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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
COMMISSION FILE NUMBER 1-12551
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CENVEO, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE CANTERBURY GREEN
201 BROAD STREET
STAMFORD, CT 06901
(Address of principal executive offices) (Zip Code)
203-595-3000
(Registrant's telephone number, including area code)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------- -----------------------------------------
Common Stock, par value $0.01 per share The New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes /X/ No / /
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes / / No /X/
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. Large accelerated filer /X/ Accelerated filer / /
Non-accelerated filer / /
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
As of June 30, 2006, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was $960,610,100
based on the closing sale price as reported on the New York Stock Exchange.
As of June 15, 2007 the registrant had 53,687,107 shares of common
stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part II (Item 5) and Part III of this
form (Items 11, 12, 13 and 14, and part of Item 10) is incorporated by
reference from the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A with respect to the Registrant's Annual Meeting of
Shareholders to be held on or about May 3, 2007.
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CENVEO, INC.
FORM 10-K/A
AMENDMENT NO. 1
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Cenveo, Inc. ("Cenveo") hereby amends Item 8, Financial Statements and
Supplementary Data and Item 15, Exhibits and Financial Statement Schedules, of
its Annual Report on Form 10-K for the year ended December 31, 2006, which was
originally filed by Cenveo with the SEC on February 27, 2007 (the "Original
10-K"), by including the separate audited Canadian GAAP financial statements
of its significant equity investee as required under Rule 3-09 of Regulation
S-X and a reconciliation of the investees net earnings to the equity income
reflected in its consolidated financial statements.
EXPLANATORY NOTE
This Form 10-K/A is being filed in order to provide the audited Canadian GAAP
financial statements of the Supremex Income Fund (the "Fund"), which qualified
as a significant equity investee of Cenveo and a reconciliation of the Fund's
audited Canadian GAAP net earnings for the nine-months ended December 31, 2006
to the $6.2 million of equity income reflected in Cenveo's consolidated
financial statements. The reconciliation is presented in Note 3 Discontinued
Operations and the audited Canadian GAAP financial statements of the Fund are
included in Exhibit 99.1. The audited Canadian GAAP financial statements of
the Fund are being filed as an amendment to Cenveo's Annual Report on Form
10-K within six months of the Fund's fiscal year end, as permitted by Rule
3-09 of Regulation S-X.
Item 8 of the Original 10-K is amended to read in its entirety as follows:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cenveo, Inc.
We have audited the accompanying consolidated balance sheets of Cenveo,
Inc. and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 2006. Our audits also included the financial statement
schedule included in Item 15(a)(2). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cenveo, Inc. and subsidiaries at December 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Notes 1, 12 and 13 to the consolidated financial
statements, effective January 1, 2006, the Company adopted Statements of
Financial Accounting Standards No. 123(R), "Share-Based Payment", and No.
158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R)."
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Cenveo, Inc.'s internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2007 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
February 28, 2007
except for the fourth
paragraph of Note 3, as
to which the date is
June 26, 2007
1
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
DECEMBER 31,
---------------------------
2006 2005
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 10,558 $ 1,035
Accounts receivable, net................................ 230,098 247,277
Inventories............................................. 92,406 108,704
Assets held for sale.................................... 51,966 --
Prepaid and other current assets........................ 41,413 25,767
---------- ----------
Total current assets................................ 426,441 382,783
Property, plant and equipment, net.......................... 251,103 317,606
Goodwill.................................................... 258,136 311,146
Other intangible assets, net................................ 31,985 23,961
Other assets, net........................................... 34,285 44,068
---------- ----------
Total assets............................................ $1,001,950 $1,079,564
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt.................... $ 7,513 $ 2,791
Accounts payable........................................ 116,067 124,901
Accrued compensation and related liabilities............ 40,242 53,765
Other current liabilities............................... 63,609 79,051
---------- ----------
Total current liabilities........................... 227,431 260,508
Long-term debt.............................................. 667,782 809,345
Deferred income taxes....................................... 4,356 10,045
Other liabilities........................................... 40,640 49,216
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $0.01 par value; 25 shares authorized,
none issued........................................... -- --
Common stock, $0.01 par value; 100,000 shares
authorized, 53,515 and 53,025 shares issued and
outstanding as of December 31, 2006 and 2005,
respectively.......................................... 535 530
Paid-in capital......................................... 244,894 239,432
Retained deficit........................................ (186,436) (305,091)
Unearned compensation................................... -- (1,825)
Accumulated other comprehensive income.................. 2,748 17,404
---------- ----------
Total shareholders' equity (deficit)................ 61,741 (49,550)
---------- ----------
Total liabilities and shareholders' equity (deficit).... $1,001,950 $1,079,564
========== ==========
See notes to consolidated financial statements.
2
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2006 2005 2004
---------- ---------- ----------
Net sales.......................................... $1,511,224 $1,594,781 $1,597,652
Cost of sales...................................... 1,208,500 1,319,950 1,313,275
Selling, general and administrative................ 189,476 218,740 236,161
Amortization of intangible assets.................. 5,473 5,147 5,381
Restructuring, impairment and other charges........ 41,096 77,254 5,407
---------- ---------- ----------
Operating income (loss).......................... 66,679 (26,310) 37,428
Loss on sale of non-strategic businesses........... 2,035 4,479 --
Interest expense, net.............................. 60,980 73,821 73,208
Loss from the early extinguishment of debt......... 32,744 -- 17,748
Other (income) expense, net........................ (78) 1,143 2,459
---------- ---------- ----------
Loss from continuing operations before income
taxes.......................................... (29,002) (105,753) (55,987)
Income tax (benefit) expense....................... (7,177) 42,348 (11,279)
---------- ---------- ----------
Loss from continuing operations.................. (21,825) (148,101) (44,708)
Income from discontinued operations, net of
taxes............................................ 140,480 13,049 25,000
---------- ---------- ----------
Net income (loss)................................ $ 118,655 $ (135,052) $ (19,708)
========== ========== ==========
Income (loss) per share--basic and diluted:
Continuing operations.......................... $ (0.41) $ (2.96) $ (0.94)
Discontinued operations........................ 2.64 0.26 0.53
---------- ---------- ----------
Net income (loss).............................. $ 2.23 $ (2.70) $ (0.41)
========== ========== ==========
Weighted average shares--basic and diluted......... 53,288 50,038 47,750
See notes to consolidated financial statements.
3
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
--------- --------- --------
Cash flows from operating activities:
Net income (loss)......................................... $ 118,655 $(135,052) $(19,708)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of discontinued operations, net of
taxes................................................ (127,438) -- (1,230)
Income from discontinued operations, net of taxes..... (13,042) (13,049) (23,770)
Depreciation.......................................... 35,220 43,101 44,148
Amortization of other intangible assets............... 5,473 5,147 5,381
Amortization of deferred financing costs.............. 1,728 3,603 4,578
Deferred income taxes................................. (10,881) 35,665 (12,657)
Non-cash restructuring, impairment and other charges,
net.................................................. 10,346 32,010 3,228
Loss on early extinguishment of debt.................. 32,744 -- 17,748
Loss on sale of non-strategic businesses.............. 2,035 4,479 --
Provisions for bad debts.............................. 4,345 3,427 3,196
Provisions for inventory obsolescence................. 1,900 2,936 1,127
Deferred compensation provision....................... 5,954 2,505 718
Loss (gain) on disposal of assets..................... 379 (555) 670
Changes in operating assets and liabilities, excluding the
effects of acquired businesses:
Accounts receivable................................... (6,508) 341 (27,383)
Inventories........................................... 2,212 (139) (18,124)
Accounts payable and accrued compensation and related
liabilities.......................................... (15,905) (59,386) 33,203
Other working capital changes......................... (23,790) 8,652 (2,648)
Other, net............................................ (2,688) 2,312 3,620
--------- --------- --------
Net cash provided by (used in) continuing operating
activities......................................... 20,739 (64,003) 12,097
Net cash provided by discontinued operating
activities......................................... 2,617 25,330 25,894
Cash flows from investing activities:
Cost of business acquisitions, net of cash acquired... (49,425) (3,552) (9,926)
Capital expenditures.................................. (19,930) (28,154) (26,240)
Acquisition payments.................................. (4,653) (4,053) (3,248)
Proceeds from divestitures, net....................... 3,189 8,377 2,000
Proceeds from sale of property, plant and equipment... 11,475 3,796 2,949
--------- --------- --------
Net cash used in investing activities of continuing
operations......................................... (59,344) (23,586) (34,465)
Proceeds from the sale of discontinued operations..... 211,529 -- --
Proceeds from the sale of property, plant and
equipment of discontinued operations................. -- 211 63
Capital expenditures for discontinued operations...... (632) (2,603) (1,195)
--------- --------- --------
Net cash provided by (used in) investing activities
of discontinued operations......................... 210,897 (2,392) (1,132)
--------- --------- --------
Net cash provided by (used in) investing
activities......................................... 151,553 (25,978) (35,597)
Cash flows from financing activities:
Repayment of 9 5/8% senior notes...................... (339,502) -- --
(Repayments) borrowings under senior secured revolving
credit facility, net................................. (123,931) 45,490 5,131
Repayments of term loan............................... (813) -- --
Repayments of other long-term debt.................... (13,095) (3,123) (304,323)
Payment of redemption premiums and expenses........... (26,142) -- (13,528)
Payment of debt issuance costs........................ (3,770) -- (9,077)
Purchase and retirement of common stock and
cancellation of RSUs................................. (1,786) (187) --
Proceeds from issuance of term loan................... 325,000 -- --
Borrowings under new revolving credit facility, net... 15,500 -- --
Proceeds from issuance of long-term debt.............. -- -- 320,000
Proceeds from exercise of stock options............... 1,956 22,433 48
Proceeds from excess tax benefit from stock based
compensation......................................... 1,168 -- --
--------- --------- --------
Net cash (used in) provided by financing
activities......................................... (165,415) 64,613 (1,749)
Effect of exchange rate changes on cash and cash
equivalents of continuing operations....................... 14 107 (16)
Effect of exchange rate changes on cash and cash equivalents
of discontinued operations..... ........................... 15 170 (140)
--------- --------- --------
Net increase in cash and cash equivalents........... 9,523 239 489
Cash and cash equivalents at beginning of year.............. 1,035 796 307
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 10,558 $ 1,035 $ 796
========= ========= ========
See notes to consolidated financial statements.
