were between three and nine months in duration.
* Project management expenses of $8.1 million that were primarily
consulting fees and related expenses were incurred to assist
management in managing the consolidation project. Consultants were
used to assist in such tasks as capacity planning, workflow planning,
production scheduling and change management.
* Impairment charges of $8.9 million were recorded for property and
equipment taken out of service or sold as a result of the plant
consolidations, net of proceeds of $5.9 million received from the
sales of those assets.
* Other costs of $3.0 million include the expenses incurred to
dismantle, move and reinstall equipment, and the costs incurred to
restore buildings to the condition required by lease agreements or to
maintain them while they arewere held for sale.
* In 2001, employee separation expenses were accrued to cover the 766
employees expected to be affected over the course of this project. At
the completion of the project, 722 employees had been separated and
the accrual was reduced by $0.5 million.
The Company's commercial printing operation in New York City was closed
in September 2002. Employee separation expenses of $1.0 million were
recorded covering 80 employees. Asset impairment charges of $1.0 million
and lease commitment and other expenses of $2.2 million were also recorded
in connection with this plant closure.
A web press haswas moved from Portland, Oregon to the web printing plant
in St. Louis and the consolidation of the web printing operation in
Indianapolis with the web plants in St. Louis and
45
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
Baltimore was announced. Employee separation expenses of $0.3 million were
recorded to cover the cost of 52 employees affected by these actions. Other
restructuring expenses included impairment charges of $1.0 million on
equipment taken out of service and $1.8 million to cover the expenses
associated with terminating lease commitments and the costs incurred in
2002 to dismantle, move and reinstall equipment.
Additionally, the commercial segment reduced the size of many of its
operations during 2002 in response to the significant decline in sales.2002. The costs associated with these actions included
$2.8 million to cover the cost of the elimination of 331 jobs, impairment
charges of $1.3 million for equipment taken out of service and $0.7 million
for expenses associated with lease commitments and the cost incurred to
dismantle, move and reinstall equipment.
RESALE. During 2002, the documents division of the resale segment closed its business forms plant
in Clearwater, Florida and its plant in Denver, Colorado which had been curtailed in 2001.Colorado. The employee
separation expenses covering 64 employees were $0.6 million. Impairment
charges related to equipment taken out of service as a result of these
closures totaled $0.6 million. Other expenses of $0.7 million primarily
related to expenses incurred to maintain the two buildings held for sale.
The resale segment completed the closure of its envelope operations in
Hattiesburg, Mississippi. The costs in 2002 were $2.4 million which were
primarily additional impairment charges, consulting
47
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED) fees, the costs incurred to
dismantle, move and reinstall equipment and expenses incurred to clean-upclean up
the building.
Additionally, theThe resale segment also incurred $2.2 million in expenses to reduce the
size of several of its other operations. Employee separation expenses
incurred to cover the elimination ofcovering 193 jobsemployees were $0.8 million, asset impairments were $0.5
million and training, project management and other costs were $0.9 million.
OTHER CHARGES. Other charges include the following items:
* In 2001, several programs to significantly improve operations and
marketing effectiveness were implemented. These programs included the
implementation of best practices, the standardization of costing and
pricing systems in the commercial segment and the alignment of
equipment and services to better serve customers and markets. Outside
assistance was used in the implementation of these programs the cost
of which was $4.4 million in 2002.
* In connection with the refinancing of the bank credit facility in
June 2002, an operating lease stemming from a sale/leaseback
arrangement executed in 1997 and amended in 2000 had to be
refinanced. The value of the equipment subject to the lease was
reduced from $34.9 million to $19.1 million, requiring a payment of
the difference of $15.8 million. In addition, deferred costs of $6.1
million associated with the lease prior to this refinancing were
written off.
* An impairment chargeThe Company used outside assistance to implement best practices and
standardize costing and pricing systems. The cost of $1.8 millionthis assistance
was recorded to write-down idle$4.4 million.
* Idle equipment in the commercial segment was written down $1.8
million to its net realizable value.
* Severance payments of $1.1 million unrelated to the restructure plans were incurred.$1.1
million.
* ConsultingThe Company incurred consulting fees of $0.7 million related to tax
matters that arose as a result of the divestitures were incurred.divestitures.
46
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
A summary of the activity charged to the 2002 restructuring liability
during the year ended December 31, 2002 is as
follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Initial accrual......................................accrual............................................ $ 4,1066,572 $1,019 $ 5,125
Additions to the accrual......................... 2,466 -- 2,4667,591
Payments for severance...........................severance................................. (2,581) (353) (2,934)
Payments for lease termination and property exit
costs..........................................costs................................................ -- (3) (3)
Payments for other exit costs....................costs............................... (1) (10) (11)
------- ------ -------
Balance at December 31, 2002........................... $2002............................... 3,990 653 4,643
Payments for severance................................. (189) (39) (228)
Payments for lease termination and property exit
costs................................................ (2,230) (47) (2,277)
Payments for other costs............................... (238) (220) (458)
Reversal of unused accrual............................. (54) (317) (371)
------- ------ -------
Balance at December 31, 2003............................... 1,279 30 1,309
Payments for lease termination and property exit
costs................................................ (406) (16) (422)
Payments for other costs............................... (220) -- (220)
------- ------ -------
Balance at December 31, 2004............................... $ 653 $ 4,64314 $ 667
======= ====== =======
48
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
2001 ACTIVITY
The restructuring and other related charges totaled $43.1 million in
2001. The following table and discussion present the details of these
charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses...... $ 7,276 $2,769 $ -- $10,045
Employee training expenses.................... 2,414 214 -- 2,628
Project management expenses................... 4,985 419 -- 5,404
Asset impairment charges, net................. 4,897 2,582 -- 7,479
Other exit costs.............................. 7,524 1,655 -- 9,179
Strategic assessment costs.................... -- -- 2,677 2,677
------- ------ ------ -------
Total restructuring costs................. 27,096 7,639 2,677 37,412
Other charges................................. 2,842 -- 1,600 4,442
------- ------ ------ -------
Total restructuring, impairments and other
charges................................. $29,938 $7,639 $4,277 $41,854
======= ====== ====== =======
COMMERCIAL. The commercial segment announced the consolidation of eight
envelope plants in 2001 and recorded employee separation expenses of $6.9
million covering 766 employees that were expected to be affected over the
course of the consolidation project. Restructuring expenses incurred in
2001 included training costs of $2.4 million, project management fees of
$5.0 million, impairment charges of $4.3 million on the equipment that was
taken out of service, and $5.5 million to cover lease termination costs,
the costs of equipment moves and building clean-up expenses.
A printing plant in Philadelphia, Pennsylvania has closed and two other
printing operations in the Philadelphia area were consolidated. These
actions were taken to improve the Company's cost effectiveness and
competitive position in the Philadelphia market. The costs associated with
the consolidation included employee separation expenses of $0.4 million
covering the elimination of 25 jobs, impairment charges of $0.6 million on
equipment taken out of service and other costs of $2.0 million to cover
lease termination costs and costs to dismantle, move and reinstall
equipment.
RESALE. The resale segment began the closure of its envelope
manufacturing facility in Mississippi. The cost recorded in 2001 was $6.5
million and included employee separation expenses of $1.6 million covering
142 employees, impairments on equipment taken out of service of $3.9
million and $1.0 million of training, project management and other costs.
Resale's documents division substantially curtailed its business forms
plant in Denver, Colorado in 2001. The employee separation expenses of $0.6
million related to the elimination of 62 jobs. Other costs were the
expenses incurred to dismantle, move and reinstall equipment. Additionally,
an impairment charge of $1.3 million taken in 2000 to write down a building
to its estimated fair market value was reversed. This building was sold for
more than its original carrying value.
A warehouse and distribution center in Santa Fe Springs, California was
closed. The cost associated with this closure was $0.9 million which was
primarily employee separation expenses covering 17 employees and lease
termination costs.
CORPORATE. Outside advisors were used in developing the Company's
strategic plan to research and evaluate markets, survey customers and
assess existing strategies. In addition, financial advisors evaluated
options for improving the Company's capital structure. The cost of these
advisors was $2.7 million in 2001.
49
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
OTHER CHARGES. Other charges include the following items:
* The outside assistance used in the implementation of initiatives in
the commercial segment to implement best practices, standardize
costing and pricing systems, and align equipment and services to
better serve customers and markets totaled $2.1 million in 2001.
* Cost of $0.7 million incurred by the commercial segment for a human
resource information system that was not implemented was written-off.
* A $1.6 million investment in a company that was developing a service,
which would enable online collaborative design and management of a
printing job, was written off.
A summary of the activity charged to the 2001 restructuring liability
during the year ended December 31, 2002 is as
follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Balance at December 31, 2001............................. $10,7302001............................... $10,899 $ 70 $10,800
Additions to the accrual............................... 169 -- 169$10,969
Payments for severance................................. (5,026) -- (5,026)
Payments for lease termination and property exit
costs................................................ (2,406) (70) (2,476)
Reversal of unused portion.............................accrual............................. (500) -- (500)
------- ---- -------
Balance at December 31, 2002.............................2002............................... 2,967 -- 2,967
Payments for severance................................. (452) -- (452)
Payments for lease termination and property exit
costs................................................ (1,167) -- (1,167)
Reversal of unused accrual............................. (660) -- (660)
------- ---- -------
Balance at December 31, 2003............................... 688 -- 688
Payments for lease termination and property exit
costs................................................ (262) -- (262)
------- ---- -------
Balance at December 31, 2004............................... $ 2,967426 $ -- $ 2,967426
======= ==== =======
13. STOCK OPTION PLANS
In May 2001, the15. STOCK-BASED COMPENSATION
The Company adoptedhas a Long-Term Equity Incentive Plan (the
"Incentive("Incentive Plan"), which replaced all prior stock option plans (the "Option
Plans"). Stock options which were available for grant under the Option
Plans were transferred to the Incentive Plan and the Option Plans have been
frozen.
The Incentive Plan allowsis administered by the compensation committeeCompensation and Human Resources
Committee of the Board of Directors and allows the Company to grant stock
options, stock appreciation rights, restricted common stock, performance awards and any other stock-based
awards to officers, directors and employees of the Company.employees. The Company has 1,397,769
stock options3,042,315
shares available for issuance.issuance under the Incentive Plan.
STOCK OPTIONS
Stock options awarded under the Incentive Plan generally vest over four to sixfive
years and expire 10 years from the date granted. Restricted
stock vests fifty percent in five years from the date of grant and fifty
percent in six years from the date of grant. Restricted stock issued to directors vests six months10 years from the date of grant. Options are
granted at a price equal to the fair market value of the Company's common stock on the
date of grant.
The Incentive Plan provides for an acceleration of the
vesting of both the stock options and the restricted stock if the Company's
stock price closes at certain levels for 20 consecutive trading days.
Upon the issuance of restricted stock, the Company records deferred
compensation as a charge to shareholders' equity for the market value of
the restricted stock on the date of grant. This deferred compensation is
being recognized as compensation expense ratably over the vesting period.
The Company has awarded 684,398 shares of restricted stock of which 40,398
shares have vested. The Company recorded compensation expense in the amount
of $0.8 million, $0.6 million and $0.3 million for the years ended December
31, 2003, 2002 and 2001, respectively.
