FILED PURSUANT TO RULE 424(b)(1)
FILE NUMBER 033-62655
PROSPECTUS
1,500,000 SHARES
[CADMUS LOGO]
COMMON STOCK
(PAR VALUE $.50 PER SHARE)
All of the Common Stock, $.50 par value per share (the "Common Stock"), offered
hereby is being offered by Cadmus Communications Corporation, a Virginia
corporation ("Cadmus" or the "Company").
The Common Stock is quoted on The Nasdaq National Market under the symbol
"CDMS." On November 1, 1995, the last reported sale price of the Common Stock on
The Nasdaq National Market was $24.25 per share. See "Price Range of Common
Stock and Dividend Policy."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share $24.00 $1.43 $22.57
Total (3) $36,000,000 $2,145,000 $33,855,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $250,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 225,000
shares of Common Stock on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $41,400,000,
$2,466,750 and $38,933,250, respectively. See "Underwriting."
The shares of Common Stock being offered by this Prospectus are offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Davis
Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of
the shares of Common Stock offered hereby will be made against payment therefor
on or about November 7, 1995 at the offices of J.P. Morgan Securities Inc., 60
Wall Street, New York, New York.
J.P. MORGAN SECURITIES INC. INTERSTATE/JOHNSON LANE
CORPORATION
November 1, 1995
<PAGE>
[ARTWORK]
2
<PAGE>
No person is authorized to give any information or to make any representations
not contained or incorporated by reference in this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information................................. 4
Incorporation of Certain Documents by Reference....... 4
Prospectus Summary.................................... 5
The Company........................................... 8
Use of Proceeds....................................... 9
Price Range of Common Stock and Dividend Policy....... 9
Capitalization........................................ 10
Pro Forma Consolidated Financial Statements........... 11
Selected Financial and Operating Data................. 15
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 16
Business.............................................. 21
Management............................................ 27
Description of Capital Stock.......................... 29
Underwriting.......................................... 32
Legal Matters......................................... 33
Experts............................................... 33
Index to Financial Statements......................... F-1
</TABLE>
3
<PAGE>
AVAILABLE INFORMATION
Cadmus Communications Corporation ("Cadmus" or the "Company") is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission").
Reports and definitive proxy or information statements filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
its Regional Offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 75 Park Place, New York, New
York 10007. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Reference is made to such
Registration Statement and the exhibits relating thereto for further information
with respect to the Company and the shares of the Common Stock, offered hereby
(the "Offering"). The Underwriters of the shares of Common Stock offered in the
Offering are herein collectively referred to as the "Underwriters."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended June 30, 1995 and
the Current Reports on Form 8-K dated October 16, 1995 and October 24, 1995, as
filed with the Commission pursuant to the Exchange Act, are incorporated herein
by reference and made a part hereof.
In addition, all documents filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the Common Stock
offered hereby and the description of the Common Stock contained in the
Company's Registration Statement on Form 8-A shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which is
incorporated by reference herein modifies or supersedes such earlier statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish without charge upon request to each person to whom a
copy of this Prospectus is delivered a copy of any or all of the documents
specifically incorporated herein by reference, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference
therein). Requests should be addressed to: Bruce V. Thomas, Vice President --
Law and Development, Cadmus Communications Corporation, 6620 West Broad Street,
Suite 500, Richmond, Virginia 23230 (telephone 804-287-5680).
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS SET FORTH IN THE FINANCIAL
STATEMENTS OR OTHERWISE NOTED HEREIN, THE INFORMATION CONTAINED IN THE
PROSPECTUS RELATING TO THE COMPANY'S CAPITAL STOCK, INCLUDING THE SUMMARY
FINANCIAL DATA, THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, AND THE
SELECTED FINANCIAL AND OPERATING DATA, ASSUMES THAT THERE WILL BE NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION. REFERENCES HEREIN TO A PARTICULAR
FISCAL YEAR OF THE COMPANY SHALL MEAN THE YEAR ENDED JUNE 30 OF THE STATED YEAR.
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "THE
COMPANY" OR "CADMUS" SHALL REFER TO CADMUS COMMUNICATIONS CORPORATION, A
VIRGINIA CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES.
THE COMPANY
Cadmus is a graphic communications company offering specialized products and
services in three areas: printing, marketing, and publishing. Cadmus was formed
in 1984 through the merger of The William Byrd Press, Incorporated ("Byrd"), a
leading publications printer based in Virginia, and Washburn Graphics, Inc.
("Washburn Graphics"), a graphic arts firm based in North Carolina.
The businesses in which Cadmus competes are currently undergoing unprecedented
change as a result of two major factors: technological development and evolving
customer needs. Technological development is changing the graphic communications
industry in two ways. Faster and more efficient printing technology has created
excess capacity and allowed companies to deliver higher quality products more
cost effectively. In addition, technological advances, such as digital
technology, have created alternative media for the dissemination of information
formerly delivered exclusively in print. As a result, there has been substantial
change in the cost, quality, and form of graphic communications.
Evolving customer needs are also forcing graphic communications companies to
adapt. Increasingly, customers are using more targeted marketing programs, which
require shorter print runs with specialized equipment and production processes.
In addition, customers are seeking ways to obtain more effective graphic
communications while reducing costs by outsourcing and through vendor
consolidation. Customers are selecting vendors that efficiently provide the most
effective graphic communications products and services -- specialists who can
interface with their in-house capabilities and provide full service product
offerings at an attractive price.
These factors will accelerate the pace of change in the graphic communications
industry. Within this changing market, Cadmus is seeking to play an increasingly
important role in helping its customers gain market share. In pursuit of this
goal, Cadmus has adopted a two-part business strategy: (i) seek profitable
positions in niche markets and (ii) become a full service provider of customers'
marketing and graphic communications needs.
Cadmus focuses on niche product segments that larger printers have not pursued.
By specializing in niche markets, Cadmus uses its knowledge of a customer's
industry to create innovative products and services that satisfy the customer's
specific needs. Services provided to these niche markets have greater perceived
value, allowing Cadmus to achieve higher margins and revenue growth. Cadmus also
has aligned its businesses to respond to the trends toward outsourcing and
vendor consolidation. Cadmus is well positioned to serve customers whose graphic
communications needs require a high degree of creativity and content generation.
Customers value Cadmus not only for its printing capabilities but also for its
ability to efficiently combine printing, marketing, and publishing skills in
unique and innovative ways.
In order to facilitate the development of profitable positions in niche markets
and the ability to provide full service offerings, Cadmus has aligned its
product offerings into three business groups: printing, marketing, and
publishing.
PRINTING. Cadmus printing operations provide customers a full range of services
which include state-of-the-art digital imaging, electronic prepress, sheetfed
and web offset printing, digital press multi-color printing, custom binding,
fulfillment, and distribution. Printing generated approximately 73% of net sales
in fiscal year 1995. Included in printing revenues are revenues from digital
imaging and composition services, which comprised approximately 18% of the net
sales of this group.
MARKETING. Cadmus provides its customers with creative, database management,
production, mailing, and fulfillment services for direct marketing,
point-of-purchase, retail catalogs, and interactive multimedia programs and
systems. Marketing generated approximately 20% of net sales in fiscal year 1995.
5
<PAGE>
PUBLISHING. Cadmus publishes its own special-interest magazines that target
consumers who have passionate interests in a hobby or sport. These magazines are
published, edited, managed, printed, and fulfilled by Cadmus. Cadmus also
provides custom publishing services to customers with narrowly defined target
audiences in the health care, travel, financial, technology, and non-profit
areas. Custom publishing services include design, editorial, advertising sales,
production, and distribution of newsletters and magazines. Publishing generated
approximately 7% of net sales in fiscal year 1995.
RECENT DEVELOPMENTS
In July 1995, Cadmus acquired the assets of Na-Tex, Inc., the publisher of
COLLECTOR'S WORLD OF RACING. In addition, in September 1995, the Company
acquired certain of the assets of The Mowry Company ("Mowry"), a direct
marketing agency located in Long Beach, California. Cadmus also acquired the
assets of PeachWeb Corp. ("PeachWeb"), a developer of Internet web sites, in
October 1995 and the assets of The Software Factory, Inc. ("Software Factory"),
a provider of software packaging and media duplication services, in November
1995. The two most recent acquisitions together required total consideration of
$11.8 million in cash and $2.0 million value of Common Stock. See "Use of
Proceeds" and "Pro Forma Consolidated Financial Statements."
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED (1).................................... 1,500,000 shares
COMMON STOCK OUTSTANDING AFTER THE OFFERING (1)(2)(3)....... 7,531,475 shares
USE OF PROCEEDS............................................. To repay approximately $11.2 million of long-term debt, plus a
$1.0 million prepayment penalty, to fund the $11.8 million cash
portion of the aggregate acquisition cost of the assets of the
Software Factory and the assets of PeachWeb, and to repay
approximately $8.0 million of borrowings to fund working
capital needs. The remaining proceeds will be used for general
corporate purposes. See "Use of Proceeds."
THE NASDAQ NATIONAL MARKET TRADING SYMBOL................... "CDMS"
DIVIDEND POLICY............................................. The Company has paid cash dividends on the Common Stock since
1984. Any future decision concerning the payment of dividends
on the Common Stock will depend upon the then prevailing
results of operations, financial condition, and capital
expenditure plans of the Company, as well as such other factors
as the Board of Directors, in its sole discretion, may consider
relevant. See "Price Range of Common Stock and Dividend
Policy."
</TABLE>
(1) Assumes that the Underwriters' over-allotment option to purchase up to
225,000 shares will not be exercised. See "Underwriting."
(2) Excludes approximately 607,000 shares of Common Stock issuable upon exercise
of outstanding and currently exercisable stock options as of June 30, 1995, at a
weighted average price of $12.73 per share.
(3) Excludes the issuance of 79,681 shares of Common Stock which represents the
$2.0 million value of Common Stock in partial consideration for the purchase of
the Software Factory at a price of $25.10 per share.
6
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary financial data for each of the fiscal years
in the five year period ended June 30, 1995. The financial data for the year
ended June 30, 1995 have been derived from the Company's audited consolidated
financial statements and notes thereto included elsewhere in this Prospectus
which have been audited by Arthur Andersen LLP. The financial data for each of
the years in the four year period ended June 30, 1994 have been derived from the
Company's audited consolidated financial statements and notes thereto which have
been audited by Coopers and Lybrand L.L.P. The data should be read in
conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Company's audited
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $279,641 $247,730 $198,126 $188,006 $177,691
Gross profit 70,226 63,642 52,095 45,581 42,140
Operating income 18,054 12,918(2) 11,342 10,405 8,875
Income before income taxes 12,682 7,933(2) 7,480 6,448 5,008
Net income 7,479 5,208(2) 4,533 3,901 2,987
Net income per share $ 1.21 $ .86 $ .76 $ .65 $ .50
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
DOLLARS IN THOUSANDS 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 32,413 $ 23,356 $ 16,539 $ 18,738 $ 18,927
Property, plant, and equipment, net 84,750 77,072 65,983 64,872 60,743
Total assets 171,570 160,129 134,189 123,054 115,106
Long-term debt 53,961 56,122 43,249 42,521 39,802
Shareholders' equity 61,882 54,929 50,693 47,571 44,865
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
DOLLARS IN THOUSANDS 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Gross profit margin 25.1% 25.7% 26.3% 24.2% 23.7%
Operating income margin 6.5% 5.2%(2) 5.7% 5.5% 5.0%
Depreciation and amortization $ 12,132 $ 11,474 $ 9,626 $ 9,041 $ 8,554
Capital expenditures 20,959 11,742 10,842 12,368 12,792
</TABLE>
(1) Certain previously reported amounts have been reclassified to conform to the
fiscal year 1995 presentation.
(2) After restructuring charge of $1.9 million pretax, $1.1 million after tax.
See Note 2 of Notes to Consolidated Financial Statements.
7
<PAGE>
THE COMPANY
Cadmus is a graphic communications company offering specialized products and
services in three areas: printing, marketing, and publishing. Cadmus was formed
in 1984 through the merger of Byrd, a leading publications printer based in
Virginia, and Washburn, a graphic arts firm based in North Carolina. Since the
merger, Cadmus has grown through enhancement of existing products, internal
development of new products, and acquisitions.
The businesses in which Cadmus competes are currently undergoing unprecedented
change as a result of two major factors: technological development and evolving
customer needs. These two factors are changing the types of products and
services offered, production processes employed, customer and supplier
relationships, and the competitive environment in general.
Technological development is changing the graphic communications industry in two
ways. Faster and more efficient printing technology has created excess capacity
and allowed companies to deliver higher quality products more cost effectively.
In addition, technological advances, such as digital technology, have created
alternative media for the dissemination of information formerly delivered
exclusively in print. As a result, there has been substantial change in the
cost, quality, and form of graphic communications.
Evolving customer needs are also forcing graphic communications companies to
adapt. Increasingly, customers are using more targeted marketing programs, which
require shorter print runs with specialized equipment and production processes.
In addition, customers are seeking ways to obtain more effective graphic
communications while reducing costs by outsourcing and through vendor
consolidation. Customers are selecting vendors that efficiently provide the most
effective graphic communications products and services -- specialists who can
interface with their in-house capabilities and provide full service product
offerings at an attractive price.
These factors will accelerate the pace of change in the graphic communications
industry. Within this changing market, Cadmus is seeking to play an increasingly
important role in helping its customers gain market share. In pursuit of this
goal, Cadmus has adopted a two-part business strategy: (i) seek profitable
positions in niche markets and (ii) become a full service provider of customers'
marketing and graphic communications needs.
Cadmus focuses on niche product segments that larger printers have not pursued.
By specializing in niche markets, Cadmus uses its knowledge of a customer's
industry to create innovative products and services that satisfy the customer's
specific needs. Services provided to these niche markets have greater perceived
value, allowing Cadmus to achieve higher margins and revenue growth. Cadmus also
has aligned its businesses to respond to the trends toward outsourcing and
vendor consolidation. Cadmus is well positioned to serve customers whose graphic
communications needs require a high degree of creativity and content generation.
Customers value Cadmus not only for its printing capabilities but also for its
ability to efficiently combine printing, marketing, and publishing skills in
unique and innovative ways.
In order to facilitate the development of profitable positions in niche markets
and the ability to provide full service offerings, Cadmus has aligned its
product offerings into three business groups: printing, marketing, and
publishing.
PRINTING. Cadmus printing operations provide customers a full range of services
which include state-of-the-art digital imaging, electronic prepress, sheetfed
and web offset printing, digital press multi-color printing, custom binding,
fulfillment, and distribution. Printing generated approximately 73% of net sales
in fiscal year 1995. Included in printing revenues are revenues from digital
imaging and composition services, which comprised approximately 18% of the net
sales of this group.
MARKETING. Cadmus provides its customers with creative, database management,
production, mailing, and fulfillment services for direct marketing,
point-of-purchase, retail catalogs, and interactive multimedia programs and
systems. Marketing generated approximately 20% of net sales in fiscal year 1995.
