UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended January 2, 2005

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ___________ to ________________

Commission file number 0-01097

THE STANDARD REGISTER COMPANY

(Exact name of Registrant as specified in its charter)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT

None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]    No [ ]    

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)  Yes [X]   No [ ]

The aggregate market value of all stock held by non-affiliates of the Registrant at June 27, 2004, was approximately $135,219,246 based on a closing sales price of $11.48 per share on June 27, 2004.

At January 30, 2005, the number of shares outstanding of the issuer’s classes of common stock is as follows:

Part III incorporates information by reference from the Proxy Statement for Registrant’s Annual Meeting of Shareholders to be held on April 28, 2005.

THE STANDARD REGISTER COMPANY

FORM 10-K

TABLE OF CONTENTS

Item                  Description

Page

Item  1.              Business

1

Item  2.              Properties

9

Item  3.              Legal Proceedings

10

Item  4.              Submission of Matters to a Vote of Security Holders

10

Item  5.              Market for the Registrant’s Common Stock and Related

                                 Shareholder Matters

11

Item  6.              Selected Consolidated Financial Data

12

Item  7.              Management’s Discussion and Analysis of Financial Condition

                                 and Results of Operations

13

Item 7A.            Quantitative and Qualitative Disclosures about Market Risk

34

Item  8.              Financial Statements and Supplementary Data

35

Item  9.              Changes In and Disagreements with Accountants on Accounting

                                and Financial Disclosure

70

Item 9A.             Controls and Procedures

70

Item 9B.             Other Information

71

Item 10.             Directors and Executive Officers of the Registrant

72

Item 11.             Executive Compensation

72

Item 12.             Security Ownership of Certain Beneficial Owners and Management

73

Item 13.             Certain Relationships and Related Transactions

73

Item 14.             Fees and Services of Independent Registered Public Accounting Firm

73

Item 15.             Exhibits and Financial Statement Schedules

75

Signatures

76

Index to Exhibits

77

Independent Registered Public Accounting Firm’s Report on Supplemental Schedule

78

Schedule II – Valuation and Qualifying Accounts and Reserves

79

PART I

Item 1 - BUSINESS

Company Overview

The Standard Register Company (referred to in this report as the “Company,” “we,” “us,” “our,” or “Standard Register”) is a publicly traded company that began operations in 1912 in Dayton, Ohio.  Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol SR.  Our principal executive offices are located at 600 Albany Street, Dayton, Ohio 45408 (telephone number: 937-221-1000).

Throughout Standard Register’s history, our core business has been providing solutions to improve business processes and the flow of information.  It started with the autographic register, a system that automated the processing of bills, receipts, and other forms.  Since then, we have expanded our products and services to include the design, production, management, and distribution of printed and electronic documents; label solutions; data-capture systems; document security; fulfillment and other outsourcing services; e-business solutions; and consulting services.  In 2002, we completed two acquisitions to complement our existing e-business and document management and fulfillment services and to enhance our digital print-on-demand operations.  In 2004, we sold our equipment service business, a component of the Document and Label Solutions segment, to Pitney Bowes.

Our Industries

We primarily serve the healthcare, financial services, insurance, pharmaceutical, manufacturing, and transportation industries.  We are a leading provider of products and services to approximately 60% of the acute care hospitals in the United States as well as many of the largest financial institutions, including eight of the top ten U.S. commercial banks.  

Our Products and Services

Our strategy is to provide a full spectrum of solutions – from print to digital – that help organizations effectively capture, manage, and use information to improve their business results.  Organizations leverage Standard Register’s deep industry expertise and innovative solutions to increase efficiency, reduce cost, enhance security, and strengthen customer loyalty.  For example:

·

We use our SMARTworks platform to manage all documents in an enterprise.   This allows our customers to store and retrieve documents electronically - or manage inventory for physical documents stored in our network of warehouses.  The system tracks usage and document spend by department, making it convenient for customers to monitor the total spend across the enterprise.    

·

Our label products are used in a wide variety of situations: from automobile parking stickers in large cities to furniture tags documenting both regulatory and marketing information.

·

For the banking industry, we offer many Check21 offerings – for onsite or offsite processing.  Check21 systems print Image Replaceable Documents (IRDs) so that checks can be truncated and converted to digital images – speeding and securing the process flow.

·

In healthcare, our Patient Linkup® Enterprise system helps improve information flow across processes while ensuring the integrity of patient information as vital statistics, billing information, diagnoses, prescriptions, and procedures are all routed electronically throughout a hospital system.  

·

Across industries, we provide a host of document security solutions to help prevent counterfeiting and other forms of document fraud for everything from checks to automobile titles to birth certificates.  

·

Our business communication solutions enable the creation and distribution of effective, often personalized, business communications through our web-based design and ordering solution and our print-on-demand capabilities.  

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Our Restructuring Programs

Beginning in 2000, we embarked on a series of restructuring efforts to renew the value of the Company and establish a strong foundation for long-term growth.

2000 Restructuring

In order to reduce excess production capacity and decrease costs, we eliminated 364 jobs and closed four manufacturing facilities during 2000.  We closed our equipment plant in Dayton, Ohio, and printing plants in Toccoa, Georgia; Corning, Iowa; and Dayton, Ohio.  We also offered an early retirement plan to select employees at our Dayton, Ohio, headquarters.

2001 Restructuring

In 2001, we undertook a significant restructuring effort.  Our analysis indicated that as much as 20% of our customer accounts did not return sufficient margin to justify the levels of investment and overhead required to support them. This low margin business was driving our overall return on capital to a level below our cost of capital.  

It was also apparent that Standard Register had many strong attributes, including leadership positions in the hospital and financial services markets, a track record of providing innovative document and workflow solutions valued by our customers, strong cash flow from a diversified base of renewable business, and a very strong financial condition.  

We eliminated the portion of our business that we believed could not be improved to provide an acceptable return.  This represented an estimated $250 million of our $1.3 billion in annual revenue.  At the end of 2001, our annual revenue base was reduced to approximately $1.1 billion.  In conjunction with these actions, we targeted, and met, a $125 million reduction in annualized costs, including manufacturing fixed costs, selling, general, and administrative expense, and depreciation.  We closed 25 plants and print centers and although some production capacity was relocated to other locations, overall capacity was reduced by about 30%.  In addition, 149 sales offices and 29 warehouses were either closed or consolidated into other locations.  The closings and consolidations reduced our workforce by 2,330 people, equivalent to 29% of our total workforce at that time.  

2003 Restructuring

In 2003, we initiated several restructuring actions to improve utilization and profitability.  We consolidated four printing and service operations within the Print-on-Demand (POD) Services (formerly called Fulfillment Services) segment to form a new regional print-on-demand and fulfillment center in Carrollton, Texas.  Within the Document and Label Solutions segment, we closed a rotary printing plant to trim excess capacity and consolidated several warehouses in response to shifting demand in favor of print-on-demand services.

Within the InSystems segment, we determined that certain software development initiatives would not produce an adequate return and elected to stop further investment in those projects.  In conjunction with this decision and to further reduce costs, we reduced staffing levels within this segment.  We also relocated our SMARTworks operations and eliminated management and other positions at our corporate headquarters.

2004 Restructuring

In 2004, we initiated several restructuring actions as part of a drive to reduce costs.  We integrated our sales specialist organization with the regional sales organization to improve coordination, resource deployment, and productivity; adjusted our client services model to improve efficiency and went to a shared service model in various administrative areas to reduce costs.  We also outsourced part of our information technology (IT) operations, including hardware management, help desk support, and telecommunications.  As a result of all these actions, we eliminated a number of positions, including four executive officer positions.  

In addition, we reduced the workforce and leased office space at our InSystems headquarters.  InSystems had experienced significant declines in their revenues and margins in recent periods, and we elected to reduce costs and refocus attention on InSystems’ key product lines.  

You can read additional information related to these restructuring actions in Note 4 “Restructuring and Asset Impairment Charges” in the Notes to Consolidated Financial Statements.   

2004 Realignment

In fiscal 2004, we reclassified certain operating segments included in our reportable segments to reflect the revised organizational structure of the Company.  SMARTworks, previously a wholly owned subsidiary, was merged and became part of our corporate center.  The Document Systems group that was previously part of InSystems became part of Document and Label Solutions.  Commercial Print, previously part of Document and Label Solutions and now a new

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operating segment, is aggregated with International and PathForward into Other.  Digital Solutions, previously included with our corporate center, is now a reportable segment.  Our four reportable segments are Document and Label Solutions, POD Services, InSystems, and Digital Solutions.

You can read additional information related to the revenues, operating profit, identifiable assets, and capital expenditures of each business segment for years 2002 through 2004 in Note 19 “Segment Reporting” in the Notes to Consolidated Financial Statements.

Our Business Segments

DOCUMENT AND LABEL SOLUTIONS  

Products and Services - Document and Label Solutions accounted for 69.0%, 69.5%, and 71.4% of our consolidated revenues in 2004, 2003, and 2002.  In this segment, we offer custom printed documents and labels, integrated document systems, business supplies, and distribution services that help customers manage their business information and transact with their customers and suppliers.   Our primary markets are large- and middle-market companies in the healthcare, financial services, manufacturing, and distribution/logistics industries.  Our wide array of products, services, and integrated solutions include the following:

·

Document design

·

Custom printed business documents (continuous, roll, sheeted and multi-part documents produced on web presses)

·

Secure documents and security services (checks, birth certificates, automobile titles, etc.)

·

Document warehousing and distribution services

·

Custom and stock label products, including form/label combinations and bar-code label solutions

·

Document processing software, hardware and systems integration

·

Business supplies.

These products and services are used for financial transactions, inventory control, product identification, distribution, regulatory compliance, healthcare, and other applications that require accuracy and security.   Our Document Systems group focuses on hardware and software solutions for negotiable and secure document output in insurance, banking, healthcare and other markets.  

We are one of the leading producers of custom pressure-sensitive labels in the United States. We produce flexographic, screen and offset printed labels, bar code labels, compliance labels, and variable image products that use the latest laser and thermal transfer technology.  Our custom label solutions help our customers improve their operational performance by reducing cycle time, error rate, and processing costs.

