<PAGE>
Filed Pursuant to Rule 424 (b)(3)
Registration No. 333-83121
PROSPECTUS
OFFER FOR
ALL OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2009
IN EXCHANGE FOR
REGISTERED 9 3/4% SENIOR SUBORDINATED NOTES DUE 2009
OF
CADMUS COMMUNICATIONS CORPORATION
$125,000,000 AGGREGATE PRINCIPAL AMOUNT OUTSTANDING
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 13, 1999
We are offering to exchange up to $125,000,000 of our 9 3/4% Exchange Notes due
2009 (the "Exchange Notes"), which have been registered under the Securities Act
of 1933 for our existing 9 3/4% Notes due 2009 (the "Old Notes"). We are
offering to issue the new notes to satisfy our obligations contained in the
Registration Rights Agreement entered into when the Old Notes were sold in
transactions pursuant to Rule 144A under the Securities Act and therefore not
registered with the SEC.
The terms of the Exchange Notes are substantially identical in all material
respects to the Old Notes that we issued on June 1, 1999, except for the
Exchange Notes have been registered under the Securities Act, and certain
transfer restrictions, registration rights and special interest provisions
relating to the Old Notes do not apply to the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on June 1 and December 1
of each year, beginning on December 1, 1999.
We may redeem some or all of the Exchange Notes at any time on or after June 1,
2004. In addition, before June 1, 2002, we may redeem up to 35% of the Exchange
Notes with the net proceeds of certain equity offerings. If we sell certain of
our assets or undergo a change of control, we must offer to repurchase the
Exchange Notes.
The Exchange Notes will be unsecured and subordinated to all of our existing and
future senior debt. All of our principal subsidiaries on the issue date
guaranteed the Exchange Notes with unconditional guarantees that are unsecured
and subordinated to senior debt of such subsidiaries.
To exchange your Old Notes for Exchange Notes:
. You must complete and send the letter of transmittal that accompanies
this prospectus to the Exchange Agent, First Union National Bank, by
5:00 p.m., New York time, on September 13, 1999.
. If your Old Notes are held in book-entry form at the Depository Trust
Company ("DTC"), you must instruct DTC through your signed letter of
transmittal that you wish to exchange your Old Notes for Exchange
Notes. When the exchange offer closes, your DTC account will be
changed to reflect your exchange of Old Notes for Exchange Notes.
. You should read the section called "The Exchange Offer" for additional
information on how to exchange your Old Notes for Exchange Notes.
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 20 OF THIS PROSPECTUS.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Exchange Notes to be distributed in the exchange
offer, nor have these organizations determined that this prospectus is accurate
or complete. Any representation to the contrary is a criminal offense.
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The date of this prospectus is August 11, 1999
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TABLE OF CONTENTS
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Page
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WHERE YOU CAN FIND MORE INFORMATION.................................................... ii
INDUSTRY DATA.......................................................................... iii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.............................. iii
PROSPECTUS SUMMARY..................................................................... 1
SUMMARY OF THE EXCHANGE OFFER.......................................................... 6
SUMMARY OF THE EXCHANGE NOTES.......................................................... 10
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA................................ 13
CADMUS COMMUNICATIONS CORPORATION SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA....... 16
MELHAM HOLDINGS, INC. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA................... 19
RISK FACTORS........................................................................... 21
USE OF PROCEEDS........................................................................ 31
UNAUDITED PRO FORMA CAPITALIZATION..................................................... 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA........................................ 33
CADMUS COMMUNICATIONS CORPORATION SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA...... 42
THE COMPANY............................................................................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 57
MANAGEMENT............................................................................. 67
EXECUTIVE COMPENSATION................................................................. 69
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 74
CERTAIN RELATED TRANSACTIONS........................................................... 77
DESCRIPTION OF SENIOR CREDIT FACILITY.................................................. 78
THE EXCHANGE OFFER..................................................................... 80
DESCRIPTION OF EXCHANGE NOTES.......................................................... 89
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES................................. 133
PLAN OF DISTRIBUTION................................................................... 133
VALIDITY OF THE EXCHANGE NOTES......................................................... 134
EXPERTS................................................................................ 134
FINANCIAL STATEMENTS................................................................... F-1
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(i)
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act, and, in
accordance therewith, file reports, proxy and information statements and other
information with the Commission. These reports, proxy and information statements
and other information may be inspected without charge and copied at the public
reference facilities maintained by the Commission at its principal offices at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials also can be
obtained at prescribed rates from the Public Reference Section of the Commission
at the principal offices of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form S-4 (the
"Registration Statement") with respect to the Exchange Notes. This prospectus,
which is a part of the Registration Statement, omits certain information
included in the Registration Statement. Statements made in this prospectus as
to the contents of any contract, agreement or other document are only summaries
and are not complete. We refer you to these exhibits for a more complete
description of the matter involved. Each statement regarding the exhibits is
qualified by the actual documents.
(ii)
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INDUSTRY DATA
In this prospectus, we rely on and refer to information regarding the printing
and graphic communications market and its segments and competitors derived from
internal company estimates, industry publications, market research reports,
analyst reports and other publicly available information. Although we believe
that information compiled by third-parties is reliable, we cannot guarantee the
accuracy and completeness of the information and have not independently verified
it.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the registration statement include forward-looking
statements. In particular, statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance contained in this
prospectus under the headings "Summary," "Risk Factors," "The Company" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements. We have based these forward-looking
statements on our current expectations about future events. While we believe
these expectations are reasonable, such forward-looking statements are
inherently subject to risks and uncertainties, many of which are beyond our
control. Our actual results may differ materially from those suggested by these
forward-looking statements for various reasons, including those discussed in
this prospectus under the headings "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Some of the key
factors that could cause actual results to differ from our expectations are:
. our ability to compete in the specific markets for our products and
services;
. the impact of industry consolidation among key customers;
. our ability to retain management and other employees;
. the gain or loss of significant customers or the decrease in demand
from existing customers;
. our ability to continue to obtain improved efficiencies and lower
overall production costs;
. changes in our product sales mix driven by changes in demand in the
evolving markets in which we operate, including the impact of
electronic commerce and the increased use of alternative, non-print
media such as the Internet;
. the effective integration of recent acquisitions and the ability to
achieve cost savings from acquisition-related synergies; and
. our ability to avoid significant increases in our labor costs or a
significant deterioration in our labor relations.
Given these risks and uncertainties, you are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements
included in this prospectus are made only as of the date hereof. We do not
undertake and specifically decline any obligation to update any such statements
or to publicly announce the results of any revisions to any of such statements
to reflect future events or developments.
_________________________
(iii)
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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. The terms "Cadmus," "we," "our"
and "us," as used in this prospectus, refer to Cadmus Communications
Corporation and its subsidiaries as a combined entity, except where it is clear
that such terms mean only Cadmus Communications Corporation. Unless the context
otherwise requires, this prospectus also assumes completion of our recent
acquisition of Melham Holdings, Inc. and its principal subsidiary, Mack Printing
Company, which is sometimes referred to as the acquisition of Mack or the Mack
acquisition, the divestitures of our financial communications and custom
publishing product lines and all other acquisitions and divestitures completed
prior to the date of this prospectus. The term "Old Notes" refers to the
unregistered 9 3/4% notes due 2009 that were issued on June 1, 1999 to
qualified institutional buyers in a Rule 144A private placement. The term
"Exchange Notes" refers to the registered 9 3/4% notes due 2009 that are
offered pursuant to this prospectus.
THE EXCHANGE OFFER
On June 1, 1999, we completed the private offering of an aggregate principal
amount of $125,000,000 of Old Notes. We entered into a registration rights
agreement with the initial purchasers (the "Registration Rights Agreement") in
which we agreed, among other things, to deliver to you this prospectus and to
offer to exchange your Old Notes for Exchange Notes with substantially
identical terms. If the exchange offer is not completed by November 27, 1999,
then special interest, in addition to the base interest that would otherwise
accrue on the Old Notes, shall accrue at an additional per annum rate of 0.50%
for the first 90 days after that date. The interest rate shall increase 0.50%
for each 90 day period that this requirement is not satisfied, provided that the
aggregate increase in the annual interest rate cannot exceed 1.0%. You should
read the discussion under the heading "Description of Exchange Notes" for
further information regarding the Exchange Notes.
We believe the Exchange Notes issued in the exchange offer may be resold by you
without compliance with the registration and prospectus delivery provisions of
the Securities Act, subject to certain conditions. You should read the
discussion under the heading "The Exchange Offer" for further information
regarding the exchange offer and resale of the Exchange Notes.
THE COMPANY
Cadmus focuses on delivering high-end, integrated graphic communications
solutions. We are the largest printer and producer of scientific, technical and
medical ("STM") journals and publications in the United States with an estimated
market share of approximately 33% in 1998. We are also a leading printer and
producer of special interest magazines, point-of-purchase materials and
specialty packaging materials. We were formed in 1984, and, through both
internal growth and over ten acquisitions, we have become the fifth largest
publications printer in the United States, with pro forma net sales of $395.3
million and pro forma adjusted EBITDA of $53.3 million for the nine months ended
March 31, 1999.
We are divided into two business sectors: Professional Communications, which
serves customers who create and convey information, and Marketing
Communications, which serves customers who create and convey marketing messages.
Cadmus Professional Communications consists of two product lines: STM journal
services and special interest magazines. We provide traditional services, such
as composition, editing, and printing, as well
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as a full complement of digital products and services, including website design,
Internet and CD-ROM-based electronic archiving, and online publishing.
On April 1, 1999, we acquired Mack, our largest competitor in the STM journal
market and one of the largest publications printers in North America. The
acquisition provides us with new STM journal services capabilities, including
the production of short-run journals and business directories. The acquisition
also significantly enhances our market position in the special interest magazine
market and creates opportunities for improvements to our overall efficiency and
competitive position.
Cadmus Marketing Communications focuses on the creation, production and
distribution of graphic communications and marketing services. Our major product
lines include point-of-purchase marketing materials (i.e. menu boards, table
tents and translites for fast food customers such as Hardee's) and specialty
packaging and promotional printing production (i.e. package designs and
construction of marketing-related packaging for customers such as UPS, FedEx and
America Online).
Within this sector, we also offer software duplication, catalog design and
photography, and advertising. We combine our creative, production and
distribution services across these product lines to provide comprehensive
solutions to our customers' marketing needs.
Cadmus is headquartered in Richmond, Virginia with primary business locations in
Richmond, Virginia; Atlanta, Georgia; Charlotte, North Carolina; Easton and
Baltimore, Maryland; and Lancaster, Easton, Ephrata, East Stroudsburg and Akron,
Pennsylvania.
RECENT EVENTS
Recent Operating Results
On August 10, 1999, we announced financial results for our fourth quarter and
1999 fiscal year, which ended June 30, 1999. The following table highlights
those results:
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(unaudited) (dollars in thousands Three Months Ended Twelve Months Ended
except per share data) June 30, June 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
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Operating income $ 10,414 $ 3,279 $ 37,863 $ 21,987
Net income 534 860 13,713 9,090
Depreciation & amortization expense 6,669 4,838 20,995 18,444
EBITDA 17,515 8,268 59,356 40,819
Percent of net sales:
Gross profit 20.4% 22.9% 20.1% 22.8%
Selling, general and 12.7% 15.6% 13.7% 15.8%
administrative expenses
Operating income 7.7% 3.1% 8.5% 5.6%
EBITDA 13.0% 7.9% 13.4% 10.4%
Earnings per share (fully diluted) $ .06 $ .10 $ 1.65 $ 1.11
</TABLE>
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Balance Sheet Data: June 30, 1999
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(unaudited) (dollars in thousands)
<S> <C>
Total assets $ 526,846
Total liabilities $ 390,313
Shareholders equity $ 136,533
</TABLE>
Summary of Fourth Quarter Results. Our fourth quarter 1999 results include the
results of Mack, acquired on April 1, 1999 and reflect the higher interest
expense associated with the acquisition related financing. Results for our
fourth quarter of fiscal 1998 included results of operations from our financial
communications and custom publishing product lines, which we divested in the
third quarter of fiscal 1999. Income before restructuring and debt curtailment
charges declined 18% in the fourth quarter to $2.7 million, or $.30 per share,
compared to $3.3 million, or $.40 per share, in the fourth quarter of fiscal
1998. Net income in the fourth quarter was $0.5 million, or $.06 per share,
compared to $0.9 million, or $0.10 per share, in the fourth quarter of 1998. We
had 9,125,000 weighted average shares outstanding for the fourth quarter of
1999, compared to 8,176,000 weighted average shares outstanding for the same
period last year.
Our net sales in the fourth quarter rose 29% to a record $134.4 million.
Adjusted for the acquisition of Mack and the divested businesses, net sales grew
6% in the fourth quarter. Professional Communications net sales, adjusted for
our acquisition of Mack, declined slightly as result of lower paper prices
(which are passed on to our customers), while net sales from our Marketing
Communications sector, adjusted for divested businesses, rose 17%. In our
Marketing Communications sector, our packaging and promotional printing and
graphic solutions product lines registered net sales increases of 58% and 44%,
respectively. These gains were partially offset by a 23% decline in net sales
from our point of purchase product line.
Operating income before one-time items in the fourth quarter totaled $10.4
million compared to $7.3 million in the same period of fiscal 1998. Operating
margins improved to 7.7% of net sales in fiscal 1999 compared to 6.9% in 1998,
with the inclusion of Mack's higher margin operations offsetting an operating
loss recorded in our point of purchase product line.
Free cash flow, adjusted for the cash impact of debt curtailment charges and
other one-time items, was $8.3 million and EBITDA totaled $17.5 million.
Summary of Year-End Results. Net income for the fiscal year ended June 30, 1999
was $13.7 million, or $1.61 per share, compared to $9.1 million, or $1.11 per
share, for fiscal 1998. Income before one-time items was $9.9 million, or $1.22
per share, down 14% from the $11.5 million, or $1.41 per share, earned in 1998.
Our weighted average shares outstanding were 8,336,000 and 8,176,000 for fiscal
years 1999 and 1998, respectively.
Net sales for fiscal 1999 rose 12% to a record $443.0 million. Adjusted for
acquisitions and divested businesses, consolidated net sales growth was 6%. Net
sales from our Professional Communications sector and Marketing Communications
sector rose 3% and 14%, respectively. Gross profit margins declined to 20.1% of
net sales from 22.8% last year due to operating losses from our point of
purchase product line. Selling, general and administrative expenses fell as a
percent of net sales to 13.1% from 15.8% last year due to reduced corporate
expenses and overall cost controls. Operating income before one-time items rose
9% for the year to a record $28.3 million, while adjusted operating margins fell
slightly to 6.4% of net sales, compared to 6.6% in fiscal 1998.
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Acquisition of Mack Printing Company
On April 1, 1999, we acquired Mack by purchasing all of the capital stock of its
parent company, Melham Holdings, Inc., for approximately $200.9 million. We
financed the purchase with $66.0 million of senior bank debt, $110.0 million of
senior subordinated bridge financing notes, $6.4 million of junior subordinated
notes and approximately 1.2 million shares of our common stock (valued at
approximately $16.3 million). We redeemed the bridge notes with $110.0 million
of the proceeds from the sale of the Old Notes on June 1, 1999. Mack, based in
Easton, Pennsylvania, has three production facilities in Pennsylvania and one in
Maryland.
Divestitures of Financial Communications and Custom Publishing Product Lines
On March 1, 1999, we sold our financial communications product line, Cadmus
Financial Communications, to R.R. Donnelley & Sons Company for approximately
$35.0 million in cash. Under the terms of our agreement with Donnelley, we sold
substantially all of the assets associated with our financial communications
product line, including our sales offices in New York, Baltimore, Richmond,
Charlotte and Raleigh, as well as our mutual fund fulfillment center in
Charlotte. For the twelve months ended December 31, 1998, Cadmus Financial
Communications' net sales were $40.7 million and its EBITDA was $4.6 million. On
February 26, 1999, we sold our custom publishing product line, Cadmus Custom
Publishing, to Pohly & Partners, Inc., a Boston-based relationship marketing
company. Contributions to net sales and EBITDA from our custom publishing
product line were immaterial. The sale of both of these product lines was driven
by our continued focus on our core markets, which we believe offer the best
opportunity for growth, profitability and market leadership.
The following table illustrates our two business sectors and principal product
lines:
--------------------------------- ----------------------------
Professional Communications Marketing Communications
--------------------------------- ----------------------------
-------------------------- -----------------------
Journal Services Point-of-Purchase
-------------------------- -----------------------
-------------------------- -----------------------
Special Interest Magazines Specialty Packaging and
-------------------------- Promotional Printing
-----------------------
-----------------------
Graphic Solutions
-----------------------
-----------------------
Marketing Services
-----------------------
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We are a Virginia corporation incorporated in 1984. Our principal executive
offices are located at 6620 West Broad Street, Suite 240, Richmond, Virginia
23230, and our telephone number is (804) 287-5680. Our Internet address is
http://www.cadmus.com. Our web site is not part of this prospectus.
5
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SUMMARY OF THE EXCHANGE OFFER
Securities to be Exchanged.......... On June 1, 1999, we issued $125.0 million
in aggregate principal amount of Old Notes
to the initial purchasers in a transaction
exempt from the registration requirements
of the Securities Act of 1933. The terms
of the Exchange Notes and the Old Notes
are substantially identical in all
material respects, except for certain
interest rate increases and transfer
restrictions. See "Description of Exchange
Notes."
The Exchange Offer.................. $1,000 principal amount of Exchange Notes
in exchange for each $1,000 principal
amount of Old Notes. As of the date
hereof, Old Notes representing $125.0
million in aggregate principal amount are
outstanding.
Based on interpretations by the staff of
the Securities and Exchange Commission, as
set forth in no-action letters issued to
certain third parties unrelated to us,
including "Exxon Capital Holdings
Corporation" (available May 13, 1988), we
believe that Exchange Notes issued
pursuant to the exchange offer in exchange
for Old Notes may be offered for resale,
resold or otherwise transferred by holders
thereof (other than any holder which is
our "affiliate" within the meaning of Rule
405 promulgated under the Securities Act
of 1933, or a broker-dealer who purchased
Old Notes directly from us to resell
pursuant to Rule 144A or any other
available exemption promulgated under the
Securities Act of 1933), without
compliance with the registration and
prospectus delivery requirements of the
Securities Act of 1933; provided that such
Exchange Notes are acquired in the
ordinary course of such holders' business
and such holders have no arrangement with
any person to engage in a distribution of
such Exchange Notes.
However, we have not submitted a no-action
letter to the Securities and Exchange
Commission. We cannot be sure that the
staff of the Securities and Exchange
Commission would make a similar
determination with respect to the exchange
offer as in such other circumstances.
Furthermore, each holder, other than a
broker-dealer, must acknowledge that it is
not engaged in, and does not intend to
engage in, a distribution of such Exchange
Notes and has no arrangement or
understanding to participate in a
distribution of Exchange Notes. Each
broker-dealer that receives Exchange Notes
for its own account pursuant to the
exchange offer must acknowledge that it
will comply with the prospectus delivery
requirements of the Securities Act of 1933
in connection with any resale of such
Exchange Notes directly from us and not as
a result of market-making activities or
other trading activities; may not rely on
the staff's interpretations discussed
above or participate in the exchange
offer; and must comply with the prospectus
delivery requirements of the Securities
Act of 1933 in
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order to resell the Old Notes.
Registration Rights Agreement....... We sold the Old Notes on June 1, 1999 in a
private placement in reliance on Section
4(2) of the Securities Act of 1933. The
Old Notes were immediately resold by the
initial purchasers in reliance on Rule
144A and Regulation S under the Securities
Act of 1933.
In connection with the sale, we entered
into a registration rights agreement with
the initial purchasers of the Old Notes
requiring us to make the exchange offer.
The registration rights agreement also
provides that we must use our reasonable
best efforts to (i) cause the registration
statement with respect to the exchange
offer to be declared effective within 150
days of the date on which we issued the
Old Notes and (ii) consummate the exchange
offer on or before the 180th day following
the date on which we issued the Old Notes.
See "The Exchange Offer."
Expiration Date..................... The exchange offer will expire at 5:00
p.m., New York City time, on September 13,
1999, or such later date and time to which
it is extended.
Withdrawal.......................... The tender of the Old Notes pursuant to
the exchange offer may be withdrawn at any
time prior to 5:00 p.m., New York City
time, on September 13, 1999, or such later
date and time to which we extend the
offer. Any Old Notes not accepted for
exchange for any reason will be returned
to the tendering holder thereof as soon as
practicable after the expiration or
termination of the exchange offer.
Interest on the Exchange Notes and
the Old Notes...................... Interest on the Exchange Notes will accrue
from June 1, 1999 or from the date of the
last payment of interest on the Old Notes,
whichever is later. No additional interest
will be paid on Old Notes tendered and
accepted for exchange.
Conditions to the Exchange
Offer............................... The exchange offer is subject to certain
customary conditions, certain of which may
be waived by us. See "The Exchange Offer--
Conditions to Exchange Offer."
Procedures for Tendering Old Notes.. Each holder of the Old Notes wishing to
accept the exchange offer must complete,
sign and date the letter of transmittal,
or a copy thereof, in accordance with the
instructions contained in this prospectus
and therein, and mail or otherwise deliver
the letter of transmittal, or the copy,
together with the Old Notes and all other
required documentation, to the exchange
agent at the address set forth in this
prospectus. Anyone holding the Old Notes
through the Depository Trust Company
("DTC") and wishing to accept the exchange
offer must do so pursuant to the DTC's
Automated
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Tender Offer Program, by which each
tendering holder will agree to be bound by
the letter of transmittal. By executing or
agreeing to be bound by the letter of
transmittal, each holder will represent to
us that, among other things:
. the Exchange Notes acquired pursuant to
the exchange offer are being obtained
in the ordinary course of business of
the person receiving such Exchange
Notes, whether or not such person is
the registered holder of the Old Notes;
. the holder is not engaging in and does
not intend to engage in a distribution
of such Exchange Notes;
. the holder does not have an arrangement
or understanding with any person to
participate in a distribution of such
Exchange Notes; and
. the holder is not an "affiliate," as
defined under Rule 405 under the
Securities Act of 1933, of the Company.
Pursuant to the registration rights
agreement if:
. we determine that we are not permitted
to effect the exchange offer as
contemplated by this prospectus because
of any change in law or Securities and
Exchange Commission policy; or
. any holder of Transfer Restricted
Securities, as that term is defined in
the Registration Rights Agreement filed
as an exhibit to this registration
statement, notifies us within 20 days
after consummation of the exchange
offer:
. that it is prohibited by law or
Securities and Exchange Commission
policy from participating in the
exchange offer;
. that it may not resell the Exchange
Notes acquired by it in the exchange
offer to the public without
delivering a prospectus and that
this prospectus is not appropriate
or available for such resales; or
. that it is a broker-dealer and owns
Old Notes acquired directly from us
or one of our affiliates,
we may be required to file a "shelf"
registration statement for a continuous
offering pursuant to Rule 415 under the
Securities Act of 1933 in respect of the
Old Notes.
We will accept for exchange any and all
Old Notes which are
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properly tendered (and not withdrawn) in
the exchange offer prior to 5:00 p.m., New
York City time, on September 13, 1999. The
Exchange Notes issued pursuant to the
exchange offer will be delivered promptly
following the expiration date. See "The
Exchange Offer--Acceptance of Old Notes
for Exchange; Delivery of Exchange Notes."
Exchange Agent...................... First Union National Bank is serving as
exchange agent in connection with the
exchange offer.
Federal Income Tax Considerations... The exchange of Old Notes for Exchange
Notes pursuant to the exchange offer
should not constitute a sale or an
exchange for federal income tax purposes.
See "Material United States Federal Income
Tax Consequences."
Effect of Not Tendering............. Old Notes that are not tendered or that
are tendered but not accepted will,
following the completion of the exchange
offer, continue to be subject to the
existing restrictions upon transfer.
Except as noted above, we will have no
further obligation to provide for the
registration under the Securities Act of
1933 of such Old Notes. See "Risk
Factors--Holders That Do Not Exchange Old
Notes Hold Restricted Securities."
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SUMMARY OF THE EXCHANGE NOTES
The summary below describes the principal terms of the Exchange Notes.
Certain of the terms and conditions described below are subject to important
limitations and exceptions. The "Description of Exchange Notes" section of this
prospectus beginning on page 20 contains a more detailed description of the
terms and conditions of the Exchange Notes.
Total Amount of Notes
Offered...................... $125.0 million in principal amount of 9 3/4%
Senior Subordinated Notes due 2009.
Maturity..................... June 1, 2009.
Issue Price.................. Par plus accrued interest from June 1, 1999.
Interest..................... 9 3/4% per year.
Interest Payment Dates....... June 1 and December 1 of each year, beginning
on December 1, 1999. Interest will accrue
from the issue date of the Old Notes.
Subsidiary Guarantors........ Each of our principal subsidiaries on the
issue date unconditionally guaranteed the
Exchange Notes. Future domestic subsidiaries
also may be required to guarantee the
Exchange Notes.
Ranking...................... The Exchange Notes will be unsecured senior
subordinated obligations of Cadmus and will
rank junior to all of our existing and future
senior debt, including indebtedness under our
senior credit facility. The guarantees by our
principal subsidiaries will be subordinated
to existing and future senior debt of such
subsidiaries, including each such
subsidiary's guarantee of indebtedness under
our senior credit facility. In addition, the
Exchange Notes will effectively be
subordinated to all existing and future
liabilities, including trade payables, of our
subsidiaries that are not guarantors of the
Exchange Notes. As of March 31, 1999, after
giving pro forma effect to our acquisition of
Mack, our divestitures of our financial
printing and custom publishing product lines,
the refinancing of our former senior credit
facility and the sale of the Old Notes and
the application of the net proceeds
therefrom, the Exchange Notes and the
subsidiary guarantees would have been
subordinated to $143.9 million of senior
debt, excluding $61.9 million of additional
borrowing capacity we expect to have
available under our senior credit facility.
In addition, on the same pro forma basis, our
subsidiaries that are not guarantors of the
Exchange Notes would have had $6.5 million of
liabilities, including trade payables, to
which the Notes would have been effectively
subordinated.
10
<PAGE>
Optional Redemption............. We may redeem some or all of the Exchange
Notes at any time on or after June 1, 2004,
at the redemption prices listed in the
"Description of Exchange Notes" section under
the heading "Redemption--Optional
Redemption," plus accrued interest.
Optional Redemption after Public At any time (which may be more than once)
Equity Offerings................ before June 1, 2002, we may redeem up to 35%
of the Old Notes and Exchange Notes with the
net proceeds we receive from certain
offerings of our equity securities at 109.75%
of the principal amount of the Old Notes and
Exchange Notes, plus accrued interest, if at
least 65% of the aggregate principal amount
of the Notes originally issued remain
outstanding immediately after the redemption.
Change of Control............... If we undergo a change of control, we must
offer to repurchase the Exchange Notes at
101% of the principal amount of the Exchange
Notes, plus accrued interest.
Our senior credit facility restricts our
ability to redeem Exchange Notes presented to
us upon a change of control. See "Description
of Senior Credit Facility."
Asset Sale Proceeds............. If we engage in certain asset sales, we
generally must either invest the net cash
proceeds from such sales in our business
within a period of time, repay senior debt or
make an offer to purchase a principal amount
of Exchange Notes equal to the net cash
proceeds. The purchase price of the Exchange
Notes will be 100% of their principal amount,
plus accrued interest.
Basic Covenants of Indenture.... The indenture governing the Exchange Notes
contains covenants limiting our (and most of
our subsidiaries') ability to:
. incur additional debt;
. pay dividends or distributions on, redeem
or repurchase our capital stock;
. make certain investments;
. enter into transactions with affiliates;
. issue stock of subsidiaries;
. engage in unrelated lines of business;
. create liens on our assets to secure debt;
and
. transfer or sell assets or merge with or
into other companies.
These covenants are subject to important
exceptions and
11
<PAGE>
Qualifications which are described in the
"Description of Exchange Notes" section under
the heading "Certain Covenants."
Use of Proceeds................ We will not receive any cash proceeds from
the issuance of the Exchange Notes.
Risk Factors
See "Risk Factors" for a discussion of certain factors that you should carefully
consider before investing in the Notes.
12
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth summary unaudited pro forma consolidated
statement of income and other financial data for the year ended June 30, 1998,
the nine months ended March 31, 1999, and summary unaudited pro forma
consolidated balance sheet data as of March 31, 1999.
The summary unaudited pro forma consolidated financial data are based upon our
historical consolidated financial statements and the historical consolidated
financial statements of Melham Holdings, Inc., adjusted to give effect in the
manner described under "Unaudited Pro Forma Consolidated Financial Data" and
the notes thereto to (1) our acquisition of Mack, (2) our divestitures of our
financial communications and custom publishing product lines, (3) the
refinancing of our former senior credit facility and (4) the sale of the Old
Notes and the application of the net proceeds therefrom, as if each event had
occurred on July 1, 1997 with respect to the summary unaudited pro forma
consolidated statement of income data and other financial data and as of March
31, 1999, to the extent the transactions had not occurred by such date, with
respect to the summary unaudited pro forma consolidated balance sheet data.
The summary unaudited pro forma consolidated financial data do not purport to be
indicative of our results of operations or financial position that actually
would have been attained had all of those transactions occurred as of the dates
indicated nor are they necessarily indicative of the results of operations that
may be achieved in the future. The pro forma information should be read in
conjunction with "Unaudited Pro Forma Consolidated Financial Data," "Cadmus
Communications Corporation Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the separate consolidated financial statements and notes
thereto of both Cadmus and Melham included elsewhere in this prospectus.
13
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------
Pro Forma
----------------------------------------------------------
Year Ended Nine Months Ended
---------- -----------------
June 30, 1998 March 31, 1999
Dollars in thousands -------------- --------------
Statement of Income Data:
<S> <C> <C>
Net sales.......................................... $ 499,241 $ 395,277
Operating expenses:
Cost of sales.................................... 381,941 307,756
Selling and administrative....................... 70,643 50,275
Amortization expense............................. 3,850 4,334
Restructuring charge, net........................ 3,950 --
-------------- --------------
Operating income................................... 38,857 32,912
Interest expense................................... 23,243 17,943
Other, net......................................... 986 (97)
-------------- --------------
Income before income taxes......................... 14,628 15,066
Income tax expense................................. 6,999 6,780
Net income......................................... -------------- --------------
$ 7,629 $ 8,286
============== ==============
Earnings Per Share Data:
Earnings per share - Basic:
Net income (loss)................................. $ 0.85 $ 0.92
Weighted average common shares
outstanding....................................... 9,022 9,034
Earnings per share - Diluted:
Net income (loss)................................. $ 0.82 $ 0.90
Weighted average common shares
outstanding....................................... 9,338 9,235
Other Financial Data:
EBITDA/(1)/........................................ $ 63,598 $ 52,711
Adjusted EBITDA.................................... 68,373 /(3)/ 53,330(4)
Adjusted EBITDA margin............................. 13.7% 13.5%
Depreciation and amortization...................... $ 25,727 $ 19,702
Capital expenditures............................... 37,932 18,425
Ratio of total debt to adjusted EBITDA............. - 5.2x
Ratio of adjusted EBITDA to interest
expense............................................ 2.9x 3.0x
Ratio of earnings to fixed charges/(2)/............ 1.6x 1.8x
</TABLE>
<TABLE>
<CAPTION>
--------------------------
Pro Forma
March 31,
1999
--------------------------
Balance Sheet Data:
<S> <C>
Working capital.............................................................. $ 54,606
Total assets................................................................. 533,739
Total debt................................................................... 275,341
Total shareholders' equity................................................... 134,807
</TABLE>
14
<PAGE>
Notes to Summary Unaudited Pro Forma Consolidated Financial Data
(1) EBITDA represents net income before interest, income taxes, depreciation and
amortization. EBITDA is presented because we believe it is frequently used
by security analysts, lenders and others in the evaluation of companies.
However, EBITDA should not be considered as an alternative to operating
income, net income, net cash provided by operating activities or any other
measure for determining our operating performance or liquidity in accordance
with generally accepted accounting principles. EBITDA, as used herein, is
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before income taxes plus fixed charges. Fixed charges
consist of interest expense, including amortization of deferred financing
costs, whether expensed or capitalized, and the portion of rental expense
which management believes is representative of the interest component of
rental expense.
(3) Represents EBITDA, adjusted to eliminate the effect of certain payroll and
payroll-related costs of $0.8 million due to the elimination of certain
employee positions in connection with the acquisition of Mack and the
acquisition of Port City Press, Inc. by Melham Holdings, Inc. and to
eliminate the effect of a restructuring charge of $4.0 million recorded in
June 1998 relating to our acquisition of Germersheim, Inc.
(4) Represents EBITDA, adjusted to eliminate the effect of certain payroll and
payroll-related costs of $0.6 million due to the elimination of certain
employee positions in connection with the acquisition of Mack and the
acquisition of Port City Press, Inc. by Melham Holdings, Inc.
15
<PAGE>
CADMUS COMMUNICATIONS CORPORATION
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial data as
of the dates and for the periods indicated. The financial data for each of the
three years in the period ended June 30, 1998, have been derived from our
audited consolidated financial statements and notes thereto, which have been
audited by Arthur Andersen LLP, independent public accountants, whose reports on
such financial statements are included elsewhere in this prospectus. The
financial data for the nine months ended March 31, 1998 and March 31, 1999 have
been derived from our unaudited condensed consolidated financial statements
which, in the opinion of management, contain all adjustments (consisting only of
normal and recurring adjustments) necessary to present fairly our financial
position and results of operations at such dates and for such periods. Results
for the nine months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the entire fiscal year. The data presented
below should be read in conjunction with, and are qualified in their entirety by
reference to, ``Management's Discussion and Analysis of Financial Condition and
Results of Operations'' and our consolidated financial statements and the notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Fiscal Year Ended Nine Months Ended
---------------------------------------------------------------------------------------------
Dollars in thousands June 30, 1996 June 30, 1997 June 30, 1998 March 31, 1998 March 31, 1999
-------------- ------------- -------------- --------------- ---------------
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales........................... $336,655 $384,942 $393,823 $289,644 $308,596
Operating expenses:
Cost of sales...................... 258,947 299,840 304,014 223,706 246,994
Selling and administrative expenses 61,204 63,123 62,141 45,933 42,221
Restructuring charge, net.......... -- 19,699 3,950 -- --
Net gain on divestiture............ -- -- -- -- (9,521)
------------- ------------ ------------- -------------- -----------
Operating income.................... 16,504 2,280 23,718 20,005 28,902
Interest and other expenses......... 5,957 9,716 8,938 6,624 7,472
------------- ------------ ------------- -------------- -----------
Income (loss) before income taxes
and extraordinary item............. 10,547 (7,436) 14,780 13,381 21,430
Income tax expense (benefit)........ 3,956 (2,219) 5,690 5,152 8,251
------------- ------------ ------------- -------------- -----------
Income (loss) before extraordinary
item............................. 6,591 (5,217) 9,090 8,229 13,179
Extraordinary loss on early
extinguishment of debt (net of tax) (795) -- -- -- --
------------- ------------ ------------- -------------- -----------
Net income (loss)................... $ 5,796 $ (5,217) $ 9,090 $ 8,229 $ 13,179
============= ============ ============= ============== ===========
Earnings Per Share Data:
Earnings per share - Basic:
Income (loss) before extraordinary
item:............................. $ 0.91 $ (0.66) $ 1.16 $ 1.05 $ 1.67
Extraordinary loss on early
extinguishment of debt............ (0.11) -- -- -- --
------------- ------------ ------------- -------------- ===========
Net income (loss).................. $ 0.80 $ (0.66) $ 1.16 $ 1.05 $ 1.67
============= ============ ============= ============== ===========
Weighted average common shares
outstanding (in thousands)........ 7,249 7,900 7,860 7,841 7,872
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Fiscal Year Ended Nine Months Ended
---------------------------------------------------------------------------------------------
Dollars in thousands June 30, 1996 June 30, 1997 June 30, 1998 March 31, 1998 March 31, 1999
-------------- ------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Earnings per share - Diluted:
Income (loss) before extraordinary
item.............................. $ 0.88 $ (0.65) $ 1.11 $ 1.01 $ 1.63
Extraordinary loss on early
extinguishment of debt............ (0.11) -- -- -- --
------------- ------------ ------------- -------------- ----------------
Net income (loss).................. $ 0.77 $ (0.65) $ 1.11 $ 1.01 $ 1.63
============= ============ ============= ============== ================
Weighted average common shares
outstanding (in thousands):....... 7,495 8,035 8,176 8,140 8,073
Other Financial Data:
EBITDA/(1)/......................... $ 29,459 $ 18,540 $ 40,819 $ 32,553 $ 41,841
Adjusted EBITDA/(2)/................ 30,254 38,239 44,769 32,553 32,320
Adjusted EBITDA margin.............. 9.0% 9.9% 11.4% 11.2% 10.5%
Depreciation and amortization....... $ 14,563 $ 18,188 $ 18,444 $ 13,608 $ 14,326
Capital expenditures................ 25,289 22,883 33,588 28,582 12,340
Ratio of total debt to adjusted
EBITDA............................. 3.5x 2.5x 2.2x -- --
Ratio of adjusted EBITDA to interest
expenses........................... 5.9 4.9 5.9 5.9x 5.3x
Ratio of earnings to fixed 2.8 -- (5) 2.7 3.1 4.2
charges/(3)/.......................
Balance Sheet Data (at period end):
Working capital/(4)/................ $ 60,517 $ 49,774 $ 35,315 $ 34,734 $ 28,777
Total assets........................ 283,723 266,916 291,752 278,530 285,229
Total debt.......................... 106,801 94,469 99,655 88,546 71,303
Total shareholders' equity.......... 108,528 100,643 109,816 107,395 120,543
</TABLE>
See Notes to Summary Historical Consolidated Financial Data
17
<PAGE>
Notes to Summary Historical Consolidated Financial Data
(1) EBITDA represents net income before interest, income taxes, depreciation and
amortization. EBITDA is presented because we believe it is frequently used
by security analysts, lenders and others in the evaluation of companies.
However, EBITDA should not be considered as an alternative to operating
income, net income, net cash provided by operating activities or any other
measure for determining our operating performance or liquidity in accordance
with generally accepted accounting principles. EBITDA, as used herein, is
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(2) Represents EBITDA, adjusted to eliminate the effect of an extraordinary loss
on early extinguishment of debt of $0.8 million (net of tax) recorded in
fiscal 1996, a restructuring charge of $19.7 million recorded in fiscal
1997, a restructuring charge of $4.0 million recorded in fiscal 1998 and a
pre-tax net gain on divestitures of $9.5 million recorded in the nine months
ended March 31, 1999.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before income taxes plus fixed charges. Fixed charges
consist of interest expense, including amortization of deferred financing
costs, whether expensed or capitalized, and the portion of rental expense
which management believes is representative of the interest component of
rental expense.
(4) Working capital represents the excess of current assets over current
liabilities, excluding restructuring reserves.
(5) Earnings were insufficient to cover fixed charges by $0.8 million.
18
<PAGE>
MELHAM HOLDINGS, INC.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial data
with respect to Melham Holdings, Inc. as of the dates and for the periods
indicated and reflects the acquisition of Port City Press, Inc. by Mack Printing
Company, a subsidiary of Melham Holdings, Inc., on September 2, 1998. The
financial data for each of the three years in the period ended December 31,
1998, have been derived from Melham's audited consolidated financial statements
and notes thereto, which have been audited by Ernst & Young LLP, independent
auditors, whose report thereon is included elsewhere in this prospectus. The
financial data for the three months ended March 31, 1998 and March 31, 1999,
have been derived from the unaudited consolidated financial statements of Melham
Holdings, Inc., which, in the opinion of the management of Melham, contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly its financial position and results of operations at such dates
and for such periods. The data presented below should be read in conjunction
with, and are qualified in their entirety by reference to Melham's consolidated
financial statements and the notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Year Ended Three Months Ended
------------------------------------------------------ --------------------------------
December 31, December 31, December 31, March 31, March 31,
Dollars in thousands 1996 1997 1998 1998 1999
-------------- ---------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales....................... $ 111,670 $ 119,120 $ 135,674 $ 31,404 $ 39,484
Operating expenses:
Cost of sales.................. 83,972 90,587 104,375 24,057 30,074
Selling and administrative
expenses...................... 13,412 14,269 16,974 3,804 5,558
Recapitalization expenses...... -- 7,405 -- -- --
-------------- ---------------- ---------------- --------------- -------------
Operating income................ 14,286 6,859 14,325 3,543 3,852
Interest expense, net........... 3,129 7,375 9,440 2,171 2,728
Miscellaneous expense (income),
net............................ (156) (157) (84) (13) 35
-------------- ---------------- ---------------- --------------- -------------
Income (loss) before income taxes
and minority interest.......... 11,313 (359) 4,969 1,385 1,089
Income tax expense.............. 4,339 36 2,124 567 456
Minority interest............... 577 (443) -- -- --
-------------- ---------------- ---------------- --------------- -------------
Net income...................... $ 6,397 $ 48 $ 2,845 $ 818 $ 633
============== ================ ================ =============== =============
Other Financial Data:
EBITDA/(1)/..................... $ 19,841 $ 13,942 $ 22,252 $ 5,307 $ 6,233
EBITDA margin................... 17.8% 11.7% 16.4% 16.9% 15.8%
Depreciation and amortization,
excluding amortization of
deferred financing costs and
original issue discounts........ $ 5,976 $ 6,483 $ 7,843 $ 1,751 $ 2,416
Capital expenditures............ 6,465 5,655 5,001 539 3,204
Balance Sheet Data
(at period end):
Working capital................. -- $ 7,550 $ 11,543 -- $ 9,265
Total assets.................... -- 92,579 124,931 -- 121,905
Total debt...................... -- 77,256 105,498 -- 101,935
Deficiency in assets............ -- (27,151) (23,358) -- (22,495)
</TABLE>
19
<PAGE>
__________
(1) EBITDA represents net income before interest, income taxes, depreciation
and amortization. EBITDA is presented because we believe it is frequently
used by security analysts, lenders and others in the evaluation of
companies. However, EBITDA should not be considered as an alternative to
operating income, net income, net cash provided by operating activities or
any other measure for determining our operating performance or liquidity in
accordance with generally accepted accounting principles. EBITDA, as used
herein, is not necessarily comparable to other similarly titled captions of
other companies due to potential inconsistencies in the method of
calculation.
20
<PAGE>
RISK FACTORS
You should consider carefully the following risks and all of the information set
forth in this prospectus before tendering your Old Notes in the exchange offer
and making an investment in the Exchange Notes. The risk factors set forth
below (other than "--Holders That Do Not Exchange Old Notes Hold Restricted
Securities") are applicable to the Old Notes as well as the Exchange Notes.
RISKS RELATING TO THE EXCHANGE OFFER
Holders That Do Not Exchange Old Notes Hold Restricted Securities
If you do not exchange your Old Notes for Exchange Notes, your ability to sell
the Old Notes will be restricted.
If you do not exchange your Old Notes for the Exchange Notes in the exchange
offer, you will continue to be subject to the restrictions on transfer described
in the legend on your Old Notes. The restrictions on transfer of your Old Notes
arise because we issued the Old Notes in a transaction not subject to the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
and applicable state securities laws. In general, you may only offer or sell
the Old Notes if they are registered under the Securities Act and applicable
state securities laws, or offered and sold pursuant to an exemption from such
requirements. If you are still holding any Old Notes after the Expiration Date
and the exchange offer has been consummated, you will not be entitled to have
such Old Notes registered under the Securities Act or to any similar rights
under the Registration Rights Agreement (subject to limited exceptions, if
applicable). After the exchange offer is completed, we will not be required,
and we do not intend, to register the Old Notes under the Securities Act. In
addition, if you exchange your Old Notes in the exchange offer for the purpose
of participating in a distribution of the Exchange Notes, you may be deemed to
have received restricted securities and, if so, will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. To the extent Old Notes are tendered
and accepted in the exchange offer, the trading market, if any, for the Old
Notes would be adversely affected.
Holders Responsible for Compliance with Exchange Offer Procedures
If you do not comply with the exchange offer procedures, you will be unable to
obtain the Exchange Notes.
We will issue the Exchange Notes in exchange for the Old Notes only after we
have timely received your Old Notes, along with a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore, if
you want to tender your Old Notes in exchange for Exchange Notes, you should
allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor
Cadmus is under any duty to give notification of defects or irregularities in
the tender of Old Notes for exchange. The exchange offer will expire at 5:00
p.m., New York City time, on September 13, 1999, or on a later extended date and
time as we may decide (the "Expiration Date").
The Exchange Notes and any Old Notes which remain outstanding after the exchange
offer will vote together as a single class for purposes of determining whether
the required percentage of holders have taken certain actions or exercised
certain rights under the Indenture.
21
<PAGE>
Requirements for Transfer of Exchange Notes
Even the Exchange Notes, in your hands, may not be freely tradeable.
Based on interpretations by the SEC staff set forth in no-action letters issued
to third parties, we believe that you may offer for resale, resell and otherwise
transfer the Exchange Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act, subject to certain
limitations. These limitations include that you are not an "affiliate" of ours
within the meaning of Rule 405 under the Securities Act, that you acquired your
Exchange Notes in the ordinary course of your business and that you have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, we have not submitted a no-action letter to the SEC regarding
this exchange offer and we cannot assure you that the SEC would make a similar
determination with respect to this exchange offer. If you are an affiliate of
Cadmus, are engaged in or intend to engage in or have any arrangement or
understanding with respect to a distribution of the Exchange Notes to be
acquired pursuant to the exchange offer, you will be subject to additional
limitations. See "The Exchange Offer - Resale of the Exchange Notes."
RISKS RELATING TO THE EXCHANGE NOTES AS WELL AS THE OLD NOTES
The following risk factors apply to an investment in the Old Notes and the
Exchange Notes. References in this section to "the Notes" apply both to the
Exchange Notes and the Old Notes.
Substantial Leverage and Additional Borrowings Possible
Our substantial indebtedness could adversely affect our business and prevent us
from fulfilling our obligations under the Exchange Notes.
We have a substantial amount of indebtedness. The following chart shows certain
important credit statistics and is presented assuming we had completed our
acquisition of Mack, our divestitures of our financial communications and custom
publishing product lines, the refinancing of our former senior credit facility
and the sale of the Old Notes and the application of the net proceeds therefrom
as of March 31, 1999 for the balance sheet statistics or on July 1, 1997 for the
ratio of earnings to fixed charges.
<TABLE>
<CAPTION>
As of
--------------------
March 31, 1999
--------------------
(Dollars in millions)
<S> <C>
Total indebtedness.............................................................. $275.3
Total shareholders' equity...................................................... 134.8
</TABLE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
----------------- --------------------
June 30, 1998 March 31, 1999
----------------- --------------------
<S> <C> <C>
Ratio of earnings to fixed charges......................... 1.6x 1.8x
</TABLE>
In addition to our current debt, we will also be permitted to incur substantial
additional indebtedness in the future. As of March 31, 1999, after giving pro
forma effect to the transactions described above, approximately $61.9 million
would have been available for additional borrowing under our senior credit
facility. If new indebtedness is added to our and our subsidiaries' current debt
levels, the related risks that we and they now face could intensify. Please
refer to the sections of this prospectus entitled "Unaudited Pro Forma
Capitalization," "Description of Senior Credit Facility" and "Description of
Exchange Notes--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness."