50
MAIL-WELL,47
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLANS15. STOCK-BASED COMPENSATION (CONTINUED)
The following table summarizes the activity of stock options for 2004,
2003 and terms of outstanding
options at December 31,2002:
2004 2003 2002 and 2001:
2003 2002 2001
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Options outstanding at beginning
of year........................ 5,738,569 $6.16 5,442,002 $6.96 6,128,637 $7.08
3,670,867 $8.75
Granted.......................... 1,885,130 $3.72 1,021,044 2.26$2.26 255,250 4.63 3,265,036 5.45$4.63
Exercised........................ (19,331) $2.62 (30,831) 2.33$2.33 (11,230) 1.63 (201,922) 2.05$1.63
Expired/cancelled................ (612,993) $5.67 (693,646) 7.59$7.59 (930,655) 6.85 (605,344) 9.83$6.85
--------- ----- --------- ----- --------- -----
Options outstanding at end of
year........................... 6,991,375 $5.55 5,738,569 $6.16 5,442,002 $6.96
6,128,637 $7.08
========= ===== ========= ===== ========= =====
Options exercisable at end of
year........................... 3,858,396 $6.67 3,629,843 $6.49 2,458,607 $8.01
1,679,137 $8.60
========= ===== ========= ===== ========= =====
SummaryThe following table summarizes information about the Company's stock options
outstanding at December 31, 2003 is as follows:2004:
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31,NUMBER REMAINING LIFE EXERCISE DECEMBER 31,NUMBER EXERCISE
RANGE OF EXERCISE PRICES 2003OUTSTANDING (IN YEARS) PRICE 2003EXERCISABLE PRICE
- ---------------------------- --------------------------------------------- ----------- -------------- -------- ------------------------- --------
$ 1.32-$2.19................ 772,056 3.92.19.................. 679,282 3.0 $ 2.10 709,8632.14 438,983 $ 2.092.13
$ 2.19-$4.37................ 442,005 5.04.37.................. 2,251,835 5.9 $ 3.62 254,4053.70 330,075 $ 3.643.70
$ 4.37-$6.56................ 2,881,050 2.9 $ 5.46 1,222,9176.56.................. 2,600,600 1.8 $ 5.45 1,674,700 $ 5.44
$ 6.56-$8.74................ 786,040 4.68.74.................. 636,440 3.4 $ 7.62 659,0007.71 592,020 $ 7.467.65
$ 8.74-$10.93............... 237,200 5.910.93................. 235,000 4.1 $ 9.71 197,600234,400 $ 9.78
$10.93-9.72
$13.11............... 427,800 4.9 10.93-$13.11................. 406,800 3.5 $12.33 408,240 $12.29
$13.11-406,800 $12.33
$15.30............... 174,418 4.3 $13.81 159,818 $13.79
$21.86...................... 13.11-$15.30................. 163,418 3.1 $13.78 163,418 $13.78
$ 21.86........................ 18,000 4.31.1 $21.86 18,000 $21.86
--------- --- ------ --------- ------
$ 1.32-$21.86............... 5,738,569 3.721.86................. 6,991,375 3.6 $ 6.16 3,629,8435.55 3,858,396 $ 6.496.67
========= === ====== ========= ======
As permitted by SFAS No. 123,RESTRICTED STOCK
Restricted stock has been granted to certain key executives under the
Company accounts for its stock-based
compensation under APB No. 25;Incentive Plan as a long-term incentive subject to continued employment.
These shares carry voting rights; however, the Company has computed for pro
forma disclosure purposes the valueshares may not be sold prior
to vesting. Restricted stock granted in 2002 vests 50% after five years of
all options granted during 2003,
2002service and 2001 using the Black-Scholes option pricing model as prescribed by
SFAS No. 123100% after six years and using the following average assumptions:
2003 2002 2001
--------- --------- ---------
Risk-free interest rate....................... 2.6% 3.0% 3.5%
Expected dividend yield....................... 0% 0% 0%
Expected option lives......................... 5 years 5 years 4-6 years
Expected volatility........................... 73% 71% 65%
The weighted averagehad a fair value of options$1.48. In 2004,
the Company granted in 2003, 2002 and
2001 was $1.39, $1.16 and $3.22, respectively, per option.
Refer to Note 1 for the pro forma effect288,788 shares of expensing the estimatedrestricted stock with a fair value of
$3.28 to key executives. These shares vest at the end of five years.
The Company has awarded restricted stock options on net incometo the members of the Board of
Directors. Restricted stock granted to the directors totaled 14,922 shares
in 2004, 30,816 shares in 2003 and earnings9,582 in 2002. The fair value per share
was $4.02 in 2004, $2.92 in 2003 and $6.26 in 2002. All awards to the
directors were fully vested at December 31, 2004.
Upon the issuance of restricted stock, the Company records unearned
compensation as a charge to shareholders' equity for the fair value of the
restricted stock on the date of grant. This unearned compensation is
recognized as compensation expense ratably over the vesting period. The
Company recorded compensation expense related to restricted stock in the
amount of $0.7 million in 2004, $0.8 million in 2003 2002 and 2001.
51
MAIL-WELL,$0.6 million in
2002.
48
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.15. STOCK-BASED COMPENSATION (CONTINUED)
The following table summarizes the activity for restricted stock for
2002, 2003 and 2004:
NUMBER OF SHARES
----------------
Outstanding at January 1, 2002.......... 669,000
Granted............................. 91,582
Vested.............................. (9,582)
Cancelled........................... (82,000)
-------
Outstanding at December 31, 2002........ 669,000
Granted............................. 30,816
Vested.............................. (30,816)
Cancelled........................... (25,000)
-------
Outstanding at December 31, 2003........ 644,000
Granted............................. 303,710
Vested.............................. (14,922)
-------
Outstanding at December 31, 2004........ 932,788
=======
16. RETIREMENT PLANS
SAVINGS PLAN. The Company sponsors a defined contribution plan to
provide substantially all U.S. salaried and certain hourly employees an
opportunity to accumulate personal funds for their retirement. As
determined by the provisions of the plan, theThe Company
matches a certain percentage of each employee's voluntary contribution. The plan also
provides for a discretionary contribution by the Company to the plan for
all eligible employees. All
contributions made by the Company are made in cash and allocated to the
funds selected by the employee. Company contributions to the plan were
approximately $6.0 million in 2004, $6.0 million in 2003 and $6.5 million
and
$10.5 million for the years ending in December 31, 2003, 2002 and 2001,
respectively. No discretionary contributions were made in 2003 or 2002. The plan held 2,776,0004,594,544 shares of the Company's common stock at
December 31, 2003. Shares held in a frozen employee stock ownership plan were 2,524,000
at December 31, 2003.2004.
PENSION PLANS. The Company maintains pension plans for certain of its
employees in the U.S. and Canada under collective bargaining agreements
with unions representing these employees. The Company expects to continue
to fund these plans based on governmental requirements, amounts deductible
for income tax purposes and as needed to ensure that plan assets are
sufficient to satisfy plan liabilities.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS. As a result of the acquisition
of American Business Products ("ABP") in 2000, the Company assumed
responsibility for the ABP supplemental executive retirement plans ("SERP")
which provide benefits to certain former directors and executives of ABP.
For accounting purposes, these plans are unfunded; however, ABP had
purchased annuities, which are included in other assets in the consolidated
balance sheets,sheets. These annuities cover a portion of the liability to cover the
benefits for certain participants.
52
MAIL-WELL,participants in these plans and the income from the annuities offsets a
portion of the cost of the plans.
49
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.16. RETIREMENT PLANS (CONTINUED)
The following table sets forth the financial status of the pension
plans and the SERP and the amounts recognized in the Company's consolidated
balance sheets at December 31, 20032004 and 20022003 (in thousands):
PENSION PLANS SERP
--------------------- --------------------
--------------------2004 2003 20022004 2003
2002
--------------- ------- ------- -------
Change in benefit obligation:
Benefit obligation at beginning of year..........year......... $ 45,864 $34,810 $31,549$ 8,736 $ 9,051
$ 9,042
Service cost..................................... 1,908 1,541cost.................................... 1,925 1,447 -- --
Interest cost....................................cost................................... 2,787 2,664 2,250652 670
998Participant contributions....................... 495 461 -- --
Actuarial gains and loss.........................loss.................................. 3,677 3,997 1,307 -- --
Foreign currency translation.....................translation.................... 3,093 5,057 316 -- --
Benefits paid....................................paid................................... (2,677) (2,572) (2,153)(978) (985)
(989)
--------------- ------- ------- -------
Benefit obligation at end of year..............year............. 55,164 45,864 34,8108,410 8,736
9,051
--------------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year... 31,188 32,715year.. $ 37,677 $31,188 $ -- $ --
Actual return on plan assets.....................assets.................... 3,555 3,455 (1,420)-- --
Participant contributions....................... 495 461 -- --
Employer contributions........................... 1,056 1,793contributions.......................... 2,841 595 -- --
Foreign currency translation.....................translation.................... 3,211 4,859 475 -- --
Benefits paid....................................paid................................... (2,677) (2,881) (2,375) -- --
--------------- ------- ------- -------
Fair value of plan assets at end of year.......year...... 45,102 37,677 31,188 -- --
--------------- ------- ------- -------
Funded status......................................status..................................... (10,062) (8,187) (3,623)(8,410) (8,736) (9,051)
Unrecognized actuarial gain........................loss....................... 21,450 18,540 13,526 -- --
Unrecognized prior service cost....................cost................... 510 239 230 -- --
Unrecognized transition asset......................asset..................... (3,606) (3,885) (4,293) -- --
--------------- ------- ------- -------
Net amount recognized..............................recognized............................. $ 8,292 $ 6,707 $ 5,840$(8,410) $(8,736)
$(9,051)
=============== ======= ======= =======
Amounts recognized in the consolidated balance
sheets:
Prepaid benefit cost...........................cost.......................... $ 5,1006,890 $ 4,4715,100 $ -- $ --
Accrued benefit liability......................liability..................... (11,058) (7,507) (2,378)(8,410) (8,736)
(9,051)
Intangible asset...............................asset.............................. 517 250 67 -- --
Deferred tax asset.............................asset............................ 4,599 3,412 1,416 -- --
Accumulated other comprehensive loss...........loss.......... 7,344 5,452 2,264 -- --
--------------- ------- ------- -------
Net amount recognized..............................recognized............................. $ 8,292 $ 6,707 $ 5,840$(8,410) $(8,736)
$(9,051)
=============== ======= ======= =======
The components of the net periodic pension costexpense for the pension
plans and the SERP were as follows (in thousands):
2004 2003 2002 2001
------- ------- -------
Service cost...........................................cost............................................ $ 1,925 $ 1,447 $ 1,185 $ 1,075
Interest cost on projected benefit obligation..........obligation........... 3,439 3,334 3,248 2,991
Expected return on plan assets.........................assets.......................... (3,447) (3,622) (3,148) (3,017)
Net amortization and deferral..........................deferral........................... (434) (482) (399)
(396)
Recognized actuarial loss..............................loss............................... 826 295 179 36
Other.................................................. 330 1 129
------- ------- -------
Net periodic pension expense............................ $ 1,3022,309 $ 1,066972 $ 8181,065
======= ======= =======
53
MAIL-WELL,50
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.16. RETIREMENT PLANS (CONTINUED)
The assumptions used in computing the net pension costexpense and the
funded status were as follows:
2004 2003 2002
2001
----------------- -------- ----- -------
Weighted average discount rate.......................rate........................ 5.75% 6.00% 6.75% 7.25%
Expected long-term rate of return on assets..........assets........... 8.00% 8.00% 8.75% 8.75-9%
Rate of compensation increase........................increase......................... 3.5-4% 3.5-4% 3-4% 2-4%
The Company's overall expected long-term rate of return on plan assets isof 8.0%. The expected return on assets assumption is based
on historical returns and the long-term
expected return onexpectations for future returns for each
asset class in which plan assets are invested as well as the U.S. and Canadian investment portfolios as estimated
by the Company's investment advisors. The portfolio return for the U.S.
pension plans is calculated based on capital market projections of returns,
risks and correlations of thesetarget asset
classes projected five-years out. The
portfolio return for the Canadian portfolio is calculated based upon the
long-term rate for Canadian bonds and projected long-term equity returns
plus an additional 0.75% for active managementallocation of the investment portfolio.