Market Trends - Excess production capacity and price competition are prevalent in the Document and Label Solutions segment.  The introduction of alternative technologies has reduced industry demand for traditional custom printed business documents, while a very competitive market has led to price competition.  In spite of these challenges, we believe there is opportunity to increase our market share if we effectively carry out our sales strategies and offer an increasing array of application software and professional services.

Driven by an increase in both consumer and industrial end-use applications, the market for pressure sensitive labels in North America is projected to exhibit steady growth.  Companies in the industry will increasingly need to incorporate technologies such as bar-code technology, Internet-based commerce, digital presses, and environmentally friendly adhesives and inks.  All of these factors will make the industry more efficient, allowing us to compete for new markets with alternative technologies.  

Other market trends include:

·

Organizations believe that documents that touch their customers are strategic to their business

·

Customers are migrating to single source suppliers

·

Paper-based documents and workflow are increasingly being automated and migrated to digital form

·

Industry consolidation is creating larger printing companies

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·

Demand for Radio Frequency Identification, linerless, laser, thermal, and on-press adhesives is increasing

·

Media recommendations by printer manufacturers are influencing designs

·

Customers are buying labels as part of a package with printers, software, and services

·

Customers are increasing their use of variable data

·

Use of removable adhesive is growing

·

Electronic commerce is driving an increase in shipping-label demand as more businesses and individuals buy goods on line.

Competition - Our principal competitors include R. R. Donnelley & Sons Company and The Relizon Company.  These companies offer products and services similar to ours.  In addition, we compete against local and regional manufacturers, brokers and distributors.  We believe we have several strategic advantages over our competitors including:

·

We are recognized as a leader in secure documents (particularly in the healthcare and financial services markets)

·

We have knowledge and experience in document workflow management, a strong national reputation, excellent domestic geographic coverage, and a complete line of products from paper to digital.

Backlog - Document and Label Solutions’ backlog of custom printing orders at January 30, 2005, was approximately $47.3 million compared to $44.2 million at January 23, 2004.  We expect to fill all orders in 2005.

POD SERVICES   

Products and Services - POD Services accounted for 27.0%, 26.4%, and 25.5% of our consolidated revenues in 2004, 2003, and 2002.  POD Services provides our customers a portfolio of custom print products and related services – producing static, versioned and variable printed documents when the customer wants them, where they want them and in the quantity they desire.  We help our customers communicate more effectively with their customers by providing customized information and marketing materials.  We focus on outsourcing products and services that primarily serve large- and middle-market companies in the financial services, healthcare, and commercial industries.  The types of products and services we offer include:

·

High-end digital color or black/white

·

Variable data printing

·

DesignonDemand™

·

Dynamic Communications™

·

Short-run, quick print production (print on demand) and related bindery and finishing operations

·

Billing and statement solutions

·

Electronic document presentment

·

One-to-one marketing communications (variable print-on-demand)

·

Web-based “information request” fulfillment

·

Customer information kits and mailing services (cards, policies, statements, manuals, etc.)

·

Envelopes.

Market Trends - We expect the overall market for document outsourcing and POD to grow as companies seek outside help in creating and delivering more impactful business communications while reducing print inventory levels and related costs.  The POD market is one that permeates all industries and is a natural extension of our core business because it is a transaction-intensive market that we already serve with our core products.  Increasingly, companies strive to reach their customers with targeted, customized, and personalized messages in order to maximize their sales and marketing investments.  The ability to print and distribute these communications on demand will also fuel growth in this area.  Our focus remains on growing digital color in support of the print-on-demand business.  

Competition - Our principal competitors include R. R. Donnelley & Sons Company, Kinko’s, and Xerox.

Backlog - POD Service’s backlog of orders at January 30, 2005, was approximately $5.5 million compared to $10.1 million at January 23, 2004.  We expect to fill all orders in 2005.

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INSYSTEMS

Products and Services - InSystems accounted for 1.3%, 2.1%, and 1.2% of our consolidated revenues in 2004, 2003 and 2002.  InSystems specializes in complex document and compliance automation for insurance and financial services.    Our solutions allow companies to achieve operational excellence by automating the creation, management, and multi-channel distribution of customized documents, and streamlining the product development and regulatory filing processes.  Our solutions give business users more control, with less dependence on IT resources.  

The types of products and solutions we offer include:

·

InSystems Calligo™

InSystems Calligo™ is a family of integrated document automation software solutions for organizations that need to create, manage and distribute complex, highly personalized, error-free documents.

·

InSystems Tracker

InSystems Tracker is a compliance software application that automates the product development and state compliance filing process, enabling insurance organizations to bring new products to market faster, lower their operating costs, and reduce market conduct exposure and possible fines.  InSystems Tracker is integrated with the National Association of Insurance Commissioners (NAIC) System for Electronic Rate and Form Filings (SERFF) enabling end-to-end electronic state filing.

·

Services

Our professional services group provides a broad range of services to assist in implementation and deployment of its software solutions.  Service categories include product-specific services, integration services and Internet services.

Market Trends - We focus on the financial services industry.  Industry analysts predict modest growth in information technology spending for financial services organizations in general and specifically for insurance, with expected increases of at least 5% forecast for the year ahead. These industries have historically been highly information technology intensive with an above average 5-8% of revenues being spent on information technology.  Market trends include increased emphasis on regulatory compliance, pressures to accelerate bringing new products to market, security, customer and distribution channel loyalty, and the migration from paper to digital solutions.

Competition - Our competitors include in-house development by insurance companies and other companies that offer document automation and document management solutions, such as Docucorp and Document Sciences Corporation.

Backlog - Our backlog of professional services and software maintenance contracted for, but not yet performed, as of January 30, 2005, is approximately $6.4 million, compared to $7.2 million as of January 23, 2004.  Of this, approximately $1.4 million is not expected to be realized in 2005.

DIGITAL SOLUTIONS

Products and Services - Digital Solutions offers a suite of intelligent, integrated solutions including an innovative digital pen and paper technology.  Aimed at streamlining workflow and improving efficiency, the new ExpeData™ digital pen and paper technology gives organizations the ability to capture information simply and naturally -- as it is handwritten -- automatically converting the writing into a digital format, verifying it and making it available to back-end systems such as customer relationship management, inventory management and patient records. This new technology also can authenticate signatures and create a fully indexed image of the document, which can be retained in a digital repository for subsequent retrieval and usage.

This technology combines the flexibility and simplicity of paper with the power of digital technology to help customers reduce the cost and time associated with data entry, mailing, scanning and indexing.  It also helps customers establish greater accountability and control by providing an exact image of the handwritten document and a secure audit trail.  Leveraging our business process management expertise, state-of-the-art printing operations and enabling technology, we are able to tailor solutions to specific customer needs.  

Market Trends - We have commenced the pilot process of the Digital Information Solution and anticipate it will be commercially available in the pharmaceutical market in early 2005.  

Competition - In the emerging marketplace for digital solutions, there are offerings similar to our solutions by companies such as Hewlett Packard, as well as some smaller companies in the United States and Europe.  There are, however, no clear leaders in the marketplace.

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Backlog - There was no backlog for Digital Solutions’ orders at January 30, 2005.

OTHER  

Our Other segment includes PathForward, Commercial Print and International.  

PathForward offers comprehensive consulting services to help customers reduce costs, improve efficiency, and increase revenue.  Our solutions focus on designing enterprise document strategies, along with providing software integration and implementation services, and sourcing management.  PathForward develops and implements enterprise-wide strategies that include (1) analyzing, mapping and reengineering document workflow, (2) benchmarking and improving on-site print and data center operations, and (3) helping companies negotiate and implement fact-based output sourcing and technology (hardware and software) investment decisions.  

Commercial Print includes output such as direct mail, marketing collateral, catalogs, books, business cards, stationery and envelopes, etc.  We offer a comprehensive support infrastructure to re-engineer the entire print-related supply chain providing alignment to customer objectives - be they to reduce costs, or improve the effectiveness of what gets printed. We help customers drive benefits across the business document lifecycle to gain control over the print procurement process and achieve best-of-class pricing and service levels.  Our Commercial Print offering is a true partnership; helping suppliers fill “available” press time while managing the supplier to a customer’s best financial interest.  By preserving a vendor-agnostic approach, and with no owned commercial print infrastructure to support, we are well positioned to manage our customer’s enterprise print spend to their best advantage.   

Our International business segment generates revenue through various revenue streams including membership fees and royalties from its Global Print Network members, products and services sold to international associates, license fees, professional services, and patent royalties.  We have a 40% equity interest in a joint venture partnership agreement with Grupo Calidata Thomas Greg, S.A. de C.V. located in Mexico and known as Label Solutions, S. de R.L. de C.V.  The joint venture manufactures and sells label products, and performs subcontracted manufacturing for the Company.  We do not receive a material portion of our revenues or net income from sales to foreign customers.  

Marketing and Distribution  

We utilize several sales channels that are devoted to selling a variety of Document Management and Label Solutions and POD Services products as part of an enterprise solution or single product offering.  These channels are primarily organized based upon a combination of their sales objective, market segmentation, and account segmentation as follows:

·

A geographical based, direct sales channel that focuses on the retention, expansion and acquisition of primarily middle-market to larger accounts across all industries that we serve

·

A strategic account sales organization that serves those customers that buy a breadth of our products and views the Company as a partner in the development of their enterprise business solutions.  These customers tend to be in the financial, manufacturing and distribution/logistics segments

·

An inside sales channel that is focused on the retention and expansion of business supplies and specialized product offerings targeted to smaller accounts or remote geographies where our direct sales force cannot be cost effective

·

A business development group that focus on the acquisition of new business

·

A healthcare sales group that supports our direct sales channel.  This group also directs the sale of and provides specialized support for selling software and systems integration

·

A technical sales group that supports our direct and strategic accounts sales organizations in the expansion and acquisition of POD products, professional consulting services, and commercial print applications to our larger accounts.

In addition to the above sales channels focused on our Document Management and Label Solutions and POD Services products, we employ a direct sales channel to sell and support InSystems product offerings.  We support our sales channels with a centralized marketing organization that provides product support, strategic marketing, alliance development, and marketing communications.  In addition, we utilize a direct client care organization that uses customer relationship management systems to improve sales productivity by automating repetitive and administrative tasks,

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reducing selling costs, and enhancing account management.  We plan to continue to invest in strategic marketing tools to help in our account management and satisfaction systems, one-to-one marketing, and e-business efforts.