4
CENVEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
ACCUMULATED TOTAL
OTHER SHAREHOLDERS'
COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE EQUITY
STOCK CAPITAL (DEFICIT) COMPENSATION INCOME (LOSS) (DEFICIT)
------ -------- --------- ------------ ------------- -------------
BALANCE AT DECEMBER 31, 2003.................. $484 $213,850 $(150,331) $(1,714) $ 5,730 $ 68,019
Comprehensive income (loss):
Net loss...................................... (19,708) (19,708)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $1,186.......................... (1,892) (1,892)
Currency translation adjustment............. 10,169 10,169
---------
Other comprehensive income................ 8,277
---------
Total comprehensive loss................ (11,431)
Issuance of restricted shares................. 3 1,004 (1,007) --
Exercise of stock options..................... 48 48
Amortization of deferred compensation......... 718 718
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2004.................. 487 214,902 (170,039) (2,003) 14,007 57,354
Comprehensive income (loss):
Net loss...................................... (135,052) (135,052)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $743............................ (1,187) (1,187)
Currency translation adjustment............. 4,584 4,584
---------
Other comprehensive income................ 3,397
---------
Total comprehensive loss................ (131,655)
Cancellation of restricted shares............. (4) (1,993) 795 (1,202)
Issuance of restricted shares................. 5 4,030 (4,035) --
Exercise of stock options..................... 42 22,391 22,433
Purchase and retirement of common stock....... (187) (187)
Amortization of deferred compensation and
restricted stock units....................... 289 3,418 3,707
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2005.................. 530 239,432 (305,091) (1,825) 17,404 (49,550)
Comprehensive income (loss):
Net income.................................... 118,655 118,655
Other comprehensive income (loss):
Pension liability adjustment, net of tax
expense of $429............................ 6,326 6,326
Unrealized loss on cash flow hedges......... (2,992) (2,992)
Currency translation adjustment............. (3,603) (3,603)
Reclassifications to earnings on sale of
discontinued operations:
Currency translation adjustment........... (14,387) (14,387)
---------
Other comprehensive loss.................. (14,656)
---------
Total comprehensive income.............. 103,999
Reversal of unamortized deferred compensation
on adoption of SFAS 123(R)................... (1,825) 1,825 --
Exercise of stock options..................... 5 1,951 1,956
Purchase and retirement of common stock and
cancellation of RSUs......................... (1,786) (1,786)
Amortization of stock based compensation...... 5,954 5,954
Excess tax benefit from stock based
compensation................................. 1,168 1,168
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2006.................. $535 $244,894 $(186,436) $ -- $ 2,748 $ 61,741
==== ======== ========= ======= ======== =========
See notes to consolidated financial statements.
5
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Cenveo, Inc. and subsidiaries (collectively,
the "Company" or "Cenveo") are engaged in the printing and manufacturing of
envelopes, business forms and labels and commercial printing. The Company
is headquartered in Stamford, Connecticut, is organized under Colorado law,
and its common stock is traded on the New York Stock Exchange under the
symbol "CVO".
The Company's reporting periods for 2006, 2005 and 2004 in this report
consist of 52, 52, and 53-week periods, respectively, ending on the Saturday
closest to the last day of the calendar month and ended on December 30, 2006,
December 31, 2005, and January 1, 2005, respectively. The accompanying
consolidated financial statements are presented as ending on December 31,
since the effect of reporting periods not ending on that date are not
material.
The consolidated financial statements include the accounts of Cenveo,
Inc. and its wholly-owned subsidiaries. All intercompany transactions have
been eliminated. On March 31, 2006, the Company sold to Supremex Income
Fund, a new open-ended trust formed under the laws of the Province of
Quebec (the "Fund"), all of the shares of Supremex Inc. ("Supremex"), a
Canadian subsidiary of the Company, and certain other assets of the
envelopes, forms and labels segment. Beginning in the fourth quarter of
2006, the financial results of Supremex and the other assets sold have been
accounted for as a discontinued operation resulting in the Company's
historical consolidated statements of operations and statements of cash
flows being reclassified to reflect such discontinued operations separately
from continuing operations (Notes 3, 13, 15 and 20).
USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Estimates
and assumptions are used for, but not limited to, establishing the
allowance for doubtful accounts, inventory obsolescence, depreciation and
amortization lives, asset impairment evaluations, tax assets and
liabilities, self-insurance accruals and other contingencies. Actual
results could differ from estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on
deposit and highly liquid investments with original maturities of three
months or less. Cash and cash equivalents are stated at cost, which
approximates fair value.
ACCOUNTS RECEIVABLE. Accounts receivable are recorded at invoiced
amounts. As of December 31, 2006 and 2005, accounts receivable were reduced
by an allowance for doubtful accounts of $4.8 million and $5.2 million,
respectively.
INVENTORIES. Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out or average cost basis. Cost
includes materials, labor and overhead related to the purchase and
production of inventories. As of December 31, 2006 and 2005, inventory was
reduced by an allowance for obsolescence of $4.9 million and $5.9 million,
respectively.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are
stated at cost. When assets are retired or otherwise disposed of, the
related costs and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in operations. Expenditures for
repairs and maintenance are charged to expense as incurred, and
expenditures that increase the capacity, efficiency or useful lives of
existing assets are capitalized.
6
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is provided using the straight-line method based on the
estimated useful lives of 15 to 45 years for buildings and building
improvements, 10 to 15 years for machinery and equipment and three to 10
years for furniture and fixtures.
COMPUTER SOFTWARE. The Company develops and purchases software for
internal use. Software development costs incurred during the application
development stage are capitalized. Once the software has been installed and
tested and is ready for use, additional costs incurred in connection with
the software are expensed as incurred. Capitalized computer software costs
are amortized over the estimated useful life of the software, usually
between three and seven years. Net computer software costs included in
property, plant and equipment were $7.9 million and $10.1 million as of
December 31, 2006 and 2005, respectively.
DEBT ISSUANCE COSTS. Direct expenses such as legal, accounting and
underwriting fees incurred to issue or extend debt, are included in other
assets, net in the consolidated balance sheets. Debt issuance costs were
$8.4 million and $13.0 million as of December 31, 2006 and 2005,
respectively, net of accumulated amortization, and are amortized over the
term of the related debt as interest expense. In June of 2006, the Company
refinanced certain of its long-term debt and wrote off approximately $6.6
million of debt issuance costs associated with the debt retired and
capitalized $3.8 million of costs related to the Company's new debt (Note
9). Interest expense includes $1.7 million, $3.6 million and $4.6 million
of debt issuance costs amortized in 2006, 2005 and 2004, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess
of acquisition costs over the fair value of net assets of businesses
acquired. Goodwill is reviewed annually in the fourth quarter to determine
if there is impairment, or more frequently if an indication of possible
impairment exists. No impairment charges for goodwill or other intangible
assets were recorded in 2006, 2005 or 2004.
Other intangible assets primarily arise from the purchase price
allocations of businesses acquired and are based on independent appraisals
or internal estimates. Intangible assets with determinable lives are
amortized on a straight-line basis over the estimated useful life assigned
to these assets. Intangible assets that are expected to generate cash flows
indefinitely are not amortized, but are evaluated for impairment similar to
goodwill.
LONG-LIVED ASSETS. Long-lived assets, including property, plant and
equipment, and intangible assets with determinable lives, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be fully recoverable. An impairment is
assessed if the undiscounted expected future cash flows derived from an
asset are less than its carrying amount. Impairment losses are recognized
for the amount by which the carrying value of an asset exceeds its fair
value. The estimated useful lives of all long-lived assets are periodically
reviewed and revised if necessary.
SELF-INSURANCE. The Company is self-insured for the majority of its
workers' compensation costs and group health insurance costs, subject to
specific retention levels. The Company records its liability for workers'
compensation claims on a fully-developed basis. The Company's liability for
health insurance claims includes an estimate for claims incurred but not
reported.
REVENUE RECOGNITION. The Company recognizes revenue when persuasive
evidence of an arrangement exists, product delivery has occurred or
services have been rendered, pricing is fixed or determinable, and
collection is reasonably assured.
Since a significant portion of the Company's products are customer
specific, it is common for customers to inspect the quality of the product
at the Company's facility prior to its shipment. Products shipped are not
subject to contractual right of return provisions.
7
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has rebate agreements with certain customers. These rebates
are recorded as reductions of sales and are accrued using sales data and
rebate percentages specific to each customer agreement. Accrued customer
rebates are included in other current liabilities in the consolidated
balance sheets (Note 8).
FREIGHT COSTS. The costs of delivering finished goods to customers are
recorded as freight costs and included in cost of sales. Freight costs that
are included in the price of the product are included in net sales.
ADVERTISING COSTS. All advertising costs are expensed as incurred.
Advertising costs were $2.6 million, $4.0 million and $5.2 million in 2006,
2005 and 2004, respectively.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of subsidiaries
operating outside the United States with a functional currency other than
the U.S. dollar are translated at year-end exchange rates. The effects of
translation are included as a component of accumulated other comprehensive
income in shareholders' equity (deficit) in the consolidated balance sheet.
Income and expense items are translated at the average monthly rate.
Foreign currency transaction gains and losses are recorded in income.
STOCK-BASED COMPENSATION. Effective January 1, 2006, the Company
adopted the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 123 (revised 2004), Share-Based
Payment ("SFAS 123(R)"), which revised SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). As a result, the Company now
measures the cost of employee services received in exchange for an award of
equity instruments based on the fair value of the award at the date of
grant rather than its intrinsic value, the method the Company previously
used (Note 12).
INCOME TAXES. Deferred income taxes reflect the future tax effect of
temporary differences between the carrying amount of assets and liabilities
for financial and income tax reporting and are measured by applying
statutory tax rates in effect for the year during which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation
allowance to the extent it is more likely than not that the deferred tax
assets will not be realized (Note 10).
In addition, the Company's policy is to establish tax contingency
liabilities for potential tax issues. The tax contingency liabilities are
based on our estimate of the probable amount of additional taxes that may
be due in the future. Any additional taxes due would be determined only
upon completion of current and future federal, state and international tax
audits. At December 31, 2006 and 2005, the Company had $12.6 million and
$9.5 million, respectively, of tax contingency liabilities included in
other liabilities in the consolidated balance sheets.
NEW ACCOUNTING PRONOUNCEMENTS. Effective January 1, 2006, the Company
adopted SFAS No. 154, Accounting Changes and Error Corrections, ("SFAS
154"). SFAS 154 replaces Accounting Principles Board Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for
and reporting of a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principles and to changes required by an
accounting pronouncement in the unusual case when specific transition
provisions are not provided by the accounting pronouncement. SFAS 154
requires retrospective application to prior periods' financial statements
for a change in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of
the change. Under SFAS 154, a change in the method of applying an
accounting principle would also be considered a change in accounting
principle. The adoption of SFAS 154 did not have any immediate effect on
the Company's
8
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consolidated financial position or results of operations, except for the
adoption of SFAS 123(R), which provides specific transition provisions.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans--An Amendment of
FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158") (Note 13).
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in
Income Taxes (an interpretation of FASB Statement No. 109) ("FIN 48"),
which was effective for the Company on January 1, 2007. FIN 48 was issued
to clarify the accounting for uncertainty in income taxes recognized in the
financial statements by prescribing a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Company is
currently evaluating the potential impact of this interpretation.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS 157"). SFAS 157 defines fair value and establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurement. SFAS 157
is effective for the Company beginning on January 1, 2008. The Company is
currently evaluating the potential impact SFAS 157 will have on its
consolidated financial statements.
2. ACQUISITIONS
Acquisitions are accounted for under the purchase method of accounting;
accordingly, the assets and liabilities of the acquired businesses have
been recorded at estimated fair value at the date acquired with the excess
of the purchase price over the estimated fair value recorded as goodwill
(Note 20).