22
<PAGE>
Our substantial indebtedness could have important consequences to you. For
example, it could
. make it more difficult for us to satisfy our obligations with respect
to the Notes;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to obtain additional financing to fund future
working capital, capital expenditures and other general corporate
requirements;
. require us to dedicate a substantial portion of our cash flow from
operations to make debt service payments, which would reduce our
ability to fund working capital, capital expenditures or other general
corporate requirements;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
. place us at a disadvantage when compared to those of our competitors
that have less debt.
Ability to Service Debt
To service our debt, we will require a significant amount of cash. Our ability
to generate cash depends on many factors beyond our control.
You should be aware that our ability to repay or refinance our current debt or
to fund planned capital expenditures and other obligations depends on our
successful financial and operating performance and on our ability to
successfully implement our business strategy. Unfortunately, we cannot assure
you that we will be successful in implementing our strategy or in realizing our
anticipated financial results. You should also be aware that our financial and
operational performance depends on general economic, financial, competitive,
legislative, regulatory and other factors, many of which are beyond our control.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available cash
and available borrowings under our senior credit facility will be adequate to
meet our future liquidity needs through at least fiscal 2000.
We cannot assure you, however, that our business will generate sufficient cash
flow from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule, or at all, or that future borrowings
will be available to us under our senior credit facility or otherwise in an
amount sufficient to enable us to service our debt, including the Notes, or to
fund our other liquidity needs. We may need to refinance all or a portion of our
debt, including the Notes, on or before maturity. We cannot assure you that we
will be able to refinance any of our debt, including our senior credit facility
and the Notes, on commercially reasonable terms or at all.
Restrictive Debt Covenants
We are required to comply with covenants in our senior credit facility and the
indenture governing the Notes that restrict the manner in which we conduct our
business.
Our senior credit facility contains, and the indenture governing the Notes, will
contain a number of significant covenants. These covenants will limit our
ability to, among other things:
23
<PAGE>
. borrow additional money;
. make capital expenditures and other investments;
. merge, consolidate or dispose of our assets;
. acquire assets in excess of certain dollar amounts; and
. grant liens on our assets.
Our senior credit facility requires and the indenture will require us and our
subsidiaries to meet certain financial tests. The failure to comply with these
covenants and tests would cause a default under those agreements. A default, if
not waived, could result in the debt under our senior credit facility becoming
immediately due and payable. In addition, a default under our senior credit
facility or the Notes could result in a default or acceleration of our other
indebtedness with cross-default provisions. If this occurs, we may not be able
to pay our debt or borrow sufficient funds to refinance it. Even if new
financing is available, it may not be on terms that are acceptable to us.
Complying with these covenants and tests may cause us to take actions that we
otherwise would not take or not take actions that we otherwise would take. The
stock of our subsidiary guarantors is pledged as security under our senior
credit facility. Please refer to the sections in this prospectus entitled
"Description of Senior Credit Facility" and "Description of Exchange Notes--
Certain Covenants."
Subordination
Your right to receive payments on the Notes and the guarantees of the Notes is
junior to substantially all of our other indebtedness and possibly all future
borrowings.
The Notes and the subsidiary guarantees rank behind all of our and the
subsidiary guarantors' existing and future senior indebtedness. As a result,
upon any distribution to our creditors or the creditors of the subsidiary
guarantors in a bankruptcy, liquidation or reorganization or similar proceeding
relating to us or the subsidiary guarantors or our or their property, the
holders of our senior debt and the senior debt of the subsidiary guarantors will
be entitled to be paid in full in cash before any payment may be made with
respect to the Notes or the subsidiary guarantees.
In addition, all payments on the Notes and the subsidiary guarantees will be
blocked in the event of a payment default on senior debt and may be blocked for
up to 180 of 360 consecutive days in the event of certain non-payment defaults
on senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the subsidiary guarantors, holders of the Notes
will participate with trade creditors and all other holders of our subordinated
indebtedness and the subordinated indebtedness of the subsidiary guarantors in
the assets remaining after we and the subsidiary guarantors have paid all senior
debt. However, because the indenture requires that amounts otherwise payable to
holders of the Notes in a bankruptcy or similar proceeding be paid to holders of
senior debt instead, holders of the Notes may receive less, ratably, than
holders of trade payables in any such proceeding. In any of these cases, we and
the subsidiary guarantors may not have sufficient funds to pay all our creditors
and holders of Notes may receive less, ratably, than the holders of senior debt.
The Notes will also be effectively subordinated to all existing and future
liabilities, including trade payables, of our subsidiaries that are not
guarantors of the Notes. Holders of indebtedness of, and trade
24
<PAGE>
creditors of, such subsidiaries, would, in a bankruptcy, liquidation or
reorganization or similar proceeding relating to us or our property, generally
be entitled to payment of their claims from the assets of the affected
subsidiaries before such assets would be made available for distribution to our
creditors, including holders of the Notes.
As of March 31, 1999, after giving pro forma effect to our acquisition of Mack,
the sale of Cadmus Financial Communications and Cadmus Custom Publishing, the
refinancing of our former senior credit facility and the consummation of this
offering and the application of net proceeds thereof, the Notes and the
subsidiary guarantees would have been subordinated to $143.9 million of senior
debt, excluding approximately $61.9 million of additional borrowing capacity we
expect to have available under our senior credit facility. In addition, on the
same pro forma basis, our subsidiaries that are not guarantors of the Notes
would have had $6.5 million of liabilities, including trade payables, to which
the Notes would have been effectively subordinated. We will be permitted to
borrow substantial additional indebtedness, including senior debt, in the future
under the terms of the indenture.
Fraudulent Conveyance
Federal and state laws allow courts, in certain circumstances, to avoid the
guarantees of the Notes and require noteholders to return payments made by the
subsidiary guarantors.
Under the federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, the subsidiary guarantees could be voided, or claims in respect
of the subsidiary guarantees could be subordinated to the debts of a subsidiary
guarantor if, among other things, the subsidiary guarantor, at the time it
incurred the indebtedness evidenced by its subsidiary guarantee:
. received less than reasonably equivalent value or fair consideration
for the incurrence of such indebtedness; and
. either (1) was insolvent or rendered insolvent by reason of such
incurrence; (2) was engaged in a business or transaction for which
such subsidiary guarantor's remaining assets constituted unreasonably
small capital; or (3) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they mature.
In addition, any payment by such subsidiary guarantor pursuant to its subsidiary
guarantee could be voided and required to be returned to such subsidiary
guarantor, or to a fund for the benefit of creditors of such subsidiary
guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will
vary depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a subsidiary guarantor
would be considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets;
. the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or
. it could not pay its debts as they become due.
25
<PAGE>
On the basis of historical financial information, recent operating history and
other factors, Cadmus and each subsidiary guarantor believes that, after giving
effect to the indebtedness incurred in connection with this offering and the
establishment of our senior credit facility, no subsidiary guarantor will be
insolvent, will have unreasonably small capital for the business in which it is
engaged or will have incurred debts beyond its ability to pay such debts as they
mature. There can be no assurance, however, as to what standard a court would
apply in making such determinations or that a court would agree with our or the
subsidiary guarantors' conclusions in this regard.
Financing a Change of Control Offer
We may not have the ability to raise the funds necessary to finance a change of
control offer as required by the indenture.
Upon the occurrence of certain specific kinds of change of control events, we
will be required to offer to repurchase all outstanding Notes. However, it is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of Notes or that restrictions in our
senior credit facility will not allow such repurchases. In addition, certain
important corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a "Change of
Control" under the indenture. Please refer to the section of this prospectus
entitled "Description of Exchange Notes--Change of Control."
No Public Market for the Notes
An active trading market for the Notes may not develop.
The Notes are a new issue of securities with no established trading market and
will not be listed on any securities exchange.
The liquidity of any market for the Notes will depend upon various factors,
including:
. the number of holders of Notes;
. the interest of securities dealers in making a market for the Notes;
. the overall market for high-yield securities;
. our financial performance or prospects; and
. the prospects for companies in our industry generally.
Accordingly, we cannot assure you that a market or liquidity will develop for
the Notes.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Notes. We cannot assure you that the market for the Notes, if
any, will not be subject to similar disruptions. Such disruptions may adversely
affect you as a holder of the Notes.
26
<PAGE>
RISKS RELATING TO OUR COMPANY
Integration of Mack
The integration of our Mack acquisition may divert management time and could
adversely affect our operations.
The integration of Mack will require substantial management time and other
resources and may pose risks with respect to production, customer service and
market share. While we believe that we have sufficient management and other
resources to accomplish the rationalization and integration of Mack, we cannot
assure you that this will occur or that we will not experience difficulties with
customers, suppliers, personnel, technology or other factors.
Although we believe that the Mack acquisition will enhance our competitive
position and business prospects, we cannot assure you that such benefits will be
realized or that our combination with Mack will be more successful than the
companies would have been if they had remained independent. Several of our
customers that also had been customers of Mack may be unwilling to have all of
their work produced by one company. We cannot assure you that we will be able to
retain these customers or that we will continue to sell to them at current
levels. Finally, our business plan contemplates certain cost savings in
connection with the acquisition and integration of Mack. The majority of these
savings relate to improved terms and pricing in connection with the purchase of
paper, ink and other raw materials. We cannot assure you that we will achieve
these synergies and efficiencies in accordance with our plan or at all.
Evolution of Technology and Alternative Delivery Media
The evolution of the Internet and other technology may decrease the demand for
our products and services.
The technology we use in our operations is rapidly evolving. We could experience
delays or difficulties in responding to changing technology, in addressing the
increasingly sophisticated needs of our customers or in keeping pace with
emerging industry standards. In addition, the cost required to respond to and
integrate changing technologies may be greater than we anticipate. If we do not
respond adequately to the need to integrate changing technologies in a timely
manner, or if the investment required to so respond is greater than anticipated,
our business, financial condition, results of operations, cash flow and ability
to make payments on the Exchange Notes and Old Notes may be adversely affected.
Although an increasing portion of the net sales and profitability of our
Professional Communications sector is derived from composition, electronic media
and other non-print revenues, we remain largely dependent on the distribution of
STM information in printed form. Usage of the Internet and other electronic
media continues to grow. We cannot assure you that the acceleration of the trend
toward such electronic media will not cause a decrease in demand for our
products or what effect, if any, such an event would have on our business,
financial condition, results of operations and cash flow.
Competition
The printing and graphic communications industry is competitive and rapidly
evolving, and competition and downward pricing pressures may adversely affect
our results of operations.
The printing and graphics communications industry is extremely competitive.
Industry over-capacity and recent technological developments in prepress and
design have increased industry consolidation and
27
<PAGE>
competitive pressures. We compete with numerous companies, some of which have
greater financial resources than we do. We compete on the basis of ongoing
customer service, quality of finished products, range of services offered,
distribution capabilities and price. We cannot assure you that we will be able
to compete successfully with respect to any of these factors. We believe that,
primarily as a result of the continued excess capacity in the industry, there
has been, and will continue to be, downward pricing pressure and increased
competition. Moreover, we compete for potential acquisition candidates with
other industry consolidators, many of which have greater financial resources
than we do. Our failure to compete successfully could have a material adverse
effect on our business, financial condition and results of operations.
Cost and Availability of Paper and Other Raw Materials
Increases in prices of raw materials or the loss of our primary paper
distributor could cause disruptions in our services to customers.
The principal raw material used in our business is paper, which represents a
significant portion of our cost of materials. Historically, we have generally
been able to pass increases in the cost of paper on to our customers. However,
we cannot assure you that we will be able to continue to do so. We do not
maintain significant stock inventories. Instead, we generally purchase paper on
a direct order basis for specific jobs under supply agreements that guarantee
tonnage and provide short range price protection for three to six month
intervals. Although we believe that we have been successful in negotiating
favorable price relationships with our paper vendors, the overall paper market
is beyond our control. Future paper price increases could have a material
adverse affect on our business, financial condition, results of operations and
cash flow.
Due to the significance of paper in our business, we are dependent upon the
availability of paper. In periods of high demand, certain paper grades have been
in short supply, including grades we use in our business. In addition, during
periods of tight supply, many paper producers allocate shipments of paper based
upon historical purchase levels of customers. Although we generally have not
experienced significant difficulty in obtaining adequate quantities of paper,
unforeseen developments in the overall paper markets could result in a decrease
in the supply of paper and could have a material adverse effect on our business.
Approximately 59% of our paper requirements are purchased from one primary
distributor. If that distributor is unwilling or unable to fulfill our future
paper requirements, we would be forced to contract with a different supplier for
the majority of our paper needs. We believe that we have good relationships both
with our primary distributor and with the paper mills that produce the paper we
purchase from this distributor. In addition, we believe that there are other
suppliers that are familiar with our business that, if necessary, could fulfill
our paper requirements in the long term. However, we cannot assure you that the
loss of services of our primary distributor would not cause an interruption in
our business in the short term or what impact, if any, such an event would have
on our business, financial condition, results of operations or cash flow.
We use a variety of other raw materials including ink, film, offset plates,
chemicals and solvents, glue, wire and subcontracted components. In general, we
have not experienced any significant difficulty in obtaining these raw
materials. We cannot assure you, however, that a shortage of any of these raw
materials will not occur in the future or what effect, if any, such a shortage
would have on our business, financial condition, results from operations and
cash flow.
28
<PAGE>
Technicians and Salespeople
A loss of skilled technicians and salespeople could adversely affect our
productivity and operations.
To provide high-quality printed products in a timely fashion we must maintain an
adequate staff of skilled technicians, including prepress personnel, pressmen,
bindery operators and fulfillment personnel. Accordingly, our ability to
increase our productivity and profitability will depend, in part, on our ability
to employ, train and retain the skilled technicians necessary to meet our
commitments. From time-to-time:
. the graphics communication industry experiences shortages of qualified
technicians, and we may not be able to maintain an adequate skilled
labor force necessary to operate efficiently;
. our labor expenses may increase as a result of shortages of skilled
technicians; or
. we may have to curtail our planned internal growth as a result of
labor shortages.
In addition, portions of the graphics communication printing industry are
characterized by personal relationships between individual members of a
company's sales force and customers who order printing services. Our business,
financial condition, results of operations, cash flow and our ability to make
payments on the Exchange Notes and Old Notes could be adversely affected if we
do not retain salespeople with large customer bases.
Labor Relations
Some of our employees belong to labor unions and certain actions by such
employees, such as strikes or work stoppages, could adversely affect our
operations or cause us to incur costs.
We employ approximately 4,600 persons. Within our Professional Communications
sector, we have approximately 1,000 employees across three plants that are
members of local labor unions of the Communications Workers of America and
Graphic Communications International. We believe we have a collaborative, non-
adversarial relationship with our union employees. We recently renewed contracts
with the three local unions at our Lancaster, Pennsylvania plant for a three-
year term expiring in February 2002. The union contract covering employees at
our Easton, Pennsylvania facility expires in January 2001. The contracts with
the three local unions at the East Stroudsburg, Pennsylvania plant expired in
March, April and May 1999, respectively. The contract with one of the local
unions at East Stroudsburg was recently renewed and the contracts with the
remaining two local unions are currently under negotiation. We do not expect
any significant problems in concluding those contracts by August 1, 1999. We
believe we have good relationships with our non-union employees and provide good
working conditions to all employees. Historically, the unions at the Cadmus
facilities have not organized a strike or other work stoppage. However, if
unionized employees were to engage in a concerted strike or other work stoppage,
or if other employees were to become unionized, we could experience a disruption
of operations, higher labor costs or both. We cannot assure you that a strike
or other disruption of operations or work stoppage would not have a material
adverse effect on our business or operations.
Environmental Compliance
Our printing and other facilities are subject to environmental regulations,
which will require us to incur costs to comply with such regulations.
29
<PAGE>
Our operations are subject to federal, state and local environmental laws and
regulations relating to, among other things, air emissions, waste generation,
handling, management and disposal, waste water treatment and discharge and
remediation of soil and groundwater contamination. In addition, permits are
required for the operation of certain of our businesses, and these permits are
subject to renewal, modification and, in some circumstances, revocation. We
believe that our current operations are in substantial compliance with
applicable environmental laws and regulations. However, we cannot assure you
that compliance with environmental laws or remedial obligations thereunder will
not have a material adverse effect on our results of operations or cash flow in
the future. Moreover, we cannot predict future changes to environmental laws and
regulations or interpretations or enforcement thereof or what impact, if any,
such changes would have on our business or operations in the future.
We and certain of the sellers from whom we have acquired businesses have been
designated as potentially responsible parties at eight sites under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
which provides, under certain circumstances, for joint and several liability for
remedial costs with respect to off-site disposal of hazardous materials. We have
established a comprehensive environmental compliance program and have a
designated environmental and safety manager. We believe that we have minimal
exposure as a result of such designations, due to indemnities obtained in the
course of acquisitions or because of the de minimis nature of the claims, or
both. Also, soil and groundwater contamination is present at two facilities due
to the actions of prior owners and is being remediated under indemnity
agreements. We cannot assure you, however, that all of our indemnities will be
fully performed or that currently unknown environmental issues will not be
identified or what impact, if any, such issues may have on our business or
operations in the future.
Year 2000 Issues
The change from 1999 to the year 2000 could cause malfunctions in our equipment
or computer systems.
Like many other companies, the Year 2000 computer issue creates risks for us. If
our internal systems, or those of our significant vendors or customers, do not
correctly recognize and process date information beyond the year 1999, there
could be an adverse impact on our operations. The Year 2000 computer issue stems
from the computer industry's practice of conserving data storage by using two
digits, instead of four digits, to represent a year. Systems and hardware which
use this two-digit format may process data incorrectly or fail with the use of
dates in the next century. These types of failures can influence applications
that rely on dates to perform calculations (such as an accounts receivable aging
report), as well as systems such as building security and heating.
We believe our internal exposure to Year 2000 issues is limited to the purchase
of computer hardware and, to a lesser extent, software at certain of our
locations. Our Year 2000 risks also include (1) equipment malfunctions; (2)
business outages or other interruptions suffered by non-compliant vendors and
(3) the inability of our customers to forward electronic images due to their own
Year 2000 malfunctions. To address the Year 2000 computer issue, we initiated a
four-phased program that included a review of all computers, software and
related date-sensitive equipment used in the management of print jobs, office
automation, accounting, process control and other applications. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issue" for a description of our Year 2000 plan. We
substantially completed all Year 2000 related remediation, testing and
implementation by June 30, 1999, pending minor system installations planned for
July, 1999 and non-compliant vendor contingency planning occurring through
August 31, 1999. Excluding costs associated with Mack, which are discussed
below, we estimate the cost of corrective actions to address our Year 2000
computer exposure to be approximately $0.4 million to $0.6 million in excess of
our normal software upgrades and replacements. We cannot assure you, however,
that we will not incur
30
<PAGE>
additional costs in addressing the Year 2000 issue or that we will be Year 2000
compliant by July 31, 1999.
Our due diligence process for new acquisitions includes a Year 2000 assessment,
and any necessary corrective actions will be scheduled for immediate
implementation. We have substantially completed the inventory and assessment
process and have made progress in remediation for the Mack entities. We estimate
that Mack's Year 2000 program will be completed during or prior to October 1999.
To accelerate remediation and to fund Year 2000 compliance efforts, we
negotiated a $2.0 million special escrow from the former owners of Mack. This
special escrow is intended to cover the cost of Year 2000 remediation at Mack.
We cannot assure you, however, that Year 2000 compliance at Mack will be
achieved by October 1999 or that the funds in the special escrow account will be
sufficient to cover the costs of any Year 2000 remediation at Mack. Moreover, we
cannot assure you that any Year 2000 issues present at Mack will not have a
material adverse effect on our business, financial condition, results of
operations and cash flow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issue."
Risks Associated With Future Acquisitions
We may not be able to acquire other companies, and companies we do acquire may
not perform as well as expected.
As part of our business strategy, we expect to pursue additional acquisitions.
Nonetheless, we cannot assure you that we will identify suitable acquisitions or
that such acquisitions can be made at an acceptable price. If we acquire
additional businesses, those businesses may require substantial capital.
Although we will be able to borrow under our senior credit facility under
certain circumstances to fund acquisitions, we cannot assure you that such
borrowings will be available in sufficient amounts or that other financing will
be available in amounts and on terms that we deem acceptable. Furthermore, the
integration of acquired businesses may result in unforeseen difficulties that
require a disproportionate amount of management's attention and our other
resources. Finally, we cannot assure you that we will achieve synergies and
efficiencies comparable to those from recent acquisitions.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the Exchange Notes.
In consideration for issuing the Exchange Notes as contemplated in this
prospectus, we will receive in exchange the Old Notes in like principal amounts,
which we will cancel. Accordingly, there will not be an increase in our
outstanding indebtedness.
31
<PAGE>
UNAUDITED PRO FORMA CAPITALIZATION
The following table sets forth our unaudited pro forma cash and cash equivalents
and capitalization as of March 31, 1999, as adjusted to give effect to (1) our
acquisition of Mack, (2) the refinancing of our former senior credit facility
and (3) the sale of the Old Notes and (4) the application of the net proceeds to
repay in full $110.0 million of senior subordinated bridge notes issued in
connection with the Mack Acquisition and to repay $10.8 million of borrowings
under the senior credit facility.
<TABLE>
<CAPTION>
---------------------
Dollars in thousands March 31, 1999
---------------------
<S> <C>
Cash and cash equivalents....................................................... $ 351
=====================
Long-term debt (including current maturities):
Senior credit facility/(1)/.................................................. $ 138,123
Old Notes.................................................................... 125,000
Other........................................................................ 12,218
---------------------
Total long-term debt (including current maturities)...................... 275,341
Total shareholders' equity...................................................... 134,807
---------------------
Total capitalization............................................................ $ 410,148
=====================
</TABLE>
_________
(1) Our senior credit facility consists of a $145.0 million revolving credit
facility, of which $83.1 million was outstanding, and a $55.0 million term
loan facility, all of which was outstanding. We had $61.9 million of
additional borrowings available under the revolving credit facility.
32
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data are based upon our
historical consolidated financial statements and the historical consolidated
financial statements of Melham Holdings, Inc., appearing elsewhere in this
prospectus, as adjusted to give effect to:
. our acquisition of Mack;
. the acquisition by Melham Holdings, Inc. of Port City Press, Inc.;
. the divestitures of our financial communications and custom
publishing product lines;
. the refinancing of our former senior credit facility; and
. the sale of the Old Notes and the application of the net proceeds
therefrom.
The pro forma adjustments are based upon available information and certain
assumptions that we believe are reasonable. The unaudited pro forma consolidated
financial data and accompanying notes should be read in conjunction with our
historical consolidated financial statements and notes thereto and the
historical consolidated financial statements and notes thereto of Melham
Holdings, Inc., appearing elsewhere in this prospectus. See "Prospectus
Summary--Recent Transactions" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The following unaudited pro forma statements of income for the year ended June
30, 1998, and the nine months ended March 31, 1999, give effect to the
transactions described above as if they had occurred on July 1, 1997. The
following unaudited pro forma balance sheet as of March 31, 1999 gives effect to
the transactions described above as if they had occurred on such date (excluding
the divestitures of our financial communications and custom publishing product
lines, which occurred in March and February 1999, respectively). The unaudited
pro forma financial data do not purport to be indicative of what our results of
operations or financial position would actually have been had the transactions
described above occurred at the beginning of the periods indicated or on such
date or to project our results of operations for any future date.
The fiscal year of Melham Holdings, Inc. ends on December 31. Financial data of
Melham Holdings, Inc. included in the unaudited pro forma statement of income
for the year ended June 30, 1998, are for the twelve months then ended.
33
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
Year Ended June 30, 1998
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Cadmus Port City
Historical Divestiture Adjusted Historical Acquisition Adjusted
Dollars in thousands Cadmus Adjustments Cadmus Melham Adjustments/(3)/ Melham
---------- ----------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 393,823 $ (54,406) $ 339,417 $ 123,699 $ 36,125 $159,824
Cost of sales........................ 304,014 (36,306) 267,708 95,079 25,852 120,931
Selling and administrative
expenses............................ 62,141 (11,700) 50,441 14,589 6,259 /(4)/ 20,848
Amortization expense................. -- -- -- 449 414 /(4)/ 863
Restructuring charge, net............ 3,950 -- 3,950 -- -- --
---------- --------- --------- ---------- ------------ --------
Operating income................... 23,718 (6,400) 17,318 13,582 3,600 17,182
---------- --------- --------- ---------- ------------ --------
Interest expense..................... 7,595 (2,039) 5,556 8,783 3,303 /(4)/ 12,086
Other expenses, net.................. 1,343 -- 1,343 (56) (281) (337)
---------- --------- --------- ---------- ------------ --------
Income (loss) before
income taxes........................ 14,780 (4,361) 10,419 4,855 578 5,433
---------- --------- --------- ---------- ------------ --------
Income tax expense
(benefit)........................... 5,690 (1,679) 4,011 2,086 230 2,316
---------- --------- --------- ---------- ------------ --------
Net income (loss).................... $ 9,090 $ (2,682) $ 6,408 $ 2,769 $ 348 $ 3,117
========== ========= ========= ========== ============ ========
Earnings Per Share Data:
Earnings per share - basic:
Net income (loss)................... $ 1.16
Weighted average common shares
Outstanding......................... 7,860
Earnings per share - diluted:
Net income (loss)................... $ 1.11
Weighted average common shares
Outstanding......................... 8,176
Other Financial Data:
EBITDA/(1)/.......................... $ 40,819 $ (7,290) $ 33,529 $ 20,508 $ 6,628 $ 27,136
Adjusted EBITDA/(2)/................. -- -- -- -- -- --
Adjusted EBITDA
margin.............................. -- -- -- -- -- --
Depreciation and
amortization........................ $ 18,444 $ (890) $ 17,554 $ 6,870 $ 2,747 $ 9,617
Capital expenditures................. 33,588 (1,332) 32,256 5,349 327 5,676
<CAPTION>
------------------------------------------------------
Mack Other
Acquisition Transaction Adjusted
Dollars in thousands Adjustments/(5)/ Adjustments Pro Forma
------------------- --------------- ----------
<S> <C> <C> <C>
Net sales............................ $ -- $ -- $ 499,241
Cost of sales........................ (6,698) /(6)(7)/ -- 381,941
Selling and administrative
expenses............................ (646) /(7)(8)/ -- 70,643
Amortization expense................. 2,987 /(8)/ -- 3,850
Restructuring charge, net............ -- -- 3,950
---------- --------- ---------
Operating income................... 4,357 -- 38,857
---------- --------- ---------
Interest expense..................... -- 5,601 /(9)/ 23,243
Other expenses, net.................. (20) -- 986
---------- --------- ---------
Income (loss) before
income taxes........................ 4,377 (5,601) 14,628
---------- --------- ---------
Income tax expense
(benefit)........................... 2,829 (2,157) /(10)/ 6,999
---------- --------- ---------
Net income (loss).................... $ 1,548 $ (3,444) $ 7,629
========== ========= =========
Earnings Per Share Data:
Earnings per share - basic:
Net income (loss)................... $ 0.85
Weighted average common shares
Outstanding......................... 9,022
Earnings per share - diluted:
Net income (loss)................... $ 0.82
Weighted average common shares
Outstanding......................... 9,338
Other Financial Data:
EBITDA/(1)/.......................... $ 2,933 $ -- $ 63,598
Adjusted EBITDA/(2)/................. -- -- 68,373
Adjusted EBITDA
margin.............................. -- -- 13.7%
Depreciation and
amortization........................ $ (1,444) $ -- $ 25,727
Capital expenditures................. -- -- 37,932
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Income
34
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
Nine Months Ended March 31, 1999
<TABLE>
<CAPTION>
Cadmus Port City
Historical Divestiture Adjusted Historical Acquisition Adjusted
Dollars in thousands Cadmus Adjustments Cadmus Melham Adjustments/(3)/ Melham
---------- ------------ ---------- ----------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $308,596 $(31,188) $277,408 $112,378 $ 5,588 $117,966
Cost of sales................. 246,994 (24,296) 222,698 86,002 4,110 90,112
Selling and administrative
expenses..................... 42,221 (6,741) 35,480 14,498 991 /(4)/ 15,489
Amortization expense.......... 1,453 -- 1,453 572 69 /(4)/ 641
Net gain on divestitures...... (9,521) 9,521 -- -- -- --
Restructuring charge, net..... -- -- -- -- -- --
-------- -------- -------- -------- ---------- --------
Operating income............ 27,449 (9,672) 17,777 11,306 418 11,724
-------- -------- -------- -------- ---------- --------
Interest expenses............. 6,085 (1,453) 4,632 7,841 554 /(4)/ 8,395
Other expenses, net........... (66) -- (66) (5) (4) (9)
-------- -------- -------- -------- ---------- --------
Income (loss) before income
taxes........................ 21,430 (8,219) 13,211 3,470 (132) 3,338
-------- -------- -------- -------- ---------- --------
Income tax expense (benefit).. 8,251 (3,164) 5,087 1,468 (53) 1,415
-------- -------- -------- -------- ---------- --------
Net income (loss)............. $ 13,179 $ (5,055) $ 8,124 $ 2,002 $ (79) $ 1,923
======== ======== ======== ======== ========== ========
Earnings Per Share Data:
Earnings per share - basic:
Net income (loss)............ $ 1.67
Weighted average common
shares outstanding.......... 7,872
Earnings per share diluted:
Net income (loss)............ $ 1.63
Weighted average common
shares outstanding.......... 8,073
Other Financial Data:
EBITDA/(1)/................... $ 41,841 $(10,368) $ 31,473 $ 18,046 $ 842 $ 18,888
Adjusted EBITDA/(11)/......... -- -- -- -- -- --
Adjusted EBITDA margin........ -- -- -- -- -- --
Depreciation and
amortization................. $ 14,326 $ (696) $ 13,630 $ 6,735 $ 420 $ 7,155
Capital expenditures.......... 12,340 (701) 11,639 6,682 104 6,786
<CAPTION>
Mack Other
Acquisition Transaction Adjusted
Dollars in thousands Adjustments/(5)/ Adjustments Pro Forma
----------------- ----------- ---------
<S> <C> <C> <C>
Net sales..................... $ (97) $ -- $395,277
Cost of sales................. (5,054) /(6)(7)/ -- 307,756
Selling and administrative
expenses..................... (694) /(7)(8)/ -- 50,275
Amortization expense.......... 2,240 /(8)/ -- 4,334
Net gain on divestitures...... -- -- --
Restructuring charge, net..... -- -- --
---------------- ----------- --------
Operating income............ 3,411 -- 32,912
---------------- ----------- --------
Interest expenses............. (89) 5,005 /(9)/ 17,943
Other expenses, net........... (22) -- (97)
---------------- ----------- --------
Income (loss) before income
taxes........................ 3,522 (5,005)
---------------- -----------
Income tax expense (benefit).. 2,205 (1,927) /(10)/ 6,780
---------------- ----------- --------
Net income (loss)............. $ 1,317 $ (3,078) $ 8,286
================ =========== ========
Earnings Per Share Data:
Earnings per share - basic:
Net income (loss)............ $ 0.92
Weighted average common
shares outstanding.......... 9,034
Earnings per share diluted:
Net income (loss)............ $ 0.90
Weighted average common
shares outstanding.......... 9,235
Other Financial Data:
EBITDA/(1)/................... $ 2,350 $ -- $ 52,711
Adjusted EBITDA/(11)/......... -- -- 53,330
Adjusted EBITDA margin........ -- -- 13.5%
Depreciation and
amortization................. $ (1,083) $ -- $ 19,702
Capital expenditures.......... -- -- 18,425
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Income
35
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statements of Income
(Dollars in thousands)
(1) EBITDA represents net income before interest, income taxes, depreciation and
amortization. EBITDA is presented because we believe it is frequently used
by security analysts, lenders and others in the evaluation of companies.
However, EBITDA should not be considered as an alternative to operating
income, net income, net cash provided by operating activities or any other
measure for determining our operating performance or liquidity in accordance
with generally accepted accounting principles. EBITDA, as used herein, is
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(2) Represents EBITDA, adjusted to eliminate the effect of certain payroll and
payroll-related costs of $825 due to the elimination of certain employee
positions in connection with the acquisition of Mack and the acquisition of
Port City Press, Inc. by Melham Holdings, Inc. and to eliminate the effect
of a restructuring charge of $3,950 recorded in June 1998 relating to our
acquisition of Germersheim, Inc.
(3) Represents the results of operations of Port City Press, Inc. for the
periods prior to September 2, 1998, its date of acquisition by Melham
Holdings, Inc., adjusted as described in footnote (4).
(4) Includes (i) an increase in amortization expense resulting from purchase
accounting adjustments, (ii) additional interest expense on the debt
incurred to finance the acquisition of Port City Press, Inc. by Melham
Holdings, Inc. and (iii) adjustments for the elimination of management fees
charged by parent and certain fringe benefits not continued:
<TABLE>
<CAPTION>
------------------------------------
Nine Months
Year Ended Ended
June 30, 1998 March 31, 1999
---------------- ----------------
<S> <C> <C>
Amortization expense.......................... $ 414 $ 69
Interest expense.............................. 3,129 527
Management fee charged by parent.............. (800) (140)
Fringe benefits not continued................. (459) --
</TABLE>
(5) Includes the elimination of the results of VPI, Inc., a subsidiary of Melham
Holdings, Inc., which we did not acquire:
<TABLE>
<CAPTION>
--------------------------------------
Nine Months
Year Ended Ended
June 30, 1998 March 31, 1999
---------------- ---------------
<S> <C> <C>
Net sales................................... $ -- $ 97
Cost of sales............................... -- 30
Selling and administrative expenses......... 217 372
---------------- ---------------
Operating loss.............................. (217) (305)
Interest expense............................ -- 89
Other, net.................................. 20 22
---------------- ---------------
Loss before income taxes.................... (237) (416)
Provision for income taxes.................. (85) (147)
---------------- ---------------
Net loss.................................... $(152) $(269)
================ ===============
</TABLE>
36
<PAGE>
(6) Includes a decrease in cost of sales primarily related to volume-related
procurement savings based on our contractual purchase programs for paper,
pre-press supplies and freight:
<TABLE>
<CAPTION>
-------------------------------------
Nine Months
Year Ended Ended
June 30, 1998 March 31, 1999
--------------- --------------------
<S> <C> <C>
Cost of sales $ 2,799 $ 2,099
</TABLE>
(7) Includes a reduction in depreciation expense resulting from the revaluation
of assets and a change in depreciable lives arising from purchase
accounting adjustments:
<TABLE>
<CAPTION>
-----------------------------------
Nine Months
Year Ended Ended
June 30, 1998 March 31, 1999
--------------- -----------------
<S> <C> <C>
Cost of sales............................... $ 3,899 $ 2,925
Selling and administrative expenses......... 532 399
</TABLE>
(8) Represents an increase in selling and administrative expenses resulting
from an increase in pension costs and goodwill amortization (goodwill is
amortized over 40 years), which was partially offset by a decrease related
to the termination of certain management and consulting agreements in
connection with the acquisition of Mack.
<TABLE>
<CAPTION>
-----------------------------------
Nine Months
Year Ended Ended
June 30, 1998 March 31, 1999
--------------- ----------------
<S> <C> <C>
Selling and administrative expenses......... $ 103 $ 77
Amortization expense........................ 2,987 $ 2,240
</TABLE>
(9) Includes additional interest expense and amortization of deferred financing
costs and estimated fees on the debt incurred in connection with the
acquisition of Mack. Amounts below represent total expenses for the periods
presented:
<TABLE>
<CAPTION>
---------------------------------------
Year Ended Nine Months Ended
June 30, 1998 March 31, 1999
--------------- --------------------
<S> <C> <C>
Revolving credit facility ($83,123
@LIBOR+2.75%).............................. $ 4,674 $ 4,079
Term loan facility ($55,000
@LIBOR+2.75%).............................. 4,011 2,812
Old Notes ($125,000 @ 9.75%)................ 12,188 9,141
Junior seller note ($6,415 @ 11.50%)........ 738 553
Amortization of deferred financing costs
and commitment fees........................ 1,359 1,019
---------- -------------
$ 22,970 $ 17,604
========== =============
</TABLE>
(10) Represents the assumed tax effect on the pro forma adjustments using an
effective tax rate of 38.5%, except for the non-deductible goodwill
amortization adjustment resulting from the acquisition of Mack.
37
<PAGE>
(11) Represents EBITDA, adjusted to eliminate the effect of certain payroll and
payroll-related costs of $619 due to the elimination of certain employee
positions in connection with the acquisition of Mack and the acquisition of
Port City Press, Inc. by Melham Holdings, Inc.
38
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Balance Sheet
As of March 31, 1999
---------------------------------------------------------------------------------------
Melham
Acquisition and Proceeds of the
Refinancing Offering of the Adjusted
Cadmus Melham (1) Adjustments Old Notes Pro Forma
------ ---------- --------------- --------------- ---------
Dollars in thousands
Assets
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 281 $ 70 $ -- $ -- $ 351
Accounts receivable, net........................ 65,454 22,198 28 (1) -- 87,680
Inventories..................................... 27,978 9,623 (181) (1) -- 37,420
Deferred income taxes........................... 5,210 1,576 344 (1) -- 7,130
Prepaid expenses and other...................... 3,892 1,402 1,880 (1) 443 (3) 8,425
808 (3)
-------- -------- ---------- ----------- --------
Total current assets......................... 102,815 34,869 2,879 443 141,006
-------- -------- ---------- ----------- --------
Property, plant and equipment, net................ 126,907 50,001 708 (1) -- 177,616
Goodwill and other intangibles, net............... 50,646 32,518 119,470 (1) -- 202,634
Other assets...................................... 4,861 4,517 3,123 (2) 3,081 (2) 12,483
(3,099) (1) -- --
-------- -------- ---------- ----------- --------
Total assets...................................... $285,229 $121,905 $ 123,081 $ 3,524 $533,739
======== ======== ========== =========== ========
Liabilities And Shareholders'
Equity
Current Liabilities:
Short-term borrowings........................... $ 12,170 $ -- $ (12,170)(5) $ -- $ --
Current maturities of long-term
debt.......................................... 6,089 6,216 (6,216)(4) -- 5,089
(1,000)(8)
Accounts payable................................ 35,577 6,374 1,420 (1) -- 43,371
Accrued expenses................................ 20,202 13,014 588 (1) -- 33,804
Restructuring reserve........................... 1,136 -- 3,000 (1) -- 4,136
-------- -------- ---------- ------------ --------
Total current liabilities.................... 75,174 25,604 (14,378) -- 86,400
-------- -------- ---------- ------------ --------
Long-term debt, less current
maturities....................................... 65,214 95,719 (95,719)(4) (120,769) (7) 270,252
84,392 (5) 125,000 (7)
116,415 (6)
Other long-term liabilities....................... 10,510 23,077 (5,095)(1) -- 28,492
Deferred income taxes............................. 13,788 -- -- -- 13,788
Shareholders' equity:
Common stock.................................... 3,923 -- 580 (1) -- 4,503
Preferred stock................................. -- 6,424 (6,424)(1) -- --
Capital in excess of par........................ 52,292 3,983 11,699 (1) -- 67,974
Retained earnings............................... 64,328 (32,902) 31,611 (1)(3) (707) (3) 62,330
-------- -------- ---------- ------------ --------
Total shareholders' equity................... 120,543 (22,495) 37,466 (707) 134,807
-------- -------- ---------- ------------ --------
Total liabilities and shareholders'
equity........................................... $285,229 $121,905 $ 123,081 $ 3,524 $533,739
======== ======== ========== ============ ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
39
<PAGE>
Notes to Unaudited Pro Forma Consolidated Balance Sheet
(Dollars in thousands)
(1) Represents the preliminary adjustments to record the acquisition of Mack
which is accounted for as a purchase.
The purchase price for pro forma purposes is as follows:
<TABLE>
<S> <C>
1,200,000 common shares of Cadmus Communications $ 16,262
Cash..................................................... 66,000
Junior seller notes...................................... 6,415
Bridge financing notes................................... 110,000
Estimated transaction costs.............................. 2,250
--------
$200,927
========
</TABLE>
The purchase price has been allocated for pro forma
purposes as follows:
<TABLE>
<S> <C>
Working capital.......................................... $ 14,794
Long-term assets, excluding goodwill..................... 52,127
Goodwill................................................. 151,988
Long-term liabilities.................................... (17,982)
--------
$200,927
========
</TABLE>
The above allocation of acquisition costs is preliminary and may change upon
final determination of the fair value of the assets acquired and liabilities
assumed.
(2) Represents the following adjustments to deferred loan costs:
<TABLE>
<CAPTION>
----------------------------------------------
Mack
Acquisition and Offering of
Refinancing Old Notes Total
--------------- ----------- ----------
<S> <C> <C> <C>
Senior credit facility........... $2,250 $ -- $2,250
Former senior credit facility.... (277) -- (277)
Bridge financing notes........... 1,150 (1,150) --
Old Notes........................ -- 4,231 4,231
------ ------- ------
$3,123 $ 3,081 $6,204
====== ======= ======
</TABLE>
(3) Represents a payment to terminate certain interest rate swaps associated
with the former senior credit facility and to write-off deferred costs
associated with the bridge financing notes.
(4) Represents an adjustment to eliminate the current and long-term debt of
Melham Holdings, Inc. that was repaid in connection with the acquisition of
Mack.
(5) Represents proceeds from the senior credit facility used to refinance the
former senior credit facility and to partially finance the acquisition of
Mack.
(6) Represents proceeds from the issuance of the junior seller notes and the
bridge financing notes in conjunction with the acquisition of Mack.
40
<PAGE>
(7) Represents the net proceeds from the offering of the Old Notes offering used
to repay the bridge financing notes and to reduce the revolving credit
facility.
(8) Represents $1.0 million decrease in current maturities of long-term due to
different maturities for our senior credit facility.
41
<PAGE>
CADMUS COMMUNICATIONS CORPORATION
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data
as of the dates and for the periods indicated. The financial data for each of
the five years in the period ended June 30, 1998, have been derived from our
audited consolidated financial statements and notes thereto. Each of the four
fiscal years in the period ended June 30, 1998, have been audited by Arthur
Andersen LLP, independent public accountants, whose reports for the fiscal years
ended June 30, 1996, through June 30, 1998, are included elsewhere in this
prospectus. The financial data for the for the nine months ended March 31, 1998,
and March 31, 1999, have been derived from our unaudited condensed consolidated
financial statements which, in the opinion of management, contain all
adjustments (consisting only of normal and recurring adjustments) necessary to
present fairly our financial position and results of operations at such dates
and for such periods. Results for the nine months ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the entire fiscal
year. The data presented below should be read in conjunction with, and are
qualified in their entirety by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
42
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
Fiscal Year Ended
--------------------------------------------------------------
June 30, June 30, June 30, June 30, June 30,
1994 1995 1996 1997 1998
Dollars in thousands ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales............................................ $247,730 $279,641 $336,655 $384,942 $393,823
Operating expenses:
Cost of sales....................................... 184,488 209,259 258,947 299,840 304,014
Selling and administrative.......................... 48,824 52,172 61,204 63,123 62,141
Restructuring charge, net........................... 1,900 -- -- 19,699 3,950
Net gain on divestitures............................ -- -- -- -- --
-------- -------- -------- -------- --------
Operating income..................................... 12,518 18,210 16,504 2,280 23,718
Interest and other expenses.......................... 4,985 5,372 5,957 9,716 8,938
-------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of changes in
accounting principles............................... 7,533 12,838 10,547 (7,436) 14,780
Income tax expense (benefit)......................... 2,968 5,263 3,956 (2,219) 5,690
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles.......................................... 4,565 7,575 6,591 (5,217) 9,090
Extraordinary loss on early extinguishment of
debt (net of tax)................................... -- -- (795) -- --
Cumulative effect of changes in accounting
principles (net of tax)............................. 401 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss).................................... $ 4,966 $ 7,575 $ 5,796 $ (5,217) $ 9,090
======== ======== ======== ======== ========
Earnings Per Share Data: (7)
Income (loss) before extraordinary item and
and cumulative effect of change in
accounting principle:(6)............................ $ 0.75 $ 1.22 $ 0.88 $ (0.65) $ 1.11
Net income (loss).................................... 0.82 1.22 0.77 (0.65) 1.11
Cash dividends....................................... 0.20 0.20 0.20 0.20 0.20
Shareholders' equity................................. 9.31 10.41 13.72 12.85 13.86
Weighted average common shares
outstanding (in thousands)...................... 6,085 6,195 7,495 8,035 8,176
Other Financial Data:
EBITDA/(1)/.......................................... $ 24,221 $ 30,321 $ 29,459 $ 18,540 $ 40,819
Adjusted EBITDA/(2)/................................. 26,121 30,321 30,254 38,239 44,769
Adjusted EBITDA margin............................... 10.5% 10.8% 9.0% 9.9% 11.4%
Depreciation and amortization........................ $ 11,474 $ 12,132 $ 14,563 $ 18,188 $ 18,444
Capital expenditures................................. 11,742 20,959 25,289 22,883 33,588
Ratio of total debt to adjusted EBITDA............... 2.2x 1.9x 3.5x 2.5x 2.2x
Ratio of adjusted EBITDA to interest expense......... 5.4 5.7 5.9 4.9 5.9
Ratio of earnings to fixed charges/(3)/.............. 2.5 3.3 2.8 --/(5)/ 2.7
Balance Sheet Data (at period end):
Working capital/(4)/................................. $ 26,033 $ 33,286 $ 60,517 $ 49,774 $ 35,315
Total assets......................................... 160,906 172,443 283,723 266,916 291,752
Total debt........................................... 58,440 56,342 106,801 94,469 99,655
Total shareholders' equity........................... 55,706 62,755 108,528 100,643 109,816
<CAPTION>
-----------------------
Nine Months Ended
-----------------------
March 31, March 31,
1998 1999
Dollars in thousands -------- --------
<S> <C> <C>
Statement of Income Data:
Net sales............................................ $289,644 $308,596
Operating expenses:
Cost of sales....................................... 223,706 246,994
Selling and administrative.......................... 45,933 42,221
Restructuring charge, net........................... -- --
Net gain on divestitures............................ -- (9,521)
-------- --------
Operating income..................................... 20,005 28,902
Interest and other expenses.......................... 6,624 7,472
-------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of changes in
accounting principles............................... 13,381 21,430
Income tax expense (benefit)......................... 5,152 8,251
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles.......................................... 8,229 13,179
Extraordinary loss on early extinguishment of
debt (net of tax)................................... -- --
Cumulative effect of changes in accounting
principles (net of tax)............................. -- --
-------- --------
Net income (loss).................................... $ 8,229 $ 13,179
======== ========
Earnings Per Share Data: (7)
Income (loss) before extraordinary item and
and cumulative effect of change in
accounting principle:(6)............................ $ 1.05 $ 1.67
Net income (loss).................................... 1.05 1.67
Cash dividends....................................... 0.15 0.15
Shareholders' equity................................. 13.65 15.36
Weighted average common shares
outstanding (in thousands)...................... 8,140 8,073
Other Financial Data:
EBITDA/(1)/.......................................... $ 32,553 $ 41,841
Adjusted EBITDA/(2)/................................. 32,553 32,320
Adjusted EBITDA margin............................... 11.2% 10.5%
Depreciation and amortization........................ $ 13,608 $ 14,326
Capital expenditures................................. 28,582 12,340
Ratio of total debt to adjusted EBITDA............... -- --
Ratio of adjusted EBITDA to interest expense......... 5.9x 5.3x
Ratio of earnings to fixed charges/(3)/.............. 3.1 4.2
Balance Sheet Data (at period end):
Working capital/(4)/................................. $ 34,734 $ 28,777
Total assets......................................... 278,530 285,229
Total debt........................................... 88,546 71,303
Total shareholders' equity........................... 107,395 120,543
</TABLE>
See Notes to Selected Historical Consolidated Financial Data
43
<PAGE>
Notes to Selected Historical Consolidated Financial Data
(1) EBITDA represents net income before interest, income taxes, depreciation and
amortization. EBITDA is presented because we believe it is frequently used
by security analysts, lenders and others in the evaluation of companies.