Documents are printed at 35 geographically disbursed locations in the United States.  Documents are shipped directly to customers or are stored by us in warehouses for subsequent on-demand delivery.  The management of document inventories to provide just-in-time delivery is a major element of customer service.

Raw Materials  

We purchase raw paper in a wide variety of weights, grades, and colors from various paper mills in the United States and Canada.  Carbonless paper, inks, and printing supplies are available nationally and are purchased from leading vendors.  We continuously ensure we have adequate supplies to meet present and future sales objectives.  We generally order from suppliers with whom we have long-standing relationships.

Research and Development  

During 2004, we spent $12.9 million on research and development compared to $17.2 million and $17.9 million in 2003 and 2002.  Research and development is primarily focused on two areas: the design and development of new products, services, software and technologies, and process improvement activities.  The design and development of new products and technologies also includes equipment design and development used in production as well as the integration of new technologies available in the marketplace.

Intellectual Property

We have many patents related to documents, equipment, systems, labels, and security products that provide a competitive advantage or which generate license income.  None of these, individually, have a material effect upon the business.

Seasonal

No material portion of our business could be considered seasonal.

Customers

The business of the Company taken as a whole, or by individual business segments, is not dependent upon any single customer or a few customers.  No single customer accounts for 10% or more of total consolidated revenue.

Governmental and Environmental Regulation

We have no significant exposure with regard to the renegotiation or termination of government contracts.  Any expenditure made to comply with federal, state, or local provisions of environmental protection have not had a material effect upon our capital expenditures, earnings, or competitive position.

Employees

At January 2, 2005, we had approximately 4,100 employees compared to 5,000 at December 28, 2003, and 5,700 at December 29, 2002.

FORWARD-LOOKING INFORMATION

This report includes forward-looking statements covered by the Private Securities Litigation Reform Act of 1995.  Because such statements deal with future events, they are subject to various risks and uncertainties and actual results for fiscal year 2005 and beyond could differ materially from the Company’s current expectations.  Forward-looking statements are identified by words such as “anticipates,” “projects,” “expects,” “plans,” “intends,” “believes,” “estimates,” “targets,” and other similar expressions that indicate trends and future events.  Factors that could cause the Company’s results to differ materially from those expressed in forward-looking statements include, without limitation, variation in demand and acceptance of the Company’s products and services, the frequency, magnitude, and timing of paper and other raw material price changes, general business and economic conditions beyond the Company’s control, timing of the completion and integration of acquisitions, the consequences of competitive factors in the marketplace, ability to retain large customer contracts, the Company’s success in attracting and retaining key personnel, and the effect of alternative technologies on the Company’s traditional product offerings.  The Company undertakes no obligation to update forward-looking statements as a result of new information since these statements may no longer be accurate or timely.  

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We caution you that the following risks and factors, and those other business risks discussed elsewhere in this report, could cause our actual results to differ materially from those included in forward-looking statements.

Variation in demand and acceptance of our products and services

We have a wide array of products and services—from printed products to digital solutions to managed services.  Our custom-printed single- and multiple-part business forms represent mature products that are in decline as companies increasingly adopt electronic forms and other e-business solutions.  These declines could be offset by capturing increased market share in the traditional document label business and generating new revenue through solutions such as print-on-demand, document automation software and print managed services.  Demand for our new offerings will vary by customer and industry, depending on their technological advancement and business priorities.

The effect of alternative technologies on our traditional product offerings

The market for our traditional products is undergoing significant change.  Our success, in part, is dependent on our ability to successfully develop and introduce new digital products and services.

Frequency, magnitude, and timing of paper and other raw material price changes

When paper mills raise prices on raw material, we generally increase prices to recover these costs.  While we have historically been successful in passing on most increases over several quarters, there is no guarantee that we will be successful in the future.

General business and economic conditions beyond our control

Economic conditions impact the demand for our products and services.  A weak economy can cause delays in customers’ investments in technology, business process improvements and other initiatives as well as cause lower consumption of forms, labels and customer communications through reduced business activity.

Timing of the completion and integration of acquisitions

In order to take advantage of growth opportunities and to enhance the products and services we offer, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties.  These risks and uncertainties include: (1) our ability to achieve strategic objectives, cost savings, and other benefits from the acquisition; (2) the risk that the technologies acquired do not prove to be those needed to succeed in those markets; (3) the potential loss of key employees of the acquired business; (4) the risk of entering new markets in which we have limited experience; and (5) the impact from future impairments of goodwill of an acquired business.

Consequences of competitive factors in the marketplace

Some of the industries in which we operate are highly competitive, and we expect that this level of competition on pricing and product offerings will continue.  Factors that could affect our ability to compete successfully include competitive pressures that result in increased price reductions and further consolidation of the forms industry, resulting in much larger competitors.

Ability to retain large customer contracts

Approximately 35% of our revenue is generated through contractual agreements with a number of healthcare group purchasing organizations.  Our ability to retain and grow these relationships generally impacts revenue in this industry segment.  

Success in attracting and retaining key personnel  

Our success depends in large part on our ability to attract and retain highly skilled technical, managerial, sales, and marketing personnel.  The loss of services of any of our key personnel or our inability to attract or retain qualified personnel in the future could impair our ability to meet our key objectives.

Available Information

Our Internet website is www.standardregister.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports are available, without charge, on the website as soon as reasonably practicable after we file these reports with the SEC.  You can also obtain these reports, free of charge, by contacting Investor Relations, Standard Register, Corporate Offices, P.O. Box 1167, Dayton, Ohio 45401, E-mail: investor@standardregister.com, phone: 1-937-221-1304. You can also obtain these reports and other information, free of charge, at www.sec.gov.  You may also read and copy materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330.

We are not including the information contained in our website as part of, or incorporating it by reference into, the Annual Report on Form 10-K.

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Item 2 - PROPERTIES  

Our corporate offices are located in Dayton, Ohio.  InSystems is located in Toronto, Ontario, Canada.  The following table is a list of our major production facilities:

Sacramento, California; Tampa, Florida; Carrollton, Texas; and Tolland, Connecticut are leased facilities.  In addition, we operate 22 smaller Stanfast Print Centers.  In most cases these facilities are located in major metropolitan cities in the United States and are leased.

Our current capacity, with modest capital additions, is expected to be sufficient to meet production requirements for the near future.  Utilization by press varies significantly, averaging an estimated 58% overall.  We believe our production facilities are suitable and can meet our future production needs.

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Item 3 - LEGAL PROCEEDINGS

a)

We have no material claims or litigation pending against us.

b)

Standard Register has been named as a potentially responsible party by the U.S. Environmental Protection Agency or has received a similar designation by state environmental authorities in several situations.  None of these matters have reached the stage where a significant liability has been assessed against the Company.  We have evaluated each of these matters and believe that none of them individually, nor all of them in the aggregate, would give rise to a material charge to earnings or a material amount of capital expenditures.  This assessment is notwithstanding our ability to recover on existing insurance policies or from other parties that we believe would be held as joint and several obligors under any such liabilities.  However, since these matters are in various stages of process by the relevant environmental authorities, future developments could alter these conclusions.  However, currently, we do not believe that there is a likelihood of a material adverse effect on our financial condition in these circumstances.

Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal 2004, no matters were submitted to a vote of our shareholders.

Executive Officers of the Registrant

The following is a list of our executive officers, their ages as of January 30, 2005, their current titles, and any positions they held during at least the last five years:

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There are no family relationships among any of the officers.  Officers are elected at the annual organizational meeting of the Board of Directors, which is held immediately after the annual meeting of shareholders, to serve at the pleasure of the Board.  

PART II

Item 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

(a)

Market Price

The following table lists the high and low market prices as reported on the NYSE and cash dividends paid per share

(b)

Approximate Number of Holders of Common Stock

On January 30, 2005, there were approximately 2,738 shareholders of record of our common stock.  This number includes restricted shares, but excludes individual holders whose shares are held by nominees.  There are also 16 holders of Class A stock.

(c)

Dividend Policy  

We expect to continue paying quarterly cash dividends in the future; however, the amounts paid will be dependent upon earnings and the future financial condition of the Company.  

Information regarding our equity compensation plans is in Item 12 on page 73 and is incorporated by reference into this section of Item 5.

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Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Dollars in Millions, Except Per Share Amounts)

OVERVIEW

The Company - We are a leading provider of information solutions for the healthcare, financial services, insurance, pharmaceutical, manufacturing, and transportation industries.  Our products and services include the design, production, management, and distribution of printed and electronic documents; label solutions; data-capture systems; document security; fulfillment and other outsourcing services; e-business solutions; and consulting services.  

As a strategic partner in migrating companies from paper-based to digital processes, our strategy is to provide a full spectrum of solutions – from printed documents to consulting to digital solutions - and continue to expand capabilities that help organizations effectively capture, manage, and use information to improve their business results.  Organizations leverage Standard Register’s deep industry expertise and innovative solutions to increase efficiency, reduce cost, enhance security, and strengthen customer loyalty.  Our operations include four reportable segments: Document and Label Solutions, POD Services (formerly called Fulfillment Services), InSystems, and Digital Solutions.

Industry challenges – The overall market for most traditional long-run printed business documents will increasingly be marked by unfavorable economic forces.   The industry is currently oversupplied and competing software and Internet technologies will continue to make inroads, eliminating or devaluing the role of many traditional paper forms.  These conditions will contribute to lower unit demand and weaker pricing for many products.  The pace of change is expected to be gradual, but is difficult to predict.

Advances in digital printing will increasingly intrude on the quality and cost advantages historically claimed by conventional long-run offset printing.  For many print applications, this will require the industry to add capital investment and will accelerate the “commoditization” of custom printed documents.  The traditional long-run web print business is evolving toward a digital print on demand business and we will invest and participate in this market.  It is a natural extension of the long-run, web-print business.

