<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 10-Q
------------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 0-12954
---------------------------
CADMUS COMMUNICATIONS CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1274108
- --------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6620 West Broad Street, Suite 240
Richmond, Virginia 23230
(Address of principal executive offices including zip code)
-----------------------------
Registrant's telephone number, including area code:
(804) 287-5680
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of January 31, 2000.
Class Outstanding at January 31, 2000
----- -------------------------------
Common Stock, $.50 Par Value 9,014,188
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- 3
December 31, 1999 (unaudited) and June 30, 1999
Condensed Consolidated Statements of Income (unaudited) -- 4
Three and Six Months Ended December 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows (unaudited) -- 5
Six Months Ended December 31, 1999 and 1998
Condensed Consolidated Statements of Shareholders' Equity --
December 31, 1999 (unaudited) and June 30, 1999 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 944 $ 5,068
Accounts receivable, less allowance for doubtful accounts 67,541 92,532
Inventories 28,313 30,586
Deferred income taxes 4,087 5,842
Prepaid expenses and other 5,720 6,230
------------- ------------
Total current assets 106,605 140,258
Property, plant, and equipment (net of accumulated depreciation
of $119,908 at December 31, 1999 and $115,382 at June 30, 1999) 156,000 173,085
Goodwill and other intangibles, net 186,434 198,570
Other assets 8,087 11,933
------------- ------------
TOTAL ASSETS $ 457,126 $ 523,846
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,300 $ --
Current maturities of long-term debt 8,858 6,637
Accounts payable 37,573 42,017
Accrued expenses 33,147 31,275
Restructuring reserve 5,528 --
------------- ------------
Total current liabilities 88,406 79,929
Long-term debt, less current maturities 220,090 269,242
Other long-term liabilities 30,632 29,426
Deferred income taxes 2,234 8,716
Shareholders' equity:
Common stock ($.50 par value; authorized shares-16,000,000
shares; issued and outstanding shares-9,014,000 at
December 31, 1999 and 9,011,000 at June 30, 1999) 4,507 4,505
Capital in excess of par value 68,033 68,001
Retained earnings 43,600 64,403
Accumulated other comprehensive income (loss) (376) (376)
------------- ------------
Total shareholders' equity 115,764 136,533
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 457,126 $ 523,846
============= ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 131,396 $ 108,811 $ 256,153 $ 208,595
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales 102,505 86,983 201,420 166,018
Selling and administrative 17,917 14,871 35,368 29,495
Restructuring and other charges 15,971 -- 32,561 --
------------ ------------ ------------ ------------
136,393 101,854 269,349 195,513
------------ ------------ ------------ ------------
Operating income (loss) (4,997) 6,957 (13,196) 13,082
------------ ------------ ------------ ------------
Interest and other expenses:
Interest 5,830 2,064 11,997 4,207
Securitization costs 411 -- 411 --
Other, net 31 (182) (397) (316)
------------ ------------ ------------ ------------
6,272 1,882 12,011 3,891
------------ ------------ ------------ ------------
Income (loss) before income taxes (11,269) 5,075 (25,207) 9,191
Income tax expense (benefit) (4,000) 1,954 (5,305) 3,539
------------ ------------ ------------ ------------
Net income (loss) $ (7,269) $ 3,121 $ (19,902) $ 5,652
============ ============ ============ ============
Earnings per share - basic:
Net income (loss) per share $ (0.81) $ .40 $ (2.21) $ .72
============ ============ ============ ============
Weighted-average common shares
outstanding 9,014 7,867 9,014 7,890
============ ============ ============ ============
Earnings per share - diluted:
Net income (loss) per share $ (0.81) $ .39 $ (2.21) $ .70
============ ============ ============ ============
Weighted-average common shares
outstanding 9,014 8,046 9,014 8,126
============ ============ ============ ============
Cash dividends per common share $ .05 $ .05 $ .10 $ .10
============ ============ ============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Activities
Net income (loss) $ (19,902) $ 5,652
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 12,892 9,711
Restructuring and other charges 32,561 -
Other, net (3,882) 2,377
----------- -----------
21,669 17,740
----------- -----------
Changes in assets and liabilities, excluding debt and effects of
acquisitions and dispositions:
Accounts receivable, net (5,346) (6,842)
Inventories 1,050 (3,978)
Accounts payable and accrued expenses (475) (2,587)
Restructuring (due to cash payments) (2,385) (987)
Other, net 4,050 (105)
----------- -----------
(3,106) (14,499)
----------- -----------
Net cash provided by operating activities 18,563 3,241
----------- -----------
Investing Activities
Purchases of property, plant, and equipment (9,354) (7,779)
Proceeds from sales of property, plant, and equipment 1,969 -
Payments for businesses acquired - (3,484)
Net proceeds from divested businesses 4,091 -
Other, net (2,196) 742
----------- -----------
Net cash used in investing activities (5,490) (10,521)
----------- -----------
Financing Activities
Proceeds from short-term borrowings 3,300 1,425
Proceeds from sale of accounts receivable 27,300 -
Proceeds from (repayment of) long-term revolving credit facility (44,000) 12,000
Repayment of tax-exempt bonds (1,600) -
Repayment of long-term borrowings (1,330) (3,190)
Dividends paid (901) (790)
Repurchase and retirement of common stock - (3,864)
Issuance of stock - 1,986
Proceeds from exercise of stock options 34 -
----------- -----------
Net cash provided by (used in) financing activities (17,197) 7,567