On July 12, 2006, the Company completed the acquisition of all of the
common stock of Rx Label Technology Corporation, with annual sales of
approximately $35 million. This new subsidiary of the Company operates
under the name Rx Technology Corporation ("Rx Technology"). Rx Technology
specializes in providing pharmacies with labels used to dispense
prescription drugs to consumers. The aggregate purchase price paid for Rx
Technology by the Company was approximately $49.4 million, which included
$0.6 million of fees and expenses. The fair values of property, plant and
equipment and other intangible assets were determined in accordance with
independent appraisals. The Rx Technology acquisition has preliminarily
resulted in $29.1 million of goodwill, of which approximately $8.9 million
is deductible for income tax purposes. The other identifiable intangible
assets determined by the independent appraisal were $12.9 million of
customer relationships which is being amortized over their estimated
weighted average useful life of 19 years and $0.6 million of patent
technology which is being amortized over six years (Note 7). Rx
Technology's operations are included within the Company's envelopes, forms
and labels segment results.
In May 2005, the Company purchased the assets of Digidel, Inc., a
provider of pre-press services to commercial printing companies in
Philadelphia, Pennsylvania with annual sales of approximately $3.0 million.
The purchase price was $4.6 million ($3.6 million paid in 2005 and $1.0
million paid in 2006) of which $0.7 million was allocated to tangible net
assets, $0.3 million to intangible assets and $3.6 million to goodwill. The
Company consolidated this operation with its commercial printing plant in
Philadelphia, Pennsylvania.
In July 2004, the Company purchased the stock of Valco Graphics Inc., a
commercial printing company in Seattle, Washington with annual sales of
approximately $18.0 million. The purchase price was $9.6 million with $5.1
million allocated to tangible net assets and $4.5 million allocated to
goodwill.
9
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
Valco Graphics Inc. was consolidated with the Company's existing commercial
printing plant in Seattle, Washington.
In August 2004, the Company purchased the assets of WWP Property
Management, Inc., a commercial printing company in San Francisco,
California with annual sales of approximately $14.0 million. The purchase
price was $2.8 million ($1.4 million paid in each of 2004 and 2005) with
$2.7 million allocated to tangible net assets and $0.1 million allocated to
goodwill. The Company has consolidated this operation with its existing
commercial printing plant in San Francisco, California and is operating the
combined entity as Cenveo, San Francisco.
The results of the acquired businesses have been included in the
Company's consolidated results from their respective acquisition dates. Pro
forma results for 2006 and 2005, assuming the acquisitions had been made at
the beginning of the applicable period, have not been presented since they
would not be materially different from the Company's reported results.
3. DISCONTINUED OPERATIONS
Supremex
On March 31, 2006, the Company sold to the Fund all of the shares of
Supremex, which operated the Company's Canadian envelope operations, and
certain other assets. At closing, the Company received cash proceeds of
approximately $119.4 million, net of transaction expenses and subject to
the finalization of a working capital adjustment, and approximately 11.4
million units of the Fund (representing a 36.5% economic and voting
interest in the Fund). The March 31, 2006 sale resulted in a pre-tax gain
of approximately $124.1 million in the first quarter of 2006, after the
allocation of $55.8 million of goodwill to the business as required by SFAS
142, Goodwill and Other Intangible Assets. In addition, after closing, in
April 2006 the Company received approximately (1) $71.4 million of proceeds
relating to the March 31, 2006 sale and recorded a pre-tax gain of
approximately $1.4 million as a result of the Canadian dollar strengthening
against the U.S. dollar, and (2) $20.7 million from the sale of 2.5 million
units in the Fund relating to an over-allotment option to the underwriters
and recorded a pre-tax gain of approximately $9.3 million, which reduced
the Company's economic and voting interest in the Fund to 28.6%. The
Company used a significant portion of the above proceeds received to repay
amounts outstanding under its senior secured credit facility on March 31,
2006 and to repay another credit facility in April 2006.
In December 2006, the Company decided to sell its remaining units in
the Fund prior to the end of the first quarter of 2007 and determined it
would not have any significant influence over its investment after the
planned sale (Note 20). Accordingly, the operating revenues and expenses of
these assets through March 31, 2006 have been classified as discontinued
operations under SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, for all periods presented, beginning in the fourth
quarter of 2006. Discontinued operations also includes equity income of
$6.2 million before withholding taxes of $0.9 million related to the
Company's retained investment in the Fund after the March 31, 2006 sale
through December 31, 2006. From April 2006 through December 2006, the
Company received $6.2 million of distributions from the Fund. As a result
of the finalization of the working capital adjustment in December 2006, the
Company recorded an additional pre-tax gain on the sale of $3.5 million and
a reduction to the gain on sale of $2.7 million as a result of finalization
of 2005 tax returns. As of December 31, 2006, the Company's investment in
the Fund was $46.2 million, which is classified in assets held for sale on
the consolidated balance sheet.
In 2006, the operating results of the discontinued operations are for
the period from January 1, 2006 to March 31, 2006, the date of the sale,
and includes equity income from April 1, 2006 through
10
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
December 31, 2006. The following table summarizes certain statement of
operations data for discontinued operations (in thousands):
2006 2005 2004
-------- -------- --------
Net sales............................................... $ 41,391 $154,600 $145,262
Operating income........................................ 8,838 34,208 35,306
Income tax expense...................................... (1,373) (19,948) (11,620)
Gain on sale of discontinued operations, net of taxes of
$8,495 and $770 in 2006 and 2004, respectively........ 127,438 -- 1,230
Income from discontinued operations, net of tax......... 140,480 13,049 25,000
Reconciliation of net earnings of the Fund to equity income
The table below presents a reconciliation of the audited Canadian GAAP
net earnings of the Fund for the nine months ended December 31, 2006 to the
$6.2 million of equity income before withholding taxes reflected in
discontinued operations in the Company's consolidated financial statements
(in thousands). The adjustments relate to the difference between the basis
of the assets in the Fund's financial statements which were recorded at
fair value at the inception of the Fund and the historical cost basis of the
assets in Cenveo's consolidated financial statements.
Net earnings of the Fund in Canadian dollars......................................... $19,431
Adjustments to earnings of the Fund resulting from the reversal of fair value
adjustments in Canadian dollars:
Amortization of intangibles...................................................... 4,232
Increased cost of sales on inventory step-up..................................... 4,304
Decreased amortization of property, plant & equipment............................ (549)
Income tax effect of above adjustments........................................... (2,492)
Income tax recovery from change in tax rates relating to assets revaluations..... (489)
-------
Net earnings of the Fund adjusted to reflect Cenveo's carrying value under
U.S. GAAP........................................................................... $24,437
Equity income in Fund at 28.6% in Canadian dollars................................... $ 6,989
Canadian/U.S. exchange rate.......................................................... 1.13147
Equity income in Fund in U.S. dollars................................................ $ 6,177
Other
In June 2004, the Company collected $2.0 million of an unsecured note
receivable from the sale of its extrusion coating and laminating business
segment of American Business Products, Inc. in 2000, which was fully reserved
at the time of the sale. The proceeds of $2.0 million, net of tax of $0.8
million, are recorded as a gain on disposal of discontinued operations in
2004.
11
4. OTHER DIVESTITURES
During 2006, the Company sold three small non-strategic commercial
printing businesses in Somerville, Massachusetts, Bloomfield Hills,
Michigan and Memphis, Tennessee for net proceeds of $3.2 million and
recorded losses on sale of non-strategic businesses of $2.0 million.
During 2005, the Company sold six small non-strategic businesses,
including a fine papers business in Ontario, Canada, a mailing supplies
business in Dekalb, Illinois, printing operations in Riviera Beach,
Florida, Jacksonville, Illinois and Osage Beach, Missouri and a jet
printing operation in Vancouver, Canada for net proceeds of $8.4 million
and recorded losses on sale of non-strategic businesses of $4.5 million.
The following table summarizes the net sales and operating income
(loss) of the businesses that were sold for the years ended December 31,
(in thousands):
2006 2005 2004
------- ------- -------
Net sales............................................ $ 9,355 $43,773 $75,626
Operating income..................................... (1,375) 345 205
The dispositions of these non-strategic businesses have not been
accounted for as discontinued operations in the consolidated financial
statements, because either the Company has continuing involvement with
these entities, migration of cash flows to other Cenveo locations has
occurred or the operations are not material.
12
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES
Inventories by major category are as follows (in thousands):
DECEMBER 31
----------------------
2006 2005
------- --------
Raw materials.......................................... $28,247 $ 32,586
Work in process........................................ 21,638 28,115
Finished goods......................................... 42,521 48,003
------- --------
$92,406 $108,704
======= ========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (Note 11) are as follows (in thousands):
DECEMBER 31
-------------------------
2006 2005
--------- ---------
Land and land improvements............................. $ 13,562 $ 18,460
Buildings and improvements............................. 80,740 108,229
Machinery and equipment................................ 437,910 500,535
Furniture and fixtures................................. 10,771 11,579
Construction in progress............................... 6,974 14,532
--------- ---------
549,957 653,335
Accumulated depreciation............................... (298,854) (335,729)
--------- ---------
$ 251,103 $ 317,606
========= =========
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for 2006 and 2005 by
reportable segment (Note 18) are as follows (in thousands):
ENVELOPES, FORMS COMMERCIAL
AND LABELS PRINTING TOTAL
---------------- ---------- --------
Balance as of December 31, 2004................... $217,465 $91,473 $308,938
Acquisitions.................................... -- 2,725 2,725
Dispositions.................................... (1,127) (1,260) (2,387)
Foreign currency translation.................... 1,700 170 1,870
-------- ------- --------
Balance as of December 31, 2005................... $218,038 $93,108 $311,146
Acquisitions.................................... 29,122 -- 29,122
Dispositions.................................... (55,739) (747) (56,486)
Reclassified to assets held for sale............ (25,749) -- (25,749)
Foreign currency translation.................... -- 103 103
-------- ------- --------
Balance as of December 31, 2006................... $165,672 $92,464 $258,136
======== ======= ========
13
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Other intangible assets are as follows (in thousands):
DECEMBER 31
----------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
INTANGIBLE ASSETS WITH
DETERMINABLE LIVES:
Customer relationship......... $29,906 $(13,001) $16,905 $17,006 $ (8,336) $ 8,670
Trademarks and tradenames..... 14,551 (2,487) 12,064 14,551 (2,092) 12,459
Patents....................... 3,028 (1,218) 1,810 2,428 (1,004) 1,424
Non-compete agreements........ 1,640 (1,591) 49 2,415 (2,196) 219
Other......................... 768 (331) 437 768 (299) 469
------- -------- ------- ------- -------- -------
49,893 (18,628) 31,265 37,168 (13,927) 23,241
INTANGIBLE ASSETS WITH
INDEFINITE LIVES:
Pollution credits............. 720 -- 720 720 -- 720
------- -------- ------- ------- -------- -------
Total..................... $50,613 $(18,628) $31,985 $37,888 $(13,927) $23,961
======= ======== ======= ======= ======== =======
As of December 31, 2006, the weighted average remaining amortization
period for customer relationships was 13 years, trademarks and tradenames
was 33 years, patents was seven years and other was 27 years.
Total pre-tax amortization expense for the five years ending December
31, 2011 is estimated to be as follows: $5.8 million, $1.4 million, $1.4
million, $1.4 million and $1.4 million, respectively.