Business Challenges – The above industry conditions, combined with some post 2001 restructuring sales productivity issues, resulted in substantial revenue and operating profit decreases in 2002 and 2003.   A realignment of our sales force and other sales initiatives, together with an improving economy, contributed to a more stable revenue picture in 2004.   Future revenue growth in our traditional product segment will require a gain in market share.  

Our strategy of expanding our portfolio of products and services to provide for long-term growth requires that we redirect some investment away from traditional capital spending and toward people, technology, and other capabilities, most of which are expensed.  This places additional stress on our near-term profitability, but is aimed at growing digital print-on-demand and other service and technology-based businesses.

By September 2002, the weak stock market and historically low interest rates drove our pension plan from an overfunded to an underfunded position.  The amortization of these past asset and liability losses, although non-cash in nature, has had a significant impact on 2003 and 2004 profits.  Pensions produced earnings in 2002 equal to $0.04 per share, but resulted in annual expense in 2004 equivalent to $0.49 per share.  Pension expense for 2005 is currently estimated at $0.56 per share.  

Paper costs have changed little in recent years; however, paper companies instituted three price increases during 2004, reflecting high operating rates at paper mills and escalating energy costs.  It appears that conditions may support additional increases in 2005 for selective materials.  In response, we have increased our target selling prices and have made progress in an attempt to recover the paper cost increases.  With each paper cost increase, we expect margins to worsen initially and to then recover over a period of several quarters as selling price increases are negotiated; however, there is no guarantee that we will be successful.  

Our Focus – Our objective is to improve the sales trend in our core document business by taking market share in targeted accounts and vertical markets where we have a strong reputation and value proposition.  We will continue to reduce costs and improve productivity in order to stay cost competitive.  

We plan to address the large and growing market to provide for digital print-on-demand output, including color and variable print.  Services that provide the customer with added convenience, design capability, and control over the process are expected to be a strong differentiator.  

We intend to continue to bring our customers products and services  that improve their ability to capture, manage, and move information in their business processes.  We also offer a portfolio of Standard Register managed services that help

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our customers reduce costs and improve their business processes, allowing them to concentrate on their core competencies.  

In addition, we will focus on improving the performance of operations that currently do not make a sufficient contribution to profit, and on improving our overall productivity.  At the end of the first half of 2004, we announced an objective to improve our cost and expense ratios over the next several quarters by a total of five percentage points in relation to revenue.  We have made good progress toward this goal, and if we are successful in recovering paper costs, we expect to achieve this objective by the second half of 2005.

We expect to continue to focus on cash flow and maintain our current strong financial condition.

CRITICAL ACCOUNTING POLICIES

In preparing our financial statements and accounting for the underlying transactions and balances, we applied the accounting policies disclosed in the Notes to the Consolidated Financial Statements.  Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Although we believe our estimates and assumptions are reasonable, they are based on information presently available, and actual results may differ significantly from those estimates.

We consider the estimates discussed below as critical to an understanding of our financial statements because they place the most significant demands on management’s judgment about the effect of matters that are inherently uncertain.  Specific risks for these critical accounting estimates are described in the following paragraphs. The impact and any associated risks related to these estimates are discussed throughout this discussion and analysis where such estimates affect reported and expected financial results.  The impact of changes in the estimates and assumptions pertaining to impairments is directly reflected in the financial results of the individual segment.  The impact of changes in estimates and assumptions related to pension and postretirement healthcare benefit plans and deferred taxes generally do not affect segment results.

For a detailed discussion of the application of these and other accounting policies, see “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.  Management has discussed the development and selection of the critical accounting policies and the related disclosure included herein with the Audit Committee of the Board of Directors.

Pension and Postretirement Healthcare Benefit Plan Assumptions

We have defined benefit pension plans covering eligible U.S. employees.  We also have a postretirement benefit plan that provides certain healthcare benefits for eligible retired employees.

Included in our financial results are significant pension and postretirement obligations and benefit costs and credits, which are measured using actuarial valuations. The use of actuarial models requires us to make certain assumptions concerning future events that will determine the amount and timing of the benefit payments.  Such assumptions include the discount rate, the expected long-term rate of return on plan assets, the rate of future compensation increases, and the healthcare cost trend rate.  In addition, the actuarial calculation includes subjective factors such as withdrawal and mortality rates to estimate the projected benefit obligation. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension or postretirement obligations and benefit expense recorded in future periods.

Discount rate - One of the principal components of calculating the projected benefit obligation, the accumulated benefit obligation, and certain components of pension and postretirement healthcare benefit expense is the assumed discount rate.  The discount rate is the assumed rate at which future pension and postretirement healthcare benefits could be effectively settled.  The discount rate established at fiscal year-end for the benefit obligations is also used in the calculation of the interest component of benefit expense for the following year.  Discount rates are established based on prevailing market rates for high-quality, fixed-income instruments with maturities equal to the future cash flows to pay the benefit obligations when due.

Expected long-term rate of return on plan assets - One of the principal components of the net periodic pension cost calculation is the expected long-term rate of return on plan assets.  The required use of an expected long-term rate of return on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year.  Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by our employees.  Our qualified defined benefit pension plan’s assets are invested in a broadly diversified portfolio consisting primarily of publicly-traded common stocks and fixed-income securities.  We use long-

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term historical actual return experience and estimates of future long-term investment return with consideration to the expected investment mix of the plan’s assets to develop our expected rate of return assumption used in the net periodic pension cost calculation.  Differences between actual and expected returns are recognized in the pension cost calculation over five years using a five-year, market-related asset value method of amortization. The amortization of these differences has and could continue to have a significant effect on net periodic pension cost.

Our non-qualified pension and postretirement healthcare benefit plans are unfunded plans and have no plan assets.  Therefore, the expected long-term rate of return on plan assets is not a factor in accounting for these benefit plans.

Rate of future compensation increases - The rate of anticipated future compensation increases is another significant assumption used in the actuarial model for pension accounting and is determined based upon our long-term plans for such increases.

Healthcare cost trend rate - One of the principal components of calculating the projected benefit obligation as well as the net periodic benefit cost for our postretirement healthcare plan is the healthcare cost trend rate.  We review external data and our own historical trends for healthcare costs to determine the healthcare cost trend rates used for the benefit obligation and expense.  

We review the assumptions used to account for pension and postretirement healthcare benefit obligations and cost each fiscal year-end.

Weighted-average Assumptions

The discount rate used to value pension obligations remained unchanged from the prior year.  Holding all other assumptions constant, a one percent increase or decrease in the discount rate would decrease or increase the pension and postretirement obligation recorded by approximately $58.8 million and $2.9 million, respectively.  A one percent increase in the assumed healthcare cost trend rate would increase the postretirement healthcare benefit obligation recorded by $2.5 million, and a one percent decrease would reduce the obligation by $2.3 million.

These assumption changes increased 2004 pension and postretirement healthcare benefit cost by $8.1 million and $0.5 million, respectively.  Holding all other assumptions constant, a one percent increase or decrease in the discount rate would increase or decrease pension or postretirement benefit cost by approximately $9.2 million and $0.8 million, respectively.   

Amortization of differences between the expected and actual returns on the plan assets, including those resulting from losses in 2002 and 2001, will continue to impact our pension cost.  The long-term rate of return on plan assets that we expect to use to determine fiscal 2005 net periodic pension cost is 8.75%, the same as 2004.  The amortization of past market losses and other probable changes in actuarial assumptions is expected to increase 2005 pension cost by approximately $3.5 million over the 2004 amount.

On December 8, 2003, President George W. Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) into law.  The Act introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.

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The postretirement benefit obligation at December 28, 2003, reflected that we would recognize a 28% subsidy as an offset to plan costs.  The effect was a $9.3 million unrecognized net actuarial gain reflected in the postretirement benefit obligation that will be amortized to income in future periods.  The postretirement benefit cost for 2004 includes a favorable impact of $1.3 million from the effect of the subsidy, including a reduction of $0.6 million of interest cost and a $0.7 million reduction of amortization of the net loss from prior periods.  Postretirement benefit cost for 2003 did not include any impact from the effect of the subsidy.  The 28% subsidy is expected to reduce our prescription drug plan costs by about 600 dollars per individual in 2006 and this amount is expected to increase by the valuation trend rates.  

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, which include intangible assets, goodwill, and plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors considered important that could trigger an impairment review include, but are not limited to, the following:

·

Sustained underperformance relative to expected historical or projected future operating results

·

Changes in the manner of use of the assets, their physical condition or the strategy for the Company’s overall business

·

Negative industry or economic trends

·

Declines in stock price of an investment for a sustained period

·

The Company’s market capitalization relative to net book value

·

A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit, or a long-lived asset will be sold or otherwise disposed of, significantly before the end of its previously estimated useful life

·

A significant decrease in the market price of a long-lived asset  

·

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator

·

An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset  

·

A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset

·

Unanticipated competition

·

A loss of key personnel.

Goodwill and indefinite-lived intangibles are required to be evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value.  Fair values are typically calculated using discounted expected future cash flows, using a risk-adjusted discount rate.

During the second quarter of 2004, we performed the annual impairment test for goodwill related to the PlanetPrint acquisition.  The test was performed at the reporting unit level using a fair-value-based test that compares the fair value of the asset to its carrying value.   Based upon the test results, we determined that the discounted sum of the expected future cash flows from the assets exceeded the carrying value of those assets; therefore, no impairment of goodwill was recognized.

In performing the test for impairment, we made assumptions about future sales and profitability that required significant judgment.  In estimating expected future cash flows for the 2004 test, we used internal forecasts that were based upon actual results, assuming flat to declining revenue, minimal cost improvement, and substantial gross margin improvement due to a higher mix of more profitable products.  At the time of the 2004 impairment test, the carrying value of net assets for PlanetPrint was $8.3 million.  If our estimate of expected future cash flows had been 10% lower, the expected future cash flows would still have exceeded the carrying value of the assets, including goodwill.

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During the third quarter of 2003, we performed the annual test for goodwill impairment related to the InSystems acquisition. The test was performed at the reporting unit level and was conducted with the assistance of independent valuation consultants.  