However, EBITDA should not be considered as an alternative to operating
income, net income, net cash provided by operating activities or any other
measure for determining our operating performance or liquidity in accordance
with generally accepted accounting principles. EBITDA, as used herein, is
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
(2) Represents EBITDA, adjusted to eliminate the effect of an extraordinary loss
on early extinguishment of debt of $0.8 million (net of tax) recorded in
fiscal 1996, a restructuring charge of $19.7 million recorded in fiscal
1997, a restructuring charge of $4.0 million recorded in fiscal 1998 and a
pre-tax net gain on divestitures of $9.5 million recorded in the nine months
ended March 31, 1999.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before taxes plus fixed charges. Fixed charges consist of
interest expense, including amortization of deferred financing costs,
whether expensed or capitalized, and the portion of rental expense which
management believes is representative of the interest component of rental
expense.
(4) Working capital represents the excess of current assets over current
liabilities, excluding restructuring reserves.
(5) Earnings were insufficient to cover fixed charges by $0.8 million.
(6) Extraordinary loss on early extinguishment of debt in fiscal 1996 of $0.8
million (net of tax) and income from cumulative effect of changes in
accounting principles in fiscal 1994 of $0.4 million (net of tax).
(7) Income per share data assumes dilution.
44
<PAGE>
THE COMPANY
Overview
Cadmus focuses on delivering high-end, integrated graphic communications
solutions. We are the largest printer and producer of STM journals and
publications in the United States with an estimated market share of
approximately 33% in 1998. We are also a leading printer and producer of special
interest magazines, point-of-purchase materials and specialty packaging
materials. We were formed in 1984, and, through both internal growth and over
ten acquisitions, we have become the fifth largest publications printer in the
United States, with pro forma net sales of $395.3 million and pro forma adjusted
EBITDA of $53.3 million for the nine months ended March 31, 1999.
We focus on specialized markets where we can use our in-depth knowledge of our
customers' industries to create innovative products and services that satisfy
our customers' graphic communications needs, including printing, information
dissemination and marketing services. We have expanded our product offerings to
include integrated, end-to-end services that go beyond the traditional printing
functions. We play an increasingly important role in helping our customers more
efficiently create and disseminate their information and marketing products. We
provide our customers with a full range of creative, production and distribution
services, making us a one-stop provider of graphic communications and marketing
solutions. We believe being a one-stop provider allows us to achieve higher
margins, solidify customer relationships and capture a greater share of our
customers' graphic communications spending.
We operate through two business sectors, Cadmus Professional Communications and
Cadmus Marketing Communications.
Cadmus Professional Communications is comprised of two product lines: STM
journal services and special interest magazines. We serve both not-for-profit
and commercial publishers of STM journals and publishers of special interest
magazines. For these customers, we provide traditional composition, editorial,
prepress, printing, warehousing and distribution services. In addition, we
provide a full complement of digital products and services, including website
design and architecture, content management, Internet and CD-ROM based
electronic archiving, electronic peer review and online publishing.
On April 1, 1999, we acquired Mack, our largest competitor in the STM journal
market and one of the largest publications printers in North America. The
acquisition provides us with new STM journal services capabilities, including
the production of short-run journals and business directories. The acquisition
also significantly enhances our market position in the special interest magazine
market and creates opportunities for additional economies of scale and
improvements to our overall efficiency and competitive position.
For the nine months ended March 31, 1999, our Professional Communications sector
contributed 68.7% of pro forma net sales and 89.6% of pro forma adjusted EBITDA
before corporate expenses.
Cadmus Marketing Communications focuses on the creation, production and
distribution of graphic communications and marketing services for Fortune 1000
companies. Our major product lines include:
. point-of-purchase marketing materials, such as menu boards, table tents
and translites for fast food customers such as Hardee's and retail
advertising displays and custom display boxes for beverage companies
such as Coca-Cola and
. specialty packaging and promotional printing production, including
package designs and construction of marketing-related packaging for
customers such as UPS, FedEx and America
45
<PAGE>
Online, and high quality packaging materials for apparel, high-tech,
pharmaceutical, transportation and travel companies.
Within this sector, we also offer software duplication, advertising, catalog
design and photography, commercial printing, direct marketing and fulfillment
and distribution services. We combine our creative, production and distribution
services across these product lines to provide comprehensive solutions to our
customers' marketing needs.
For the nine months ended March 31, 1999, our Marketing Communications sector
contributed 31.3% of pro forma net sales and 10.4% of pro forma adjusted EBITDA
before corporate expenses.
The Industry
We compete in specialized markets of the highly fragmented U.S. printing
industry.
STM Journal Market
We estimate that the STM journal market is a $650.0 million market that has
grown at a compounded annual rate of 6.2% since 1992. The STM journal market is
generally characterized by non-cyclical product demand, long-term customer
contracts and relationships, an increasing demand for an integrated, full line
of services and an appreciation of high value-added services. The STM journal
market consists of approximately 8,500 publications from approximately 1,600 STM
journal publishers and is largely supported by governmental and private research
funding and association dues and subscriptions. Approximately 60% of the STM
journal market consists of not-for-profit societies, universities and government
agencies. These customers typically have limited composition, editorial,
production and distribution capabilities in-house and thus value and demand our
end-to-end services.
Special Interest Magazine Market
Special interest magazines are typically directed at a defined audience and
usually have circulations of between 20,000 and 200,000. We believe that the
special interest magazine market, which we estimate to be a $2.0 billion market,
is growing faster than the general interest or longer run magazine markets. In
recent years, special interest magazines have gained increasing advertising
revenue due to the focused nature of their circulations. Special interest
magazine publishers typically have more limited in-house capabilities than
larger commercial publishers and require a higher level of service. Our
customers in this market consist primarily of special interest and trade or
professional association publishers and include the National Council of Teachers
of Math, International Mission Board, American Kennel Club, Bank Director,
TimeOut New York and Billboard.
Point-of-Purchase and Specialty Packaging Markets
The point-of-purchase and specialty packaging markets are both characterized by
a significant number of regional, privately-held businesses. The point-of-
purchase market is highly fragmented, with over 10,000 competitors. According to
industry sources, point-of-purchase expenditures are expected to grow at a 4.1%
compounded annual rate between 1997 and 2002, from $13.1 billion to $16.0
billion, benefiting in recent years from a continuing shift in advertising
spending toward point-of-purchase and other impulse-oriented programs. The
point-of-purchase market is the third largest consumer of advertising spending
behind network and local "spot" television.
Similarly, the $9.7 billion folding carton specialty packaging market is highly
fragmented and has a large number of market participants, none of which is a
dominant provider. Folding cartons function as part of a
46
<PAGE>
product's marketing campaign and may employ multiple colors, coatings, several
printing techniques, stamping and other features. This market is characterized
by a demand for high-quality packaging with fast turnaround.
Competitive Strengths
We attribute our strong historical results and positive growth outlook to the
following factors:
Leading Position in Highly Attractive STM Journal Market. The STM journal market
is highly attractive because of its historical insensitivity to economic
downturns and because customers are increasingly placing a premium on the
integrated, end-to-end services we provide. We are the largest producer of STM
journals in the United States with an estimated market share of 33% in 1998,
more than four times the market share of our nearest competitor. Because of our
focus and market share, we believe we know the market better, and can anticipate
its trends more readily, than our smaller competitors. We capitalize on that
knowledge and our range of services to win new customers and to develop new
products that our customers value highly.
Well-Established and Diversified Customer Relationships. We serve over 1,300
customers, including many of the leading and largest businesses and associations
in their sectors. For the nine months ended March 31, 1999, more than 85% of
Cadmus's net sales from STM journal customers (not including Mack) were under
long-term contracts, and we estimate that approximately 70% of Mack's net sales
from STM journal customers were under long term contracts. For the same period,
more than 55% of our STM journal net sales came from not-for-profit
organizations. Our average relationship with our top ten STM journal customers
is over 38 years, our typical contract length is three to seven years and our
renewal rate for STM journal publishers has been approximately 97% over the past
five years. We serve many of the leading STM journal publishers, including the
American Chemical Society, American Medical Association, American Psychological
Society, American Society for Microbiology, Elsevier Science, Lippincott
Williams & Wilkins, Macmillan, W.B. Saunders and Wiley/Liss, Inc. In our point-
of-purchase and specialty packaging businesses, our customers include
significant marketers such as America Online, Bell South, Coca-Cola, FedEx,
Hardee's, IBM, Microsoft, Modus Media, Polaroid, Sara Lee and UPS. None of our
customers contributed more than 5.0% of our pro forma net sales in fiscal 1998.
Positive and Stable Operating Results. From fiscal 1993 to fiscal 1998, our net
sales and adjusted EBITDA increased at compounded annual growth rates of 14.7%
and 17.1%, respectively. We also experienced stable operating results from our
Professional Communications sector, which grew net sales and adjusted EBITDA at
20.2% and 34.1% compounded annual rates, respectively, from fiscal 1993 to
fiscal 1998. We have seen similar operating results from Mack, which grew net
sales and EBITDA by compounded annual rates of 6.1% and 16.9%, respectively,
from 1993 to 1998. The Professional Communications sector generated $51.9
million, or 89.6%, of our pro forma adjusted EBITDA before corporate expenses
for the nine months ended March 31, 1999.
Proven Ability To Deliver Full-Service Solutions. We have enhanced and expanded
our traditional printing capabilities with creative and distribution
capabilities through hiring qualified personnel, training employees and
acquiring facilities and companies. We have integrated our capabilities to
provide full service, end-to-end solutions to our customers, including:
. The Society for Neuroscience, for whom we perform online peer review,
electronic editing, electronic copy editing, digital art integration,
digital content management, composition, printing, binding, mailing,
international distribution and order and full service reprint
fulfillment;
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. FedEx, for whom we provide package design, in-package literature
composition, disk duplication and warehousing and distribution services
for their online shipping software; and
. Hardee's, for whom we developed and maintain a detailed database of all
restaurant dimensions, produce and catalog a variety of table tents,
menu boards and translites, answer phone calls directly from franchisees
and assemble and ship materials to franchisees.
Leading Edge Capabilities. We are a technology leader in each of our markets.
For example, in our STM journal product line, we have substantially improved
lead times, improved our competitive position and reduced our operating costs by
converting the entire STM composition and prepress operations to a fully
automated, digital process. In our specialty packaging product line, we built a
new state-of-the-art plant in Charlotte, adding the most modern press and
finishing equipment available to support this fast growing product line. In
addition, we are building state-of-the-art fulfillment facilities in both
Atlanta and Charlotte. As a result of this consistent pattern of technological
advances, we have streamlined our operations and believe we now offer our
customers some of the most advanced facilities and capabilities in our markets.
Experienced Management. Our executive officers have an average of 16 years of
service in the industry. This team has been responsible for the successful
development of our niche-market strategy, as well as the integration of more
than ten acquisitions over the past 13 years. Our Professional Communications
sector's management team has an average of 22 years of service in the
publications industry and has successfully integrated several substantial
acquisitions, including Waverly Press in 1993 and Lancaster Press in 1996.
Business Strategy
Key elements of our business strategy include:
Tailoring End-to-End Solutions to Customer Needs. We are one of the few
printing, graphic communications and marketing companies that has a proven track
record of integrating creative, production and distribution services into
customer-specific solutions. In our STM journals product line, we offer
traditional composition, editorial, prepress, printing, warehousing and
distribution services, as well as a full complement of digital products and
services, including website design and architecture, content management,
Internet and CD-ROM-based electronic archiving, electronic peer review, online
publishing and related composition and editorial services. In our point-of-
purchase product line, we provide unique third-party marketing outsourcing
solutions by combining marketing design services, traditional printing on paper
and board, ultraviolet printing on plastics, sophisticated fulfillment services
and other customer service functions.
Our goal is to continue to enhance our knowledge in these specialized markets
and to expand our creative, production and distribution capabilities to make our
services more valuable to customers and more distinct from those offered by our
competitors. This full service strategy allows us to expand existing customer
relationships and to attract new customers. We believe that this strategy will
enhance internal growth rates as we capitalize on our market expertise and
further expand our capabilities.
Disciplined, In-Market Strategic Acquisitions. We believe significant
opportunities exist both to consolidate market share and to broaden our product
offerings in our markets. We particularly focus on acquisitions of profitable,
established businesses that enhance our position by offering products
complementary to our existing creative, production and distribution capabilities
and that create operating efficiencies and cost savings.
Improving Margins. We believe that we will continue to realize cost savings as a
result of volume purchases of paper, ink and other raw materials used in the
printing process. As we acquire additional businesses in each
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of our markets, we believe we will be able to realize similar additional
savings. We have also achieved cost savings through the consolidation of
insurance, employee benefits, risk management and other administrative
functions. We believe that by continuing to centralize certain administrative
and support functions, management of our operating businesses will be able to
focus on pursuing new customers, developing additional product and service
capabilities and increasing capacity utilization. In addition, we believe that
opportunities exist to further improve the operating efficiency of our business
by eliminating redundant facilities and equipment, by consolidating operations
and by achieving better capacity utilization as a result of improved
coordination among our operations. For example, as a result of our Mack
acquisition, we believe that immediately available procurement synergies alone
will account for approximately $2.6 million annually in reduced materials and
outside services costs.
Our Product Lines
Professional Communications Sector
Journal Services
In our STM journal services product line, we provide traditional composition,
printing and distribution services, as well as a full complement of digital
solutions and management services for not-for-profit associations and commercial
publishers. We are the largest producer of STM journals in the United States.
Approximately 80% of our STM journal customers and approximately 55% of net
sales from this product line come from the association and society marketplace.
We offer STM journal customers a wide range of products and services, including
editorial services, composition, management of digital content, Internet and
online publishing services, CD-ROM production services, traditional and digital
prepress services, web and sheet-fed offset printing, complete bindery and
mailing services, international distribution services, author reprint services
and mail list support.
With our extensive knowledge of the STM journal market, we have developed
proprietary products and services, including:
. CJSNet, a secured, electronic file transfer process which allows
customers to send any type of file, mail list, digital art or other
information via the Internet or an ISDN or modem;
. Digital Direct, a digital desktop work flow that builds an
infrastructure of advertising, pages, proofs, imposition and output, all
in a digital format;
. EdiTech Services, a proprietary, electronic editing program which
converts and pre-edits manuscripts by correcting typographical errors,
making exchanges according to each journal's unique style and inserting
typesetting codes;
. Virtual Journals and Reference Books online, an Internet and online
publishing service; and
. World-Wide Destination Services, a delivery service offering expedited
world-wide delivery of journals.
We have developed a workflow process called the "Total Digital Pathway" that
provides a completely digital production process for STM journal customers and
provides for the creation of a digital content database of a customer's text and
graphics. With the Total Digital Pathway, we receive data from a customer,
digitize the content and create final digital pages with fully integrated text
and graphic images. These digital pages are used to create a variety of end
products, including printed products, CD-ROM versions for archival
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applications, and Internet and online publishing products, and assure that the
content is readily accessible for future use.
Through our STM journal services product line, we are a leader in the online
delivery of STM journal information. We have developed an online capability that
meets the specific needs of both authors and users. This online environment
enables the publisher to control the Internet or online publishing site with a
great deal of administrative efficiency. Using our advanced access technology,
the publisher can profile its users and deliver more targeted access and
research content to a specific customer profile. Simultaneous release of the
printed and online journal allows readers to view articles from anywhere in the
world on the day of publication. Individual readers also can create their own
personal pages, enabling them to track session history information and save
citation lists.
Special Interest Magazines
We specialize in short-to-medium run magazines, producing over 750 titles for
over 275 customers, servicing associations, commercial publishers and
educational institutions in the United States, with a primary concentration on
the east coast. We employ advanced technologies to meet our magazine customers'
requirements for printing, distribution and digital solutions. Our special
interest magazine product line offers a wide array of services, including
conventional and digital prepress services, desktop publishing, printing,
binding, distribution, mailing list support, worldwide distribution services,
reprint services and backcopy storage and fulfillment. Examples of our special
interest magazine customers include the National Council of Teachers of Math,
International Mission Board, American Kennel Club, Bank Director, Bird Watcher's
Digest, Diabetes Care, US Banker, TimeOut New York, Computer Telephony,
Billboard and Daily Variety.
Marketing Communications Sector
Point of Purchase
In our point-of-purchase product line, we offer creative design and sales
promotional concepts and a full range of production capabilities for
merchandising materials of all sizes and shapes. Our products include tabletop
displays, table tent cards, banners, posters, shelf danglers, translites,
motorized aisle displays, retail spectaculars and other merchandising materials
used to gain the attention of consumers. We specialize in providing customized
solutions for a customer's marketing and sales promotion needs. Production
services include traditional offset full-color printing, ultraviolet printing on
plastics, large-format printing, finishing, product engineering and prototyping
and silkscreen printing. This product line's sophisticated fulfillment database
captures the exact quantities and types of materials each franchisee or
distribution point requires for a promotional campaign and fulfills the order
via in-bound telemarketing stations maintained by us on behalf of the customer.
Additionally, distribution and fulfillment services include inventory
management, warehousing, in-bound customer services and out-bound telemarketing
services, fulfillment and customer service for third party marketing services.
Primary markets served include the fast food restaurant, beverage, retail,
motorsports, hospitality and travel industries.
Specialty Packaging and Promotional Printing
In our specialty packaging and promotional printing product line, we produce
full color, high quality, high visibility product packaging and printed
materials that promote the sale of products or communicate marketing messages.
Our primary markets within this product line include the apparel, technology,
pharmaceutical, transportation, travel and furniture industries. Our primary
services include structural package design, production and distribution of high-
quality, full-color external and internal packaging, dimensional mailers,
corporate identity materials, product literature, computer documentation and
catalogs for leading national
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companies. In addition, we provide turnkey software services, including CD-ROM
and floppy disk duplication, label printing, custom kit assembly, fulfillment,
distribution and inventory and logistics management for technology-oriented
customers.
In fiscal 1998, we achieved several significant milestones in our specialty
packaging and promotional printing product line, including:
. the completion of our move to a new state-of-the-art 180,000 square-foot
printing facility, providing capacity to keep pace with our growing
national customer base;
. the national expansion of our sales force, adding offices in Atlanta,
Boston, Chicago, New York and Raleigh; and
. the registration of our quality system to the ISO 9002 standard, a
designation awarded to a select few organizations in the industry, which
we believe is increasingly required by both our existing and target
customers.
Graphic Solutions
Our graphic solutions product line offers a full array of commercial printing
and distribution services to Fortune 1000 companies and catalog marketers. This
product line focuses on larger corporate customers that want preferred vendor
relationships and full service offerings. Services include electronic and
conventional prepress services, web and sheet-fed offset printing, bindery,
fulfillment and distribution services. Our graphic solutions product line's
offerings were expanded with the purchase of the assets of Beacon Press in
October 1998, which brought us additional web offset printing capabilities.
Marketing Services
In our marketing services product line, we provide creative development and
marketing strategies for customers. Our services include brand research and
implementation, print and broadcast advertising, direct marketing, catalog
design, communications design and new media services. In fiscal 1998, we
consolidated all of our creative businesses under one operating model. The
combination of these diverse marketing and advertising capabilities allows us to
provide customers with complete solutions to marketing challenges.
Our Products and Services
We believe that our success is due largely to our emphasis on providing a full
array of products and services, combined with superior customer service and
responsiveness. In close collaboration with our sales forces, customer service
staffs in each product line work closely with customers from product design and
editing through production and final delivery to assure that customers'
expectations and specifications are met on a consistent basis. Our goal is to
offer the highest standards in meeting our printing customers' needs with our
primary focus on responding quickly and competitively to customer demands and
requirements. Many of our production facilities are open 24 hours a day, seven
days a week, to allow for timely production of materials. We provide the
following services to our customers in both sectors of our business:
Creative Services
. Composition. These services include digital typesetting and the
integration of text with graphics. These services are focused primarily
on our STM journal customers where the composition capability is a
critical component of our end-to-end services. We are one of the largest
providers
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of composition services in the United States, with four facilities in
the Mid-Atlantic region. Our composition processes and software are
among the best in the industry.
. Editorial services. These services are primarily focused on serving the
needs of STM journal customers who want to out-source components of
their editorial functions, including digital file conversion, copy
editing and indexing. We have developed proprietary software and
processes to improve the efficiency and effectiveness of this function
for customers.
. Internet and online publishing services. These services include the
design, engineering and content maintenance of our customers' Internet
and web-based, online publishing operations. Our STM journal customers
increasingly desire additional distribution outlets via the Internet or
online publishing applications. Our E-DOC division provides a full array
of digital information delivery services to address the STM journal
customers' needs for Internet and online publishing services.
. Creative marketing services. These services typically involve the design
of a customer's marketing message or materials. Creative services
include package design, package engineering, sales promotion
development, strategic marketing consulting, direct marketing,
photography and advertising services. Our advertising services include
the creation and placement of TV, radio and print advertising.
. Digital archiving. We allow customers to store digitally rendered
artwork on our file servers. The artwork can then be accessed and
retrieved from a remote site via high-speed data transmission.
Production Services
Over the past several years, we have developed state-of-the-art print production
facilities and equipment specifically tailored for the markets we serve. Our STM
journal facilities, for example, are equipped to produce high quality black and
white images required to accurately reproduce scientific and medical research.
Similarly, our point-of-purchase facilities are specifically equipped to print
large format point-of-purchase materials and to print on plastic substrates for
products such as translites for fast food restaurant and beverage customers.
Our typical job involves one or more of the following steps and services:
. Prepress. Our prepress services include all the processes necessary to
prepare the media (art, photographs and typed copy), photographically
duplicate or digitally produce images, separate color images into
process colors, assemble films and reproduce film images onto a printing
press. We use electronic technology to compose the individual pages of
the project and to create screen tints, produce color blends and retouch
photos. These images can then be reviewed for exact color and content.
The digital information is then processed to a film plotter for film
output. Our film plotters are capable of plotting up to 3600 dots per
inch resolution, giving a clean detail of the image. We have also
developed an advanced screening process which allows larger quantities
of ink to be used in the printing process, thereby producing a higher
quality image than is available using conventional techniques.
. Electronic prepress. This is a fully automated electronic prepress
process which allows the customer to submit its graphic design and
materials in digital formats, including diskettes and modem file
transfers, or in hard copy, which is digitized through a computer
scanning process. We then edit the design and import digital text and
graphics on a computer to create digital files
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from which the printing plate is developed. Electronic prepress greatly
reduces the time and the number of people involved in the production of
plates, and we believe that we are an industry leader in fully automated
electronic prepress operations.
. Printing. We operate heatset web presses, including half-web, full-web
and double-web presses, as well as large format and conventional sheet-
fed presses. For short-to-medium run length jobs, we primarily use
sheet-fed presses capable of printing up to eight colors, running at
standard press speeds of 6,000 to 10,000 sheets per hour. Web presses
are higher run length presses which utilize rolls of paper, print on
both sides and produce a product that may be folded, glued and
perforated on the press.
. Finishing. We provide extensive finishing services in the final stages
of the production cycle. These services include the cutting, folding and
binding of the finished product.
Distribution Services
We also provide warehousing, fulfillment and distribution services to customers
in each of our major product lines. These services are critical elements of our
integrated end-to-end services.
Primary distribution services include:
. Warehousing. Our customers typically order more materials than they
immediately require. For many of these customers we store the excess
finished products and distribute them as requested by the customer.
. Fulfillment. Many of our large franchised or manufacturing customers
have complicated distribution requirements for their multiple
franchisee, retail or distribution networks. For these customers, we
provide sophisticated inventory management, inbound and outbound
telemarketing, custom kit assembly and order processing for finished
product and marketing materials.
. Reprint services. For our STM journal customers, we provide complete
article reprint services, including order processing, printing and
mailing.
. Distribution. We provide distribution services to customers through
multiple services, including air and ground, U.S. mail, and bulk freight
delivery. For our STM journal customers, we have developed World Wide
Destination Services, a delivery service offering expedited world-wide
distribution of STM journals.
Sales and Marketing
Each of our product lines has dedicated sales and marketing employees. We
believe this structure facilitates understanding and serving the needs of our
specialized markets, enhances our market-focused strategy and allows us to
deliver improved services to our customers. In each of our production
facilities, customer service employees are dedicated to specific product lines.
This alignment of customer service and sales teams improves the flow of work in
our facilities and provides for more efficient internal communications.
Materials and Supply Arrangements
The primary materials used in each of our printing divisions are paper, ink,
film, offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a
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number of suppliers and have not experienced any significant difficulties in
obtaining the raw materials necessary for operations. We have implemented an
inventory management system in which a limited number of paper suppliers supply
all of our paper needs. These suppliers are responsible for delivering paper on
a "just-in-time" basis directly to our facilities. We believe that this system
enhances the flexibility and speed with which we can serve customers, improves
pricing on paper purchases, eliminates a significant amount of paper inventory
and reduces costs by reducing warehousing capacity. See "Risk Factors--Cost and
Availability of Paper and Other Raw Materials."
Competition
We compete in the highly fragmented and competitive U.S. printing and marketing
services industry. To lessen our exposure to larger competitors with greater
resources, we focus generally on specialized markets where we can achieve market
leader status and where we can gain competitive advantages through our knowledge
of the market and our ability to offer high quality, end-to-end solutions to
customers.
In our Professional Communications sector, we compete in the STM journal and
special interest magazine markets. In the STM journal market, our primary
competitors consist of several smaller, privately-held full-service firms
including Sheridan Press, Inc., Allen Press Inc. and Edwards Brothers, which
offer a range of products and services similar to ours. In addition, several
large publication printers, including R. R. Donnelley & Sons Company, Banta
Corporation and Quebecor Printing Inc., provide more limited services to journal
publishers. In this market, we compete primarily on our ability to provide end-
to-end services to not-for-profit and commercial STM journal publishers, most of
whom choose to out-source significant aspects of their journal editorial,
production and distribution process.
In the special interest magazines market, our competition consists of both large
national printers and smaller regional printers. While the competitive nature of
this market requires that we provide quality services at competitive prices, our
strategy is to focus on associations, educational institutions and special-
interest commercial publishers. These customers typically place a higher value
on service and publish shorter circulation titles, where we believe our
equipment and processes give us a competitive advantage over longer-run
printers.
Our Marketing Communications sector competes with a wide range of traditional
printing and packaging firms, as well as marketing, advertising and new media
firms. In the highly fragmented specialty packaging market, many firms compete
in the high quality folding carton printing sector. Several of these competitors
are larger than us, with the remainder of our competition consisting of regional
commercial printing and package printing firms. In this market, firms compete
based on ability to provide high quality products with quick turn around. In the
point-of-purchase market, there are over 10,000 firms providing point-of-
purchase products and services in the United States, none of which is dominant.
Customers in this market demand sophisticated, customized services ranging from
design to distribution and fulfillment.
Patents, Trademarks and Brand Names
We market products under a number of trademarks and brand names. We also hold or
have rights to use various patents relating to our envelope business, which
expire at various times through 2012. Our sales do not materially depend upon
any single or related group of patents.
Facilities
We consider all of our properties and the related machinery and equipment to be
well-maintained, in good operating condition and adequate for our present needs.
We expect to expand as necessary to support the
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continued development of our operations. The following table contains
information regarding our primary facilities:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Owned/ Size
Product Line Location Primary Use Leased (sq. ft.)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Professional Communications Sector
Journal Services Akron, PA Manufacturing/Composition Owned 50,000
Directories, Books Baltimore, MD Manufacturing/Printing Leased 175,000
Journal Services Baltimore, MD Manufacturing/Composition Leased 51,700
Directories, Books Baltimore, MD Warehouse, Distribution Leased 40,000
Magazines East Stroudsburg, PA Manufacturing/Printing Owned 164,570
Journal Services Easton, MD Manufacturing/Printing Owned 196,800
Journal Services, Magazines Easton, PA Manufacturing, Warehouse, Offices Owned 252,320
Journal Services Ephrata, PA Manufacturing/Printing Owned 142,300
Journal Services, Magazines Ephrata, PA Warehouse Leased 24,840
Journal Services Lancaster, PA Manufacturing/Printing Owned 175,000
Journal Services Lancaster, PA Warehouse Owned 52,000
Journal Services, Magazines Lancaster, PA Warehouse, Distribution Leased 18,000
Journal Services, Magazines Richmond, VA Manufacturing/Printing Owned 266,900
Journal Services Richmond, VA Warehouse, Backcopy Leased 72,000
Journal Services Richmond, VA Manufacturing, Digital Services Owned 14,760
Marketing Communications Sector
Specialty Packaging (Disk Duplication) Atlanta, GA Manufacturing Leased 88,000
Point of Purchase Atlanta, GA Manufacturing Owned 80,000
Point of Purchase Atlanta, GA Manufacturing, Office Owned 65,300
Point of Purchase Atlanta, GA Warehouse Leased 61,175
Marketing Services (Catalogs) Atlanta, GA Catalog Services and Production Leased 60,000
Point of Purchase Atlanta, GA Offices Leased 38,000
Point of Purchase Atlanta, GA Warehouse Leased 19,000
Specialty Packaging and Promotional Charlotte, NC Manufacturing/Printing Owned 180,000
Printing
Specialty Packaging and Promotional Charlotte, NC Warehouse Leased 39,600
Printing
Marketing Services (Direct Marketing) Charlotte, NC Direct Marketing Services Leased 19,000
Graphic Solutions Richmond, VA Manufacturing/Printing Owned 97,000
Marketing Services (Advertising, Identity
Marketing, New Media) Richmond, VA Advertising Services Leased 13,000
Corporate
Corporate Office Richmond, VA Corporate Office Leased 23,000
</TABLE>
Employees
We employ approximately 4,600 persons, approximately 22% of whom are covered by
collective bargaining agreements with local unions of the Communications Workers
of America and Graphic Communications International. We recently renewed
contracts with the three local unions at our Lancaster, Pennsylvania plant for a
three-year term expiring in February 2002. The union contract covering employees
at the Easton, Pennsylvania facility expires in January 2001. The contract with
one of the local unions in East Stroudsburg was recently renewed and the
contracts with the two remaining local unions are currently under negotiation.
We do not foresee any significant problems in concluding those contracts by
August 1, 1999. These agreements expire from time to time and are negotiated
separately. We believe our relationship with our employees is good. In addition,
we believe that no single collective bargaining agreement is material to our
operations taken as a whole.
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Legal Proceedings
From time to time we may be involved in claims or lawsuits that arise in the
ordinary course of business. Accruals for claims or lawsuits have been provided
for to the extent that losses are deemed probable and can reasonably be
estimated. Although the ultimate outcome of these claims or lawsuits cannot be
ascertained, on the basis of present information and advice received from
counsel, it is our opinion that the disposition or ultimate determination of
such claims or lawsuits will not have a material adverse effect on us. In the
case of administrative proceedings related to environmental matters involving
governmental authorities, we do not believe that any imposition of monetary
damages or fines would be material.
Environmental
Our operations are subject to federal, state and local environmental laws and
regulations relating to, among other things, air emissions, waste generation,
handling, management and disposal, wastewater treatment and discharge and
remediation of soil and groundwater contamination. We believe we are in
substantial compliance with environmental laws and regulations.
Although we do not anticipate that material capital expenditures will be
required to achieve or maintain compliance with environmental laws and
regulations, changing environmental laws and regulations might affect the
printing industry as well as the manufacture or transportation of envelopes and
related packaging products. For example, we will be subject to regulations being
developed by the federal Environmental Protection Agency ("EPA") and state
environmental agencies to implement the Clean Air Act Amendments of 1990.
Accordingly, we cannot assure you that we will not discover environmental
matters resulting in material liabilities or expenditures or that, in the
future, material expenditures for environmental matters will not be required by
changes in law or regulations or their enforcement.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), as amended (also known as the "Superfund" legislation), under
certain circumstances imposes joint and several liability, without regard to
fault or the legality of the original conduct, on certain classes of persons for
the costs of investigation and remediation of sites at which there have been
releases or threatened releases of hazardous substances. These persons, known as
potentially responsible parties ("PRPs"), include the owners and operators of
property and persons that generated, disposed of or arranged for the disposal of
hazardous substances found at a site. Many states have similar programs.
Although certain of our predecessors have been designated as PRPs under CERCLA
with respect to off-site disposal of hazardous substances, we believe that we
have minimal exposure as a result of such designations, particularly because of
the indemnifications described below. We have not been named as a PRP at any
Superfund sites as a result of our ongoing operations. Due to our waste
management and minimization programs and our current use of permitted hazardous
waste disposal facilities, we do not believe that our current operations will
give rise to future material liability under CERCLA.
Soil and groundwater contamination is present at our facilities in Lancaster,
Pennsylvania and Easton, Maryland owing to the operations of former owners. This
contamination is being remediated by the former owners pursuant to indemnity
agreements obtained from them at the time of purchase of these facilities. There
can be no assurance, however, that these indemnities will be fully performed or
that we will not incur any material costs with respect to these matters.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We are the largest printer and producer of STM journals and publications in the
United States. We are also a leading printer and producer of special interest
magazines, point-of-purchase materials and specialty packaging materials. We are
organized around two business sectors, Cadmus Professional Communications, which
provides printing and publishing services for STM journal and special interest
magazine publishers, and Cadmus Marketing Communications, which provides graphic
communications and marketing services primarily to Fortune 1000 companies. In
the third quarter of fiscal 1999, we divested our financial communications and
custom publishing product lines. On April 1, 1999, we acquired Mack, further
strengthening our position in the STM journal and special interest magazine
market.
The following discussion and analysis of the financial condition and results of
operations covers periods prior to our acquisition of Mack and the refinancing
of our former senior credit facility. As a result of those transactions, we now
have a different capital structure. Accordingly, the results of operations for
periods subsequent to the consummation of these transactions will not
necessarily be comparable to prior periods. See "Prospectus Summary--Recent
Transactions," "Unaudited Pro Forma Consolidated Financial Data," "Cadmus
Communications Corporation Selected Historical Consolidated Financial Data,"
"Description of Senior Credit Facility," "Description of Exchange Notes" and the
audited and unaudited consolidated historical financial statements and notes
thereto, included elsewhere in this prospectus.
Certain Effects of Mack Acquisition
We believe that the acquisition of Mack will create economies of scale and
synergies that should result in improved margins and operating results and
enable us to better serve our customers. For example, we believe we will realize
procurement savings of approximately $2.6 million annually by applying the
volume discounts in our existing national procurement contracts to Mack's
historical purchases of paper, printing supplies and certain other manufacturing
items. As we integrate Mack, we will evaluate additional opportunities to
improve our operating results through revenue expansion, cost reductions and
consolidation of redundant operations and functions. If we decide to eliminate
any assets, that decision could result in a charge for business integration and
consolidation costs that would have the effect of reducing assets and our net
worth.
Significant Transactions
In the third quarter of fiscal 1999, we divested our financial communications
and custom publishing product lines. Net cash proceeds from these transactions
totaled $35.0 million and resulted in a pre-tax net gain of $9.5 million. For
the twelve months ended December 31, 1998, our financial communications product
line's net sales were $40.7 million and its operating income was $3.8 million.
Contributions to net sales and operating income from our custom publishing
product line were immaterial.
In April 1998, we acquired Germersheim, Inc., an Atlanta-based point-of-purchase
provider. In June 1998, we recorded an acquisition-related restructuring charge
of $4.0 million ($2.5 million net of tax) related to the integration of
Germersheim with our existing point-of-purchase operations. The charge included
costs to consolidate facilities, eliminate redundant assets and provide
severance.
During the fourth quarter of fiscal 1997, we adopted a restructuring plan that
impacted a number of our operations. The plan included:
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. the closing of our Baltimore promotional printing facility and our Long
Beach-based direct marketing agency;
. the consolidation of our Atlanta and Richmond-based interactive
divisions;
. the consolidation of two STM journal fulfillment and distribution
operations;
. the realignment of management, production and administrative personnel
due to the realignment of our businesses;
. the write-down of tangible and intangible assets; and
. the exit from certain nonstrategic customer relationships and product
lines.
In connection with this restructuring plan, we recorded a restructuring charge
of $19.9 million ($12.9 million net of tax) in the fourth quarter of fiscal
1997. Operations that were discontinued as a result of the restructuring had net
sales of $16.4 million and $15.9 million in fiscal 1997 and fiscal 1996,
respectively. The fiscal 1997 restructuring charge was offset by a $0.3 million
restructuring gain ($0.2 million net of tax) recorded in the first quarter of
fiscal 1997 related to the restructuring of our former consumer publishing
product line.
As of March 31, 1999, we had $1.1 million remaining in restructuring reserves,
which we believe is adequate to complete the restructuring activities described
above.
Results of Operations
The following table summarizes our consolidated results of operations for the
periods indicated, as well as the percentages of certain categories relative to
net sales.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Years Ended June 30, Nine Months Ended March 31,
---------------------------------------------------- ---------------------------------
Dollars in millions 1996 1997 1998 1998 1999
---------------- ----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $336.7 100.0% $384.9 100.0% $393.8 100.0% $289.6 100.0% $308.6 100.0%
Cost of sales 259.0 76.9 299.8 77.9 304.0 77.2 223.7 77.2 247.0 80.0
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Gross profit 77.7 23.1 85.1 22.1 89.8 22.8 65.9 22.8 61.6 20.0
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Selling and administrative expenses 61.2 18.2 63.1 16.4 62.1 15.8 45.9 15.9 42.2 13.7
Restructuring charge, net -- -- 19.7 5.1 4.0 1.0 -- -- -- --
Net gain on divestitures -- -- -- -- -- -- -- -- (9.5) (3.1)
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Operating income 16.5 4.9 2.3 0.6 23.7 6.0 20.0 6.9 28.9 9.4
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Interest expense 5.2 1.5 7.8 2.0 7.6 1.9 5.6 1.9 6.1 2.0
Other expenses, net 0.8 0.3 1.9 0.5 1.3 0.3 1.1 0.4 1.4 0.4
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Income (loss) before income taxes and
extraordinary item 10.5 3.1 (7.4) (1.9) 14.8 3.8 13.3 4.6 21.4 7.0
Income tax expense (benefit) 3.9 1.2 (2.2) (0.6) 5.7 1.5 5.1 1.8 8.2 2.7
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Income (loss) before extraordinary
item 6.6 1.9 (5.2) (1.3) 9.1 2.3 8.2 2.8 13.2 4.3
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit) (0.8) (0.2) -- -- -- -- -- -- -- --
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Net income (loss) $ 5.8 1.7% $ (5.2) (1.3)% $ 9.1 2.3% $ 8.2 2.8% $ 13.2 4.3%
====== ===== ====== ====== ====== ===== ====== ===== ====== =====
Capital expenditures $ 25.3 7.5% $ 22.9 5.9 % $ 33.6 8.5% $ 28.6 9.9% $ 12.3 4.0%
</TABLE>
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<PAGE>
Comparison of Nine Months Ended March 31, 1999 with Nine Months Ended March 31,
1998
Net Sales
Net sales for the first nine months of fiscal 1999 increased 6.5% to $308.6
million from $289.6 million for the same period in fiscal 1998. The increase for
the nine-month period was driven primarily by growth from our STM journal,
graphic solutions and specialty packaging and promotional printing product lines
and the inclusion of Germersheim's point-of-purchase operations in the first
nine months of fiscal 1999. Adjusted for the acquisition of Germersheim and the
divestitures of our financial communications and custom publishing product
lines, net sales growth was 5.8% for the nine-month period ended March 31, 1999.
Professional Communications sector net sales rose 2.4% to $154.3 million during
the first nine months of fiscal 1999. This increase was primarily attributable
to net sales growth in our STM journal product line, which was partially offset
by lower magazine net sales. This decline was due principally to our decision to
discontinue serving certain non-strategic magazine accounts in fiscal 1998.
Net sales for the Marketing Communications sector increased by 11.7% for the
first nine months of fiscal 1999, from $138.9 million to $155.1 million. This
increase was primarily driven by sales growth of 28.5% and 19.4% in our graphic
solutions and specialty packaging and promotional printing product lines,
respectively, and the inclusion of Germersheim's point-of-purchase operations in
the first nine months of fiscal 1999. These increases in net sales were
generally attributable to the addition of new clients, increased work from
existing clients and the expansion of manufacturing and selling capacity within
these businesses. The acquisition of certain assets from Beacon Press in October
1998 also contributed to the growth in our graphic solutions product line. These
increases were partially offset by lower net sales from our financial
communications and custom publishing product lines, which were divested in the
third quarter of fiscal 1999.
Gross Profit
Our gross profit margin declined to 20.0% for the first nine months of fiscal
1999, compared to 22.8% for the same period of fiscal 1998. This decline was
attributable to several factors, including: (1) the impact of lower margins in
our financial communications product line; (2) lower net sales in our custom
publishing product line; and (3) higher costs and certain production
inefficiencies associated with the integration of Germersheim into our existing
point-of-purchase product line. Adjusted for the divestitures of our financial
communications and custom publishing product lines, gross profit margin was
20.3% for the first nine months of fiscal 1999 compared to 21.2% for the same
period last year.
Selling and Administrative Expenses
Selling and administrative expenses expressed as a percentage of net sales
declined to 13.7% in the first nine months of fiscal 1999 from 15.9% for the
same period of fiscal 1998. This improvement was largely attributable to net
sales growth, continued aggressive cost containment, lower sales and
administrative costs in our point-of-purchase product line resulting from the
integration of Germersheim and lower incentive compensation and discretionary
benefits reflecting lower than anticipated year-to-date performance.
Operating Income
Operating income rose 44.5% for the first nine months of fiscal 1999 to $28.9
million from $20.0 million in the same period of fiscal 1998. Adjusted for the
$9.5 million pre-tax net gain on the divestitures of our financial
communications and custom publishing product lines, and the operating results of
these product lines, our operating income rose 33.5% to $20.6 million for the
first nine months of fiscal 1999 compared to the same period last year.
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<PAGE>
Interest Expense and Income Taxes
Interest expense increased $0.5 million for the first nine months of fiscal 1999
over the same period last year due to higher interim debt levels resulting
primarily from acquisitions and additional working capital requirements.
The effective income tax rate remained unchanged at 38.5% for the first nine
months of fiscal 1999 and fiscal 1998.
Comparison of Fiscal 1998 with Fiscal 1997
Net Sales
Net sales rose 2.3% to $393.8 million for fiscal 1998 from $384.9 million in
fiscal 1997. Adjusted for businesses discontinued in connection with the 1997
restructuring and for the 1998 acquisition of Germersheim, net sales growth was
6.5%.
Net sales for our Professional Communications sector were $202.7 million for
fiscal 1998, which were relatively unchanged from fiscal 1997. This was due to
lower paper prices, which are passed on to our customers and consequently
decrease net sales, and the intentional downsizing of our magazine product line.
These declines in net sales were offset by increases in trade
association/educational publications and a 1.1% increase in STM journal net
sales.
Net sales for our Marketing Communications sector were $199.0 million for fiscal
1998 compared to $183.5 million for fiscal 1997, representing an increase of
8.4%. Adjusting for the impact of discontinued operations and the acquisition of
Germersheim, net sales increased 16.7%. This increase in Marketing
Communications' net sales was led primarily by: (1) a 19.0% increase in net
sales from our specialty packaging and promotional printing product line; (2) a
17.5% increase in agency fees from our marketing services product line; (3) a
30.8% increase from our financial communications product line; and (4) strong
performances by our graphic solutions and point-of-purchase product lines,
particularly in the latter half of the fiscal year. The net sales increase in
our marketing services product line was driven by a 32.2% increase in direct
marketing agency fees resulting from new account development and growth from
existing customers, a 19.0% increase in custom publishing agency fees due to
growth from existing customers and an increase in catalog design and photography
agency fees due to increased billings to existing customers. The growth in the
financial communications product line was driven by strong capital markets
activity, growth in mutual fund services and growth in full service banking
relationships.
Gross Profit
Our gross profit margin improved to 22.8% in fiscal 1998 from 22.1% in the prior
year. This increase was primarily attributable to the benefits resulting from
restructuring actions that we took in the fourth quarter of fiscal 1997, a
favorable change in product mix and lower paper prices.
Selling and Administrative Expenses
Selling and administrative expenses were $62.1 million for fiscal 1998,
representing a decrease of $1.0 million from the prior year. As a percentage of
net sales, selling and administrative expenses decreased from 16.4% in fiscal
1997 to 15.8% in fiscal 1998. This improvement was driven by efficiencies
resulting from restructuring actions that we took in the fourth quarter of
fiscal 1997.
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<PAGE>
Operating Income
Operating income was $23.7 million for fiscal 1998, as compared to $2.3 million
for fiscal 1997. Operating income was affected by restructuring charges of $4.0
million and $19.7 million in fiscal 1998 and 1997, respectively. Operating
income before restructuring charges rose to $27.7 million, or 7.0% of net sales,
from $22.0 million, or 5.7% of net sales in the prior year. This increase in
operating income was driven by improvement from both our Professional
Communications and Marketing Communications sectors.
Interest Expense and Income Taxes
Interest expense decreased to $7.6 million in fiscal 1998 from $7.8 million in
fiscal 1997, primarily due to our lower average debt levels throughout the year.
The effective income tax rate was 38.5% for fiscal 1998 and 29.8% for fiscal
1997.
Comparison of Fiscal 1997 with Fiscal 1996
Net Sales
Fiscal 1997 net sales increased 14.3% to $384.9 million from $336.7 million in
fiscal 1996. Professional Communications sector net sales increased by 26.4% and
Marketing Communications sector net sales rose by 7.2%. Offsetting these
increases were lower publishing net sales resulting from the sale of our
consumer publishing operation during the first quarter of fiscal 1997. Fiscal
1997 net sales were flat with fiscal 1996 when adjusted for the impact of
acquisitions, divestitures and lower paper prices.
The 26.4% increase in Professional Communications sector net sales was primarily
due to our acquisition of Lancaster Press, Inc. in the fourth quarter of fiscal
1996, and continued growth in other STM journal product lines. Excluding
Lancaster net sales and the impact of lower paper prices, other STM journal net
sales increased by 3.0%. Special interest magazine net sales declined by 27.3%
as a result of the intentional refocusing of our sales mix and discontinuation
of relationships with non-strategic customers and lower paper prices.
Marketing Communications sector net sales rose 7.2%, driven by a full year's
inclusion of net sales from our purchase of The Software Factory during the
second quarter of fiscal 1996 and internal growth. Specialty packaging and
promotional printing product line net sales rose by 22.9% in fiscal 1997 as
compared to fiscal 1996 due to the inclusion of The Software Factory operations
and continued growth from existing customers. Financial communications net sales
increased 22.8%, primarily due to continued strength in financial markets, an
increase in shareholder communication sales and growth in full-service contracts
with financial institutions. These increases were partially offset by a 16.5%
decline in point-of-purchase product line net sales resulting from lower sales
to fast food restaurant and beverage customers, the loss of a significant
account during fiscal 1997 and a longer than anticipated selling cycle for new
business.
Gross Profit
Our gross profit margin in fiscal 1997 was 22.1% of net sales compared to 23.1%
in fiscal 1996. The margin decline was due to margin erosion in our point-of-
purchase, interactive and custom publishing product lines, due to the
combination of lower sales and higher production costs. Cost of sales also was
negatively impacted by excess capacity at several of our Marketing
Communications sector printing facilities. These factors were partially offset
by significant gross margin improvement in our Professional Communications
sector as a result of improved sales mix, continued efficiency improvements from
the Richmond manufacturing facility and the successful integration of the
acquired Lancaster operations.
