8-K, 1996-10-24
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                             WASHINGTON, D.C. 20549


                                    Form 8-K


                       THE SECURITIES EXCHANGE ACT OF 1934

        Date of Report (Date of earliest event reported) October 23, 1996

             (Exact name of registrant as specified in its charter)

               Virginia                 0-12954             54-1274108
(State or other jurisdiction of       (Commission          (I.R.S. Employer
 incorporation or organization)       File Number)       Identification Number)

6620 West Broad Street, Suite 240, Richmond, Virginia              23230
     (Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code           (804) 287-5680


Item 5.      Other Events.

On October 23, 1996, Cadmus Communications Corporation (the "Company") issued
the press release attached hereto as Exhibit 99.1 with respect to first quarter
financial results and read the prepared remarks attached hereto as Exhibit 99.2
on a conference call with analysts. Information in these documents relating to
Cadmus' future prospects and performance are "forward-looking statements," as
defined by the Private Securities Litigation Reform Act of 1995, and, as such,
are subject to certain risks and uncertainties that could cause actual results
to differ materially. Potential risks and uncertainties include but are not
limited to: (1) continuing competitive pricing in the markets in which the
Company competes, (2) the gain or loss of significant customers or the decrease
in demand from existing customers, (3) the timing of significant orders received
from customers, (4) seasonal changes in the demand for the Company's products,
(5) changes in the Company's product sales mix, and (6) continued success in the
integration of recently acquired businesses.

Item 7.      Exhibits.

            Exhibit 99.1               Press Release
            Exhibit 99.2               Prepared Remarks from Conference Call



Pursuant  to the  requirements  of the  Securities  Exchange  Act of 1934,  the
Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized on October 23, 1996.


                           By:  /s/ C. Stephenson Gillispie, Jr.
                                C. Stephenson Gillispie, Jr.
                                Chairman, President, and Chief Executive Officer


                                  Exhibit Index


99.1        Press Release
99.2        Prepared Remarks from Conference Call

                                                                  Exhibit 99.1

                                                        David E. Bosher
                                              vice President & Treasurer
                                                          (804) 287-5685

                              FIRST QUARTER RESULTS

RICHMOND, VA, October 23, 1996 -- Cadmus Communications Corporation (NASDAQ NMS:
CDMS) today reported net income of $1.7 million, or $.21 per share, for its
first quarter ended September 30, 1996. Excluding a gain resulting from a
restructuring of the Company's publishing operations, net income was $1.5
million, or $.19 per share. Net income for the same quarter of fiscal 1996
amounted to $1.5 million, or $.24 per share. There were 8,024,000 average
outstanding shares for the first quarter of fiscal 1997, compared to 6,326,000
average outstanding shares for the same period of last year.

Sales for the first quarter of fiscal 1997 were $93.9 million, up 26% from sales
of $74.7 million recorded in the first quarter of fiscal 1996. This increase was
primarily attributable to acquisitions and internal growth from the Company's
Periodicals and Graphic Communications groups. Periodicals Group sales increased
40% due to the inclusion of Lancaster Information Group, acquired in May 1996,
and continued internal growth in journal services, which offset a 16% decline in
magazine sales. Graphic Communications Group sales rose 20% due to the inclusion
of The Software Factory, acquired in the second quarter of fiscal 1996, and
continued strong growth in the Company's specialty packaging, financial
communications, and promotional printing product lines. Marketing Group sales
declined 6% in the first quarter. Adjusted for the acquisition of a direct
marketing agency in the second quarter of fiscal 1996, marketing sales declined
by 16%. Direct marketing and catalogs sales declined 19% and 22%, respectively,
more than offsetting increased sales from the custom publishing and interactive
product lines.

Gross margins declined to 22.6% of sales in the first quarter of fiscal 1997
from 23.9% for the same period last year due to lower sales in the Marketing
Group, a decline in point-of-purchase revenues, and inefficiencies at certain
manufacturing facilities. Partially offsetting these factors were gross margin
improvements in the Company's journal services product line and the successful
integration of Lancaster during the quarter.


Page 2


First quarter pretax income was positively affected by $250,000, or $.02 per
share, resulting from a restructuring of the Company's publishing operations.
The restructuring gain included income of $650,000 related to the sale of its
consumer publishing business, which was offset by charges of $400,000 related to
the restructuring and repositioning of custom publishing into the Company's
Marketing Group.