In estimating expected future cash flows related to the InSystems assets, we used internal forecasts that reflected our assumptions about future sales and profitability.  We used a weighted-average of probable expected future cash flows over a five-year period, discounted using a risk-adjusted discount rate of 9.4%, after considering terminal values.   Our expected future cash flow estimates were based on the strategic direction of InSystems at that time, which included enhancements to document automation software, growth from utilizing the components of the eXterity™ software suite, and growth in the Tracker software product.  These strategic plans included significant research and development expenditures in 2004 and beyond.  We determined that the discounted sum of the expected future cash flows from the assets exceeded the carrying value of those assets; therefore, no impairment of goodwill was recognized.  At the time of the impairment tests, the carrying value of net assets for InSystems was $83.7 million.  If our estimate of expected future cash flows had been 10% lower, the expected future cash flows would still have exceeded the carrying value of the assets, including goodwill.

In the fourth quarter of 2003, we saw a need for a change in strategic direction for InSystems in order to improve their earnings performance for 2004.  The strategic direction of InSystems was changed to focus on penetrating markets with existing products and canceling all plans related to its eXterity™ software, which resulted in a restructuring.  As a result of these actions, in the fourth quarter of 2003, we performed an additional impairment test of goodwill and tested other intangible assets and capitalized software development costs related to InSystems for impairment.  The change in strategic direction significantly reduced our forecast of future estimated revenues.  The discounted sum of the expected future cash flows from the assets in this test also exceeded the carrying value of those assets, although by a much smaller margin.  Although there was no impairment of goodwill required, we did recognize a $4.5 million impairment charge related to capitalized software development costs due to the cancellation of all plans related to the use of InSystems’ eXterity™ software platform.

The most critical estimates, in order of significance, used in the impairment test included (1) estimated revenue in year five, (2) the weight of probability given to each business case, (3) the terminal value assumed, (4) the amount of research and development spending, (5) the foreign exchange rate used, and (6) the discount rate applied.  In developing each business case, the estimates were primarily based on expected license revenue, service revenue, maintenance revenue, recovery in the general economy allowing increased capital spending in the insurance market, and development of new functionality and uses for our document automation software. A 10% change in any one of these assumptions, of which revenue in year five had the most significant impact, would have required us to record an impairment.  At that time, if InSystems was unable to achieve its business plans, the likelihood of future goodwill impairment would have increased.

A significant restructuring at InSystems during the third quarter of 2004 was considered to be a triggering event that indicated that goodwill possibly was impaired.  Accordingly, we performed an evaluation of the recoverability of InSystems’ goodwill in advance of the annual test that would otherwise have been conducted in the fourth quarter of 2004.  

The goodwill impairment test is a two-step process that is performed at the reporting unit level using a fair-value-based test that compares the fair value of the asset to its carrying value.  Under the first step, we calculated the fair value of InSystems based on discounted expected future cash flows, using a risk-adjusted discount rate, and a terminal value based on a multiple of earnings before interest, depreciation, taxes and amortization.  We utilized five-year forecasts that were based on management’s best estimate of future sales, future investments and profitability.  These estimates were based primarily on expected license revenue, service revenue, and maintenance revenue and reflected routine enhancements for its document automation software and a modest recovery in the general economy.  These estimates contained more modest projections for revenue growth and recovery in the insurance market from those used in earlier impairment tests.  These estimates were reviewed and approved by senior management.  

The results of the first step indicated that the carrying value of the InSystems assets exceeded their fair value.  The analysis showed that a majority of the reduction in fair value since the test at the end of 2003 was caused by the reduction in earnings multiples that occurred in the software industry over the last nine months.  Additionally, delays in the timing of expected recovery in the insurance market, and a lower base for revenue growth stemming from recent restructuring actions at InSystems and decreased revenue in 2004, both contributed to a reduced earnings forecast.

We retained a third-party valuation firm to assist in calculating the fair values included in the determination of the implied value of goodwill used in the second step of the impairment test.  We concluded that goodwill was impaired, and we recorded an impairment charge of $47.1 million, which represents all of the goodwill for InSystems.  In conjunction with the goodwill impairment test, we performed impairment tests of InSystems’ intangible assets and they were found not to be impaired.

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The most critical estimates, in order of significance, used in the impairment test include (1) estimated revenue in year five, (2) the terminal value assumed,  (3) the discount rate applied, and (4) the weight of probability given to each business case.  In developing each business case, the estimates were primarily based on expected license revenue, service revenue, maintenance revenue, recovery in the general economy allowing increased capital spending in the insurance market, and development of new functionality and uses for our document automation software.  A positive change in any one of these assumptions would have reduced the amount of the impairment recorded.  A 10% increase in our year-five revenue estimate would have increased our total expected future cash flows by approximately $12 million on an undiscounted basis.  A 10% increase in the earnings multiple would have increased our expected future cash flows by approximately $0.3 million on an undiscounted basis.

We cannot predict the occurrence of future impairment triggering events nor the impact such events might have on its reported asset values.  Such events may include strategic decisions made in response to economic conditions relative to operations and the impact of technology, economic conditions, and industry trends on our customer base.  

Deferred Taxes  

We record income taxes under the asset and liability method.  Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

At January 2, 2005, we have recorded a net deferred tax asset of $103.1 million attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards.  We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans, tax planning strategies, and other expectations about future outcomes.  Since the effect of a change in tax rates is recognized in earnings in the period when the changes are enacted, changes in existing tax laws or rates could affect actual tax results, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time.  

The realizability of our deferred tax assets is primarily dependent on the future taxable income of the taxable entity to which the deferred tax asset relates.  We evaluate all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax asset will not be realized.  The decision to record a valuation allowance requires varying degrees of judgment based upon the nature of the item giving rise to the deferred tax asset.  As a result of operating losses incurred by InSystems, and uncertainty as to the timing of profitability in future periods, we established valuation allowances of $6.8 million in 2004 and $2.9 million in 2003 for deferred tax assets related to net operating loss carryforwards and other Canadian tax credits that we believe will expire unused.  We also established additional valuation allowances of $1.1 million in 2004 and $1.5 million in 2003 for U.S. capital loss carryforwards that we also believe will not be utilized before the expiration period.  Had we not recorded these allowances, we would have reported a more favorable effective tax rate in 2004 and 2003.  Should future taxable income be materially different from our estimates, changes in the valuation allowance could occur that would impact our tax expense in the future.

RESULTS OF OPERATIONS

Two factors that affect the comparability of results of continuing operations include the acquisitions made in 2002 and restructuring and impairment charges in 2003 and 2004.

Acquisitions

On July 2, 2002, we purchased all of the outstanding stock of InSystems Technologies, Inc. (InSystems), a privately-owned company based in Toronto, Ontario, Canada.  On July 12, 2002, we acquired selected assets from PlanetPrint, a business services company headquartered in Minneapolis, Minnesota.  Results of operations from these acquisitions are included in our consolidated financial statements from the date of acquisition.  

Restructuring and Asset Impairment

Our 2004 and 2003 restructuring actions are accounted for under the provisions of Statement of Financial Accounting Standards (SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities.  This statement requires that liabilities for costs associated with an exit or disposal activity not be recognized until the liability is incurred and the fair value can be estimated, except for certain one-time termination benefits.  As a result, SFAS No.146 may affect the timing of the recognition of costs associated with a restructuring.  SFAS No.146 nullifies Emerging Issues Task Force (EITF) 94-3 which permitted recognition of a liability for such costs at the date of a company’s commitment to an exit plan.  The provisions of EITF 94-3 continue to apply for restructuring actions previously initiated.  

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Pre-tax components of restructuring expense are as follows:

2004 Restructuring

In 2004, we initiated several restructuring actions as part of a drive to reduce costs.  We integrated our sales specialist organization with our regional sales organization to improve coordination, resource deployment, and productivity; adjusted our client services model to improve efficiency; and went to a shared service model in various administrative areas to reduce costs.  We also outsourced part of our information technology operations, including hardware management, help desk support, and telecommunications.  As a result of all these actions, we eliminated a significant number of positions, including four executive officer positions.  

In addition, we reduced the workforce and leased office space at our InSystems headquarters.  InSystems had experienced significant declines in their revenues and margins in recent periods, and we elected to reduce costs and refocus attention on InSystems’ key product lines.  

Most of the actions were completed by the end of 2004.  Costs incurred included severance and employer related costs, including outplacement and healthcare allowances; lease termination costs for one sales office and a portion of the InSystems headquarters, including contractual obligations for taxes, utilities, and maintenance costs; and associated travel and moving costs related to the restructuring actions.  Approximately $0.4 million of expense was reversed in 2004, a result of lower than expected severance and healthcare benefits for certain associates.  An additional $0.1 million of restructuring expense will be recorded through 2006, primarily for the vacated sales office, as the amount accrued is net of any expected sub-lease income and we have been unable to sublease this facility.

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Pre-tax components of 2004 restructuring actions are as follows:

A summary of the 2004 restructuring accrual activity is as follows:

2003 Restructuring

In 2003, we initiated several restructuring actions to improve utilization and profitability.  We consolidated four printing and service operations within the POD Services segment to form a new regional print-on-demand and fulfillment center in Dallas, Texas.  Within the Document and Label Solutions segment, a rotary printing plant was closed to trim excess capacity and several warehouses were consolidated.  Within the InSystems segment, we determined that certain software development initiatives would not produce an adequate return and elected to stop further investment in those projects.  In conjunction with this decision and to further reduce costs, we reduced staffing levels within this segment.  We also relocated our SMARTworks operations and eliminated management and other positions at our corporate headquarters.  

All of the actions were completed by the end of 2004.  Costs incurred included severance and employer related costs, including outplacement and healthcare allowances; lease termination costs, including contractual obligations for taxes, utilities, and maintenance costs; and other associated costs directly related to the restructuring efforts, including travel, security, and the relocation of SMARTworks.  Approximately $0.3 million of expense was reversed in 2004, a result of lower than expected utilities and maintenance costs on lease terminations, and $0.1 million was reversed in 2004 from lower than expected severance.  An additional $0.5 million of additional restructuring expense will be recorded through 2006 related to vacated facilities that we have been unable to sublease.