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<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses declined to 16.4% of net sales compared to
18.2% in fiscal 1996. This decrease was primarily attributable to the full-year
impact of the acquisition of Lancaster, which had a lower selling and
administrative expense ratio than we did in the aggregate, and to cost control
measures implemented in fiscal 1997.
Operating Income
Operating income in 1997 was $2.3 million, down 86.1% from fiscal 1996. This
decline was due to a $19.7 million restructuring charge taken in June 1997.
Adjusted for the restructuring charge, operating income rose 33.2% to $22.0
million from $16.5 million in 1996.
Interest Expense and Income Taxes
Interest expense increased by $2.6 million, or 51.4% in fiscal 1997, due to
additional debt incurred to fund the acquisition of Lancaster during the fourth
quarter of fiscal 1996. The effective income tax rate was 29.8% for fiscal 1997
and 37.4% for fiscal 1996.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was $3.5 million for the first nine
months of fiscal 1999, as compared to $27.3 million for the first nine months of
1998, representing a $23.8 million reduction in cash provided by operating
activities. This change was primarily due to an increase in working capital
demands in the first half of fiscal 1999, which included: (1) seasonal increases
in receivables due to higher net sales over the prior quarter and pre-billings
to customers; (2) seasonal increases to work in process and paper inventory
levels; (3) final payments on certain production equipment purchased in late
fiscal 1998; and (4) the payment of fiscal year 1998 sales and management
incentives. The decrease in cash provided by operating activities as compared to
the prior year was partially offset by a reduction in cash outflows related to
our restructuring plans announced in the fourth quarters of fiscal years 1998
and 1997 and by a decrease in the required cash contribution to fund our pension
plan.
Net cash provided by operating activities totaled $35.3 million, $31.6 million
and $13.8 million for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. The lower amount recorded in fiscal 1996 was attributable to
increases in our investment in accounts receivable and inventories.
Investing Activities
Net cash provided by (used in) investing activities was $18.1 million for the
first nine months of fiscal 1999, compared to $(24.0) million in the first nine
months of 1998. This increase was due primarily to the receipt of $35.0 million
in proceeds from the sale of the financial communications product line, offset
by an aggregate of $5.2 million paid for the purchase of certain printing assets
of Beacon Press and the acquisition of Dynamic Diagrams, Inc., a web information
architecture firm. Capital expenditures for the first nine months of fiscal 1999
were $12.3 million compared to $28.6 million in the prior period, and primarily
consisted of investments in new presses and new business and manufacturing
systems. On a pro forma basis, after giving effect to the acquisition of Mack,
capital expenditures were $18.4 million for the first nine months of fiscal 1999
and $37.9 million for fiscal 1998. Currently, we have no material commitments
for capital expenditures. However, we estimate that capital expenditures for
fiscal 1999 will total $20.0 million and anticipate that capital expenditures
for fiscal 2000 will total approximately $22.5 million.
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<PAGE>
Net cash used in investing activities totaled $38.5 million in fiscal 1998.
Investing activities included $33.6 million for capital expenditures and $11.1
million to fund acquisitions. Partially offsetting these uses was $6.8 million
in proceeds from sales of property, plant and equipment, primarily related to
the sale of manufacturing facilities in Charlotte and Baltimore. Significant
capital expenditures included three new presses and the expansion of our
Charlotte manufacturing and fulfillment facilities.
Net cash used in investing activities in fiscal 1997 totaled $15.5 million.
Included in this amount were capital expenditures of $22.9 million, which were
partially offset by proceeds of $6.5 million from the sale of our consumer
publishing product line and sales of property, plant and equipment of $2.9
million.
In fiscal 1996, net cash used in investing activities totaled $98.3 million,
including $25.3 million for capital expenditures and $73.4 million related to
our acquisitions of Lancaster Press and The Software Factory.
Financing Activities
Net cash used in financing activities was $21.3 million for the first nine
months of fiscal 1999 compared to $3.2 million for the same period of the prior
year. We reduced borrowings by $18.3 million in the first nine months of fiscal
1999. Additional uses of funds include the repurchase of shares of our common
stock for $3.9 million, and dividend payments of $1.2 million.
Net cash provided by financing activities totaled $3.0 million in fiscal 1998 as
additional bank revolving credit facility borrowings were utilized to fund
investing activities in excess of net cash provided by operating activities.
Net cash used by financing activities in fiscal 1997 totaled $17.1 million as we
used the excess of net cash provided by operating activities less net cash used
in investing activities to repay debt.
Net cash provided by financing activities in fiscal 1996 totaled $85.4 million.
Included in this amount was additional indebtedness incurred to finance the
acquisitions of Lancaster Press and The Software Factory and the issuance of
$38.4 million in common stock.
Total debt at March 31, 1999 was $83.5 million, down from $101.8 million at June
30, 1998, as proceeds from the sale of the financial communications product line
partially offset an increase in working capital requirements described above. As
a result of the decreased debt level, our debt to total capital ratio decreased
to 40.9% at March 31, 1999, from 48.1% at June 30, 1998.
On April 1, 1999, we entered into a new five year, $200.0 million senior credit
facility. Initial borrowings under this facility totaled approximately $137.4
million and were used to pay off borrowings under our former senior credit
facility, to repay certain indebtedness of Mack and to pay the cash purchase
price to the former shareholders of Mack. See "Description of Senior Credit
Facility."
Following our acquisition of Mack, the divestiture of our financial
communications and custom publishing product lines, the refinancing of our
former senior credit facility and the sale of the Old Notes and the application
of the net proceeds therefrom, our primary cash requirements will be for debt
service, capital expenditures and working capital. Our primary sources of
liquidity will be cash flow provided by operations and borrowings under our
senior credit facility. We believe that these funds will provide us with
sufficient liquidity and capital resources to meet our anticipated debt service
requirements, capital expenditures and working capital needs through fiscal
2000. We cannot assure you, however, that our business will generate sufficient
cash flow from operations or that future borrowings will be available under our
senior credit facility or otherwise to enable us to do so. Our future operating
performance and our ability to service or refinance
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<PAGE>
the Old Notes and the Exchange Notes or to service, extend or refinance our
senior credit facility depends on our ability to implement our business strategy
and on general economic, financial, competitive, legislative, regulatory and
other factors, many of which are beyond our control.
Market Risk
Our total outstanding long-term debt at March 31, 1999, included approximately
$79.4 million in variable rate obligations. As of June 30, 1998, we had
outstanding interest rate swap agreements that effectively converted $53.7
million of these variable rate obligations to fixed rate obligations. These swap
agreements expired or were terminated prior to March 31, 1999. At March 31,
1999, there were approximately $2.1 million of unamortized losses on the
terminated contracts which were to be amortized over the remaining life of the
former senior credit facility. For the nine months ended March 31, 1999, the
interest rate swap agreements increased interest expense by approximately $0.9
million. Additional information on the interest rate swaps is provided in Note 7
of Notes to Consolidated Financial Statements in our annual report on Form 10-K
for the fiscal year ended June 30, 1998.
Year 2000 Issue
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems will recognize
the year 2000 as "00." This could cause many computer applications to fail
completely or to create erroneous results unless corrective measures are taken.
We recognize the need to ensure that our operations will not be adversely
impacted by Year 2000 software failures and are in the process of preparing for
the Year 2000. We are engaged in an ongoing analysis and remediation of our Year
2000 exposure. Mack, which we acquired on April 1, 1999, was engaged in its own
analysis of its Year 2000 exposure at the time we acquired them. We are actively
continuing the process that they started and are aggressively integrating Mack's
Year 2000 response model into our model, which is discussed below. Because each
company's Year 2000 model has operated separately up to this point, we have
presented separate discussions of each below.
Cadmus
In April 1998, we designated a formal Year 2000 monitoring team to coordinate,
identify, evaluate and implement changes to computer systems and applications
necessary to achieve a Year 2000 date conversion with minimal effect on
customers or disruption to business operations. Cadmus' Year 2000 response model
includes the following four phases, each of which are explained more fully
below:
. problem awareness;
. inventory;
. assessment; and
. remediation, testing and implementation.
Problem Awareness: During the problem awareness phase, we held training
sessions for management on potential effects of the change to the year 2000 and
notified our employees that we were aware of and addressing the problem. This
phase was completed in October 1998.
Inventory: During this phase, the monitoring team conducted site level
inventories of systems and equipment to survey assets and software for potential
compliance problems. Information technology systems and operational systems
(presses, environmental controls, telecommunications equipment, etc.) were
addressed. These continually updated inventories formed the basis of the site
level remediation, testing and implementation efforts. All formal system
inventories were completed by November 1998.
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<PAGE>
Assessment: In the assessment phase, we analyzed the results of our inventories
and concluded that our risk of having non-compliant systems was low. The
assessment phase was completed by November 1998.
Remediation, Testing and Implementation: This phase began in January 1999.
During this phase, we implemented planned financial and administrative system
upgrades and Year 2000 compliant replacements. In addition, our manufacturing
systems also were made compliant. Programming modifications were tested and
placed back into production when the testing was completed. We substantially
completed all remediation, testing and implementation by June 30, 1999, pending
minor system installations planned for July, 1999.
We believe that our most reasonably likely worst case Year 2000 scenario may
involve non-compliant vendors or non-compliant customers who may experience
business outages. Accordingly, we have been communicating with all third parties
with which we have a material relationship (including vendors, financial
institutions and customers) to identify potentially non-compliant parties. We
will compile a list of non-compliant parties for the purpose of assessing the
degree of exposure and risk. Contingency plans specific to those parties
(including, with respect to vendors, alternative vendor relationships) will be
developed. This process is expected to be completed by August 31, 1999.
We estimate the total cost of achieving Year 2000 compliance to be $0.4 million
to $0.6 million in excess of our normal software upgrades and replacements. Some
of these costs have already been incurred during fiscal 1998. The remainder will
be incurred in fiscal 1999 and the first half of fiscal 2000 and will be
expensed through operations.
Mack
We have substantially completed the inventory and assessment process for the
Mack entities and have made progress in their remediation.
Prior to our acquisition of Mack, they recognized the need to ensure that their
business operations would not be adversely affected by the Year 2000 and were
aware of the time-sensitive nature of the problem. Mack has assessed and we are
completing our assessment of how Mack may be impacted by the Year 2000. Mack had
formulated and commenced a comprehensive plan to address all known aspects of
the Year 2000 problem: information systems, production and facilities equipment,
suppliers and customers. We are currently making inquiries of Mack's customers
and suppliers to assess their Year 2000 readiness. We are also in the process of
testing Mack's information technology systems, as well as all other systems and
verifying that vendor-supplied or outsourced systems will be Year 2000
compliant. Any systems that are not compliant will be repaired or replaced. Mack
executives have represented that they have substantially completed their
assessment of how Mack may be impacted, have completed the development of plans
to address the testing and remediation of their systems and have completed more
than half of their testing and remediation activities. In collaboration with
former Mack executives, we have estimated that Mack will complete this process
prior to October 1999.
The identifiable costs of assessing and modifying Mack's computer software and
hardware and its production facilities and equipment, incurred as of March 31,
1999, were $1.9 million. The estimated costs yet to be incurred are $2.0
million. In conjunction with our purchase of Mack, $2.0 million of the purchase
price has been placed in escrow to cover the expected Year 2000 costs. The
current assessment (and therefore the escrow) does not include costs related to
software and hardware replaced in the normal course of business other than
replacements accelerated due to the Year 2000 issue.
We believe that the most reasonably likely worst-case Year 2000 scenario for
Mack may involve non-compliant vendors or non-compliant customers who may
experience business outages. Accordingly, we are
65
<PAGE>
currently communicating with all third parties with which Mack has a material
relationship (including vendors, financial institutions and customers) and
identifying potentially non-compliant parties. We will compile a list of non-
compliant parties for the purpose of assessing the degree of exposure and risk.
Contingency plans specific to those parties (including, with respect to vendors,
alternative vendor relationships) will be developed at that time. We expect to
complete this entire process for Mack prior to November 1999.
66
<PAGE>
MANAGEMENT
The name, age and position held of each of our directors and executive officers
as of May 1, 1999 are set forth below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
C. Stephenson Gillispie, Jr. 56 Chairman of the Board, President and Chief Executive Officer
David G. Wilson, Jr. 58 Chairman, Professional Communications, Director
Steven R. Isaac 51 Executive Vice President, Cadmus Marketing Communications
Joseph J. Ward 52 Executive Vice President, Cadmus Professional Communications
Group
President and Chief Executive Officer, Cadmus Journal Services
Bruce V. Thomas 42 Senior Vice President and Chief Financial Officer
David E. Bosher 45 Vice President and Treasurer
Edward B. Fernstrom 50 Vice President, Information Technology
D. Raymond Fisher 41 Vice President and Controller
John H. Phillips 55 Vice President, Procurement and Operations Finance
Frank Daniels, III 43 Director
G. Waddy Garrett 58 Director
Jeanne M. Liedtka 44 Director
John D. Munford, II 71 Director
Nathu R. Puri 59 Director
John C. Purnell, Jr. 58 Director
Jerry I. Reitman 61 Director
Russell M. Robinson, II 67 Director
John W. Rosenblum 55 Director
Wallace Stettinius 66 Director
Bruce A. Walker 65 Director
</TABLE>
C. Stephenson Gillispie, Jr. has served as Chairman of the Board, President and
Chief Executive Officer since 1992. He has served as a director since 1991.
Prior to that he served as President and Chief Operating Officer from 1990-1992.
He is a director of First Union--VA/MD/DC Advisory.
David G. Wilson, Jr. has served as Chairman, Cadmus Professional Communications
since 1998. He has served as a director since 1998. Prior to that he served as
Executive Vice President of Cadmus Professional Communications from 1997-1998;
President and Chief Executive Officer of Cadmus Journal Services from 1994-1998;
and Senior Vice President and General Manager of our Byrd Journals division from
1993-1994.
Steven R. Isaac has served as Executive Vice President, Cadmus Marketing
Communications since 1997. Prior to that he served as Group President of Cadmus
Marketing Group from 1996-1997; Executive Vice President and Chief Operating
Officer of The Martin Agency in 1996; and Chairman and CEO, Martin Direct from
1979-1996.
Joseph J. Ward has served as Executive Vice President of Cadmus Professional
Communications since 1998 and Group President and Chief Executive Officer of
Cadmus Journal Services since 1998. Prior to that he served as President of
Direct Response for Europe & North America, Bertelsmann Book Group, Bertelsmann
AG from 1996-1998; President and Chief Executive Officer of JWard Consulting
from 1995-1996; and President, Meredith Book Group, Meredith Corporation from
1991-1995.
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Bruce V. Thomas has served as Senior Vice President and Chief Financial Officer
since 1997. Prior to that he served as Vice President and Chief Financial
Officer from 1996-1997; and Vice President, Law and Development from 1992-1996.
David E. Bosher has served as Vice President and Treasurer since 1993. Prior to
that he served as Vice President, Treasurer and Chief Financial Officer from
1990-1993.
Edward B. Fernstrom has served as Vice President of Information Technology since
1995. Prior to that he served as Vice President, Chief Information Officer of
Dyncorp from 1990-1995.
D. Raymond Fisher has served as Vice President and Controller since 1998. Prior
to that he served as Director, Corporate Strategy for CSX Corporation from 1994-
1998; Director, Financial and Economic Reporting for CSX Transportation from
1992-1994; and Director of Finance and Treasurer for TDSI from 1987-1992.
John H. Phillips has served as Vice President, Procurement and Operations
Finance since 1997. Prior to that he served as Vice President, Support and
Development from 1996-1997; Vice President and Regional Manufacturing Officer
from 1994-1996; and Vice President--Operations from 1992-1994.
Frank Daniels, III has served as a director since 1994. He is also Chairman and
Chief Executive Officer, Total Sports, Inc., a Raleigh-based news media
publisher and Chairman, KOZ Inc., a Raleigh-based provider of Web-based data. He
formerly served as Publisher, Nando.net and Vice President, Editor and Director
of Operations, The News and Observer Publishing Company.
G. Waddy Garrett has served as a director since 1997. He is also Chairman and
Chief Executive Officer of Alliance Agronomics, Inc., a Mechanicsville, Virginia
fertilizer production and distribution concern. He is a director of Ag-Chem
Equipment Co., Inc., Reeds Jewelers, Inc. and County Bank of Chesterfield, Inc.
Jeanne M. Liedtka has served as a director since 1995. She also serves as
Associate Professor at the Darden Graduate School of Business Administration,
University of Virginia. She formerly served as Associate Professor at Rutgers
University and Simmons College.
John D. Munford, II has served as a director since 1965. He formerly served as
Vice Chairman and Executive Vice President, Union Camp Corporation, Franklin,
Virginia. He is a director of Universal Corporation and Caraustar Industries,
Inc.
Nathu R. Puri became a director as of the closing of the Mack acquisition on
April 1, 1999, and will serve as a director until the next annual meeting of our
shareholders, which is expected to occur in September of 1999. Mr. Puri has
served as Chairman of the Melton Medes Group since he founded that building
services company by acquiring F.G. Skerritt Limited in 1983. From 1988 to April
1, 1999, Mr. Puri was the Chairman and founder of Melham Holdings, Inc., the
parent company of Mack Printing, which we acquired on April 1, 1999.
John C. Purnell, Jr. has served as a director since 1979. He also serves as
Executive Director, Friends Association for Children, Richmond, Virginia, a non-
profit child welfare organization.
Jerry I. Reitman has served as a director since 1997. He currently serves as
Vice Chairman, International Data Response Corporation and Chairman, Board of
Governors of Children's Miracle Network and as Executive Vice President and
Director, Integrated Communications (retired) of the Leo Burnett Company, a
Chicago-based international advertising agency.
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Russell M. Robinson, II has served as a director since 1984. He is an attorney-
at-law, and serves as President, Director and shareholder of Robinson, Bradshaw
& Hinson, P.A., Charlotte, North Carolina. He is a director of Caraustar
Industries, Inc. and Duke Energy Corporation.
John W. Rosenblum has served as a director since 1988. He is Dean of The Jepson
School of Leadership Studies, University of Richmond, Richmond, Virginia.
Formerly, he served as Tayloe Murphy Professor and Dean, the Darden Graduate
School of Business Administration, University of Virginia. He is a Director of
Chesapeake Corporation, Comdial Corporation, Cone Mills Corporation and a former
director of T. Rowe Price Associates.
Wallace Stettinius has served as a director since 1967. He is also Senior
Executive Fellow at the School of Business, Virginia Commonwealth University,
Richmond, Virginia. He was formerly Chairman of the Board, President and Chief
Executive Officer of our company. He is also a director of Chesapeake
Corporation.
Bruce A. Walker has served as a director since 1977. He is also President and
Chief Executive Officer of Valco Graphics, Inc., a Seattle marketing firm
providing printing, mailing and fulfillment services.
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended June 30, 1998, 1997, and
1996, all compensation paid or accrued by us to our Chief Executive Officer and
our four other most highly compensated executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------------------------------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL COMPENSATION OPTIONS/ COMPEN-
POSITION YEAR SALARY ($)(1) BONUS ($)(2) ($)(3) SARS (#S) SATION ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
C. Stephenson Gillispie, Jr. FY98 $332,000 $199,200 -- 45,000 $ 16,160 (8)
Chairman, President and FY97 322,000 0 -- 20,000 19,347 (9)
Chief Executive Officer FY96 310,000 0 $46,575(5) 20,000 29,185 (10)
Steven R. Isaac FY98 315,000 137,800 -- 20,000 14,611 (11)
Executive Vice President FY97 305,000 50,000 -- 25,000 5,520 (12)
FY96 -- -- -- -- --
David G. Wilson, Jr. FY98 275,000 138,300 -- 25,000 13,414 (13)
Executive Vice President FY97 248,000 50,000 -- 25,000 14,681 (14)
FY96 -- -- -- -- --
Bruce V. Thomas FY98 218,000 130,000 -- 19,000 6,237 (15)
Senior Vice President and FY97 198,000 50,000(4) -- 15,000 4,899 (16)
Chief Financial Officer FY96 165,000 0 21,344(6) 8,000 7,952 (17)
John H. Phillips FY98 182,500 52,000 -- 5,000 8,169 (18)
Vice President, Procurement FY97 176,900 0 -- 10,000 9,003 (19)
and Operations Finance FY96 172,000 0 25,777(7) 8,000 10,105 (20)
</TABLE>
_______________________
(1) Reflects salary before pretax contributions under the our Thrift Savings
Plans. David G. Wilson, Jr., served as Executive Vice President of our
Professional Communications sector during the fiscal year ended June 30,
1998, and assumed his current position as Chairman of that sector effective
July 22, 1998.
(2) Reflects short-term incentive awards, if any, accrued for each of the three
fiscal years ended June 30, 1998 under the Cadmus Executive Incentive Plan.
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(3) For the fiscal year ended June 30, 1998, perquisites did not exceed 10% of
salary and bonus for any of the named executive officers and thus no
amounts are reportable as "Other Annual Compensation."
(4) Reflects a short-term incentive award paid with respect to the fiscal year
ended June 30, 1997, but not included in the Summary Compensation Table in
1997 because it was not awarded until after release of the 1997 Proxy
Statement.
(5) Of the total amount reported as "Other Annual Compensation" for Mr.
Gillispie in fiscal year 1996, $34,875 was paid, pursuant to a change in
our vacation policy, for previously accrued vacation not taken in prior
fiscal years and $11,700 was paid as an automobile allowance.
(6) Of the total amount reported as "Other Annual Compensation" for Mr. Thomas
in fiscal year 1996, $12,163 was paid, pursuant to a change our vacation
policy, for previously accrued vacation not taken in prior fiscal years and
$9,181 was paid as an automobile allowance.
(7) Of the total reported as "Other Annual Compensation" for Mr. Phillips in
1996, $19,350 was paid, pursuant to a change our vacation policy, for
previously accrued vacation not take in prior fiscal years and $6,427 was
paid as an automobile allowance.
(8) Reflects $11,472 contributed or matched by us for fiscal year 1998 under
our Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(9) Reflects $16,452 contributed or matched by us for fiscal year 1997 under
our Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(10) Reflects $26,809 contributed or matched by us for fiscal year 1996 under
our Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(11) Reflects $11,409 contributed or matched by us for fiscal year 1998 under
our Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(12) Reflects $4,883 contributed or matched by us for fiscal year 1997 under our
Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(13) Reflects $10,553 contributed or matched by us for fiscal year 1998 under
our Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(14) Reflects $12,525 contributed or matched by us for fiscal year 1997 under
our Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(15) Reflects $5,628 contributed or matched by us for fiscal year 1998 under our
Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(16) Reflects $4,347 contributed or matched by us for fiscal year 1997 under our
Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(17) Reflects $7,635 contributed or matched by us for fiscal year 1996 under our
Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(18) Reflects $6,906 contributed or matched by us for fiscal year 1998 under our
Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
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<PAGE>
(19) Reflects $7,782 contributed or matched by us for fiscal year 1997 under our
Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
(20) Reflects $8,600 contributed or matched by us for the fiscal year 1996 under
our Thrift Savings Plans and the remainder paid by us for life insurance
premiums.
Stock Options
The following table reflects grants of stock options made during the fiscal year
ended June 30, 1998 to each of the named executive officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS/ STOCK PRICE
UNDERLYING SARS GRANTED EXERCISE APPRECIATION FOR
OPTIONS TO EMPLOYEES OR BASE EXPIRATION OPTION TERM (3)
---------------
NAME GRANTED (#) IN FISCAL YEAR PRICE ($/SH) DATE 5% 10%
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
C. Stephenson Gillispie, Jr. 15,000(1) 6 26.875 5/12/08 253,521 642,476
30,000(2) 12 26.875 5/12/08 507,043 1,284,952
Stephen R. Isaac 5,000(1) 2 26.875 5/12/08 84,507 214,158
15,000(1) 6 26.875 5/12/08 253,521 642,476
David G. Wilson, Jr. 5,000(1) 2 17.125 8/12/07 53,848 136,463
5,000(1) 2 26.875 5/12/08 84,507 214,158
15,000(2) 6 26.875 5/12/08 253,521 642,476
Bruce V. Thomas 5,000(1) 2 26.875 5/12/08 84,507 214,158
14,000(2) 6 26.875 5/12/08 236,620 599,644
John H. Phillips 5,000(2) 2 26.875 5/12/08 84,507 214,158
</TABLE>
____________________
(1) Grants were made our 1990 Long Term Incentive Stock Plan, and were
immediately exercisable.
(2) Grants were made under our 1990 Long Term Incentive Stock Plan and become
exercisable in increments of one-third of the total number of shares
subject to option each on December 31, 2000, 2001 and 2002, subject to
earlier vesting if certain performance criteria are met.
(3) The dollar amounts under these columns are the result of calculations at
assumed annual rates of stock price appreciation set by the Securities and
Exchange Commission. The dollar amounts shown are not intended to forecast
possible future appreciation, if any, of the price of our common stock.
The following table reflects certain information regarding the exercise of stock
options during the fiscal year ended June 30, 1998, as well as information with
respect to unexercised options held at such date by each of the named executive
officers.
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Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED "IN THE MONEY" OPTION
OPTIONS AT FISCAL YEAR END (#) FISCAL YEAR END ($)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C>
C. Stephenson Gillispie, Jr. 204,200/30,000 2,216,632/0
Stephen R. Isaac 30,000/15,000 250,313/0
David G. Wilson, Jr. 79,900/15,000 882,178/0
Bruce V. Thomas 58,800/14,000 573,736/0
John H. Phillips 51,500/33,800 803,281/220,840
</TABLE>
The Columns "Number of Shares Acquired Upon Exercise" and "Value Realized" have
been omitted because no options were exercised by the named executive officers
during the last fiscal year.
Change-In-Control Agreements
We entered into agreements with Messrs. Gillispie, Isaac, Wilson, Thomas,
Phillips, Bosher and Fernstrom and five other managers that provide for
severance payments and certain other benefits if their employment terminates
after "a change in control." Payments and benefits will be paid under these
agreements only if, within three years following a change in control (or such
shorter period from the date of any change in control to normal retirement), the
employee (i) is terminated involuntarily without "cause" (as defined therein)
and not as a result of death, disability or normal retirement, or (ii)
terminates his employment voluntarily for "good reason" (as defined therein).
"Change in control" is defined generally to include (i) an acquisition of 20% or
more of our voting stock, (ii) certain changes in the composition of our board
of directors, (iii) shareholder approval of certain business combinations or
asset sales in which our historic shareholders hold less than 60% of the
resulting or purchasing company or (iv) shareholder approval of our liquidation
or dissolution.
In the event of such termination following a change in control, the employee
will be entitled to receive a lump sum severance payment, certain other payments
and a continuation of employee welfare benefits. Severance payments under these
agreements are determined by a formula that takes into account base salary,
annual bonus and years of employment. Under this formula, Mr. Gillispie will be
entitled to the maximum severance payment, which will be an amount equal to
three times the sum of his base salary and annual bonus for the year in which
termination occurs, or for the fiscal year ended June 30, 1998, whichever is
higher. The total amount payable to Mr. Gillispie may not exceed the maximum
amount that may be paid without the imposition of a federal excise tax on Mr.
Gillispie, except that the amount payable will not be reduced unless his net
after-tax benefit would be greater than that without the reduction.
Retirement Benefits
Pension Plan
Substantially all of our employees who are 21 years of age or older and who are
credited with at least one year of service are covered by our pension plan. The
pension plan is a non-contributory defined benefit pension plan under which
retirement benefits are generally based on periods of active participation. For
the period July 1, 1979 through June 30, 1985, a participant earned a retirement
benefit expressed as an annuity for life equal to 2% of his or her base
compensation (exclusive of non-guaranteed commissions, bonuses, overtime pay and
similar payments) for each year of service. For periods after June 30, 1985, a
participant earns a
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<PAGE>
retirement benefit generally equal to 1.6% of his or her base compensation each
year (limited to the inflation adjusted compensation cap each year starting July
1, 1989). Under a special rule, employees who were participants on June 30, 1985
generally accrued further benefits after June 30, 1985 and before January 1,
1992 at no less than the amount of accrual for the fiscal year ended June 30,
1985. This special rule ceased to apply effective for accruals after December
31, 1991. Prior to July 1, 1979, several different benefit formulas applied, and
employees who were participants before July 1, 1979 will retain their accrued
past service benefit for service before July 1, 1979 based on the benefit
formulas then in effect.
Because retirement benefits under our pension plan are based on career average
compensation, a table showing annual retirement benefits based upon final
average compensation and years of service is inappropriate and has been omitted.
Based on the benefit formula in effect on and after July 1, 1985, and on the
assumption that the individuals named will continue to receive, until normal
retirement age, covered compensation in the same amounts paid for the fiscal
year ended June 30, 1998, the estimated annual benefits (which are not subject
to any deduction for Social Security or other offset amount) payable for the
named executive officers are $67,050 for Mr. Gillispie, $37,120 for Mr. Isaac,
$61,252 for Mr. Wilson, $73,928 for Mr. Thomas and $66,268 for Mr. Phillips.
Supplemental Executive Retirement Plan
We maintain a Supplemental Executive Retirement Plan (the "SERP") to provide
supplemental retirement benefits for our key employees who are credited with at
least five years of service and who are selected by the board of directors for
participation in the SERP. Our board of directors may waive all or any part of
the five year service requirement. The SERP is a non-qualified unfunded plan
which covers 17 active key employees. The retirement or death benefit payable
under the SERP is a 15-year term certain annuity equal to 30% of the
participant's final average (highest three years out of last ten) base
compensation (exclusive of non-guaranteed commissions, bonuses, overtime pay or
similar payments) generally commencing at the participant's normal retirement
age (which is age 65 for employees last hired prior to age 60 or otherwise is
the fifth anniversary of commencement of participation). Benefits are not
subject to any reduction for Social Security or other offset amount.
The following table shows the estimated annual retirement benefits payable to
SERP participants in the following average final compensation and years of
service classifications assuming retirement at age 65. Average compensation
under the SERP includes only the amounts set forth under "Salary" in the Summary
Compensation Table.
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Supplemental Executive Retirement Plan Table
<TABLE>
<CAPTION>
HIGHEST 3-YEAR YEARS OF SERVICE
----------------------------------------
AVERAGE COMPENSATION 5 10 15 20 AND OVER
- --------------------
<S> <C> <C> <C> <C>
100,000 $ 7,500 15,000 22,500 $ 30,000
125,000 9,125 18,750 28,125 37,500
150,000 11,250 22,500 33,750 45,000
175,000 13,125 26,250 39,375 52,500
200,000 15,000 30,000 45,000 60,000
225,000 16,875 33,750 50,625 67,500
250,000 18,750 37,500 56,250 75,000
300,000 22,500 45,000 67,500 90,000
350,000 26,250 52,500 78,750 105,000
400,000 30,000 60,000 90,000 120,000
450,000 33,750 67,500 101,250 135,000
500,000 37,500 75,000 112,500 150,000
</TABLE>
Credited years of service under the SERP as of the fiscal year ended June 30,
1998 are: Mr. Gillispie -- 21; Mr. Isaac -- 2; Mr. Wilson -- 35; Mr. Thomas --
6; and Mr. Phillips -- 23.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 6, 1999, the number and percentage of
shares of common stock held by persons known by us to be the owners of more than
5% of our common stock, each of our directors, certain executive officers and
all directors and executive officers as a group.
<TABLE>
<CAPTION>
--------------------------------------------------------------
Amount and Nature of Beneficial Percent of Common Stock
Name and Address of Beneficial Owner Ownership of Common Stock/(1)/ Issued and Outstanding/(2)/
- ------------------------------------ -------------------------------- ---------------------------
<S> <C> <C>
Kestrel Investment Management................. 503,000 5.58%
411 Borel Avenue, Suite 403
San Mateo, California 94402
Sheridan Printing Company, Inc................ 460,000 5.11%
1425 Third Avenue
Alpha, New Jersey 08865
J. & W. Seligman & Co. Inc.................... 478,545 5.31%
100 Park Avenue, 8th Floor
New York, New York 10006
Frank Daniels, III............................ 26,000(3) *
Raleigh, North Carolina
C. Stephenson Gillispie, Jr................... 236,038(4) 2.62%
Richmond, Virginia
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
G. Waddy Garrett.............................. 4,600(5) *
Richmond, Virginia
Steven R. Isaac............................... 32,600(6) *
Richmond, Virginia
Jeanne M. Liedtka............................. 3,000(7) *
Charlottesville, Virginia
John D. Munford, II........................... 50,145 *
Virginia Beach, Virginia
John H. Phillips.............................. 92,849(8) 1.03%
Richmond, Virginia
Nathu R. Puri................................. 1,058,333(9) 11.75%
Nottingham, England
John C. Purnell, Jr........................... 10,182(10) *
Richmond, Virginia
Jerry I. Reitman.............................. 1,500(11) *
Chicago, Illinois
Russell M. Robinson, II....................... 20,272 *
Charlotte, North Carolina
John W. Rosenblum............................. 7,000 *
Charlottesville, Virginia
Wallace Stettinius............................ 194,328(12) 2.16%
Richmond, Virginia
Bruce V. Thomas............................... 62,799(13) *
Richmond, Virginia
Bruce A. Walker............................... 6,800 *
Seattle, Washington
David G. Wilson, Jr........................... 136,270(14) 1.51%
Richmond, Virginia
All Directors and Executive Officers as a 1,998,903 22.19%
Group (17 persons)............................
</TABLE>
* Less than one percent.
(1) Except as otherwise indicated and except to the extent that in certain
cases shares may be held in joint tenancy with a spouse, each nominee,
director, or executive officer has sole voting and investment power with
respect to the shares shown. Except as otherwise noted, beneficial
ownership for each non-
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employee director includes 5,000 shares as to which each such director
holds presently exercisable options under the 1992 Non-Employee Director
Stock Compensation Plan.
(2) Based on 9,007,848 shares outstanding on April 30, 1999.
(3) Mr. Daniels holds 3,000 of his shares in the form of presently exercisable
options.
(4) Includes: 204,200 shares as to which Mr. Gillispie holds presently
exercisable options, 986 shares held in his father's estate of which he is
executor; 10 shares held as custodian; and 581 shares held for his account
in the Cadmus account under the Cadmus Thrift Savings Plan.
(5) Includes: 1,000 shares held by Mr. Garrett's wife, as to which shares Mr.
Garrett disclaims beneficial ownership, and 1,000 shares held in the form
of presently exercisable options.
(6) Includes: 500 shares held by Mr. Isaac's children and 350 shares held by
Mr. Isaac's wife, as to all of which shares Mr. Isaac disclaims beneficial
ownership; and 30,000 shares in the form of presently exercisable options.
(7) Ms. Liedtka holds all of her shares in the form of presently exercisable
options.
(8) Includes: 51,500 shares as to which Mr. Phillips holds presently
exercisable options and 11,517 shares held for his account under the Cadmus
Thrift Savings Plan.
(9) Includes 929,268 shares owned by Purico (IOM) Limited, a wholly-owned
subsidiary of Clary Limited, which is approximately 88% owned by Mr. Puri,
and 129,065 shares owned by Melham U.S. Inc., which is approximately 88%
indirectly owned by Mr. Puri.
(10) Includes 150 shares held by Mr. Purnell's wife, as to which shares Mr.
Purnell disclaims beneficial ownership.
(11) Mr. Reitman holds 1,000 of his shares in the form of presently exercisable
options.
(12) Includes: 156,106 shares held in an agency account by NationsBank of
Virginia, N.A., as to all of which shares Mr. Stettinius is the beneficial
owner; 2,222 shares, also held in an agency account by NationsBank of
Virginia, N.A., for Mr. Stettinius' wife, as to which shares Mr. Stettinius
disclaims beneficial ownership; and 36,000 shares as to which Mr.
Stettinius holds presently exercisable options.
(13) Includes: 58,800 shares as to which Mr. Thomas holds presently exercisable
options and 2,063 shares held for his account under the Cadmus Thrift
Savings Plan.
(14) Includes: 79,900 shares as to which Mr. Wilson holds presently exercisable
options and 506 shares held for his account under the Cadmus Thrift Savings
Plan.
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CERTAIN RELATED TRANSACTIONS
The Members of our Executive Compensation and Organization Committee are Messrs.
Garrett (Chairman), Gwynn, Munford, Rosenblum, Walker and Ms. Liedtka. No
member of the Executive Compensation and Organization Committee is or has been
our employee. Furthermore, none of our executive officers has served on the
board of directors of any company of which an Executive Compensation and
Organization Committee member is an employee except for John H. Phillips, Vice
President, Procurement and Operations Finance of Cadmus, who serves as a
director of Valco Graphics, Inc., a privately-held Seattle marketing firm
providing printing, mailing and fulfillment services, of which Bruce Walker, an
Executive Compensation and Organization Committee, member is President.
Russell M. Robinson, II, a Class III director, served as Chairman of the
Executive Compensation and Organization Committee until August 12, 1997 and
currently serves as lead outside director of our board of directors. The firm
of Robinson, Bradshaw and Hinson, P.A., of which Mr. Robinson is President, a
Director and a shareholder, was retained to perform legal services for us during
fiscal year 1998. It is anticipated that the firm will continue to provide
legal services to us during fiscal year 1999 and fiscal year 2000.
From time to time, we may purchase products from or utilize services of, other
corporations of which one of our directors is a director, officer or employee.
Such transactions occur in the ordinary course of business and are not deemed
material.
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DESCRIPTION OF SENIOR CREDIT FACILITY
On April 1, 1999, we entered into our senior credit facility with a group of
lenders, with Wachovia Bank, N.A., as agent, NationsBank, N.A., as documentation
agent, and First Union National Bank, an affiliate of First Union Capital
Markets Corp., as syndication agent. The senior credit facility consists of a
$145 million revolving credit facility and a $55 million term loan facility.
The proceeds of the loans under the senior credit facility have been and will be
used: (1) to refinance indebtedness under our former senior credit facility and
certain other indebtedness; (2) to finance a portion of the Mack acquisition and
pay related expenses; and (3) for general corporate purposes, including working
capital.
The senior credit facility is jointly and severally guaranteed by each of our
present and future significant subsidiaries and is secured by a pledge of all of
the capital stock of such subsidiaries.
The senior credit facility requires us to meet certain financial tests,
including a maximum total debt to EBITDA ratio, a maximum senior debt to EBITDA
ratio, a minimum consolidated net worth and a minimum fixed charge coverage
ratio. In addition, the senior credit facility contains certain negative
covenants prohibiting or limiting, among other things, additional indebtedness,
liens, consolidations, mergers and sales of assets, loans or advances,
investments, capital expenditures, transactions with affiliates, acquisitions,
prepayments and modifications of debt instruments, new lines of business, sale-
leaseback transactions, restrictive agreements and other matters. The senior
credit facility contains customary events of default, including, among others,
payment defaults, financial and other negative covenant violations, other
covenant violations, breaches of representations and warranties, cross-defaults
to certain other debt, certain events of bankruptcy and insolvency, ERISA
defaults, material judgments, changes in control of Cadmus and actual or
asserted failure of any guaranty or security document supporting the senior
credit facility to be valid and binding.
Our senior credit facility restricts our ability to redeem the Old Notes and the
Exchange Notes with the net proceeds of equity offerings or upon a change in
control or asset sale. See "Description of Exchange Notes--Redemption" and "--
Change of Control."
The revolving credit facility will terminate on March 31, 2004. The term loan
facility will be amortized in quarterly installments beginning June 30, 1999 and
will mature on March 31, 2004. In addition, the senior credit facility provides
that the net proceeds of certain stock issuances, debt incurrences, sale, lease
or transfer of assets and casualties and condemnations must be used to
permanently prepay the term loan facility. The net proceeds from the offering of
the Old Notes in excess of the amount required to repay the bridge financing
notes was used to prepay amounts outstanding under the revolving credit
facility. That prepayment did not reduce the revolving credit commitments under
that facility. Voluntary prepayments of the revolving credit facility and the
term loan facility are permitted, subject to certain notice, minimum amount and
other customary requirements.
Outstanding borrowings under the senior credit facility will bear interest at a
floating rate and may be maintained for an initial period of approximately seven
and one-half months at either (1) the Base Rate (defined as the higher of (x)
the applicable prime rate of Wachovia Bank, N.A. and (y) 0.50% in excess of the
Federal Funds Rate (defined as the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System) plus
0.50% (1.0% after June 15, 1999) per annum or (2) LIBOR plus 2.50% (2.75% after
June 15, 1999) per annum. Thereafter, outstanding borrowings under the senior
credit facility will bear interest at (1) the Base Rate or (2) LIBOR plus, in
either case, a margin determined by reference to our total debt to EBITDA ratio
as it exists from time to time. Upon the occurrence of certain
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<PAGE>
events, including, without limitation, a default or an event of default under
the senior credit facility, the interest rates applicable to outstanding
borrowings under the senior credit facility will or may be increased as provided
in the senior credit facility documents.
We are required to pay an unused commitment fee with respect to the revolving
credit facility under the senior credit facility. The unused commitment fee for
an initial period of approximately seven and one-half months is equal to the
aggregate of the daily average amounts of the Unused Revolving Credit
Commitments (as defined in the senior credit facility) multiplied by 0.50%
(0.625% after June 1, 1999) per annum. Thereafter, the unused commitment fee
will be determined by reference to our total debt to EBITDA ratio as it exists
from time to time. Upon the occurrence of certain events, including, without
limitation, a default or an event of default under the senior credit facility,
the unused commitment fee will or may be increased as provided in the senior
credit facility documents. We have also agreed to pay certain additional fees to
Wachovia Bank, N.A. in its capacity as agent.
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THE EXCHANGE OFFER
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus and in
the Letter of Transmittal, Cadmus will accept for exchange Old Notes that are
properly tendered on or prior to the Expiration Date and not withdrawn.
"Expiration Date" means 5:00 p.m., New York City time, on September 13, 1999,
or, if Cadmus has extended the period of time for the exchange offer, the latest
time and date to which the exchange offer is extended.
As of the date of this prospectus, $125,000,000 aggregate principal amount of
the Old Notes was outstanding. This prospectus, together with the Letter of
Transmittal, is first being sent on or about the date set forth on the cover
page to all holders of Old Notes at the addresses set forth in the securities
register with respect to Old Notes maintained by DTC. Cadmus' obligation to
accept Old Notes for exchange pursuant to the exchange offer is subject to
certain conditions set forth below. See "-Conditions to Exchange Offer."
Cadmus expressly reserves the right, at any time or from time to time, to extend
the period during which the exchange offer is open, and thereby delay acceptance
for exchange of any Old Notes, by mailing written notice of such extension to
the holders as described below. During any extension, all Old Notes previously
tendered will remain subject to the exchange offer and may be accepted for
exchange by Cadmus. Any Old Notes not accepted for exchange for any reason will
be returned without expense to the holder as promptly as practicable after the
expiration or termination of the exchange offer.
Old Notes tendered in the exchange offer must be $1,000 in principal amount or
any integral multiple thereof.
The Company will mail written notice of any extension, amendment, non-acceptance
or termination to the holders of the Old Notes as promptly as practicable, such
notice to be mailed to the holders of record of the Old Notes no later than 9:00
a.m. New York City time, on the next business day after the previously scheduled
Expiration Date or other event giving rise to such notice requirement.
Procedures For Tendering Old Notes
Letter of Transmittal. The tender to Cadmus of Old Notes by a holder as set
forth below and the acceptance of the tender by Cadmus will constitute a binding
agreement between the tendering holder and Cadmus upon the terms and subject to
the conditions set forth in this prospectus and in the Letter of Transmittal.
Except as set forth below, a holder who wishes to tender Old Notes for exchange
must transmit a properly completed and executed Letter of Transmittal, together
with all other documents required by such Letter of Transmittal, to the Exchange
Agent at the address set forth below under " Exchange Agent" on or prior to the
Expiration Date.
Other Documents. In addition,
. the Exchange Agent must receive certificates for the Old Notes along
with the Letter of Transmittal,
. the Exchange Agent must receive prior to the Expiration Date a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
the Old Notes, if such procedure is available, into the Exchange
Agent's account at the DTC pursuant to the procedure for book-entry
transfer described below, or
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. the holder must comply with the guaranteed delivery procedures
described in " Guaranteed Delivery Procedures," below.
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The method of delivery of Old Notes, Letters of Transmittal and all other
required documents is at the election and risk of the holders. If the delivery
is by mail, it is recommended that registered mail, properly insured, with
return receipt requested, be used in all cases. Sufficient time should be
allowed to assure timely delivery. No Letters of Transmittal or Old Notes
should be sent to Cadmus.
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Signatures. Signatures on a Letter of Transmittal or a notice of withdrawal
must be guaranteed unless the Old Notes surrendered for exchange pursuant
thereto are tendered (1) by a registered holder of the Old Notes who has not
completed the box entitled "Special Issuance Instructions" on the Letter of
Transmittal or (2) for the account of an Eligible Institution (as defined
below). If signatures on a Letter of Transmittal or a notice of withdrawal are
required to be guaranteed, the guarantees must be by a firm that is an eligible
guarantor institution (bank, stockbroker, national securities exchange,
registered securities association, savings and loan association or credit union
with membership in a signature medallion program) pursuant to Exchange Act Rule
17Ad-15 (collectively, "Eligible Institutions"). If Old Notes are registered in
the name of a person other than the person signing the Letter of Transmittal,
the Old Notes surrendered for exchange must be endorsed by, or be accompanied
by, a written instrument or instruments of transfer or exchange, in satisfactory
form as determined by Cadmus, duly executed by the registered holder, with the
signature guaranteed by an eligible Institution.
Powers of Attorney. If the Letter of Transmittal is signed by a person or
persons other than the registered holder or holders of Old Notes, the Old Notes
must be endorsed or accompanied by appropriate powers of attorney, in either
case signed exactly as the name or names of the registered holder or holders
that appear on the Old Notes.
Representatives, Trustees, Guardians, Etc. If the Letter of Transmittal or any
Old Notes or powers of attorney are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by Cadmus, proper evidence satisfactory
to Cadmus of their authority to so act must be submitted with the Letter of
Transmittal.
Required Acknowledgments; Resales by Broker-Dealers. By tendering Old Notes,
each holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of Exchange Notes. If any
holder of Old Notes is an "affiliate" of Cadmus, as defined in Rule 405 under
the Securities Act, or is engaged in or intends to engage in or has any
arrangement with any person to participate in the distribution of the Exchange
Notes to be acquired pursuant to the exchange offer, the holder:
. cannot rely on the applicable interpretations of the SEC staff, and
. must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Old Notes must acknowledge that the Old Notes were acquired by the broker-
dealer as a result of market-making activities or other trading activities and
that it will deliver a prospectus in connection with any resale of the Exchange
Notes. Any such broker-dealer may be deemed to be an "underwriter" under the
Securities Act. See "Plan of Distribution." The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
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Acceptance of Old Notes For Exchange; Delivery of Exchange Notes
The Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Old Notes. For each Old Note accepted for exchange, the holder of the Old
Note will receive an Exchange Note having a principal amount equal to that of
the surrendered Old Note. The Exchange Notes will bear interest from the most
recent date on which interest has been paid on the Old Notes or, if no interest
has been paid, from June 1, 1999. Accordingly, if the relevant record date for
interest payment occurs after the completion of the exchange offer, registered
holders of Exchange Notes on the record date will receive interest accruing from
the most recent date that interest has been paid or, if no interest has been
paid, from June 1, 1999. If, however, the relevant record date for interest
payment occurs prior to the completion of the exchange offer, registered holders
of Old Notes on the record date will receive interest accruing from the most
recent date that interest has been paid or, if no interest has been paid, from
June 1, 1999. Old Notes accepted for exchange will cease to accrue interest
from and after the date of completion of the exchange offer, except as set forth
in the immediately preceding sentence. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any payment in respect of interest on the
Old Notes otherwise payable on any interest payment date the record date for
which occurs on or after completion of the exchange offer.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the Exchange Agent of:
. certificates for the Old Notes or a timely Book-Entry Confirmation of
the transfer of the Old Notes into the Exchange Agent's account at
DTC;
. a properly completed and duly executed Letter of Transmittal; and
. all other required documents.