The allocationsinvestments of the assets of the pension plansplan assets. The asset allocations at
December 31, 2004 and 2003 and 2002 by investment categorythe target allocations for the investments
were as follows:
USU.S. PLANS CANADIAN PLANS
DECEMBER 31 DECEMBER 31
--------------- ------------------------------------------- ----------------------------
2004 2003 2002TARGET 2004 2003 2002TARGET
---- ---- ------ ---- ---- ------
US Large Cap Equity.................................... 38% 39% -- --
US Small Cap Equity.................................... 13% 12% -- --
International Equity................................... 16% 15% 17% 14%
US Emerging Markets Equity............................. 3% 3% -- --
US Fixed income........................................ 24%
Equity securities.................. 69% 70% 68% 47% 47% 50%
Debt securities, including cash.... 25% -- --25% 27% 53% 53% 50%
Real estate mutual funds...............................estate........................ 6% 5% 5% -- --
Cash equivalents....................................... 1% 1% 6% 8%
Canadian equity funds.................................. -- -- 30% 28%
Canadian fixed income.................................. -- -- 47% 50%
--- --- --- ---
Total..............................................0% 0% 0%
---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100%
The Company employs a total returnCompany's investment approach whereby a mix of
equities and fixed income investments are usedobjective is to maximize the long-term return
on the pension plan assets of the pension plans for awithin prudent levellevels of risk. In
order to achieve investment objectives, target asset allocations have been
established andInvestments are
reviewed quarterly. The intent of this strategy is to
minimize pension cost by outperforming liabilities of the pension plans
over the long run. Risk tolerance is established through careful
consideration of the liabilities and the funded status of the pension plans
and the Company's financial condition. The investment portfolio containsdiversified with a
diversified blend of equity and fixed income investments. Furthermore,
equitysecurities. Equity
investments are diversified acrossby including U.S. and non-U.S. stocks, as well
as growth
stocks, value stocks and stocks of large and small and large capitalizations.
54
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RETIREMENT PLANS (CONTINUED)
The Company's policy is to allocate pension plan assets for each major
asset category as follows:
US PLANS CANADIAN PLANS
-------- --------------
US Large Cap Equity......................................... 38% 8%
US Small Cap Equity......................................... 12% --
International Equity........................................ 15% 17%
US Emerging Markets Equity.................................. 3% --
US Fixed income............................................. 26% --
Real estate mutual funds.................................... 5% --
Cash equivalents............................................ 1% 5%
Canadian equity funds....................................... -- 25%
Canadian fixed income....................................... -- 45%
--- ---
Total................................................... 100% 100%
companies.
The accumulated benefit obligation and fair value of plan assets for
the plans with accumulated benefit obligations in excess of plan assets
were as followfollows (in thousands):
USU.S. PLANS CANADIAN PLANS
DECEMBER 31 DECEMBER 31
-------------------- --------------------- ---------------------
2004 2003 20022004 2003
2002
------- ------------- ------- -------
Projected benefit obligation......................obligation..................... $11,124 $10,556 $9,700$44,041 $35,308 $25,111
Accumulated benefit obligation.................... $ 2,019 $2,378 $ 6,527 $ --obligation................... $10,977 $10,366 $38,293 $30,786
Fair value of plan assets.........................assets........................ $ 8,517 $ 8,347 $7,054$36,585 $29,330 $24,134
The increase in the minimum liability included in other comprehensive
income was $3.1 million in 2004 and $5.2 million in 2003 and $1.9 million in 2002.2003.
The Company expects to contribute $2.8$3.1 million to its pension plans in
2004. The Company does not expect to contribute2005. Contributions to the SERP in 2004.2005 will not be significant.
51
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RETIREMENT PLANS (CONTINUED)
The estimated pension benefit payments expected to be paid by the
pension plans and the estimated SERP payments expected to be paid by the
Company for the years 2005 through 2009, and in the aggregate for the years
2010 through 2014, are as follows (in thousands):
PENSION PLANS SERP
------------- ------
2005 ..................................... $ 2,772 $ 985
2006 ..................................... $ 2,823 $ 985
2007 ..................................... $ 2,861 $ 985
2008 ..................................... $ 2,914 $ 985
2009 ..................................... $ 2,881 $ 985
2010 - 2014 ..................................... $15,410 $3,485
Certain other U.S. employees are included in multi-employer pension
plans to which the Company makes contributions in accordance with the
contractual union agreements. Such contributions are made on a monthly
basis in accordance with the requirements of the plans and the actuarial
computations and assumptions of the administrators of the plans.
Contributions to multi-employer plans were $3.0 million in 2004, $3.0
million in 2003 and $3.1 million and
$2.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
55
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15.in 2002.
17. COMMITMENTS AND CONTINGENCIES
LEASES. The Company leases buildings and equipment under operating
lease agreements expiring at various dates through 2011. Certain leases
include renewal and purchase options. At December 31, 2003,2004, future minimum
annual payments under non-cancelable lease agreements with original terms
in excess of one year were as follows (in thousands):
2004.................................2005................................. $ 31,057
2005................................. 26,30833,765
2006................................. 21,78627,931
2007................................. 16,30123,902
2008................................. 14,77715,395
2009................................. 8,958
Thereafter........................... 11,4124,189
--------
Total............................ $121,641$114,140
========
Aggregate future minimum rentals to be received under noncancelable
subleases as of December 31, 20032004 are approximately $0.8$1.3 million.
Rent expense for the years ended December 31, 2003, 2002 and 2001 was $37.7 million in 2004, $37.2 million in 2003 and $40.5
million and $39.9 million, respectively.in 2002.
CONCENTRATIONS OF CREDIT RISK. The Company has limited concentrations
of credit risk with respect to financial instruments. Temporary cash
investments and other investments are placed with high credit quality
institutions, and concentrations within accounts receivable are limited due
to the Company's customer base and its dispersion across different
industries and geographic areas.
LITIGATION. The Company is party to various legal actions that are
ordinary and incidental to its business. Refer to Note 19 for disclosure
related to the settlement of a lawsuit. While the outcome of pending legal
actions cannot be predicted with certainty, management believes the outcome
of these various proceedings will not have a material adverse effect on the
Company's consolidated financial condition or results of operations.
52
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
TAX AUDITS. The Company's income, sales and use, and other tax returns
are routinely subject to audit by various authorities. The Company believes
that the resolution of any matters raised during such audits will not have
a material adverse effect on the Company's financial position or results of
operations.
56
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16.18. EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing
net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect the
potential dilution that could occur if securities or other contractsoptions to issue common stock were
exercised or converted into common stock.exercised. A reconciliation of the amounts included in the computation of
basic earnings (loss) per share and diluted earnings (loss) per share is as
follows (in thousands, except per share amounts):
DECEMBER 31
-------------------------------------2004 2003 2002
2001
--------------- -------- --------
Numerator:
Numerator for basic and diluted earnings (loss) per
share--income (loss) from continuing operations........ $(20,938) $ 3,924 $(73,488)
$(45,213)
=============== ======== ========
Denominator:
Denominator for basic earnings (loss) per share--weighted
average shares......................................... 47,750 47,687 47,665
47,562
EffectsEffect of dilutive securities:
Stock options........................................ -- 628 --
--
--------------- -------- --------
Denominator for diluted earnings (loss) per
share--adjusted weighted average shares................ 47,750 48,315 47,665
47,562
=============== ======== ========
Earnings (loss) forfrom continuing operations per share:
Basic and diluted.................................... $ (0.44) $ 0.08 $ (1.54)
$ (0.95)
=============== ======== ========
During the years ended December 31, 2003,In 2004 and 2002, and 2001, outstanding options to purchase 1,145,000 and shares of restricted stock in the amount of 5,795,000,
5,357,000 and 5,625,00050,000
common shares, respectively, were excluded from the calculation of diluted
earnings per share because the effect would behave been antidilutive. In
2004, 2003 and 2002, outstanding options to purchase approximately
5,847,000, 5,111,000 and 2001, interest, net of tax, on convertible notes
in the amount of $4.9 million and5,392,000 common shares of 7,319,000 that would be issued
upon assumed conversion of the convertible notes were excluded from the
calculation of net income per diluted loss percommon share due tobecause their exercise
price exceeded the antidilutive effect on
loss per share.
17.average market price of the common stock for the year.
19. SEGMENT INFORMATION
In October 2003, theThe Company reorganized intooperates two business segments:
commercial and resale. This reorganization aligns the structure with the
Company's distribution channels and with the Company's principle strategic
goals: to operate as one company; to provide customers with one point of
entry into Mail-Well; and to go to market with a complete range of products
and services. Segment data for prior years has been restated to reflect the
new operating segments. The commercial segment
consists of commercial printing facilities that specialize in printing of
annual reports, car brochures, brand marketing collateral, catalogs, maps
and guidebooks, calendars, financial communications, and facilities that
produce customized envelopes for billing and remittance and direct mail
advertising. The commercial segment also offers such services as design,
fulfillment, e-commerce and inventory management. The resale segment
includes facilities that produce specialty packaging, customized and stock
labels, envelopes, and printed business documents which are sold to
distributors and value-added resellers of office products.
Intercompany sales forwere $25.2 million in 2004, $16.4 million in 2003
and $20.1 million in 2002 and 2001 were $164.5 million, $142.7 million and
$177.0 million, respectively, which are eliminated in consolidation and excluded
from reported net sales.
OperatingSegment operating income includes all costs and expenses directly
related to the segment involved.commercial or resale segment. Corporate expenses include
general corporate generaloverhead and administrative expenses amortization expense, and gains and losses on
disposal of assets.
57
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED)not allocated to the segments.
Identifiable assets are accumulated by facility within each business
segment. Corporate assets consist primarily of cash and cash equivalents,
miscellaneous receivables, deferred financing fees, deferred tax assets and
other assets.
53
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENT INFORMATION (CONTINUED)
The following tables present certain business segment information (in
thousands):
YEAR ENDED DECEMBER 31
--------------------------------------------2004 2003 2002 2001
---------- ---------- ----------
Net sales:
Commercial................................. $1,329,778 $1,272,525 $1,268,367
$1,357,430
Resale..................................... 413,136 399,139 460,338 511,338
---------- ---------- ----------
Total...................................... $1,742,914 $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
Operating income (loss):
Commercial................................. $ 60,81650,538 $ 3,07658,704 $ 42,3051,513
Resale..................................... 45,711 44,317 44,58843,102 44,703 43,298
Corporate(a)............................... (26,312) (80,312) (72,069)(20,905) (23,192) (61,267)
---------- ---------- ----------
Total...................................... $ 72,735 $ 80,215 $ (32,919) $ 14,824(16,456)
========== ========== ==========
Restructuring, asset impairmentsimpairment and other
charges:
Commercial................................. $ 4,158 $ 1,198 $ 44,894
$ 29,938
Resale..................................... -- 332 6,639
7,639
Corporate.................................. --1,249 5,330 23,018 4,277
---------- ---------- ----------
Total...................................... $ 1,5305,407 $ 74,5516,860 $ 41,85474,551
========== ========== ==========
Significant other noncash charges(b):charges:
Commercial................................. $ 3,706 $ -- $ 23,016 $ 9,47614,015
Resale..................................... -- 925 -- 1,650
Corporate.................................. 295 -- 41,240 36,52325,378
---------- ---------- ----------
Total...................................... $ 4,001 $ -- $ 65,181 $ 45,99941,043
========== ========== ==========
Depreciation and intangible amortization:
Commercial................................. $ 42,355 $ 36,428 $ 36,014
$ 36,272
Resale..................................... 9,574 9,106 11,389
12,613
Corporate(c)Corporate(b)............................... 2,4331,054 2,434 2,652 14,511
---------- ---------- ----------
Total...................................... $ 47,96752,983 $ 50,05547,968 $ 63,39650,055
========== ========== ==========
Capital expenditures:
Commercial................................. $ 22,032 $ 28,507 $ 22,949
$ 22,097
Resale..................................... 3,365 3,076 7,668
9,537
Corporate.................................. 2,038 19 279 1,108
---------- ---------- ----------
Total...................................... $ 27,435 $ 31,602 $ 30,896 $ 32,742
========== ========== ==========
Net sales by product line:
Commercial Printing........................printing........................ $ 781,010821,332 $ 764,404777,639 $ 817,937769,930
Envelopes.................................. 691,968 760,487 835,534
Printed Office Products.................... 198,686 203,814 215,297719,465 693,929 754,238
Business forms and labels.................. 202,117 200,096 204,537
---------- ---------- ----------
Total...................................... $1,742,914 $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
58
MAIL-WELL,54
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17.19. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31
---------------------------
2004 2003 2002
---------- ----------
Identifiable assets:
Commercial..........................................Commercial........................................ $ 829,682 $ 785,649
$ 763,250
Resale..............................................Resale............................................ 271,217 261,619
275,948
Corporate...........................................Corporate......................................... 62,877 60,125 63,677
---------- ----------
Total............................................. $1,163,776 $1,107,393 $1,102,875
Net assets held for sale............................ -- 4,492
---------- ----------
Total............................................... $1,107,393 $1,107,367
========== ==========
- --------
(a) Includes $5.3 million for athe settlement of litigationa lawsuit in 2003. In
2002, corporate expenses includes $16.5 million loss from the early
extinguishment of debt, the $6.4 million impairment loss on assets held
for sale and the $12.8 million impairment on operations formerly held
for sale.