8. OTHER CURRENT LIABILITIES
Other current liabilities are as follows (in thousands):
DECEMBER 31
---------------------
2006 2005
------- -------
Accrued customer rebates............................... $19,135 $18,639
Accrued taxes.......................................... 11,282 9,542
Accrued interest....................................... 5,267 16,003
Restructuring liabilities.............................. 4,521 7,964
Other accrued liabilities.............................. 23,404 26,903
------- -------
$63,609 $79,051
======= =======
14
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
DECEMBER 31
-----------------------
2006 2005
-------- --------
Term Loan, due 2013..................................... $324,188 $ --
7 7/8% Senior Subordinated Notes, due 2013.............. 320,000 320,000
9 5/8% Senior Notes, due 2012........................... 10,498 350,000
Revolving Credit Facility, due 2012..................... 15,500 --
Senior Secured Credit Facility.......................... -- 123,931
Other................................................... 5,109 18,205
-------- --------
675,295 812,136
Less current maturities................................. (7,513) (2,791)
-------- --------
Long-term debt.......................................... $667,782 $809,345
======== ========
On June 23, 2006, the Company completed a tender offer and consent
solicitation (the "Tender Offer") for any and all of its 9 5/8% Senior
Notes due 2012 and extinguished approximately $339.5 million in aggregate
principal amount (approximately 97% of the outstanding amount) that were
tendered and accepted for purchase under the terms of the Tender Offer. The
Company may redeem the remaining outstanding 9 5/8% Senior Notes, in whole
or in part, on or after March 15, 2007, at redemption prices from 104.8% to
100%, plus accrued and unpaid interest.
On June 21, 2006, the Company entered into a credit agreement that
provides for $525 million of senior secured credit facilities with a
syndicate of lenders (the "Credit Facilities"). The Credit Facilities
consist of a $200 million six-year revolving credit facility ("Revolving
Credit Facility") and a $325 million seven-year term loan facility ("Term
Loan"). The Credit Facilities contain customary financial covenants,
including maintenance of a maximum consolidated leverage ratio and a
minimum consolidated interest coverage ratio. Borrowing rates under the
Credit Facilities are determined at the Company's option at the time of
each borrowing and are based on the London Interbank Offered Rate ("LIBOR")
or the prime rate publicly announced from time to time, in each case plus a
specified interest rate margin (see "Interest rate swaps"). The Credit
Facilities are secured by substantially all of the Company's assets.
Proceeds from the Credit Facilities and other available cash were used to
fund the Tender Offer, to retire the Company's existing Senior Secured
Credit Facility due 2008 (which had no amounts outstanding), and for $3.8
million of debt issuance costs, which are being amortized over the
maturities of the Credit Facilities.
In connection with the debt refinancing in June 2006, the Company
incurred a $32.7 million loss on early extinguishment of debt related to
the Tender Offer and the retirement of the Senior Secured Credit Facility,
which consisted of Tender Offer premiums of $25.2 million, the write-off of
previously unamortized deferred financing costs of $6.6 million and Tender
Offer expenses of $0.9 million.
In January 2004, the Company issued $320 million of 7 7/8% senior
subordinated notes due 2013 ("Senior Subordinated Notes"). The interest on
these notes is payable semi-annually. The Company may redeem these notes,
in whole or in part, on or after December 1, 2008, at redemption prices
from 103.9% to 100%, plus accrued and unpaid interest. The net proceeds
from the sale of the Senior Subordinated Notes were used to fund the tender
offer and redemption of the Company's 8 3/4% senior subordinated note which
were due to mature in 2008. The loss recorded on the early extinguishment
of
15
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
the 8 3/4% senior subordinated notes consisted of redemption premiums of
$13.5 million and unamortized debt issuance costs of $4.2 million. The debt
issuance costs for the Senior Subordinated Notes of $7.2 million are being
amortized over the term of the notes.
The interest rate on other long-term debt was 8.6% and 8.1% at December
31, 2006 and 2005, respectively.
The aggregate annual maturities for long-term debt are as follows (in
thousands):
2007................................. $ 7,513
2008................................. 4,082
2009................................. 4,158
2010................................. 4,243
2011................................. 4,176
Thereafter........................... 651,123
--------
$675,295
========
Cash interest payments on long-term debt were $68.0 million in 2006,
$68.9 million in 2005 and $67.4 million in 2004.
The estimated fair value of the Company's long-term debt was $665.9
million and $828.4 million at December 31, 2006 and 2005, respectively.
The Credit Facilities contain certain restrictions that, among other
things and with certain exceptions, limit the ability of the Company to
incur additional indebtedness, prepay subordinated debt, transfer assets
outside of the Company, pay dividends or repurchase shares of common stock.
The Company is also required to comply with maximum consolidated leverage
ratio and minimum consolidated interest coverage ratio financial covenants
pertaining to the Credit Facilities. As of December 31, 2006, the Company
was in compliance with all debt agreements.
Interest rate swaps
During June 2006, the Company entered into interest rate swap
agreements to hedge interest rate exposure for $220 million notional amount
of floating rate debt. This hedge of interest rate risk was designated and
documented at inception as a cash flow hedge and is evaluated for
effectiveness at least quarterly. Effectiveness of this hedge is calculated
by comparing the fair value of the derivative to a hypothetical derivative
that would be a perfect hedge of floating rate debt. There was no
ineffectiveness from this hedge through December 31, 2006. At December 31,
2006, the Company has recorded a liability of $2.8 million, which
represents the decrease in the current fair value of floating rate cash
inflows that are less than the fixed cash outflows over the remaining term
of the hedges. The decrease of cash inflows largely reflects the decrease
in LIBOR as of December 31, 2006, as compared to LIBOR at the time that the
Company entered into the swap agreements. The liability is included in
other liabilities and the offsetting amount is included in accumulated
other comprehensive income in the consolidated balance sheet as of December
31, 2006. The accounting for gains and losses associated with changes in
the fair value of cash flow hedges and the effect on the Company's
consolidated financial statements will depend on whether the hedge is
highly effective in achieving offsetting changes in fair value of cash
flows of the liability hedged. As of December 31, 2006, the Company does
not anticipate reclassifying any ineffectiveness into its results of
operations for the next twelve months.
16
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
Guarantees
In conjunction with the sale of the prime label business in 2002, the
Company guarantees a lease obligation assumed by the buyer of this
business. The guarantee requires the lessor to pursue collection and other
remedies against the buyer before demanding payment from the Company. The
remaining payments under the lease term, which expires in April 2008, are
approximately $3.5 million. If the Company were required to honor its
obligation under the guarantee, any loss would be reduced by the amount
generated from the liquidation of the equipment.
10. INCOME TAXES
Loss from continuing operations before income taxes for the years ended
December 31, was as follows (in thousands):
2006 2005 2004
-------- --------- --------
Domestic............................................ $(30,691) $(105,403) $(59,239)
Foreign............................................. 1,689 (350) 3,252
-------- --------- --------
$(29,002) $(105,753) $(55,987)
======== ========= ========
Income tax (benefit) expense on loss from continuing operations for the
years ended December 31, consisted of the following (in thousands):
2006 2005 2004
-------- ------- --------
Current tax expense (benefit):
Federal.......................................... $ 3,082 $ 5,839 $ (43)
Foreign.......................................... 247 595 965
State............................................ 375 249 456
-------- ------- --------
3,704 6,683 1,378
Deferred (benefit) expense:
Federal.......................................... (9,392) 31,853 (11,141)
Foreign.......................................... 33 (239) 58
State............................................ (1,522) 4,051 (1,574)
-------- ------- --------
(10,881) 35,665 (12,657)
-------- ------- --------
Income tax (benefit) expense......................... $ (7,177) $42,348 $(11,279)
======== ======= ========
17
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
A reconciliation of the expected tax (benefit) based on the federal
statutory tax rate to the Company's actual income tax (benefit) expense for
the years ended December 31, is summarized as follows(in thousands):
2006 2005 2004
-------- -------- --------
Expected tax benefit at federal statutory income tax
rate................................................... $(10,150) $(37,013) $(19,595)
State and local income tax benefit....................... (1,015) (3,701) (1,960)
Change in valuation allowance............................ 1,108 79,951 20,275
Change in contingency reserves........................... -- 2,073 (6,369)
Utilization of foreign tax credits, net.................. -- (91) (4,718)
Non-U.S. tax rate differences............................ (306) 524 (1,023)
Non-deductible expenses.................................. 868 709 970
Non-deductible investment expense........................ 1,248 254 313
Expiration of net operating losses....................... 565 516 --
Other.................................................... 505 (874) 828
-------- -------- --------
Income tax (benefit) expense............................. $ (7,177) $ 42,348 $(11,279)
======== ======== ========
18
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred taxes are recorded to give recognition to temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. The tax effects of these temporary differences are
recorded as deferred tax assets and deferred tax liabilities. Deferred tax
assets generally represent items that can be used as a tax deduction or credit
in future years. Deferred tax liabilities generally represent items that have
been deducted for tax purposes, but have not yet been recorded in the
consolidated statements of operations. Valuation allowances are recorded to
reduce deferred tax assets when it is not more likely than not that a tax
benefit will be realized. The tax effects of temporary differences that give
rise to the deferred tax assets and deferred tax liabilities of the Company at
December 31, are as follows (in thousands):
2006 2005
-------- ---------
Deferred tax assets:
Net operating loss carryforwards.................... $ 72,830 $ 127,436
Capital loss carryforwards.......................... -- 20,950
Compensation and benefit related accruals........... 15,986 19,580
Foreign tax credit carryforwards.................... 16,662 16,662
Alternative minimum tax credit carryforwards........ 9,180 4,650
Accounts receivable................................. 1,288 1,858
Restructuring accruals.............................. 4,769 4,896
Gain on discontinued operations..................... 13,879 --
Other............................................... 7,996 4,185
Valuation allowance................................. (54,482) (113,854)
-------- ---------
Total deferred tax assets............................... 88,108 86,363
Deferred tax liabilities:
Property, plant and equipment....................... (48,697) (70,788)
Goodwill and other intangible assets................ (26,954) (20,641)
Inventory........................................... (2,659) (2,372)
Other............................................... (2,425) (2,607)
-------- ---------
Total deferred tax liabilities.......................... (80,735) (96,408)
-------- ---------
Net deferred tax asset (liability)...................... $ 7,373 $ (10,045)
======== =========
The net deferred tax asset (liability) as of December 31, includes the
following (in thousands):
2006 2005
------- --------
Current deferred tax asset (included in other current
assets)............................................... $ 4,070 $ --
Long-term deferred tax asset (included in other assets,
net).................................................. 7,659 --
Long-term deferred tax liability........................ (4,356) (10,045)
------- --------
Total............................................... $ 7,373 $(10,045)
======= ========
The Company has federal and state net operating loss carryforwards. The
tax effect of these attributes was $72.8 million as of December 31, 2006.
The Company utilized all of its capital loss carryforwards in 2006. Net
operating loss carryforwards of $189.2 million will expire in 2023 through
19
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
2025, foreign tax credit carryforwards of $16.7 million will expire in 2012
through 2015 and alternative minimum tax credit carryforwards of $9.2
million do not have an expiration date.