If any tendered Old Notes are not accepted for any reason set forth in the terms
and conditions of the exchange offer or if certificates representing Old Notes
are submitted for a greater principal amount than the holder desires to
exchange, certificates representing the unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at DTC pursuant to the book-entry transfer procedures described below,
the non-exchanged Old Notes will be credited to an account maintained with DTC)
as promptly as practicable after the expiration or termination of the exchange
offer.
All questions as to the validity, form, eligibility (including time of receipt)
and acceptance of Old Notes tendered for exchange will be determined by Cadmus
in its sole discretion, which determination shall be final and binding. The
Company reserves the absolute right to reject any and all tenders of any
particular Old Notes not properly tendered or not to accept any particular Old
Notes if acceptance might, in the judgment of Cadmus or its counsel, be
unlawful. See "--Conditions to Exchange Offer." The Company also reserves the
absolute right in its sole discretion to waive any defects or irregularities or
conditions of the exchange offer as to any particular Old Notes either before or
after the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Old Notes in the exchange offer). The interpretation
of the terms and conditions of the exchange offer as to any particular Old Notes
either before or after the Expiration Date (including the Letter of Transmittal
and the instructions thereto) by Cadmus shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of Old Notes for exchange must be cured within a reasonable period of
time that Cadmus shall determine. Neither Cadmus, the Exchange Agent nor any
other person shall be required to give notice of any defect or irregularity
regarding any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give notice.
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The Exchange Agent has established an account with respect to the Old Notes at
DTC for purposes of the exchange offer and any financial institution that is a
participant in DTC's systems may make book-entry delivery of Old Notes by
causing DTC to transfer the Old Notes into the Exchange Agent's account at DTC
in accordance with DTC's procedures for transfer.
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Although delivery of Old Notes may be effected through book-entry transfer at
DTC, the Letter of Transmittal or a facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth below
under "Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedures described below must be complied with.
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Guaranteed Delivery Procedures
If a registered holder of Old Notes desires to tender the Old Notes and the Old
Notes are not immediately available, or time will not permit the holder's Old
Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if:
. the tender is made through an Eligible Institution;
. prior to the Expiration Date, the Exchange Agent receives from the
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and a Notice of Guaranteed
Delivery, substantially in the form provided by Cadmus (by telegram,
telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Notes and the amount of Old
Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading
days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all Old Notes will be physically tendered in
proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent;
and
. the certificates for all Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange
Act within five NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
Withdrawal Rights
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. For a withdrawal to be effective, a written
or facsimile notice of withdrawal must be received by the Exchange Agent at the
address set forth below under " Exchange Agent." Any notice of withdrawal must
specify the name of the person having tendered the Old Notes to be withdrawn,
identify the Old Notes to be withdrawn (including the principal amounts of such
Old Notes), and (where certificates for Old Notes have been transmitted) specify
the name in which such Old Notes are registered, if different from that of the
withdrawing holder.
If certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless the holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the
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procedure for book-entry transfer, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn Old
Notes and otherwise comply with the procedures of the facility. All questions as
to the validity, form and eligibility (including time of receipt) of the notices
will be determined by Cadmus, whose determination shall be final and binding on
all parties. Certificates for any Old Notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the exchange offer. Any
Old Notes that have been tendered for exchange but which are not exchanged for
any reason will be returned to the holder thereof without cost to the holder
(or, in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at DTC pursuant to the book-entry transfer procedures described
above, the Old Notes will be credited to an account maintained with DTC for the
Old Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under " Procedures for
Tendering Old Notes," at any time on or prior to the Expiration Date.
Conditions to Exchange Offer
Notwithstanding any other provision of the exchange offer, we are not required
to accept for exchange, or to issue Exchange Notes in exchange for, any Old
Notes and may terminate or amend the exchange offer if, at any time before the
acceptance of such Old Notes in exchange or the exchange of the Exchange Notes
for such Old Notes, we determine that the exchange offer violates applicable
law, any applicable interpretation of the staff of the SEC or any order of any
governmental agency or court of competent jurisdiction.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time in our sole
discretion. Our failure to exercise any of the foregoing rights at any time
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
In addition, we will not accept for exchange any Old Notes tendered, and no
Exchange Notes will be issued in exchange for any such Old Notes, if at such
time any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended. In any event, we are required to use every reasonable effort to obtain
the withdrawal of any stop order at the earliest possible time.
Exchange Agent
All executed Letters of Transmittal should be directed to the Exchange Agent at
the address set forth below. Questions and requests for assistance, requests
for additional copies of this prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
By Registered or Certified Mail:
First Union National Bank
First Union Customer Information Center
Corporate Trust Operations (NC1153)
1525 West W. T. Harris Boulevard-3C3
Charlotte, NC 28288
Attention: Mike Klotz
By Overnight Courier or By Hand:
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First Union National Bank
First Union Customer Information Center
Corporate Trust Operations (NC1153)
1525 West W. T. Harris Boulevard-3C3
Charlotte, NC 28262-1153
Attention: Mike Klotz
Confirm by Telephone: (704) 590-7628
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Delivery of the Letter of Transmittal to an address other than as set forth
above or transmission or instructions via facsimile other than as set forth
above does not constitute a valid delivery of the Letter of Transmittal.
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Fees and Expenses
The Company will not make any payment to brokers-dealers or others soliciting
acceptances of the exchange offer.
Transfer Taxes
Holders who tender Old Notes for exchange will not be obligated to pay any
transfer tax in connection therewith, except that Holders who instruct Cadmus to
register Exchange Notes in the name of, or request that Old Notes not tendered
or not accepted in the exchange offer be returned to, a person other than the
registered tendering Holder will be responsible for the payment of any
applicable transfer tax.
Appraisal Rights
Holders of Old Notes will not have dissenters' rights or appraisal rights in
connection with the exchange offer.
Resale of the Exchange Notes
Based on interpretations by the SEC staff issued to third parties, Exchange
Notes issued in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by holders thereof without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that:
. the Exchange Notes are acquired in the ordinary course of the holders'
business;
. the holders have no arrangement with any person to participate in the
distribution of the Exchange Notes; and
. the holder is not an "affiliate" of Cadmus as defined in Rule 405
under the Securities Act.
Each holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of Exchange Notes. This
analysis is based upon the SEC's position in no-action letters issued regarding
other transactions that were substantially similar to this exchange offer
including "Exxon Capital Holdings Corporation" (available May 13, 1988).
Although the SEC has not indicated that it has changed its position on this
issue, Cadmus has not sought its own interpretive letter from the SEC. There is
no assurance that the SEC would make a similar determination with respect to the
resale of the Exchange Notes. See "Risk Factors Requirements for Transfer of
Exchange Notes."
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If any holder is an affiliate of Cadmus, or if any holder is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the exchange
offer, the holder
. can not rely on the applicable interpretations of the SEC staff; and
. must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus meeting
the requirements under the Securities Act in connection with any resale of
Exchange Notes. The Letter of Transmittal states that by so acknowledging and
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter' within the meaning of the Securities Act. This prospectus, as
it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes where the Old Notes
exchanged for such Exchange Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. We have agreed
to use our best efforts to make this prospectus available for a period not to
exceed 180 days to any participating broker-dealer for use in connection with
any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the Exchange Notes may
not be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available.
Same-Day Funds Settlement and Payment
We will make all payments of principal and interest in respect of Exchange Notes
in book-entry form in immediately available funds to the accounts specified in
DTC.
Secondary trading in long-term notes and notes of corporate issuers is generally
settled in clearing house or next-day funds. In contrast, the Exchange Notes
will trade in DTC's Same-Day Funds Settlement System until maturity or until the
Exchange Notes are issued in certificated form, and secondary market trading
activity in the Exchange Notes will therefore be required by DTC to settle in
immediately available funds. No assurance can be given as to the effect, if
any, of settlement in immediately available funds on trading activity in the
Exchange Notes.
Concerning the Trustee
First Union National Bank is the trustee under the Indenture. We may maintain
deposit accounts or conduct other banking transactions with the Trustee in the
ordinary course of business. Notice to the Trustee should be directed to its
Corporate Trust Department, 800 East Main Street, Lower Mezzanine, Richmond,
Virginia 23219-3279, attention: Patricia A. Welling.
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Form, Denomination and Book-Entry Procedures
Exchange Notes will be issued in fully registered book-entry form without
interest coupons and in denominations of $1,000 and integral multiples thereof.
The Exchange Notes generally will be represented by one or more fully-registered
global securities (collectively, the "Global Note"). Notwithstanding the
foregoing, Old Notes held in certificated form will be exchanged solely for
Exchange Notes in certificated form, as discussed below. The Global Note will
be deposited upon issuance with the DTC and registered in the name of Cede & Co.
Except as set forth below, the Global Note may be transferred, in whole and not
in part, only to another nominee of DTC or to a successor of DTC or its nominee.
Global Notes and Book-Entry System
The certificates representing the Exchange Notes will be issued in the form or
one or more permanent global certificates in definitive fully registered form
and will be deposited with, or on behalf of, DTC and registered in the name of
Cede & Co., as the nominee of DTC. Except as described below, the Exchange
Notes will not be issued in definitive form. Unless and until they are
exchanged in whole or in part for the individual Exchange Notes represented
thereby, any interests in the Global Notes may not be transferred except as a
whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any nominee of DTC to a successor depositary or any
nominee of such successor.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities and
Exchange Act of 1934, as amended. DTC holds securities that its participants
("Participants") pledge, in deposited securities through electronic computerized
book-entry changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations ("Direct Participants"). DTC is owned by a
number of its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly. The rules applicable to DTC and its Participants are on file with
the SEC.
Upon the issuance of the Global Notes, and the deposit of such Global Notes with
or on behalf of DTC, DTC will credit, on its book-entry registration and
transfer system, the respective principal amounts of the Exchange Notes
represented by such Global Notes to the accounts of Participants that have
accounts with DTC or its nominee. The accounts to be credited will be
designated by the underwrites or agents engaging in the distribution or
placement of the Exchange Notes. Ownership of beneficial interests in such
Global Notes will be limited to Participants or persons that may hold interests
through participants. Ownership of beneficial interests by participants in such
Global Notes will be shown by book-keeping entries on, and the transfer of that
ownership interest will be effected only through book-keeping entries to,
records maintained by DTC or its nominee for such Global Notes. Ownership of
beneficial interests in such Global Notes by persons that hold through
Participants will be shown by book-keeping entries on, and the transfer of that
ownership interest among or through such Participants will be effected only
through book-keeping entries to, records maintained by such Participants. The
laws of some jurisdictions require that certain purchasers take physical
delivery of such securities in definitive certificated form rather than book-
entry form. Such laws may impair the ability to own, transfer or pledge
beneficial interests in the Global Notes.
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So long as DTC or its nominee is the registered owner of such Global Notes, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the Exchange Notes represented by the Global Notes for all purposes under the
Indenture. Except as set forth below, owners of beneficial interests in the
Global Notes will not be entitled to have Exchange Notes represented by such
Global Notes registered in their names, will not receive or be entitled to
receive physical delivery of Exchange Notes in definitive certificated form, and
will not be considered the holders thereof for any purposes under the Indenture.
Accordingly, each person owning a beneficial interest in Global Notes must rely
on the procedures of DTC and, if such person is not a participant, on the
procedures of the Participant through which such person directly or indirectly
owns its interest, to exercise any rights of a holder under the Indenture. The
Indenture provides that DTC may grant proxies and otherwise authorize
Participants to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action that a holder is entitled to give or
take under the Indenture. The Indenture provides that DTC may grant proxies and
otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action that a holder
is entitled to give or take under the Indenture. (Indenture, Section 104). We
understand that under existing industry practices, if we request any action of
holders or any owner of a beneficial interest in the Global Notes desires to
give any notice or take any action that a holder is entitled to give or take
under the Indenture, DTC would authorize the Participants holding the relevant
beneficial interest to give such notice or take such action, and such
Participants would authorize beneficial owners owning through such Participants
to give such notice or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Principal and any premium and interest payments on the Exchange Notes
represented by the Global Notes registered in the name of DTC or its nominee
will be made to DTC or its nominee, as the case may be, as the registered owner
of the Global Notes. Neither we, the Trustee nor any paying agent for the
Exchange Notes will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
We expect that DTC, upon receipt of any payment of principal, premium or
interest, will credit immediately Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Notes as shown on the records of DTC. We also expect that
payments by Participants to owners of beneficial interests in such Global Notes
held through such Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in "street name," and will be the responsibility of such
Participants.
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by us within 90 days, we will issue the
Notes in definitive certificated form in exchange for such Global Notes. In
addition, we may at any time and in our sole discretion determine not to have
the Exchange Notes represented by one or more Global Notes and, in such event,
will issue the Exchange Notes in definitive certificated form in exchange for
Global Notes.
Further, an owner of a beneficial interest in the Global Notes may, on terms
acceptable to us and DTC, receive Exchange Notes in definitive certificated
form, if we so specify. In any such instance, an owner of beneficial interest
in the Global Notes will be entitled to have Exchange Notes equal in principal
amount to such beneficial interest registered in its name and will be entitled
to physical delivery of such Exchange Notes in definitive certificated form.
Exchange Notes so issued in definitive certificated form will be issued in
denominations of $1,000 and integral multiples thereof and will be issued in
registered form.
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DESCRIPTION OF EXCHANGE NOTES
The Company will issue the Exchange Notes under an indenture (the "Indenture")
among itself, the Guarantors and First Union National Bank, as Trustee (the
"Trustee"). The following description is a summary of the material provisions of
the Indenture and the Registration Rights Agreement. It does not include all of
the provisions of the Indenture or the Registration Rights Agreement. We urge
you to read the Indenture and the Registration Rights Agreement because they,
and not this description, define your rights as a holder of the Exchange Notes.
The terms of the Exchange Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended ("TIA"), as in effect on the date of the Indenture. Copies of the
proposed forms of the Indenture and the Registration Rights Agreement may be
obtained from the Company or the Initial Purchasers. You can find definitions of
certain capitalized terms used in this description under the heading "--Certain
Definitions." For purposes of this description, references to the "Company" mean
only Cadmus Communications Corporation and not its Subsidiaries.
Brief Description of the Exchange Notes and the Subsidiary Guarantees
The Exchange Notes
The Exchange Notes:
. are general unsecured obligations of the Company;
. are subordinated in right of payment to all existing and future Senior
Debt of the Company;
. are equal in right of payment to all future senior subordinated
Indebtedness of the Company; and
. are senior in right of payment to all existing and future subordinated
Indebtedness of the Company.
The Subsidiary Guarantees
The Exchange Notes are guaranteed by each of the Company's principal
Subsidiaries on the Issue Date.
The Guarantees of the Exchange Notes:
. are general unsecured obligations of each Guarantor;
. are subordinated in right of payment to all existing and future
Guarantor Senior Debt of each Guarantor;
. are equal in right of payment to all future senior subordinated
Indebtedness of each Guarantor; and
. are senior in right of payment to all future subordinated Indebtedness
of each Guarantor.
As discussed in detail below under the headings "--Subsidiary Guarantees" and
"--Subordination," payments on the Exchange Notes and under the Guarantees will
be subordinated to the prior payment in full in cash or Cash Equivalents of all
Senior Debt and Guarantor Senior Debt, respectively, including under the Credit
Facility. In addition, the Exchange Notes will be effectively subordinated to
all existing and future liabilities, including trade payables, of the Company's
Subsidiaries that are not Guarantors. As of March 31, 1999, after
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giving pro forma effect to the acquisition of Mack, the sale of Cadmus Financial
Communications and Cadmus Custom Publishing, the refinancing of the Company's
former credit facility and the sale of the Old Notes and the application of the
net proceeds therefrom, the Company would have had $138.1 million of Senior Debt
outstanding and approximately $61.9 million of additional borrowing capacity
under the Credit Facility and the Guarantors would have had $5.8 million of
Guarantor Senior Debt outstanding (other than guarantees of Senior Debt). In
addition, on the same pro forma basis, the Company's Subsidiaries that are not
Guarantors would have had outstanding $6.5 million of liabilities, including
trade payables, to which the Exchange Notes would have been effectively
subordinated. The Indenture will permit the Company and the Guarantors to incur
additional Senior Debt and Guarantor Senior Debt, respectively, and will permit
the Company's Subsidiaries that are not Guarantors to incur additional
liabilities.
As of the date of the Indenture, all of our Subsidiaries will be Restricted
Subsidiaries. However, under the circumstances described below under the heading
"--Certain Covenants--Limitation on Restricted and Unrestricted Subsidiaries,"
we will be permitted to designate certain of our subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants in the Indenture. Unrestricted Subsidiaries will not
guarantee the Exchange Notes.
Principal, Maturity and Interest
The Indenture will provide that the Company may issue Exchange Notes with an
aggregate principal amount of up to $200.0 million, of which $125.0 million will
be issued in this offering. Additional amounts may be issued under the Indenture
from time to time, subject to the limitations described below under the heading
"--Certain Covenants--Limitation on Incurrence of Additional Indebtedness" and
restrictions contained in the Credit Facility. The Company will issue Exchange
Notes only in registered form without coupons, in denominations of $1,000 and
integral multiples of $1,000. The Exchange Notes will mature on June 1, 2009.
Interest on the Exchange Notes will accrue at the rate of 9 3/4% per annum and
will be payable in cash semi-annually in arrears on each June 1 and December 1,
beginning on December 1, 1999. The Company will make each interest payment to
the Holders of record of the Exchange Notes on the immediately preceding May 15
and November 15.
Interest on these Exchange Notes will accrue from the date of original issuance
or, if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve 30-
day months.
Methods of Receiving Payments on the Exchange Notes
The Company will pay principal, premium, if any, and interest (including
Additional Interest, if any) on the Exchange Notes at the office or agency of
the Paying Agent within the City of New York. In addition, interest may be paid
at the option of the Company by check mailed to the Holders at their addresses
set forth in the register of Holders.
Paying Agent and Registrar for the Exchange Notes
The Trustee will initially act as Paying Agent and Registrar. The Company may
change the Paying Agent or Registrar without prior notice to the Holders of the
Exchange Notes.
Transfer and Exchange
A Holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer
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documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any Exchange Note selected for redemption. Also, the
Company is not required to transfer or exchange any Exchange Note for a period
of 15 days before a selection of Exchange Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of it for
all purposes.
Voting
The Indenture provides that the Holders of the Old Notes and the Exchange Notes
will vote and consent together on all matters to which such Holders are entitled
to vote or consent as one class and that none of the Holders of the Old Notes or
the Exchange Notes will have the right to vote or consent as a separate class on
any matter.
Subsidiary Guarantees
Each Guarantor will fully and unconditionally guarantee, on a senior
subordinated basis, jointly and severally, the Company's Obligations under the
Indenture and the Exchange Notes, including the payment of principal of and
interest on the Exchange Notes. Each Guarantee will be subordinated to the prior
payment in full in cash or Cash Equivalents of all Guarantor Senior Debt of that
Guarantor. The subordination provisions applicable to the Guarantees will be
substantially similar to the subordination provisions applicable to the Exchange
Notes as set forth below under the heading "--Subordination."
The Obligations of each Guarantor under its Guarantee will be limited as
necessary to prevent the Guarantee from constituting a fraudulent conveyance or
fraudulent transfer under applicable law. See "Risk Factors--Fraudulent
Conveyance." Each Guarantor that makes a payment or distribution under the
Guarantee shall be entitled to a contribution from each other Guarantor in a
proportionate amount based upon the net assets of each Guarantor, determined in
accordance with GAAP.
Each Guarantor may consolidate with, or merge with or into, or sell its assets
to, the Company or another Guarantor that is a Wholly Owned Restricted
Subsidiary of the Company without limitation, or with, into or to other Persons
upon the terms and conditions set forth in the Indenture. See "--Certain
Covenants--Merger, Consolidation and Sale of Assets." In the event that all of
the Capital Stock or all or substantially all of the assets of a Guarantor are
sold and the sale complies with the provisions described under the heading
"--Certain Covenants--Limitation on Asset Sales," then the Guarantor's Guarantee
will be released.
Subordination
The payment of all Obligations on the Exchange Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt of the Company, whether outstanding on the Issue Date
or thereafter incurred, including, without limitation, the Company's Obligations
under the Credit Facility.
The holders of Senior Debt will be entitled to receive payment in full in cash
or Cash Equivalents of all Obligations due in respect of Senior Debt (including
interest after the commencement of any bankruptcy or other like proceeding at
the rate specified in the applicable Senior Debt, whether or not such interest
is an allowed claim in any such proceeding) before the Holders of Exchange Notes
will be entitled to receive any payment or distribution in respect to the
Exchange Notes in the event of any payment or distribution to creditors of the
Company:
(1) in a liquidation or dissolution of the Company;
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(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property, whether voluntary
or involuntary;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of the Company's assets and liabilities.
The Company also may not make any payment or distribution in respect of the
Exchange Notes if:
(1) a payment default on Designated Senior Debt occurs and is continuing;
or
(2) any other default occurs and is continuing on Designated Senior Debt
that permits holders of the Designated Senior Debt to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Representative of any Designated Senior
Debt.
Payments on the Exchange Notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default
is cured or waived or ceases to exist; and
(2) in case of a nonpayment default, upon the earlier of (x) the date on
which such nonpayment default is cured or waived or ceases to exist
(so long as no other default exists), (y) 180 days after the date on
which the applicable Payment Blockage Notice is received and (z) the
date on which the Trustee receives notice from the Representative for
such Designated Senior Debt rescinding the Payment Blockage Notice,
unless the maturity of any Designated Senior Debt has been
accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been cured or
waived for a period of not less than 90 consecutive days.
The Company must promptly notify holders of Senior Debt if payment of the
Exchange Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of a
bankruptcy, liquidation or reorganization of the Company, Holders of the
Exchange Notes may recover less ratably than creditors of the Company who are
holders of Senior Debt. See "Risk Factors--Subordination."
Redemption
Optional Redemption. Except as described below, the Exchange Notes are not
redeemable before June 1, 2004. Thereafter, the Company may redeem the Exchange
Notes at its option, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the following redemption prices (expressed as percentages of
the principal amount thereof), plus accrued and unpaid interest (including
Additional Interest, if any) thereon to the date of redemption, if redeemed
during the twelve month period beginning on June 1 of the years set forth below:
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Year Percentage
---- ----------
2004..................... 104.875%
2005..................... 103.250%
2006..................... 101.625%
2007 and thereafter...... 100.000%
Optional Redemption upon Equity Offerings. On one or more occasions prior to
June 1, 2002, the Company may, at its option, use the net cash proceeds of one
or more Equity Offerings to redeem up to 35% of the sum of (i) the initial
aggregate principal amount of the Old Notes originally issued under the
Indenture in this offering and (ii) the respective initial aggregate principal
amounts of Exchange Notes issued under the Indenture after the Issue Date, at a
redemption price of 109.75% of the principal amount thereof, plus accrued and
unpaid interest (including Additional Interest, if any) thereon to the date of
redemption; provided that:
(1) at least 65% of the aggregate principal amount of the sum of (i) the
initial aggregate principal amount of the Exchange Notes originally
issued under the Indenture in this offering and (ii) the respective
initial aggregate principal amounts of Exchange Notes issued under the
Indenture after the Issue Date, remains outstanding immediately after
any such redemption; and
(2) the Company makes such redemption not more than 90 days after the
consummation of any such Equity Offering.
Selection and Notice of Redemption
In the event that the Company chooses to redeem less than all of the Exchange
Notes, selection of the Exchange Notes for redemption will be made by the
Trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the Exchange Notes are listed;
or
(2) on a pro rata basis, by lot or by such method as the Trustee shall
deem fair and appropriate.
No Exchange Notes of a principal amount of $1,000 or less shall be redeemed in
part.
If a partial redemption is made with the proceeds of an Equity Offering, the
Trustee will select the Exchange Notes only on a pro rata basis or on as nearly
a pro rata basis as is practicable. Notice of redemption will be mailed by
first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Exchange Notes to be redeemed at its registered address.
If any Exchange Note is to be redeemed in part only, the notice of redemption
that relates to such Exchange Note shall state the portion of the principal
amount thereof to be redeemed. A new Exchange Note in a principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Exchange Note. On and after the
redemption date, interest will cease to accrue on Exchange Notes or portions
thereof called for redemption as long as the Company has deposited with the
Paying Agent funds in satisfaction of the applicable redemption price.
Change of Control
If a Change of Control occurs, each Holder will have the right to require that
the Company purchase all or a portion of such Holder's Exchange Notes pursuant
to the offer described below (the "Change of Control Offer"), at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest (including Additional Interest, if any) thereon, to the date of
purchase.
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Within 30 days following the date upon which the Change of Control occurred, the
Company must send, by first class mail, a notice to each Holder, with a copy to
the Trustee, which notice shall govern the terms of the Change of Control Offer.
Such notice shall state, among other things, the purchase date, which must be no
earlier than 30 days nor later than 45 days from the date such notice is mailed,
other than as may be required by law (the "Change of Control Payment Date").
Holders electing to have an Exchange Note purchased pursuant to a Change of
Control Offer will be required to surrender the Exchange Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Exchange
Note completed, to the Paying Agent at the address specified in the notice prior
to the close of business on the third Business Day prior to the Change of
Control Payment Date.
Prior to the mailing of the notice referred to above, but in any event within 30
days following any Change of Control, the Company covenants to:
(1) repay in full and terminate all commitments under all Indebtedness
under the Credit Facility and all other Senior Debt the terms of which
require repayment upon a Change of Control or offer to repay in full
and terminate all commitments under all Indebtedness under the Credit
Facility and all other such Senior Debt and to repay the Indebtedness
owed to each lender which has accepted such offer; or
(2) obtain the requisite consents under the Credit Facility and all such
other Senior Debt to permit the repurchase of the Exchange Notes as
provided below.
The Company shall first comply with the covenant in the immediately preceding
sentence before it shall be required to repurchase Exchange Notes pursuant to
the provisions described below. The Company's failure to comply with the
covenant described in the immediately preceding paragraph shall constitute an
Event of Default described in clause (3) and not in clause (2) under the heading
"--Events of Default" below.
The Company will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Indenture.
If a Change of Control Offer is made, there can be no assurance that the Company
will have available funds sufficient to pay the purchase price for all the
Exchange Notes that might be delivered by Holders seeking to accept the Change
of Control Offer. In the event the Company is required to purchase outstanding
Notes pursuant to a Change of Control Offer, the Company expects that it would
seek third party financing to the extent it does not have available funds to
meet its purchase obligations. However, there can be no assurance that the
Company would be able to obtain such financing.
The Credit Facility contains covenants prohibiting the Company from repurchasing
the Exchange Notes upon a Change of Control. In order to make a Change of
Control Offer, the Company would be required to pay off the Credit Facility in
full or seek the consent of the lenders under the Credit Facility to allow the
Company to make the Change of Control Offer. The occurrence of certain change of
control events with respect to the Company will also constitute an event of
default under the Credit Facility and will entitle the lenders thereunder to
accelerate all amounts owing under the Credit Facility. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. Moreover, the
exercise by the Holders of the Exchange Notes of their rights to require the
Company to repurchase the Exchange Notes upon a Change of Control could cause a
default under other Indebtedness of the Company, even if the Change of Control
does not, due to the financial effect of such repurchase on the Company. Failure
to make a Change of Control Offer, even if prohibited by the Company's debt
instruments, would constitute an Event of Default under the Indenture which
would, in turn, constitute a
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default under the Credit Facility and possibly other Indebtedness. If such cross
default leads to an acceleration of the Obligations under the Credit Facility or
any other Senior Debt, the subordination provisions of the Indenture would
restrict payments to the Holders of the Exchange Notes.
Neither the Board of Directors of the Company nor the Trustee may waive
compliance with this covenant. Restrictions in the Indenture described herein on
the ability of the Company and its Restricted Subsidiaries to incur additional
Indebtedness, to grant Liens on their property, to make Restricted Payments and
to make Assets Sales may also make more difficult or discourage a takeover of
the Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
redemption of repurchase of the Exchange Notes, and there can be no assurance
that the Company or the acquiring party will have sufficient financial resources
to effect such redemption or repurchase. Such restrictions and the restrictions
on transactions with Affiliates may, in certain circumstances, make more
difficult or discourage any leveraged buyout of the Company or any of its
Subsidiaries by the management of the Company. While such restrictions cover a
wide variety of arrangements which have traditionally been used to effect highly
leveraged transactions, the Indenture may not afford the Holders of the Exchange
Notes protection in all circumstances from the adverse aspects of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The definition of "Change of Control" includes a phrase relating to the sale,
lease, exchange or other transfer of all or substantially all of the assets of
the Company. Although there is a limited body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a Holder of Exchange
Notes to require the Company to repurchase Exchange Notes as a result of a sale,
lease, exchange or other transfer of less than all of the assets of the Company
may be uncertain.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of
Exchange Notes pursuant to a Change of Control Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Change of
Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and shall not be deemed to have breached its
obligations under the "Change of Control" provisions of the Indenture by virtue
thereof.
Certain Covenants
The Indenture will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness
The Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume, guarantee, acquire, become
liable, contingently or otherwise, with respect to, or otherwise become
responsible for payment of (collectively, "incur") any Indebtedness (other than
Permitted Indebtedness); provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time of or as a consequence
of the incurrence of any such Indebtedness, the Company and any Guarantor may
incur Indebtedness (including, without limitation, Acquired Indebtedness) if on
the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.25 to 1.0.
Limitation on Restricted Payments
The Company will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly:
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(1) declare or pay any dividend or make any distribution (other than (x)
dividends or distributions made to the Company or any Wholly Owned
Restricted Subsidiary of the Company that is a Guarantor and (y)
dividends or distributions payable in Qualified Capital Stock of the
Company or in warrants, rights or options to purchase or acquire
shares of such Qualified Capital Stock) on or in respect of shares of
Capital Stock of the Company or any Restricted Subsidiary of the
Company to holders of such Capital Stock; provided, however, that if
no Default or Event of Default shall have occurred and be continuing,
the Company may pay cash dividends on its Common Stock in an aggregate
amount that, when taken together with all other dividends paid by the
Company on its Common Stock after the Issue Date, does not exceed
$500,000;
(2) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any Restricted Subsidiary or any warrants,
rights or options to purchase or acquire shares of any class of such
Capital Stock;
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking
fund payment, any Indebtedness of the Company or a Restricted
Subsidiary that is subordinate or junior in right of payment to the
Exchange Notes or such Restricted Subsidiary's Guarantee, as the case
may be; or
(4) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being
referred to as a "Restricted Payment");
if at the time of such Restricted Payment or immediately after giving effect
thereto:
(a) a Default or an Event of Default shall have occurred and be
continuing;
(b) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with
the covenant described under the heading "--Limitation on Incurrence
of Additional Indebtedness;" or
(c) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purpose, if other than cash, being the fair market
value of such property as determined reasonably and in good faith by
the Board of Directors of the Company) shall exceed the sum of:
(i) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss)
of the Company earned subsequent to the Issue Date through the
last day of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of
such Restricted Payment (the "Reference Date") (treating such
period as a single accounting period); plus
(ii) 100% of the aggregate net cash proceeds received by the Company
from any Person (other than a Restricted Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date
and on or prior to the Reference Date of Qualified Capital Stock
of the Company (excluding any net cash proceeds from an Equity
Offering to the extent used to redeem the Exchange Notes in
compliance with the provisions set forth under the heading
"--Redemption--Optional Redemption upon Equity Offerings"); plus
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(iii) without duplication of any amounts included in clause (c)(ii)
above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the
Company's Capital Stock (excluding any net cash proceeds from
an Equity Offering to the extent used to redeem the Exchange
Notes in compliance with the provisions set forth under the
heading "--Redemption--Optional Redemption Upon Equity
Offerings"); plus
(iv) to the extent not otherwise included in the Company's
Consolidated Net Income, in the case of the disposition or
repayment of any Investment constituting a Restricted Payment
made after the Issue Date, an amount equal to the lesser of (A)
the cash return of capital with respect to such Investment and
(B) the initial amount of such Investment, in either case, less
the cost of the disposition of such Investment.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been permitted
on the date of declaration;
(2) if no Default or Event of Default shall have occurred and be
continuing, the redemption, repurchase or other acquisition or
retirement of any shares of Capital Stock of the Company, either (i)
solely in exchange for shares of Qualified Capital Stock of the
Company or (ii) through the application (within 60 days of the sale
thereof) of net cash proceeds of a sale for cash (other than to a
Restricted Subsidiary of the Company) of shares of Qualified Capital
Stock of the Company;
(3) if no Default or Event of Default shall have occurred and be
continuing, the redemption, repurchase or other acquisition or
retirement of any Indebtedness of the Company or any Guarantor that is
subordinate or junior in right of payment to the Exchange Notes or
such Guarantor's Guarantee, as the case may be, either (i) solely in
exchange for shares of Qualified Capital Stock of the Company or
warrants, rights or options to purchase or acquire shares of Qualified
Capital Stock of the Company or (ii) through the application (within
60 days of the sale thereof) of net proceeds of a sale for cash (other
than to a Restricted Subsidiary of the Company) of (A) shares of
Qualified Capital Stock of the Company or (B) Refinancing
Indebtedness; and
(4) if no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of Common Stock of the Company
pursuant to repurchase options in stock option agreements between the
Company and employees of the Company or any of its Subsidiaries from
such employees or their authorized representatives upon the death,
disability or termination of employment of such employees, in the
aggregate not to exceed $250,000 in any calendar year.
In determining the aggregate amount of Restricted Payments made subsequent to
the Issue Date in accordance with clause (c) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2)(ii) and (4) of this
paragraph shall be included in such calculation.
Limitation on Asset Sales
The Company will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
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(1) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise
disposed of (as determined reasonably and in good faith by the
Company's Board of Directors);
(2) at least 80% of the consideration received by the Company or such
Restricted Subsidiary, as the case may be, from such Asset Sale shall
be in the form of cash or Cash Equivalents and is received at the time
of such disposition; and
(3) upon the consummation of an Asset Sale, the Company shall apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 270 days of receipt thereof either:
(a) to prepay any Senior Debt or Guarantor Senior Debt and, in the
case of any Senior Debt or Guarantor Senior Debt under any
revolving credit facility, including the Credit Facility, effect
a corresponding permanent reduction in the availability under
such revolving credit facility;
(b) to make an investment in Productive Assets; or
(c) to a combination of prepayment and investment permitted by the
foregoing clauses (3)(a) and (3)(b).
On the 271st day after an Asset Sale or such earlier date, if any, as the Board
of Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(3)(a), (3)(b) and (3)(c) of the immediately preceding paragraph (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (3)(a), (3)(b) and (3)(c) of the immediately preceding
paragraph (each a "Net Proceeds Offer Amount") shall be applied by the Company
or such Restricted Subsidiary, as the case may be, to make an offer to purchase
(the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not
less than 20 Business Days nor more than 30 Business Days following the date on
which the notice of such Net Proceeds Offer is mailed to the Holders, from all
Holders on a pro rata basis, that principal amount of Exchange Notes equal to
the Net Proceeds Offer Amount at a price equal to 100% of the principal amount
of the Exchange Notes to be purchased, plus accrued and unpaid interest
(including Additional Interest, if any) thereon to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Restricted Subsidiary of the Company, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant.
Notwithstanding the foregoing, the Company may defer the Net Proceeds Offer
until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in
excess of $5.0 million resulting from one or more Asset Sales (at which time,
the entire unutilized Net Proceeds Offer Amount, and not just the amount in
excess of $5.0 million, shall be applied as required pursuant to this
paragraph). Upon completion of a Net Proceeds Offer, the amount of Net Cash
Proceeds and the amount of aggregate unutilized Net Proceeds Offer Amount will
be reset to zero. Accordingly, to the extent that any Net Proceeds remain after
consummation of a Net Proceeds Offer, the Company or any Restricted Subsidiary
of the Company, as the case may be, may use such Net Proceeds for any purpose
not prohibited by the Indenture.
Notwithstanding the first two paragraphs of this covenant, the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent that:
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(1) at least 80% of the consideration for such Asset Sale constitutes
Productive Assets; and
(2) such Asset Sale is for fair market value; provided that any cash or
Cash Equivalents received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds
subject to the provisions of the two immediately preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Exchange Notes in whole or in part in integral multiples
of $1,000 in exchange for cash. To the extent Holders properly tender Exchange
Notes in an amount exceeding the Net Proceeds Offer Amount, Exchange Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 Business
Days or such longer period as may be required by law.
The Company's and its Restricted Subsidiaries' ability to repurchase Exchange
Notes in a Net Proceeds Offer is prohibited by the terms of the Credit Facility
and may be prohibited or otherwise limited by the terms of any then-existing
borrowing arrangements and the Company's financial resources.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations to the extent such laws and
regulations are applicable in connection with the repurchase of Exchange Notes
pursuant to a Net Proceeds Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Asset Sale" provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of the Company to:
(1) pay dividends or make any other distributions on or in respect of its
Capital Stock;
(2) make loans or advances, or pay any Indebtedness or other obligation
owed, to the Company or any other Restricted Subsidiary of the
Company; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of:
(a) applicable law;
(b) the Indenture and the Exchange Notes;
(c) any agreement governing Acquired Indebtedness, which encumbrance
or restriction shall not apply to any Person, or the properties
or assets of any Person, other than the Person, or the assets of
the Person, so acquired;
(d) the Credit Facility;
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(e) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary of
the Company;
(f) agreements existing on the Issue Date, to the extent and in the
manner such agreements are in effect on the Issue Date;
(g) Liens permitted to be incurred pursuant to the provisions of the
covenant described under the heading "--Limitation on Liens;"
(h) any contract for the sale of specified assets, including, without
limitation, any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered for the sale
or disposition of all or substantially all of the Capital Stock
or assets of such Restricted Subsidiary, to be consummated in
accordance with the terms of the Indenture, pending the closing
of such sale or disposition; provided that any such restriction
relates solely to the Capital Stock or assets that are the
subject of such agreement;
(i) any agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clauses (b), (c), (d) or (f) above; provided,
however, that the provisions relating to such encumbrance or
restriction contained in any such Indebtedness are not materially
more restrictive, as determined by the Board of Directors of the
Company in their reasonable and good faith judgment, than the
provisions relating to such encumbrance or restriction contained
in agreements referred to in such clause (b), (c), (d) or (f);
and
(j) Indebtedness or other contractual requirements of a
Securitization Entity in connection with a Qualified
Securitization Transaction or the charter documents of such
Securitization Entity; provided that, in any case, such
restrictions apply only to such Securitization Entity.
Limitation on Preferred Stock of Restricted Subsidiaries
The Company will not cause or permit any of its Restricted Subsidiaries to issue
to any Person (other than to the Company or to a Wholly Owned Restricted
Subsidiary of the Company) any Preferred Stock or permit any Person (other than
the Company or a Wholly Owned Restricted Subsidiary of the Company) to own any
Preferred Stock of any Restricted Subsidiary of the Company.
Limitation on Liens
Other than Permitted Liens, the Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries (whether
owned on the Issue Date or acquired after the Issue Date), or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Exchange Notes or any
Guarantee, the Exchange Notes are, or such Guarantee is, as the case
may be, secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens at least to the same extent that the
Exchange Notes are, or such Guarantee is, as the case may be, senior
in priority to such Indebtedness; and
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(2) in all other cases, the Exchange Notes are, and the Guarantee is, as
the case may be, equally and ratably secured.
Prohibition on Incurrence of Senior Subordinated Debt
The Company will not, and will not permit any Restricted Subsidiary that is a
Guarantor to, incur or suffer to exist Indebtedness that is senior in right of
payment to the Exchange Notes or such Guarantor's Guarantee, as the case may be,
and subordinate in right of payment to any other Indebtedness of the Company or
such Guarantor, as the case may be.
Merger, Consolidation and Sale of Assets
The Company will not, in a single transaction or series of related transactions,
consolidate or merge with or into any Person, or sell, assign, transfer, lease,
convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of
the Company to sell, assign, transfer, lease, convey or otherwise dispose of)
all or substantially all of the Company's assets (determined on a consolidated
basis for the Company and the Company's Restricted Subsidiaries) whether as an
entirety or substantially as an entirety to any Person unless:
(1) either:
(a) the Company shall be the surviving or continuing corporation; or
(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person
which acquires by sale, assignment, transfer, lease, conveyance
or other disposition the properties and assets of the Company and
of the Company's Restricted Subsidiaries substantially as an
entirety (the "Surviving Entity"):
(i) shall be a corporation organized and validly existing under
the laws of the United States or any State thereof or the
District of Columbia; and
(ii) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and
delivered to the Trustee, the due and punctual payment of
the principal of, premium, if any, and interest on all of
the Exchange Notes and the performance of every covenant of
the Exchange Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed
or observed;
(2) immediately after giving effect to such transaction and the assumption
contemplated by clause (1)(b)(ii) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to
be incurred in connection with or in respect of such transaction), the
Company or such Surviving Entity, as the case may be:
(a) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such
transaction; and
(b) shall be able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the
covenant described under the heading "--Limitation on Incurrence
of Additional Indebtedness;"
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(b)(ii) above
(including, without limitation, giving effect to any
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Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing;
(4) each Guarantor, unless it is the other party to the transactions
described above, shall have by supplemental indenture to the Indenture
confirmed that its Guarantee of the Exchange Notes shall apply to such
Person's obligations under the Indenture and the Exchange Notes; and
(5) the Company or the Surviving Entity, as the case may be, shall have
delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such
transaction, such supplemental indenture, comply with the applicable
provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation or merger of the Company
or any transfer of all or substantially all of the assets of the Company and its
Restricted Subsidiaries in accordance with the foregoing, in which the Company
is not the continuing corporation, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
lease or transfer is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture and the
Exchange Notes with the same effect as if such surviving entity had been named
as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released in
accordance with the terms of the Guarantee and the Indenture in connection with
any transaction complying with the covenant described under the heading "--
Limitation on Asset Sales") will not, and the Company will not cause or permit
any Guarantor to, consolidate with or merge with or into any Person other than
the Company or any other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger (if
other than the Guarantor) is a corporation organized and existing
under the laws of the United States or any State thereof or the
District of Columbia;
(2) such entity assumes by supplemental indenture all of the Obligations
of the Guarantor under its Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of any
net proceeds therefrom on a pro forma basis, the Company could satisfy
the provisions of clause (2) of the first paragraph of this covenant.
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Any merger or consolidation of a Guarantor with and into the Company (with the
Company being the surviving entity) or any other Guarantor that is a Wholly
Owned Restricted Subsidiary of the Company need only comply with clause (5) of
the first paragraph of this covenant.
Limitations on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or permit to occur any transaction or series
of related transactions (including, without limitation, the purchase, sale,
lease or exchange of any property, the guaranteeing of any Indebtedness or the
rendering of any service) with, or for the benefit of, any of their respective
Affiliates (each, an "Affiliate Transaction"), other than Affiliate Transactions
on terms that are no less favorable than those that could reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1.0 million shall be
approved by the Board of Directors of the Company or such Restricted Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If the Company or any Restricted Subsidiary of the
Company enters into an Affiliate Transaction (or a series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $10.0 million,
the Company or such Restricted Subsidiary, as the case may be, shall, prior to
the consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view, from
an Independent Financial Advisor and file the same with the Trustee.
The restrictions set forth in the first paragraph of this covenant shall not
apply to:
(1) reasonable fees and compensation paid to, and indemnity provided on
behalf of, officers, directors, employees or consultants of the
Company or any Restricted Subsidiary of the Company as determined
reasonably and in good faith by the Board of Directors or senior
management of the Company or such Restricted Subsidiary, as the case
may be;
(2) transactions exclusively between or among the Company and any of its
Wholly Owned Restricted Subsidiaries or exclusively between or among
such Wholly Owned Restricted Subsidiaries; provided that such
transactions are not otherwise prohibited by the Indenture;
(3) any agreement as in effect as of the Issue Date or any amendment
thereto, any transaction contemplated thereby (including pursuant to
any amendment thereto) or in any replacement agreement thereto so long
as any such amendment or replacement agreement is not more
disadvantageous to the Holders in any material respect than the
original agreement as in effect on the Issue Date;
(4) Restricted Payments permitted by the Indenture; and
(5) transactions effected as part of a Qualified Securitization
Transaction.
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Additional Guarantees
If the Company or any of its Restricted Subsidiaries transfers or causes to be
transferred, in one transaction or a series of related transactions, any
property to any Domestic Restricted Subsidiary of the Company that is not a
Guarantor having total consolidated assets with a book value in excess of $2.0
million or if the Company or any of its Restricted Subsidiaries shall organize,
acquire or otherwise invest in or hold an Investment in a Domestic Restricted
Subsidiary of the Company that is not a Guarantor having total consolidated
assets with a book value in excess of $2.0 million, then such transferee or
acquired or other Domestic Restricted Subsidiary shall:
(1) execute and deliver to the Trustee a supplemental indenture in form
satisfactory to the Trustee pursuant to which such Domestic Restricted
Subsidiary shall unconditionally guarantee all of the Company's
Obligations under the Exchange Notes and the Indenture on the terms
set forth in the Indenture; and
(2) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Domestic Restricted Subsidiary and constitutes a legal, valid, binding
and enforceable obligation of such Domestic Restricted Subsidiary;
provided, however, that, notwithstanding the foregoing, each transferee or
acquired or other Domestic Restricted Subsidiary shall comply with clauses (1)
and (2) above if such Domestic Restricted Subsidiary, together with the
Company's other Restricted Subsidiaries that are not Guarantors, after giving
pro forma effect to such transfer, organization, acquisition or Investment,
would constitute a Significant Subsidiary (using 5.0%, rather than 10.0%, for
purposes of such calculation).
Thereafter, such Domestic Restricted Subsidiary shall be a Guarantor for all
purposes of the Indenture.
Limitation on Restricted and Unrestricted Subsidiaries
The Board of Directors of the Company may designate an Unrestricted Subsidiary
to be a Restricted Subsidiary under the Indenture only if:
(1) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such designation;
(2) any such designation shall be deemed to be an incurrence as of the
date of such designation by a Restricted Subsidiary of the Company of
the Indebtedness (if any) of such designated Subsidiary for purposes
of the covenant described under the heading "--Limitation on
Incurrence of Additional Indebtedness;" and
(3) immediately after giving effect to such designation and the incurrence
of such additional Indebtedness, the Company is able to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in
compliance with the covenant described under the heading "--Limitation
on Incurrence of Additional Indebtedness."
The Board of Directors of the Company may designate any Restricted Subsidiary
(other than a Guarantor) to be an Unrestricted Subsidiary under the Indenture
only if:
(1) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such designation;
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(2) such designation is at that time permitted pursuant to the covenant
described under the heading "--Limitation on Restricted Payments"
(other than pursuant to clause (8) of the definition of Permitted
Investment); and
(3) immediately after giving effect to such designation, the Company is
able to incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the covenant described under the
heading "--Limitation on Incurrence of Additional Indebtedness."