In 2001, corporate expenses include the $36.5 million
impairment on operations formerly held for sale.
(b) Represents the noncash portion of restructuring, impairments, and
other charges.
(c) Includes adjustments to depreciation for assets held for sale in 2002
and 2001.2002.
Geographic information for the years ended December 31,2004, 2003 2002 and 20012002 and at December 31, 20032004
and 2002,2003, is presented below (in thousands):
2004 2003 2002 2001
---------- ---------- ----------
Net sales:
U.S........................................ $1,548,080 $1,482,443 $1,561,859
$1,691,837
Canada..................................... 194,834 189,221 166,846 176,931
---------- ---------- ----------
Total...................................... $1,742,914 $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
Identifiable assets:Long-lived assets(a):
U.S........................................ $ 948,530589,389 $ 964,310597,713
Canada..................................... 158,863 138,565115,597 109,606
---------- ----------
Total...................................... $1,107,393 $1,102,875$ 704,986 $ 707,319
========== ==========
==========
- --------
(a) Property, plant and equipment and intangible assets.
59
MAIL-WELL,55
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18.20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER(a) QUARTER QUARTER QUARTER ---------- ---------- ---------- ----------QUARTER
-------- -------- -------- --------
20032004
Net sales................................... $ 427,320 $407,826 $412,218 $424,300sales........................................... $423,742 $409,396 $428,099 $481,677
Gross profit................................ 83,920 79,125 81,877 89,624profit........................................ 88,420 83,634 84,503 92,836
Income (loss) from continuing operations.... 532 (1,683) 2,172 2,903
Discontinued operations..................... (2,500) 581operations............ (16,535) (3,296) 2,490 (3,597)
Gain (loss) on discontinued operations.............. -- 371
Cumulative effect of a change in accounting
principle................................. 3221,230 -- --
--
----------------- -------- -------- --------
Net income (loss).............................................................. $(16,535) $ 2,710(2,066) $ (2,264)2,490 $ 2,172 $ 2,532
=========(3,597)
======== ======== ======== ========
Earnings (loss) per share--basic and diluted:
Income (loss) from continuing operations............................operations........ $ 0.01(0.35) $ (0.04)(0.07) $ 0.05 $ 0.06(0.08)
Discontinued operations................. 0.05 (0.01)operations......................... -- (0.01)
Cumulative effect of a change in
accounting principle..................0.03 -- --
-- --
----------------- -------- -------- --------
Net income (loss) per share--basic and diluted...............................diluted.. $ 0.06(0.35) $ (0.05)(0.04) $ 0.05 $ 0.05
=========(0.08)
======== ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ------------------ -------- -------- --------
20022003
Net sales................................... $ 443,482 $420,967 $428,720 $435,536sales........................................... $427,320 $407,826 $412,218 $424,300
Gross profit................................ 88,029 78,838 85,235 91,239profit........................................ 83,920 79,121 81,877 89,628
Income (loss) from continuing operations.... (13,609) (38,069) (22,149) 339
Discontinued operations..................... (7,999) (153) (5,804) (2,912)operations............ 532 (1,681) 2,172 2,901
Gain (loss) on discontinued operations.............. 2,500 (581) -- (371)
Cumulative effect of a change in accounting
principle................................. (111,748)principle......................................... (322) -- -- --
----------------- -------- -------- --------
Net loss.................................... $(133,356) $(38,222) $(27,953)income (loss)................................... $ (2,573)
=========2,710 $ (2,262) $ 2,172 $ 2,530
======== ======== ======== Loss========
Earnings (loss) per share--basic and diluteddiluted:
Income (loss) from continuing operations............................ $ (0.29) $ (0.80) $ (0.46)operations........ $ 0.01 $ (0.04) $ 0.05 $ 0.06
Discontinued operations................. (0.17)operations......................... 0.05 (0.01) -- (0.13) (0.06)(0.01)
Cumulative effect of a change in accounting
principle.................. (2.34)principle..................................... -- -- -- -----------
-------- -------- -------- --------
Net lossincome (loss) per share--basic and
diluted...diluted....................................... $ (2.80) $ (0.80) $ (0.59)0.06 $ (0.05) =========$ 0.05 $ 0.05
======== ======== ========
- --------
(a) The first quarter data for 2003 has been restated from data previously
reported to reflect the adoption of FIN 46 effective January 1, 2003
(See Note 2).========
19. SUBSEQUENT EVENT
On February 20, 2004, a jury in Los Angeles County, California returned
a $5.3 million verdict in favor of an ex-employee who had sued the Company
alleging wrongful dismissal. In order to avoid the expense and risk of
further litigation and appeals, the Company settled the dispute. The amount
of the settlement and the costs of the litigation are reflected in the
consolidated statement of operations for the year ended December 31, 2003.
60
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In March 2002, Mail-Well I Corporation ("Issuer" or "MWI"), the
Company's wholly-owned subsidiary, and the only direct subsidiary of the
Company, issued $350 million aggregate principal amount of 9 5/8% Senior
Notes ("Senior Notes") due in 2012. The Senior Notes are guaranteed by all
of the subsidiaries (the "Guarantor Subsidiaries") of MWI, all of which are
wholly owned, and by Mail-Well, Inc. ("Parent Guarantor"). The guarantees
are joint and several, full, complete and unconditional. There are no
material restrictions on the ability of the Guarantor Subsidiaries to
transfer funds to MWI in the form of cash dividends, loans or advances,
other than ordinary legal restrictions under corporate law, fraudulent
transfer and bankruptcy laws.
In December 1998, MWI issued $300 million aggregate principal amount of
8 3/4% Senior Subordinated Notes ("Senior Subordinated Notes") due in 2008.
The Senior Subordinated Notes are guaranteed by Guarantor Subsidiaries and
by the Parent Guarantor. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
ability of the Guarantor Subsidiaries to transfer funds to MWI in the form
of cash dividends, loans or advances, other than ordinary legal
restrictions under corporate law, fraudulent transfer and bankruptcy laws.
The following condensed consolidating financial information illustrates
the composition of the Parent Guarantor, Issuer, and Guarantor
Subsidiaries. The Issuer and the Guarantor Subsidiaries comprise all of the
direct and indirect subsidiaries of the Parent Guarantor. Management has
determined that separate complete financial statements would not provide
additional material information that would be useful in assessing the
financial composition of the Guarantor Subsidiaries.
Investments in subsidiaries are accounted for under the equity method,
wherein the investor company's share of earnings and income taxes
applicable to the assumed distribution of such earnings are included in net
income. In addition, investments increase in the amount of permanent
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries. The elimination entries remove the equity method
investment in subsidiaries and the equity in earnings of subsidiaries,
intercompany payables and receivables and other transactions between
subsidiaries.
61
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ --------- ------------
Current assets:
Cash and cash equivalents............ $ -- $ -- $ 307 $ -- $ 307
Accounts receivable, net............. -- 50,125 173,416 -- 223,541
Inventories, net..................... -- 35,509 55,893 -- 91,402
Note receivable from subsidiaries.... -- 603,100 -- (603,100) --
Other current assets................. -- 32,109 16,026 -- 48,135
------- -------- -------- --------- ----------
Total current assets............... -- 720,843 245,642 (603,100) 363,385
Investment in subsidiaries............. 68,019 12,364 -- (80,383) --
Property, plant and equipment, net..... -- 90,956 297,284 -- 388,240
Goodwill and other intangible assets,
net................................... -- 67,474 251,605 -- 319,079
Other assets, net...................... -- 29,322 7,367 -- 36,689
------- -------- -------- --------- ----------
Total assets........................... $68,019 $920,959 $801,898 $(683,483) $1,107,393
======= ======== ======== ========= ==========
Current liabilities:
Accounts payable..................... $ -- $ 29,092 $111,376 $ -- $ 140,468
Other current liabilities............ -- 58,868 58,701 -- 117,569
Intercompany payable (receivable).... -- 9,059 (9,059) -- --
Note payable to Issuer............... -- -- 603,100 (603,100) --
Current portion of long-term debt.... -- 1,776 799 -- 2,575
------- -------- -------- --------- ----------
Total current liabilities.......... -- 98,795 764,917 (603,100) 260,612
Long-term debt......................... -- 741,589 4,797 -- 746,386
Deferred income taxes.................. -- (4,040) 10,757 -- 6,717
Other long-term liabilities............ -- 16,596 9,063 -- 25,659
------- -------- -------- --------- ----------
Total liabilities.................. -- 852,940 789,534 (603,100) 1,039,374
Shareholders' equity................... 68,019 68,019 12,364 (80,383) 68,019
------- -------- -------- --------- ----------
Total liabilities and shareholders'
equity................................ $68,019 $920,959 $801,898 $(683,483) $1,107,393
======= ======== ======== ========= ==========
62
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ ----------- ------------
Current assets:
Cash and cash equivalents......... $ -- $ 1,957 $ 693 $ -- $ 2,650
Accounts receivable, net.......... -- 54,274 165,650 -- 219,924
Inventories, net.................. -- 42,805 60,728 -- 103,533
Net assets held for sale.......... -- -- 4,492 -- 4,492
Other current assets.............. -- 32,462 13,300 -- 45,762
------- ---------- --------- ----------- ----------
Total current assets............ -- 131,498 244,863 -- 376,361
Investment in subsidiaries.......... 42,768 417,049 -- (459,817) --
Property, plant and equipment,
net................................ -- 119,737 259,887 -- 379,624
Goodwill and other intangible
assets, net........................ -- 85,097 223,850 -- 308,947
Note receivable from subsidiaries... -- 603,100 -- (603,100) --
Other assets, net................... -- 34,030 8,405 -- 42,435
------- ---------- --------- ----------- ----------
Total assets........................ $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
Current liabilities:
Accounts payable.................. $ -- $ 41,057 $ 110,873 $ -- $ 151,930
Other current liabilities......... -- 68,128 53,012 -- 121,140
Intercompany payable
(receivable)..................... -- 507,381 (507,381) -- --
Current portion of long-term
debt............................. -- 970 1,991 -- 2,961
------- ---------- --------- ----------- ----------
Total current liabilities....... -- 617,536 (341,505) -- 276,031
Long-term debt...................... -- 754,983 5,955 -- 760,938
Note payable to Issuer.............. -- -- 603,100 (603,100) --
Deferred income tax liabilities
(assets)........................... -- (38,269) 48,605 -- 10,336
Other long-term liabilities......... -- 13,493 3,801 -- 17,294
------- ---------- --------- ----------- ----------
Total liabilities............... -- 1,347,743 319,956 (603,100) 1,064,599
Shareholders' equity................ 42,768 42,768 417,049 (459,817) 42,768
------- ---------- --------- ----------- ----------
Total liabilities and shareholders'
equity............................. $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
63
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales.............................. $ -- $412,819 $1,258,845 $ -- $1,671,664
Cost of sales.......................... -- 342,852 994,266 -- 1,337,118
------ -------- ---------- -------- ----------
Gross profit........................... -- 69,967 264,579 -- 334,546
Operating expenses:
Selling, administrative and other.... -- 62,671 184,917 -- 247,588
Restructuring and other operating
charges............................. -- 4,617 2,126 -- 6,743
------ -------- ---------- -------- ----------
Operating income (loss)................ -- 2,679 77,536 -- 80,215
Other (income) expense:
Interest expense..................... -- 71,503 388 -- 71,891
Intercompany interest expense
(income)............................ -- (54,340) 54,340 -- --
Other (income) expense............... -- 1,154 665 -- 1,819
------ -------- ---------- -------- ----------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries.......................... -- (15,638) 22,143 -- 6,505
Provision for income taxes............. -- (6,255) 8,836 -- 2,581
------ -------- ---------- -------- ----------
Income (loss) from continuing
operations, before undistributed
earnings of subsidiaries.............. -- (9,383) 13,307 -- 3,924