PUBLISHING. Cadmus publishes its own special-interest magazines that target
consumers who have passionate interests in a hobby or sport. These magazines are
published, edited, managed, printed, and fulfilled by Cadmus. Cadmus also
provides custom publishing services to customers with narrowly defined target
audiences in the health care, travel, financial, technology, and non-profit
areas. Custom publishing services include design, editorial, advertising sales,
production, and distribution of newsletters and magazines. Publishing generated
approximately 7% of net sales in fiscal year 1995.
The Company's principal executive offices are located at 6620 West Broad Street,
Suite 500, Richmond, Virginia 23230, and its telephone number is (804) 287-5680.
8
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering (after deducting underwriting discounts and
estimated expenses associated with the Offering) will be $33.6 million ($38.7
million if the Underwriters' over-allotment option is exercised in full). The
Company will use the net proceeds to (i) repay $11.2 million of 9.76% Senior
Notes due June 2000, plus a $1.0 million prepayment penalty, (ii) fund the $11.8
million cash portion of the aggregate acquisition cost of the assets of the
Software Factory, a provider of software packaging and media duplication
services, and the assets of PeachWeb, a developer of Internet web sites (the
"Acquisitions"), and (iii) repay approximately $8.0 million of borrowings to
fund working capital needs with an interest rate of approximately 6.4% which
matures at February 1997. Payment of the prepayment penalty is expected to
produce an after-tax charge to net income of approximately $0.6 million in the
period in which such payment is made. The remaining proceeds will be used for
general corporate purposes, including expenditures relating to other
acquisitions.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on The Nasdaq National Market under the symbol
"CDMS." The following table presents the high and low sales prices as reported
by The Nasdaq National Market and the cash dividends declared per share, for the
periods indicated.
<TABLE>
<CAPTION>
CASH
DIVIDEND
HIGH LOW DECLARED
<S> <C> <C> <C>
Fiscal Year ended June 30, 1993
First Quarter $ 9.50 $ 6.75 $ .05
Second Quarter 9.75 6.25 .05
Third Quarter 11.00 9.00 .05
Fourth Quarter 10.25 8.50 .05
Fiscal Year ended June 30, 1994
First Quarter $10.25 $ 8.50 $ .05
Second Quarter 14.50 9.50 .05
Third Quarter 15.25 13.50 .05
Fourth Quarter 19.50 13.75 .05
Fiscal Year ended June 30, 1995
First Quarter $18.75 $15.00 $ .05
Second Quarter 18.75 14.87 .05
Third Quarter 19.25 14.50 .05
Fourth Quarter 24.75 17.00 .05
Fiscal Year ended June 30, 1996
First Quarter $27.25 $22.25 $ .05
Second Quarter (through November 1, 1995) 26.25 24.00
</TABLE>
On November 1, 1995, the last reported sale price of the Common Stock on The
Nasdaq National Market was $24.25 per share.
The Company has paid cash dividends on the Common Stock since 1984. Any future
decision concerning the payment of dividends on the Common Stock will depend
upon the then prevailing results of operations, financial condition, and capital
expenditures of the Company, as well as such other factors as the Board of
Directors, in its sole discretion, may consider relevant.
9
<PAGE>
CAPITALIZATION
The table below sets forth the consolidated short-term debt and capitalization
of the Company as of June 30, 1995, and as adjusted to reflect the sale of the
shares of Common Stock in the Offering, the application of the estimated net
proceeds therefrom (assuming the Underwriters' overallotment option is not
exercised), and the issuance of shares of Common Stock in connection with the
Acquisitions. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1995
AS ADJUSTED FOR
THE ACQUISITIONS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA ACTUAL AND THE OFFERING
<S> <C> <C>
Short-term borrowings $ 3,775
Current maturities of long-term debt 2,381 $ 184
Total short-term debt $ 6,156 $ 184
Long-term debt $ 53,961 $ 45,000
Shareholders' equity (1):
Common stock, $.50 par value, 16,000,000 shares authorized, 6,031,475 shares issued and
outstanding, and 7,611,156 shares issued and outstanding, as adjusted to give effect to
the Acquisitions and the Offering 3,015 3,805
Capital in excess of par value 12,448 47,263
Retained earnings 46,419 45,806
Total shareholders' equity 61,882 96,874
Total capitalization $115,843 $ 141,874
</TABLE>
(1) Excludes approximately 607,000 shares of Common Stock issuable upon exercise
of outstanding and currently exercisable stock options as of June 30, 1995, at a
weighted average exercise price of $12.73 per share.
10
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited Pro Forma Consolidated Financial Statements of Cadmus
Communications Corporation and Subsidiaries give effect to the sale of the
shares of Common Stock in the Offering and to the acquisitions of the assets of
the Software Factory and PeachWeb, and certain of the assets of Mowry, as if
such transactions had occurred as of July 1, 1994 for the Pro Forma Consolidated
Statement of Income and as of June 30, 1995 for the Pro Forma Consolidated
Balance Sheet.
The pro forma information is based on the historical financial statements of the
acquired companies giving effect to the acquisitions under the purchase method
of accounting and the assumptions and adjustments described in the accompanying
Notes to Pro Forma Consolidated Financial Statements.
The pro forma information does not purport to be indicative of the combined
results of operations or financial position that would have been reported had
these transactions taken place as of July 1, 1994 with respect to the Statement
of Income data and as of June 30, 1995 with respect to the Balance Sheet data as
the case may be, or future results of operations or financial position of the
Company. The Pro Forma Consolidated Financial Statements should be read in
conjunction with the Company's separate historical consolidated financial
statements and related notes thereto, included elsewhere herein, and the
historical financial statements and notes thereto of the Software Factory,
incorporated herein by reference.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1995
PRO FORMA
HISTORICAL PRO FORMA PRO FORMA ADJUSTMENTS
CADMUS ADJUSTMENTS FOR FOR
DOLLARS IN THOUSANDS COMMUNICATIONS ACQUISITIONS FOR ACQUISITIONS ACQUISITIONS OFFERING
ASSETS
Current Assets
Cash and cash equivalents $ 226 $ 1,036 $ (12,319)(a)(b) $ (11,057) $ 18,017(f)
Accounts receivable, net 57,204 1,466 (728)(a) 57,942
Inventories 16,308 326 16,634
Deferred income taxes 1,092 1,092
Prepaid expenses and other 1,489 90 (55)(a) 1,524
Total current assets 76,319 2,918 (13,102) 66,135 18,017
Property, plant, and equipment, net 84,570 326 84,896
Investment in unconsolidated joint
venture
Other assets 2,400 46 (35)(a) 2,411
Goodwill and intangibles, net 8,281 13,383(c) 21,664
TOTAL ASSETS $ 171,570 $ 3,290 $ 246 $ 175,106 $ 18,017
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 3,775 $ $ $ 3,775 $ (3,775)(g)
Current maturities of long-term
debt 2,381 3 2,384 (2,200)(g)
Accounts payable 18,818 1,063 (178)(a) 19,703
Accrued expenses
Compensation 10,905 386 (143)(a) 11,148
Restructuring charge 120 120
Other 7,907 366 8,273
Total current liabilities 43,906 1,818 (321) 45,403 (5,975)
Long-term debt 53,961 39 54,000 (9,000)(g)
Other long-term liabilities 7,180 7,180
Deferred income taxes 4,641 4,641
Commitments and contingencies
Shareholders' equity
Common stock 3,015 16 24(d)(e) 3,055 750(h)
Partnership equity 450 (450)(d)
Capital in excess of par value 12,448 1,960(e) 14,408 32,855(h)
Retained earnings 46,419 967 (967)(d) 46,419 (613)(i)
Total shareholders' equity 61,882 1,433 567 63,882 32,992
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 171,570 $ 3,290 $ 246 $ 175,106 $ 18,017
<CAPTION>
PRO
DOLLARS IN THOUSANDS FORMA
ASSETS
Current Assets
Cash and cash equivalents $ 6,960
Accounts receivable, net 57,942
Inventories 16,634
Deferred income taxes 1,092
Prepaid expenses and other 1,524
Total current assets 84,152
Property, plant, and equipment, net 84,896
Investment in unconsolidated joint
venture
Other assets 2,411
Goodwill and intangibles, net 21,664
TOTAL ASSETS $193,123
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $
Current maturities of long-term
debt 184
Accounts payable 19,703
Accrued expenses
Compensation 11,148
Restructuring charge 120
Other 8,273
Total current liabilities 39,428
Long-term debt 45,000
Other long-term liabilities 7,180
Deferred income taxes 4,641
Commitments and contingencies
Shareholders' equity
Common stock 3,805
Partnership equity
Capital in excess of par value 47,263
Retained earnings 45,806
Total shareholders' equity 96,874
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $193,123
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
11
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995
PRO FORMA
HISTORICAL PRO FORMA PRO FORMA ADJUSTMENTS
CADMUS ADJUSTMENTS FOR FOR
IN THOUSANDS, EXCEPT PER SHARE DATA COMMUNICATIONS ACQUISITIONS FOR ACQUISITIONS ACQUISITIONS OFFERING
<S> <C> <C> <C> <C> <C>
Net sales $ 279,641 $ 15,114 $ $ 294,755 $
Operating expenses
Cost of sales 209,415 10,281 219,696
Selling and administrative 52,172 2,194 (234)(a) 54,132
261,587 12,475 (234) 273,828
Operating income 18,054 2,639 234 20,927
Interest and other (income) expenses
Interest 5,351 (37) 37(c) 5,351 (1,794)(c)
Other (income) expenses, net 21 43 669(b) 733
5,372 6 706 6,084 (1,794)
Income before income taxes 12,682 2,633 (472) 14,843 1,794
Income taxes 5,203 820(d) 6,023 694(d)
Net income $ 7,479 $ 2,633 $ (1,292) $ 8,820 $ 1,100
Net income per share $ 1.21 $ 1.41
Average common shares outstanding 6,195 80 6,275 1,500
</TABLE>
<TABLE>
<CAPTION>
PRO
IN THOUSANDS, EXCEPT PER SHARE DATA FORMA
<S> <C>
Net sales $294,755
Operating expenses
Cost of sales 219,696
Selling and administrative 54,132
273,828
Operating income 20,927
Interest and other (income) expenses
Interest 3,557
Other (income) expenses, net 733
4,290
Income before income taxes 16,637
Income taxes 6,717
Net income $ 9,920
Net income per share $ 1.28
Average common shares outstanding 7,775
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
12
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF REPORTING
The unaudited Pro Forma Consolidated Financial Statements of Cadmus give effect
to the sale of the shares of Common Stock in the Offering and to the
acquisitions of the assets of the Software Factory and PeachWeb and certain of
the assets of Mowry, as if such transactions had occurred as of July 1, 1994 for
the Pro Forma Consolidated Statement of Income and as of June 30, 1995 for the
Pro Forma Consolidated Balance Sheet.
The pro forma information is based on the historical financial statements of the
acquired companies giving effect to the acquisitions under the purchase method
of accounting and the assumptions and adjustments described in the accompanying
Notes to the Pro Forma Consolidated Financial Statements. Under the purchase
method of accounting the assets and liabilities were recorded at their fair
value with the excess of the purchase price over the fair value of identifiable
net assets acquired recorded as goodwill.
The pro forma information does not purport to be indicative of the combined
results of operations or financial position that would have been reported had
these transactions taken place as of July 1, 1994 with respect to the Statement
of Income data and as of June 30, 1995 with respect to the Balance Sheet data as
the case may be, or future results of operations or financial position of the
Company. The Pro Forma Consolidated Financial Statements should be read in
conjunction with the Company's separate historical consolidated financial
statements and related notes thereto, included elsewhere herein, and the
historical financial statements and notes thereto of the Software Factory,
incorporated herein by reference.
(2) CONSOLIDATED BALANCE SHEET PRO FORMA ADJUSTMENTS
The Pro Forma Consolidated Balance Sheet gives effect to the adjustments
described below.
(a) To exclude assets and liabilities not included in these transactions
(dollars in thousands):
<TABLE>
<S> <C>
ASSETS
Cash $ 469
Accounts receivable 728
Prepaid expenses and other 55
Other assets 35
Total assets $ 1,287
LIABILITIES
Accounts payable $ 178
Accrued expenses 143
Total liabilities $ 321
</TABLE>
(b) To record $11.9 million cash disbursed to purchase the acquired companies.
(c) To record the excess of the purchase price over the net assets acquired
under the purchase method of accounting for the acquisitions.
(d) To eliminate the equity of the acquired companies.
(e) To record the $2.0 million common stock portion of the consideration for the
purchase of the Software Factory which represents the issuance of 79,681 shares
of Common Stock at a price of $25.10 per share.
(f) To record the net proceeds from the Offering after debt repayment and
prepayment penalty (See Note 4).
(g) To record the repayment of borrowings under the Company's revolving credit
facilities and of the 9.76% Senior Notes due 2000, from the proceeds of the
Offering (See Note 4).
(h) To record the 1.5 million shares issued in the Offering and the resulting
capital in excess of par value at the public offering price of $24.00 per share.
13
<PAGE>
(i) To record the after-tax effect of the prepayment penalty associated with the
9.76% Senior Notes which will be repaid from proceeds of the Offering.
(3) CONSOLIDATED STATEMENT OF INCOME PRO FORMA ADJUSTMENTS
The Pro Forma Consolidated Statement of Income gives effect to the adjustments
described below.
(a) To adjust for reductions in selling and administrative expenses associated
with the elimination of duplicate costs. Management expects that there will be
cost reductions as various selling and administrative functions and certain
operating facilities are combined.
(b) To amortize, over twenty years, the costs in excess of the net assets
acquired which were generated by applying the purchase method of accounting for
the acquisitions.
(c) To record the interest savings from the debt repayment and the interest
income from the excess of the proceeds from the Offering less the cash payments
for the companies acquired.
(d) To record the income taxes on the earnings of the acquired companies and to
record the tax effect of the pro forma adjustments at an effective tax rate of
38.7%. The Software Factory, which is qualified as an "S" corporation, and
Mowry, which is a partnership, had no income tax expense in fiscal year ended
June 30, 1995. Accordingly, the pro forma income tax expense has been recorded
for the reported earnings of the companies at an effective rate of 38.7%.
(4) NONRECURRING PREPAYMENT PENALTY
The Company will use a portion of the proceeds from the Offering to repay $11.2
million of 9.76% Senior Notes due 2000. Under the provisions of these notes, the
Company is obligated to pay an approximately $1.0 million, $0.6 million after
tax, prepayment penalty which will be recorded as interest expense in the period
in which the payment occurs. See "Use of Proceeds."