Operating  income rose 36% in the first quarter to $5.4 million and improved as
a percent of sales to 5.7% from 5.3% last year.  Adjusted for the publishing
restructuring gain, operating income increased 29% and margins were 5.4% of

C. Stephenson Gillispie, Jr., president and chief executive officer, stated, "We
are encouraged by our performance this quarter which represents an important
step in the continued recovery of Cadmus operating results. Most of the Cadmus
product lines performed well in the first quarter. Lancaster has been
effectively integrated and its performance has met our expectations. In
addition, we are pleased with the performance of our journal services, financial
communications, specialty packaging, and promotional printing product lines.
However, we continue to experience softness in our marketing and
point-of-purchase businesses. These areas will receive additional attention
during the second quarter as their recovery is critical to achieving our
financial targets for the remainder of fiscal 1997."

Cadmus Communications Corporation is an integrated communications company
offering products and services in three broad areas: periodicals, graphic
communications, and marketing. Headquartered in Richmond, Virginia, Cadmus is
one of the largest graphic communications companies in North America.


"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of

Information in this release relating to Cadmus' future prospects and performance
are "forward-looking statements" and, as such, are subject to certain risks and
uncertainties that could cause actual results to differ materially. Potential
risks and uncertainties include but are not limited to: (1) continuing
competitive pricing in the markets in which the Company competes, (2) the gain
or loss of significant customers or the decrease in demand from existing
customers, (3) the timing of significant orders received from customers, (4)
seasonal changes in the demand for the Company's products, (5) changes in the
Company's product sales mix, and (6) continued success in the integration of
recently acquired businesses.

                     **(See attached financial highlights)**



                      (In thousands, except per share data)

                                                Three Months Ended
                                                    September  30,
                                                1996          1995
                                              --------      --------

      Net sales                                $93,922      $74,673
                                                ------      ------

      Operating expenses:
         Cost of sales                          72,707       56,803
         Selling and administrative             16,101       13,918
         Restructuring gain                       (250)        --
                                                --------    --------
                                                88,558       70,721
                                                --------    --------
      Operating income                           5,364        3,952

      Interest and other expenses:
         Interest                                2,076        1,422
         Other, net                                511           57
                                                 -------   ---------
                                                 2,587        1,479
                                                 -------   ----------
      Income before income taxes                 2,777        2,473

      Income taxes                               1,083          957
                                                --------     -------
      Net income                               $ 1,694      $ 1,516
                                                =======      =======
      Net income per share                     $   .21      $   .24
                                                =======      =======

      Weighted average common shares
        outstanding                               8,024        6,326
                                                =======       ======

                                                                Exhibit 99.2

Prepared Remarks from Conference Call

This is Dave Bosher, Vice President and Treasurer of Cadmus. I want to welcome
you to our conference call and to thank you for taking time from your busy
schedules to join us for a review of Cadmus' financial results for the 1st
quarter of our 1997 fiscal year. I am joined on today's call by Bruce Thomas,
Cadmus Vice President and Chief Financial Officer. I will begin this call with a
review of our 1st quarter results and recent corporate developments and then
turn the session over to any questions that you may have.

We announced this morning that Cadmus recorded net income of $1.7 million, or
$.21 per share for the 1st quarter of fiscal 1997, compared to $1.5 million or
$.24 per share for the same period of fiscal 1996. Excluding a gain resulting
from a restructuring of our publishing operations, which I will discuss in
greater detail later, net income was $1.5 million, or $.19 per share. Average
outstanding shares were 8,024,000, up from 6,326,000 in the 1st quarter of
fiscal 1996.

We are encouraged by these results and our performance for the quarter, which
are in line with our expectations and which we believe represent an important
step in the continued recovery of Cadmus' financial and operating performance.
In my remarks today, however, I want to elaborate on three areas or points of
emphasis. First, as our operating results indicate, most of Cadmus is performing
quite well. I will spend a couple of moments discussing in greater detail the
strong performers. Second, there are aspects or elements of Cadmus that are
continuing to experience softness or are otherwise slower to recover than we had
hoped. Again, we will spend some time discussing these businesses and what we
are doing to accelerate the pace of recovery. Finally, we have continued to
pursue aggressively our strategy and there are a number of corporate
developments that we will describe and discuss in greater detail.

Let's start with the operating results. First quarter sales were $93.9 million,
an increase of 26% over the $74.7 million for the first quarter of fiscal 1996.
This increase was attributable to the inclusion of sales from the acquisitions
of Lancaster Information Group, Software Factory, and Mowry Direct Marketing in
fiscal 1996. Base business revenues were flat year over year as gains in our
journal services, financial communications, specialty packaging, and promotional
printing product lines were offset by declines in our magazines,
point-of-purchase, and marketing businesses. I will discuss this sales
performance in greater detail in just a moment.