The Company assesses the recoverability of its deferred tax assets and, to
the extent recoverability does not satisfy the "more likely than not"
recognition criteria under SFAS 109, records a valuation allowance against its
deferred tax assets. The Company considered its recent operating results and
anticipated 2007 taxable income in assessing the need for its valuation
allowance. As a result, in the fourth quarter of 2006, the Company adjusted
its valuation allowance to reflect the realizability of deferred tax assets.
In 2006, the Company decreased its valuation allowance by approximately $59.4
million, primarily as a result of utilizing its net operating loss
carryforwards, principally against the gain on sale of Supremex and certain
other assets, which is reflected in discontinued operations (Note 3).
During 2005, due to insufficient positive evidence substantiating
recoverability, the Company increased its valuation allowance against its
net U.S. deferred tax assets by $87.1 million, which included $7.1 million
relating to the tax benefit from stock-based compensation. This resulted
from management determining that it would no longer implement prior
identified tax planning strategies.
During 2004, the Company increased its valuation allowance by $20.3
million. This increase resulted from the Company's belief that it would not
be able to realize certain U.S. deferred tax assets through the reversal of
taxable temporary differences and the execution of available tax planning
strategies given the net operating losses from its U.S. operations.
The remaining portion of the Company's valuation allowance as of December
31, 2006 will be maintained until there is sufficient positive evidence to
conclude that it is more likely than not that the remaining deferred tax
assets will be realized. When sufficient positive evidence exists, the
Company's income tax expense will be reduced by the decrease in its valuation
allowance. An increase or reversal of the Company's valuation allowance could
have a significant negative or positive impact on the Company's future
earnings. Any reversal of the valuation allowance related to stock-based
compensation will be reflected as paid-in capital and will not affect the
Company's future effective income tax rate.
The Company establishes tax contingency liabilities for potential tax
issues, which are based on estimates of whether it is probable additional
taxes will be due in the future. As of December 31, 2006 and 2005, the
Company had tax contingency liabilities of $12.6 million and $9.5 million,
respectively, which were included in other liabilities on its consolidated
balance sheets. During 2004, the Internal Revenue Service ("IRS") completed
the examination of the Company's tax years 1996 through 2002. The outcome
of the tax audit resulted in the issuance of a "no change" letter by the
IRS. As a result, the Company determined that tax contingency liabilities
reserves of $6.4 million were no longer necessary and released these
reserves in 2004.
Net cash payments for income taxes were $2.7 million in 2006, $1.5
million in 2005 and $4.3 million in 2004.
20
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
2006 ACTIVITY
During 2006, the senior management team of Cenveo substantially
completed the implementation of its cost savings programs that it initiated
in September 2005, including the consolidation of the Company's purchasing
activities and manufacturing platform, corporate and field human resources
reductions, streamlining information technology infrastructure and
eliminating all discretionary spending. As a result of these actions in
2006, the Company reduced headcount by approximately 900 employees,
consolidated seven manufacturing facilities and closed three printing
operations in 2006.
Restructuring and impairment charges in 2006 are as follows (in
thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -------
Employee separation costs.................... $ 6,746 $11,663 $1,438 $19,847
Asset impairments, net of gains on sale...... 2,697 935 -- 3,632
Equipment moving expenses.................... 4,972 1,398 -- 6,370
Lease termination expense (income), net...... 2,187 2,104 (276) 4,015
Building clean-up and other expenses......... 1,734 5,460 38 7,232
------- ------- ------ -------
Total restructuring and impairment
charges................................ $18,336 $21,560 $1,200 $41,096
======= ======= ====== =======
ENVELOPES, FORMS AND LABELS. In 2006, the envelopes, forms and labels
segment closed plants in Denver, Colorado, Chestertown, Maryland, Kankakee,
Illinois, Phoenix, Arizona, Terre Haute, Indiana and Atlanta, Georgia and
consolidated their activities into other plants and closed an office
location. As a result of these activities, the segment recorded employee
separation costs of $4.9 million related to workforce reductions,
impairment charges of $1.8 million, net of the gain on sale of a facility
of $1.9 million, and equipment moving expenses of $4.2 million for the
redeployment of equipment. In addition, the segment recorded lease
termination expenses of $2.2 million, representing the net present value of
costs that are not expected to be recovered over the remaining terms of
three leased facilities no longer in use and building clean-up and other
expenses of $1.3 million.
The segment incurred impairment charges of $0.9 million related to
equipment taken out of service, equipment moving expenses of $0.8 million
for the redeployment of equipment, and building clean-up and other expenses
of $0.4 million related to locations closed in the fourth quarter of 2005.
The segment incurred employee separation costs of $1.8 million related
to workforce reductions at other locations relating to the Company's cost
savings programs.
COMMERCIAL PRINTING. In 2006, the commercial printing segment closed
plants in Denver, Colorado, Phoenix, Arizona, Cambridge, Maryland, Glen
Burnie, Maryland and Fenton, Missouri. As a result of these activities, the
segment recorded employee separation costs of $4.2 million related to
workforce reductions, asset impairment charges of $1.8 million related to
equipment taken out of service at these locations, net of the gain on sale
of a facility of $1.3 million, equipment moving expenses of $1.1 million
for the redeployment of equipment, lease termination expenses of $2.1
million representing the net present value of costs that are not expected
to be recovered over the remaining terms of three leased facilities no
longer in use and building clean-up and other expenses of $3.3 million.
The segment incurred employee separation costs of $2.4 million related
to workforce reductions, equipment moving expenses of $0.3 million,
building clean-up and other expenses of $2.2 million, and a
21
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
reduction of asset impairment charges of $0.9 million, relating to changes
in its estimate of assets to be taken out of service for three plants to be
closed or downsized in the fourth quarter of 2005.
The segment incurred employee separation costs of $5.1 million related
to workforce reductions at other locations relating to the Company's cost
savings initiatives.
CORPORATE. The Company incurred employee separation costs of $1.4
million and recorded lease termination income of $0.3 million resulting
from adjusting its estimate of the net present value of the cost of the
lease that is not expected to be recovered over its remaining life, upon
subleasing its former corporate headquarters.
2005 ACTIVITY
The following table and discussion present the details of the expenses
recognized in 2005 as a result of new senior management's cost savings
plan, as well as, restructuring expenses incurred as a result of programs
initiated by the Company prior to September 2005. As a result of these
actions in 2005, the Company reduced headcount by approximately 1,900
employees, consolidated three manufacturing facilities and closed three
printing facilities. In addition, the Company incurred charges during 2005
related to a special meeting of shareholders and the changes made to the
board of directors and management. These expenses are also included in the
table and the discussion that follow:
Restructuring, impairment and other charges in 2005 were as follows (in
thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- -------
Employee separation costs.................... $ 6,487 $ 9,348 $10,572 $26,407
Asset impairments............................ 5,066 20,340 853 26,259
Equipment moving expenses.................... 338 454 -- 792
Lease termination expenses................... 41 1,586 4,124 5,751
Multi-employer pension withdrawal expenses... 541 409 -- 950
Building clean-up and other expenses......... 67 313 -- 380
------- ------- ------- -------
Total restructuring charges.................. 12,540 32,450 15,549 60,539
Other charges................................ -- 3,917 12,798 16,715
------- ------- ------- -------
Total restructuring, impairment and other
charges................................ $12,540 $36,367 $28,347 $77,254
======= ======= ======= =======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
closed plants in Philadelphia, Pennsylvania, Eugene, Oregon and Marshall,
Texas. As a result of these plant closures, the segment recorded impairment
charges of $2.3 million for equipment taken out of service, employee
separation costs of $0.9 million, a pension withdrawal liability of $0.5
million and equipment moving expenses of $0.3 million to redeploy
equipment.
For additional plant closures planned for 2006, the segment incurred
$0.1 million in employee separation costs, recorded impairment charges of
$2.8 million related to equipment at these plants that it expected to take
out of service in 2006 and equipment moving expenses of $0.1 million.
22
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
The segment incurred employee separation costs of $5.5 million at other
locations relating to the Company's cost savings programs.
COMMERCIAL PRINTING. The commercial printing segment completed the
merger of its two plants in Seattle, Washington and its two plants in San
Francisco, California. The cost to complete these mergers was $0.3 million.
The segment closed two plants in Atlanta, Georgia and a plant in
Waterbury, Connecticut and a small operation in Phoenix, Arizona. The
segment recorded impairment charges of $3.8 million for equipment taken out
of service or sold for less than its carrying value. Employee separation
costs incurred for these four plant closures were $1.9 million. The cost
incurred to redeploy equipment was $0.4 million. In addition, during 2005,
the segment ceased use of three leased buildings and recorded lease
termination expenses of $1.5 million.
For additional plant closures planned for 2006, the segment recorded
impairment charges of $12.5 million related to the equipment at the plants
that it expected to take out of service or sell in 2006.
The segment also incurred withdrawal liabilities of $0.4 million from
several multi-employer pension plans in 2005.
The segment incurred employee separation costs of $7.4 million at other
locations relating to the Company's cost savings programs. In addition, new
senior management terminated the implementation of a segment wide
information system, for which a portion of the investment and other related
information technology projects of $3.9 million was written-off. Other
charges recorded by the segment include the settlement of a legal matter
and the cost of legal matters that were settled in 2006.
CORPORATE. In 2005, the Company made significant changes to its
corporate management team and staff and moved its corporate headquarters
from Denver, Colorado to Stamford, Connecticut. As a result, the Company
incurred employee separation costs of $10.6 million. In addition, in
December 2005, the Company ceased use of office space in Denver and
recorded a $4.1 million charge representing the net present value of the
cost of the lease that was not expected to be recovered over its remaining
term and a $0.9 million charge for the net book value of leasehold
improvements and furniture and fixtures.
Other charges include the following:
* In April 2005, the Company engaged an investment banking firm as a
financial advisor to assist the then current board of directors in
its evaluation of the Company's strategic alternatives and incurred
fees of $3.2 million.
* Legal and other fees incurred in connection with the special meeting
of shareholders of $4.9 million.
* In January 2005, the Company's Chief Executive Officer resigned and
the cost incurred as a result of this resignation was $2.1 million.
* Under the Company's Long-Term Incentive Plan, the change in the board
of directors in September 2005 constituted a change of control and
accelerated the vesting of the restricted stock issued to certain
executives. The compensation expense recognized by the Company as a
result of the vesting of this restricted stock totaled $2.6 million.
23
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
2004 ACTIVITY
Restructuring and impairment charges in 2004 were as follows (in
thousands):
ENVELOPES,
FORMS AND COMMERCIAL
LABELS PRINTING CORPORATE TOTAL
---------- ---------- --------- ------
Employee separation costs..................... $ 683 $ 25 $ -- $ 708
Asset impairments (net of gain on sale)....... (360) 2,670 295 2,605
Equipment moving expenses..................... 157 169 -- 326
Lease termination expenses.................... -- 130 954 1,084
Building clean-up and other expenses.......... 684 -- -- 684
------ ------ ------ ------
Total restructuring and impairment
charges................................. $1,164 $2,994 $1,249 $5,407
====== ====== ====== ======
ENVELOPES, FORMS AND LABELS. The envelopes, forms and labels segment
closed its envelope plant in Bensalem, Pennsylvania. The cost of this plant
closure was $1.2 million and included employee separation costs of $0.7
million, expenses incurred to relocate equipment of $0.2 million, and
building clean-up and other expenses of $0.7 million. The net gain
recognized on the sale of the plant building exceeded the impairment charge
recorded for assets taken out of service by $0.4 million.