Equity in undistributed earnings of
subsidiaries.......................... 5,150 13,307 -- (18,457) --
------ -------- ---------- -------- ----------
Income from continuing operations...... 5,150 3,924 13,307 (18,457) 3,924
Gain from discontinued operations...... -- 1,548 -- -- 1,548
Cumulative effect of a change in
accounting principle.................. -- (322) -- -- (322)
------ -------- ---------- -------- ----------
Net income (loss)...................... $5,150 $ 5,150 $ 13,307 $(18,457) $ 5,150
====== ======== ========== ======== ==========
64
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ -------- ------------
Net sales............................ $ -- $ 519,971 $1,208,734 $ -- $1,728,705
Cost of sales........................ -- 420,696 964,665 -- 1,385,361
--------- --------- ---------- -------- ----------
Gross profit......................... -- 99,275 244,069 -- 343,344
Other operating expenses............. 161 75,033 190,777 -- 265,971
Restructuring and other operating
charges............................. -- 56,641 17,910 -- 74,551
Impairment charges................... -- 22,524 13,217 -- 35,741
--------- --------- ---------- -------- ----------
Operating income (loss).............. (161) (54,923) 22,165 -- (32,919)
Other expense (income):
Interest expense................... 5,188 75,580 58,008 (68,315) 70,461
Other expense (income)............. (5,820) (61,341) 600 68,315 1,754
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations before income taxes and
equity in undistributed earnings of
subsidiaries........................ 471 (69,162) (36,443) -- (105,134)
Income tax benefit................... -- (19,646) (12,000) -- (31,646)
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations before equity in
undistributed earnings of
subsidiaries........................ 471 (49,516) (24,443) -- (73,488)
Equity in undistributed earnings of
subsidiaries........................ (202,575) (136,191) -- 338,766 --
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of a
change in accounting principle...... (202,104) (185,707) (24,443) 338,766 (73,488)
Loss on disposal, net of tax
benefit............................. -- (16,868) -- -- (16,868)
Cumulative effect of a change in
accounting principle................ -- -- (111,748) -- (111,748)
--------- --------- ---------- -------- ----------
Net income (loss).................... $(202,104) $(202,575) $ (136,191) $338,766 $ (202,104)
========= ========= ========== ======== ==========
65
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2001
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ -------- ------------
Net sales............................ $ -- $ 590,082 $1,278,686 $ -- $1,868,768
Cost of sales........................ -- 477,170 1,003,965 -- 1,481,135
--------- --------- ---------- -------- ----------
Gross profit......................... -- 112,912 274,721 -- 387,633
Operating expenses:
Selling, administrative and
other............................. 378 87,621 205,202 -- 293,201
Impairment on assets held for sale
and former discontinued
operation......................... -- -- 36,523 -- 36,523
Restructuring and other operating
charges........................... -- 38,878 4,207 -- 43,085
--------- --------- ---------- -------- ----------
Operating income (loss).............. (378) (13,587) 28,789 -- 14,824
Other (income) expense:
Interest expense................... 7,970 73,260 58,590 (76,506) 63,314
Other expense (income)............. (8,923) (66,925) 1,265 76,506 1,923
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries........................ 575 (19,922) (31,066) -- (50,413)
Provision (benefit) for income
taxes............................... -- (7,670) 2,470 -- (5,200)
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations, before undistributed
earnings of subsidiaries............ 575 (12,252) (33,536) -- (45,213)
Equity in undistributed earnings of
subsidiaries........................ (136,792) (42,845) -- 179,637 --
--------- --------- ---------- -------- ----------
Income from continuing operations.... (136,217) (55,097) (33,536) 179,637 (45,213)
Loss from discontinued operations.... -- (81,695) (9,309) -- (91,004)
--------- --------- ---------- -------- ----------
Net income (loss).................... $(136,217) $(136,792) $ (42,845) $179,637 $ (136,217)
========= ========= ========== ======== ==========
66
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows from operating activities........... $ -- $ 5,431 $ 54,028 $ 59,459
Cash flows from investing activities:
Acquisitions, net of cash acquired........... -- -- (2,800) (2,800)
Proceeds from divestitures, net.............. -- -- 3,864 3,864
Capital expenditures......................... -- (2,162) (29,440) (31,602)
Intercompany advances........................ (75) 26,341 (26,266) --
Proceeds from sales of property, plant and
equipment................................... -- 3 679 682
---- ----------- -------- -----------
Net cash provided by (used in) investing
activities.................................. (75) 24,182 (53,963) (29,856)
Cash flows from financing activities:
Proceeds from exercise of stock options...... 75 -- -- 75
Proceeds from issuance of long-term debt..... -- 1,915,452 -- 1,915,452
Repayments of long-term debt................. -- (1,946,539) (1,760) (1,948,299)
Capitalized loan fees........................ -- (484) -- (484)
---- ----------- -------- -----------
Net cash provided by (used in) financing
activities.................................. 75 (31,571) (1,760) (33,256)
Effect of exchange rate changes on cash and
cash equivalents.............................. -- -- 1,310 1,310
---- ----------- -------- -----------
Net decrease in cash and cash equivalents...... -- (1,958) (385) (2,343)
Cash and cash equivalents at beginning of
year.......................................... -- 1,958 692 2,650
---- ----------- -------- -----------
Cash and cash equivalents at end of year....... $ -- $ -- $ 307 $ 307
==== =========== ======== ===========
67
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows from operating activities.......... $ (3,914) $ (31,306) $ 58,191 $ 22,971
Cash flows from investing activities:
Acquisition costs........................... -- (2,610) -- (2,610)
Capital expenditures........................ -- (8,336) (22,560) (30,896)
Proceeds from divestitures, net............. -- 122,330 -- 122,330
Intercompany advances....................... -- (108,783) 108,783 --
Proceeds from the sale of assets............ -- 9,862 2,133 11,995
--------- ----------- --------- -----------
Net cash provided by investing activities... -- 12,463 88,356 100,819
Cash flows from financing activities:
Proceeds from common stock issuance......... 18 -- -- 18
Proceeds from long-term debt................ -- 1,635,102 -- 1,635,102
Proceeds for repayment of intercompany note
from Issuer................................ 142,959 (142,959) -- --
Repayments of long-term debt................ (139,063) (1,575,902) (11,753) (1,726,718)
Intercompany dividends...................... -- 129,246 (129,246) --
Debt issuance costs......................... -- (18,624) -- (18,624)
--------- ----------- --------- -----------
Net cash provided by (used in) financing
activities................................. 3,914 26,863 (140,999) (110,222)
Effect of exchange rate changes on cash....... -- -- (985) (985)
Net cash used in discontinued operations...... -- -- (10,827) (10,827)
--------- ----------- --------- -----------
Net change in cash and cash equivalents....... -- 8,020 (6,264) 1,756
Balance at beginning of year.................. -- (1,589) 2,483 894
--------- ----------- --------- -----------
Balance at end of year........................ $ -- $ 6,431 $ (3,781) $ 2,650
========= =========== ========= ===========
68
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2001
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ --------- ------------
Cash flows from operating
activities........................... $ -- $ 17,692 $(101,449) $ 254,692 $ 170,935
Cash flows from investing activities:
Acquisition costs, net of cash
acquired........................... -- (3,838) -- -- (3,838)
Capital expenditures................ -- (13,187) (19,555) -- (32,742)
Purchase of investments............. -- (100) -- -- (100)
Investment in subsidiaries.......... (413) (12,940) 13,353 -- --
Other, net.......................... -- -- 3,782 -- 3,782
----- --------- --------- --------- ---------
Net cash used in investing
activities......................... (413) (30,065) (2,420) -- (32,898)
Cash flows from financing activities:
Decrease in accounts receivable
financing facility................. -- -- (75,000) -- (75,000)
Proceeds from exercise of stock
options............................ 413 -- -- -- 413
Proceeds from issuance of long-term
debt............................... -- 628,013 6,391 -- 634,404
Repayments of long-term debt........ -- (682,612) (16,910) -- (699,522)
Capitalized loan fees............... -- (4,439) -- -- (4,439)
Investment by parent................ -- 68,233 186,459 (254,692) --
----- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............... 413 9,195 100,940 (254,692) (144,144)
Effect of exchange rate changes on
cash and cash equivalents............ -- -- (73) -- (73)
Cash flows from discontinued
operations........................... -- -- 6,612 -- 6,612
----- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents..................... -- (3,178) 3,610 -- 432
Cash and cash equivalents at beginning
of year.............................. -- 1,589 (1,127) -- 462
----- --------- --------- --------- ---------
Cash and cash equivalents at end of
year................................. $ -- $ (1,589) $ 2,483 $ -- $ 894
===== ========= ========= ========= =========
69
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
OurDISCLOSURE CONTROLS AND PROCEDURES
The management of the Company, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in RulesRule 13a-15(e)
and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) are designedamended) as of December 31,
2004. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures
were sufficiently effective to ensure that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act isthis Annual Report on Form 10-K was recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms of the Securities and Exchange Commission.
The Chief Executive Officer and the Chief Financial Officer, with
assistance from other members of management, have reviewed the
effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report and, based on their evaluation, have
concluded that the disclosure controls and procedures were effective as of
such date.
There has been noinstructions for Form 10-K.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in ourthe Company's internal control over financial reporting
(as defined in RulesRule 13a-15(f) and 15d-15(f)under the Securities Exchange Act of the Exchange Act)1934, as
amended), occurred during the fourth quarter ended September 30, 2003of 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting. 70
Management's Report on Internal
Control over Financial Reporting and the Report of Independent Registered
Public Accounting Firm thereon are set forth in Part II, Item 8 of the
Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Under the terms of the Company's Articles of Incorporation and Bylaws,
each of the Directors named below is to serve until the next annual meeting
of Shareholders.stockholders.
DIRECTOR
NAME AGE POSITION SINCE(1)
- ---- --- -------- ---------
Paul V. Reilly.................... 51 Chairman,52 Director, CEO and President and Chief Executive Officer 1998
Thomas E. Costello(3)(5).......... 6465 Director 2003
Frank P. Diassi(2)(5)............. 70Paul F. Kocourek(2)(4)............ 54 Director 1993
Frank J. Hevrdejs(2)(4)........... 58 Director 19932004
Martin J. Maloney(3)Maloney(2)(4)........... 5960 Director 2003
David M. Olivier(3)(5)............ 6061 Director 2003
Jerome W. Pickholz(2)(4).......... 7172 Director 1994
Alister W. Reynolds(3)(4)(5)......... 4647 Director 2002
Susan O. Rheney(2)(4)............. 4445 Chairman 2003
Wellington E. Webb(3)(5).......... 64 Director 20032004
Gordon A. Griffiths............... 6162 President--Commercial Division
RobertSegment
Allen C. Hart.................... 66Conway, Sr. ............. 47 President--Resale DivisionSegment
Herbert H. Davis III.............. 5657 Senior Vice President--Corporate Development and Chief
Legal Officer
Michel P. Salbaing................ 5859 Senior Vice President--Finance and Chief Financial
Officer
Brian P. Hairston................. 4647 Vice President--Human Resources
William W. Huffman, Jr............ 55Jr. .......... 56 Vice President--Corporate Controller
D. Robert Meyer, Jr............... 47Jr. ............. 48 Vice President--Treasurer
Matthew H. Mitchell............... 3940 Vice President--Chief Information Officer
Keith T. Pratt.................... 5758 Vice President--Purchasing and Supply Chain Management
Wayne M. Wolberg.................. 5455 Vice President--General Auditor
Mark L. Zoeller................... 4445 Vice President--General Counsel and Secretary
- --------
(1) Directors serve one year terms.