----------- -----------
Increase (decrease) in cash and cash equivalents (4,124) 287
Cash and cash equivalents at beginning of period 5,068 -
----------- -----------
Cash and cash equivalents at end of period $ 944 $ 287
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS SHAREHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Accumulated
Capital in Other
Common Stock Excess of Retained Comprehensive
(in thousands) Shares Amount Par Value Earnings Income (Loss) Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 7,921 $3,961 $53,532 $ 52,323 $ -- $109,816
Net income -- -- -- 13,713 -- 13,713
Change in minimum pension liability -- -- -- -- (376) (376)
-------- ----- --------
Comprehensive income 13,713 (376) 13,337
-------- ----- --------
Cash dividends - $.20 per share -- -- -- (1,633) -- (1,633)
Repurchase and retirement
of common stock (201) (101) (3,763) -- -- (3,864)
Issuance of common stock for
business acquisitions 1,288 644 18,204 -- -- 18,848
Net shares issued upon exercise
of stock options 3 1 28 -- -- 29
- ----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 9,011 4,505 68,001 64,403 (376) 136,533
(the following data is unaudited)
Net loss (and comprehensive loss) -- -- -- (19,902) -- (19,902)
Cash dividends - $.05 per share -- -- -- (901) -- (901)
Net shares issued upon exercise
of stock options 3 2 32 -- -- 34
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 9,014 $4,507 $68,033 $ 43,600 $ (376) $115,764
================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements of Cadmus
Communications Corporation (the "Company") 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, 1999.
In the opinion of management, all adjustments (consisting 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 December 31, 1999, are not necessarily indicative of
results for the entire fiscal year.
Certain previously reported amounts have been reclassified to conform to
the current-year presentation.
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 0 and 179,000 for the three
months ended, and 0 and 236,000 for the six months ended December 31, 1999
and 1998, respectively.
3. Components of net inventories at December 31, 1999 and June 30, 1999, were
as follows (in thousands):
December 31, June 30,
1999 1999
---------- ---------
Raw materials and supplies $ 8,114 $ 9,389
Work in process 18,362 17,485
Finished Goods 1,837 3,712
---------- ---------
$ 28,313 $ 30,586
========== =========
4. The Company is organized around two business groups: Professional
Communications, serving customers who publish information, and Marketing
Communications, serving customers who convey marketing messages.
Professional Communications, which serves both not-for-profit and
commercial publishers, is comprised of three product lines: STM journal
services, special interest magazines, and soft cover books/directories.
Professional Communications provides a full range of composition,
editorial, prepress, printing, warehousing and distribution services. In
addition, this group provides 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. Marketing Communications includes specialty packaging,
promotional printing, and business-to-business catalog production.
The accounting policies for the groups are the same as those described in
Note 1 "Significant Accounting Policies" in the fiscal 1999 Annual Report
on Form 10-K. The Company primarily evaluates the performance of its
operating groups based on operating income, excluding amortization of
goodwill and restructuring charges. Intergroup sales for the second quarter
and first
7
<PAGE>
six months of fiscal 2000 are not significant. The Company manages
income taxes on a consolidated basis.
Summarized group data is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Professional Marketing
(In thousands) Communications Communications Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended December 31, 1999:
Net sales $ 92,434 $ 38,962 $ 131,396
Operating income 12,213 1,817 14,030
Three Months Ended December 31, 1998:
Net sales $ 51,387 $ 57,424 $ 108,811
Sales between groups (117) -- (117)
Operating income 8,713 438 9,151
Six Months Ended December 31, 1999:
Net sales $ 178,393 $ 77,760 $ 256,153
Operating income 24,259 768 25,027
Six Months Ended December 31, 1998:
Net sales $ 101,354 $ 107,241 $ 208,595
Sales between groups (820) -- (820)
Operating income 16,185 1,256 17,441
</TABLE>
A reconciliation of group data to consolidated data is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
(In thousands) 1999 1998 1999 1998
------------ ---------- ----------- -----------
Earnings from operations:
<S> <C> <C> <C> <C>
Reportable group operating income $ 14,030 $ 9,151 $ 25,027 $ 17,441
Amortization of goodwill (1,310) (490) (2,675) (967)
Unallocated shared services and other
expenses (1,746) (1,704) (2,987) (3,392)
Restructuring and other charges (15,971) -- (32,561) --
Interest expense, net (5,830) (2,064) (11,997) (4,207)
Securitization costs (411) -- (411) --
Other income, net (31) 182 397 316
------------ ---------- ----------- -----------
Income (loss) before income taxes $ (11,269) $ 5,075 $ (25,207) $ 9,191
------------ ---------- ----------- -----------
</TABLE>
5. In October 1999, the Company announced organizational changes and a
restructuring plan intended to 1) effect additional planned synergies in
connection with its April 1999 acquisition of the Mack Printing Group
("Mack") and 2) focus the Company's resources on the professional
communications and specialty packaging markets. The restructuring plan has
the following broad components:
. closing the Atlanta-based Cadmus Point of Purchase ("POP") business
unit;
8
<PAGE>
. implementing additional, planned synergies associated with the
integration of Mack;
. divesting the Company's Richmond- and Charlotte-based marketing
agencies;
. consolidating certain corporate functions and overhead.