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Pre-tax components of the 2003 restructuring actions are as follows:

A summary of the 2003 restructuring accrual activity is as follows:

2001 Restructuring

In 2001, we undertook a significant restructuring effort.  The restructuring delivered cost reductions through the reduction of overhead, the consolidation of plants, warehouses, and sales offices, and the elimination of approximately 2,400 positions Company wide.  The restructuring resulted in the closing of 25 production facilities and the consolidation of 149 sales offices and 29 warehouses into other locations.  All actions related to the restructuring were completed in 2002.  Due to the nature of the costs and the duration of the program, estimates of the liability amounts required significant judgment.

Ultimately 2,330 positions were eliminated in 2001, but as a result of voluntary resignations, we paid severance to only 1,985 persons.  An additional 70 were later eliminated during 2002.  We incurred lower than anticipated payments for compliance with the Worker Adjustment and Retraining Notification Act.  Outplacement and stay bonuses were likewise less than originally expected.  These changes resulted in a final reversal of $1.7 million in 2002 to the accrual established for severance and employer related costs.  

We were unable to sublease as many of the facilities as expected or to buyout the leases with as favorable terms as originally anticipated.  As a result, the liability for contract exit and termination costs was in excess of the amount originally estimated.  Since the liability balance was reduced to zero during 2003, approximately $4.6 million of lease payments are being charged to restructuring expense as incurred through 2006, of which $1.2 million is remaining at January 2, 2005.

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2000 Restructuring

In 2003, we reversed $0.1 million of contract exit and termination costs related to a non-cancelable lease obligation that expired in June 2003.  

2004 Asset Impairments

At January 2, 2005, we classified a vacant parcel of land in North Carolina with a carrying value of $0.2 million as held for sale in the accompanying Consolidated Balance Sheet.  We expect to sell the land in 2005 and record a gain.  The assets discussed below that were held for sale at December 28, 2003, were sold in 2004, resulting in additional impairment charges of $0.2 million for the POD Services segment.

In order to reduce costs, our InSystems segment sold its Roanoke, Virginia, facility in 2004.  The carrying value was adjusted to its fair value less costs to sell, based upon a recent appraisal, resulting in an impairment charge of approximately $0.6 million.  We also performed an impairment test on the goodwill related to the InSystems acquisition and recorded an impairment charge of $47.1 million.  See Note 8 for further discussion of the goodwill impairment test. The POD Services segment also recorded $0.1 million of asset impairment charges related to an intangible asset and the Document and Label Solutions segment recorded asset impairment charges on equipment totaling $0.5 million.

2003 Asset Impairments

At December 29, 2002, assets held for sale related to the Document and Label Solutions segment included buildings with net book values of $2.3 million.  These buildings were sold during 2003, resulting in a total gain of $1.1 million in 2003 that was included as a credit to Asset Impairments in the accompanying Consolidated Statements of Income.  

In conjunction with the 2003 restructuring actions, assets were either written off or written down to estimated fair value if the asset was to be sold.  Due to an oversupply of used production equipment in the marketplace, approximately $2.5 million of assets, primarily machinery and equipment, were determined to have no fair value and were disposed of, resulting in a non-cash impairment charge.  Of this amount, $1.6 million related to the Document and Label Solutions segment and $0.9 million related to the POD Services segment.   

We also identified certain pieces of equipment and two buildings that were closed that we believed could be sold. The carrying values were adjusted to their fair value less costs to sell, considering recent sales of similar properties, real estate brokers’ valuations, and offers and bids, resulting in a net impairment charge of $6.8 million.  Of this amount, $5.4 million related to the Document and Label Solutions segment and $1.4 million related to the POD Services segment.  At December 28, 2003, remaining assets held for sale related to the POD Services and Document and Label Solutions segments totaled $1.2 million and $0.9 million, respectively.  We discontinued depreciation on these assets in June 2003.  

In addition, the Document and Label Solutions segment recorded an impairment charge of $2.0 million related to forms-design software that became technologically outdated.  We replaced the software used for forms design to one that is more widely used by our customers and is more of an industry standard.  Accordingly, the carrying value of the software was written down to its fair value, based upon the fair value of the number of estimated remaining forms to be designed with the software, and its useful life was reduced.  The fair value was calculated based upon the weighted average of probable future cash flows of the asset.  The effect on annual amortization expense was not material.

PathForward recorded an impairment charge of $1.2 million related to capitalized software development costs recorded with the acquisition of PlanetPrint.  The software was used exclusively by one customer.  Beginning in the fourth quarter of 2003, the use of this software by the customer ceased as a result of a mutual decision by both the Company and the customer.  We determined there were no alternative uses for this software.  

InSystems recorded an impairment charge of $4.5 million related to capitalized software development costs recorded with the acquisition.  A change in the strategic direction of InSystems that resulted in the restructuring actions previously discussed, also included the cancellation of all plans related to the use of the InSystems eXterity™ software platform.

Analysis of Operations

The following discussion and analysis provides information which management believes is relevant to an understanding of our consolidated results of operations and financial condition, supplemented with a discussion of segment results.  This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.  

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This discussion also presents information that excludes restructuring and impairment expense, pension settlement expense, and pension loss amortization.  These financial measures are considered non-GAAP.  Generally a non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows where amounts are either excluded or included not in accordance with generally accepted accounting principles (GAAP).  We believe that this information will enhance an overall understanding of our financial performance due to the non-operational nature of these items and the significant change from period to period.  The presentation of non-GAAP information is not meant to be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States.

Unless otherwise noted, references to 2004, 2003, and 2002 refer to the 53-week period ended January 2, 2005 and the 52-week periods ended December 28, 2003 and December 29, 2002.

The table below presents an analysis of operations for each of the respective years:

Discontinued Operations

In December 2004, we sold our equipment service business to Pitney Bowes for approximately $16.8 million in cash and retained $2.4 million of equipment service business accounts receivable.  The transaction resulted in a gain of $12.8 million after tax, equivalent to $0.45 per share.  That gain, plus the results of operations of that business during 2004, produced earnings of $14.5 million after tax, or $0.51 per share.

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The sale of the equipment service business, a component of the Document and Label Solutions segment, met the criteria to be accounted for as a discontinued operation under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and the results of operations have been excluded from continuing operations.  Revenue of the equipment service business included in discontinued operations was $22.9 million, $22.1 million, and $24.4 million for 2004, 2003, and 2002.  No interest expense was allocated to discontinued operations.  The following discussion will focus on the results of continuing operations. The Company’s consolidated balance sheet at December 28, 2003 includes $4.0 million in current assets (primarily inventory), $0.1 million of net property and equipment, and $8.7 million in current liabilities (primarily deferred revenue) related to discontinued operations.

Revenue

The table below presents revenue from continuing operations by segment :

Fiscal year 2004 contained 53 weeks, compared to 52 weeks for 2003 and 2002.  On a straight-line, pro-rata basis the extra week is equivalent to $17.0 million, increasing 2004 revenue by approximately 1.9% in relation to 2003.  Excluding the extra week, 2004 revenue was down 2.3% from the prior year.

The market for our traditional core Document and Label Solutions (DLS) products and services has been marked by generally unfavorable economic forces, including excess supply and flat to declining demand.  Moreover, paper costs were increased three times in 2004, reversing a prolonged period of benign paper price activity and putting additional pressure on document pricing.  We raised the target prices for our documents and have made good progress in recovering the higher paper costs as the year 2004 progressed.

Following two years of double-digit sales declines attributed in major part to the above market dynamics, a weak economy, and some post 2001 restructuring issues related to sales productivity, revenue in the DLS segment has been relatively stable over the last six quarters.   This improvement is attributed to organizational, incentive, and focus changes made in 2003 and 2004 directed toward an eventual gain in market share.   

Sales of our POD Services’ products and services rebounded in 2004, after declines in each of the prior two years.  Since POD Services and DLS rely on the same sales force, many of the same factors identified in the preceding paragraph explain the decrease and subsequent turnaround in this business segment.  Over the three-year timeframe, POD Services has experienced declines in short-run offset print, but growth in digital print, often augmented by software application services aimed at improving customers’ productivity.

Taken as a whole, our DLS and POD Services segments experienced unit growth in 2004 of approximately 1% after adjusting for the extra week.  We estimate that we were able to pass through a significant majority of higher paper costs incurred in 2004 on our existing base of business.  The marketplace continued to be competitive; however, new business in 2004 generally came in at lower margins.

Insystems was acquired in July 2002.  Revenue declined in 2003 as sales of the segment’s new product line failed to materialize, a major customer was lost, and there was a general tightening of the market for software aimed at the insurance industry.  We discontinued the new product line, restructured the segment, and focused on its core products and services.  The installed maintenance base has held up well, but license sales and professional services revenue were lower in 2003 and 2004.  Following the 2004 restructuring, Insystems ended 2004 on a strong note with an increase in new license sales of its core products.

Digital Solutions is in start-up mode and is currently testing market acceptance of its digital pen and paper application with several potential customers.  This is an emerging market and there is not yet any revenue of significance to report.   

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Other segments in the table above include Commercial Print, PathForward, and International.  The majority of the revenue and increase over the period is attributed to Commercial Print.  

Our earnings prospects are heavily dependent on the success of our initiatives to continue to improve the revenue trend.  The changes in sales structure, planning tools, and incentives have placed increased focus on penetrating strategic accounts and vertical markets where we have a strong presence and value proposition.  We expect that 2005 revenue will show modest growth on a 52-week fiscal year basis.

Gross Margin  

Gross margin declined from $402.4 million in 2002, to $341.4 million in 2003, to $324.3 million in 2004; it ranged from 40.1% of revenue in 2002 to 36.4% in the most recent year.  

The $61.0 million decrease from 2002 to 2003 was primarily a function of the substantial decrease in revenue discussed earlier, including weaker pricing, mitigated by cost savings from restructuring actions taken during the year in DLS, POD Services, Insystems, and the Corporate center.  The more modest $17.1 million decline in 2004, during a period of relative revenue stability, primarily resulted from weaker pricing in some price competitive DLS product segments, the decrease in Insystems revenue, and a slight mix shift in favor of lower margin products.  These unfavorable factors were mitigated by improved margins in the POD Services segment as a result of improved productivity and cost reductions.  