(2) Member of the Governance and Nominating Committee.committee.
(3) Member of the Compensation and Human Resources Committee.committee.
(4) Member of the Audit Committee.committee.
(5) Member of the Employee Health and Safety and Environmental Committee.committee.
PAUL V. REILLY, hasage 52, served as the Parent Company'sour President, and Chief Executive Officer
since January 2001,and Chairman of the Board since Junefrom 2001 until January 2005 when he announced his
resignation. Mr. Reilly will continue to serve as Chief Executive Officer
and President to assist with the transition to his successor. He has been a
Director since 1998. Mr. Reilly was our President and Chief Operating
Officer from January 1998 to March 2001 and was Senior Vice President--Finance and Chief
Financial Officer from 1995 to 1998. Mr. Reilly spent 14 years with
Polychrome Corporation, a prepress supplier to the printing industry, where
he held a number of positions including Assistant Corporate Treasurer,
Corporate Treasurer, Vice President and Chief Financial Officer and General
Manager of United States Operations.operations. Mr. Reilly is a Certified Public
Accountant.
THOMAS E. COSTELLO, age 65, became a directorDirector in February 2003. From 19911992
through retirement in 2002, Mr. Costello served as Chief Executive Officer
of Xpedx,xpedx, a multi-billion dollar business to business distributor of printing and packaging
products, and Senior Vice President of International Paper Co. Xpedxxpedx is a
wholly-ownedwholly owned
58
division of International Paper. He is also a directorDirector of Cadmus
Communications 71
Corporation, a customized printer,content management, publisher's
fulfillment and custom packaging fulfillment company, Intertape Polymer
Group, a manufacturer of tape for plastic packaging.packaging, and Eagle Hospitality
Properties, Inc., a real estate investment trust. Mr. Costello is a member
of the Compensation and Human Resources Committeecommittee and Chairman of the
Employee Health and Safety and
Environmental Committeecommittee of the Board of Directors.
FRANK P. DIASSIPAUL F. KOCOUREK, age 54, became a Director in August 2004. Mr.
Kocourek has been a directorSenior Partner with Booz/Allen/Hamilton, a global
strategy and technology consulting firm since 1993. Mr. Diassi was Chairman
of Sterling Chemicals, Inc., a manufacturer of commodity petrochemicalsKocourek serves as
Senior Partner for the strategic leadership practice, and chemicals used primarily in the pulp and paper industry, from 1996 through
2001. He was a founding director of Arcadian Corporation, the largest
nitrogen fertilizer company in North America. From 1989 to 1994 Mr. Diassi
was a director and Chairmanpreviously served
as Global Managing Partner of the Finance CommitteeAsia Pacific region and Global Managing
Partner of Arcadian
Corporation.financial services. From 1993 through 1995, Mr. Diassi has been manager and a member of The Unicorn Group,
LLC, an investment company, since 1981. Mr. Diassi is a director of
Fibreglass Holdings, Inc., a truck accessory manufacturer, a director and
Chairman of Amerlux Inc., a commercial lighting company, a director and
Chairman of Software Plus, Inc., a human resources/ payroll software design
firm, and a director of Lifelines Technology, Inc., a manufacturer of time
and temperature indicator labels. On July 16, 2001, Sterling Chemicals,
Inc., a company for which Mr. Diassi hasKocourek served
as an executive officer,
filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code. Mr. Diassi is a member of the Governance and
Nominating Committee and Chairman of the Health, Safety and Environmental
Committee ofon the Board of Directors.
FRANK J. HEVRDEJS has been a director since 1993. In 1982,Directors of Booz/Allen/Hamilton. He received an MBA in
finance and accounting from the Wharton School of Business. Mr. Hevrdejs
co-founded The Sterling Group, L.P., a private investment company, where he
is currently a principal and Chairman. He also serves as President of First
Sterling Ventures Corp., an investment company, and Chairman of Enduro
Holdings, Inc., a structural and electrical manufacturing company, and
Chairman of Fibreglass Holdings, Inc., a truck accessory manufacturer. He
is a director of Eagle U.S.A., an air-freight company. From 1998 through
2003, he was a director of the Houston Regional Board of J.P. Morgan Chase
and Co., a financial institution. Mr. Hevrdejs is a certified public
accountant. He was a public accounting auditor in the accounting firm of
Deloitte Haskins and Sells, now known as Deloitte & Touche LLP, corporate
accounting manager of Baker International and a financial consultant. He is
also chairman of the audit committee of Eagle U.S.A. Mr. HevrdejsKocourek is
a member of the Audit Committeecommittee and serves as Chairman of the Governance and Nominating Committeecommittee
of the Board of Directors.
MARTIN J. MALONEY, age 60, became a directorDirector in February 2003. Since 1984 Mr.
Maloney has served as Chairman and Co-Founder of Broadford and Maloney,
Inc., an agency specializing in public relations, advertising and marketing
communications for graphic arts related companies. Since 1989 he has served
on the Board of Advisors of the New York University Center for Graphic Arts
Management. He is also a Director of the Association of Graphic
Communications and serves on the Board of Governors of Legatus. Mr. Maloney
served as internal auditorInternal Auditor and prepared annual reports for companies for
over 20 years. Mr. Maloney is Chairman of the Governance and Nominating
committee and a member of the Compensation
and Human Resources Committee and the Audit Committeecommittee of the Board of Directors.
DAVID M. OLIVIER, age 61, became a directorDirector in February 2003. Mr. Olivier was
with Wyeth Corporation, a pharmaceutical company, and its affiliated
entities for over 35 years when he retired in May 2002. He was a Directormember of the
executive and Senior Vice Presidentfinance committees and a corporate senior vice president at
the time of his retirement. He is also a
Director of Summerset Medical Center, a Director and advisor to Taratec Corp.,
a management consultingpharmaceutical compliance company, and an Advisor to AIG Healthcare Partners,chairman of Alterna, LLC, a
private equity firm.investment company. He received an MBA from the University
of California at Berkeley. Mr. OliverOlivier is a member of the Compensation and
Human Resources Committeecommittee and the Employee Health and Safety and Environmental Committeecommittee of
the Board of Directors.
JEROME W. PICKHOLZ, age 72, has been a directorDirector since 1994. From 1978 until
1994, he was Chief Executive OfficerMr.
Pickholz is chairman emeritus of Ogilvy & Mather Direct Worldwide, a direct
advertising agency. From 1994 through 1995,agency, where he served as Chairman of
the Board of Ogilvy & Mather Direct Worldwide where he is now Chairman
Emeritus.chief executive officer from 1978
until 1994, and as chairman in 1994 and 1995. Mr. Pickholz served as
founder and Chairmanchairman of Pickholz, Tweedy, Cowan, L.L.C., a marketing
communications company, from 1996 until January
2001 and he has been a direct
marketing consultant since February 2001. He also serves as a Director of Gift
Certificates.com, Inc., a provider of gift certificate products and
services. Mr. Pickholz is a certified public accountant. Mr. PickholzCertified Public Accountant and serves as
the
72
Chairmanchairman of theour Audit Committeecommittee and as a member of theour Governance and
Nominating Committeecommittee of the Board of Directors.
ALISTER W. REYNOLDS, age 47, has been a director since 2002. In 2004
Mr. Reynolds has
been employed byconcluded a 22 year career with Quest Diagnostics, Inc., a
provider of diagnostic laboratory testing services, and its former parent
company, Corning Incorporated, since 1982Incorporated. Mr. Reynolds served in various positions
including Senior Vice President--U.S.President of Operations and, most recently, Senior
Advisor to the Office of the Chairman. Mr. Reynolds received an MBA in
finance from Cornell University. He is also a directorDirector of Soma Logic Incorporated, athree privately
held biotechnology company, Health Carecompanies: SomaLogic Incorporated, Healthcare Waste Solutions, and
Viecore Inc.,
a privately held software integration company. He is a member of the Audit
Committee andIncorporated. Mr. Reynolds serves as Chairman of the Compensation
and Human Resources Committeecommittee and is a member of the Employee Health and
Safety committee of the Board of Directors.
SUSAN O. RHENEY, becameage 45, has been a directorDirector since 2003 and was
appointed Chairman of the Board in February 2003.January 2005. Ms. Rheney previously
served as a directorDirector of the CompanyCenveo from 1993 to 1997. She was a principal in The
Sterling Group, L.P., a private investment company, from 1992 to 2001.2002. Ms.
Rheney is also a Director of Genesis Energy LP, an oil pipeline company, and
Texas Petrochemical Holdings, Inc., a chemical manufacturer. From 1999 through 2003, she served as a Director of American
Plumbing and Mechanical, Inc., a plumbing contractor. Texas
Petrochemical filed a voluntary petition for reorganization under Chapter 11
of the United States Bankruptcy Code in July 2003. In connection
59
with this filing, the holder of discount notes issued by Texas Petrochemical
filed a lawsuit against the directorsDirectors and officers of Texas Petrochemical in
December 2003.2003, which suit has been administratively terminated by the
bankruptcy court. Ms. Rheney received an MBA from Harvard University. She is
a certified
public accountantCertified Public Accountant and was a public accountingan auditor for the accounting firm of
Deloitte & Touche. Ms. Rheney is a member of the Audit committee and the
Governance and Nominating Committee and the Audit Committeecommittee of the Board of Directors.
WELLINGTON E. WEBB, age 64, has been a Director since August 2004.
Former Mayor Webb was elected Mayor of Denver in 1991 and reelected in 1995
and 1999. In 2003 he established a consulting service, Webb Group
International LLC, which assists cities with local economic projects and
economic opportunities in Asia and Africa. He is also a Director of Maximus
Corporation, which provides services to governmental agencies, the National
Homebuyers Association and The Labor's Community Agency and is the Vice
Chair of the Democratic National Committee. Former Mayor Webb is a member
of the Compensation and Human Resources committee and the Employee Health
and Safety committee of the Board of Directors.
ALLEN C. CONWAY, SR. age 47, has served as Executive Vice President of
Cenveo and President of our Resale Segment since September 2004. Mr. Conway
has served Cenveo and its predecessor companies for over 26 years, including
as Vice President of our Printxcel division from 2000 to 2003 and Executive
Vice President of the Custom division of our Resale Segment from 2003 until
September 2004 when he became President of our Resale Segment.
GORDON A. GRIFFITHS, age 62, served as Senior Vice President since 2002
and as President of our Commercial Segment since our reorganization in
October 2003. From April 2002 until October 2003, he served as President
and Chief Executive Officer of our former Commercial Printing Division.
From February 2000 until April 2002, Mr. Griffiths was Chairman and Chief
Executive Officer of Pareto Corporation, a Canadian knowledge services
provider. He continues to serve as Director of Pareto Corporation. In 2000,
Mr. Griffiths co-founded the Caxton Group, a marketing services agency,
which became a public company in 2001. He was President of St. Joseph
Corporation, Canada's largest privately owned printer, from May 1997 until
February 2000.
ROBERT C. HART served as Senior Vice President since 2000, and as
President of our Resale Segment since our reorganization in October 2003.
From 2000 until October 2003, he served as President and Chief Executive
Officer of our former Envelope Division. From 1998, until he joined the
Company, he owned his own consulting firm after having spent over 30 years
with Riverwood International, a paperboard and packaging company. While at
Riverwood, Mr. Hart served as Vice President and Mill Manager, Vice
President, Sales and Marketing, Vice President, and General Manager of
Paperboard Operations. As Senior Vice President of the paperboard
operation, Mr. Hart directed the operations of three paper mills.
HERBERT H. "WOODY" DAVIS III, age 57, has been Senior Vice
President--Corporate Development and Chief Legal Officer since August 2001.
Before that, Mr. Davis was in the private practice of law and was a partner
at the Denver, Colorado law firm of Rothgerber Johnson & Lyons LLP for over
20 years. Mr. Davis remains "Of Counsel" at Rothgerber Johnson & Lyons LLP.