Any such designation by the Board of Directors of the Company of an Unrestricted
Subsidiary to be a Restricted Subsidiary or of a Restricted Subsidiary to be an
Unrestricted Subsidiary shall be evidenced to the Trustee by the filing with the
Trustee of a certified copy of a Board Resolution of the Company giving effect
to such designation and an officers' certificate certifying that such
designation complied with the foregoing conditions and setting forth in
reasonable detail the underlying calculations.
For purposes of the covenant described under the heading "--Limitation on
Restricted Payments" above:
(1) Investment shall be deemed to have been made at the time any
Restricted Subsidiary is designated to be an Unrestricted Subsidiary
in an amount (proportionate to the Company's equity interest in such
Subsidiary) equal to the net worth of such Restricted Subsidiary at
the time that such Restricted Subsidiary is designated to be an
Unrestricted Subsidiary;
(2) at any date the aggregate amount of all Restricted Payments made as
Investments since the Issue Date shall exclude and be reduced by an
amount (proportionate to the Company's equity interest in such
Subsidiary) equal to the net worth of any Unrestricted Subsidiary at
the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary, not to exceed, in the case of any such designation of an
Unrestricted Subsidiary as a Restricted Subsidiary, the amount of
Investments previously made by the Company and its Restricted
Subsidiaries in such Unrestricted Subsidiary (in the case of each of
clauses (1) and (2), "net worth" shall be calculated based upon the
fair market value of the assets of such Subsidiary as of any such date
of designation); and
(3) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer.
Notwithstanding the foregoing, the Board of Directors of the Company may not
designate any Restricted Subsidiary of the Company to be an Unrestricted
Subsidiary if, after such designation:
(1) the Company or any of its Restricted Subsidiaries, other than pursuant
to Standard Securitization Undertakings, (x) provides credit support
for, or a guarantee of, any Indebtedness of such Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness)
or (y) is directly or indirectly liable for any Indebtedness of such
Subsidiary;
(2) a default with respect to any Indebtedness of such Subsidiary
(including any right which the holders thereof may have to take
enforcement action against such Subsidiary) would permit (upon notice,
lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated
or payable prior to its final stated maturity; or
(3) such Subsidiary owns any Capital Stock of, or owns or holds any Lien
on any property of, any Restricted Subsidiary which is not a
Subsidiary of the Subsidiary to be so designated.
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Subsidiaries of the Company that are not designated by the Board of Directors of
the Company as Restricted or Unrestricted Subsidiaries will be deemed to be
Restricted Subsidiaries.
Conduct of Business
The Indenture will provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in any businesses other than a Permitted
Business.
Reports to Holders
The Company will deliver to the Trustee within 15 days after the filing of the
same with the Commission, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the Company is required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the Commission, to the extent permitted, and provide the Trustee and
Holders or prospective Holders (upon request) with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. The Company will also comply with the other provisions of
Section 314(a) of the TIA.
Events of Default
The following events are defined in the Indenture as "Events of Default:"
(1) the failure to pay interest (including Additional Interest, if any) on
any Old Notes or Exchange Notes when the same becomes due and payable
and the default continues for a period of 30 days (whether or not such
payment shall be prohibited by the subordination provisions of the
Indenture);
(2) the failure to pay the principal on any Old Notes or Exchange Notes,
when such principal becomes due and payable, at maturity, upon
redemption or otherwise (including the failure to make a payment to
purchase Old Notes or Exchange Notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer) (whether or not such payment
shall be prohibited by the subordination provisions of the Indenture);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying
the default (and demanding that such default be remedied) from the
Trustee or the Holders of at least 25% of the outstanding principal
amount of the Old Notes and Exchange Notes (except in the case of a
default with respect to the covenant described under the heading "--
Certain Covenants--Merger, Consolidation and Sale of Assets," which
will constitute an Event of Default with such notice requirement but
without such passage of time requirement);
(4) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the Junior
Subordinated Note or the principal amount of any other Indebtedness of
the Company or any Restricted Subsidiary of the Company (other than a
Securitization Entity), or the acceleration of the final stated
maturity of the Junior Subordinated Note or any such other
Indebtedness (which acceleration is not rescinded, annulled or
otherwise cured within 20 days after receipt by the Company or such
Restricted Subsidiary of notice of any such acceleration), if, in the
case of any such other Indebtedness, the aggregate principal amount of
such Indebtedness, together
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with the principal amount of any such other Indebtedness in default
for failure to pay principal at final maturity or which has been
accelerated, aggregates $10.0 million or more at any time;
(5) one or more judgments in an aggregate amount in excess of $10.0
million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid
or unstayed for a period of 60 days after such judgment or judgments
become final and non-appealable;
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(7) any Guarantee of a Significant Subsidiary ceases to be in full force
and effect or any Guarantee of a Significant Subsidiary is declared to
be null and void and unenforceable or any Guarantee of a Significant
Subsidiary is found to be invalid or any Guarantor that is a
Significant Subsidiaries denies its liability under its Guarantee
(other than by reason of release of a Guarantor in accordance with the
terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause (6)
above with respect to the Company) shall occur and be continuing, the Trustee or
the Holders of at least 25% in principal amount of outstanding Old Notes and
Exchange Notes may declare the principal, premium, if any, and accrued and
unpaid interest (including Additional Interest, if any) on all the Old Notes and
Exchange Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), and the same:
(1) shall become immediately due and payable; or
(2) if there are any amounts outstanding under the Credit Facility, shall
become immediately due and payable upon the first to occur of an
acceleration under the Credit Facility or five Business Days after
receipt by the Company and the Representative under the Credit
Facility of such Acceleration Notice but only if such Event of Default
is then continuing. If an Event of Default specified in clause (6)
above with respect to the Company occurs and is continuing, then all
unpaid principal, premium, if any, and accrued and unpaid interest
(including Additional Interest, if any) on all of the outstanding
Exchange Notes and Old Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on
the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of acceleration
with respect to the Old Notes and Exchange Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the Old Notes and
Exchange Notes may rescind and cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because
of the acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has
become due otherwise than by such declaration of acceleration, has
been paid;
(4) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances;
and
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(5) in the event of the cure or waiver of an Event of Default of the type
described in clause (6) of the description above of Events of Default,
the Trustee shall have received an officers' certificate and an
opinion of counsel that such Event of Default has been cured or
waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Old Notes and Exchange
Notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Old Notes and Exchange Notes.
Holders of the Old Notes and Exchange Notes may not enforce the Indenture or the
Old Notes and Exchange Notes except as provided in the Indenture and under the
TIA. Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable indemnity.
Subject to all provisions of the Indenture and applicable law, the Holders of a
majority in aggregate principal amount of the then outstanding Old Notes and
Exchange Notes have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers' certificate
to the Trustee promptly upon any such officer obtaining knowledge of any Default
or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its obligations
and the obligations of the Guarantors discharged with respect to the outstanding
Old Notes and Exchange Notes ("Legal Defeasance"). Such Legal Defeasance means
that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Old Notes and Exchange Notes, except
for:
(1) the rights of Holders to receive payments in respect of the principal
of, premium, if any, and interest on the Old Notes and Exchange Notes
when such payments are due;
(2) the Company's obligations with respect to the Old Notes and Exchange
Notes concerning issuing temporary Old Notes and Exchange Notes,
registration of Old Notes and Exchange Notes, mutilated, destroyed,
lost or stolen Old Notes and Exchange Notes and the maintenance of an
office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Old Notes and Exchange Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under the
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heading "Events of Default" above will no longer constitute an Event of Default
with respect to the Exchange Notes or Old Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the Old Notes and Exchange Notes on the stated
date for payment thereof or on the applicable redemption date, as the
case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that:
(a) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(b) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm
that, the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or
any other material agreement or instrument to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the
Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others;
(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance, as the case may be, have been complied
with;
(8) the Company shall have delivered to the Trustee an opinion of counsel
to the effect that:
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(a) the trust funds will not be subject to any rights of holders of
Senior Debt, including, without limitation, those arising under
the Indenture; and
(b) assuming no intervening bankruptcy of the Company between the
date of deposit and the 91st day following the date of deposit
and that no Holder is an insider of the Company, after the 91st
day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights
generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clause (2)
above with respect to a Legal Defeasance need not be delivered if all Old Notes
not theretofore delivered to the Trustee for cancellation:
(1) have become due and payable; or
(2) will become due and payable on the maturity date within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect (except
as to surviving rights or registration of transfer or exchange of the Old Notes,
as expressly provided for in the Indenture) as to all outstanding Old Notes and
Exchange Notes when:
(1) either:
(a) all the Old Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Old Notes which have been replaced or
paid and Old Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company
and thereafter repaid to the Company or discharged from such
trust) have been delivered to the Trustee for cancellation; or
(b) all Old Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, pursuant to an optional
redemption notice or otherwise, and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on
the Old Notes not theretofore delivered to the Trustee for
cancellation, for principal of, premium, if any, and interest on
the Old Notes to the date of deposit together with irrevocable
instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the
case may be; and
(2) the Company has paid all other sums payable under the Indenture by the
Company; and
(3) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
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The Trustee will acknowledge the satisfaction and discharge of the Indenture if
the Company has delivered to the Trustee an officers' certificate and an opinion
of counsel stating that all conditions precedent under the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
Modification of the Senior Subordinated Indenture
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may:
(1) reduce the amount of Old Note and Exchange Notes whose Holders must
consent to an amendment;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any Old
Notes and Exchange Notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any Old Notes and Exchange Notes, or change the date
on which any Old Notes and Exchange Notes may be subject to redemption
or reduce the redemption price therefor;
(4) make any Old Notes and Exchange Notes payable in money other than that
stated in the Old Notes and Exchange Notes;
(5) make any change in the provisions of the Indenture protecting the
right of each Holder to receive payment of principal of and interest
on such Old Notes or Exchange Note on or after the due date thereof or
to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of Old Notes and Exchange Notes to waive
Defaults or Events of Default;
(6) after the Company's obligation to purchase Old Notes and Exchange
Notes arises thereunder, amend, change or modify in any material
respect the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and
consummate a Net Proceeds Offer with respect to any Asset Sales that
have been consummated or, after such Change of Control has occurred or
such Asset Sale has been consummated, modify any of the provisions or
definitions with respect thereto;
(7) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Old Notes
and Exchange Notes or any Guarantee in a manner which adversely
affects the Holders; or
(8) release any Guarantor that is a Significant Subsidiary from any of its
obligations under its Guarantee or the Indenture otherwise then in
accordance with the terms of the Indenture.
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Governing Law
The Indenture will provide that it, the Exchange Notes and the Guarantees will
be governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the law of another jurisdiction would be
required thereby.
The Trustee
The Indenture will provide that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on the
rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with or into the Company or
any of its Restricted Subsidiaries or that is assumed in connection with the
acquisition of assets from such Person, in each case not incurred by such Person
in connection with, or in anticipation or contemplation of, such Person becoming
a Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other Person who
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the
foregoing. Notwithstanding the foregoing, no Person (other than the Company or
any Subsidiary of the Company) in whom a Securitization Entity makes an
Investment in connection with a Qualified Securitization Transaction shall be
deemed to be an Affiliate of the Company or any of its Subsidiaries solely by
reason of such Investment.
"Asset Acquisition" means:
(1) an Investment by the Company or any Restricted Subsidiary of the
Company in any other Person pursuant to which such Person shall become
a Restricted Subsidiary of the Company, or shall be merged with or
into the Company or any Restricted Subsidiary of the Company; or
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(2) the acquisition by the Company or any Restricted Subsidiary of the
Company of the assets of any Person (other than a Restricted
Subsidiary of the Company) which constitute all or substantially all
of the assets of such Person or comprises any division or line of
business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer,
lease (other than operating leases entered into in the ordinary course of
business), assignment or other transfer for value by the Company or any of its
Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any
Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of:
(1) any Capital Stock of any Restricted Subsidiary of the Company; or
(2) any other property or assets of the Company or any Restricted
Subsidiary of the Company other than in the ordinary course of
business.
Notwithstanding the foregoing, the following shall not be deemed to be Asset
Sales:
(a) a transaction or series of related transactions for which the Company
or its Restricted Subsidiaries receive aggregate consideration of less
than $250,000;
(b) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted by the
covenant described under the heading "--Certain Covenants --Merger,
Consolidation and Sale of Assets;"
(c) sales of accounts receivable and related assets (including contract
rights) of the type specified in the definition of "Qualified
Securitization Transaction" to a Securitization Entity for the fair
market value thereof, including cash in an amount at least equal to
75% of the fair market value thereof as determined in accordance with
GAAP (for the purposes of this clause (c), Purchase Money Notes shall
be deemed to be cash); and
(d) transfers of accounts receivable and related assets (including
contract rights) of the type specified in the definition of Qualified
Securitization Transaction (or a fractional undivided interest
therein) by a Securitization Entity in a Qualified Securitization
Transaction.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Business Day" means any day other than Saturday, Sunday or any other day on
which banking institutions in the City of New York are required or authorized by
law or governmental action to be closed.
"Capital Stock" means:
(1) with respect to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however designated and
whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person; and
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(2) with respect to any Person that is not a corporation, any and all
partnership, membership or other equity interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States Government or issued by any agency thereof and
backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United States
of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date
of acquisition thereof and, at the time of acquisition, having one of
the two highest ratings obtainable from either S&P or Moody's;
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of
at least A-1 from S&P or at least P-1 from or Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or
the District of Columbia or any U.S. branch of a foreign bank having
at the date of acquisition thereof combined capital and surplus of not
less than $250.0 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above
entered into with any bank meeting the qualifications specified in
clause (4) above; and
(6) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (1) through (5)
above.
"Change of Control" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the
assets of the Company to any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act (a "Group"), together
with any Affiliates thereof (whether or not otherwise in compliance
with the provisions of the Indenture);
(2) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company
(whether or not otherwise in compliance with the provisions of the
Indenture);
(3) any Person or Group is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 14(d) under the Exchange Act, except that a Person
shall be deemed to have "beneficial ownership" of all securities
that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly
or indirectly, of more than 50% of the total Voting Stock of the
Company, measured by voting power rather than number of shares;
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(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors; or
(5) the Company consolidates with, or merges with or into, any Person, or
any Person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged
for cash, securities or other property, other than any such
transaction where the Voting Stock of the Company outstanding
immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Capital Stock) of the
surviving or transferee Person constituting a majority of such Voting
Stock of such surviving or transferee Person, measured by voting power
rather than number of shares (immediately after giving effect to such
issuance).
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net income has been reduced thereby:
(a) all income taxes of such Person and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other
than income taxes attributable to extraordinary, unusual or
nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business);
(b) Consolidated Interest Expense; and
(c) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person,
the ratio of Consolidated EBITDA of such Person during the four full fiscal
quarters (the "Four-Quarter Period") ending prior to the date of the transaction
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio for which financial statements are available (the "Transaction Date") to
Consolidated Fixed Charges of such Person for the Four-Quarter Period. In
addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis (in accordance with Article
11 of Regulation S-X under the Securities Act) for the period of such
calculation to:
(1) the incurrence or repayment of any Indebtedness of such Person or any
of its Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of
the proceeds thereof), other than the incurrence or repayment of
Indebtedness in the ordinary course of business for working capital
purposes pursuant to working capital facilities, occurring during the
Four-Quarter Period or at any time subsequent to the last day of the
Four-Quarter Period and on or prior to the Transaction
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Date, as if such incurrence or repayment, as the case may be (and the
application of the proceeds thereof), had occurred on the first day of
the Four-Quarter Period; and
(2) any Asset Sales or other dispositions or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to
the need to make such calculation as a result of such Person or one of
its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also
including any Consolidated EBITDA (including any pro forma expense and
cost reductions calculated in accordance with Article 11 of Regulation
S-X under the Securities Act) attributable to the assets which are the
subject of the Asset Sale or other disposition or Asset Acquisition
during the Four-Quarter Period) occurring during the Four-Quarter
Period or at any time subsequent to the last day of the Four Quarter
Period and on or prior to the Transaction Date, as if such Asset Sale
or other disposition or Asset Acquisition (including the incurrence,
assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four-Quarter Period. If such Person or any of
its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly
incurred or otherwise assumed such other Indebtedness that was so
guaranteed. If, since the beginning of such Four-Quarter Period, any
Person (that subsequently became a Restricted Subsidiary or was merged
with or into the Company or any Restricted Subsidiary since the
beginning of such Four-Quarter Period) shall have made any Asset Sale
or other disposition or Asset Acquisition that would have required
adjustment pursuant to this definition, then the Consolidated Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect
thereto (in accordance with Article 11 of Regulation S-X under the
Securities Act) as if such Asset Sale or other disposition or Asset
Acquisition had occurred at the beginning of the applicable Four-
Quarter Period.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio:"
(1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the
Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the
Four-Quarter Period; and
(3) notwithstanding clause (1) of this paragraph, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be
deemed to accrue at the rate per annum resulting after giving effect
to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any period,
the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the product of (x) the amount of all dividend payments on any series
of Preferred Stock of such Person and its Restricted Subsidiaries
(other than dividends paid in Qualified Capital Stock) paid or
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accrued during such period times (y) a fraction, the numerator of
which is one and the denominator of which is one minus the then
current effective consolidated federal, state and local income tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Restricted Subsidiaries for such period on a consolidated basis in
accordance with GAAP, including, without limitation, (w) any
amortization of debt discount and amortization or write-off of
deferred financing costs, (x) the net costs under Interest Swap
Obligations, (y) all capitalized interest and (z) the interest portion
of any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period, the
aggregate net income (or loss) of such Person and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided, that there shall be excluded therefrom:
(1) after-tax gains from Asset Sales (without regard to the $250,000
limitation set forth in the definition thereof) or abandonments or
reserves relating thereto;
(2) after-tax items classified as extraordinary, unusual or nonrecurring
gains;
(3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted
Subsidiary of the referent Person or is merged or consolidated with or
into the referent Person or any Restricted Subsidiary of the referent
Person;
(4) the net income (but not loss) of any Restricted Subsidiary of the
referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is
prohibited by contract, operation of law or otherwise;
(5) the net income of any Person, other than a Restricted Subsidiary of
the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or a Wholly Owned Restricted
Subsidiary of the referent Person by such Person;
(6) in the case of a successor to the referent Person by consolidation or
merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation,
merger or transfer of assets;
(7) any restoration of income of any contingency reserve, except to the
extent that provision for such reserve was made out of Consolidated
Net Income accrued at any time following the Issue Date; and
(8) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period, whether
or not such operations were classified as discontinued).
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"Consolidated Net Worth" of any Person as of any date means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash charges and
expenses of such Person and its Restricted Subsidiaries reducing Consolidated
Net Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charges constituting an extraordinary item or loss or any such charges that
require an accrual of or a reserve for cash charges for any future period).
"Continuing Directors" means, as of any date of determination, any member of the
Board of Directors of the Company who:
(1) was a member of such Board of Directors on the Issue Date; or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Facility" means the Credit Agreement, dated as of April 1, 1999, among
the Company, the lenders party thereto in their capacities as lenders
thereunder, NationsBank, N.A., as documentation agent, First Union National
Bank, as syndication agent, and Wachovia Bank, N.A., as agent, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with the
lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Debt," as to the Company or any Guarantor, means:
(1) Indebtedness under or in respect of the Credit Facility; and
(2) any other Indebtedness constituting Senior Debt or Guarantor Senior
Debt, as the case may be, which, at the time of determination, has an
aggregate principal amount of at least $25.0 million and is
specifically designated in the instrument evidencing such Senior Debt
or Guarantor Senior Debt, as the case may be, as "Designated Senior
Debt" by such Person.
"Disqualified Capital Stock" means that portion of any Capital Stock which, by
its terms (or by the terms of any security into which it is convertible or for
which it is exchangeable at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation
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or otherwise, or is redeemable at the sole option of the holder thereof on or
prior to the final maturity date of the Notes. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Capital Stock
solely because the holders thereof have the right to require the Company to
repurchase such Capital Stock upon the occurrence of a change of control or
asset sale shall not constitute Disqualified Capital Stock if the terms of such
Capital Stock provide that the Company may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described under the heading "--Certain Covenants--
Limitation on Restricted Payments."
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of the Company
that is incorporated or otherwise organized under the laws of the United States
or any State thereof or the District of Columbia.
"Equity Offering" means an underwritten public offering of Qualified Capital
Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession
of the United States, which are in effect on the Issue Date.
"Guarantee" means the guarantee of the Obligations of the Company with respect
to the Notes by each Guarantor pursuant to the terms of the Indenture.
"Guarantor" means:
(1) each of Cadmus Journal Services, Inc., Washburn Graphics, Inc.,
American Graphics, Inc., Expert Graphics, Inc., Cadmus Direct
Marketing, Inc., Three Score, Inc., Mack Printing Company, Port City
Press, Inc., Mack Printing Group, Inc. and Science Craftsman
Incorporated; and
(2) each of the Company's Restricted Subsidiaries that in the future
executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Guarantor;
provided that any Person constituting a Guarantor as described above shall cease
to constitute a Guarantor when its respective Guarantee is released in
accordance with the terms of the Indenture.
"Guarantor Senior Debt" means, with respect to any Guarantor, the principal
of, premium, if any, and interest (including any interest accruing subsequent to
the filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) on any Indebtedness of such Guarantor, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness
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shall not be senior in right of payment to the Guarantee of such Guarantor.
Without limiting the generality of the foregoing, "Guarantor Senior Debt"
shall also include the principal of, premium, if any, interest (including any
interest accruing subsequent to the filing of a petition of bankruptcy at the
rate provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of:
(1) all monetary obligations of every nature of such Guarantor in respect
of the Credit Facility, including, without limitation, obligations to
pay principal and interest, reimbursement obligations under letters of
credit, fees, expenses and indemnities;
(2) all Interest Swap Obligations (including guarantees thereof); and
(3) all obligations under Currency Agreements (including guarantees
thereof),
in each case, whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include:
(1) any Indebtedness of such Guarantor to any Subsidiary or Affiliate of
such Guarantor, or any Subsidiary of such Affiliate;
(2) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(3) Indebtedness represented by Disqualified Capital Stock;
(4) any liability for federal, state, local or other taxes owed or owing
by such Guarantor;
(5) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of such Guarantor or any Subsidiary of
such Guarantor (including, without limitation, amounts owed for
compensation);
(6) that portion of any Indebtedness incurred in violation of the covenant
described under the heading "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness" (but, as to any such
obligation, no such violation shall be deemed to exist for purposes of
this clause (6) if the holder(s) of such obligation or their
representative and the Trustee shall have received an officers'
certificate of the Company to the effect that the incurrence of such
Indebtedness does not (or, in the case of revolving credit
indebtedness, that the incurrence of the entire committed amount
thereof at the date on which the initial borrowing thereunder is made
would not) violate such provisions of the Indenture);
(7) Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without
recourse to such Guarantor; and
(8) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of such Guarantor.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
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(2) all Obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 90 days or more or are
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted);
(5) all Obligations for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of Indebtedness
referred to in clauses (1) through (5) above and clause (8) below;
(7) all Obligations of any other Person of the type referred to in clauses
(1) through (6) above which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be
the lesser of the fair market value of such property or asset and the
amount of the Obligation so secured;
(8) all Obligations under currency agreements and interest swap agreements
of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the amount
of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding
accrued dividends, if any.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock.
"Independent Financial Advisor" means a nationally recognized investment
banking or accounting firm:
(1) which does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the
Company or any of its Subsidiaries; and
(2) which, in the judgment of the Board of Directors of the Company, is
otherwise independent and qualified to perform the task for which it
is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to any
arrangement with any other Person, whereby, directly or indirectly, such Person
is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
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"Investment" means, with respect to any Person, any direct or indirect loan or
other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or any such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary of
the Company sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, such Restricted Subsidiary is no longer a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Common Stock of such Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Junior Subordinated Note" means, collectively, the three 11.5% subordinated
promissory notes of the Company due March 31, 2010.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Moody's" means Moody's Investors Service, Inc.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the
form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment
banking fees and sales commissions);
(2) taxes paid or payable relating to such Asset Sale after taking into
account any reduction in consolidated tax liability due to available
tax credits or deductions and any tax sharing arrangements;
(3) the repayment of Indebtedness that is secured by such assets in
accordance with the terms of any Lien upon or with respect to such
assets; and
(4) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained
by the Company or any Restricted Subsidiary of the Company, as the
case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest, penalties,
fees, indemnifications, reimbursements, damages and other liabilities payable
under the documentation governing any Indebtedness.
"Permitted Business" means any business (including stock or assets) that
derives its revenues from the business engaged in by the Company and its
Restricted Subsidiaries on the Issue Date and/or activities that are
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reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which the Company and its
Restricted Subsidiaries are engaged on the Issue Date.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness represented by the Notes issued on the Issue Date in an
aggregate principal amount not to exceed $125.0 million and the
Guarantees thereof;
(2) Indebtedness incurred by the Company pursuant to the Credit Facility
in an aggregate principal amount not to exceed $200.0 million at any
one time outstanding, less:
(a) the amount of all mandatory principal payments actually made by
the Company in respect of term loans thereunder;
(b) the amount of all required permanent repayments (which are
accompanied by a corresponding permanent commitment reduction)
thereunder; and
(c) the aggregate amount of Indebtedness of Securitization Entities
in Qualified Securitization Transactions at the time outstanding,
to the extent that the proceeds from such Indebtedness are not
used (within five Business Days after the incurrence of such
Indebtedness) to make mandatory principal payments or required
permanent repayments in accordance with clauses (a) and (b)
above.
(3) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereof;
(4) Interest Swap Obligations of the Company or any of its Restricted
Subsidiaries covering Indebtedness of the Company or any of its
Restricted Subsidiaries; provided that such Interest Swap Obligations
are entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent that the
notional principal amount of any such Interest Swap Obligation does
not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligation relates;
(5) Indebtedness of the Company or any of its Restricted Subsidiaries
under Currency Agreements; provided that such Currency Agreements are
entered into to protect the Company and its Restricted Subsidiaries
from fluctuations in the value of foreign currencies purchased or
received in the ordinary course of business; provided, further, that,
in the case of Currency Agreements which relate to Indebtedness, such
Currency Agreements do not increase the Indebtedness of the Company
and its Restricted Subsidiaries outstanding other than as a result of
fluctuations of foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(6) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company to
the Company or to a Wholly Owned Restricted Subsidiary of the Company
for so long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary of the Company, in each case subject to no
Lien held by a Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company; provided that if as of any date
any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company owns or holds any such Indebtedness or holds
a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by
the issuer of such Indebtedness;
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(7) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary of
the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien;
provided that (a) any Indebtedness of the Company to any Wholly Owned
Restricted Subsidiary of the Company that is not a Guarantor is
unsecured and subordinated, pursuant to a written agreement, to the
Company's Obligations under the Indenture and the Notes and (b) if as
of any date any Person other than a Wholly Owned Restricted Subsidiary
of the Company owns or holds any such Indebtedness or any Person holds
a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by
the Company;
(8) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two Business Days of incurrence;
(9) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or
such Restricted Subsidiary, as the case may be, in order to provide
security for workers' compensation claims, payment obligations in
connection with self-insurance or similar requirements in the ordinary
course of business;
(10) Indebtedness represented by Capitalized Lease Obligations and Purchase
Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed $5.0 million
at any one time outstanding;
(11) Refinancing Indebtedness;
(12) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is not recourse to the
Company or any Subsidiary of the Company (except for Standard
Securitization Undertakings); and
(13) additional Indebtedness of the Company and its Restricted Subsidiaries
in an aggregate principal amount that does not exceed $15.0 million at
any one time outstanding (which amount may, but need not, be incurred
in whole or in part under the Credit Facility).
For purposes of determining compliance with the covenant described under the
heading "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness," in the event that an item of Indebtedness meets the criteria of
more than one of the categories of Permitted Indebtedness described in clauses
(1) through (11) and (13) above or is otherwise entitled to be incurred pursuant
to the Consolidated Fixed Charge Coverage Ratio provisions of such covenant, the
Company shall, in its sole discretion, classify (or later reclassify) such item
of Indebtedness in any manner that complies with such covenant. Accrual of
interest, accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms and the payment of dividends on Disqualified Capital Stock will not
be deemed to be an incurrence of Indebtedness or an issuance of Disqualified
Capital Stock for purposes of the covenant described under the heading "--
Certain Covenants--Limitation on Incurrence of Additional Indebtedness." The
amount of Indebtedness issued at a price that is either less or greater than the
principal amount thereof shall be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
"Permitted Investments" means:
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(1) Investments by the Company or any Restricted Subsidiary of the Company
in any Wholly Owned Restricted Subsidiary of the Company that is a
Guarantor or any Person if as a result of such Investment such Person
shall become a Wholly Owned Restricted Subsidiary of the Company that
is a Guarantor or will merge or consolidate with or into the Company
or a Wholly Owned Restricted Subsidiary of the Company that is a
Guarantor;
(2) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture;
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries in the ordinary course of business for bona
fide business purposes in an aggregate principal amount not to exceed
$2.0 million at any one time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of the Company's or its Restricted Subsidiaries'
business and otherwise in compliance with the Indenture;
(6) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(7) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made
in compliance with the covenant described under the heading "--Certain
Covenants--Limitation on Asset Sales;"
(8) additional Investments having an aggregate fair market value, when
taken together with all other Investments made pursuant to this clause
(8) that are at that time outstanding, not to exceed $5.0 million
(with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value);
(9) any Investment by the Company or a Restricted Subsidiary of the
Company in a Securitization Entity or any Investment by a
Securitization Entity in any other Person in connection with a
Qualified Securitization Transaction; provided that any Investment in
a Securitization Entity is in the form of a Purchase Money Note or an
equity interest; and
(10) Investments in Permitted Businesses made by the Company or any Wholly
Owned Restricted Subsidiary of the Company that is a Guarantor having
an aggregate fair market value, when taken together with all other
Investments made pursuant to this clause (10) after the Issue Date,
not to exceed $5.0 million (with the fair market value of each
Investment being measured at the time made and without giving effect
to subsequent changes in value).
"Permitted Liens" means the following types of Liens:
(1) Liens securing Senior Debt and Guarantor Senior Debt (including Liens
securing Indebtedness outstanding under the Credit Facility) to the
extent that the Indebtedness secured thereby is permitted to be
incurred pursuant to the covenant described under the heading "--
Certain Covenants--Limitation on Incurrence of Additional
Indebtedness;"
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(2) Liens securing the Notes and the Guarantees;
(3) Liens in favor of the Company or any Wholly Owned Restricted
Subsidiary of the Company on assets of any Restricted Subsidiary of
the Company;
(4) Liens existing on the Issue Date securing Indebtedness existing on the
Issue Date to the extent and in the manner such Liens are in effect on
the Issue Date;
(5) Liens securing Refinancing Indebtedness which is incurred to Refinance
any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided that such Liens:
(a) are no less favorable to the Holders and are not more favorable
to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being Refinanced; and
(b) do not extend to or cover any property or assets of the Company
or any of its Restricted Subsidiaries not securing the
Indebtedness so Refinanced;
(6) Liens for taxes, assessments or governmental charges or claims either:
(a) not delinquent; or
(b) contested in good faith by appropriate proceedings and as to
which the Company or any of its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required
pursuant to GAAP;
(7) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen and repairmen and other Liens
imposed by law incurred in the ordinary course of business for sums
not yet delinquent or being contested in good faith, if such reserve
or other appropriate provision, if any, as shall be required by GAAP
shall have been made in respect thereof;
(8) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of
borrowed money);
(9) judgment Liens not giving rise to an Event of Default so long as any
such Lien is adequately bonded and any appropriate legal proceedings
which may have been duly initiated for the review of such judgment
shall not have been finally terminated or the period within which such
proceedings may be initiated shall not have expired;
(10) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in
any material respect with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries;
(11) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property of
asset which is not leased property subject to such Capitalized Lease
Obligation;
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(12) Liens securing Purchase Money Indebtedness of the Company or any
Restricted Subsidiary of the Company; provided that:
(a) the Purchase Money Indebtedness shall not exceed purchase price
or the cost of construction or improvement of such property or
assets, as the case may be, and shall not be secured by any
property or assets of the Company or any Restricted Subsidiary of
the Company other than the property or assets so acquired,
constructed or improved; and
(b) the Lien securing such Indebtedness shall be created within 90
days of such acquisition or completion of construction or
improvement;
(13) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to
facilitate the purchase, shipment, or storage of such inventory or
other goods;
(14) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating
to such letters of credit and products and proceeds thereof;
(15) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of
offset and set-off;
(16) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under
the Indenture;
(17) Liens securing Indebtedness under Currency Agreements;
(18) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of custom duties in connection with the
importation of goods;
(19) Liens securing Acquired Indebtedness incurred in compliance with the
covenant described under the heading "--Certain Covenants--Limitation
on Incurrence of Additional Indebtedness;" provided that:
(a) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary of the Company and were not
granted in anticipation of the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the
Company; and
(b) such Liens do not extend to or cover any property or assets of
the Company or of any of its Restricted Subsidiaries other than
the property or assets that secured the Acquired Indebtedness
prior to the time such Indebtedness became Acquired Indebtedness
of the Company or a Restricted Subsidiary of the Company and are
no more favorable to the lienholders than those securing the
Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the
Company; and
(20) Liens on assets transferred to a Securitization Entity or on assets of
a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction.
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"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that has
preferential rights to any other Capital Stock of such Person with respect to
dividends or redemptions or upon liquidation.
"Productive Assets" means properties and assets (including Capital Stock) that
are used or useful by the Company and its Restricted Subsidiaries in Permitted
Businesses.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
construction or improvement, of property or equipment.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Subsidiary of the Company in connection with a Qualified Securitization
Transaction to a Securitization Entity, which note shall be repaid from cash
available to the Securitization Entity, other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest, principal and other amounts owing to such investors and
amounts paid in connection with the purchase of newly generated receivables.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any or its Subsidiaries may sell, convey or
otherwise transfer to (a) a Securitization Entity (in the case of a transfer by
the Company or any of its Subsidiaries) or (b) any other Person (in the case of
a transfer by a Securitization Entity), or may grant a security interest in, any
accounts receivable (whether now existing or arising in the future) of the
Company or any of its Subsidiaries, and any assets related thereto including,
without limitation, all collateral securing such accounts receivable, all
contracts and contract rights and all guarantees or other obligations in respect
of such accounts receivable, proceeds of such accounts receivable and other
assets (including contract rights) which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness (the proceeds of which are applied within 60 days after
the incurrence thereof) in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any of its
Restricted Subsidiaries of Indebtedness incurred in accordance with the covenant
described under the heading "--Certain Covenants--Limitation on Incurrence of
Additional Indebtedness" (other than pursuant to clauses (2), (4), (5), (6),
(7), (8), (9), (10), (12) or (13) of the definition of Permitted Indebtedness),
in each case, that does not:
(1) directly or indirectly result in an increase in the aggregate
principal amount (or accreted value, if applicable) of Indebtedness of
the Company or such Restricted Subsidiary as of the date of such
Refinancing (plus the amount of any premium required to be paid under
the terms of the instrument governing such Indebtedness and the amount
of reasonable expenses incurred by the Company or such Restricted
Subsidiary in connection with such Refinancing); or
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(2) create Indebtedness with (a) a Weighted Average Life to Maturity as of
the date of such Refinancing that is less than the Weighted Average
Life to Maturity at such time of the Indebtedness being Refinanced or
(b) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; provided that (x) such Refinancing
Indebtedness shall be incurred solely by the obligor of the
Indebtedness being Refinanced and (y) if such Indebtedness being
Refinanced is subordinated to the Notes or a Guarantee, then such
Refinancing Indebtedness shall be subordinated or junior to the Notes
or such Guarantee, as the case may be, at least to the same extent and
in the same manner as the Indebtedness being Refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person which
at the time of determination is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Rating Group.
"Sale and Leaseback Transaction" means any direct or indirect arrangement with
any Person or to which any such Person is a party, providing for the leasing to
the Company or a Restricted Subsidiary of the Company of any property, whether
owned by the Company or any Restricted Subsidiary of the Company at the Issue
Date or later acquired, which has been or is to be sold or transferred by the
Company or such Restricted Subsidiary to such Person or to any other Person from
whom funds have been or are to be advanced by such Person on the security of
such property.
"Securities Act" means the Securities Act of 1933, as amended, or any successor
statute or statutes thereto.
"Securitization Entity" means a Wholly Owned Subsidiary of the Company (or
another Person in which the Company or any Subsidiary of the Company makes an
Investment and to which the Company or any Subsidiary of the Company transfers
accounts receivable and related assets) which engages in no activities other
than in connection with the financing of accounts receivable and which is
designated by the Board of Directors of the Company (as provided below) as a
Securitization Entity:
(a) no portion of the Indebtedness or any other obligation (contingent or
otherwise) of which:
(i) is guaranteed by the Company or any Subsidiary of the Company
(excluding guarantees of obligations (other than the principal
of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings);
(ii) is recourse to or obligates the Company or any Subsidiary of
the Company in any way other than pursuant to Standard
Securitization Undertakings; or
(iii) subjects any property or asset of the Company or any Subsidiary
of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
(b) with which neither the Company nor any Subsidiary of the Company has
any material contract, agreement, arrangement or understanding other
than on terms no less favorable to the Company or
129
<PAGE>
such Subsidiary than those that might be obtained at the time from
Persons that are not Affiliates of the Company, other than fees
payable in the ordinary course of business in connection with
servicing receivables of such entity; and
(c) to which neither the Company nor any Subsidiary of the Company has any
obligation to maintain or preserve such entity's financial condition
or cause such entity to achieve certain levels of operating results.
Any such designation by the Board of Directors of the Company shall be evidenced
to the Trustee by filing with the Trustee a Board Resolution of the Board of
Directors of the Company giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
conditions.
"Senior Debt" means the principal of, premium, if any, and interest (including
any interest accruing subsequent to the filing of a petition of bankruptcy at
the rate provided for in the documentation with respect thereto, whether or not
such interest is an allowed claim under applicable law) on any Indebtedness of
the Company, whether outstanding on the Issue Date or thereafter created,
incurred or assumed, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the Notes. Without limiting the generality of the foregoing,
"Senior Debt" shall also include the principal of, premium, if any, interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on, and
all other amounts owing in respect of:
(1) all monetary obligations of every nature of the Company under the
Credit Facility, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of
credit, fees, expenses and indemnities;
(2) all Interest Swap Obligations (including guarantees thereof); and
(3) all obligations under Currency Agreements (including guarantees
thereof),
in each case, whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(1) any Indebtedness of the Company to any Subsidiary or Affiliate of the
Company, or any Subsidiary of such Affiliate;
(2) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(3) Indebtedness represented by Disqualified Capital Stock;
(4) any liability for federal, state, local or other taxes owed or owing
by the Company;
(5) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of the Company or any Subsidiary of the
Company (including, without limitation, amounts owed for
compensation);
130
<PAGE>
(6) that portion of any Indebtedness incurred in violation of the covenant
described under the heading "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness" (but, as to any such
obligation, no such violation shall be deemed to exist for purposes of
this clause (6) if the holder(s) of such obligation or their
representative and the Trustee shall have received an officers'
certificate of the Company to the effect that the incurrence of such
Indebtedness does not (or, in the case of revolving credit
indebtedness, that the incurrence of the entire committed amount
thereof at the date on which the initial borrowing thereunder is made
would not) violate such provisions of the Indenture);
(7) Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company; and
(8) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of the Company.
"Significant Subsidiary," with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company which are reasonably customary in an accounts receivable transaction.
"Subsidiary," with respect to any Person, means:
(1) any corporation a majority of whose Voting Stock shall at the time be
owned, directly or indirectly, by such Person; or
(2) any other Person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly,
owned by such Person.
"Unrestricted Subsidiary" of any Person means:
(1) any Subsidiary of such Person formed or acquired after the Issue Date
that at the time of determination shall be or continue to be
designated an Unrestricted Subsidiary by the Board of Directors of
such Person in compliance with the covenant described under the
heading "--Certain Covenants--Limitation on Restricted and
Unrestricted Subsidiaries"; and
(2) any Subsidiary of an Unrestricted Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of any
Person (irrespective of whether or not, at the time, stock of any other class or
classes shall have, or might have, voting power by reason of the happening of
any contingency) and, with respect to the Company, shall be deemed to include
the Common Stock of the Company.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of such Indebtedness;
into
131
<PAGE>
(2) the sum of the total of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof; by
(b) the number of years (calculated to the nearest one-twelfth) which
will elapse between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Wholly Owned
Subsidiary of such Person which at the time of determination is a Restricted
Subsidiary.
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person of
which all the outstanding Voting Stock (other than in the case of a Subsidiary
that is incorporated in a jurisdiction other than a State in the United States
or the District of Columbia, directors' qualifying shares or an immaterial
amount of shares required to be owned by other Persons pursuant to applicable
law) is owned by such Person or any Wholly Owned Subsidiary of such Person.
132
<PAGE>
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the material federal income tax consequences of the
exchange of Old Notes for Exchange Notes. This summary is based on current law,
which is subject to change at any time, possibly with retroactive effect. In
addition, this summary does not address the tax consequences of the exchange
under applicable state, local or foreign laws.
The exchange of Old Notes for Exchange Notes pursuant to the exchange offer will
not result in any United States federal income tax consequences to Holders. When
a Holder exchanges an Old Note for an Exchange Note pursuant to the exchange
offer, the Holder will have the same adjusted basis and holding period for the
Exchange Note as for the Old Note immediately before the exchange.
Each Holder should consult his own tax advisor as to the particular tax
consequences to it of exchanging Old Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. We have agreed that we will, for a period of 180 days
after the consummation of the exchange offer, make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale.
We will not receive any proceeds from the sale of Exchange Notes by broker-
dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of Exchange Notes and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the consummation of the exchange offer, we will
promptly send additional copies of the prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such document
in the Letter of Transmittal. We have agreed to pay all expenses incident to the
exchange offer other than commissions or concessions of any brokers or dealers
and will indemnify the holders of the Exchange Notes, including any broker-
dealers, against certain liabilities, including liabilities under the Securities
Act.
Following consummation of the exchange offer, we may, in our sole discretion,
commence one or more additional exchange offers to holders of Old Notes who did
not exchange their Old Notes for Exchange Notes
133
<PAGE>
in the exchange offer on terms which may differ from those contained in the
Registration Rights Agreement. This prospectus, as it may be amended or
supplemented from time to time, may be used by us in connection with any such
additional exchange offers. Such additional exchange offers will take place from
time to time until all outstanding Old Notes have been exchanged for Exchange
Notes pursuant to the terms and conditions contained herein.
VALIDITY OF THE EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for us by Hunton &
Williams, Richmond, Virginia.
EXPERTS
The consolidated financial statements of Cadmus Communications Corporation as of
June 30, 1998 and 1997, and for each of the three years in the period ended June
30, 1998 included in this registration statement to the extent and for the
periods indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
Ernst & Young LLP, independent auditors, have audited the consolidated financial
statements of Melham Holdings, Inc. at December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, as set forth in their
report. We have included those consolidated financial statements in this
prospectus and registration statement in reliance on Ernst & Young LLP's report,
given on their authority as experts in accounting and auditing.
134
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Interim Financial Statements of Cadmus
Communications Corporation (unaudited):
Condensed Consolidated Balance Sheets as of March 31, 1999 and June 30,
1998 F-2
Condensed Consolidated Statements of Income for the Nine Months ended
March 31, 1999 and 1998 F-3
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 1999 and 1998 F-4
Notes to Condensed Consolidated Financial Statements F-5
Consolidated Financial Statements of Cadmus Communications Corporation:
Report of Independent Public Accountants F-8
Consolidated Statements of Income for the Years ended June 30, 1998,
1997 and 1996 F-9
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-10
Consolidated Statements of Cash Flows for the Years ended June 30, 1998,
1997 and 1996 F-11
Notes to Consolidated Financial Statements F-12
Consolidated Interim Financial Statements of Melham Holdings, Inc.
(unaudited):
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 F-24
Consolidated Statements of Operations for the Three Months ended March
31, 1999 and 1998 F-25
Consolidated Statements of Cashflows for the Three Months ended March
31, 1999 and 1998 F-26
Notes to Unaudited Consolidated Financial Statements F-27
Consolidated Financial Statements of Melham Holdings, Inc.:
Report of Independent Auditors F-28
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-29
Consolidated Statements of Operations for the Years ended December 31,
1998, 1997 and 1996 F-30
Consolidated Statements of Changes in (Deficiency in Assets)
Stockholder's Equity for the Years ended December 31, 1998, 1997 and
1996 F-31
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1997 and 1996 F-32
Notes to Consolidated Financial Statements F-33
</TABLE>
F-1
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
----------------------
March 31,
1999 June 30,
Dollars in thousands, except per share data (Unaudited) 1998
- ------------------------------------------- ----------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 281 $ --
Accounts receivable, less allowance for doubtful
accounts 65,454 70,571
Inventories 27,978 25,610
Deferred income taxes 5,210 3,832
Prepaid expenses and other 3,892 4,107
----------- ---------
Total current assets 102,815 104,120
----------- ---------
Property, plant, and equipment (net of accumulated
depreciation of $111,896 at March 31, 1999, and
$107,269 at June 30, 1998) 126,907 133,836
Goodwill and other intangibles, net 50,646 48,158
Other assets 4,861 5,638
----------- ---------
Total assets $ 285,229 $ 291,752
=========== =========
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 12,170 $ 2,100
Current maturities of long-term debt 6,089 6,431
Accounts payable 35,577 41,981
Accrued expenses 20,202 18,293
Restructuring reserve 1,136 4,378
----------- ---------
Total current liabilities 75,174 73,183
----------- ---------
Long-term debt, less current maturities 65,214 93,224
Other long-term liabilities 10,510 8,867
Deferred income taxes 13,788 6,662
Shareholders' equity:
Common stock ($.50 par value; authorized shares-
16,000,000 shares; issued and outstanding shares-
7,846,000 at March 31, 1999, and 7,921,000 at
June 30, 1998) 3,923 3,961
Capital in excess of par value 52,292 53,532
Retained earnings 64,328 52,323
----------- ---------
Total shareholders' equity 120,543 109,816
----------- ---------
Total liabilities and shareholders' equity $ 285,229 $ 291,752
=========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-2
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
---------------------
Nine Months Ended
March 31,
1999 1998
Dollars in thousands, except per share data --------- ---------
<S> <C> <C>
Net sales $ 308,596 $ 289,644
Operating expenses:
Cost of sales 246,994 223,706
Selling and administrative 42,221 45,933
Net gain on divestitures (9,521) --
--------- ---------
279,694 269,639
--------- ---------
Operating income 28,902 20,005
--------- ---------
Interest and other expenses:
Interest 6,085 5,564
Other, net 1,387 1,060
--------- ---------
7,472 6,624
--------- ---------
Income before income taxes 21,430 13,381
Income taxes 8,251 5,152
--------- ---------
Net income $ 13,179 $ 8,229
========= =========
Earnings per share--basic:
Net income per share $ 1.67 $ 1.05
========= =========
Weighted-average common shares outstanding 7,872 7,841
========= =========
Earnings per share--diluted:
Net income per share $ 1.63 $ 1.01
========= =========
Weighted-average common shares outstanding 8,073 8,140
========= =========
Cash dividends per common share $ .15 $ .15
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-3
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
---------------------
Nine Months Ended
March 31,
1999 1998
Dollars in thousands, except share data --------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 13,179 $ 8,229
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 14,326 13,608
Net gain on divestitures (9,521) --
Other, net 6,461 3,152
--------- ---------
24,445 24,989
--------- ---------
Changes in assets and liabilities, excluding debt and
effects of acquisitions and dispositions:
Accounts receivable, net (4,523) 655
Inventories (4,846) (4,555)
Accounts payable and accrued expenses (8,928) 11,511
Restructure reserve (due to cash payments) (1,236) (3,648)
Other current assets and liabilities (142) 115
Other long-term liabilities (due to pension plan
payments) -- (1,148)
Other, net (1,252) (668)
--------- ---------
(20,927) 2,262
--------- ---------
Net cash provided by operating activities 3,518 27,251
--------- ---------
Cash Flows from Investing Activities
Purchases of property, plant and equipment (12,340) (28,582)
Proceeds from sale of property, plant and equipment 962 4,557
Payments for business acquired (5,192) --
Proceeds from divested businesses 34,971 --
Other, net (295) --
--------- ---------
Net cash provided by (used in ) investing activities 18,106 (24,025)
--------- ---------
Cash Flows from Financing Activities
Proceeds from short-term borrowings 10,070 3,445
Repayment of long-term revolving credit facility (23,500) (2,500)
Repayment of long-term borrowings (4,852) (3,423)
Dividends paid (1,183) (1,176)
Repurchase and retirement of common stock (3,864) (118)
Issuance of stock 1,986 --
Proceeds from exercise of stock options -- 581
--------- ---------
Net cash used in financing activities (21,343) (3,191)
--------- ---------
Increase in cash and cash equivalents 281 35
Cash and cash equivalents at beginning of period -- 184
--------- ---------
Cash and cash equivalents at end of period $ 281 $ 219
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-4
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements of
Cadmus Communications Corporation and Subsidiaries have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting, and with applicable quarterly reporting regulations of
the Securities and Exchange Commission. They do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements and, accordingly, should be
read in conjunction with the consolidated financial statements and related
footnotes included in the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1998.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of
interim financial information have been included. The results of operations
for the period ended March 31, 1999, are not necessarily indicative of
results for the entire fiscal year.