14
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth selected financial data with respect to the
Company as of the dates and for the periods indicated. The financial data for
the year ended June 30, 1995 have been derived from the Company's audited
consolidated financial statements and notes thereto included elsewhere in this
Prospectus which have been audited by Arthur Andersen LLP. The financial data
for each of the years in the four year period ended June 30, 1994 have been
derived from the Company's audited consolidated financial statements and notes
thereto which have been audited by Coopers & Lybrand L.L.P. These data should be
read in conjunction with "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Company's audited
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $279,641 $247,730 $198,126 $188,006 $177,691
Operating expenses
Cost of sales 209,415 184,088 146,031 142,425 135,551
Selling and administrative 52,172 48,824 40,753 35,176 33,265
Restructuring charge 1,900
261,587 234,812 186,784 177,601 168,816
Operating income 18,054 12,918(2) 11,342 10,405 8,875
Interest and other expenses
Interest 5,351 4,813 3,233 3,248 3,285
Other expenses, net 21 172 629 709 582
5,372 4,985 3,862 3,957 3,867
Income before income taxes 12,682 7,933(2) 7,480 6,448 5,008
Income taxes 5,203 3,126 2,947 2,547 2,021
Income before cumulative effect of changes in accounting
principles 7,479 4,807(2) 4,533 3,901 2,987
Cumulative effect of changes in accounting for:
Postretirement benefits (net of income tax benefit of $355) (532)
Income taxes 933
Net income $ 7,479 $ 5,208(2) $ 4,533 $ 3,901 $ 2,987
Earnings per share:
Income before cumulative effect of changes in accounting
principles $ 1.21 $ .79(2) $ .76 $ .65 $ .50
Cumulative effect of changes in accounting for
postretirement benefits and income taxes .07
Net income $ 1.21 $ .86(2) $ .76 $ .65 $ .50
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
DOLLARS IN THOUSANDS 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 32,413 $ 23,356 $ 16,539 $ 18,738 $ 18,927
Property, plant, and equipment, net 84,570 77,072 65,983 64,872 60,743
Total assets 171,570 160,129 134,189 123,054 115,106
Long-term debt 53,961 56,122 43,249 42,521 39,802
Shareholders' equity 61,882 54,929 50,693 47,571 44,865
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
DOLLARS IN THOUSANDS 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Gross profit margin 25.1% 25.7% 26.3% 24.2% 23.7%
Operating income margin 6.5% 5.2%(2) 5.7% 5.5% 5.0%
Operating income return on average total capital 15.3% 12.0%(2) 11.7% 11.3% 10.2%
Depreciation and amortization $ 12,132 $ 11,474 $ 9,626 $ 9,041 $ 8,554
Capital expenditures 20,959 11,742 10,842 12,368 12,792
</TABLE>
(1) Certain previously reported amounts have been reclassified to conform to the
fiscal year 1995 presentation.
(2) After restructuring charge of $1.9 million pretax, $1.1 million after tax.
See Note 2 of Notes to Consolidated Financial Statements.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY HIGHLIGHTS
Fiscal 1995 financial highlights include:
(Bullet) Sales increased 12.9% to $279.6 million.
(Bullet) Operating income rose to $18.1 million, a 39.8% increase.
(Bullet) Net income climbed 43.6% to $7.5 million ($1.21 per share).
(Bullet) The operating income return on average total capital improved from
12.0% in fiscal 1994 to 15.3% in fiscal 1995.
In the fourth quarter of fiscal 1995, Cadmus was named by General Electric as a
preferred nationwide supplier of printing related services. To better serve
General Electric, the Company formed a new division dedicated to managing its
relationship with General Electric and to matching General Electric's business
needs with the appropriate Cadmus solutions. The formation of Cadmus
Interactive, an Atlanta-based multimedia company, in the first quarter of fiscal
1995, positioned the Company to offer its customers state-of-the-art interactive
multimedia products and services. In the fourth quarter of fiscal 1995, the
acquisition of Ronald James Direct expanded the Company's direct marketing
agency capabilities into Los Angeles and Denver. During the third quarter of
fiscal 1995, the Company sold its fifty percent joint venture interest in
Central Florida Press, L.C. ("CFP") to The Lanman Companies, Inc. ("Lanman") to
redirect its capital to those markets and products which offer the best
opportunities for growth and profitability.
In the second quarter of fiscal 1994, Cadmus acquired the net assets of the
Waverly Press printing division ("Waverly Press") from Waverly, Inc. Waverly
Press, a leading printer of scientific, technical, medical, and scholarly
journals, was renamed Cadmus Journal Services, Inc. ("Cadmus Journal Services")
following the acquisition. By combining the strengths and assets of Waverly
Press with the Company's existing research journal operations, the Company was
able to significantly improve the level of service as well as the nature of the
products offered to journal publishers. As part of the transaction, Waverly,
Inc. entered into a long-term printing agreement with Cadmus Journal Services,
which ensures important continuity of business.
RESULTS OF OPERATIONS
The following table presents the major components from the Consolidated
Statements of Income as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 74.9 74.3
Gross profit 25.1 25.7
Selling and administrative expenses 18.6 19.7
Restructuring charge .8
Operating income 6.5 5.2
Interest expense 1.9 1.9
Other expenses, net .0 .1
Income before income taxes 4.6 3.2
Income taxes 1.9 1.3
Income before cumulative effect of changes in accounting principles 2.7 1.9
Cumulative effect of changes in accounting principles .2
Net income 2.7% 2.1%
<CAPTION>
1993
<S> <C>
Net sales 100.0%
Cost of sales 73.7
Gross profit 26.3
Selling and administrative expenses 20.6
Restructuring charge
Operating income 5.7
Interest expense 1.6
Other expenses, net .3
Income before income taxes 3.8
Income taxes 1.5
Income before cumulative effect of changes in accounting principles 2.3
Cumulative effect of changes in accounting principles
Net income 2.3%
</TABLE>
16
<PAGE>
COMPARISON OF FISCAL 1995 WITH FISCAL 1994
Net sales in fiscal 1995 were $279.6 million, representing an increase of 12.9%
over fiscal 1994 sales of $247.7 million. Sales growth occurred in each of the
Company's three business groups: printing 14.8%, marketing 12.6%, and publishing
5.7%. The growth in printing sales was driven by a 25.3% increase in journal
services sales, a 53.0% increase in specialty packaging sales, and a 13.2%
increase in sales of promotional printing. In addition, higher paper prices
accounted for 2.3% of the increase in fiscal 1995 printing sales. Excluding the
full year impact of the Waverly Press acquisition, journal services sales
increased 9.2% due primarily to an increase in the number of titles. The
increase in specialty packaging sales was principally the result of growth from
existing customers.
Increased sales for the marketing group resulted from a 22.1% growth in
point-of-purchase revenues combined with a 5.4% increase in direct marketing
sales. In addition, the formation of Cadmus Interactive in the first quarter of
fiscal 1995 accounted for 22.0% of the overall increase in marketing revenues.
These increases were partially offset by a decline in marketing services
revenues due to the loss of a customer in fiscal 1994. This customer entered
into a new contract with the Company in late fiscal 1995. Effective June 30,
1995, the Company ceased operating two marketing services programs, Kids Link
and Sports Marketing, which together contributed $1.9 million to fiscal 1995
sales.
Publishing sales growth resulted from new titles and expanded product
circulation, an increased market share, and a 25.3% cover price increase for
TUFF STUFF magazine. New product circulation involved the introduction in March
1994 of MID-ATLANTIC SOCCER, a regional magazine focused on promoting youth
soccer. In addition, circulation of COLLECT!, a magazine serving the
non-sports collectibles market, was expanded through an increase in the
frequency of distribution from bi-monthly to monthly. Market share expansion was
achieved through extensive telemarketing efforts within consumer publishing
despite a decline in sports card collecting due in part to the baseball strike.
Gross profit in fiscal 1995 was 25.1% of sales compared with 25.7% in fiscal
1994. The gross profit decline in fiscal 1995 was a result of increased paper
prices and a change in sales mix due to the full year impact of the acquisition
of Waverly Press, which had a relatively lower gross margin. Excluding Waverly
Press, the gross margin was 27.0% and 26.8% for fiscal 1995 and 1994,
respectively. The decline in gross profit was partially offset by approximately
$1.3 million in savings generated in fiscal 1995 from the restructuring and
transfer of the Company's Springfield, Virginia composition and prepress
activities to Richmond, Virginia and Baltimore, Maryland.
Selling and administrative expenses as a percent of sales were 18.6% and 19.7%
in fiscal 1995 and 1994, respectively. The decrease in the selling and
administrative expense ratio in fiscal 1995 was primarily attributable to the
full year impact of the acquisition of Waverly Press, which had a lower selling
and administrative expense ratio of 8.8%. In addition, savings of approximately
$0.3 million generated from the restructuring and consolidation of composition
and prepress facilities in Richmond, Springfield, and Baltimore contributed to
the decline in the selling and administrative expense ratio in fiscal 1995.
Operating income improved to 6.5% of sales for fiscal 1995 from 5.2% in fiscal
1994. This improvement reflects the impact of sales growth and restructuring
savings. Operating income as a percent of sales before the restructuring charge
was 6.0% in fiscal 1994. Other expenses declined $0.2 million in fiscal 1995 due
primarily to a gain on sale of assets.
The effective income tax rate of 41.0% in fiscal 1995 increased from 39.4% in
fiscal 1994 due to a one-time liability of $0.3 million arising from the sale of
the Company's fifty percent joint venture interest in CFP. Exclusive of the sale
transaction, the effective rate would have been 38.7%, a decrease attributable
to both higher levels of pretax income and a decrease in the overall state
effective tax rate.
COMPARISON OF FISCAL 1994 WITH FISCAL 1993
Net sales in fiscal 1994 were $247.7 million compared to $198.1 million for
fiscal 1993 and included increases in each business group. The 22.9% increase in
printing sales for fiscal 1994 was due to growth of 92.5% in journal services
sales due primarily to the fiscal 1994 acquisition of Waverly Press, 30.8%
growth in specialty packaging sales, and a 55.2% increase in annual report
sales. Promotional printing sales were down 16.2% as a result of the
deconsolidation of Vaughan sales through the CFP joint venture in the third
quarter of fiscal 1993. Adjusted for the acquisition of Waverly Press and the
CFP joint venture, printing sales increased 4.9% over fiscal 1993.
The 11.8% increase in marketing sales for fiscal 1994 resulted from growth of
43.2% in direct marketing sales and growth of 13.5% in point-of-purchase
revenues. The increase in direct marketing revenues was attributable to growth
in sales to existing customers and the restructuring of the business into an
agency organization. Point-of-purchase revenues grew as a result of
relationships developed with new customers, coupled with growth in existing
accounts.
17
<PAGE>
The 76.3% increase in publishing sales for fiscal 1994 was the result of the
acquisition of Marblehead Communications, Inc. ("Marblehead"), a custom
publisher of newsletters and magazines, coupled with continued sales growth of
17.0% of its consumer magazines, including TUFF STUFF magazine. Expansion at
Marblehead resulted in an increase of 78.4% over prior year annualized sales due
to both additions of new accounts and increased sales to existing customers.
In fiscal 1994, gross profit was 25.7% of sales compared with 26.3% in fiscal
1993. Gross profit declined slightly in fiscal 1994 as a result of a change in
the sales mix due to the addition of Waverly Press, which had a relatively lower
gross margin. Excluding Waverly Press, the gross margin improved to 26.8%.
The decrease in selling and administrative expenses as a percent of sales was
primarily driven by the inclusion in fiscal 1994 of Waverly Press, which had a
lower selling and administrative expense ratio of 11.6%.
Operating income before the restructuring charge improved to 6.0% of sales for
fiscal 1994 from 5.7% in fiscal 1993. Operating income as a percent of sales
after the restructuring charge was 5.2% in fiscal 1994.
Interest expense increased slightly from 1.6% of sales in fiscal 1993 to 1.9% of
sales in fiscal 1994 due to increased average debt levels associated with the
purchase of Waverly Press in fiscal 1994. Other expenses declined $0.5 million
in fiscal 1994 due to the full year inclusion of earnings from the CFP joint
venture.
RESTRUCTURING CHARGE
In the fourth quarter of fiscal 1994, the Company announced a plan to
restructure its journal services and specialty magazine printing divisions,
resulting in a one-time pretax charge of $1.9 million. This charge resulted from
reductions in the workforce related to the closing of the Company's Springfield,
Virginia, composition and prepress facility and the transfer of these activities
to the Richmond and Baltimore facilities. These actions were substantially
complete by June 30, 1995. During fiscal 1995, the Company recognized pretax
cost savings of $1.6 million, primarily due to payroll-related savings. The full
year impact of cost savings are estimated to be $3.2 million for fiscal 1996.
Following is a schedule of the costs included in and the amounts charged against
the restructuring reserve to date:
<TABLE>
<CAPTION>
ORIGINAL CHARGES AS OF
RESERVE JUNE 30, 1995
<S> <C> <C>
DESCRIPTION (IN THOUSANDS)
Employee separations $ 1,630 $1,585
Equipment write-down 75 93
Other direct costs 195 102
$ 1,900 $1,780
</TABLE>
The employee separation costs relate to termination benefits of approximately
100 employees: twenty percent management and eighty percent production. During
fiscal 1995, all of these employees left the Company as a result of this plan.
Cash expenditures of approximately $0.1 million will occur in the first and
second quarter of fiscal 1996 due to the election by many of the terminated
employees to receive a stream of separation benefits, rather than a lump sum
payment.
CHANGES IN ACCOUNTING PRINCIPLES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." The Company elected to immediately recognize the liability
for prior years' service as the cumulative effect of a change in accounting
principle. Accordingly, the Company recorded an accumulated postretirement
benefit obligation and a corresponding charge to net income of $0.9 million, and
a noncurrent deferred income tax benefit of $0.4 million, resulting in an
after-tax charge of $0.5 million in the first quarter of fiscal 1994.
The Company also adopted SFAS No. 109, "Accounting for Income Taxes," effective
July 1, 1993, which requires the liability method of accounting for deferred
income taxes, whereby enacted statutory tax rates are applied to the differences
between financial reporting and tax bases of assets and liabilities. The
cumulative effect of the change was a reduction in the deferred income tax
liability and a corresponding increase in net income of $0.9 million in the
first quarter of fiscal 1994.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's major capital requirements are for investments in property, plant,
and equipment, working capital, and acquisitions. Management believes that the
Company has the financial resources and access to capital necessary to fund
internal growth and acquisitions.
COMPARISON OF FISCAL 1995 WITH FISCAL 1994
Net cash provided by operating activities in fiscal 1995 declined to $5.4
million from $26.0 million in 1994 due to a significant increase in working
capital investment. The increase in the Company's working capital investment
resulted from a $12.0 million increase in accounts receivable, resulting from
higher sales and a slowdown in collection cycles, and a $4.9 million increase in
inventories, primarily attributable to higher paper inventory balances. Slowdown
in collections occurred primarily in Fortune 500 companies and does not reflect
a deterioration of the quality of the Company's receivables portfolio. The
Company is undertaking efforts to enhance its billing processes, which are
expected to improve its collections.
Net cash used in investing activities totaled $9.9 million in fiscal 1995, down
from $31.0 million in fiscal 1994. Capital expenditures totaled $21.0 million in
fiscal 1995 but were partially offset by a $3.6 million sale of real estate,
$6.8 million in proceeds received from the sale of the Company's interest in
CFP, and proceeds from loans on Company-owned life insurance of $2.9 million.
Acquisition-related payments required funding of $1.5 million in fiscal 1995.
Cadmus reinvests in its businesses to remain current with technology, in order
to improve productivity and quality, and to develop new products and markets.
The Company is concentrating its expenditures in its higher growth and higher
margin product lines. During fiscal 1995, the Company invested $21.0 million in
property, plant, and equipment. These investments included the purchase of a new
manufacturing facility to consolidate the Company's Richmond promotional and
financial printing operations, a second ultraviolet six-unit sheetfed press and
a four-unit digital press for the point-of-purchase product line, a six-unit CD
sheetfed press for specialty packaging, and the relocation of the Company's
Baltimore journal composition operations. The Company projects that capital
spending in fiscal 1996 will be approximately $21.0 million.