MICHEL P. SALBAING, age 59, has been Senior Vice President--Finance and
Chief Financial Officer since November 2000. From 1996 to November 2000,
Mr. Salbaing was with Quebecor World, then the largest North American
printer, where he held a number of positions including Chief Financial
Officer of the overall corporation, President and Chief Executive Officer
of Quebecor Printing Europe and Senior Vice President and Chief Financial
Officer of Quebecor World North America. Before 1996 Mr. Salbaing held
various senior financial positions with three large Canadian manufacturing
firms and spent eight years with Ernst & Young LLP. Mr. Salbaing is a
member of the Canadian Institute of Chartered Accountants.
73
BRIAN P. HAIRSTON, age 47, has been Vice President--Human Resources
since August 2002. From April 2001 through August 2002, he was a human
resources consultant for a variety of firms. From October 1999 until April
2001, he was Senior Vice President--Human Resources for Kellogg
Corporation, a cereal producer. From 1997 to 1999, he served as Vice
President--Human Resources for CitiGroup, a financial institution.
WILLIAM W. HUFFMAN, JR., age 56, has been Vice President--Corporate
Controller since November 2000. From January 1999 to November 2000, he was
Vice President--Chief Financial Officer of the Company's commercial
printing division. In 1997 and 1998, he was a financial consultant. Mr.
Huffman began his career with the accounting firm of Coopers & Lybrand and
is a Certified Public Accountant.
60
D. ROBERT MEYER, JR., age 48, has been Vice President--Treasurer since
1998. From 1994 to 1998, Mr. Meyer was a partner in the tax department of
the accounting firm of Deloitte & Touche LLP. Mr. Meyer is a licensed
attorney, Certified Public Accountant and Certified Financial Planner.
MATTHEW H. MITCHELL, age 40, has been Vice President--Chief Information
Officer since December 2003. From 1996 to November 2003, he served as Vice
President--Information Services with Aramark Educational Resources, Inc.,
an educational service provider.
KEITH T. PRATT, age 58, has been Vice President--Purchasing and Supply
Chain Management since 1998. From 1994 to 1998, Mr. Pratt was Vice
President of Material Sourcing and Logistics of Ply Gem Industries, a
subsidiary of Nortek, Inc., a building products manufacturer.
WAYNE M. WOLBERG, age 55, has been Vice President--General Auditor
since October 2001. From June 2000 to April 2001, he served as Vice
President--Finance of AT&T Broadband. Mr. Wolberg was Vice President and
General Auditor of MediaOne from 1996 to 2000. He is a Certified Management
Accountant.
MARK L. ZOELLER, age 45, has been Vice President--General Counsel and
Secretary since January 2003. He joined the Company in 1997 as Corporate
Counsel, was Assistant General Counsel from May 2000 to May 2001 and was
Vice President--Corporate Development from May 2001 until January 2003. He
is a licensed attorney.
The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD
COMPENSATION--Corporate Governance, --Nomination of Directors, and --Board
Procedures and Committees," and "OTHER INFORMATION--Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy
Statement filed pursuant to Regulation 14A in connection with the 20042005
Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD
COMPENSATION--Board Compensation," and "--Compensation and Human Resources
Committee Interlocks and Insider Participation," "COMPENSATION OF EXECUTIVE
OFFICERS," "REPORT ON EXECUTIVE COMPENSATION," and "COMPARISON OF FIVE-YEAR
CUMULATIVE TOTAL RETURN" appearing in the Company's Proxy Statement filed pursuant to
Regulation 14A in connection with the 20042005 Annual Meeting of Stockholders
are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The sections captioned "OWNERSHIP OF VOTING SECURITIES" and
"COMPENSATION OF EXECUTIVE OFFICERS--Equity Compensation Plan Information"
appearing in the Company's Proxy Statement filed pursuant to Regulation 14A
in connection with the 20042005 Annual Meeting of Stockholders are incorporated
herein by reference.
74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Executive
Agreements--Loan to Mr. Salbaing" appearing in the Company's Proxy
Statement filed pursuant to Regulation 14A in connection with the 20042005
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The sectionsections captioned "INDEPENDENT PUBLIC AUDITORS" and "REPORT OF THE
AUDIT COMMITTEE" appearing in the Company's Proxy Statement filed pursuant
to Regulation 14A in connection with the 20042005 Annual Meeting of
Stockholders isare incorporated herein by reference.
75
61
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Included in Part II, Item 8 of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this Report:
PAGE
----
Schedule I Condensed Parent-Only Balance Sheets at December 31, 2003
and 2002 and Condensed Parent-Only Statements of
Operations and Cash Flows for the Years Ended December 31,
2003, 2002, and 2001...................................... 80
Schedule II Valuation and Qualifying Accounts for the Years Ended
December 31, 2004, 2003, 2002, and 2001......................... 842002......................... 66
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 CertificateArticles of Incorporation of Mail-Well Corporation--incorporatedthe Company--incorporated by
reference from Mail-Well I Corporation'sExhibit 3(i) of the Company's Form S-4 filed March 15,
1999 (Reg. No. 333-74409).10-Q for the
quarter ended June 30, 1997.
3.2 Articles of Amendment to the Articles of Incorporation of the
Company dated May 17, 2004--incorporated by reference to
Exhibit 3.2 to Cenveo Inc.'s quarterly report on Form 10-Q for
the quarter ended June 30, 2004.
3.3* Bylaws of the Company--as amended February 24, 2005.
3.4 Certificate of Amendment of Certificate of Incorporation of
Cenveo Corporation (formerly known as Mail-Well Corporation--incorporatedI Corporation)
dated May 14, 2004 --incorporated by reference from
Mail-Well I Corporation'sto Exhibit 3.4
to Cenveo Inc.'s quarterly report on Form S-4 filed March 15, 1999
(Reg. No. 333-74409).
3.3 Certificate of Correction Filed to Correct Certain Error in10-Q for the Certificate of Amendment of Mail-Well I Corporation
Filed in the Office of the Secretary of State of Delaware on
September 11, 1995--incorporated by reference from Mail-Well
I Corporation's Form S-4 filed March 15, 1999 (Reg. No.
333-74409).
3.4quarter
ended June 30, 2004.
3.5 Bylaws of Mail-Well I Corporation--incorporated by reference
from Mail-Well I Corporation's Form S-4 filed March 15, 1999
(Reg. No. 333-74409).
4.1 Indenture dated as of December 16, 1998 between Mail-Well I
Corporation and State Street Bank and Trust Company, as
Trustee, relating to Mail-Well I Corporation's $300,000,000
aggregate principal amount of 8 3/4% Senior Subordinated
Notes due 2008--incorporated by reference from Exhibit 4.4
to Mail-Well, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, File No. 1-12551.
4.2 Form of Senior Subordinated Note--incorporated by reference
from Exhibit 4.5 to Mail-Well, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998, File No. 1-12551.
4.3 Indenture dated as of March 13, 2002 between Mail-Well I
Corporation and State Street Bank and Trust Company, as Trustee
relating to Mail-Well I Corporation's $350,000,000 aggregate
principal amount of 9 5/8% Senior Notes due 2012--incorporated
by reference to Exhibit 10.30 to Mail-Well, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
4.44.2 Form of Senior Note and Guarantee relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount 9 5/8%
due 2012--incorporated by reference to Exhibit 10.31 to
Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.
4.5*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 76
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
relating to
Mail-Well I Corporation's $320,000,000 aggregate principal
amount of 7 7/8%8 Senior Subordinated Notes due
2013.
4.6*2013--incorporated by reference to Exhibit 4.5 to Mail-Well,
Inc.'s Annual Form 10-K filed February 27, 2004.
4.4 Registration Rights Agreement dated February 4, 2004, between
Mail-Well I Corporation and Credit Suisse First Boston, as
Initial Purchaser, relating to Mail-Well I Corporation's
$320,000,000 aggregate principal amount of 7 7/8%8 Senior
Subordinated Notes due 2013.2013--incorporated by reference to
Exhibit 4.6 to Mail-Well, Inc.'s Annual Form 10-K filed
February 27, 2004.
62
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of
its officers and directors-- incorporateddirectors--incorporated by reference from
Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on
Form S-1 dated March 25, 1994.
10.2 Form of Indemnity Agreement between Mail-Well I Corporation and
each of its officers and directors--incorporated by reference
from Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement
on Form S-1 dated March 25, 1994.
10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of
February 23, 1994 and related Employee Stock Ownership Plan
Trust Agreement--incorporated by reference from Exhibit 10.19
of Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated
by reference from Exhibit 10.20 of Mail-Well, Inc.'s
Registration Statement on Form S-1 dated March 25, 1994.
10.5 Form of Mail-Well, Inc. Incentive Stock Option
Agreement--incorporated by reference from Exhibit 10.22 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.6 Form of Mail-Well, Inc. Nonqualified Stock Option
Agreement--incorporated by reference from Exhibit 10.23 of
Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.7 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q for
the quarter ended March 31, 1997.
10.8 Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive
Stock Option Agreement-- incorporatedAgreement--incorporated by reference from Exhibit
10.59 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
10.9 Mail-Well, Inc. 2001 Long-Term Equity Incentive
Plan--incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
10.10 Form of Non-Qualified Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
10.11 Form of Incentive Stock Option Agreement under 2001 Long-Term
Equity Incentive Plan-- incorporatedPlan--incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.12 Form of Restricted Stock Award Agreement under 2001 Long-Term
Equity Incentive Plan-- incorporatedPlan--incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.13 Purchase Agreement dated March 8, 2002, between Mail-Well I
Corporation, and Credit Suisse First Boston, UBS Warburg LLC, Banc
of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., First
Union Securities, Inc., and Scotia Capital (USA) Inc., as Initial
Purchasers, relating to Mail-Well I Corporation's $350,000,000
aggregate principal amount of
77
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit
10.30 to Mail-Well I Corporation's Registration Statement on Form
S-4 filed June 11, 2002.
10.14 Registration Rights Agreement dated March 13, 2002, between
Mail-Well I Corporation, and Credit Suisse First Boston, UBS
Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper
Jaffray Inc., First Union Securities, Inc., and Scotia Capital
(USA) Inc., as Initial Purchasers, 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 10.32
to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.
10.15 Amended and Restated Credit Agreement dated June 27, 2002, among
the Company, Mail-Well I Corporation, the domestic subsidiaries of
Mail-Well I Corporation named in the agreement, the financial
institutions from time to time parties thereto, and Bank of
America, N.A., as administrative agent--incorporated by reference
to Exhibit 10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter
ended June 30, 2002.
10.16 Amended and Restated Security Agreement dated June 27, 2002, among
the Company, Mail-Well I Corporation, the domestic subsidiaries of
Mail-Well I Corporation named in the agreement, and Bank of
America, N.A., as agent--incorporated by reference to Exhibit 10.28
of Mail-Well, Inc.'s Form 10-Q for the quarter ended June 30, 2002.
10.17 Amendment No. 1 to Amended and Restated Credit Agreement, dated
September 27, 2002 among Mail-Well, Inc., Mail-Well I Corporation,
certain subsidiaries of Mail-Well I, the lenders under the Amended
and Restated Credit Agreement, and Bank of America, N.A., as
administrative agent for the lenders--incorporated by reference to
Exhibit 10.36 of Mail-Well I Corporation's Amendment No. 2 to
Registration Statement on Form S-4 filed October 8, 2002.
10.18 Second Amended and Restated Equipment Lease dated as of August
6, 2002 between Wells Fargo Bank Northwest, National
Association, as trustee under MW 1997-1 Trust, and Mail-Well I
Corporation--incorporated by reference to Exhibit 10.26 of
Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30,
2002.
10.1910.14 Second Amended and Restated Guaranty Agreement dated as of
August 6, 2002, among Mail-Well I Corporation as Lessee,
certain of its subsidiaries and Mail-Well, Inc. as Guarantors,
Fleet Capital Corporation as Agent, and the Trust Certificate
Purchasers named therein--incorporated by reference to Exhibit
10.27 of Mail-Well, Inc.'s Form 10-Q for the quarter ended
September 30, 2002.