Consolidated gross margins declined to 22.6% of sales from 23.9% last year. This
decline was primarily attributable to weaker than expected performance from our
marketing group, lower revenues in our point-of-purchase product line, and
inefficiencies at certain manufacturing facilities. At the same time, SG&A
expenses, as a percentage of sales, declined from 18.6% last year to 17.1% this
year as corporate expenses actually declined year over year. Operating income,
excluding the restructuring gain, rose 29% in the 1st quarter to $5.1 million,
compared to $4.0 million in fiscal 1996. Operating margins, again excluding the
restructuring gain, improved to 5.4% of sales from 5.3% last year.

Interest expense increased to $2.1 million this year from $1.4 million last year
as a result of the debt incurred to purchase Lancaster. Other expenses also


increased to $.5 million from $.1 million, again due to additional amortization
related to fiscal 1996 acquisitions.

Net income advanced 12% to $1.7 million from $1.5 million. However, EPS declined
to $.21 from $.24 last year due to the additional shares outstanding following
our fiscal 1996 equity offering. Adjusted for the publishing restructuring gain,
net income was $1.5 million, or $.19 per share, in line with our expectations
for the quarter.

Let's turn for a moment to the balance sheet. Debt to capital at September 30
improved to 49.2% from 50.6% at June 30. This improvement was due to the sale of
the consumer publishing division and the use of those proceeds primarily to pay
down debt. Exclusive of the sale of the publishing division, the acquisition of
O'Keefe Marketing, and a $2.8 million pension plan contribution, cash flow was
$2.0 million in the 1st quarter. Receivables fell $4.5 million as a result of
improved collections, but inventories rose $3.0 million due to high work in
process levels at September 30. CAPEX were approximately $4.5 million in the 1st
quarter, compared to depreciation of $4.1 million.

As I indicated earlier, we are quite pleased with these operating results and
with the continued recovery of Cadmus' financial and operating performance. I
would like to spend a couple of minutes talking first about those aspects of
business that are performing exceptionally well and then about those aspects of
our business that have been slower to recover.

Our Periodicals Group is off to an outstanding start in fiscal 1997. Sales for
this Group advanced 40%, largely due to the inclusion of Lancaster. In addition,
our base research journal business achieved real sales growth of 5%. These sales
gains were offset by a 16% decline in magazine sales, where we have continued to
examine our working relationships with slower paying, disruptive, or otherwise
non-strategic customers. On the operating side, Dave Wilson and his team have
done an outstanding job of effecting the integration of Lancaster with and into
Cadmus Journal Services, and Lancaster has performed up to our expectations for
the 1st quarter. On the other hand, we have not yet experienced tangible
improvement in the manufacturing performance and efficiencies at our Byrd
facility, although trends began to improve late in the 1st quarter.

In our Graphic Communications Group, sales advanced 20% as a result of inclusion
of sales from The Software Factory and from continued strong growth in several
product lines. Promotional sales showed strength in the 1st quarter, registering
a 9% gain. Financial communications' sales rose 12%, driven by increased mutual
fund business and growth in full services sales to financial institutions.
Finally, specialty packaging sales increased 49% for the quarter. These gains
were partially offset by a softness in point-of-purchase revenues, where we were
adversely impacted by the departure of Coldwell Banker and by delays in customer
promotional programs.

Finally, our Marketing Group had a disappointing 1st quarter. Sales declined 6%
from 1996, but declined 16% when adjusted for the Mowry acquisition. Direct
Marketing had a significant decline, falling 19% . Catalog sales also fell 22%
due to a deferral of several customer projects into the second quarter. While
custom publishing and interactive sales each registered double-digit increases
in sales, the profitability of each of these units was adversely affected by a
significant increase in expenses and by a change in business and product mix.


In short, we are pleased with Cadmus' operating performance for the 1st quarter.
Most of Cadmus performed extremely well and we have identified, and are focusing
upon, those aspects of our business that have been slower to recover or
otherwise experiencing operating performance problems. I'll talk more later
about the specific actions we are taking to address these performance issues.

Now, there are a number of corporate developments that I would like to discuss.
Let me begin with the sale of our consumer publishing division. Over the past
year, it became increasingly apparent to us that this business was no longer a
complete fit with our strategy of becoming an integrated, solutions-based
communications and marketing company and that an acquisition strategy to grow
this business was simply not financially attractive or feasible. We see our job,
in part, as requiring us to identify and "monetize" these sort of non-strategic
assets and we have done so here. The net proceeds were used to pay down debt and
the sale will not have a material impact on future operating performance.
Offsetting the gain from the sale of this business were some one-time expenses
related to the strategic repositioning of our custom publishing business into
the Marketing Group, including changes in management and reduction in personnel
in that business unit.