During fiscal 1995, the Company entered into two interest rate swap agreements
with banks to convert debt with an aggregate notional value of $8.7 million from
floating-rate to fixed-rate debt. Both of these swap agreements have a term of
four years and were initiated to moderate exposure to interest rate changes.
Under the terms of these agreements, the Company makes payments at a fixed
interest rate of 8.061% and will receive payments based on six-month LIBOR in
arrears. These swaps are hedged against the $35.0 million fixed-to-floating rate
swap. These hedging activities increased interest expense by $0.7 million in
fiscal 1995 and by $0.5 million in fiscal 1994 and 1993. The net interest paid
or received is included in interest expense.
Total debt at June 30, 1995 was $60.1 million, representing an increase of $1.7
million from the $58.4 million at June 30, 1994. Despite the increase in debt
levels, the Company's debt-to-capital ratio improved from 51.5% at June 30, 1994
to 49.3% at June 30, 1995. The higher debt levels were required to fund
operations. At June 30, 1995, borrowings under the Company's $25.0 million
revolving credit agreements totaled $3.8 million, leaving an unused balance of
$21.2 million.
COMPARISON OF FISCAL 1994 WITH FISCAL 1993
During fiscal 1994, the Company experienced significant improvement in cash flow
performance. Net cash provided by operating activities rose to $26.0 million
from $10.4 million in fiscal 1993. This gain was primarily attributable to a
40.0% increase in income before the restructuring charge, higher depreciation
and amortization expense, and an $11.7 million reduction in operating assets and
liabilities. The $1.8 million increase in depreciation and amortization expense
was due to additions of property, plant, and equipment, both through the
acquisition of Waverly Press and through capital investments made for strategic
expansion and reinvestment. The reduction in operating assets and liabilities
was credited to improved receivables and paper inventory management, and more
aggressive utilization of trade credit.
The increase in fiscal 1994 in net cash used in investing activities of $17.6
million, and the increase in net cash provided by financing activities of $3.5
million were both primarily a result of transactions related to the acquisition
of Waverly Press. Cash paid or placed in escrow for this acquisition of $19.7
million and capital investments of $11.7 million account for the majority of the
investing activities. In fiscal 1993, cash used in investing activities included
$2.2 million related to the investment in the CFP joint venture as well as $10.7
million in capital investments. The financing activities in fiscal 1994 include
proceeds from the placement of $40.0 million in senior notes and the repayment
of $32.0 million in term loans and long-term debt. In fiscal 1993, cash provided
by financing activities of $3.2 million resulted from increased borrowings under
bank lines of credit of $7.0 million and the repayment of long-term debt of $2.4
million.
19
<PAGE>
Capital investment in property, plant, and equipment totaled $11.7 million
during fiscal 1994. Significant projects included in this amount were the
purchase of new composition software to integrate text and graphics for research
journals and the rebuilding of a six-unit web press. Other significant capital
investments included the purchase of a six-unit sheetfed press and the
installation of a financial network. In addition, the Company entered into two
long-term operating leases during the year, one for a new six-unit sheetfed
press and one for an eight-unit half-web press.
Total debt at June 30, 1994, was $58.4 million, representing an increase of $7.9
million from the $50.5 million at June 30, 1993. The Company's debt-to-capital
ratio at June 30, 1994 was 51.5% compared with 49.9% at June 30, 1993. This
increase was primarily due to additional debt incurred to purchase Waverly
Press. On December 23, 1993, the Company placed $40.0 million of senior notes
with two insurance companies. The proceeds from these notes were used to repay
short-term bridge loans incurred to finance the purchase of Waverly Press,
short-term revolving bank lines of credit, and a bank term loan. These senior
notes, which have an average life of 8.1 years with a final maturity of 10
years, carry a fixed interest rate of 6.74%. Concurrent with the placement of
the senior notes, the Company entered into an interest rate swap agreement to
effectively convert $35.0 million of the senior notes to floating-rate debt. The
Company also entered into agreements with four banks on February 14, 1994, for a
$25.0 million revolving credit facility. There were no outstanding borrowings
against these revolving credit lines at June 30, 1994.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1995 QUARTERS ENDED
IN THOUSANDS, EXCEPT PER SHARE DATA SEP. 30 DEC. 31 MAR. 31 JUN. 30 TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $60,383 $67,237 $74,846 $77,175 $279,641
Gross profit 13,752 16,793 19,438 20,243 70,226
Operating income 2,755 4,238 5,482 5,579 18,054
Net income 974 1,784 2,068 2,653 7,479
Net income per share $ .16 $ .29 $ .33 $ .43 $ 1.21
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1994 QUARTERS ENDED (1)
IN THOUSANDS, EXCEPT PER SHARE DATA SEP. 30 DEC. 31 MAR. 31 JUN. 30 TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $49,126 $61,448 $67,413 $69,743 $247,730
Gross profit 12,409 15,475 17,278 18,480 63,642
Operating income 2,381 3,666 4,097 2,774(2) 12,918
Income before cumulative effect of changes in accounting principles 836 1,510 1,682 779(2) 4,807
Net income 1,237 1,510 1,682 779(2) 5,208
Earnings per share:
Income before cumulative effect of changes in accounting
principles $ .14 $ .25 $ .28 $ .12(2) $ .79
Net income .21 .25 .28 .12(2) .86
</TABLE>
(1) Certain previously reported amounts have been reclassified to conform to the
fiscal year 1995 presentation.
(2) After restructuring charge of $1.9 million pretax, $1.1 million after tax.
See Note 2 of Notes to Consolidated Financial Statements.
20
<PAGE>
BUSINESS
Cadmus is a graphic communications company offering specialized products and
services in three areas: printing, marketing, and publishing. Cadmus was formed
in 1984 through the merger of Byrd, a leading publications printer based in
Virginia, and Washburn, a graphic arts firm based in North Carolina. Since the
merger, Cadmus has grown through enhancement of existing products, internal
development of new products, and acquisitions.
BACKGROUND
The businesses in which Cadmus competes are currently undergoing unprecedented
change as a result of two major factors: technological development and evolving
customer needs. These two factors are changing the types of products and
services offered, production processes employed, customer and supplier
relationships, and the competitive environment in general.
Technological development is changing the graphic communications industry in two
ways. Faster and more efficient printing technology has created excess capacity
and allowed companies to deliver higher quality products more cost effectively.
In addition, technological advances, such as digital technology, have created
alternative media for the dissemination of information formerly delivered
exclusively in print. As a result, there has been substantial change in the
cost, quality, and form of graphic communications.
Evolving customer needs are also forcing graphic communications companies to
adapt. Increasingly, customers are using more targeted marketing programs, which
require shorter print runs with specialized equipment and production processes.
In addition, customers are seeking ways to obtain more effective graphic
communications while reducing costs by outsourcing and through vendor
consolidation. Customers are selecting vendors that efficiently provide the most
effective graphic communications products and services -- specialists who can
interface with their in-house capabilities and provide full service product
offerings at an attractive price.
STRATEGY
Within this changing market, Cadmus is seeking to play an increasingly important
role in helping its customers gain market share. In pursuit of this goal, Cadmus
has adopted a two-part business strategy: (i) seek profitable positions in niche
markets and (ii) become a full service provider of customers' marketing and
graphic communications needs.
Cadmus focuses on niche product segments that larger printers have not pursued.
By specializing in niche markets, Cadmus uses its knowledge of a customer's
industry to create innovative products and services that satisfy the customer's
specific needs. Services provided to these niche markets have greater perceived
value, allowing Cadmus to achieve higher margins and revenue growth. Cadmus also
has aligned its businesses to respond to the trends toward outsourcing and
vendor consolidation. Cadmus is well positioned to serve customers whose graphic
communications needs require a high degree of creativity and content generation.
Customers value Cadmus not only for its printing capabilities but also for its
ability to efficiently combine printing, marketing, and publishing skills in
unique and innovative ways.
There are three elements to Cadmus' strategy:
(Bullet) Organize Cadmus as a single operating company;
(Bullet) Expand and enhance product offerings through increased
specialization, acquisitions, and new product development; and
(Bullet) Invest in technology to improve productivity and quality and to
support full service offerings.
ORGANIZE CADMUS AS A SINGLE OPERATING COMPANY
Cadmus has changed from a collection of separate businesses into a single
operating company organized around business groups and product lines. Cadmus
sales personnel focus on specific product lines, such as financial
communications or specialty packaging, and particular industries or markets,
such as banking or software publishing. Cadmus production personnel focus on
gaining efficiency and improving quality at each production facility. In
addition, all product lines and production facilities use the Cadmus name,
permitting Cadmus to develop name recognition and franchise value in its
markets.
In order to support this single operating company approach, Cadmus has largely
centralized its accounting, human resources, and information technologies
functions. This change has resulted in savings for the Company, focused
attention on the development of systems and procedures to facilitate information
and resource sharing, and improved the quality of services provided.
21
<PAGE>
Cadmus is also creating a corporate culture consistent with this new operating
approach. The Company has developed a comprehensive training and orientation
program -- "The Cadmus Way" -- that is designed to create a single,
values-driven culture. Employees are encouraged to consider themselves Cadmus
employees, rather than employees of any particular business group, and are given
training to facilitate collaboration throughout Cadmus. In addition,
compensation and incentive systems have been redesigned to support this new
approach.
These changes allow Cadmus to utilize all of its expertise and capabilities to
meet its customers' needs, improve its production performance, and expand and
enhance its product offerings.
EXPAND AND ENHANCE PRODUCT OFFERINGS THROUGH INCREASED SPECIALIZATION,
ACQUISITIONS, AND NEW PRODUCT DEVELOPMENT
In order to increase specialization, Cadmus has unified its marketing
focus -- organizing its sales personnel by product lines and by industry or
market. As a result of this focus, each business group and product line has
begun to develop more innovative and competitive products and services to
improve revenue growth and profitability. In addition, some of the special
skills formerly "locked in" at the business units are now shared across Cadmus.
This sharing is enhancing existing offerings, creating new products and
services, and supporting the development of full service offerings.
Cadmus will also continue to expand and enhance its product offerings through
acquisitions. When considering an acquisition opportunity, Cadmus evaluates how
it complements current product lines and business groups and how it furthers the
strategy of Cadmus. Factors considered in evaluating acquisition opportunities
include market growth, customer base, competition, management, geographic
location, and effect on earnings.
The most significant acquisitions to date include: in 1986, a company providing
promotional printing and production of point-of-purchase advertising materials
located in Atlanta, Georgia (American Graphics, Inc.); in 1987, a company
offering retail and other direct mail catalog production services located in
Atlanta, Georgia (Three Score, Inc.) and a printing company located in
Baltimore, Maryland (Garamond/Pridemark Press, Inc.); in 1992, a custom
publisher of newsletters and magazines located in Boston, Massachusetts
(Marblehead Communications, Inc.) and a publisher of specialty magazines located
in Richmond, Virginia (Tuff Stuff Publications, Inc.); in 1993, the assets of a
division engaged in the business of printing scientific, technical, medical, and
scholarly journals, located in Baltimore and Easton, Maryland (the Waverly Press
Division of Waverly, Inc.); and in 1995, a direct marketing agency located in
Los Angeles, California and Denver, Colorado (Ronald James Direct, Inc.),
certain of the assets of a second direct marketing agency located in Long Beach,
California (The Mowry Company), and the assets of Na-Tex, Inc., the publisher of
COLLECTOR'S WORLD OF RACING. Cadmus also acquired the assets of PeachWeb, a
developer of Internet web sites, in October 1995 and the assets of the Software
Factory, a provider of software packaging and media duplication services, in
November 1995. The two most recent acquisitions together required total
consideration of $11.8 million in cash and $2.0 million value of Common Stock.
See "Use of Proceeds" and "Pro Forma Consolidated Financial Statements." The
Company believes that the continued consolidation in the industry will provide
attractive acquisition opportunities in the future.
Finally, Cadmus has developed new products and services. These new products and
services include extensions of its traditional product lines. Examples include
Cadmus' specialty packaging and point-of-purchase product lines. Cadmus is also
developing interactive products and services for tradeshows, kiosks, electronic
catalogs, and Internet and other electronic media. In its journal product line,
Cadmus has expanded the electronic products and services it offers to
scientific, technical, and medical journal publishers, developing a growing
portfolio of skills and capabilities to provide electronic publishing solutions,
ranging from fully searchable databases to Internet home pages maintained by
Cadmus. Cadmus' journal home page is found at HTTP://WWW.CADMUS.COM.
INVEST IN TECHNOLOGY TO IMPROVE PRODUCTIVITY AND QUALITY AND TO SUPPORT FULL
SERVICE OFFERINGS
Cadmus has spent approximately $60.0 million over the past five years investing
in technology to improve productivity and quality and to develop new products
and markets. The Company is concentrating its expenditures in its higher growth
and higher margin product lines. Improvements include:
(Bullet) a state-of-the-art text and graphics composition system in the
journal operations in Richmond and Baltimore, a system which has
significantly improved the range of services Cadmus can offer its
journal services customers and the efficiency of its journal
businesses;
(Bullet) a typesetting system for the financial communications product
line, electronically linking its facilities along the east coast
and permitting Cadmus to output typeset pages directly into its
customers' offices;
22
<PAGE>
(Bullet) a complete reequipping of its prepress operations in Baltimore,
Richmond, Charlotte, and Atlanta with state-of-the-art color and
image manipulation computers and software, permitting some of the
most sophisticated film production and image manipulation
possible;
(Bullet) a half-web press for the Charlotte production facility, enhancing
the range of products offered by the Company's financial
communications and promotional printing product lines;
(Bullet) two presses for the Atlanta production facility, equipped with
ultraviolet drying that permits high quality printing on plastics,
a capability which has helped expand the Company's offerings in
its profitable point-of-purchase product line; and
(Bullet) two presses capable of printing on board stock at the Charlotte
production facility, doubling its specialty packaging capacity.
Many of these investments enhance Cadmus' short to medium run length printing
capability, producing the lead time reductions and efficiencies required to meet
customers' more targeted graphic communications needs.
The Company also is standardizing the equipment at its production facilities.
Currently, across all Cadmus facilities, sheetfed presses are manufactured by
Heidelberg, composition operations are largely Xyvision-based, and prepress
operations are based upon Macintosh and Scitex equipment and technology. In
addition, Cadmus facilities, as well as customers and key suppliers, are being
electronically linked. Three important benefits result from standardizing
production equipment and linking production facilities. First, these efforts
enable Cadmus to implement a company-wide capacity management system that
permits better utilization of excess capacity. Second, standardization is the
necessary first step in obtaining the progressively higher quality demanded by
customers and required for ISO 9002 certification, a production quality
assurance standard developed by the International Standards Organization. Cadmus
is working to achieve ISO 9002 certification for all of its facilities by
January 1997. Finally, these efforts permit the development of databases,
on-line bulletin board systems, and other systems necessary to support full
service offerings to customers such as General Electric, Hardees, Delta Air
Lines, NationsBank, and Morningstar.
These investments and efforts have strengthened the Company's competitive
position and will help Cadmus control production costs and support full service
product offerings.