2. Basic earnings per share is computed on the basis of weighted-average common
shares outstanding from the date of issue. Diluted earnings per share is
computed on the basis of weighted-average common shares outstanding plus
common shares contingently issuable upon exercise of dilutive stock options.
Incremental shares for dilutive stock options, computed under the treasury
stock method, were 133,000 and 317,000 for the quarters ended March 31, 1999
and 1998, respectively.
3. In August 1998, the Board of Directors approved an extension to August 31,
1999, of its fiscal 1997 stock repurchase plan. Under the plan, the Company
is authorized to repurchase up to 750,000 shares of its common stock. As of
March 31, 1999, approximately 297,000 shares have been repurchased under
this plan, including approximately 202,000 shares repurchased during fiscal
1999.
4. Components of net inventories at March 31, 1999, and June 30, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
------------------
March 31, June 30,
1999 1998
--------- --------
<S> <C> <C>
Raw materials and supplies $ 5,967 $ 4,841
Work in process:
Materials 9,974 6,567
Other manufacturing costs 9,168 11,331
Finished Goods 2,869 2,871
--------- --------
Inventories $27,978 $25,610
========= ========
</TABLE>
5. On March 1, 1999, the Company consummated the sale of certain assets and
liabilities related to the Company's Financial Communications ("CFC")
division. Pursuant to the terms of the Asset Purchase Agreement dated
February 20, 1999, between the Company and R.R. Donnelley & Sons Company,
the Company sold certain of the assets and was relieved of certain of the
liabilities which were employed by the Company in operating the Financial
Communications division. The assets sold were specific to CFC's business of
marketing, selling and distribution of financial printing services, mutual
fund printing services, shareholder communications printing services, and
activities related thereto.
The Company recorded a gain on the sale of CFC of approximately $12.3
million ($7.5 million or $.94 per diluted share, after taxes). The initial
purchase price for the business was $35 million in cash. The net book value
of CFC was approximately $14.4 million. In connection with the sale, the
Company recorded liabilities for certain purchase price adjustments
(approximately $1.9 million), severance payments, and other transaction
costs and recorded impairments of certain long lived assets as a result of
the sale ($2.3 million). The purchase price was established through arms-
length negotiations among the parties. The funds received in the sale were
used to pay down debt.
6. On February 26, 1999, the Company completed the sale of its Custom
Publishing business ("Custom") to the president of Custom. The sales price
was approximately $2.1 million comprised of cash and a note. The Company
recorded a loss on the sale of approximately $2.8 million (approximately
$1.7 million or $.22 per share, after taxes).
F-5
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements--(Continued)
7. On April 1, 1999, the Company consummated the purchase of all of the
outstanding stock of Melham Holdings, Inc., a Delaware corporation. The
purchase was pursuant to the terms of a Stock Purchase Agreement dated April
1, 1999, (the "Melham Agreement"), by and among Cadmus Communications
Corporation, Melham U.S. Inc., Purico (IOM) Limited, and Paul F. Mack.
Immediately prior to consummation of the transactions contemplated by the
Melham Agreement, Melham U.S. Inc., Purico (IOM) Limited, and Paul F. Mack
(collectively the "Sellers") owned 100% of Melham Holdings, Inc.
The principal operating subsidiary of Melham Holdings, Inc. is Mack Printing
Company ("Mack"), a full-service printer that produces a wide variety of
short-to medium-run magazines and journals generally for customers in the
mid-Atlantic and northeast regions of the United States. Melham Holdings,
Inc. indirectly owns 100% of Mack through Melham, Inc., a Delaware
corporation. In connection with the consummation of the transactions
contemplated by the Melham Agreement, Mack repurchased approximately 15% of
its then-outstanding equity securities from other securityholders and repaid
certain indebtedness to such securityholders.
The purchase price was approximately $201 million and consisted of the
following: approximately $110 million in bridge financing notes issued to the
Sellers and others, approximately $66 million in cash, approximately $6.4
million of newly issued junior subordinated notes of the Company and
approximately 1.2 million shares of the Company's common stock (valued at
approximately $18.6 million). The Company expects to repay in full the $110
million in bridge financing notes with the proceeds of $125 million of senior
subordinated notes that the Company plans to issue in its fiscal fourth
quarter. The senior subordinated notes are anticipated to have a 10 year
term. In order to satisfy a condition to closing under the Melham Agreement,
the Company elected Mr. Nathu R. Puri, a majority shareholder of Melham U.S.
Inc. and Purico (IOM) Limited, to the Board of Directors of the Company to
serve until the next annual meeting of shareholders of the Company.
The purchase price was established through arms-length negotiations among
the parties.
The facilities of Mack include its headquarters in Easton, Pennsylvania with
manufacturing facilities located in Easton, Ephrata, and East Stroudsburg,
Pennsylvania, and Baltimore, Maryland. The Company intends to continue to use
these facilities for the same or similar purposes.
8. On April 1, 1999, the Company entered into a new $200 million senior credit
facility with various banks and financial institutions, including Wachovia
Bank, NationsBank, and First Union National Bank. The new facility consists
of a $145 million, five-year revolving credit facility and a $55 million,
five-year amortizing term loan facility.
The proceeds of the loans under the senior credit facility have been and will
be used (1) to refinance indebtedness under the former senior credit facility
and certain other indebtedness, (2) to finance a portion of the Melham
Holdings Inc. acquisition and related transaction expenses, (3) to finance
permitted acquisitions and (4) for general corporate purposes, including
working capital.
The new facility is jointly and severally guaranteed by each of the Company's
present and future significant subsidiaries and is secured by a pledge of all
of the capital stock of present and future significant subsidiaries.
The revolving credit facility under the new facility will terminate on March
31, 2004. The term loan facility under the new facility will be amortized in
quarterly installments beginning June 30, 1999 and will also mature on March
31, 2004.
Interest on the new facility will be a function of LIBOR. The senior credit
facility requires the Company to pay unused commitment fees with respect to
the revolving credit facility. The unused commitment fee for an initial
period of approximately seven and one-half months is 0.50%. Thereafter, the
unused commitment fee will be determined by reference to total debt to EBITDA
ratio as it exists from time to time.
The new facility contains certain covenants regarding debt to EBITDA (as
defined), fixed charged coverage and net worth, and contains other
restrictions including limitations on additional borrowings, and the
acquisition, disposition and securitization of assets.
F-6
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements--(Continued)
9. On April 1, 1998, the Company acquired Germersheim, Inc., an Atlanta-based
national point-of-purchase marketing service provider, for $13.7 million. Of
$11 million in cash payments made during fiscal 1998, $2 million were held
in escrow at June 30, 1998, as contingent consideration only to be released
if specified performance levels are met during each of the next two years.
On August 31, 1998, the Company, the seller and the Escrow Agent amended
certain terms and conditions of the purchase and escrow agreements related
to this acquisition. Pursuant to these amendments, the Company issued, in
the name of the seller, 93,500 shares of the Company's common stock, at an
aggregate market value of $2 million, and delivered these shares to the
Escrow Agent in exchange for the $2 million of cash held in escrow. These
"Escrow Shares" are subject to certain terms and restrictions, as outlined
in the amended purchase and escrow agreements, and are held in escrow as of
March 31, 1999, as contingent consideration, to be released only if
specified performance levels are met during each of the next two years.
10. During the fourth quarter of fiscal 1998, the Company recorded a one-time
restructuring charge of $3.95 million ($2.5 million net of tax) related to
the integration of Germersheim, Inc. with its existing point-of-purchase
operations. The charge included costs to consolidate facilities, eliminate
duplicate assets and provide severance costs. These actions were initiated
in fiscal 1998 and are substantially complete. The restructuring reserve
balance remaining at March 31, 1999 totaled $0.9 million, and relates to
lease termination costs and excess rent payments. Management believes that
the remaining restructuring reserve is adequate to complete the
restructuring plan.
During the fourth quarter of fiscal 1997, the Company adopted a
restructuring plan that impacted a number of its operations. The plan
included the closure of certain facilities; realignment of certain
management, production and administrative personnel; write-down of certain
tangible and intangible assets; and exiting certain nonstrategic customer
relationships and product lines. All restructuring actions were taken by the
end of fiscal 1998. The restructuring reserve balance remaining at March 31,
1999 totaled $0.3 million, and relates primarily to continuing excess rent
and lease termination costs related to the restructuring. Management
believes the remaining restructuring reserve is adequate to cover such
costs.
F-7
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Cadmus Communications Corporation:
We have audited the accompanying consolidated balance sheets of Cadmus Communi-
cations Corporation (a Virginia corporation), and Subsidiaries as of June 30,
1998 and 1997, and the related consolidated statements of income and cash flows
for each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our responsibil-
ity is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform an audit to obtain rea-
sonable 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 man-
agement, 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 financial position of Cadmus Communications Corpora-
tion and Subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
As explained in Note 4 to the financial statements, the Company has given ret-
roactive effect to the change in accounting for certain of its inventories from
the last-in, first-out method to the first-in, first-out method.
ARTHUR ANDERSEN LLP
Richmond, Virginia
July 28, 1998
F-8
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
-----------------------------------------
Years Ended June 30,
Dollars in thousands, except per 1998 1997 1996
share data --------- -------------- --------------
(as adjusted-- (as adjusted--
see Note 4) see Note 4)
<S> <C> <C> <C>
Net sales $ 393,823 $ 384,942 $ 336,655
--------- -------------- --------------
Operating expenses:
Cost of sales 304,014 299,840 258,947
Selling and administrative 62,141 63,123 61,204
Restructuring charge, net 3,950 19,699 --
--------- -------------- --------------
370,105 382,662 320,151
--------- -------------- --------------
Operating income 23,718 2,280 16,504
Interest and other expenses:
Interest 7,595 7,788 5,144
Other, net 1,343 1,928 813
--------- -------------- --------------
8,938 9,716 5,957
--------- -------------- --------------
Income (loss) before income taxes
and extraordinary item 14,780 (7,436) 10,547
Income tax expense (benefit) 5,690 (2,219) 3,956
--------- -------------- --------------
Income (loss) before extraordinary
item 9,090 (5,217) 6,591
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $487) -- -- (795)
--------- -------------- --------------
Net income (loss) $ 9,090 $ (5,217) $ 5,796
--------- -------------- --------------
Earnings per share--basic:
Income (loss) before extraordinary
item $ 1.16 $ (.66) $ .91
Extraordinary loss on early
extinguishment of debt -- -- (.11)
--------- -------------- --------------
Net income (loss) $ 1.16 $ (.66) $ .80
========= ============== ==============
Weighted-average common shares
outstanding 7,860 7,900 7,249
========= ============== ==============
Earnings per share--diluted:
Income (loss) before extraordinary
item $ 1.11 $ (.65) $ .88
Extraordinary loss on early
extinguishment of debt -- -- (.11)
--------- -------------- --------------
Net income (loss) $ 1.11 $ (.65) $ .77
========= ============== ==============
Weighted-average common shares
outstanding--assuming dilution 8,176 8,035 7,495
========= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
----------------------
At June 30,
1998 1997
-------- -------------
(as adjusted,
see Note 4)
<S> <C> <C>
Dollars in thousands, except share data
Assets
Current assets:
Cash and cash equivalents $ -- $ 184
Accounts receivable, less allowance for doubtful
accounts ($2,575 in 1998 and $2,250 in 1997) 70,571 69,093
Inventories 25,610 20,673
Deferred income taxes 3,832 7,789
Prepaid expenses and other 4,107 3,969
-------- -------------
Total current assets 104,120 101,708
-------- -------------
Property, plant and equipment, net 133,836 118,621
Goodwill and other intangibles, net 48,158 42,572
Other assets 5,638 4,015
-------- -------------
Total assets $291,752 $266,916
-------- -------------
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 2,100 $ 1,650
Current maturities of long-term debt 6,431 5,017
Accounts payable 41,981 29,593
Accrued expenses 18,293 15,674
Restructuring reserve 4,378 7,612
-------- -------------
Total current liabilities 73,183 59,546
-------- -------------
Long-term debt, less current maturities 93,224 89,452
Other long-term liabilities 8,867 7,811
Deferred income taxes 6,662 9,464
Shareholders' equity:
Common stock ($.50 par value; authorized shares--
16,000,000; issued and outstanding shares--7,921,000
in 1998 and 7,830,000 in 1997) 3,961 3,915
Capital in excess of par value 53,532 51,923
Retained earnings 52,323 44,805
-------- -------------
Total shareholders' equity 109,816 100,643
-------- -------------
Total liabilities and shareholders' equity $291,752 $266,916
======== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
----------------------------------------
Years Ended June 30,
1997 1996
(as adjusted-- (as adjusted--
1998 Note 4) Note 4)
-------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss)................... $ 9,090 $ (5,217) $ 5,796
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary loss on early
extinguishment of debt............ -- -- 795
Depreciation and amortization...... 18,444 18,188 14,563
Restructuring charge............... 3,950 19,699 --
Deferred income taxes.............. 679 (5,580) 1,836
Other, net......................... 997 112 1,942
-------- -------------- --------------
33,160 27,202 24,932
-------- -------------- --------------
Changes in assets and liabilities,
excluding debt and effects of
acquisitions:
Accounts receivable, net........... 4,675 5,544 (7,064)
Inventories........................ (4,158) 4,455 (2,735)
Accounts payable and accrued
expenses.......................... 7,873 (3,071) 1,680
Restructure reserve (due to cash
payments)......................... (4,745) (2,850) --
Other current assets............... (138) 2,018 (2,391)
Other long-term liabilities (due to
pension plan payments)............ (1,774) (3,400) (300)
Other, net......................... 414 1,742 (302)
-------- -------------- --------------
2,147 4,438 (11,112)
-------- -------------- --------------
Net cash provided by operating
activities....................... 35,307 31,640 13,820
-------- -------------- --------------
Investing Activities
Proceeds from sale of consumer
publishing division................ -- 6,500 --
Purchases of property, plant and
equipment.......................... (33,588) (22,883) (25,289)
Proceeds from sales of property,
plant and equipment................ 6,765 2,860 651
Purchase of license agreement....... -- (482) --
Payments for businesses acquired.... (11,139) -- (73,372)
Other, net.......................... (543) (1,520) (303)
-------- -------------- --------------
Net cash used in investing
activities........................ (38,505) (15,525) (98,313)
-------- -------------- --------------
Financing Activities
Proceeds from stock offering, net... -- -- 38,376
Penalty on early extinguishment of
debt............................... -- -- (1,282)
Proceeds from (repayment of) short-
term borrowings, net............... 450 (1,673) (452)
Proceeds from long-term revolving
credit facility.................... 8,500 18,000 30,000
Proceeds from long-term borrowings.. -- 40,415 32,724
Repayment of long-term borrowings... (5,018) (70,747) (12,502)
Dividends paid...................... (1,572) (1,581) (1,485)
Repurchase and retirement of common
stock.............................. (118) (1,185) --
Proceeds from exercise of stock
options............................ 772 98 631
Other, net.......................... -- (399) (602)
-------- -------------- --------------
Net cash provided by (used in)
financing activities.............. 3,014 (17,072) 85,408
-------- -------------- --------------
Increase (decrease) in cash and cash
equivalents........................ (184) (957) 915
Cash and cash equivalents at
beginning of year.................. 184 1,141 226
-------- -------------- --------------
Cash and cash equivalents at end of
year............................... $ -- $ 184 $ 1,141
======== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Consolidation.
The consolidated financial statements include the accounts and operations of
Cadmus Communications Corporation and Subsidiaries (the "Company"), a Virginia
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements. Es-
timates also affect the reported amounts of revenue and expenses during the re-
porting period. Actual results could differ from those estimates.
Nature of Operations.
The Company is an integrated communications company offering products and serv-
ices in the areas of marketing communications and professional communications.
Revenue Recognition.
Substantially all 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 invest-
ments with an original maturity of three months or less.
Inventories.
Inventories are valued at the lower of cost or market. Inventory costs have
been determined by the first-in, first-out method (see Note 4).
Property, Plant and Equipment.
Property, plant and equipment are stated at cost, net of accumulated deprecia-
tion. Major renewals and improvements are capitalized, whereas ordinary mainte-
nance 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 calcu-
lated by the straight-line method based on useful lives of 30 years for build-
ings and 3 to 10 years for machinery, equipment, and fixtures.
Goodwill.
The Company amortizes costs in excess of fair value of net assets of businesses
acquired using the straight-line method over a period not to exceed 40 years.
Recoverability is reviewed annually or sooner if events or changes in circum-
stances indicate that the carrying amount may exceed fair value. If
recoverability is deemed to be potentially impaired, recoverability is then de-
termined by comparing the undiscounted net cash flows of the assets to which
the goodwill applies to the net book value including goodwill of those assets.
Accumulated amortization at June 30, 1998 and 1997 was $8.1 million and $6.4
million, respectively.
Income Taxes.
The Company uses the asset and liability method of Statement of Financial Ac-
counting Standards ("SFAS") No. 109 to account for income taxes. SFAS No. 109
requires the recognition of deferred tax liabilities and assets for the ex-
pected future tax consequences of temporary differences between the financial
reporting basis and tax basis of assets and liabilities.
Earnings Per Share.
During the second quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share," which establishes new standards for computing and pre-
senting earnings per share. The impact of adopting the new standard was not ma-
terial. Basic earnings per share is computed on the basis of weighted-average
common shares outstanding from the date of issue. Diluted earnings per share is
computed on the basis of weighted-average common shares outstanding plus common
shares
F-12
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
contingently issuable upon the exercise of dilutive stock options. Incremental
shares for dilutive stock options, computed under the treasury stock method,
were 316,000, 135,000, and 246,000, in fiscal 1998, 1997, and 1996, respective-
ly.
Recently Issued Accounting Pronouncements.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106."
The Company plans to adopt these three pronouncements in fiscal 1999. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The Company plans to adopt this pronouncement in fiscal
2000. These statements will affect the Company's financial statement disclo-
sures. Management believes that the adoption of these pronouncements is not ex-
pected to have a material impact on the Company's financial position or results
of operations.
Reclassifications.
Certain previously reported amounts have been reclassified to conform to the
current-year presentation.
2. Restructuring Charges
During the fourth quarter of fiscal 1998, the Company recorded a one-time re-
structuring charge of $3.95 million ($2.5 million net of tax) related to the
integration of Germersheim, Inc. (see Note 3) with its existing point of pur-
chase operations. The charge included costs to consolidate facilities, elimi-
nate duplicate assets and provide severance costs. These actions were initiated
in fiscal 1998 and are expected to be completed within one year. Management be-
lieves that the remaining restructuring reserve at June 30, 1998 of $3.2 mil-
lion is adequate to complete the restructuring plan.
During the fourth quarter of fiscal 1997, the Company adopted a restructuring
plan that impacted a number of its operations. The plan included the following
actions: closure of the Baltimore promotional printing facility and the Long
Beach-based direct marketing agency; consolidation of Atlanta and Richmond-
based interactive divisions and certain journal fulfillment and distribution
operations; realignment of certain management, production and administrative
personnel; write-down of certain tangible and intangible assets; and exiting
certain nonstrategic customer relationships and product lines. In connection
with the restructuring plan, the Company recorded a restructuring charge of
$19.9 million ($12.9 million net of tax) in the fourth quarter of fiscal 1997.
The restructuring charge consisted of tangible and intangible asset write-downs
of $11.5 million, severance and other employee costs of $4.5 million, facility
closure and consolidation costs of $2.9 million and exit costs of $1.0 million.
Severance and other employee costs relate to approximately 250 associates at
various operating and corporate facilities. Operations that were discontinued
as a result of the restructuring reported sales of $16.4 million and $15.9 mil-
lion in fiscal 1997 and fiscal 1996, respectively. All restructuring actions
were taken by the end of fiscal 1998. The restructuring reserve balance remain-
ing at June 30, 1998 totaled $1.2 million, and relates primarily to continuing
excess rent and lease termination costs related to the restructuring. Manage-
ment believes the remaining restructuring reserve is adequate to cover such
costs.
The fiscal 1997 restructuring charge was offset by a $0.3 million restructuring
gain ($0.2 million net of tax) recorded in the first quarter of fiscal 1997 re-
lated to the restructuring of the former publishing operations. The $0.3 mil-
lion gain consisted of a $0.7 million gain from the sale of the consumer pub-
lishing operation, offset by a $0.4 million charge related to the strategic re-
positioning of the custom publishing product line into the Marketing Communica-
tions sector.
3. Acquisitions and Dispositions
On April 1, 1998, the Company acquired Germersheim, Inc., an Atlanta-based na-
tional point of purchase marketing service provider. The $13.7 million purchase
price consisted of 41,195 shares of the Company's common stock, at an aggregate
value of $1 million, $11 million in cash payments (including direct acquisition
costs), and $1.7 million in debt (primarily capital lease obligations). Of the
$11 million in cash payments, $2 million was held in escrow at June 30, 1998,
as contingent consideration, and will only be released if specified sales per-
formance levels are met during each of the next two years. The purchase agree-
ment also provides for additional contingent consideration payable to the
seller based upon future profitability of the business. Such contingent consid-
eration has been excluded from the purchase price above. The acquisition was
accounted for under the purchase method and, accordingly, the costs of the ac-
quisition were allocated to the assets acquired and the liabilities assumed
based upon their respective fair values at the date of purchase. The
F-13
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
operating results of Germersheim, Inc. have been included in the consolidated
operating results since the date of acquisition.
In September 1996, the Company sold the net assets of its consumer publishing
division for total consideration of $6.5 million. The sale resulted in a pretax
gain of $0.7 million (see Note 2).
In May 1996, the Company acquired all of the outstanding stock of Lancaster
Press, Inc. and Subsidiary, a Pennsylvania-based producer of scientific, tech-
nical and medical journals, for total consideration, including assumed debt and
transaction costs, of approximately $58.7 million. Debt assumed included a $2.7
million mortgage payable obligation. The acquisition was funded by borrowings
under the Company's revolving credit/term loan facility with its banks (see
Note 7).
In November 1995, the Company acquired substantially all of the assets and as-
sumed certain liabilities of The Software Factory, Inc., an Atlanta-based pro-
vider of software packaging and media duplication services. The $14.1 million
purchase price consisted of 79,681 shares of the Company's common stock, at an
aggregate value of $2.0 million, and $12.1 million in cash payments, including
direct acquisition costs. In fiscal 1996, the Company acquired certain assets
of four other companies. Total cash paid for these acquisitions was $3.4 mil-
lion.
The funds used to acquire fiscal 1996 acquisitions were primarily provided from
the proceeds of the issuance of 1.725 million shares of the Company's common
stock (see Note 11). All of the fiscal 1996 acquisitions were accounted for un-
der the purchase method and, accordingly, the costs of the acquisitions were
allocated to the assets acquired and liabilities assumed based on their respec-
tive fair values. The results of operations of each of the acquired companies
have been included in the Company's consolidated results of operations since
each respective date of acquisition.
The unaudited consolidated results of operations on a pro forma basis, as
though Lancaster Press, Inc. and The Software Factory, Inc. had been acquired
as of the beginning of fiscal year 1996 are as follows:
<TABLE>
<CAPTION>
-------------
1996
(In thousands, except per share data) -------------
(as adjusted,
see Note 4)
<S> <C>
Revenues $391,804
Income before extraordinary item 8,459
Net income 7,664
Earnings per share, assuming dilution:
Income before extraordinary item $ 1.13
Net income 1.02
<CAPTION>
=============
</TABLE>
4. Inventories
Inventories as of June 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
---------------
1998 1997
(In thousands) ------- -------
<S> <C> <C>
Raw materials and supplies $ 4,841 $ 5,341
Work in process:
Materials 6,567 2,838
Other manufacturing costs 11,331 9,451
Finished goods 2,871 3,043
------- -------
Inventories $25,610 $20,673
======= =======
</TABLE>
During the fourth quarter of fiscal 1998, the Company changed its method of ac-
counting for certain of its inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. As of June 30, 1997, the Com-
pany had valued approximately 15% of its inventories using LIFO. This change
standardizes the method of accounting for all Company inventory. As required by
generally accepted accounting principles, the Company has retroactively ad-
justed prior years'
F-14
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
financial statements for the change. The restatement had no effect on net in-
come in fiscal 1998, increased the net loss in fiscal 1997 by $194,000, or
$0.02 per share, and increased net income in fiscal 1996 by $87,000, or $0.01
per share. The restatement also had the effect of increasing retained earnings
as of June 30, 1995 by $873,000.
5. Property, Plant and Equipment
Property, plant and equipment as of June 30, 1998 and 1997 consist of the fol-
lowing:
<TABLE>
<CAPTION>
-----------------
1998 1997
(In thousands) -------- --------
<S> <C> <C>
Land and improvements $ 6,041 $ 5,040
Buildings and improvements 49,985 45,856
Machinery, equipment and fixtures 185,079 167,283
-------- --------
Total property, plant and equipment 241,105 218,179
Less: Accumulated depreciation 107,269 99,558
-------- --------
Property, plant and equipment, net $133,836 $118,621
======== ========
</TABLE>
Commitments outstanding for capital expenditures at June 30, 1998 totaled $9.9
million.
The Company leases office, production and storage space, and equipment under
various noncancelable operating leases. A number of leases contain renewal op-
tions and some contain purchase options. Certain leases require the Company to
pay utilities, taxes, and other operating expenses. Future minimum rental pay-
ments required under operating leases that have initial or remaining noncancel-
able lease terms in excess of one year as of June 30, 1998 are as follows:
1999--$6.2 million; 2000--$4.7 million; 2001--$3.5 million; 2002-- $3.0 mil-
lion; 2003--$2.7 million and thereafter--$4.4 million.
Total rental expense charged to operations was $6.5 million, $7.0 million, and
$5.7 million in fiscal 1998, 1997 and 1996, respectively. Substantially all
such rental expense represented the minimum rental payments under operating
leases.
Depreciation expense was $16.7 million, $16.2 million, and $13.4 million for
fiscal 1998, 1997 and 1996, respectively.
6. Other Balance Sheet Information
Accrued expenses at June 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
---------------
1998 1997
(In thousands) ------- -------
<S> <C> <C>
Compensation $12,737 $11,029
Deferred revenue 818 1,576
Other 4,738 3,069
------- -------
Accrued expenses $18,293 $15,674
======= =======
</TABLE>
Other long-term liabilities consist principally of amounts recorded under de-
ferred compensation arrangements with certain executive officers and other em-
ployees and amounts recorded under the pension and other postretirement benefit
plans (see Notes 9 and 10).
F-15
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
7. Debt
Long-term debt at June 30, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
---------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Bank borrowings:
Term loan facility, weighted-average interest rate of 6.38% $37,000 $40,000
Revolving credit facility, weighted-average interest rate of
6.15% 56,500 48,000
Tax-exempt variable rate industrial development bonds,
weighted-average interest rate of 4.4%, due 2016 1,600 3,315
Mortgage payable, 10%, due 2002 2,669 2,696
Other 1,886 458
------- -------
Total long-term debt 99,655 94,469
Less: current maturities of long-term debt 6,431 5,017
------- -------
Long-term debt $93,224 $89,452
======= =======
</TABLE>
In October 1996, the Company entered into a new $160 million bank credit agree-
ment with six major banks. The $160 million bank credit agreement consists of a
$40 million term loan facility, expiring in 2003, and a $120 million revolving
credit facility, expiring in 2001. This agreement replaced an existing $115
million bank credit agreement, consisting of a $30 million term loan facility
and an $85 million revolving credit facility, entered into with four of the
same banks in January 1996. The term of the facility, interest rate spreads and
commitment fees were essentially the same under both the current and former
bank credit agreements.
The term loan facility requires the Company to make quarterly installment pay-
ments beginning January 1998 through expiration. The revolving credit facility
requires the Company to pay commitment fees at an annual rate ranging from 1/8
to 1/4 of 1% (based on the level of certain debt covenants) of the total amount
of the facility. The rate of interest payable under the bank credit agreement
is a function of (i) LIBOR, (ii) prime rate or (iii) money market rate, each as
defined under the agreement.
Using the additional capacity available under the new $160 million bank credit
agreement, the Company repaid $40 million of 6.74% senior unsecured notes.
These notes were originally due in 2003. There was no prepayment penalty asso-
ciated with the debt retirement in fiscal 1997.
In December 1995, the Company retired $11.2 million principal of 9.76% senior
notes originally due June 2000 and recorded a $1.3 million ($0.8 million net of
tax) extraordinary loss relating to the early retirement of this debt. The
funds used for the debt retirement were provided from the proceeds of the issu-
ance of 1.725 million shares of the Company's common stock (see Note 11).
The Company's debt agreements contain covenants regarding fixed charge coverage
and net worth and contain other restrictions, including limitations of addi-
tional borrowings, and the acquisition, disposition and securitization of as-
sets. The Company was in compliance with all debt covenants at June 30, 1998.
The fair value of long-term debt as of June 30, 1998 and 1997 approximated
their recorded values.
Maturities of long-term debt are as follows: 1999--$6.4 million; 2000--$6.4
million; 2001--$6.4 million; 2002--$66.3 million; 2003--$8.3 million; thereaf-
ter--$5.9 million. The net book value of all encumbered properties as of June
30, 1998 and 1997 totaled $4.2 million and $4.4 million, respectively.
The Company had uncommitted bank lines of credit which provide for unsecured
borrowings of up to $10 million, of which $2.1 million was outstanding at June
30, 1998.
The Company incurred interest costs of $8.2 million, $8.5 million, and $5.4
million for fiscal 1998, 1997 and 1996, respectively, of which $0.6 million for
1998, $0.7 million for 1997, and $0.3 million for 1996 were capitalized. Inter-
est
F-16
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
paid, net of amounts capitalized, totaled $7.7 million, $7.9 million, and $5.0
million for fiscal 1998, 1997 and 1996 respectively.
The Company has a strategy to optimize the ratio of the Company's fixed-to-
variable rate financing consistent with maintaining an acceptable level of ex-
posure to the risk of interest rate fluctuations. To achieve this mix, the
Company, from time to time, enters into interest rate swap agreements with
various banks to exchange fixed and variable rate interest payment obligations
without the exchange of the underlying principal amounts (the "notional
amounts"). These agreements are hedged against the Company's long-term
borrowings and have the effect of converting the Company's long-term
borrowings from variable rate to fixed rate, or fixed rate to variable rate,
as required. The differential to be paid or received is accrued as interest
rates change and recognized as an adjustment to interest expense related to
the debt. The related amount payable to or receivable from counterparties is
included in other liabilities or assets. The Company's strategy to effectively
convert variable rate financing to fixed rate financing through the use of the
aforementioned swap agreements resulted in additional interest cost of $1.3
million in fiscal 1998, $1.2 million in fiscal 1997, and $0.7 million in fis-
cal 1996.
At June 30, 1998, the Company had one fixed-to-floating interest rate swap
agreement outstanding with a notional amount of $35 million. This swap was en-
tered into in fiscal 1994 to convert $35 million of the 6.74% Senior Notes due
in 2003 to floating-rate debt. Under the terms of this agreement, the Company
receives interest payments at a fixed rate of 5.265% and pays interest at a
variable rate that is based on six-month LIBOR. The initial term of this swap
agreement expires in fiscal 1999, and is renewable at the bank's option for an
additional two years. The fair value of this contract (which is not recognized
in the consolidated financial statements) at June 30, 1998 and 1997 was nega-
tive $0.1 million, and negative $0.4 million, respectively. In fiscal 1997,
the Company repaid the fixed rate debt hedged by this swap with variable rate
debt. To adjust the ratio of the Company's fixed to variable rate financing,
the Company entered into additional floating-to-fixed rate swap agreements in
fiscal 1997.
At June 30, 1998, the Company had various floating-to-fixed interest rate swap
agreements outstanding with notional amounts totaling $88.7 million. These
swaps effectively convert a portion of the Company's variable-rate debt and
aforementioned fixed-to-floating rate swap to a fixed-rate. The swap agree-
ments have individual notional amounts ranging from $6.5 million to $40 mil-
lion. Under the terms of each of the agreements, the Company receives interest
payments at a variable rate based on either 30-day or six-month LIBOR and pays
interest at a fixed rate ranging from 6.54% to 8.09%. The fair value of these
contracts (which is not recognized in the consolidated financial statements)
at June 30, 1998 and 1997 totaled negative $2.0 million and negative $1.1 mil-
lion, respectively. These swap agreements are scheduled to expire as follows:
1999: $18.7 million; 2002: $40 million; 2003: $30 million.
The notional amounts and applicable rates of the Company's interest rate swap
agreements are as follows:
<TABLE>
<CAPTION>
------------------------------------------------
Paid Fixed, Received Paid Floating, Received
Floating Fixed
1998 1997 1996 1998 1997 1996
(In thousands) ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Notional amount:
Beginning balance $88,700 $47,900 $17,375 $35,000 $35,000 $35,000
New contracts -- 40,800 37,900 -- -- --
Expired contracts -- -- (7,375) -- -- --
------- ------- ------- ------- ------- -------
Ending Balance $88,700 $88,700 $47,900 $35,000 $35,000 $35,000
======= ======= ======= ======= ======= =======
<CAPTION>
-------------------
Weighted-Average
Interest Rate
for 1998
-------------------
Paid Received
-------- ----------
<S> <C> <C>
Type of swap:
Paid fixed, received floating 7.0% 5.8%
Paid floating, received fixed 5.9% 5.3%
</TABLE>
The notional amount of each swap contract does not represent exposure to
credit loss. In the event of default by the counterparties, the risk, if any,
is the cost of replacing the swap agreement at current market rates. The Com-
pany continu-
F-17
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
ally 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.
8. Income Taxes
Income tax expense (benefit), for the years ended June 30, 1998, 1997, and 1996
consists of the following:
----------------------
1998 1997 1996
(In thousands) ------ ------- ------
(as adjusted,
see Note 4)
Current:
Federal $4,069 $ 2,878 $2,139
State 1,098 483 418
------ ------- ------
Total current 5,167 3,361 2,557
------ ------- ------
Deferred:
Federal 456 (4,168) 1,228
State 67 (1,412) 171
------ ------- ------
Total deferred 523 (5,580) 1,399
------ ------- ------
Income tax expense (benefit) $5,690 $(2,219) $3,956
====== ======= ======
The amount of income tax expense (benefit) differs from the amount obtained by
application of the statutory U.S. rates to income (loss) before income taxes
and extraordinary item for the reasons shown in the following table:
<TABLE>
<CAPTION>
-----------------------
1998 1997 1996
(In thousands) ------ ------- ------
(as adjusted,
see Note 4)
<S> <C> <C> <C>
Computed at statutory U.S. rate $5,059 $(2,573) $3,591
State income taxes, net of Federal tax benefit 341 (613) 388
Goodwill amortization 450 924 251
Research tax credit (50) (75) (217)
Other (110) 118 (57)
------ ------- ------
Income tax expense (benefit) $5,690 $(2,219) $3,956
====== ======= ======
</TABLE>
Cash paid for income taxes totaled $5.0 million, $2.3 million, and $2.4 mil-
lion, for fiscal 1998, 1997, and 1996, respectively.
The Company has state net operating loss carryforwards aggregating approxi-
mately $52.6 million, which expire during fiscal years 2004 to 2013. A valua-
tion allowance of $0.8 million has been established for state net operating
loss benefits that are not expected to be realized. The valuation allowance in-
creased by $0.1 million in fiscal 1998 and $0.2 million in fiscal 1997.
F-18
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The tax effects of the significant temporary differences that comprise the de-
ferred tax assets and liabilities in the consolidated balance sheets at June
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
---------------------
1998 1997
(In thousands) ------- -------------
(as adjusted,
see Note 4)
<S> <C> <C>
Assets:
Allowance for doubtful accounts $ 1,067 $ 857
Employee benefits 5,028 3,510
State net operating loss carryforwards 1,545 1,354
Goodwill 2,625 2,576
Accrued restructuring costs 2,133 3,318
Other 51 308
------- -------------
Gross deferred tax assets 12,449 11,923
------- -------------
Liabilities:
Property, plant, and equipment 14,171 12,450
Other 346 501
------- -------------
Gross deferred tax liabilities 14,517 12,951
------- -------------
Valuation allowance 762 647
------- -------------
Net liability $ 2,830 $ 1,675
======= =============
</TABLE>
9. Retirement Plans
Defined Benefit Plans
The Company sponsors a noncontributory defined benefit pension plan that cov-
ers substantially all employees, and participates in a multiemployer retire-
ment plan that provides defined benefits to employees covered under a collec-
tive bargaining agreement (collectively, the "core plans"). The Company also
sponsors a supplemental pension plan for certain key executives (the "supple-
mental plan"). All plans provide benefit payments using formulas based on an
employee's compensation and length of service, or stated amounts for each year
of service. The Company makes contributions to its core plans sufficient to
meet the minimum funding requirements of applicable laws and regulations. The
supplemental plan for key executives is a nonqualified, nonfunded pension
plan, and is provided for by charges to earnings sufficient to meet the pro-
jected benefit obligation. Contributions to the multiemployer plan are gener-
ally based on a negotiated labor contract. The Company's contributions totaled
$1.8 million, $3.4 million, and $0.3 million in fiscal 1998, 1997 and 1996,
respectively. The core plans' assets consist primarily of equity and debt se-
curities.
The components of net pension costs for fiscal 1998, 1997, and 1996 for all
plans follow:
<TABLE>
<CAPTION>
-------------------------
1998 1997 1996
(In thousands) ------- ------- -------
<S> <C> <C> <C>
Present value of benefits earned $ 2,550 $ 2,341 $ 2,010
Interest cost on plan liabilities 3,288 2,783 2,305
Return on plan assets:
Actual (9,546) (3,567) (4,522)
Deferred 6,154 838 2,382
Net amortization (41) (86) (104)
Contributions to multiemployer plan 64 59 --
------- ------- -------
Net pension costs $ 2,469 $ 2,368 $ 2,071
======= ======= =======
</TABLE>
F-19
<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 all plans were as follows:
-----------------
1998 1997 1996
----- ----- -----
Discount rate 7.25% 8.25% 8.25%
Rate of increase in compensation 4.5% 4.5% 4.5%
Long-term rate of return on plan assets 9.75% 9.0% 9.0%
A summary of the funded status of pension plans at June 30, 1998 and 1997 fol-
lows:
<TABLE>
<CAPTION>
---------------------------------
Supplemental
Core Plans Plan
1998 1997 1998 1997
(In thousands) ------- ------- ------- ------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits $38,612 $29,581 $ 4,073 $3,360
Nonvested benefits 2,498 1,733 362 341
------- ------- ------- ------
Accumulated benefit obligation 41,110 31,314 4,435 3,701
Effect of projected salary increases 6,516 4,975 1,132 868
------- ------- ------- ------
Projected benefit obligation 47,626 36,289 5,567 4,569
------- ------- ------- ------
Plan assets at market value 44,860 35,057 * *
------- ------- ------- ------
Excess of projected benefit obligation over
plan assets 2,766 1,232 5,567 4,569
Unrecognized net asset (obligation) at
transition 1,723 1,875 (578) (649)
Unrecognized prior service cost (365) (40) -- --
Unrecognized losses (1,609) (867) (1,306) (474)
Additional minimum pension liability -- 238 577 255
------- ------- ------- ------
Accrued pension costs $ 2,515 $ 2,438 $ 4,260 $3,701
======= ======= ======= ======
</TABLE>
* The supplemental plan is technically a nonfunded plan. However, the Company
has acquired life insurance contracts ($14.5 million face amount at June 30,
1998 and 1997) intended to be adequate to fund future benefits. The cash sur-
render value of these contracts, net of policy loans, was $2.2 million and
$1.9 million at June 30, 1998 and 1997, respectively, and is included in
other assets in the consolidated balance sheets.
Defined Contribution Plan
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 pro-
vides for individual subsidiary companies to make profit-sharing contributions.
The Company's expense under this plan was $1.9 million in fiscal 1998, and $1.8
million in fiscal 1997 and fiscal 1996.
10. 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 age 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 age 65, cover-
age 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. For those employees who re-
tired on or after April 1, 1988, but before January 1, 1994, coverage is avail-
able until age 65. The retiree contributes the full active rate. Upon reaching
age 65, coverage under the Company's plan ceases and the retiree becomes cov-
ered by Medicare. For those employees who retire on or after January 1, 1994,
coverage is available until 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 age 65, coverage under the Company's plan ceases, and the retiree
becomes covered by Medicare.
F-20
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The following table sets forth the components of the accrued postretirement
benefit obligation as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
---------
1998 1997
(In thousands) ---- ----
<S> <C> <C>
Accrued postretirement benefit obligation attributable to retirees $337 $356
Unrecognized net gain 206 274
---- ----
Accrued postretirement benefit cost $543 $630
==== ====
</TABLE>
Amounts recognized as net periodic postretirement benefit cost in fiscal 1998
and 1997 were not material.
The discount rate used in determining the accumulated postretirement benefit
obligation as of June 30, 1998 was 7.25%. The assumed healthcare cost trend
rate used in measuring the accumulated benefit obligation was 8% in fiscal
1998, gradually decreasing to 5.75% in the year 2003 and remaining level there-
after. A one percentage-point increase in the assumed healthcare cost trend
rates would not change the accumulated postretirement benefit obligation.
11. Shareholders' Equity
Shareholders' equity consists of the following:
<TABLE>
<CAPTION>
---------------------------------------
Capital in
Common Stock Excess of Retained
(Dollars in thousands, except per Shares Amount Par Value Earnings
share data) --------- ------ ---------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 (as
previously reported) 6,030,000 $3,015 $12,448 $46,419
Adjustment for the cumulative effect
on prior years of applying
retroactively the new method of
accounting for inventory (see note
4) -- -- -- 873
--------- ------ ---------- --------
Balance at June 30, 1995, as adjusted 6,030,000 3,015 12,448 47,292
Net income (as adjusted, see note 4) -- -- -- 5,796
Cash dividends--$.20 per share -- -- -- (1,485)
Issuance of common stock 1,805,000 902 39,459 --
Net shares issued upon exercise of
stock options 73,000 37 1,064 --
--------- ------ ---------- --------
Balance at June 30, 1996, as adjusted 7,908,000 3,954 52,971 51,603
Net loss (as adjusted, see note 4) -- -- -- (5,217)
Cash dividends--$.20 per share -- -- -- (1,581)
Repurchase of common stock (88,000) (44) (1,141) --
Net shares issued upon exercise of
stock options 10,000 5 93 --
--------- ------ ---------- --------
Balance at June 30, 1997, as adjusted 7,830,000 3,915 51,923 44,805
Net income -- -- -- 9,090
Cash dividends--$.20 per share -- -- -- (1,572)
Repurchase of common stock (8,000) (4) (114) --
Issuance of common stock for business
acquisition (see note 3) 41,000 21 980 --
Net shares issued upon exercise of
stock options 58,000 29 743 --
--------- ------ ---------- --------
Balance at June 30, 1998 7,921,000 $3,961 $53,532 $52,323
========= ====== ========== ========
</TABLE>
In fiscal 1997, the Board of Directors authorized the repurchase of up to
750,000 shares of the Company's common stock, or about 9% of shares outstand-
ing. Shares may be repurchased from time to time in the open market or through
privately negotiated transactions. As of June 30, 1998, 96,000 shares had been
repurchased under this authorization.
In November 1995, the Company completed the issuance of an additional 1.725
million shares of the Company's common stock through a public offering, result-
ing in net proceeds (after deducting issuance costs) of $38.4 million. The Com-
pany
F-21
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
used the net proceeds to (i) repay the $11.2 million of 9.76% Senior Notes due
in June 2000, plus a $1.3 million ($0.8 million net of tax) prepayment penalty,
(ii) fund the cash portion of certain acquisitions and (iii) repay short-term
borrowings used to fund seasonal working capital needs.
In 1989 and 1990, the Board of Directors authorized the purchase of up to
200,000 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, 1998, 133,000 shares had been repurchased under this au-
thorization.
In February 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 pur-
chase price of $45 per share (the "Purchase Price"), subject to adjustment. The
rights will become exercisable initially if a person or group acquires or an-
nounces a tender offer for 20% or more of the Company's common stock ("Acquir-
ing 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 Per-
son merges into or combines with the Company, each right will entitle the hold-
er, other than the Acquiring Person, upon payment of the Purchase Price, to ac-
quire Series A Preferred or, at the option 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 Acquir-
ing 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.
In addition to its common stock, the Company's authorized capital includes
1,000,000 shares of preferred stock ($1.00 par value), issuable in series, of
which 100,000 shares are designated as Series A Preferred.
12. Stock Options
Under the Company's stock option plans, selected employees and nonemployee di-
rectors 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. In fis-
cal 1997, the Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by the provisions of
SFAS No. 123, the Company continues to follow Accounting Principles Board Opin-
ion No. 25, "Accounting for Stock Issued to Employees," and related interpreta-
tions in accounting for its stock-based awards. Accordingly, since stock op-
tions are issued at fair market value on the date of grant, the Company does
not recognize charges to earnings resulting from the plans.
The following information is provided solely in connection with the disclosure
requirements of SFAS No. 123. If the Company had elected to recognize compensa-
tion cost related to its stock options granted in fiscal 1998 and 1997 in ac-
cordance with the provisions of SFAS No. 123, there would have been a pro forma
net income of $8,436,000 in fiscal 1998 ($1.03 per share, assuming dilution)
and a pro forma net loss of $5,450,000 during fiscal 1997 (($0.68) per share,
assuming dilution). The fair value of these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following weight-
ed-average assumptions for fiscal 1998 and 1997, respectively: risk-free inter-
est rates of 5.97% and 6.61%; dividend yields of 0.82% and 1.42%; volatility
factors of .340 and .390 and an expected life of 8 years. The weighted-average
fair value of options was $11.52 and $6.71 per option during fiscal 1998 and
1997, respectively.