COMMERCIAL PRINTING. The commercial printing segment merged its two
plants in Seattle, Washington and its two plants in San Francisco,
California. The cost of these plant consolidations totaled $1.1 million and
included impairment charges of $0.8 million for equipment taken out of
service and other expenses of $0.3 million.
At the end of 2004, the segment made the decision to close a small
printing operation in Phoenix, Arizona and recorded a $1.4 million
impairment charge for equipment taken out of service in 2005.
The segment incurred other equipment impairments of $0.4 million
recorded in 2004.
CORPORATE. The Company negotiated the termination of a lease on a
building in New York City that had been used by an operation that was
closed in 2002. The cost to terminate the lease and write-off the
unamortized value of leasehold improvements was $1.2 million.
A summary of the activity charged to the restructuring liabilities is
as follows (in thousands):
LEASE EMPLOYEE PENSION
TERMINATION SEPARATION WITHDRAWAL
COSTS COSTS LIABILITIES OTHER TOTAL
----------- ---------- ----------- ----- --------
Balance at December 31, 2004...... $ 1,079 $ -- $ -- $ 14 $ 1,093
Accruals..................... 5,751 26,407 950 -- 33,108
Payments..................... (763) (22,673) -- (4) (23,440)
Reversal of unused accrual... -- -- -- (10) (10)
------- -------- ----- ---- --------
Balance at December 31, 2005...... 6,067 3,734 950 -- 10,751
Accruals, net................. 4,015 19,847 -- -- 23,862
Payments...................... (4,541) (22,154) (308) -- (27,003)
------- -------- ----- ---- --------
Balance at December 31, 2006...... $ 5,541 $ 1,427 $ 642 $ -- $ 7,610
======= ======== ===== ==== ========
24
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION
The Company's 2001 Long-Term Incentive Plan (the "Plan") provides for
the grant of stock options, restricted shares and stock appreciation rights
of the Company's common stock and restricted share units ("RSUs") based on
the Company's common stock to certain officers, other key employees,
non-employee directors and consultants.
The Company's outstanding nonvested stock options have maximum
contractual terms of up to ten years, principally vest ratably over four
years and were granted at exercise prices equal to the market price of the
Company's common stock on the date of grant. The Company's outstanding
stock options are exercisable into shares of the Company's common stock.
The Company's outstanding restricted shares vest ratably over four years.
The Company has no outstanding stock appreciation rights. The Company's
outstanding restricted share units principally vest ratably over four
years. Upon vesting, the restricted share units are convertible into shares
of the Company's common stock.
Effective January 1, 2006, the Company adopted SFAS 123(R). As a
result, the Company now measures the cost of employee services received in
exchange for an award of equity instruments, including grants of employee
stock options, restricted stock and restricted share units, based on the
fair value of the award at the date of grant rather than its intrinsic
value, the method the Company previously used. The Company is using the
modified prospective application method under SFAS 123(R) and has elected
not to use the retrospective application method. Thus, amortization of the
fair value of all nonvested grants as of January 1, 2006, as determined
under the previous pro forma disclosure provisions of SFAS 123, except as
adjusted for estimated forfeitures, is included in the Company's results of
operations commencing January 1, 2006, and prior periods have not been
restated. As required under SFAS 123(R), the Company has reversed the
unearned compensation component of shareholders' equity (deficit) with an
equal offsetting reduction of paid-in capital as of January 1, 2006 and is
now increasing paid-in capital for share-based compensation costs
recognized during the period. Additionally, effective with the adoption of
SFAS 123(R), the Company recognizes share-based compensation expense net of
estimated forfeitures, rather than as forfeitures occur as presented under
the previous pro forma disclosure provisions of SFAS 123 subsequently set
forth in this footnote. Employee stock compensation grants or grants
modified, repurchased or cancelled on or after January 1, 2006 are valued
in accordance with SFAS 123(R). Under SFAS 123(R), the Company has chosen
(1) the Black-Scholes-Merton option pricing model (the "Black-Scholes
Model") for purposes of determining the fair value of stock options granted
commencing January 1, 2006 and (2) to continue recognizing compensation
costs ratably over the requisite service period for each separately vesting
portion of the award.
Total share-based compensation expense recognized in selling, general
and administrative expenses in the Company's consolidated statements of
operations was $6.0 million, $2.5 million and $0.7 million in 2006, 2005
and 2004, respectively. Total share-based compensation expense recognized
in restructuring, impairment and other charges in the Company's
consolidated statements of operations was $2.7 million in 2005.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
income from continuing operations before income taxes and net income in
2006 was $3.3 million lower than if it had continued to account for share
based compensation under Accounting Principles Board Opinion 25 ("APB 25").
Basic and diluted income per share in 2006 was $0.06 lower than if the
Company had to account for share-based compensation under APB 25. Net cash
used in operating and financing activities in 2006 were the same as if the
Company had continued to account for share-based compensation under APB 25.
As of December 31, 2006, there was approximately $29.1 million of
total unrecognized compensation cost related to nonvested share-based
compensation grants, which is expected to be amortized over a
weighted-average period of 2.2 years.
25
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION (CONTINUED)
Stock Options
A summary of the Company's outstanding stock options as of and for the
year ended December 31, 2006 is as follows:
WEIGHTED
AVERAGE AGGREGATE
WEIGHTED REMAINING INTRINSIC
AVERAGE CONTRACTUAL VALUE(A)
EXERCISE TERM (IN
OPTIONS PRICE (IN YEARS) THOUSANDS)
--------- -------- ----------- ----------
Outstanding at January 1, 2006....................... 2,365,961 $ 8.95
Granted.............................................. 1,570,000 20.55
Exercised............................................ (329,814) 6.03 $ 3,479
=======
Forfeited............................................ (279,367) 8.99
---------
Outstanding at December 31, 2006..................... 3,326,780 14.71 5.7 $21,589
========= =======
Exercisable at December 31, 2006..................... 549,280 9.32 5.4 $ 6,529
========= =======
<FN>
- ----------------------------------------------------------------------------------------------------------------
(a) Intrinsic value for purposes of this table represents the amount by which the fair value of the
underlying stock, based on the respective market prices at December 31, 2006 or, if exercised, the
exercise dates, exceeds the exercise prices of the respective options which, for outstanding options,
represents only those expected to vest.
The following table summarizes the activity of stock options for the
years ended December 31, 2005 and 2004:
2005 2004
------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- -------- --------- --------
Options outstanding at beginning of year......... 6,868,100 $5.55 5,738,569 $6.16
Granted.......................................... 2,308,000 9.17 1,885,130 3.72
Exercised........................................ (4,661,854) 4.82 (19,331) 2.62
Expired/cancelled................................ (2,148,285) 7.06 (736,268) 7.26
---------- ---------
Options outstanding at end of year............... 2,365,961 8.97 6,868,100 5.55
========== =========
Options exercisable at end of year............... 535,961 6.83 3,858,396 6.67
========== =========
The total intrinsic value of stock options exercised during 2005 was
approximately $19.5 million and during 2004 was approximately $19,000.
26
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION (CONTINUED)
The weighted-average grant date fair value of stock options granted
during the three years ended December 31, 2006, at exercise prices equal to
the market price of the stock on the grant dates, as calculated under the
Black-Scholes Model with the weighted-average assumptions are as follows:
2006 2005 2004
----- ----- -----
Weighted average fair value of option grants during the
year...................................................... $9.56 $5.08 $2.22
Assumptions:
Expected option life in years.......................... 4.27 4.81 5.00
Risk-free interest rate................................ 4.75% 4.40% 3.10%
Expected volatility.................................... 51.6% 62.4% 69.6%
Expected dividend yield................................ 0.0% 0.0% 0.0%
The risk-free interest rate represents the U.S. Treasury Bond constant
maturity yield approximating the expected option life of stock options
granted during the period. The expected option life represents the period
of time that the stock options granted during the period are expected to be
outstanding, based on the mid-point between the vesting date and
contractual expiration date of the option. The expected volatility is based
on the historical market price volatility of the Company's common stock for
the expected term of the options, adjusted for expected mean reversion.
Restricted Shares and RSUs
A summary of the Company's nonvested restricted shares and RSUs as of
and for 2004, 2005 and 2006 is as follows:
RESTRICTED GRANT DATE GRANT DATE
SHARES FAIR VALUE RSUS FAIR VALUE
---------- ---------- -------- ----------
Outstanding at January 1, 2004............ 644,000 $4.90 -- --
Granted................................... 303,710 3.32 -- --
Vested.................................... (14,922) 4.02 -- --
-------- --------
Outstanding at December 31, 2004.......... 932,788 4.40 -- --
Granted................................... 485,680 8.47 236,600 $ 9.69
Vested.................................... (739,449) 5.48 -- --
Forfeited................................. (479,019) 4.72 -- --
-------- --------
Outstanding at December 31, 2005.......... 200,000 $9.52 236,600 $ 9.69
Granted................................... -- -- 532,150 20.55
Vested.................................... (50,000) 9.52 (141,600) 9.81
Forfeited................................. -- -- (20,000) 9.52
-------- --------
Outstanding at December 31, 2006.......... 150,000 $9.52 607,150 $19.19
======== ========
The total fair value of restricted shares and RSUs which vested during
2006 was $1.0 million and $2.9 million, respectively, as of the respective
vesting dates.
27
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION (CONTINUED)
The accompanying consolidated statements of operations for 2005 and
2004 were not restated since the Company elected not to use the
retrospective application method under SFAS 123(R). A summary of the effect
on net loss and net loss per share for 2005 and 2004 as if the Company had
applied the fair value recognition provisions of SFAS 123 to share-based
compensation for all outstanding and nonvested stock options (calculated
using the Black-Scholes Model) and restricted shares is as follows (in
thousands except per share data):
2005 2004
--------- --------
Net loss as reported........................................ $(135,052) $(19,708)
Reversal of share-based compensation expense determined
under the intrinsic value method included in net loss, net
of taxes.................................................. 2,505 718
Recognition of share-based compensation expense determined
under the fair value method, net of taxes................. (8,962) (4,952)
--------- --------
Pro forma net loss.......................................... $(141,509) $(23,942)
========= ========
Net loss per share--basic and diluted:
As reported............................................. $ (2.70) $ (0.41)
========= ========
Pro forma............................................... $ (2.83) $ (0.50)
========= ========
Under the Plan, the change in the Company's board of directors on
September 12, 2005, triggered the change of control provision of the Plan.
Accordingly, all outstanding stock options and restricted stock vested on
September 12, 2005. The amount of stock-based compensation expense
reflected in the pro forma calculation of net loss per share for 2005 is
primarily the result of the acceleration in the vesting of the outstanding
stock options and restricted stock.
The Black-Scholes Model has limitations on its effectiveness including
that it was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable and
that the model requires the use of highly subjective assumptions including
expected stock price volatility. The Company's stock option awards to
employees have characteristics significantly different from those of traded
options and changes in the subjective input assumptions can materially
affect the fair value estimates.