BUSINESS GROUPS AND PRODUCT LINES
In order to facilitate the development of profitable positions in niche markets
and the ability to provide full service offerings, Cadmus has aligned its
product offerings into three business groups: printing, marketing, and
publishing.
PRINTING
<TABLE>
<CAPTION>
FISCAL YEAR
1995 REVENUES
<S> <C>
(IN
PRODUCT LINE THOUSANDS)
Journal Services $ 93,615
Promotional Printing 41,760
Magazines 40,777
Financial Communications 19,132
7,822
Specialty Packaging
$203,106
Total Printing Revenues
</TABLE>
Cadmus printing operations provide customers a full range of services which
include state-of-the-art digital imaging, electronic prepress, sheetfed and web
offset printing, digital press multi-color printing, custom binding,
fulfillment, and distribution. Printing generated approximately 73% of net sales
in fiscal year 1995. Included in printing revenues are revenues from digital
imaging and composition services, which comprised approximately 18% of the net
sales of this group.
JOURNAL SERVICES. Cadmus is an industry leader in the production of medical and
biomedical, technical and scientific, learned and scholarly, and mathematics
journals. Cadmus offers a full range of journal production services, including
typesetting, editing, content management, printing, packaging, and fulfillment
services to many of the most prestigious scientific, technical, and medical
journal publishers. The Company operates one of the largest journal typesetting
operations in the United States. Its four production facilities are linked
through a sophisticated electronic network and high speed telephony. In response
to increasing
23
<PAGE>
interest in Internet products, the Company offers customers a full range of
electronic publishing products, ranging from Internet home pages to fully
searchable databases created and maintained by Cadmus.
PROMOTIONAL PRINTING. Cadmus produces catalogs, directories, programs, corporate
identity and promotional brochures, specialty books, and product literature for
corporations, agencies, and educational institutions. Cadmus offers full service
graphic communications solutions to meet each customer's unique needs, including
creative design, complete prepress, multi-color sheetfed and web printing,
binding, and fulfillment and distribution services.
MAGAZINES. Cadmus offers print production services to publishers of
professional, trade, corporate, and consumer magazines. Such services include
electronic publishing, litho preparation, printing, finishing, and distribution.
The Company also offers customers consulting services in magazine production
planning, conversion to desktop publishing, and postal and other distribution
services.
FINANCIAL COMMUNICATIONS. Cadmus provides financial and shareholder
communication services to corporate customers. Services provided include design,
typesetting, printing, finishing, electronic filing, and fulfillment for debt
and equity offerings, proxy statements, annual reports, and quarterly reports.
Many of the Company's larger customers are electronically linked with Cadmus
facilities, giving Cadmus the ability to send documents directly to its
customers for review. Cadmus has also developed proprietary software, EDNA, to
assist in the conversion of Macintosh-based files and other graphical and
tabular material into EDGAR format for filing with the Commission.
SPECIALTY PACKAGING. Cadmus produces folding cartons, computer hardware and
software cartons, promotional packaging, portfolio folders, 3-D mailers, and
diskette sleeves for computer software publishers and technology and consumer
products companies. Specializing in short run production and using
state-of-the-art Heidelberg presses and Bobst die-cutting equipment, Cadmus
offers film preparation, structural engineering, printing, and finishing
services.
MARKETING
<TABLE>
<CAPTION>
FISCAL YEAR
1995 REVENUES
<S> <C>
(IN
PRODUCT LINE THOUSANDS)
Point-of-Purchase $31,581
Direct Marketing 14,530
Catalogs 9,649
1,406
Interactive
$57,166
Total Marketing Revenues
</TABLE>
Cadmus provides its customers with creative, database management, production,
mailing, and fulfillment services for direct marketing, point-of-purchase,
retail catalogs, and interactive multimedia programs and systems. Marketing
generated approximately 20% of net sales in fiscal year 1995.
POINT-OF-PURCHASE. Cadmus offers full service point-of-purchase support
including design, production, database management, fulfillment, and printing.
Additional services include merchandising, consulting, and point-of-purchase
program management. Through its fulfillment services, Cadmus maintains finished
goods inventories of point-of-purchase products and delivers these products for
Cadmus customers on an as needed basis. The Company's fulfillment capabilities
rely on a sophisticated inventory management system, customer database, and
telephonic and electronic links between Cadmus facilities and those of its
customers.
DIRECT MARKETING. Cadmus' fully integrated direct marketing agency provides
measurable, response-oriented advertising services, including research, design,
creative, database management, and marketing information analysis. The agency is
organized into customer-focused, cross-functional teams. Cadmus' direct
marketing services use a proprietary strategy development process that is
information-based. Advanced statistical analysis precedes all strategy and
creative development and is also performed following every advertising event.
CATALOGS. Cadmus offers catalog design, creative services, and photography for
nationwide customers in the retail industry. These services include design,
layout, copywriting, and studio and location photography.
INTERACTIVE. Cadmus creates and provides interactive and multimedia products,
including kiosks, CD-ROM, and Internet applications, to Fortune 1000 customers
in the hospitality, travel, banking, and telecommunications industries. Cadmus
has formed an interactive multimedia marketing and software solution development
team with significant technical expertise. Cadmus is also
24
<PAGE>
working to create interactive and multimedia products for retail sale by Cadmus
customers. These products will be marketed as inexpensive and impulse purchase
items to be sold on a national basis. Cadmus will obtain a fee for development
of the prototype and will collect a royalty on each unit sold.
PUBLISHING
<TABLE>
<CAPTION>
FISCAL YEAR
1995 REVENUES
<S> <C>
(IN
PRODUCT LINE THOUSANDS)
Consumer Publishing $10,387
8,982
Custom Publishing
$19,369
Total Publishing Revenues
</TABLE>
Publishing is comprised of two divisions, Consumer Publishing and Custom
Publishing. Publishing generated approximately 7% of net sales in fiscal year
1995.
CONSUMER PUBLISHING. Cadmus publishes its own special-interest magazines that
target consumers who have passionate interests in a hobby or sport. Currently
Cadmus owns five publications: TUFF STUFF; COLLECT!; KENNER GUIDE; MID-ATLANTIC
SOCCER; and RPM. TUFF STUFF, the largest Cadmus consumer publishing title, is a
225,000 run-length monthly magazine directed at trading card collectors.
COLLECT! is a monthly magazine directed at non-sport trading card collectors and
hobbyists. KENNER GUIDE is an annual guide to Kenner sports figurines.
MID-ATLANTIC SOCCER is a seasonal, regional magazine focused on promoting youth
soccer. RPM is a monthly magazine directed at collectors of NASCAR
racing-related memorabilia. These magazines are published, edited, managed,
printed, and fulfilled by Cadmus.
CUSTOM PUBLISHING. Cadmus provides custom publishing services to customers with
narrowly defined target audiences in the health care, travel, financial,
technology, and non-profit areas. Publishing services include design, editorial,
advertising sales, production, and distribution of newsletters and magazines.
Services also include research and marketing to assist the customer in
efficiently reaching its target audience. Current titles include PROFILES, a
Continental Airlines in-flight magazine, LIVING HEALTHY, a magazine for Blue
Cross and Blue Shield of Massachusetts, and UNION PLUS, a monthly magazine
published for Union Privilege, a consumer benefits organization of the AFL-CIO.
25
<PAGE>
PRODUCTION FACILITIES
The production operations of Cadmus are conducted at the following facilities:
<TABLE>
<CAPTION>
CADMUS
LOCATION PRODUCT LINES SERVED BUILDING MAJOR EQUIPMENT
<S> <C> <C> <C>
Richmond, Virginia Journal Services, Magazines, Owned; Hantscho web presses; Man Roland web
Promotional Printing, Consumer 274,000 sq. ft. presses; Heidelberg sheetfed presses;
Publishing, and Custom Publishing Mueller-Martini perfect binding; and
Xyvision composition
Easton, Maryland Journal Services Owned; Hantscho web presses (waterless);
202,400 sq. ft. Miller roll-fed sheetfed presses; CREO
direct-to-plate platemaking; and
Mueller-Martini perfect binding
Atlanta, Georgia Point-of-Purchase Owned; 120,000 Heidelberg sheetfed presses
sq. ft. (ultraviolet in-line); Heidelberg
digital press; Scitex electronic
prepress; and Bobst die-cutting
Charlotte, North Carolina Financial Communications, Specialty Owned; 118,000 Heidelberg sheetfed presses (board
Packaging, Promotional Printing, and sq. ft. capable); Heidelberg half-web press;
Direct Marketing Harris non-heatset web press; Scitex
electronic prepress; Datalogics
composition; and Bobst die-cutting
Richmond, Virginia Promotional Printing, Financial Owned; Heidelberg sheetfed presses
Communications, Journal Services, and 89,100 sq. ft. (waterless); Scitex electronic
Direct Marketing prepress; Harris non- heatset web
press; Datalogics composition; and
Mueller-Martini perfect binding
Baltimore, Maryland Journal Services Leased; Xyvision composition
51,700 sq. ft.
Baltimore, Maryland Promotional Printing and Financial Owned; Heidelberg sheetfed presses
Communications 43,000 sq. ft. (waterless); Scitex electronic
prepress; and Consolidated die-cutting
</TABLE>
EMPLOYEES
As of June 30, 1995, Cadmus employed approximately 2,380 persons. No employees
are currently covered by a collective bargaining agreement. Cadmus believes its
relationship with its employees is excellent.
REGULATION
The printing business uses or generates substantial quantities of inks,
solvents, and other waste products that require disposal. Cadmus usually returns
salvageable waste ink to its suppliers and contracts for the removal of other
waste products.
Cadmus believes it is in substantial compliance with all applicable air quality,
waste disposal, and other environmental-related rules and regulations, as well
as with other general employee health and safety laws and regulations.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
The Company is a party to various legal actions that are ordinary and incidental
to its business. While the outcome of legal actions cannot be predicted with
certainty, management believes the outcome of these proceedings will not have a
materially adverse effect on its consolidated financial position or results of
operations.
26
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages, and positions, and a brief description of
the business experience, of the Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE COMPANY
<S> <C> <C>
C. Stephenson Gillispie, Jr. 53 Chairman of the Board, President, and Chief Executive Officer
Michael Dinkins 41 Vice President and Chief Financial Officer
John H. Phillips 51 Vice President and Regional Manufacturing Officer
Bruce V. Thomas 38 Vice President -- Law and Development
David E. Bosher 42 Vice President and Treasurer
Gregory Moyer 47 Vice President -- Human Resources and Quality
Edward B. Fernstrom 46 Vice President -- Information Technologies
Robert I. Dalton, Jr. 74 Director
Frank Daniels, III 39 Director
Lee P. Dudley 62 Director
Price H. Gwynn, III 72 Director
Jeanne M. Liedtka 40 Director
Frank G. Louthan, Jr. 75 Director
John D. Munford, II 67 Director
John C. Purnell, Jr. 54 Director
Russell M. Robinson, II 63 Director
John W. Rosenblum 51 Director
Wallace Stettinius 62 Director
Bruce A. Walker 61 Director
</TABLE>
C. STEPHENSON GILLISPIE, JR. has been Chairman of the Board of Directors of the
Company since February 1995 and has been President and Chief Executive Officer
of the Company since 1992. Mr. Gillispie was President and Chief Operating
Officer of the Company from 1990 to 1992, prior to which he served as President
and Chief Executive Officer of Byrd.
MICHAEL DINKINS has been Vice President and Chief Financial Officer of the
Company since 1993. Prior to joining the Company in 1993, Mr. Dinkins held a
variety of positions with General Electric Company.
JOHN H. PHILLIPS has been Vice President and Regional Manufacturing Officer of
the Company since 1994. From 1992 through 1994, Mr. Phillips was Vice
President -- Operations and Chief Operating Officer of the Company. Prior to
1992, Mr. Phillips served as Executive Vice President and Chief Operating
Officer and Senior Vice President of Manufacturing and Plant Operations at Byrd
from 1990 to 1992 and 1987 to 1990, respectively.
BRUCE V. THOMAS has been Vice President -- Law and Development of the Company
since June 1992. Prior to joining the Company, Mr. Thomas was a partner in the
Richmond, Virginia law firm of Mays & Valentine.
DAVID E. BOSHER has been Vice President and Treasurer of the Company since 1993.
Previously, Mr. Bosher served as Chief Financial Officer of the Company from
1990 to 1993 and Corporate Controller of the Company from 1988 to 1990.
GREGORY MOYER has been Vice President -- Human Resources and Quality since
November 1994. Prior to joining Cadmus, from 1993 to 1994, Mr. Moyer served as
Corporate Vice President, Human Resources at Dyncorp, Inc. and from 1989 to
1993, Mr. Moyer served as Vice President of Human Resources and Quality at
P.R.C. Inc.
EDWARD B. FERNSTROM has been Vice President -- Information Technologies since
February 1995. Prior to joining Cadmus, Mr. Fernstrom served as Vice President,
Chief Information Officer at Dyncorp, Inc.
ROBERT I. DALTON, JR. is President of Tech-Tex, Inc., a Charlotte, North
Carolina business brokerage firm. Formerly, Mr. Dalton was a partner of
Dalton-Briley and Company, a Charlotte, North Carolina business brokerage firm.
27
<PAGE>
FRANK DANIELS, III is Publisher of Nando.net and Vice President of The News and
Observer Publishing Company, Raleigh, North Carolina. Formerly, Mr. Daniels was
Executive Editor and Director of Operations of The News and Observer Publishing
Company.
LEE P. DUDLEY is Vice President -- Investments and Branch Manager of the
Richmond, Virginia office of A.G. Edwards & Sons, Inc., a broker-dealer
organization. Formerly, Mr. Dudley was Chairman and Chief Executive Officer of
Financial Corporation of Virginia, a Richmond, Virginia investment banking and
broker-dealer organization.
PRICE H. GWYNN, III is Chairman of Presbyterian Publishing Corporation.
Formerly, Mr. Gwynn was Vice President of Lance, Inc., Charlotte, North
Carolina.
JEANNE M. LIEDTKA is an Associate Professor at the Darden Graduate School of
Business Administration, University of Virginia. Formerly, Ms. Liedtka was an
Associate Professor at Rutgers University and Simmons College.
FRANK G. LOUTHAN, JR. is retired. Formerly, Mr. Louthan was Chairman and Chief
Executive Officer of RECO Industries, Inc., a privately-owned engineering
company headquartered in Richmond, Virginia.
JOHN D. MUNFORD, II is retired. Formerly, Mr. Munford was Vice Chairman and
Executive Vice President of Union Camp Corporation, Franklin, Virginia. He is a
director of Pulaski Furniture Corporation, Universal Corporation, Caraustar
Industries, Inc. and Mohawk Papermill, Inc.
JOHN C. PURNELL, JR. is Executive Director of Friends Association For Children,
Richmond, Virginia, a non-profit child welfare organization.
RUSSELL M. ROBINSON, II is Attorney-at-Law, President, Director and shareholder
of Robinson, Bradshaw & Hinson, P.A., Charlotte, North Carolina. Mr. Robinson is
a director of Caraustar Industries, Inc. and Duke Power Company.