F-22
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
A summary of the Company's stock option activity and related information for
the fiscal years ended June 30, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
--------------------------------------------
Weighted-Average
Number of Option Price Exercise
Shares Per Share Price(A)
--------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding at June 30, 1995 607,000 $ 6.38 to $28.00
Exercised (73,000) 6.38 to 9.75
Granted 169,000 16.75 to 25.06
Lapsed or canceled (30,000) 16.75 to 25.06
--------- ---------------- ----------------
Outstanding at June 30, 1996 673,000 8.25 to 28.00 $14.12
Exercised (10,000) 9.81 9.81
Granted 258,000 13.18 to 16.13 14.06
Lapsed or canceled (24,000) 9.13 to 19.19 16.30
--------- ---------------- ----------------
Outstanding at June 30, 1997 897,000 8.25 to 28.00 14.08
Exercised (58,000) 9.00 to 17.13 13.21
Granted 251,000 16.14 to 26.88 24.46
Lapsed or canceled (88,000) 13.25 to 19.19 16.78
--------- ---------------- ----------------
Outstanding at June 30, 1998 1,002,000 $ 8.25 to $28.00 $16.50
--------- ---------------- ----------------
Exercisable at June 30:
1996 436,000 $ 8.25 to $24.05
1997 403,000 8.25 to 24.05 $11.44
1998 590,000 8.25 to 26.88 13.67
========= ================ ================
</TABLE>
(A) Disclosure of weighted-average exercise price information is required by
SFAS No. 123 for fiscal years beginning after December 15, 1995.
The weighted-average remaining contractual life of options outstanding at June
30, 1998 is 7 years. At June 30, 1998, 1,129,000 shares of authorized but
unissued common stock were reserved for issuance upon exercise of options
granted or grantable under the plans. Options are generally exercisable under
the plans for periods of 5 to 10 years from the date of grant. The following
table provides additional detail of the 1,002,000 options outstanding at June
30, 1998:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Weighted-Average Number of
Range of Number of Remaining Life Weighted-Average Options Weighted-Average
Exercise Prices Outstanding (years) Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 8.25 to $13.25 322,000 4.0 $ 9.66 297,000 $ 9.36
14.25 to 19.19 465,000 8.0 16.50 252,000 16.73
24.05 to 28.00 215,000 9.2 26.75 41,000 26.12
</TABLE>
13. Concentrations of Credit Risk
Financial instruments that 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, 1998 and 1997, the
Company had no significant concentrations of credit risk.
14. 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-23
<PAGE>
Melham Holdings, Inc.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
------------------------
March 31 December 31
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 70 $ 450
Accounts receivable, less allowance of $1,234 in
1999 and $1,426 in 1998 22,198 24,427
Inventories 9,623 10,590
Prepaid expenses and other 1,128 1,165
Deferred income taxes 1,576 1,692
Recoverable income taxes 274 282
----------- -----------
Total current assets 34,869 38,606
Property, plant, and equipment, at cost:
Land 761 761
Buildings 12,926 12,988
Machinery and equipment 81,275 80,516
Construction in progress 3,955 1,714
----------- -----------
98,917 95,979
Less accumulated depreciation 48,916 46,937
----------- -----------
50,001 49,042
Excess of cost over net assets of businesses
acquired, net of amortization 32,518 32,730
Deferred financing costs, net of amortization 2,608 2,733
Deferred income taxes 1,045 900
Other assets 864 920
----------- -----------
$121,905 $124,931
=========== ===========
Liabilities and deficiency in assets
Current liabilities:
Trade accounts payable $ 6,374 $ 7,841
Other accrued expenses 6,259 6,176
Accrued payroll costs 5,577 4,822
Accrued pension contribution 716 714
Income taxes payable 462 38
Current portion of long-term debt 6,216 7,472
----------- -----------
Total current liabilities 25,604 27,063
Long-term debt, excluding current portion 95,719 98,026
Deferred credits and other liabilities:
Pension liabilities 6,061 5,842
Postretirement benefits 16,441 16,715
Customer deposits and other 575 608
Due to affiliates -- 35
----------- -----------
23,077 23,200
----------- -----------
Total liabilities 144,400 148,289
Deficiency in assets:
Series A Preferred Stock, $0.01 par value (stated
at $100 liquidation value), authorized 100,000
shares, issued 64,243 shares in 1999 and 62,263
shares in 1998 6,424 6,226
Common Stock, $0.01 par value, authorized 50,000
shares, issued 40,000 shares in 1999 and 1998 -- --
Additional paid-in capital 3,983 3,983
Retained-earnings deficit (32,692) (33,357)
Accumulated other comprehensive loss (210) (210)
----------- -----------
Total deficiency in assets (22,495) (23,358)
----------- -----------
$121,905 $124,931
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-24
<PAGE>
Melham Holdings, Inc.
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
-------------------
Three months ended
March 31
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Net sales $ 39,484 $ 31,404
Cost of sales:
Materials and outside services 10,113 7,838
Other operating costs 19,961 16,219
--------- ---------
30,074 24,057
--------- ---------
Gross profit 9,410 7,347
Selling, general, and administrative expenses 5,558 3,804
--------- ---------
Operating income 3,852 3,543
Interest expense 2,728 2,171
Miscellaneous expense (income), net 35 (13)
--------- ---------
2,763 2,158
--------- ---------
Earnings before income taxes 1,089 1,385
Provision for income taxes 456 567
--------- ---------
Net income $ 633 $ 818
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-25
<PAGE>
Melham Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
--------------------
Three months ended
March 31
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Operating activities
Net income $ 633 $ 818
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,204 1,638
Amortization, including deferred financing costs 347 235
(Benefit) provision for loss on accounts receivable (123) 64
(Benefit) provision for deferred income taxes (29) 288
Loss on sale of assets 43 6
Series A Preferred Stock issued in lieu of payment of
interest 198 214
Changes in operating assets and liabilities:
Accounts receivable 2,352 1,939
Inventories (932) (474)
Prepaid expenses and other 3 (40)
Income taxes 403 208
Trade accounts payable (1,423) (2,981)
Accrued liabilities and other 1,017 (748)
Accrued pension 221 377
Postretirement benefits (274) (284)
Other 539 136
--------- ---------
Net cash provided by operating activities 5,179 1,396
Investing activities
Proceeds from sale of assets 21 3
Capital expenditures (3,204) (539)
--------- ---------
Net cash used in investing activities (3,183) (536)
Financing activities
Principal payments on long-term debt (2,282) (1,212)
Proceeds from debt financing 1,232 1,270
Proceeds from line of credit 43,435 35,060
Repayments of line of credit (44,726) (35,737)
Change in due to affiliates (35) 15
--------- ---------
Net cash used in financing activities (2,376) (604)
--------- ---------
(Decrease) increase in cash (380) 256
Cash at beginning of period 450 320
--------- ---------
Cash at end of period $ 70 $ 576
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-26
<PAGE>
Melham Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation and Description of Business
The Company's principal operating business is Mack Printing Company ("Mack"),
which it indirectly owns 85% through Melham, Inc. Mack is a full-service
printer that produces a wide variety of short- to medium-run magazines and
journals generally for customers in the mid-Atlantic and northeast regions of
the United States.
On April 1, 1999, the stockholders of the Company entered into a definitive
agreement to sell the stock of the Company to Cadmus Communications Corporation
(See Note 4).
2. Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim finan-
cial information and with the instructions to Form 10-Q and Rule 10-01 of Regu-
lation S-X. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary to present fairly the financial
position as of March 31, 1999, the results of operations for the three months
ended March 31, 1999 and 1998 and the cash flows for the three months ended
March 31, 1999 and 1998 have been included. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles, but which are not required for
interim reporting purposes, have been omitted. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results which
may be expected for the year ending December 31, 1999. The accompanying unau-
dited consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included elsewhere herein.
3. Inventories
The major classes of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
--------------------------------
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials $4,922 $ 5,155
Supplies and other 148 191
Work-in-process 4,457 3,970
Finished goods 96 1,274
-------------- -----------------
$9,623 $10,590
============== =================
</TABLE>
4. Subsequent Event
On April 1, 1999, the stockholders of Melham Holdings, Inc. sold all of the
Company's Capital Stock owned by them to Cadmus Communications Corporation for
$201 million in cash, notes and stock, subject to certain closing conditions
and adjustments. Prior to the sale, the Company stockholders purchased all of
the capital stock of VPI owned by the Company. The VPI transaction occurred
prior to March 31, 1999 and, accordingly, the assets and liabilities of VPI are
not included in the March 31, 1999 balance sheet. The operating results of VPI
for the three months ended March 31, 1999 and 1998 were immaterial. The Company
also paid-off all long-term debt and purchased all common stock of Mack owned
by the minority stockholders of Mack; these transactions and their impact are
not reflected in the accompanying unaudited financial statements.
F-27
<PAGE>
Melham Holdings, Inc.
Report of Independent Auditors
The Board of Directors and Stockholders
Melham Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Melham Hold-
ings, Inc. (a 90%-owned subsidiary of Purico (IOM) Limited) as of December 31,
1998 and 1997, and the related consolidated statements of operations, changes
in (deficiency in assets) stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Melham Holdings,
Inc. as of December 31, 1998 and 1997, and the consolidated results of its op-
erations and its cash flows for each of the three years in the period ended De-
cember 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
February 19, 1999, except for Note 14, as to
which the date is April 1, 1999
F-28
<PAGE>
Melham Holdings, Inc.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
------------------
December 31
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash $ 450 $ 320
Accounts receivable, less allowance of $1,426 in 1998 and
$1,283 in 1997 24,427 18,511
Inventories 10,590 8,900
Prepaid expenses and other 1,165 1,088
Deferred income taxes 1,692 1,872
Recoverable income taxes 282 463
-------- --------
Total current assets 38,606 31,154
Property, plant, and equipment, at cost:
Land 761 761
Buildings 12,988 12,588
Machinery and equipment 80,516 65,513
Construction in progress 1,714 488
-------- --------
95,979 79,350
Less accumulated depreciation 46,937 40,142
-------- --------
49,042 39,208
Excess of cost over net assets of businesses acquired, net
of amortization 32,730 17,415
Deferred financing costs, net of amortization 2,733 2,725
Deferred income taxes 900 1,393
Other assets 920 684
-------- --------
$124,931 $ 92,579
======== ========
Liabilities and deficiency in assets
Current liabilities:
Trade accounts payable $ 7,841 $ 6,365
Other accrued expenses 6,176 6,320
Accrued payroll costs 4,822 4,609
Accrued pension contribution 714 1,299
Income taxes payable 38 --
Current portion of long-term debt 7,472 5,011
-------- --------
Total current liabilities 27,063 23,604
Long-term debt, excluding current portion 98,026 72,245
Deferred credits and other liabilities:
Pension liabilities 5,842 5,344
Postretirement benefits 16,715 17,850
Customer deposits and other 608 642
Due to affiliates 35 45
-------- --------
23,200 23,881
-------- --------
Total liabilities 148,289 119,730
Deficiency in assets:
Series A Preferred Stock, $0.01 par value (stated at $100
liquidation value), authorized 100,000 shares, issued
62,263 shares in 1998 and 44,288 shares in 1997 6,226 4,429
Common Stock, $0.01 par value, authorized 50,000 shares,
issued 40,000 shares in 1998 and 1997 -- --
Additional paid-in capital 3,983 3,983
Retained-earnings deficit (33,357) (35,563)
Accumulated other comprehensive loss (210) --
-------- --------
Total deficiency in assets (23,358) (27,151)
-------- --------
$124,931 $ 92,579
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE>
Melham Holdings, Inc.
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
----------------------------
Year ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $135,674 $119,120 $111,670
Cost of sales:
Materials and outside services 34,025 27,030 25,045
Other operating costs 70,350 63,557 58,927
-------- -------- --------
104,375 90,587 83,972
-------- -------- --------
Gross profit 31,299 28,533 27,698
Selling, general, and administrative expenses 16,974 14,269 13,412
Recapitalization expenses -- 7,405 --
-------- -------- --------
Operating income 14,325 6,859 14,286
Interest expense 9,440 7,375 3,129
Miscellaneous income, net (84) (157) (156)
-------- -------- --------
9,356 7,218 2,973
-------- -------- --------
Earnings before income taxes and minority
interest 4,969 (359) 11,313
Provision for income taxes 2,124 36 4,339
Minority interest -- (443) 577
-------- -------- --------
Net income $ 2,845 $ 48 $ 6,397
======== ======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE>
Melham Holdings, Inc.
Consolidated Statements of Changes in (Deficiency in Assets) Stockholders'
Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
------------------------------------------------------------
Accumulated
Other
Series A Additional Retained Compre-
Preferred Common Paid-in Earnings hensive
Stock Stock Capital (Deficit) Loss Total
--------- ------ ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996 $ -- $-- $ 500 $ (6,023) $ -- $ (5,523)
Net income (1) -- -- -- 6,397 -- 6,397
Preferred Stock
dividends -- -- -- (102) -- (102)
--------- ------ ---------- --------- ----------- --------
Balance at December 31,
1996 -- -- 500 272 -- 772
Net income (1) -- -- -- 48 -- 48
Issuance of 40,000
shares of Common Stock
and Warrants -- -- 3,483 -- -- 3,483
Issuance of 40,000
shares of Series A
Preferred Stock 4,000 -- -- -- -- 4,000
Common Stock dividends -- -- -- (35,500) -- (35,500)
Series A Preferred Stock
dividends -- -- -- (383) -- (383)
Issuance of 4,288 shares
of Series A Preferred
Stock as payment of
interest 429 -- -- -- -- 429
--------- ------ ---------- --------- ----------- --------
Balance at December 31,
1997 4,429 -- 3,983 (35,563) -- (27,151)
Comprehensive income
(loss):
Net income -- -- -- 2,845 -- 2,845
Other comprehensive
income (loss) net of
tax, minimum pension
liability -- -- -- -- (210) (210)
--------
Comprehensive income -- -- -- -- -- 2,635
Series A Preferred Stock
dividends 989 -- -- (639) -- 350
Issuance of 8,084 shares
of Series A Preferred
Stock as payment of
interest 808 -- -- -- -- 808
--------- ------ ---------- --------- ----------- --------
Balance at December 31,
1998 $6,226 -- $3,983 $(33,357) $(210) $(23,358)
========= ====== ========== ========= =========== ========
</TABLE>
(1) Equals comprehensive income for the year.
See accompanying notes.
F-31
<PAGE>
Melham Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
-------------------------------
Year ended December 31
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income $ 2,845 $ 48 $ 6,397
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest -- (443) 577
Depreciation 7,258 6,138 5,944
Amortization, including deferred financing
costs 1,164 831 198
Provision for loss on accounts receivable 258 233 341
Provision (benefit) for deferred income
taxes 815 4 (154)
Write-off of deferred financing costs -- 455 --
Loss on sale of assets 12 7 (244)
Series A Preferred Stock issued in lieu of
payment of interest 808 429 --
Changes in operating assets and
liabilities, net of effect of business
acquired:
Accounts receivable (820) (1,383) 675
Inventories 341 (953) 1,222
Prepaid expenses and other 49 26 80
Income taxes 210 (488) 275
Trade accounts payable (44) 1,733 409
Accrued liabilities and other (490) 2,097 (178)
Accrued pension (573) (625) (26)
Postretirement benefits (1,135) (994) (1,267)
Other (120) (389) 35
--------- --------- ---------
Net cash provided by operating activities 10,578 6,726 14,284
Investing activities
Acquisition of businesses (33,111) (19,137) --
Proceeds from sale of assets 11 14 2,916
Capital expenditures (5,001) (5,655) (6,465)
--------- --------- ---------
Net cash used in investing activities (38,101) (24,778) (3,549)
Financing activities
Recapitalization and refinancing
transactions:
Proceeds from issuance of long-term debt -- 81,514 --
Repayment of debt -- (23,534) --
Proceeds from sale of Common Stock -- 2,710 --
Proceeds from sale of Series A Preferred
Stock -- 4,000 --
Common Stock dividends -- (35,500) --
Principal payments on long-term debt (5,183) (5,391) (9,611)
Proceeds from debt financing 19,611 923 --
Proceeds from line of credit 143,020 179,910 130,635
Repayments of line of credit (129,321) (182,056) (131,553)
Payment of deferred financing costs (464) (3,081) --
Cash dividends -- -- (102)
Change in due to affiliates (10) (1,163) (108)
--------- --------- ---------
Net cash provided by (used in) financing
activities 27,653 18,332 (10,739)
--------- --------- ---------
Increase (decrease) in cash 130 280 (4)
Cash at beginning of year 320 40 44
--------- --------- ---------
Cash at end of year $ 450 $ 320 $ 40
========= ========= =========
</TABLE>
See accompanying notes.
F-32
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
1. Basis of Presentation and Description of Business
Melham Holdings, Inc. (the "Company"), which is a 90%-owned subsidiary of
Purico (IOM) Limited ("Purico"), was incorporated on February 26, 1997 and was
initially capitalized primarily by issuing its capital stock in exchange for
all of the outstanding capital stock of Melham, Inc. The controlling sharehold-
ers of the Company and Melham, Inc. were the same before and after the transac-
tion. Therefore, the historical basis of Melham, Inc.'s consolidated assets and
liabilities is carried over in the accompanying consolidated financial state-
ments, and the combination of the two entities is accounted for similar to the
pooling-of-interests method of accounting for business combinations. The re-
sults of operations of all companies are combined for all periods presented.
The Company's principal operating business is Mack Printing Company ("Mack"),
which it indirectly owns 85% through Melham, Inc. Mack is a full-service
printer that produces a wide variety of short- to medium-run magazines and
journals generally for customers in the mid-Atlantic and northeast regions of
the United States. Generally, the Company does not require collateral as a con-
dition of sale.
The Company's other operating business is Vital Public Information, Inc.
("VPI"), which was formed on September 19, 1997 and continues in the start-up
stage. The Company owns a 90% interest in VPI. VPI currently publishes self-
help books for sale and distribution through supermarket-continuity programs on
a consignment basis. VPI had no sales through December 31, 1998 and it had to-
tal assets of $2,155 and $79 at December 31, 1998 and 1997, respectively, con-
sisting primarily of inventory. VPI is subject to the risks and uncertainties
that are normal to a start-up company. Although VPI has a definitive marketing
plan for its business concept and products, there is no assurance that the plan
or VPI's products will be accepted in the marketplace. If not accepted in the
marketplace, it is unlikely VPI will be able to realize the full carrying
amount of its assets.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated. Because Mack had a deficit in assets as a result of the recap-
italization in 1997 (Note 13), subsequent to the recapitalization, the Company
has not reflected in its results of operations any share of earnings or loss
otherwise attributable to Mack's 15% minority shareholders. In addition to its
ownership of 85% of Mack's common stock, the Company owns all of Mack's out-
standing preferred stock, which had a liquidation value of $21,765 and $19,176
at December 31, 1998, and 1997, respectively. The Mack preferred stock pays cu-
mulative dividends of 13% on the senior preferred stock and 14% on the junior
preferred stock. Net income of Mack would be reduced by the preferred stock
dividends and credited to the Company before determining the amount allocable
to the minority interests.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Ac-
tual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market. Mack paper inventories
included in raw material and work-in-process, amounting to $4,586 and $5,559 at
December 31, 1998 and 1997, respectively, are determined using the last-in,
first-out (LIFO) method. At December 31, 1998 and 1997, the LIFO value of the
inventory approximated the FIFO value. The cost of all other inventories is de-
termined using the first-in, first-out (FIFO) method.
VPI's inventories at December 31, 1998 and 1997 include work-in-process and
finished goods. Included in work-in-process inventory is editorial development
costs associated with the development of three new publications. Inventory is
valued at cost.
F-33
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
The major classes of inventory are:
<TABLE>
<CAPTION>
------------------------
December 31
1998 1997
Mack VPI Mack VPI
------ ------ ------ ---
<S> <C> <C> <C> <C>
Raw materials $5,155 $ -- $5,471 $--
Supplies and other 191 -- 137 --
Work-in-process 3,489 481 3,024 47
Finished goods 95 1,179 221 --
------ ------ ------ ---
$8,930 $1,660 $8,853 $47
====== ====== ====== ===
</TABLE>
Property, Plant, and Equipment
Depreciation of property, plant, and equipment is computed over estimated use-
ful lives using the straight-line method.
Excess of Cost Over Net Assets of Businesses Acquired
Excess of cost over net assets of businesses acquired ("goodwill") by Mack
($16,778 and $1,045, net of accumulated amortization of $423 and $256 at De-
cember 31, 1998 and 1997, respectively) is primarily the result of the acqui-
sition of Port City Press, Inc. in 1998. The balance of goodwill ($15,952 and
$16,370, net of accumulated amortization of $731 and $313 at December 31, 1998
and 1997, respectively) resulted from the 1997 acquisition by Melham, Inc. of
Mack's capital stock owned by minority interests, which increased Melham,
Inc.'s ownership in Mack's common stock to 85% from 55%. Goodwill is being am-
ortized on a straight-line basis over 40 years. The carrying value of goodwill
is evaluated periodically in relation to the operating performance and ex-
pected future undiscounted cash flows of the underlying businesses.
Deferred Financing Costs
Deferred financing costs are amortized over the lives of the respective debt
obligations, using the interest method for the Term Loans and Debenture and
the straight-line method for the Revolver. Accumulated amortization at Decem-
ber 31, 1998 and 1997 was $812 and $356, respectively.
Revenue Recognition
Substantially all revenue is recognized when products are shipped to custom-
ers.
Comprehensive Income
As of December 31, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which estab-
lished standards for the reporting and display of comprehensive income and its
components in financial statements. Comprehensive income is defined in the
Statement as net income plus other comprehensive income, which for the Company
consists only of a minimum pension liability. Comprehensive (loss) income is
reported by the Company in the consolidated statement of changes in (defi-
ciency in assets) stockholders' equity. Prior years' financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
Internal Use Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, Accounting For the Costs of Computer Soft-
ware Developed For or Obtained For Internal Use. The Company adopted the SOP
during 1998. The SOP requires the capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. The adop-
tion of this SOP did not have a material effect on the results of operations
or financial position.
3. Acquisition
On September 2, 1998, Mack acquired all of the outstanding stock of Port City
Press, Inc. ("PCP") based in Baltimore, Maryland for an aggregate purchase
price of $33,536. PCP is a full-service printer servicing the association,
medical, legal, reference and scientific book market as well as the business
directory and catalog market. The acquisition has been accounted for under the
purchase method and, accordingly, is included in the consolidated financial
statements from the date of acquisition. The aggregate purchase price was al-
located to the net assets based on their estimated fair values. The excess of
the purchase price over the fair value of net assets acquired of approximately
$16,324 is being amortized over
F-34
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
forty years on a straight-line basis. This acquisition was funded by increasing
Mack's Term Loan under its Credit Facility and available borrowings under the
Revolver portion of the Credit Facility.
The following unaudited pro forma information has been prepared assuming the
acquisition had taken place on January 1, 1997:
<TABLE>
<CAPTION>
-----------------------
Year ended December 31
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 160,015 $ 153,798
Net income (loss) 3,186 (825)
</TABLE>
The unaudited pro forma information includes adjustments for interest expense
that would have been incurred to finance the purchase, additional depreciation
based on the estimated fair value of the property, plant, and equipment ac-
quired, and the amortization of the intangible assets arising from the transac-
tion. The unaudited pro forma financial information is not necessarily indica-
tive of the results of operations that would have been achieved had the trans-
action been effected on the assumed date.
4. Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
----------------
December 31
----------------
1998 1997
-------- -------
<S> <C> <C>
Fixed-rate term note (9.78%), payable in quarterly
installments through January 1, 2003 $ 14,440 $17,997
Floating-rate term note payable in quarterly installments
through April 1, 2004:
At LIBOR plus 2.75% (7.94% at December 31, 1998) 31,000 19,000
At Prime plus 0.75% (8.50% at December 31, 1998) 5,310 503
Borrowings under revolving credit facility expiring April 1,
2004:
At LIBOR plus 2.25% (7.59% at December 31, 1998) 13,500 2,000
At Prime plus 0.25% (8.00% at December 31, 1998) 3,209 1,010
Subordinated notes (12.0%), face value $25,000 (net of
unamortized discount of $341 in 1998 and $382 in 1997) with
warrants to purchase 15,464 shares of common stock 24,659 24,618
Fixed-rate equipment note (8.08%) payable in monthly
installments through September 5, 2001 594 856
Fixed-rate equipment note (7.40%) payable in monthly
installments through February 1, 2002 504 --
Promissory notes payable to shareholders (11%) due March 27
and March 31, 2007 (net of unamortized discount of $653 in
1998 and $728 in 1997), interest payable quarterly 11,347 11,272
Promissory notes payable to shareholder (8%), due in 2001 935 --
-------- -------
105,498 77,256
Less current portion 7,472 5,011
-------- -------
$ 98,026 $72,245
======== =======
</TABLE>
During 1998, in conjunction with the acquisition of Port City Press, Inc., Mack
amended its credit agreement ("Credit Facility") to increase the available
borrowings to $80,000. The Credit Facility consists of $52,000 in amortizing
Term Loans and a Revolver. The Term Loans and Revolver are secured by liens on
substantially all of Mack's tangible and intangible property. Borrowings under
the Revolver are limited to the lesser of (a) $80,000 minus the Term Loans, the
equipment notes and outstanding letters of credit, with such amount not to ex-
ceed $25,000 or (b) a borrowing base of 85% of Mack's eligible receivables (es-
sentially excludes greater-than-60-day-past-due amounts) plus the lesser of
$7,500 or 75% of Mack's raw materials inventories plus 60% of work-in-process
inventories minus outstanding letters of credit. As of December 31, 1998, ap-
proximately $8,000 of additional borrowings were available under the Credit Fa-
cility.
F-35
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
At Mack's option, borrowings under the Term Loans may bear interest at a rate
based on the London Interbank Offered Rate ("LIBOR") plus 2.75%, the lender's
prime rate plus .75%, or at a fixed rate as quoted by the lender, and
borrowings under the Revolver may bear interest at a rate based on LIBOR plus
2.25% or at the lender's prime rate plus .25%. Borrowings subject to the LIBOR-
rate option must remain outstanding for a term not to exceed six months. Mack
may obtain a .25% interest-rate reduction on the Term Notes and Revolver by
meeting certain provisions and making certain prepayments. In addition, Mack is
required to pay a commitment fee of .25% on the unused portion of the Credit
Facility.
Mack has outstanding letters of credit at December 31, 1998 and 1997 of $940,
and $1,140, respectively, primarily for its workers' compensation program. The
letters of credit, which may not exceed $3,000, are secured by Mack's Revolver.
Mack issued a subordinated debenture (the "Debenture") in 1997 in the principal
amount of $25,000. The Debenture is due on March 31, 2007 and is subordinated
to Mack's obligations under the Credit Facility. The Debenture was recorded at
$24,587, with the $413 balance ascribed to the warrants and Mack common stock
issued to the investor. If, upon the fifth anniversary of the debenture, any
amounts under the Debenture remain outstanding, Mack shall issue to the warrant
holder 15,464 shares of Mack common stock at par value. The debt discount is
amortized over the ten-year term of the Debenture. Interest is payable on the
Debenture semi-annually at 12% per annum.
Interest due on the 11% Promissory Notes payable to shareholders may be paid,
at the Company's option, 60% in shares of the Company's Series A Preferred
Stock. At issuance, the creditor shareholder for $10,800 of Promissory Notes
received a warrant to purchase 5,000 shares of the Company's Common Stock at
$100 per share. The warrant expires in 2007. At the time of issuance, the Com-
pany valued the warrant at $783, which was credited to Additional Paid-in Capi-
tal, and is classified as a reduction of the carrying amount of the note. The
discount is being amortized to interest expense over the life of the note.
Under the Credit Facility and Debenture, Mack is required to maintain minimum
levels of tangible net worth and fixed-charge coverage ratios, each as defined.
The agreements also contain covenants which, among other things, restrict capi-
tal expenditures, mergers, acquisitions, additional borrowings, operating
leases, and dividends.
Mack's Credit Facility provides for principal pay downs based upon an excess
cash flow provision which resulted in $1,990 being classified as currently due
at December 31, 1998. Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
--------
<S> <C>
1999 $ 7,472
2000 5,997
2001 7,276
2002 6,029
2003 6,000
Thereafter 72,724
--------
Total $105,498
========
</TABLE>
The Company made interest payments of $7,564, $5,442, and $3,167 in 1998, 1997,
and 1996, respectively.
F-36
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
5. Fair Value of Financial Instruments
The estimated fair values of the Company's financial obligations compared to
the recorded amounts as of December 31 are as follows:
<TABLE>
<CAPTION>
---------------------------------------
1998 1997
Recorded Recorded
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Fixed-rate term note $ 14,440 $ 16,365 $17,997 $18,589
Floating-rate term note payable 36,310 36,310 19,503 19,503
Revolving lines of credit 16,709 16,709 3,010 3,010
Fixed-rate equipment note payable 504 506 -- --
Fixed-rate equipment note payable 594 558 856 852
Debenture 24,659 24,659 24,618 24,618
Promissory Notes payable to sharehold-
ers 12,282 12,282 11,272 11,272
-------- -------- ------- -------
$105,498 $107,389 $77,256 $77,844
======== ======== ======= =======
</TABLE>
The fair values of these obligations are estimated based on borrowing rates
currently available to the Company for loans with similar terms and maturities.
The fair value of these borrowings does not reflect estimated fees that would
be incurred if the debt were refinanced. The fair value of the Debenture and
the Promissory Notes payable to shareholders are not readily determinable due
to the nature of the instruments.
6. Income Taxes
The Company files a consolidated federal income tax return with its subsidiar-
ies.
Income tax expense consists of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Current Deferred Total
------- -------- ------
<S> <C> <C> <C>
1998:
Federal $1,146 $ 782 $1,928
State 163 33 196
------- -------- ------
Total $1,309 $ 815 $2,124
======= ======== ======
1997
Federal $ -- $ (18) $ (18)
State 32 22 54
------- -------- ------
Total $ 32 $ 4 $ 36
======= ======== ======
1996:
Federal $3,888 $(134) $3,754
State 605 (20) 585
------- -------- ------
Total $4,493 $(154) $4,339
======= ======== ======
</TABLE>
F-37
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
The provision for income taxes differs from the amount of tax expense which
would result from using the federal tax rate of 35% as follows:
<TABLE>
<CAPTION>
--------------------
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Statutory federal income tax $1,739 $(126) $3,960
State income taxes, net of federal tax benefit 127 35 380
Permanent difference 213 161 35
Other 45 (34) (36)
------ ----- ------
$2,124 $ 36 $4,339
====== ===== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences be-
tween the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets at
December 31, 1998 include approximately $132 related to the minimum pension li-
ability, which is included in accumulated other comprehensive loss.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
----------------
December 31,
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Vacation and compensation $ 843 $ 820
Employee benefits 9,046 9,847
Bad debts 536 499
Net operating loss and alternative minimum tax credit
carry-forwards -- 423
Other 177 43
------- -------
Total deferred tax assets 10,602 11,632
Deferred tax liabilities:
Fixed assets (7,036) (7,072)
Inventory valuation (24) (472)
Other (209) (82)
------- -------
Total deferred tax liabilities (7,269) (7,626)
Valuation allowance (741) (741)
------- -------
Net deferred tax assets $ 2,592 $ 3,265
======= =======
</TABLE>
Income tax payments amounted to $1,089, $508, and $4,225 in 1998, 1997, and
1996 respectively.
7. Preferred Stock
In conjunction with its initial capitalization, the Company issued 40,000
shares of its 12% Series A Preferred Stock. Dividends on the Series A Preferred
Stock are payable annually, on the 15th day of December, in an amount equal to
the stated rate times the liquidation value of $100 per share. All dividend
payments are to be made either in cash or by issuance of additional shares of
Series A Preferred Stock, at the Company's option. All dividends, whether paid
in cash or in shares, accrue from the date of issuance and are cumulative. Dur-
ing 1998, the Company paid the 1998 and 1997 dividends with 9,891 shares of Se-
ries A Preferred Stock. Additionally, dividends of $33 and $383 were accrued at
December 31, 1998 and 1997, respectively. The terms of the Company's 11% Prom-
issory Notes provide for interest to be paid either in cash or by issuance of
additional shares of Series A Preferred Stock at the Company's option. During
1998 and 1997, respectively, the Company issued 8,084 and 4,288 shares of Se-
ries A Preferred Stock in lieu of payment of interest on the Promissory Notes.
F-38
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
The shares of Series A Preferred Stock are non-voting. The Company, at the op-
tion of the Board of Directors, may at any time redeem the Series A Preferred
Stock for cash equal to the liquidation value of $100 per share, plus any ac-
cumulated and unpaid dividends, whether or not earned or declared. In the
event of any liquidation, dissolution, or winding up of the affairs of the
Company, whether voluntary or involuntary, each issued and outstanding share
of Series A Preferred Stock will entitle the holder to payment at the rate of
$100 per share.
The Company is authorized to issue 250,000 shares of Series Preferred Stock of
which 100,000 has been reserved for the issuance of Series A Preferred Stock.
8. Stock Options and Appreciation Rights
In 1997, in connection with the Recapitalization, Mack settled for cash all
outstanding stock options for $4,018 and for cash and installment payments all
stock appreciation rights for $2,200 ($1,600 in cash). The unpaid stock appre-
ciation rights of $600 were payable in two installments of $300 each, of which
$300 was paid in 1998 with the remainder due in 1999. Expenses incurred in
connection with the settlement of these stock options and stock appreciation
rights were $3,756 and $1,964, respectively. No awards were granted under the
these plans during the three-year period ended December 31, 1998.
9. Pension Plans and Other Post Retirement Benefits
Mack has various retirement plans which cover substantially all employees.
Mack's defined benefit plans provide for payments under varying formulas. Cer-
tain executives also participate in a supplemental plan, which is not funded.
Mack contributes to the plans in amounts not less than required under the Em-
ployee Retirement Income Security Act of 1974.
In 1997, Mack merged its East Stroudsburg Typographical Union Local No. 943
Pension Plan into the Mack Printing Company Pension Plan.
Plan assets consist primarily of listed stocks and bonds and interest-bearing
deposits under insurance contracts.
Mack provides certain health care benefits for eligible retired employees and
their spouses. In addition, the Company provides fully paid life insurance
coverage with benefits ranging from $5 to $40 for all retirees. The retiree
health care plan is contributory for all retirees who were full-time regular
employees of Mack.
Since the adoption of Statement of Financial Accounting Standards No. 106 in
1993, Mack has introduced various amendments to its plan which have resulted
in a cumulative unrecognized gain at December 31, 1998 of $9,462. Amendments
in 1994 yielded a gain of $13,373 and a 1996 amendment requiring all non-bar-
gaining and retired participants to be covered under one insurance plan re-
sulted in a gain of $4,379. In 1998, Mack amended its plan to cap its contri-
bution for retiree medical coverage. This amendment resulted in a gain of
$1,461. These amounts, after reduction for the 1997 acquisition of 30% of
Mack's common stock owned by then-minority shareholders, are being credited to
expense on a straight-line basis over periods ranging from 10 to 13 years--the
average expected years of future service to be rendered by active plan partic-
ipants to reach full eligibility.
F-39
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
The following table sets forth the plans' funded status and amounts recognized
in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
Plans with Plans with
Assets in Plans with Assets in Plans with
Excess of Assets Less Excess of Assets Less
Benefit Than Benefit Other Benefit Than Benefit Other
Obligations Obligations Benefits Total Obligations Obligations Benefits Total
----------- ------------ -------- -------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in benefit
obligation
Benefit obligation at
beginning of year $1,238 $43,921 $ 5,860 $ 51,019 $1,242 $41,082 $ 6,046 $ 48,370
Service cost 58 1,032 102 1,192 57 967 134 1,158
Interest cost 90 3,186 325 3,601 93 3,046 403 3,542
Plan participants'
contributions -- -- 68 68 -- -- 71 71
Amendments -- -- (1,461) (1,461) -- -- -- --
Actuarial gain/loss 152 3,100 485 3,737 104 1,040 (410) 734
Benefits paid (148) (2,728) (416) (3,292) (258) (2,214) (384) (2,856)
----------- ------------ -------- -------- ----------- ------------ -------- --------
Benefit obligation at
end of year $1,390 $48,511 $ 4,963 $ 54,864 $1,238 $43,921 $ 5,860 $ 51,019
=========== ============ ======== ======== =========== ============ ======== ========
Change in plan assets
Fair value of plan
assets at beginning of
year $1,479 $37,446 $ -- $ 38,925 $1,540 $32,688 $ -- $ 34,228
Actual return on plan
assets 88 3,852 -- 3,940 78 5,385 -- 5,463
Employer contribution 119 1,397 -- 1,516 119 1,587 -- 1,706
Benefits paid (148) (2,728) -- (2,876) (258) (2,214) -- (2,472)
----------- ------------ -------- -------- ----------- ------------ -------- --------
Fair value of plan
assets at end of year $1,538 $39,967 $ -- $ 41,505 $1,479 $37,446 $ -- $ 38,925
=========== ============ ======== ======== =========== ============ ======== ========
Funded status at end of
year $ 148 $(8,543) $ (4,963) $(13,358) $ 246 $(6,475) $ (5,860) $(12,089)
Unrecognized net
actuarial (gain) loss 380 2,301 (2,290) 391 234 (393) (2,860) (3,019)
Unrecognized prior
service cost 32 286 (9,462) (9,144) 33 323 (9,130) (8,774)
----------- ------------ -------- -------- ----------- ------------ -------- --------
Prepaid (accrued)
benefit cost $ 560 $(5,956) $(16,715) $(22,111) $ 513 $(6,545) $(17,850) $(23,882)
=========== ============ ======== ======== =========== ============ ======== ========
Amounts recognized in
the statements of
financial position
consist of
Prepaid (accrued)
benefit cost $ 560 $(5,956) $(16,715) $(22,111) $ 513 $(6,545) $(17,850) $(23,882)
Additional minimum
liability -- (485) -- (485) -- (170) -- (170)
Intangible asset -- 143 -- 143 -- 170 -- 170
Accumulated other
comprehensive income -- 342 -- 342 -- -- -- --
----------- ------------ -------- -------- ----------- ------------ -------- --------
Net amount recognized at
end of year $ 560 $(5,956) $(16,715) $(22,111) $ 513 $(6,545) $(17,850) $(23,882)
=========== ============ ======== ======== =========== ============ ======== ========
</TABLE>
<TABLE>
<CAPTION>
-------------------------
Year ended December 31
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 1,192 $ 1,158 $ 1,193
Interest cost 3,601 3,542 3,443
Expected return on plan assets (3,615) (3,035) (2,742)
Amortization of prior service cost (1,065) (1,011) (1,318)
Amortization of net (gain)/loss (85) (143) (147)
Recognized net actuarial loss 21 9 --
------- ------- -------
Net periodic benefit cost $ 49 $ 520 $ 429
======= ======= =======
</TABLE>
F-40
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
--------------------------------------
Year ended December 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average assumptions:
Discount rate 6.75% 7.25% 7.50%
Expected return on plan assets 8.0% to 9.5% 8.0% to 9.0% 8.0% to 9.0%
Rate of compensation increase 4.75% 4.75% 4.75%
Assumed health care cost trend rate 7.00% 7.00% 9.00%
</TABLE>
The weighted-average health care cost trend rate is assumed to decrease gradu-
ally to 6% by 1999 and remain at that level thereafter. The assumed health care
cost trend rate affects the amounts reported. For example: 1) increasing the
assumed health care cost trend rate by one percentage point would increase the
accumulated postretirement benefit obligation as of December 31, 1998 by $296
and the aggregate of the service and interest cost components of the
postretirement benefit obligation for 1998 by $36; and 2) decreasing the as-
sumed health care cost trend rate by one percentage point would decrease the
accumulated postretirement benefit obligation as of December 31, 1998 by $252
and the aggregate of the service and interest cost components of the
postretirement benefit obligation for 1998 by $29.
Mack sponsors a defined contribution plan. For certain eligible employees, Mack
makes annual contributions of 4% of qualifying compensation. For certain addi-
tional eligible employees, Mack will match employee contributions up to a maxi-
mum of 2% of qualifying compensation. The expense under the defined contribu-
tion plan was $784, $749 and $705 in 1998, 1997, and 1996, respectively. In ad-
dition, Mack provides a defined contribution plan for two of its unions. The
contributions under this plan are based on a bargaining agreement and amounted
to $142, $145, $114 in 1998, 1997, and 1996, respectively.
10. Commitments and Contingencies
Expenses under a services agreement and operating lease arrangements were ap-
proximately $1,515, $1,123 and $843, for December 31, 1998, 1997 and 1996, re-
spectively. A summary of noncancelable, long-term commitments at December 31,
1998 follows:
<TABLE>
<CAPTION>
-------
Year Amount
---- -------
<S> <C>
1999 $ 2,375
2000 2,201
2001 2,072
2002 1,668
2003 1,025
Thereafter 18,966
-------
Total $28,307
=======
</TABLE>
In December 1997, Mack entered into a five-year agreement with a vendor for
document management services. Since this agreement is essentially a replacement
and supplement for previous duplicating equipment leases, the expense commit-
ments under this arrangement are included above.
The Company has employment agreements with certain executives and one other em-
ployee of its subsidiaries.
The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these mat-
ters will not have a material adverse effect on the Company's financial posi-
tion.
As of December 31, 1998, the Company has entered into commitments for capital
expenditures totaling approximately $2,819.
Under the terms of the 1991 sale of the assets of Specialty Printers of Ameri-
ca, Inc. (SPA), Mack guaranteed the operating lease obligation ($444 at Decem-
ber 31, 1998) relating to SPA's manufacturing facility in the event that the
buyer were to default. The lease expires on January 10, 2002.
F-41
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
11. Related Party Transactions
The Company incurred interest and fees to affiliates for services rendered in
connection with financing arrangements and other matters. These fees are in-
cluded in the accompanying statement of operations as follows.
<TABLE>
<CAPTION>
------------------
1998 1997 1996
------ ------ ----
<S> <C> <C> <C>
Interest $1,449 $1,072 $107
Management fees 360 28 210
Deferred financing fees 342 1,240 --
Recapitalization costs -- 835 --
------ ------ ----
$2,151 $3,175 $317
====== ====== ====
</TABLE>
12. Year 2000 Issue (Unaudited)
The Year 2000 issue exists because many software programs, computer hardware,
operating systems and microprocessor-based embedded controls in automated
equipment use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial and operational information incorrectly or
fail to operate.
The Company has recognized the need to ensure that its business operations will
not be adversely affected by the upcoming calendar Year 2000 and is cognizant
of the time sensitive nature of the problem. The Company has assessed or is in
the process of assessing how it may be impacted by Year 2000 and has formulated
and commenced a comprehensive plan to address all known aspects of the Year
2000 problem: information systems, production, and facilities equipment, sup-
pliers and customers. The Company is currently making inquiries of customers
and suppliers to assess their Year 2000 readiness. The Company is also in the
process of testing information technology ("IT") systems, as well as non-IT
systems, and verifying that vendor-supplied or outsourced systems will be Year
2000 compliant and will repair or replace any such systems found to be non-com-
pliant. Currently, the Company estimates that it has substantially completed
its assessment of how it may be impacted, is completely through the development
of plans to address the testing and remediation of its systems, and has com-
pleted approximately 55% to 70% of its testing and remediation activities. The
Company estimates that it will complete this process prior to October 1999.
The Company has not separately tracked its Year 2000 costs as a project, but
rather has incurred the costs in conjunction with normal sustaining activities.
The discretely identifiable costs incurred through December 31, 1998 of com-
pleting the Company's Year 2000 assessment and of modifying its computer soft-
ware and hardware, as well as its production and facilities equipment, to be
Year 2000 compliant were approximately $1,800. The estimated costs yet to be
incurred are approximately $2,000. The current assessment does not include
costs related to software and hardware replaced in the normal course of busi-
ness other than replacements accelerated due to the Year 2000 issue.
While the Company does not currently foresee any material problems, there can
be no assurance that the Company and its material suppliers and customers will
be Year 2000 compliant by January 1, 2000 and that any such non-compliance will
not have a material adverse effect on the Company.
The Company is in the process of developing contingency plans in the event that
any unresolved issues are identified.
13. Formation of the Company
The Company was formed on February 26, 1997 with authorized capital of 50,000
shares of Common Stock and 250,000 shares of Series Preferred Stock (see Note
7). The Company was formally capitalized in March, 1997 through a series of
transactions with related entities as follows: 1) issued 5,000 shares of its
Common Stock to Purico in exchange for 500 shares of Melham, Inc. common stock
(constituting 100% of the capital stock of Melham, Inc.); 2) issued 31,000
shares of its Common Stock and 36,000 shares of Series A Preferred Stock to
Purico for $6,700; 3) issued 4,000 shares of its Common Stock, 4,000 shares of
its Series A Preferred Stock and a $1,200 11% promissory note to Mack's presi-
dent in exchange for Mack common stock (the Company subsequently contributed
the Mack common stock to Melham, Inc.); and
F-42
<PAGE>
Melham Holdings, Inc.
Notes to Consolidated Financial Statements--(Continued)
(dollars in thousands, except per share data)
4) issued to Melham, U.S., Inc. (an affiliated company) for $10,800 cash a
$10,800 11% promissory note and warrants to purchase 5,000 shares of Common
Stock of the Company at $100 per share. Prior to the exchange of common stock
between the Company and Purico, Melham, Inc. declared and paid to Purico a div-
idend on its common stock totaling $35,500.
In 1997, Mack completed a recapitalization which resulted in changes in its
ownership and capital structure (the "Recapitalization"). Through a series of
transactions, Mack: (1) redeemed and retired all of the outstanding shares of
its Series A Preferred Stock ($760, which excludes the amount paid to Melham,
Inc.); (2) redeemed and retired all of the outstanding shares of its Common
Stock, except the shares owned by Melham, Inc. and a portion of the shares held
by the Company's president ($18,087); (3) effected the exchange of the presi-
dent's Common Stock for Common Stock of the new indirect parent company (Melham
Holdings, Inc.); (4) purchased all outstanding stock options ($4,018) and set-
tled all stock appreciation rights ($2,200).
An unrelated investor purchased for $25,000, 15% of Mack's common stock, Mack's
$25,000 subordinated debenture, and warrants to purchase 3% of Mack's common
stock. Mack also issued to Melham, Inc. shares of Mack cumulative senior and
junior preferred stock. As a result of these transactions, the Company in-
creased its ownership of Mack from 55% to 85% at a cost of $19,923, represent-
ing the net amount paid to buy-out a 30% interest owned by minority stockhold-
ers, which was accounted for under the purchase method of accounting. The total
amount was allocated $5,400 (before deferred income taxes of $2,160), to reduce
the recorded amount of postretirement benefits (Note 9) and the remainder to
goodwill (Note 2).
Mack completed the financing for the Recapitalization by replacing its existing
bank credit facility with a new $65,000 arrangement (the "Credit Facility"),
consisting of a revolving credit agreement (the "Revolver") and $42,000 in term
loans (the "Term Loans").
14. Subsequent Event
On April 1, 1999, the stockholders of Melham Holdings, Inc. sold all of the
Company's Capital Stock owned by them to Cadmus Communications, Inc. Coincident
with the sale, the Company stockholders purchased all of the capital stock of
VPI owned by the Company. The Company also paid-off all long-term debt and pur-
chased all common stock of Mack owned by the minority stockholders of Mack.
F-43
<PAGE>
CADMUS COMMUNICATIONS CORPORATION
_______________________________
PROSPECTUS
_______________________________
OFFER FOR
ALL OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2009
IN EXCHANGE FOR
REGISTERED 9 3/4% SENIOR SUBORDINATED NOTES DUE 2009
August 11, 1999