10.2010.15 Second Amended and Restated Participation Agreement dated as of
August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet
Capital Corporation as Arranger and Agent, and
63
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
the Trust Certificate Purchasers named therein--incorporated by
reference to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the
quarter ended September 30, 2002.
10.2110.16 Amendment Agreement No. 1 dated as of September 25, 2002, among
Mail-Well I Corporation as Lessee, certain of its subsidiaries
and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as
Agent, and the Trust Certificate Purchasers named
therein--incorporated by reference to Exhibit 10.29 of
Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30,
2002.
10.22 Amendment No. 2 to Amended and Restated Credit Agreement, dated
December 27, 2002, among the Company, Mail-Well I Corporation,
certain subsidiaries of Mail-Well I, the lenders under the Amended
and Restated Credit Agreement, and Bank of America, N.A., as
78
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
administrative agent for the lenders--incorporated by reference to
Exhibit 99.1 of the Company's Current Report on Form 8-K filed
January 8, 2003.
10.23 Amendment No. 1 to Amended and Restated Security Agreement, dated
December 27, 2002, among the Company, Mail-Well I Corporation,
certain subsidiaries of Mail-Well I, and Bank of America, N.A., as
agent--incorporated by reference to Exhibit 99.2 of the Company's
Current Report on Form 8-K filed January 8, 2003.
10.2410.17 Employment and Executive Severance Agreement dated as of March
10, 2003, between the Company and Paul V. Reilly--incorporated
by reference to Exhibit 10.26 of the Company's Annual Form 10-K
filed March 21,31, 2003.
10.2510.18 Form of Executive Severance Agreement entered into between the
Company and each of the following: Michel Salbaing, Gordon
Griffiths, Brian Hairston, Herbert H. Davis, Keith Pratt, William Huffman, D.
Robert Meyer and Mark Zoeller--incorporated by reference to
Exhibit 10.27 of the Company's Annual Form 10-K filed March 21,31,
2003.
10.19 Amendment Agreement No. 2 dated as of March 25, 2004 among
Mail-Well I Corporation as Lessee, certain of its subsidiaries
and Mail-Well, Inc. as Guarantor, Fleet Capital Corporation as
Agent, and the Trust Purchasers named therein--incorporated by
reference to Exhibit 10.21 of the Company's Form 10-Q for
quarter ended March 31, 2004.
10.20 Second Amended and Restated Credit Agreement dated March 25,
2004 among Mail-Well, Inc., Mail-Well I Corporation, certain
subsidiaries of Mail-Well I, the lenders under the Second
Amended and Restated Credit Agreement, and Bank of America,
N.A., as administrative agent for the lenders--incorporated
by reference to Exhibit 10.22 of the Company's Form 10-Q for
quarter ended March 31, 2004.
10.21 Second Amended and Restated Security Agreement dated March 25,
2004 among Mail-Well, Inc., Mail-Well I Corporation, certain
subsidiaries of Mail-Well I, the lenders under the Second
Amended and Restated Credit Agreement, and Bank of America,
N.A., as administrative agent for the lenders--incorporated by
reference to Exhibit 10.23 of the Company's Form 10-Q for
quarter ended March 31, 2004.
10.22 Cenveo, Inc. 2001 Long-Term Equity Incentive Plan, as amended
--incorporated by reference to Exhibit 10.24 to Cenveo Inc.'s
quarterly report on Form 10-Q for the quarter ended June 30,
2004.
10.23* Amendment No. 1 to Second Amended and Restated Credit Agreement
dated February 8, 2005 among Cenveo, Inc., Cenveo Corporation,
certain subsidiaries of Cenveo Corporation, the lenders under
the Second Amended and Restated Credit Agreement, and Bank of
America, N.A., as administrative agent for the lenders.
21* Subsidiaries of the Company.
23* Consent of Ernst & Young LLP.
24 Power of Attorney--incorporated by reference to page 86.68.
31.1* Certification of Periodic Report by Paul V. Reilly, President and
Chief Executive
Officer and President, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Periodic Report by Michel P. Salbaing, Senior
Vice President--Finance and Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
64
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
32.1** Certification of Periodic Report by Paul V. Reilly, President and
Chief Executive
Officer and President, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** Certification of Periodic Report by Michel P. Salbaing, Senior
Vice President--Finance and Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------
* Filed herewith.
** Furnished herewith.
(b) REPORTS ON FORM 8-K
1. Current Report on Form 8-K filed November 3, 2003, providing certain
disclosures under Regulation FD.
2. Current Report on Form 8-K filed November 5, 2003, disclosing other
events and providing certain disclosures under Regulation FD.
(c) EXHIBITS FILED
Included in Item 15(a)(3) of this Report.
(d)(c) FINANCIAL STATEMENT SCHEDULES FILED
Included in Item 15(a)(2) of this Report.
79
65
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------
2003 2002
------- -------
ASSETS
Investment in subsidiary........................ $68,019 $42,768
------- -------
Total assets.................................... $68,019 $42,768
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Shareholders' equity............................ $68,019 $42,768
------- -------
Total liabilities and shareholders' equity...... $68,019 $42,768
======= =======
See notes to condensed financial statements.
80
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------
2003 2002 2001
------ --------- ---------
Other operating costs:
Administrative.................................. $ -- $ -- $ 359
Amortization.................................... -- 161 19
------ --------- ---------
Total other operating costs................. -- 161 378
------ --------- ---------
Operating loss...................................... -- (161) (378)
Other (income) expense:
Interest expense-debt........................... -- 5,188 7,970
Interest income from subsidiary................. -- (5,820) (8,923)
------ --------- ---------
Income before equity in undistributed earnings of
subsidiary........................................ -- 471 575
------ --------- ---------
Equity (loss) in undistributed earnings of
subsidiary........................................ 5,150 (202,575) (136,792)
------ --------- ---------
Net income (loss)................................... $5,150 $(202,104) $(136,217)
====== ========= =========
See notes to condensed financial statements.
81
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY FINANCIAL SUPPLEMENTAL STATEMENTS)
CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
------ --------- ---------
Cash flow from operating activities:
Net income (loss).................................... $5,150 $(202,104) $(136,217)
Adjustments to reconcile net income to net cash
provided (used in) by operating activities:
Equity in undistributed earnings (loss) of
subsidiary..................................... 5,150 202,575 136,792
Amortization..................................... -- 1,023 859
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Other working capital........................ -- (5,408) (1,434)
------ --------- ---------
Net cash used in operating activities........ -- (3,914) --
Cash flow from investing activities:
Investment in subsidiary............................. -- -- (413)
Other activity with subsidiary, net.................. (75) -- --
------ --------- ---------
Net cash provided by (used in) investing
activities................................. (75) -- (413)
Cash flow from financing activities:
Net proceeds from issuance of common stock........... 75 18 413
Proceeds from intercompany debt...................... -- 142,959 --
Repayment of long-term debt.......................... -- (139,063) --
------ --------- ---------
Net cash provided by financing activities.... 75 3,914 413
------ --------- ---------
Net increase (decrease) in cash and cash equivalents..... -- -- --
Cash and cash equivalents at beginning of year........... -- -- --
------ --------- ---------
Cash and cash equivalents at end of year................. $ -- $ -- $ --
====== ========= =========
See notes to condensed financial statements.
82
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED SUPPLEMENTAL FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements of Mail-Well, Inc. (the "Company") reflect the
investment in Mail-Well I Corporation ("MWI"), a wholly-owned subsidiary,
using the equity method.
2. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the consolidated financial statements and related
Notes of Mail-Well, Inc. and Subsidiaries included elsewhere herein for
additional information.
3. DEBT AND GUARANTEES
The Company has guaranteed all debt of MWI and it's subsidiaries
($749.0 million outstanding at December 31, 2003, including current
maturities) and certain other obligations arising in the ordinary course of
business. The aggregate amounts of MWI's and it's subsidiaries debt
maturities for the five years following 2003 are: 2004--$2.6 million;
2005--$75.8 million; 2006--$2.3 million; 2007--$13.5 million; 2008--$301.0
million; and $353.8 million thereafter.
4. DIVIDENDS RECEIVED
No dividends have been received from MWI since the Company's inception.
MWI's ability to declare dividends to the Company is restricted by the
terms of its bank credit agreements and the indentures relating to MWI's
Senior Notes and Senior Subordinated Notes.
83
SCHEDULE II
MAIL-WELL,CENVEO, INC. AND SUBSIDIARIES
SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 2002 AND 20012002
(amounts in thousands)
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------
2004 2003 2002 2001
------- ------- -------
ACCOUNTS RECEIVABLE ALLOWANCES
Balance at beginning of year......................... $ 3,984 $ 4,673 $ 5,385 $ 4,618
Charged to costs and expenses........................ 3,335 3,276 4,026 3,674
Recoveries and other charges.........................charges(2)...................... (133) (72) 552
3,994 (1)
Deductions(2)Deductions(1)........................................ (2,448) (3,893) (5,290) (6,901)
------- ------- -------
Balance at end of year............................... $ 4,738 $ 3,984 $ 4,673 $ 5,385
======= ======= =======
INVENTORY RESERVES
Balance at beginning of year......................... $ 4,995 $ 5,668 $ 4,636 $ 4,995
Charged to costs and expenses........................ 1,127 2,072 2,830 1,408
Recoveries and other charges......................... (1,514)charges(2)...................... (1,051) (1,511) (602)
(559)(1)
Deductions(2)Deductions(1)........................................ (371) (1,234) (1,196) (1,208)
------- ------- -------
Balance at end of year............................... $ 4,9924,700 $ 5,6684,995 $ 4,6365,668
======= ======= =======
- --------
(1) Includes amounts transferred from Mail-Well Trade Receivable
CorporationAccounts and inventories written off.
(2) Other charges includes acquired balances in the amount of $3,169. In addition, this amount includes
the reclassifications in the amounts of $2902004 and $169 which relatechanges
attributable to reserves for accounts receivable allowances and inventory reserves
transferred to assets held for sale, respectively.
(2) Accounts and inventories written off.foreign currency translation.
84
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Englewood, state of Colorado, on February 25,28, 2004.
MAIL-WELL,CENVEO, INC.
By: /s/ PAULPaul V. REILLYReilly
-------------------------------------------
Paul V. Reilly, Chairman of the Board,
President andDirector,
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ MICHELMichel P. SALBAINGSalbaing
-------------------------------------------
Michel P. Salbaing, Senior Vice President--
Finance and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
85
67
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons
in the capacities and on the dates indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Herbert H. Davis III as attorneys-in-fact,attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any
amendments to this report and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL V. REILLY Chairman of the Board, February 25, 2004
---------------------------- President & Chief Executive Officer Paul V. Reilly
----------------------------
Paul V. Reilly Director, Chief Executive February 28, 2005
Officer & President
/s/ THOMASThomas E. COSTELLO Director February 25, 2004Costello
----------------------------
Thomas E. Costello /s/ FRANK P. DIASSI Director February 25, 200428, 2005
/s/ Paul F. Kocourek
----------------------------
Frank P. Diassi
/s/ FRANK. J. HEVRDEJSPaul F. Kocourek Director February 25, 2004
----------------------------
Frank28, 2005
/s/ Martin J. Hevrdejs
/s/ MARTIN J. MALONEY Director February 25, 2004Maloney
----------------------------
Martin J. Maloney /s/ DAVID M. OLIVIER Director February 25, 200428, 2005
/s/ David M. Olivier
----------------------------
David M. Olivier /s/ JEROME W. PICKHOLZ Director February 25, 200428, 2005
/s/ Jerome W. Pickholz
----------------------------
Jerome W. Pickholz /s/ ALISTER W. REYNOLDS Director February 25, 200428, 2005
/s/ Alister W. Reynolds
----------------------------
Alister W. Reynolds /s/ SUSAN O. RHENEY Director February 25, 200428, 2005
/s/ Susan O. Rheney
----------------------------
Susan O. Rheney Director, Chairman February 28, 2005
/s/ Wellington E. Webb
----------------------------
Susan O. RheneyWellington E. Webb Director February 28, 2005
86
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