JOHN W. ROSENBLUM is the Tayloe Murphy Professor of the Darden Graduate School
of Business Administration, University of Virginia. Formerly, Mr. Rosenblum was
Dean of the Darden School. He is a director of Chesapeake Corporation, Comdial
Corporation, Cone Mills Corporation and T. Rowe Price Associates.
WALLACE STETTINIUS is retired. Until February 1995, Mr. Stettinius was Chairman
of the Board of Cadmus. He is a director of American Filtrona Corporation and
Chesapeake Corporation.
BRUCE A. WALKER is President of Valco Graphics, Inc., a Seattle publication and
tabloid printing firm. Formerly, Mr. Walker was Marketing Representative of
Pacific Northwest, Anderson, Lithograph Company, Los Angeles, California.
28
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 16,000,000 shares of
Common Stock, par value $.50 per share, and 1,000,000 shares of Serial Preferred
Stock, par value $1.00 per share (the "Serial Preferred Stock"). As of June 30,
1995, 6,031,475 shares of Common Stock and no shares of the Serial Preferred
Stock were outstanding. All of the issued and outstanding shares of Common Stock
are fully paid and nonassessable.
The following summary description of the Common Stock and Serial Preferred Stock
does not purport to be complete and is qualified in its entirety by this
reference to the Company's Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") and Amended and Restated Bylaws (the "Bylaws"),
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part, and to the applicable provisions of the
Virginia Stock Corporation Act (the "Virginia Act").
COMMON STOCK
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share of record on all matters to be voted upon by
shareholders. At a meeting of shareholders at which a quorum is present, a
majority of the votes cast decides all questions other than the election of
directors, unless the matter is one upon which a different vote is required by
express provision of law or the Articles of Incorporation or Bylaws. There is no
cumulative voting with respect to the election of directors (or any other
matter).
The holders of the Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. In addition, there are no
redemption or sinking fund provisions applicable to the Common Stock.
In the event of a liquidation, dissolution or winding up of the Company, holders
of the Common Stock are entitled to participate equally and ratably, share for
share, in all assets remaining after payment of liabilities and obligations of
the Company and all preferential amounts to which the holders of shares at the
time outstanding of all classes of stock having prior rights thereto may be
entitled.
Subject to the rights of any holders of shares at the time outstanding of all
classes of stock having prior rights as to dividends, the holders of the Common
Stock are entitled to receive ratably such dividends as the Board of Directors
may declare out of funds legally available therefor, when and if so declared.
The payment by the Company of dividends, if any, rests within the discretion of
its Board of Directors and will depend upon the Company's then prevailing
results of operations, financial condition and capital expenditure plans, as
well as other factors considered relevant by the Board of Directors. The Company
may enter into bank credit agreements which include financial covenants
restricting the payment of dividends. See "Price Range of Common Stock and
Dividend Policy."
SERIAL PREFERRED STOCK
The Board of Directors is authorized, without further action by the
shareholders, to issue up to 1,000,000 shares of Serial Preferred Stock, in one
or more series, with such voting powers, preferences, special rights,
qualifications, limitations or restrictions as shall be set forth in resolutions
providing for the issue thereof adopted by the Board of Directors. As of the
date hereof, the Company has no shares of Serial Preferred Stock outstanding.
The Company has designated 100,000 shares of Series A Junior Participating
Preferred Stock ("Series A Preferred Stock") for possible future issuance
pursuant to the Rights Agreement described below under "Shareholder Rights
Plan."
The holders of the Serial Preferred Stock of each series will be entitled to
receive, if and when declared by the Board of Directors, dividends at the
dividend rate for such series, and not exceeding such rate except to the extent
of any participation right.
If any shares of any series of Serial Preferred Stock are outstanding, Cadmus
may not declare or pay dividends on the Common Stock or any other class of stock
junior to the Serial Preferred Stock, or for any shares of Serial Preferred
Stock which are entitled to participate with the Common Stock, unless all
accrued dividends on the Series Preferred Stock have been paid or declared and
set aside for payment.
The holders of the Serial Preferred Stock of each series will be entitled to a
liquidation preference for the fixed liquidation price for such series plus in
case such liquidation, dissolution or winding up shall have been voluntary, the
fixed liquidation premium
29
<PAGE>
for such series, if any, together in all cases with accrued and unpaid dividends
and the full additional amount required by any participation right. Upon any
liquidation, dissolution or winding up, after the holders of the Serial
Preferred Stock have been paid preferential amounts, such holders will have no
right or claim to any of the remaining assets of the Company.
SHAREHOLDER RIGHTS PLAN
Pursuant to a Rights Agreement dated February 1, 1989, the Company declared a
dividend of one right (the "Rights") for each outstanding share of Common Stock
to the shareholders of record on the close of business on February 13, 1989.
Unless the Board of Directors directs otherwise, one Right will be issued with
respect to each share of Common Stock that becomes outstanding prior to the
occurrence of certain potential change-in-control events (including the shares
of Common Stock offered hereby).
The Rights become exercisable upon certain potential change-in-control events.
When exercisable, the Rights entitle holders to purchase one one-thousandth of a
share (subject to adjustment) of Series A Preferred Stock. Thereafter, upon the
occurrence of certain additional events, the Rights entitle holders to purchase,
at a substantial discount, shares of Common Stock or other assets of the Company
or, under certain circumstances, common stock of the acquiring entity. In
addition, after the occurrence of certain change-in-control events, the Company
may exchange all or a part of the Rights for shares of Common Stock at an
exchange ratio of one share per Right (subject to adjustment).
After the occurrence of certain potential change-in-control events, Rights held
by a person that beneficially owns more than 20% of the outstanding shares of
the Common Stock (an acquiring person) or any affiliate or associate of an
acquiring person will become null and void and thereafter cannot be exercised or
exchanged by any such person.
Exercise or exchange of the Rights will cause substantial dilution to a person
or group attempting to acquire control of the Company without the approval of
the Board of Directors. Except under certain circumstances, the Board of
Directors may cause the Company to redeem the Rights in whole, but not in part,
at a price of $.01 per Right.
The Rights expire on February 13, 1999, if not earlier redeemed or exchanged.
The Rights have no voting or dividend privileges. Until such time as the Rights
become exercisable, they are attached to and do not trade separately from the
Common Stock.
The Rights Agreement is incorporated by reference to the Registration Statement
of which this Prospectus forms a part and a copy of the Rights Agreement is
available free of charge from the Rights Agent, First Union National Bank of
North Carolina, N.A. This summary description of the Rights and Rights Agreement
does not purport to be complete and is qualified in its entirety by reference to
the Rights Agreement.
CERTAIN PROVISIONS OF VIRGINIA LAW, AND THE ARTICLES OF INCORPORATION AND BYLAWS
The following summary description of certain provisions of Virginia law and the
Articles of Incorporation and Bylaws of the Company do not purport to be
complete and is qualified in its entirety by reference to Virginia law and the
Articles of Incorporation and Bylaws.
STAGGERED BOARD OF DIRECTORS; REMOVAL; VACANCIES
The Articles of Incorporation provide that the number of directors may be
determined by the Board of Directors or holders of at least two-thirds of the
outstanding shares entitled to vote but may be no less than eight nor more than
twenty. Pursuant to the Articles of Incorporation, Cadmus directors are divided
into three classes, and are elected to staggered, three year terms. Directors
may be removed by shareholders of the Company only for cause and with the
affirmative vote of at least two-thirds of the outstanding shares entitled to
vote. Any vacancy may be filled by a majority vote of the remaining directors
and the director elected will serve until the next annual meeting.
The Bylaws require that a shareholder give written notice of a nomination for
election of a director to the Secretary of the Company, in the case of an
election at an annual meeting of shareholders, no later than 90 days before the
first anniversary of the immediately preceding meeting and, in the case of an
election at a special meeting, no later than ten business days after the date on
which notice of such meeting is first given to shareholders.
SUPER MAJORITY VOTING PROVISION
In the event that at least two-thirds of the directors then in office do not
approve a proposed amendment to the Articles of Incorporation, a plan of merger
or exchange, a sale of substantially all of the Company's assets or a plan of
dissolution, the Articles of Incorporation require approval of the proposed
amendment or transaction by the affirmative vote of at least 80% of the
outstanding shares entitled to vote.
30
<PAGE>
LIABILITY OF OFFICERS AND DIRECTORS
As permitted under Virginia law, the Articles of Incorporation limit to $1.00
the liability of officers and directors of the Company to the Company or its
shareholders for monetary damages except for liabilities resulting from such
persons having engaged in willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
Virginia law permits, and the Articles of Incorporation require, indemnification
of the Company's directors against all liabilities imposed or asserted against
him by reason of having been a director of the Company, which may include
liabilities under the Securities Act. The Articles of Incorporation permit
indemnification of any person who was or is a party to any proceeding by reason
of the fact that he is or was an officer, employee or agent, unless in each case
such person engaged in willful misconduct or a knowing violation of the criminal
law.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
POTENTIAL EFFECT OF CERTAIN PROVISIONS UPON AN ATTEMPT TO ACQUIRE CONTROL OF THE
COMPANY
Certain of the foregoing provisions of the Articles of Incorporation, Bylaws and
the Shareholder Rights Plan summarized above may discourage or make more
difficult the acquisition of control of the Company by means of a tender offer,
open market purchase, proxy fight or otherwise, including certain types of
coercive takeover practices and inadequate takeover bids. These provisions are
intended to encourage persons seeking to acquire control of the Company first to
negotiate with the Company. The Company believes the foregoing measures, many of
which are substantially similar to the takeover-related measures in effect for
many other publicly held companies, provide benefits by enhancing the Company's
potential ability to negotiate with the proponent of any unfriendly or
unsolicited proposal to take over or restructure the Company that outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is The First Union
National Bank of North Carolina, Charlotte, North Carolina.
31
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below, for whom J.P. Morgan Securities Inc. and Interstate/Johnson Lane
Corporation are acting as representatives (the "Representatives"), have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective number of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
J.P. Morgan Securities Inc. 500,000
Interstate/Johnson Lane Corporation 500,000
A.G. Edwards & Sons, Inc. 125,000
Davenport & Co. of Virginia, Inc. 125,000
Scott & Stringfellow, Inc. 125,000
Wheat First Butcher Singer 125,000
1,500,000
Total
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and certain other conditions. The Underwriters
are obligated to take and pay for all such shares of Common Stock, if any are
taken.
The Underwriters propose initially to offer such shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $.86 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to certain other dealers. After the
shares of Common Stock are released for sale to the public, the offering price
and such concessions may be changed.
The Company has granted to the Underwriters an option, expiring at the close of
business on the 30th day after the date of this Prospectus, to purchase up to
225,000 additional shares of Common Stock at the public offering price, less the
underwriting discount. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any. To the extent that the Underwriters
exercise such option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered
hereby.
The Company and certain of its shareholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock, for a period of 90 days after the date hereof, without the prior written
consent of J.P. Morgan Securities Inc., with certain limited exceptions.
Pursuant to regulations promulgated by the Commission, market makers in the
Common Stock who are Underwriters or prospective underwriters ("passive market
makers") may, subject to certain limitations, make bids for or purchases of
shares of Common Stock until the earlier of the time of commencement (the
"Commencement Date") of offers or sales of the Common Stock contemplated by this
Prospectus or the time at which a stabilizing bid for such shares is made. In
general, on and after the date two days prior to the Commencement Date (i) such
market makers' net daily purchases of the Common Stock may not exceed 30% of the
average daily trading volume in such stock for the two full consecutive calendar
months immediately preceding the filing date of the Registration Statement of
which this Prospectus forms a part, (ii) such market makers may not effect
transactions in, or display bids for, the Common Stock at a price that exceeds
the highest bid for the Common Stock by persons who are not passive market
makers, and (iii) bids by passive market makers must be identified as such.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
32
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Mays & Valentine, Richmond, Virginia. Certain legal matters in
connection with the Offering will be passed upon for the Company by Hunton &
Williams, Richmond, Virginia, and for the Underwriters by Davis Polk & Wardwell,
New York, New York.
EXPERTS
The financial statements included herein and in this Registration Statement, to
the extent and for the periods indicated in their reports, have been audited by
Arthur Andersen LLP and Coopers & Lybrand L.L.P., independent public
accountants, and are included herein in reliance upon the reports of said firms
and upon the authority of said firms as experts in accounting and auditing.
Reference is made to said reports, which include an explanatory paragraph with
respect to the change in the method of accounting for postretirement benefits
and the change in the method of accounting for income taxes as discussed in
Notes 12 and 10 to the financial statements.
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Public Accountants F-2
Consolidated Statements of Income for the Years Ended June 30, 1995, 1994, and 1993 F-4
Consolidated Balance Sheets as of June 30, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1994, and 1993 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Cadmus Communications Corporation:
We have audited the accompanying consolidated balance sheet of Cadmus
Communications Corporation and Subsidiaries as of June 30, 1995, and the related
consolidated statements of income and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cadmus Communications
Corporation and Subsidiaries as of June 30, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Notes 12 and 10 to the consolidated financial statements,
effective as of July 1, 1994, the Company changed its method of accounting for
postretirement benefits other than pensions to conform with Statement of
Financial Accounting Standards No. 106 and its method of accounting for income
taxes to conform with Statement of Financial Accounting Standards No. 109.
ARTHUR ANDERSEN LLP
Richmond, Virginia,
August 1, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Cadmus Communications Corporation:
We have audited the consolidated financial statements of Cadmus Communications
Corporation and Subsidiaries as of June 30, 1994, and for each of the two years
in the period ended June 30, 1994. 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 generally accepted auditing
standards. 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 Cadmus
Communications Corporation and Subsidiaries as of June 30, 1994, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended June 30, 1994 in conformity with generally
accepted accounting principles.
As discussed in Notes 10 and 12 to the consolidated financial statements,
effective as of the beginning of 1994, Cadmus changed its method of accounting
for income taxes to conform with Statement of Financial Standards No. 109 and
its method of accounting for postretirement benefits other than pensions to
conform with Statement of Financial Accounting Standards No. 106.
COOPERS & LYBRAND L.L.P.