Also in the 1st quarter, we purchased O'Keefe Marketing. O'Keefe is a
Richmond-based marketing firm specializing in advertising, point-of-purchase and
interactive marketing services. This acquisition not only brings to Cadmus new
services and capabilities, such as TV, radio, and media ad placement, but also
adds, in the addition of Kelly O'Keefe, another versatile and well-recognized
marketing executive to assist Steve Isaac in the development and growth of our
Marketing Group.

On October 15, we completed a new $160 million revolving credit/term loan
facility with our bank group, which replaced our $115 million facility. The
additional capacity was used to refund senior notes from our 1993 acquisition of
Waverly and positions us to have increased access to capital and borrowing
flexibility as we pursue our strategy and grow Cadmus.

We also announced in the 1st quarter an expansion of our Charlotte manufacturing
facility to accommodate the strong growth we are experiencing in our specialty
packaging, financial communications, and promotional printing product lines. Net
outlay for this expansion and related equipment purchases will total
approximately $8 million. We expect this facility to be completed and fully
operational by the end of fiscal 1997.

There is also good news to report regarding major customers. First, we are
pleased to announce that Cadmus was recently awarded an exclusive preferred
vendor contract with James River Corporation. This contract will be worth
approximately $3 million annually, will improve capacity utilization of excess
capacity position in Richmond, and serves as continued confirmation of our
strategy. Second, we were selected as outstanding Supplier of the Year by Sara
Lee's Knit Products Division, an account that has grown to over $7 million
annually. Third, we have been informed that our business with First Union will
be increasing due to their decision to purchase Keystone's mutual fund business.
Finally, our full-service promotional rack brochure contract with NationsBank
will grow nicely in the last half of this year due to their acquisition of
Boatsman Bank.

At the same time, and as we highlighted above, we face challenges in several of
our product lines. First, we must replace the volume we have lost with the


of Coldwell Banker, which has created a significant short-term volume issue.
Although we have replaced that volume in part and have effected significant cost
reductions with the layoff of 29 associates, we will experience short-term
margin pressure until that replacement volume is won. Second, in our custom
publishing business we have terminated the President of that division. This
leadership change, combined with softness in ad sales and the loss of several
accounts, has created revenue and profit challenges for us over the next couple
of quarters. Finally, we have struggled to establish a cost structure and
production management system that allows us to preserve margins and
profitability at Cadmus Interactive as revenues grow dramatically.

In summary, as we have said, most of Cadmus is performing exceptionally well. In
order to continue our recovery we must have continued strong performance in our
Periodical and Graphic Communications Groups and capitalize on the opportunities
we have to expand business with both existing as well as prospective clients.
These opportunities include synergies from the continued integration of
Lancaster as well as the opportunities we have with First Union, NationsBank,
UPS, James River and other full-service clients. At the same time, we must
continue to proactively deal with those parts of our business which have been
slower to return to acceptable performance levels. Specifically, we must (i) see
improved performance at our Byrd manufacturing facility, (ii) replace the
point-of-purchase revenues lost with the departure of Coldwell Banker, and (iii)
achieve improved performance in our Marketing Group, particularly in our
interactive and custom publishing businesses.

So what specifically are we doing to address these concerns? First, at Byrd. The
critical success factor is improved work flow management. We have assembled a
new management team with considerable industry experience. In addition, we have
reconfigured shifts and press crews to align capacity with the current product
mix. Finally, we have put in place new technology and new resources to address
bottlenecks in our pre-press and finishing departments. We are beginning to see
improved results and we are encouraged by recent performance trends.

In point-of-purchase, we have, very simply, a volume problem. Historically, this
has been our strongest new business development team and we are confident that,
over time, they will replace the volume that we have lost. We are optimistic
about opportunities we have with several prospects and we expect the situation
to improve throughout the second and third quarters.

At custom publishing, our challenge is new business development, an effort that
had not received sufficient attention under former leadership. We have hired a
new leader for this organization, who is an experienced marketing executive with
a successful new business development track record. Recently, we have secured
several attractive new projects, reversing a trend of account losses. Under new
leadership, and under the guidance of Steve Isaac, we believe the new business
acquisition effort can pick up speed and that the former profitability of this
business can be restored over time.

Finally, at Cadmus Interactive, we have increased expense levels ahead of new
revenue acquisition. Recently, we have put in place headcount and expense
controls to ensure that revenues consistently precede increases in the cost
structure. This expense control, combined with more effective new business
development, should help to restore this business to former profitability


These four businesses are receiving more of our attention and focus and will
continue to do so over the next quarter or two. Importantly, we now have in
place the organizational structure and the management talent to pro-actively
manage these sorts of performance issues. We are cautiously optimistic about our
near-term prospects for improvement in each of these businesses as well as about
Cadmus' near-term prospects overall.

This concludes my remarks. I will now turn it over to questions you may have for
Bruce or for me.

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