In November 2005, the FASB issued FASB Staff Position ("FSP"), No.
123(R)-3, Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards. FSP No. 123(R)-3 provides an elective
alternative method that establishes a computational component to arrive at
the beginning balance of the paid-in capital pool related to employee
compensation and a simplified method to determine the subsequent impact on
the paid-in capital pool of employee awards that are fully vested and
outstanding upon the adoption of SFAS 123(R). This election is not available
for adoption until January 1, 2007. The Company has determined not to use
the alternative method.
13. RETIREMENT PLANS
SAVINGS PLAN. The Company sponsors a defined contribution plan to
provide substantially all U.S. salaried and certain hourly employees an
opportunity to accumulate personal funds for their retirement. In 2006, the
Company only matched certain union employee's voluntary contributions. In
2005 and 2004, the Company matched a certain percentage of each employee's
voluntary contribution. All contributions made by the Company were made in
cash and allocated pro-rata to the funds selected by the employee. Company
contributions to the plan were approximately $0.4 million in 2006
28
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RETIREMENT PLANS (CONTINUED)
and $6.0 million in 2005 and 2004. The plan held 2,192,289 shares of the
Company's common stock at December 31, 2006.
PENSION PLANS. The Company currently maintains pension plans for
certain of its employees in the U.S. under collective bargaining agreements
with unions representing these employees. The Company expects to continue
to fund these plans based on governmental requirements, amounts deductible
for income tax purposes and as needed to ensure that plan assets are
sufficient to satisfy plan liabilities.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS. As a result of an acquisition
in 2000, the Company assumed responsibility for a supplemental executive
retirement plan ("SERP"), which provide benefits to certain former
directors and executives. For accounting purposes, these plans are
unfunded; however, the predecessor company had purchased annuities, which
are included in other assets, net in the consolidated balance sheets. These
annuities cover a portion of the liability to the participants in these
plans and the income from the annuities offsets a portion of the cost of
the plans.
In September 2006, the FASB issued SFAS 158. This standard requires an
employer to: (i) recognize in its statement of financial position an asset
for a plan's overfunded status or a liability for a plan's underfunded
status; (ii) measure a plan's assets and its obligations that determine its
funded status as of the end of the employer's fiscal year (with limited
exceptions); and (iii) recognize changes in the funded status of a defined
benefit postretirement plan in the year in which the changes occur. These
changes will be reported in accumulated other comprehensive income. For the
Company, the requirement to recognize the funded status of its benefit plans
and the disclosure requirements are effective as of December 31, 2006 and
are detailed below. The Company's current measurement date is the date of
its fiscal year end; therefore, the measurement date requirement under SFAS
158 will have no impact on the Company. Beginning in 2007, the Company will
recognize changes in the funded status in the year in which the change
occurs through accumulated other comprehensive income on its consolidated
balance sheet.
The effect of applying SFAS 158 on the accompanying consolidated
balance sheet as of December 31, 2006, was (in thousands):
BEFORE AFTER
APPLICATION OF EFFECT OF APPLYING APPLICATION OF
SFAS 158 SFAS 158 SFAS 158
-------------- ------------------ --------------
Other assets, net............................ $ 34,327 $ (42) $ 34,285
Total assets................................. 1,001,992 (42) 1,001,950
Other liabilities............................ 40,235 405 40,640
Accumulated other comprehensive income....... 3,111 (363) 2,748
Total shareholders' equity (deficit)......... 62,104 (363) 61,741
Total liabilities and shareholders' equity
(deficit)................................... 1,001,992 (42) 1,001,950
29
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RETIREMENT PLANS (CONTINUED)
As a result of the sale of Supremex (Note 3), the Company has no
further obligation relating to Supremex's pension plans. The following
table sets forth the financial status of the Company's U.S. pension plans
and the SERP and the amounts recognized in the consolidated balance sheets
as of December 31, 2006 (in thousands). The amounts as of December 31, 2005
include Supremex's pension plans.
PENSION PLANS SERP
--------------------- --------------------
2006 2005 2006 2005
------- -------- ------- -------
Change in projected benefit obligation:
Benefit obligation at beginning of year...... $11,888 $ 55,164 $ 8,023 $ 8,410
Service cost................................. 169 2,138 -- --
Interest cost................................ 668 3,212 1,393 571
Participant contributions.................... -- 531 -- --
Actuarial (gain) loss........................ (559) 2,710 -- --
Foreign currency translation................. -- 2,771 -- --
Benefits paid................................ (635) (2,761) (953) (958)
------- -------- ------- -------
Benefit obligation at end of year......... $11,531 $ 63,765 $ 8,463 $ 8,023
------- -------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of
year........................................ $ 8,596 $ 45,102 $ -- $ --
Actual return on plan assets.................. 1,022 4,032 -- --
Participant contributions..................... -- 531 -- --
Employer contributions........................ 539 3,047 -- --
Foreign currency translation.................. -- 2,324 -- --
Benefits paid................................. (635) (2,761) -- --
------- -------- ------- -------
Fair value of plan assets at end of
year.................................... 9,522 52,275 -- --
------- -------- ------- -------
Funded status............................. $(2,009) $(11,490) $(8,463) $(8,023)
======= ======== ======= =======
Amounts recognized in accumulated other
comprehensive loss:
Net actuarial loss............................ $(3,320) $ -- $ -- $ --
Prior service cost............................ (34) -- -- --
------- -------- ------- -------
Total..................................... $(3,354) $ -- $ -- $ --
======= ======== ======= =======
The components of the net periodic pension expense for the U.S. pension
plans and the SERP for the years ended December 31, was as follows (in
thousands):
2006 2005 2004
------ ------ ------
Service cost........................................... $ 169 $ 173 $ 197
Interest cost on projected benefit obligation.......... 2,061 1,196 1,269
Expected return on plan assets......................... (703) (710) (742)
Net amortization and deferral.......................... 8 8 8
Recognized actuarial loss.............................. 267 200 134
------ ------ ------
Net periodic pension expense............................ $1,802 $ 867 $ 866
====== ====== ======
30
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RETIREMENT PLANS (CONTINUED)
The assumptions used in computing the net pension expense and the
funded status were as follows:
2006 2005 2004
---------- ---------- ----------
Weighted average discount rate............. 6.00% 5.50-5.75% 5.75%
Expected long-term rate of return on
assets................................... 8.00% 8.00% 8.00%
Rate of compensation increase.............. 4.00% 3.5-4% 3.5-4%
The discount rate assumption used to determine the Company's pension
obligations at December 31, 2006, was based on the Hewitt Yield Curve ("HYC"),
with the result rounded to the nearest 0.25%. The HYC was designed by Hewitt
Associates to provide a means for plan sponsors to value the obligations of
their pension plans or postretirement benefit plans. The HYC is a hypothetical
double A yield curve represented by a series of annualized individual discount
rates. Each bond issue underlying the HYC is required to have a rating of Aa
or better by Moody's Investor Service, Inc. or a rating AA or better by
Standard & Poor's. The discount rate assumptions for the pension expenses in
2006 and the obligations at December 31, 2006 and 2005 were also based on the
HYC.
The expected long-term rate of return on plan assets of 8.0% is based
on historical returns and the expectations for future returns for each
asset class in which plan assets are invested as well as the target asset
allocation of the investments of the plan assets. The asset allocations and
the target allocations for the investments as of December 31, were as
follows:
U.S. PLANS CANADIAN PLANS
---------------------------- -----------------
2006 2005 TARGET 2005 TARGET
---- ---- ------ ---- ------
Equity securities............................ 67% 69% 68% 49% 50%
Debt securities, including cash.............. 27% 26% 27% 51% 50%
Real estate.................................. 6% 5% 5% 0% 0%
--- --- --- --- ---
100% 100% 100% 100% 100%
The Company's investment objective is to maximize the long-term return
on the pension plan assets within prudent levels of risk. Investments are
diversified with a blend of equity and fixed income securities. Equity
investments are diversified by including U.S. and non-U.S. stocks, growth
stocks, value stocks and stocks of large and small companies.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the plans with accumulated benefit
obligations in excess of plan assets as of December 31, were as follows (in
thousands):
U.S. PLANS CANADIAN PLANS
--------------------- --------------
2006 2005 2005
------- ------- --------------
Projected benefit obligation............................ $11,531 $11,888 $51,877
Accumulated benefit obligation.......................... 11,202 11,529 45,427
Fair value of plan assets............................... 9,522 8,596 43,679
The Company expects to contribute $0.8 million to its pension plans
and $0.2 million to SERP in 2007.
31
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RETIREMENT PLANS (CONTINUED)
The estimated pension benefit payments expected to be paid by the
pension plans and the estimated SERP payments expected to be paid by the
Company for the years 2007 through 2011, and in the aggregate for the years
2012 through 2016, are as follows (in thousands):
PENSION PLANS SERP
------------- ------
2007 ........... $ 594 $ 953
2008 ........... 604 953
2009 ........... 621 953
2010 ........... 646 953
2011 ........... 655 953
2012 - 2016 ........... 3,587 3,697
Certain other U.S. employees are included in multi-employer pension
plans to which the Company makes contributions in accordance with
contractual union agreements. Such contributions are made on a monthly
basis in accordance with the requirements of the plans and the actuarial
computations and assumptions of the administrators of the plans.
Contributions to multi-employer plans were $3.1 million in 2006, $3.2
million in 2005 and $3.0 million in 2004. In 2005, the Company recorded
withdrawal liabilities of $1.0 million from certain multi-employer pension
plans that were incurred in connection with its restructuring program (Note
11).
14. COMMITMENTS AND CONTINGENCIES
LEASES. The Company leases buildings and equipment under operating
lease agreements expiring at various dates through 2018 (Note 11). Certain
leases include renewal and purchase options. As of December 31, 2006,
future minimum annual payments under non-cancelable lease agreements with
original terms in excess of one year were as follows (in thousands):
2007.................................. $27,972
2008.................................. 19,208
2009.................................. 13,282
2010.................................. 8,254
2011.................................. 4,891
Thereafter............................ 9,074
-------
Total............................. $82,681
=======
Aggregate future minimum rentals to be received under non-cancelable
subleases as of December 31, 2006 are approximately $0.3 million.
Rent expense was $35.2 million in 2006, $39.3 million in 2005 and $35.7
million in 2004.
CONCENTRATIONS OF CREDIT RISK. The Company has limited concentrations
of credit risk with respect to financial instruments. Temporary cash
investments and other investments are placed with high credit quality
institutions, and concentrations within accounts receivable are limited due
to the Company's customer base and its dispersion across different
industries and geographic areas.
LITIGATION. The Company is party to various legal actions that are
ordinary and incidental to its business. While the outcome of pending legal
actions cannot be predicted with certainty, management believes the outcome
of these various proceedings will not have a material adverse effect on the
Company's consolidated financial condition or results of operations (Note 11).
32
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
TAX AUDITS. The Company's income, sales and use, and other tax returns
are routinely subject to audit by various authorities. The Company believes
that the resolution of any matters raised during such audits will not have
a material adverse effect on the Company's financial position or its
results of operations (Note 10).
15. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income was as follows (in thousands):
DECEMBER 31
---------------------
2006 2005
------- -------
Currency translation adjustments............................ $ 7,945 $25,935
Unrealized loss on cash flow hedges......................... (2,992) --
Pension liability adjustments, net of tax benefit........... (2,205) (8,531)
------- -------
Accumulated other comprehensive income...................... $ 2,748 $17,404
======= =======
As a result of the sale of Supremex and certain other assets, the
Company reclassified into the gain on sale of discontinued operations from
accumulated other comprehensive income $6.0 million of a minimum pension
liability adjustment (Note 3).
16. INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed based upon the weighted
average number of common shares outstanding for the period. Diluted income
(loss) per share reflects the potential dilution that could occur if
options to issue common stock were exercised. The only Company securities
as of December 31, 2006 that could dilute basic income per share for
periods subsequent to December 31, 2006 are (1) outstanding stock options
which are exercisable into 3,326,780 shares of the Company's common stock
and (2) 757,150 shares of restricted stock and RSUs.
The following table sets forth the computation of basic and diluted
income (loss) per share for the years ended December 31, (in thousands,
except per share data):
2006 2005 2004
-------- --------- --------
Numerator for basic and diluted income (loss) per
share:
Loss from continuing operations.................... $(21,825) $(148,101) $(44,708)
Income from discontinued operations, net of
taxes............................................ 140,480 13,049 25,000
-------- --------- --------
Net income (loss).................................. $118,655 $(135,052) $(19,708)
======== ========= ========
Denominator weighted average common shares outstanding:
Basic shares....................................... 53,288 50,038 47,750
Dilutive effect of stock options............... -- -- --
-------- --------- --------
Diluted shares..................................... 53,288 50,038 47,750
======== ========= ========
Income (loss) per share - basic and diluted:
Continuing operations.............................. $ (0.41) $ (2.96) $ (0.94)
Discontinued operations............................ 2.64 0.26 0.53
-------- --------- --------
Net income (loss).................................. $ 2.23 $ (2.70) $ (0.41)
======== ========= ========
33
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. RELATED PARTY TRANSACTIONS
In 2005, a group of shareholders called for a special meeting of
shareholders to elect a new board of directors. On September 9, 2005, the
shareholder group and the board of directors of the Company reached an
agreement pursuant to which the board of directors was reconstituted and a
new Chairman and Chief Executive Officer was appointed effective September
12, 2005. In 2005, the Company reimbursed Burton Capital Management, LLC
$0.8 million for expenses incurred in its efforts to elect a new board of
directors. The Company's Chairman and Chief Executive Officer is also the
Chairman, Chief Executive Officer and Managing Member of Burton Capital
Management, LLC.
18. SEGMENT INFORMATION
The Company operates in two segments--the envelope, forms and labels
segment and the commercial printing segment. The envelopes, forms and
labels segment specializes in the manufacturing and printing of customized
envelopes for billing and remittance and direct mail advertising. This
segment also produces business forms and labels, custom and stock envelopes
and mailers generally sold to third-party dealers such as print
distributors, office products suppliers, office-products retail chains and
the U.S. retail pharmacy market. The commercial printing segment is in the
business of designing, manufacturing and distributing printed products that
include advertising literature, corporate identity materials, financial
printing, calendars, greeting cards, brand marketing materials, catalogs,
maps, CD packaging and direct mail.
Operating income of each segment includes all costs and expenses
directly related to the segment's operations. Corporate expenses include
corporate general and administrative expenses (Note 11).
Corporate identifiable assets consist primarily of cash and cash
equivalents, miscellaneous receivables, deferred financing fees, deferred
tax assets and other assets.
34
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT INFORMATION (CONTINUED)
Summarized financial information concerning the reportable segments as
of and for the years ended December 31, is as follows (in thousands):
2006 2005 2004
---------- ---------- ----------
Net sales:
Envelopes, Forms and Labels................ $ 780,696 $ 767,403 $ 754,609
Commercial Printing........................ 730,528 827,378 843,043
---------- ---------- ----------
Total...................................... $1,511,224 $1,594,781 $1,597,652
========== ========== ==========
Operating income (loss):
Envelopes, Forms and Labels................ $ 85,877 $ 51,830 $ 54,150
Commercial Printing........................ 13,766 (30,675) 4,184
Corporate.................................. (32,964) (47,465) (20,906)
---------- ---------- ----------
Total...................................... $ 66,679 $ (26,310) $ 37,428
========== ========== ==========
Restructuring, asset impairment and other
charges:
Envelopes, Forms and Labels................ $ 18,336 $ 12,540 $ 1,164
Commercial Printing........................ 21,560 36,367 2,994
Corporate.................................. 1,200 28,347 1,249
---------- ---------- ----------
Total...................................... $ 41,096 $ 77,254 $ 5,407
========== ========== ==========
Significant noncash charges (credits):
Envelopes, Forms and Labels................ $ 6,880 $ 5,107 $ 1,036
Commercial Printing........................ 3,821 21,926 2,670
Corporate.................................. (355) 4,977 295
---------- ---------- ----------
Total...................................... $ 10,346 $ 32,010 $ 4,001
========== ========== ==========
Depreciation and intangible asset amortization:
Envelopes, Forms and Labels................ $ 16,438 $ 17,728 $ 19,010
Commercial Printing........................ 23,567 29,978 29,466
Corporate.................................. 688 542 1,053
---------- ---------- ----------
Total...................................... $ 40,693 $ 48,248 $ 49,529
========== ========== ==========
Capital expenditures:
Envelopes, Forms and Labels................ $ 4,837 $ 3,884 $ 5,748
Commercial Printing........................ 12,974 23,065 18,454
Corporate.................................. 2,119 1,205 2,038
---------- ---------- ----------
Total...................................... $ 19,930 $ 28,154 $ 26,240
========== ========== ==========
Net sales by product line:
Envelopes.................................. $ 582,460 $ 594,327 $ 574,203
Commercial Printing........................ 727,611 812,194 821,332
Labels and Business Forms.................. 201,153 188,260 202,117
---------- ---------- ----------
Total...................................... $1,511,224 $1,594,781 $1,597,652
========== ========== ==========
Intercompany sales:
Envelopes, Forms and Labels to Commercial
Printing................................. $ 13,254 $ 12,629 $ 8,949
Commercial Printing to Envelopes, Forms and
Labels................................... 15,855 19,977 13,453
---------- ---------- ----------
Total...................................... $ 29,109 $ 32,606 $ 22,402
========== ========== ==========
35
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31
---------------------------
2006 2005
---------- ----------
Identifiable assets:
Envelopes, Forms and Labels......................... $ 484,366 $ 613,580
Commercial Printing................................. 393,954 438,938
Corporate........................................... 123,630 27,046
---------- ----------
Total............................................... $1,001,950 $1,079,564
========== ==========
Geographic information as of and for the years ended December 31, is as
follows (in thousands):
2006 2005 2004
---------- ---------- ----------
Net sales:
U.S........................................ $1,452,453 $1,535,281 $1,536,578
Canada..................................... 58,771 59,500 61,074
---------- ---------- ----------
Total...................................... $1,511,224 $1,594,781 $1,597,652
========== ========== ==========
2006 2005
---------- ----------
Long-lived assets (property plant and equipment and
intangible assets):
U.S........................................ $ 517,018 $ 540,332
Canada..................................... 29,918 112,381
---------- ----------
Total...................................... $ 546,936 $ 652,713
========== ==========
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
YEAR ENDED 2006
Net sales........................................... $385,286 $357,895 $383,868 $384,175
Operating income.................................... 9,854 5,685 25,028 26,112
Income (loss) from continuing operations............ (8,848) (45,801) 9,290 23,534
Income from discontinued operations, net of taxes... 121,050 12,707 2,326 4,397
Net income (loss)................................... 112,202 (33,094) 11,616 27,931
Income (loss) per share from continuing operations--
basic(1).......................................... (0.17) (0.86) 0.18 0.44
Income (loss) per share from continuing operations--
diluted(1)........................................ (0.17) (0.86) 0.17 0.43
Income per share from discontinued operations--basic
and diluted(1).................................... 2.28 0.24 0.04 0.08
Net income (loss) per share--basic(1)............... 2.11 (0.62) 0.22 0.52
Net income (loss) per share--diluted(1)............. 2.11 (0.62) 0.21 0.51
36
CENVEO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
YEAR ENDED 2005
Net sales........................................... $409,738 $385,469 $392,148 $407,426
Operating income (loss)............................. (3,941) 4,739 (13,078) (14,030)
Loss from continuing operations..................... (28,069) (16,159) (69,335) (34,538)
Income (loss) from discontinued operations, net of
taxes............................................. 5,513 5,550 5,257 (3,271)
Net loss............................................ (22,556) (10,609) (64,078) (37,809)
Basic and diluted income (loss) per share(1):
Continuing operations........................... $ (0.59) $ (0.33) $ (1.38) $ (0.65)
Discontinued operations......................... 0.12 0.11 0.10 (0.06)
-------- -------- -------- --------
Net income (loss)............................... $ (0.47) $ (0.22) $ (1.28) $ (0.71)
======== ======== ======== ========
<FN>
- --------------
(1) The quarterly earnings per share information is computed separately for each period. Therefore, the sum
of such quarterly per share amounts may differ from the total for the year.
20. SUBSEQUENT EVENTS
On February 12, 2007, the Company completed the acquisition of all of
the common stock of PC Ink Corp., ("Printegra") for approximately $78
million in cash, which was funded through the Company's Revolving Credit
Facility. Printegra generates annual revenues of approximately $90 million
and operates thirteen strategically located facilities domestically.
Printegra produces printed business communication documents, including
laser cut sheets, envelopes, business forms, security documents, and
labels, which are regularly consumed by small and large businesses.
Printegra's results of operations and cash flows from the February 12, 2007
acquisition date will be included in the Company's consolidated results of
operations and cash flows within the envelopes, forms and labels segment.
On February 22, 2007, the Company entered into an agreement to sell its
remaining 8,947,439 units in the Fund for estimated net proceeds of $67
million. The sale of the units in the Fund is expected to close in March 2007.
37
PART IV
Item 15 of the Original 10-K is amended as follows:
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
Included in Part II, Item 8 of this Report.
The separate audited Canadian GAAP financial statements of the Supremex
Income Fund, the Company's significant equity investee as defined under
Rule 3-09 of Regulation S-X, are included in Exhibit 99.1 of this report.
(a)(13) Exhibits
The exhibits listed in the Exhibit Index following the signature page hereto
are filed herewith.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Englewood, State of Colorado, on June 26, 2007.
CENVEO, INC.
By: /S/ ROBERT G. BURTON, SR.
---------------------------------------
Robert G. Burton, Sr., Chairman and
Chief Executive Officer
(Principal Executive Officer)
By: /S/ SEAN S. SULLIVAN
---------------------------------------
Sean S. Sullivan,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ernst & Young LLP.
31.1 Certification by Robert G. Burton, Sr., Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Sean S. Sullivan, Chief Financial Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to this
report on Form 10-K/A.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to this
report on Form 10-K/A.
99.1 Audited Canadian GAAP financial statements of the Supremex Income
Fund for the 276-day period ended December 31, 2006.