Richmond, Virginia
August 2, 1994
F-3
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994 1993
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $279,641 $247,730 $198,126
Operating expenses
Cost of sales 209,415 184,088 146,031
Selling and administrative 52,172 48,824 40,753
Restructuring charge 1,900
261,587 234,812 186,784
Operating income 18,054 12,918 11,342
Interest and other expenses
Interest 5,351 4,813 3,233
Other expenses, net 21 172 629
5,372 4,985 3,862
Income before income taxes 12,682 7,933 7,480
Income taxes 5,203 3,126 2,947
Income before cumulative effect of changes in accounting principles 7,479 4,807 4,533
Cumulative effect of changes in accounting for:
Postretirement benefits (net of income tax benefit of $355) (532)
Income taxes 933
Net income $ 7,479 $ 5,208 $ 4,533
Earnings per share:
Income before cumulative effect of changes in accounting principles $ 1.21 $ .79 $ .76
Cumulative effect of changes in accounting for postretirement benefits and income taxes .07
Net income $ 1.21 $ .86 $ .76
Average common shares outstanding 6,195 6,085 5,972
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT JUNE 30,
1995 1994
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Current Assets
Cash and cash equivalents $ 226 $ 3,855
Accounts receivable, less allowance for doubtful accounts
($1,153 in 1995 and $1,514 in 1994) 57,204 44,747
Inventories 16,308 11,219
Deferred income taxes 1,092 1,227
Prepaid expenses and other 1,489 889
Total current assets 76,319 61,937
Property, plant, and equipment, net 84,570 77,072
Investment in unconsolidated joint venture 6,831
Other assets 2,400 6,672
Goodwill and intangibles, net 8,281 7,617
TOTAL ASSETS $171,570 $160,129
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 3,775
Current maturities of long-term debt 2,381 $ 2,318
Accounts payable 18,818 17,312
Accrued expenses
Compensation 10,905 10,612
Restructuring charge 120 1,900
Other 7,907 6,439
Total current liabilities 43,906 38,581
Long-term debt 53,961 56,122
Other long-term liabilities 7,180 7,575
Deferred income taxes 4,641 2,922
Commitments and contingencies
Shareholders' equity
Common stock ($.50 par value; authorized -- 16,000 shares; issued and outstanding
shares -- 6,031 at June 30, 1995; and 5,984 at June 30, 1994) 3,015 2,992
Capital in excess of par value 12,448 11,796
Retained earnings 46,419 40,141
Total shareholders' equity 61,882 54,929
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $171,570 $160,129
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994 1993
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 7,479 $ 5,208 $ 4,533
Adjustments to reconcile net income to net cash provided by operating activities
Cumulative effect of changes in accounting for:
Postretirement benefits 532
Income taxes (933)
Depreciation and amortization 12,132 11,474 9,626
Restructuring charge 1,900
Deferred income taxes 2,080 284 352
Other, net 1,010 657 738
22,701 19,122 15,249
Changes in working capital sources (requirements), excluding debt and effects of
acquisitions
Accounts receivable, net (11,999) (2,515) (6,398)
Inventories (4,897) 2,780 (481)
Accounts payable, accrued expenses, and income taxes 624 6,959 1,683
Other, net (1,069) (353) 327
(17,341) 6,871 (4,869)
Net cash provided by operating activities 5,360 25,993 10,380
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (20,959) (11,742) (10,842)
Proceeds from sale of property and equipment 3,610 502 173
Sale of unconsolidated joint venture 6,800
Proceeds from life insurance loans 2,940 159 86
Payments for businesses acquired (1,519) (19,740)
Investment in unconsolidated joint venture 248 (254) (2,150)
Other, net (988) 73 (670)
Net cash used in investing activities (9,868) (31,002) (13,403)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 79,825 43,709 34,002
Repayment of short-term borrowings (76,050) (47,709) (27,000)
Proceeds from long-term borrowings 111 40,069
Repayment of long-term borrowings (2,250) (28,112) (2,435)
Dividends paid (1,201) (1,192) (1,196)
Repurchase of common stock (215)
Proceeds from exercise of stock options 449 220
Other, net (5) (327) 51
Net cash provided by financing activities 879 6,658 3,207
Increase (decrease) in cash and cash equivalents (3,629) 1,649 184
Cash and cash equivalents at beginning of year 3,855 2,206 2,022
Cash and cash equivalents at end of year $ 226 $ 3,855 $ 2,206
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of
Cadmus Communications Corporation and Subsidiaries ("Company"), including its
unconsolidated fifty percent owned equity investment (see Note 7). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Substantially all printing, marketing, and publishing products are produced to
customer specifications. The Company recognizes revenue when service projects
are completed or products are shipped.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity of three months or less.
INVENTORIES
Inventories are valued at the lower of cost or market, principally using the
last-in, first-out (LIFO) method (70% in 1995 and 73% in 1994). The first-in,
first-out (FIFO) method is used to value the remaining inventories.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost net of accumulated
depreciation. Major renewals and betterments are capitalized, whereas ordinary
maintenance and repair costs are expensed as incurred. Gains or losses on
disposition of assets are reflected in earnings and the related asset costs and
accumulated depreciation are removed from the respective accounts. Depreciation
is calculated principally by the straight-line method based on useful lives of
thirty years for buildings and three to ten years for machinery and equipment.
GOODWILL AND INTANGIBLES
Goodwill and intangibles include the costs in excess of the purchase price over
the net assets of businesses acquired and other valued intangibles and are being
amortized by the straight-line method over twenty years. The carrying value of
goodwill and intangible assets is periodically reviewed and if there were
evidence these values are impaired, the Company's carrying value of the
intangible assets would be reduced to its estimated fair value. Accumulated
amortization was $3,842 and $3,278 at June 30, 1995 and 1994, respectively.
INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 requires
the liability method of accounting for deferred income taxes, whereby enacted
statutory tax rates are applied to the differences between the financial
reporting and tax bases of assets and liabilities (see Note 10). The Company had
previously accounted for income taxes in accordance with the method prescribed
by Accounting Principles Board Opinion No. 11.
EARNINGS PER SHARE
Earnings per share is computed on the basis of weighted average common shares
outstanding and common equivalent shares in the form of stock options.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to the
1995 presentation.
(2) RESTRUCTURING CHARGE
In the fourth quarter of fiscal 1994, the Company recorded a restructuring
charge of $1.9 million. This charge resulted from reductions in its workforce
related to the decision to close its Springfield, Virginia composition and
prepress facility and to transfer these activities to Richmond, Virginia and
Baltimore, Maryland, facilities. The Company recorded a pretax charge of
F-7
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$1.6 million related to employee termination benefits, with the remaining $0.3
million charge related to equipment write-offs and miscellaneous other direct
costs associated with the discontinuation of the operations and other exit
costs. During fiscal year 1995, the Company substantially completed its
restructuring plan. Actual amounts charged against the reserve for fiscal year
ended June 30, 1995, were $1.8 million.
(3) ACQUISITION OF WAVERLY PRESS
On November 1, 1993, the Company acquired the net assets of the Waverly Press
printing division ("Waverly Press") from Waverly, Inc. ("Waverly") for
approximately $20.0 million, which was funded through the placement of senior
notes with two insurance companies (see Note 9). Waverly Press, a leading
printer of scientific, technical, medical, and scholarly journals, was renamed
Cadmus Journal Services, Inc. ("Cadmus Journal Services") following the
acquisition. The acquisition was accounted for under the purchase method and,
accordingly, the costs of the acquisition were allocated to the assets acquired
and liabilities assumed based upon their respective fair values. The operating
results of Waverly Press have been included in the consolidated operating
results since the date of acquisition.
(4) ACQUISITION OF TUFF STUFF PUBLICATIONS MINORITY INTEREST
During the first quarter of fiscal 1995, the Company purchased the remaining
twenty percent equity interest in Tuff Stuff Publications, Inc. ("Tuff Stuff")
under the original repurchase agreement for approximately $0.6 million to bring
the Company's equity interest in Tuff Stuff to one hundred percent. The Company
purchased the initial eighty percent equity interest in April 1992, at which
time the acquisition was accounted for using the purchase method. Accordingly,
the assets and liabilities were recorded at their estimated fair value with the
excess of the purchase price over the fair value of the identifiable net assets
acquired recorded as goodwill. The additional $0.6 million equity interest was
recorded first as a reduction of the existing minority interest ownership and
then as an addition to goodwill which is being amortized on a straight-line
basis over the remaining life of the original goodwill (approximately seventeen
years).
(5) INVENTORIES
Inventories as of June 30, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Raw materials and supplies $ 6,044 $ 3,997
Work in process:
Materials 3,270 2,219
Other manufacturing costs 5,315 3,623
Finished goods 1,679 1,380
Inventories $ 16,308 $ 11,219
</TABLE>
The current cost of inventories exceeded the LIFO value of inventories by $1,844
and $1,578 at June 30, 1995 and 1994, respectively.
During fiscal 1994, inventory quantities were reduced resulting in liquidations
of LIFO inventory quantities carried at lower costs which prevailed in prior
years as compared with the cost of current purchases. The effect of the
inventory reduction increased net income by $0.2 million. There were no
significant reductions of inventories in fiscal 1995 and 1993.
F-8
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of June 30, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 2,866 $ 3,071
Buildings and improvements 39,844 34,496
Machinery, equipment, and fixtures 118,471 110,145
Transportation equipment 178 178
Total property, plant, and equipment 161,359 147,890
Less: accumulated depreciation 76,789 70,818
Property, plant, and equipment, net $ 84,570 $ 77,072
</TABLE>
Commitments outstanding for the purchase of machinery, equipment, and fixtures
at June 30, 1995 totaled $3.3 million.
The Company leases office, production and storage space, and equipment under
various noncancelable operating leases. A number of leases contain renewal
options and some contain purchase options. Certain leases require the Company to
pay utilities, taxes, and other operating expenses.
Future minimum rental payments required under operating leases that have initial
or remaining noncancellable lease terms in excess of one year as of June 30,
1995, are as follows: 1996 -- $3.4 million; 1997 -- $3.4 million; 1998 -- $3.3
million; 1999 -- $3.1 million; 2000 -- $2.1 million; and thereafter -- $7.3
million.
Total rental expense charged to operations was $4.1 million, $3.0 million, and
$2.0 million in fiscal 1995, 1994, and 1993, respectively. Substantially all
such rental expense represented the minimum rental payments under operating
leases.
On September 29, 1994, the Company sold the land, building, and building
improvements ("property") of Three Score, Inc., in Tucker, Georgia for $2.9
million (which approximated net book value) under sale and leaseback agreements.
The lease is classified as an operating lease in accordance with SFAS No. 13,
"Accounting for Leases." The Company has lease renewal options after the initial
fifteen year lease term at projected future fair market values under the lease.
Average annual rental payments on the lease are $0.3 million.
(7) INVESTMENT IN JOINT VENTURE
On February 28, 1995, the Company sold its fifty percent joint venture interest
in Central Florida Press, L.C. ("CFP") to The Lanman Companies, Inc. ("Lanman"),
the other owner of CFP, for $6.8 million in cash. The sale resulted in an
after-tax charge of $0.4 million, or $.06 per share, arising primarily from
certain tax liabilities related to the transaction.
The Company completed the joint venture with Lanman to form CFP in March 1993
whereby the Company invested $6.5 million for a fifty percent interest in CFP
and Lanman contributed net assets of its subsidiary, Central Florida Press, for
its fifty percent interest. This investment was accounted for on the equity
basis. Equity income from unconsolidated joint venture totaled $0.3 million for
the fiscal 1995 and 1994, and $0.1 million for fiscal 1993.
(8) OTHER BALANCE SHEET INFORMATION
Other accrued expenses include $5,174 and $3,467 of deferred revenue at June 30,
1995 and 1994, respectively. Other long-term liabilities consist principally of
amounts recorded under deferred compensation arrangements with certain executive
officers and other employees and amounts recorded under the pension and other
postretirement benefit plans (see Notes 11 and 12).
F-9
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(9) DEBT
Debt at June 30, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Long-term debt
Senior unsecured notes, 9.76%, due 2000 $ 11,200 $ 13,400
Senior unsecured notes, 6.74%, due 2003 40,000 40,000
Tax-exempt variable rate industrial development bonds, weighted average
interest rate of
3.7% to 5.0%, due serially through 2011 4,482 4,532
Various mortgage and other notes 660 508
Total long-term debt 56,342 58,440
Less: current maturities 2,381 2,318
Long-term debt $ 53,961 $ 56,122
</TABLE>
The Company completed placement of $40.0 million in senior notes with two
insurance companies on December 23, 1993. The placement has a fixed interest
rate of 6.74% with an average life of 8.1 years and is due in 2003. The proceeds
of this placement were used to fund the acquisition of Waverly Press and to
refinance approximately $20.0 million of revolving bank credit and term loans.
During fiscal 1994, the Company entered into agreements for revolving credit
facilities aggregating $25.0 million with its four major banks, replacing the
former lines of credit. These new unsecured, committed lines of credit have a
three-year term expiring in February 1997, at which time any loans outstanding
under the facility convert to term loans with a two-year maturity. The Company
has the following interest rate options: (i) adjusted CD rate or (ii) adjusted
LIBOR. These agreements also require commitment fees of 1/4 to 1/2 percent per
annum on any unused portion of the lines of credit. At June 30, 1995, borrowings
under these revolving credit facilities totaled $3.8 million, leaving an unused
balance of $21.2 million. At June 30, 1994 there were no outstanding borrowings
under these agreements.
The Company periodically enters into interest rate swap agreements to moderate
its exposure to interest rate changes and to lower the overall cost of
borrowing. The notional values and applicable rates are as follows:
<TABLE>
<CAPTION>
PAID FIXED, PAID FLOATING,
RECEIVED FLOATING RECEIVED FIXED
NOTIONAL VALUE: 1995 1994 1993 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 9,125 $10,000 $10,000 $35,000 $ 0 $ 0
New contracts 10,000 35,000
Expired contracts (1,750) (875)
Ending balance $17,375 $ 9,125 $10,000 $35,000 $35,000 $ 0
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AGGREGATE NOTIONAL VALUE INTEREST RATES
TYPE OF SWAP: 1995 1996 1997 1998 1999 PAID RECEIVED
<S> <C> <C> <C> <C> <C> <C> <C>
Paid fixed, received floating $ 17,375 $ 17,400 $ 17,900 $ 18,700 $ 0 8.342% 5.843%
Paid floating, received fixed 35,000 35,000 35,000 35,000 35,000 6.125 5.265
</TABLE>
Hedging activities increased interest expense by $0.7 million, $0.5 million, and
$0.5 million in fiscal 1995, 1994, and 1993, respectively.
F-10
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
During fiscal 1995, the Company entered into two interest rate swap agreements
with two banks to convert debt with an aggregate notional value of $8.7 million
from floating-rate to fixed-rate debt. These swaps have a term of four years.
Under the terms of these agreements, the Company makes payments at a fixed
interest rate of 8.061% and will receive payments based on six-month LIBOR in
arrears. The net interest paid or received is included in interest expense.
These swaps are hedged against the $35.0 million fixed-to-floating rate swap
described below. At June 30, 1995, the fair value of these contracts was
negative $0.9 million.
The Company also entered into a fixed-to-floating interest rate swap agreement
with a notional value of $35.0 million to convert that amount of the 2003 senior
notes to floating-rate debt. This swap has an initial term of three years, which
is renewable at the bank's option for an additional two years. Under the terms
of this agreement, the Company makes payments at variable rates, which are based
on six-month LIBOR, and receives payments at a fixed interest rate of 5.265%.
The net interest paid or received is included in interest expense. The variable
rate at June 30, 1995 was 5.9063% and the fair value of this contract was
negative $1.2 million.
During fiscal 1990, the Company entered into two interest rate swap agreements
with a notional value of $10.0 million which expire in December 1995. The swap
agreements originally converted certain variable-rate term loans into fixed-rate
obligations with a fixed rate of 9.01%. Under the terms of these agreements, the
Company makes payments at a fixed interest rate of 8.34% and receives payments
at variable rates, which are based on LIBOR. The net interest paid or received
is included in interest expense. In fiscal 1994, the Company repaid the balance
of these term loans and utilized these swap agreements as a hedge against the
$35.0 million fixed-to-floating rate swap mentioned above. At June 30, 1995, the
fair value of this contract was negative $0.1 million.