SG&A and R&D

The following table identifies several key factors that impacted selling, general, and administrative (SG&A) and research and development (R&D) expense:

First, significant levels of pension loss amortization were triggered primarily by back-to-back years of stock market declines in 2001 and 2002, which pushed the pension plan into an under-funded position.  Pension loss amortization in 2005 is expected to be approximately $20.0 million.   Somewhat offsetting the increase is the expected reduction in service cost of approximately $2.0 million due to the fact that beginning in 2005, our qualified pension plan will no longer be available to new participants.  Our 401(k) employee savings plan will be the primary source for retirement savings for employees hired after 2004 and, as a result, expense from the Company’s match will increase .   Second, a pension settlement charge was incurred in 2003 as a result of a large number of employees electing to retire in the face of reductions in force related to the restructuring and a relatively low prevailing interest rate that increased the value of their payouts.  Third, expenses incurred to develop our digital pen and paper offering were significant in 2004, particularly in the absence of revenue for this start-up business.   

Excluding these three items, our SG&A and R&D expense has declined as a result of the restructuring actions taken in 2003 and 2004.

Depreciation & Amortization

Depreciation and amortization expense decreased in 2004 primarily as a result of consistently lower capital expenditures in recent years. A decrease would have also been shown for 2003, if not for the full year effect of intangible amortization from the 2002 mid-year acquisition of InSystems.  

Interest Expense

Interest expense has trended lower over the three year period, declining from $13.3 million in 2002, to $4.1 million in 2003, to $2.7 million in 2004.  A fixed interest rate swap expired in January 2003, allowing the Company to take advantage of lower prevailing floating interest rates and reducing expense significantly in 2003.  Despite increasing interest rates in 2004, the decrease in borrowing produced a drop in 2004 interest expense.

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Pretax Income (Loss) from Continuing Operations

In summary, results of continuing operations before taxes decreased by $112.6 million, from a profit of $51.1 million in 2002, to a loss of $61.5 million in 2003.  Approximately $70.8 million of this decrease is attributed to restructuring, impairment, pension loss amortization, and pension settlement expense.  The balance of the decrease was primarily the result of lower 2003 revenue.

In 2004, restructuring, impairment, and pension loss amortization reduced pretax results by $79.5 million and our investment in development of our digital pen and paper offering subtracted an additional $6.5 million.  Excluding these items, all other operations contributed $12.9 million to pretax earnings, compared to $8.4 million for the prior year.  

In July 2004, we announced a goal to increase our operating earnings before restructuring, impairment, and interest expenses by five percentage points in relation to revenue by the second half 2005, using the first half 2004 negative 2.2% as a baseline.  Pretax earnings excluding restructuring and impairment improved in each successive quarter of 2004, and we believe we have made good progress toward our goal.

SEGMENT REPORTING

In fiscal 2004, we reclassified certain operating segments included in our reportable segments to reflect the revised organizational structure of the Company.  SMARTworks, previously a wholly owned subsidiary, was merged and became part of our corporate center.  The Document Systems group that was previously part of InSystems became part of Document and Label Solutions.  Commercial Print, previously part of Document and Label Solutions and now a new operating segment, is aggregated with International and PathForward into Other.  Digital Solutions, previously included with our corporate center is now a reportable segment.  Our four reportable segments are Document and Label Solutions, POD Services, InSystems, and Digital Solutions.

The segment discussions that follow include annual operating results from continuing operations, excluding LIFO inventory adjustments, certain components of pension expense, interest income, and interest expense.  Total assets represent those identifiable or allocable to each segment.  The return on assets calculation equals income on operations less income taxes, divided by total assets.

Document and Label Solutions

Document and Label Solutions offers custom printed documents, integrated systems, business supplies, and distribution services that help its customers manage their business information and transact with their customers and suppliers.  This segment also offers identification solutions that improve its customers’ operational performance by reducing cycle time, error rate, and processing costs.  These products and services are used for financial transactions, inventory control, product identification, distribution, regulatory compliance, healthcare, and other applications that require accuracy and security.  Document and Label Solutions also produces custom pressure-sensitive labels, flexographic, screen and offset printed labels, bar code labels, compliance labels, and variable image products that use the latest laser and thermal transfer technology.  This segment comprised about 69.0%, 69.5%, and 71.4% of our consolidated revenues in 2004, 2003, and 2002.  

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The market for DLS products and services has been marked by generally unfavorable economic forces, including excess supply and flat to declining demand.  Moreover, paper costs were increased three times in 2004, reversing a prolonged period of benign paper price activity and putting additional pressure on document pricing.  We raised the target prices for DLS products and have made good progress in recovering the higher paper costs as the year 2004 progressed.

After two years of double-digit sales declines attributed in major part to the above market dynamics, a weak economy, and some post 2001 restructuring issues related to sales productivity, revenue in this segment has been relatively stable over the last six quarters.  This improvement is attributed to organizational, incentive, and focus changes made in 2003 and 2004 directed toward an eventual gain in market share.   

Operating profit in 2003 and 2004 was reduced for restructuring and impairment expenses, and a pension settlement charge was reported in 2003, as indicated in the table above.  Excluding these items, operating profit decreased from $65.6 million in 2002 to $15.0 million and $21.2 million in the two succeeding years.    

The $50.6 million decrease in 2003 operating results was primarily due to the loss of contribution margin on the $94.5 million reduction in revenue; of this amount, approximately $9.0 million was attributed to weaker pricing with the balance due to lower unit sales.  

In 2004, higher paper costs, lower margins on the mix of new business, and lower revenue pushed gross margins lower versus the prior year despite a one-time $2.8 million supplier rebate received in the first quarter of the year.  The lower gross margin was more than offset, however, by a reduction in operating expenses that produced a net increase in annual operating profit excluding the restructuring and impairment expenses.

POD Services

POD Services provides our customers a portfolio of custom print products and related services – producing static, versioned, and variable printed documents when the customer wants them, where they want them, and in the quantity they desire.  They help our customers communicate more effectively with their customers by providing customized information and marketing materials.  This business segment focuses on outsourcing products and services that primarily serve large-and middle-market companies in the financial services, healthcare, and commercial industries.  The types of products and services this segment offers include high-end digital color or black/white, short-run, quick print production (print-on- demand), billing and statement solutions, one-to-one marketing communications (variable print-on-demand), web-based “information request” fulfillment, and customer information kits (cards, policies, statements, manuals, etc.).  This segment accounted for 27.0%, 26.4%, and 25.5% of our consolidated revenues in 2004, 2003, and 2002.

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Sales of POD Services’ products and services rebounded in 2004, after declines in each of the prior two years attributed to relatively weak economic activity and the aforementioned post 2001 restructuring issues related to sales productivity.  A relatively stable revenue pattern over the last eight quarters can be attributed to structural changes in the sales organization, changes in sales incentives, and a sharpened focus during 2003 and 2004.

Over the three-year timeframe, POD Services has experienced declines in short-run offset print, but has seen growth in digital print and software services aimed at improving customers’ productivity and reducing cost.

The decrease in 2003 operating profit can be traced primarily to the reduction in revenue.  The improvement in 2004 is attributed to the higher revenue, cost reductions in the plants, and lower operating expenses.  

InSystems

InSystems specializes in complex document and compliance automation for insurance and financial services.  Its solutions allow companies to achieve operational excellence by automating the creation, management, and multi-channel distribution of customized documents, and streamlining the product development and regulatory filing processes.  InSystems’ solutions give business users more control with less dependence on IT resources.  

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InSystems was acquired in July 2002.  Revenue declined in 2003 and 2004 as sales of the segment’s new product line failed to materialize, a major customer was lost to an acquisition, and there was a general tightening of the market for insurance industry application software.  The Company discontinued the new product line, restructured the segment, and focused on its core products and services where it saw a market opportunity.  

The installed maintenance base held up well through this period, but sales of new licenses and related professional services were lower in 2003 and 2004 and the operating deficit widened.   The results of operations shown above for 2004 include non-cash charges of $4.7 million of amortization of intangible assets and software development costs and $0.9 million of depreciation.  

InSystems ended 2004 on a strong note with a pick-up in new license sales and positive cash flow (operating profit plus non-cash charges) for the fourth quarter.

Digital Solutions

Digital Solutions is a new business unit that offers a suite of intelligent, integrated solutions including an innovative digital pen and paper technology.  Aimed at streamlining workflow and improving efficiency, the new ExpeData™ digital pen and paper technology gives organizations the ability to capture information simply and naturally, automatically converting the writing into a digital format, verifying it and making it available to back-end systems.  This new technology also can authenticate signatures and create a fully indexed image of the document, which can be retained in a digital repository for subsequent retrieval and usage.  This technology combines the flexibility and simplicity of paper with the power of digital technology to help customers reduce the cost and time associated with data entry, mailing, scanning and indexing.

Digital Solutions is in start-up mode and is currently testing market acceptance of its digital pen and paper application with several potential customers.

Expenses incurred in 2004 to develop our digital pen and paper offering and establish a sales channel and customer pipeline were $6.5 million.  Management believes it has a strong position in this emerging market and pilot testing has gone well, but market size and acceptance is difficult to predict at this stage.

ENVIRONMENTAL MATTERS

We have been named as one of a number of potentially responsible parties at several waste disposal sites, none of which has ever been Company owned.  Our policy is to accrue for investigation and remediation at sites where costs are probable and estimable.  At this writing, there are no identified environmental liabilities that are expected to have a material adverse effect on our operating results, financial condition, or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Our discussion of liquidity and capital resources will include an analysis of our cash flows, an analysis of our net investment and capital structure, and a summary of our significant contractual obligations.    

This discussion also presents financial measures that are considered non-GAAP.  Generally a non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows where amounts are either excluded or included not in accordance with generally accepted accounting principles.  We believe that this information will enhance an overall understanding of our cash flows.  The presentation of non-GAAP information is not meant to be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States.

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The major elements of the Statements of Cash Flows are summarized below:

The following table identifies the major categories of items that have had a significant impact on cash flow over the last three years:

Although the balance of cash and short-term investments decreased in each successive year, much of the cash was utilized to pay down debt borrowed under the revolving credit agreement, and the Company’s cash flow prior to debt payments was positive in years 2003 and 2004.

We have undertaken several actions designed to alter the structure of the Company.  Acquisitions played a major role in 2002 and a minor role in 2004, as indicated above.  Expenditures for restructuring were also significant in all three years, as we have endeavored to reduce future operating costs and dispose of excess assets.  We also elected to sell our equipment service business in 2004.  Excluding these restructuring related items, cash flow has been positive in all three years, as indicated above.  Although a small amount of future expenditures are expected to flow from past restructuring actions, it is difficult to predict future expenditures of this type.

Capital expenditures were $23.2 million in 2004, generally in line with the average spending for the previous three years. Expenditures for 2005 are projected at $25 million to $28 million with an emphasis on developing our POD Services technology and production capacities.

Dividend payments have remained steady at approximately $26.0 million per year.  Our defined benefit plan has been under-funded since late 2002.  We expect to close the gap over a period of several years with a combination of earnings from investments and company contributions.  We funded $20 million and $17.5 million of pension plan contributions in

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2004 and 2003.  Although we do not have a mandatory funding requirement in 2005, we currently plan to contribute $10 million.  

Cash flow from operations in years 2002 and 2003 was stronger than in 2004, primarily because the significant reductions in revenue in those years produced lower working capital requirements.  Accounts receivable and inventories decreased by $48.8 million and $40.4 million in 2002 and 2003, respectively.  This contrasts with 2004, where revenue was relatively unchanged from the prior year, and accounts receivable and inventories rose by $7.2 million on the strength of fourth quarter 2004 revenue.  

Net Investment and Capital Structure

The management of working capital continued to improve in 2004 as indicated by the increase in the turnover of net current assets (excluding cash, debt and accrued restructuring) from 8.0x in 2003 to 9.0x in 2004.  The turnover calculation divides fourth quarter’s revenue times four by the ending balance of net current assets.

Excluding the asset impairment charges in 2004, the net book value of capital assets decreased $16.9 million, primarily reflecting a $14.3 million gap between the $23.2 million of capital spending and $37.5 million in annual depreciation.  The balance is expected to decrease further in 2005 as an estimated $34.0 million in depreciation will once again exceed capital spending, currently estimated at $25 to $28 million.

Total debt was $81.4 million, as we made $45.3 million in debt repayments in 2004.  Cash decreased $32.9 million from $77.0 million at the beginning of 2004 to $44.1 million at January 2, 2005, primarily as a result of the debt repayments, pension contributions, and restructuring payments.  Net debt (total debt less cash and cash equivalents) was $37.3 million at January 2, 2005, compared to $48.0 million at December 28, 2003.  Our strong financial condition is illustrated by the 15% ratio of net debt to total capital at January 2, 2005.  

The Company has a $150 million unsecured revolving credit facility agreement with nine banks that matures in May 2005.  In fiscal 2004, we requested, and were granted, a reduction in the credit facility amount from $220 million to $150 million.  

We expect to have a new agreement in place prior to May 2005.

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The credit facility incurs interest at a floating rate of the London Interbank Offered Rate (LIBOR) plus a spread dependent upon our net debt to total capital ratio. The interest rate, including the spread was 2.725% and 1.663% at January 2, 2005 and December 28, 2003, respectively.  We are also required to pay a commitment fee on the total unused credit facility amount.  The credit facility also contains financial covenants that require us to maintain, among other things, a minimum coverage of interest expense.  

In 2004, we entered into a three-year capital lease for computer equipment.  Our capitalized lease obligation provides for aggregate payments, including interest, of approximately $1.7 million.  Payments under the lease, including interest, are as follows: 2005-$0.6 million; 2006-$0.6 million and 2007-$0.3 million.  At January 2, 2005, future minimum payments for the lease were $1.4 million.  Amortization expense for the capital lease is included with depreciation expense on our consolidated statement of income for the year ended January 2, 2005.

Contractual Obligations

The following table summarizes our significant contractual obligations at January 2, 2005. Some of the amounts we included in this table are based on estimates and assumptions about our obligations, and the amounts we actually pay in the future may vary from the amounts reflected below.

(1) The debt payment information above assumes the debt will be paid on the maturity date of May 11, 2005.  We expect to have a new debt agreement in place prior to May 2005 and, more likely than not, will not be required to make this payment.  The amount above also includes approximately $0.8 million of interest based on the interest rate in place at January 2, 2005 (2.725%).

(2) The pension plan obligations included in the table above represent benefit payments for 2005 to 2014 under the non-qualified defined benefit plans that are unfunded.

(3) The postretirement benefit obligation included in the table above represents healthcare benefit payments expected to be paid for future claims under the plan for 2005 to 2014.

We are obligated under operating leases for real estate, sales offices, transportation equipment, and computer and other equipment.  The obligations under these operating leases are not recorded on our balance sheet in accordance with generally accepted accounting principles.

Purchase commitments at January 2, 2005, totaled $10.6 million, including $1.4 million for capital improvements.  We also have a four-year commitment with an equipment supplier to spend a total of $4.0 million over the commitment term.  There are three years remaining on this commitment.  In addition, we have various other purchase commitments for telecommunications services from suppliers under multi-year agreements that provide for minimum commitments of $1.4 million.  We outsource certain information technology services from a supplier under a multi-year agreement that provides for an early termination penalty.  At January 2, 2005, the early termination penalty is approximately $14.2 million. The remaining terms of the agreements range from two to four years.  As these remaining terms diminish, the amount of the termination penalties decline.  We have no purchase agreements with suppliers extending beyond normal quantity requirements.

Our near-term cash requirements are primarily related to funding our operations and capital expenditures.  The remaining cash requirements of our restructuring programs are approximately $6.7 million through 2006, primarily for severance and lease obligations.  We do not expect to have a minimum funding requirement in 2005, although we plan to make at least a $10 million voluntary contribution to our defined benefit pension plan.

We believe that the combination of internally generated funds, available cash reserves, and our existing credit facility are sufficient to fund our operations, including capital expenditures, dividends, remaining restructuring costs, and investments

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in growth initiatives over the next year.  In our judgment, our strong balance sheet could support additional debt financing, should it become necessary.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4 Inventory Pricing”.  SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs.  Under this concept, if the costs associated with the actual level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference would be charged to current-period expense, not included in inventory costs.  SFAS No. 151 also requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  We will adopt this statement for fiscal year 2006 and are currently assessing the impact that this standard will have on our consolidated results of operations, financial position, and cash flows.  

In December 2004, the FASB issued SFAS No. 123(R), "Share Based Payment (Revised 2004)," which requires that compensation costs relating to share-based payment transactions be recognized in the financial statements and includes implementation guidance on measuring the fair value of share-based payments.  Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."  SFAS No. 123, as originally issued, preferred a fair-value-based method of accounting for share-based payment transactions with employees, but permitted the option of continuing to apply the guidance in Opinion No. 25 and disclosing in the footnotes the effect on net income of applying the preferred fair-value-based method.  We will adopt this statement in the third quarter of 2005 and do not expect the compensation expense for 2005 will be material for current options outstanding that will be unvested at the time of adoption.

In December 2004, the compensation committee of our board of directors voted to accelerate the vesting of approximately 965,500 unvested options which had option prices at least 30% greater than the market price as of December 15, 2004.  The accelerated vesting of these stock options provides reward, recognition and immediate motivation for our associates.  By accelerating the vesting on these “out-of-the-money” options, we will reduce the future expense to be recognized under SFAS No. 123(R) by approximately $1.2 million which we believe is in the best interest of our shareholders.  

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.”  The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.  The guidance in APB Opinion No. 29 provided an exception to this basic measurement principle for exchanges of similar productive assets.  That exception required that some nonmonetary exchanges be recorded on a carryover basis.  SFAS No. 153 eliminates this exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.  An exchange would lack commercial substance if our future cash flows are not expected to change significantly as a result of that exchange.  SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.  Earlier application is permitted.  We will adopt this new standard in the third quarter 2005 and do not anticipate that the adoption of this standard will have a material effect on our consolidated results of operations, financial position, and cash flows.  

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Item 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

We are exposed to interest rate risk arising from fluctuations in interest rates on our borrowings under our revolving credit facility agreement (the “Credit Facility”).  At January 2, 2005, we had $80 million borrowed against the Credit Facility.  The Credit Facility incurs interest at a floating rate of the London Interbank Offered Rate (LIBOR) plus a spread dependent upon the net debt to total capital ratio.  A hypothetical 100 basis point movement in the prevailing interest rates on the $80 million of borrowings under the Credit Facility would result in a $0.8 million annualized effect on our interest expense.

We also have short-term investments of $23.2 million as of January 2, 2005, that primarily bear interest at variable rates.   A hypothetical 100 basis point movement in the interest rate would result in an approximate $0.2 million annualized effect on our investment income.

Foreign Currency

We are exposed to market risk from changes in foreign currency exchange rates and utilize derivative financial instruments to manage our exposure to such fluctuations.  Our risk management objective is to minimize the effects of volatility on our cash flows by identifying the assets, liabilities or forecasted transactions exposed to these risks and hedging them with forward contracts or by embedding terms into certain contracts that affect the ultimate amount of cash flows under the contract. Since there is a high correlation between the hedging instruments and the underlying exposures, the gains and losses on these exposures are generally offset by reciprocal changes in value of the hedging instruments when used. We use derivative financial instruments as risk management tools and not for trading or speculative purposes.

Commodity Prices

Paper is the principal raw material in the production of business forms.  Because we have historically been successful in adjusting our sales prices in response to changes in paper costs, we do not believe a 10% change in paper costs would have a material effect on our financial statements; however, an increase of 10% in paper costs, if not recovered by us, would increase cost of sales by approximately $16.5 million.

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Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

The Standard Register Company

Dayton, Ohio

We have audited the accompanying consolidated balance sheet of The Standard Register Company and subsidiaries as of January 2, 2005 and December 28, 2003, and the related consolidated statements of income and comprehensive income, cash flows, and shareholders’ equity for each of the three years in the period ended January 2, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public 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 The Standard Register Company and subsidiaries as of January 2, 2005 and December 28, 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 2, 2005 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Standard Register Company and subsidiaries’ internal control over financial reporting as of January 2, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 10, 2005 expressed an unqualified opinion.

/s/ Battelle & Battelle LLP

Dayton, Ohio

March 10, 2005

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