The notional value of the swap contracts does not represent exposure to credit
loss. In the event of default by the counterparties, the risk, if any, in these
transactions is the cost of replacing the swap agreement at current market
rates. The Company continually monitors its positions and the credit rating of
its counterparties and limits the amount of agreements it enters into with any
one party. Management does not anticipate nonperformance by the counterparties;
however, if incurred, any such loss would be immaterial.
The fair value of long-term debt as of June 30, 1995 was $53.9 million based on
the market value of debt with similar maturities and covenants.
Under the terms of the various debt instruments, approximately $46.3 million of
retained earnings at June 30, 1995, is not available for payment of cash
dividends.
Maturities of long-term debt for the five years ending June 30, 2000 are as
follows: 1996 -- $2.4 million; 1997 -- $2.3 million; 1998 -- $3.6 million;
1999 -- $5.2 million; 2000 -- $6.9 million; and $33.6 million thereafter. The
book value of all encumbered properties as of June 30, 1995, totaled $0.7
million.
The Company incurred interest expense of $5.4 million, $4.8 million, and $3.7
million for fiscal 1995, 1994, and 1993, respectively, of which $0.1 million for
fiscal 1995, and $0.5 million for fiscal 1993 were capitalized. Interest paid,
net of amounts capitalized, totaled $5.3 million, $4.8 million, and $3.2 million
for fiscal 1995, 1994, and 1993 respectively.
(10) INCOME TAXES
Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the liability method of accounting for deferred
income taxes, whereby enacted statutory tax rates are applied to the differences
between the financial reporting and tax bases of assets and liabilities. The
cumulative effect of the change in accounting principle was a reduction in the
deferred income tax liability and a corresponding increase in net income of $933
in the first quarter of fiscal 1994. Under the provisions of SFAS No. 109, the
Company elected not to restate prior years' consolidated financial statements.
F-11
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Income taxes for the years ended June 30, 1995, 1994, and 1993 consist of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current
Federal $3,052 $2,313 $2,365
State 297 360 230
3,349 2,673 2,595
Deferred
Federal 1,743 133 288
State 111 320 64
1,854 453 352
Income taxes $5,203 $3,126 $2,947
</TABLE>
Cash paid for income taxes totaled $3.3 million, $3.0 million, and $2.3 million
for fiscal 1995, 1994, and 1993, respectively.
The amounts of income tax expense differ from the amounts obtained by
application of the statutory U.S. rates to income before income taxes for the
reasons shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Computed at statutory U.S. rate $4,312 $2,697 $2,542
State income taxes, net of Federal tax benefit 269 449 194
Goodwill amortization 221 242 227
Charitable contribution (127)
Sale of joint venture 295
Other 106 (135) (16)
Income taxes $5,203 $3,126 $2,947
</TABLE>
The net current and noncurrent components of deferred income taxes recognized in
the balance sheet at June 30, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net current assets $ 1,092 $ 1,227
Net noncurrent liabilities 4,641 2,922
Net liability $ 3,549 $ 1,695
</TABLE>
The Company has state net operating loss carryforwards aggregating approximately
$15.3 million which expire during fiscal years 2004 to 2010. A valuation
allowance of $0.3 million has been established for state net operating loss
benefits that are not expected to be realized. There was no significant change
in the valuation allowance during fiscal 1995 and there was a $0.1 million
decrease in the valuation allowance during fiscal 1994.
F-12
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at
June 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Assets:
Allowance for doubtful accounts $ 368 $ 512
Inventory 135 137
Employee benefits 3,056 2,604
Restructuring reserve 45 760
State net operating loss carryforwards 501 465
Charitable contribution carryover 32 219
Gross deferred tax assets 4,137 4,697
Liabilities:
Property, plant, and equipment 7,230 5,908
Intangible assets 158 179
Other 24 68
Gross deferred tax liabilities 7,412 6,155
Less: Valuation allowance 274 237
Net liability $ 3,549 $ 1,695
</TABLE>
(11) RETIREMENT PLANS
Retirement benefits are provided to substantially all employees principally
through a noncontributory, defined benefit pension plan ("Core Plan") and a
thrift savings plan. The Core Plan is a defined benefit plan and benefits are
based on the plan provisions relating to employees' compensation and years of
service. Assets under the plans consist of marketable securities and are held in
trust funds managed by independent investment advisors. These plans are
qualified plans under the Internal Revenue Code. The policy of the Company is to
fund the Core Plan at amounts not less than the minimum requirements of the
Employee Retirement Income Security Act of 1974. A supplementary nonqualified,
nonfunded, pension plan ("Supplemental Plan") for certain key executives is also
maintained and is being provided for by charges to earnings sufficient to meet
the projected benefit obligation. The pension cost for this plan is based on
substantially the same actuarial assumptions as those used for the Core Plan.
The components of net pension costs follow:
<TABLE>
<CAPTION>
CORE PLAN SUPPLEMENTAL PLAN
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Present value of benefits earned $ 1,685 $ 1,056 $ 1,129 $ 78 $ 80 $ 116
Interest cost on plan
liabilities 1,647 1,419 1,480 299 237 272
Return on plan assets:
Actual (2,257) (14) (1,578)
Deferred 371 (1,921) (464)
Amortization of transition
(asset) obligation (180) (215) (188) 68 37 53
Net pension costs $ 1,266 $ 325 $ 379 $ 445 $ 354 $ 441
</TABLE>
F-13
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The actuarial assumptions used in determining net pension cost and the related
benefit obligations for the Core Plan were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Discount rate for liabilities 8.5% 8.5% 8.0%
Discount rate for expenses 8.5% 8.5% 9.0%
Rate of increase in compensation 4.5% 4.5% 6.0%
Long-term rate of return on plan assets 9.0% 9.0% 10.0%
</TABLE>
A summary of the funded status of the pension plans at June 30, 1995 and 1994
follows:
<TABLE>
<CAPTION>
CORE PLAN SUPPLEMENTAL PLAN
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Plan assets at market value $24,192 $21,318 $ * $ *
Plan liabilities:
Present value of benefit obligation:
Vested 18,896 16,078 2,886 2,384
Nonvested 637 420 411 525
Accrued benefit obligation 19,533 16,498 3,297 2,909
Adjustment for future salary increases 4,154 3,240 637 695
Projected benefit obligation 23,687 19,738 3,934 3,604
(Excess) deficiency of plan assets over plan
liabilities (505) (1,580) 3,934 3,604
Unrecognized transition asset (obligation) 2,449 2,629 (838) (903)
Adjustment required to reflect minimum
liability 219 134
Unrecognized gains (losses) (79) 917 (65) 33
Accrued pension costs $ 1,865 $ 1,966 $ 3,250 $ 2,868
</TABLE>
* The Supplemental Plan is technically a nonfunded plan; however, the Company
has acquired life insurance contracts ($14.5 million and $13.9 million face
amount at June 30, 1995 and 1994, respectively) intended to be adequate to
fund future benefits. The cash surrender value of these contracts, net of
policy loans, was $1.1 million and $3.6 million at June 30, 1995 and 1994,
respectively, and is included in other assets in the Consolidated Balance
Sheets.
The Company's contribution to the Core Plan was $1.4 million in fiscal 1995. Due
to the overfunded status, no contributions were made in fiscal 1994 and fiscal
1993.
The thrift savings plan enables employees to save a portion of their earnings on
a tax-deferred basis and also provides for matching contributions from the
Company for a portion of the employees' savings. Additionally, the plan provides
for individual subsidiary companies to make profit sharing contributions. The
Company's expense under this plan was $1.5 million, $1.1 million, and $1.0
million for 1995, 1994, and 1993, respectively.
(12) OTHER POSTRETIREMENT BENEFITS
All employees of the Company are eligible for retiree medical coverage if they
retire on or after attaining age 55 with ten or more years of service. Benefits
differ depending upon the date of retirement. For those employees who retired
prior to April 1, 1988, and are under 65, coverage is available at a cost to the
retiree equal to the cost to the Company for an active employee less the fixed
company subsidy. Once employees in this group have reached 65, coverage is
available at a cost to the retiree equal to the cost to the Company for a
post-65 retiree less the fixed company subsidy.
F-14
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
For those employees who retired on or after April 1, 1988, but before January 1,
1994, coverage is available until the earlier of the death of the retiree or
attainment of age 65. The retiree contributes the full active rate. Upon
reaching 65, coverage under the Company's plan ceases and the retiree becomes
covered by Medicare.
For those employees who retire on or after January 1, 1994, coverage is
available until the earlier of the death of the retiree, or attainment of age
65. The retiree contributes the full retiree rate, which is equal to the cost to
the Company for a pre-65 retired employee. Upon reaching 65, coverage under the
Company's plan ceases and the retiree becomes covered by Medicare.
Effective July 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions." SFAS No. 106 requires
recognition of the cost of postretirement benefits during the employees' service
periods. Previously, such expenses were accounted for on a cash basis. The
Company elected to immediately recognize the liability for prior years' service
as the cumulative effect of a change in accounting principle. Accordingly, in
the first quarter of fiscal 1994, the Company recorded an accumulated
postretirement benefit obligation and a corresponding charge to net income of
$887 and a noncurrent deferred income tax benefit of $355, resulting in an
after-tax charge of $532. This is an unfunded plan.
The accumulated postretirement benefit obligation ("APBO") existing at July 1,
1995 was $388. The discount rate used in determining the APBO was 8%. An 11%
rate of increase in the per capita cost of covered health care benefits was
assumed for fiscal 1995, with the rates gradually decreasing to 5.5% in the year
2003 and remaining level thereafter. A one percentage-point increase in the
assumed health care cost trend rates would increase the APBO approximately 0.8%
or $3.
(13) SHAREHOLDERS' EQUITY
Shareholders' equity consists of the following:
<TABLE>
<CAPTION>
COMMON STOCK
($.50 PAR VALUE;
16,000 SHARES CAPITAL IN
AUTHORIZED) EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS
<S> <C> <C> <C> <C>
Balance -- June 30, 1992 5,975 $2,987 $ 11,796 $ 32,788
Net income 4,533
Cash dividends -- $.20 per share (1,196)
Shares repurchased (27) (13) (202)
Balance -- June 30, 1993 5,948 2,974 11,594 36,125
Net income 5,208
Cash dividends -- $.20 per share (1,192)
Net shares issued upon exercise of stock options 36 18 202
Balance -- June 30, 1994 5,984 2,992 11,796 40,141
Net income 7,479
Cash dividends -- $.20 per share (1,201)
Net shares issued upon exercise of stock options 47 23 652
Balance -- June 30, 1995 6,031 $3,015 $ 12,448 $ 46,419
</TABLE>
On February 1, 1989, as part of a shareholder rights plan, the Board of
Directors declared a dividend distribution of one preferred share purchase right
for each outstanding share of common stock. Each right entitles the shareholder
to buy one unit (one one-thousandth of a share) of Series A Preferred Stock at a
purchase price of $45 per share, subject to adjustment. The rights will become
exercisable initially only if a person or group acquires or announces a tender
offer for 20% or more of the Company's common stock ("Acquiring Person"), at
which time each right will be exercisable to purchase one unit of Series A
Preferred at the purchase price. At any time after a person becomes an Acquiring
Person, the Company may issue a share of common stock in exchange for each right
other than those held by the Acquiring Person. If an Acquiring Person acquires
30% or more of the Company's common stock or an Acquiring Person merges into or
combines with the Company, each right will entitle the holder, other than the
Acquiring Person, upon payment of the purchase price, to acquire Series A
Preferred or, at the option
F-15
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of the Company, common stock, having a market value equal to twice the purchase
price. If the Company is acquired in a merger or other business combination in
which it does not survive or if 50% of its earnings power is sold, each right
will entitle the holder, other than the Acquiring Person, to purchase securities
of the surviving company having a market value equal to twice the purchase
price. Unless redeemed earlier, the rights expire on February 13, 1999. The
rights may be redeemed by the Board of Directors at any time prior to the tenth
day after a person becomes an Acquiring Person, subject to the Board of
Directors' ability to extend or reinstate the redemption period under certain
circumstances. The rights may have certain anti-takeover effects. An Acquiring
Person will experience substantial dilution under certain circumstances.
However, the rights should not interfere with any merger or other business
combination approved by the Board of Directors because the rights are generally
redeemable at the discretion of the Board.
The Board of Directors has authorized the purchase of up to 200 shares of the
Company's stock from time to time on the open market. The shares, if and when
purchased, may be used for the funding of employee benefit plans. As of June 30,
1995, 133 shares had been repurchased under this authorization.
In addition to its common stock, the Company authorized capital includes 1,000
shares of preferred stock ($1.00 par value), issuable in series, of which 100
shares are designated as Series A Preferred.
(14) STOCK OPTIONS
Under the Company's stock option plans, selected employees may be granted
options to purchase its common stock at prices equal to the fair market value of
the stock at the date the options are granted. There are no charges to earnings
resulting from the plans.
The following is a summary of changes in options outstanding:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE OPTION PRICE
SHARES PER SHARE TOTAL
<S> <C> <C> <C>
Outstanding and exercisable at June 30, 1992 434 $ 4.60 to $28.00 $5,226
Granted 133 $ 9.00 to $10.63 1,210
Lapsed or canceled (97) $ 9.00 to $27.63 (1,847)
Outstanding and exercisable at June 30, 1993 470 $ 4.60 to $28.00 4,589
Exercised (43) $ 4.60 to $ 9.75 (301)
Granted 117 $ 9.45 to $14.13 1,144
Lapsed or canceled (91) $ 9.50 to $12.38 (1,067)
Outstanding and exercisable at June 30, 1994 453 $ 6.38 to $28.00 4,365
Exercised (50) $ 9.00 to $10.63 (486)
Granted 204 $16.75 to $19.19 3,846
Outstanding and exercisable at June 30, 1995 607 $ 6.38 to $28.00 $7,725
</TABLE>
At June 30, 1995, 1,099 shares of authorized but unissued common stock were
reserved for issuance upon exercise of options granted or grantable under the
plans. Options are exercisable under the plans for periods of five to ten years
from the date of grant.
(15) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
different businesses and geographic regions. As of June 30, 1995 and 1994, the
Company had no significant concentrations of credit risk.
F-16
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(16) SUPPLEMENTAL CASH FLOW INFORMATION
Excluded from the consolidated statements of cash flows was the effect of
certain noncash activities. The Company assumed $0.2 million and $1.5 million of
obligations in conjunction with acquisitions for fiscal years ended June 30,
1995, and 1993 respectively. The Company also received in fiscal 1993 a $0.4
million note receivable in exchange for certain assets. There were no noncash
investing or financing activities in fiscal 1994.
(17) ROYALTY COMMITMENTS
In March, 1994, the Company entered into an agreement with National Football
League Properties, Inc., whereby the Company was granted a license to
manufacture, publish, and distribute a sports publication. Royalty expense under
the agreement was $0.5 million for fiscal 1995. There was no royalty expense for
fiscal 1994 or 1993.
(18) CONTINGENCIES
The Company is party to various legal actions which are ordinary and incidental
to its business. While the outcome of legal actions cannot be predicted with
certainty, management believes the outcome of any of these proceedings, or all
of them combined, will not have a materially adverse effect on its consolidated
financial position or results of operations.
F-17
<PAGE>
[CADMUS LOGO]