As of December 31, 1999, the following restructuring actions had taken
place:
. The POP business unit was closed in October, 1999.
. The consolidation of two composition facilities in Lancaster,
Pennsylvania was substantially completed.
. The Richmond agency business was closed in July, 1999, and the
Company sold its Charlotte-based agency operation in September,
1999.
. The Company consolidated certain corporate functions, including
eliminating the overhead associated with its Marketing
Communications sector.
The Company recorded first quarter restructuring and other charges totaling
$16.6 million ($14.1 million net of taxes). These charges included the
write-off of intangible assets related to the Company's POP business of
$11.1 million, the write-off of redundant manufacturing software resulting
from the integration of Mack of $6.2 million, and a net gain from the
closure and divestiture of the two marketing businesses of $0.7 million.
The Company recorded second quarter restructuring and other charges
totaling $16.0 million ($10.0 million net of taxes). These charges related
to the closure of the company's POP business, the consolidation of two
composition facilities, and the consolidation of certain corporate
functions and overhead. Total restructuring and other charges in the second
quarter consisted of asset write-downs of $7.9 million, involuntary
termination costs of $4.5 million, contract termination costs of $3.0
million, and other post closure shutdown costs of $0.6 million. Involuntary
termination costs relate to approximately 170 associates located primarily
at the POP business, two composition facilities, and the corporate
location. For the six month period ended December 31, 1999, the company
made severance payments totaling $2.1 million to approximately 150
associates. The $5.5 million restructuring reserve at December 31, 1999 is
comprised of the following: $2.4 million for involuntary termination costs,
$1.7 million for contract termination costs, and $1.4 million for other
post closure shutdown costs.
The Company expects an additional pre-tax charge of approximately $2
million in the third quarter of fiscal 2000, related to the additional
reductions in force in connection with the restructuring plan, and
anticipates all restructuring actions will be completed over the next 12
months.
6. The Company entered into a receivables securitization program on October
26, 1999. Under the program, the Company entered into an agreement to sell,
on a revolving basis, certain of its accounts receivable to a wholly-owned
subsidiary, which entered into an agreement to transfer, on a revolving
basis, an undivided percentage ownership interest in a designated pool of
accounts receivable to an unrelated third party purchaser up to a maximum
of $35.0 million. These transactions are accounted for as a sale of
accounts receivable. At December 31, 1999, $27.3 million of accounts
receivable had been sold and reflected as a reduction of accounts
receivable, the proceeds of which were used to repay a corresponding amount
of the term loan facility under the senior bank credit facility. The fees
arising from the securitization transaction of $0.4 million are reported as
securitization costs on the condensed consolidated statements of income for
the quarter ended December 31, 1999. These fees vary based on commercial
paper rates plus a margin, providing a lower effective rate than that
available under the Company's senior bank credit facility. The Company
maintains an allowance for doubtful accounts based on the expected
collectibility of all accounts receivable, including receivables sold.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Headquartered in Richmond, Virginia, Cadmus Communications Corporation provides
customers with integrated, end-to-end information and communications solutions.
The Company has been organized around two primary business groups: Professional
Communications, serving customers who publish information, and Marketing
Communications, serving customers who convey marketing messages. In October
1999, the Company announced organizational changes and a restructuring plan
intended to 1) effect additional planned synergies in connection with its April
1999 acquisition of the Mack Printing Group ("Mack") and 2) focus the Company's
resources on the professional communications and specialty packaging markets.
The restructuring plan has the following broad components:
. closing the Atlanta-based Cadmus Point of Purchase ("POP") business
unit;
. implementing additional, planned synergies associated with the
integration of Mack;
. divesting the Company's Richmond- and Charlotte-based marketing
agencies; and
. consolidating certain corporate functions and overhead.
The company estimates that the annualized improvement in operating income from
its restructuring plan will exceed $6 million and that it also will achieve
approximately $1 million in annual interest savings.
As of December 31, 1999, the following restructuring actions had taken place:
. The POP business unit was closed in October, 1999.
. The consolidation of two composition facilities in Lancaster,
Pennsylvania was substantially completed.
. The Richmond agency business was closed in July, 1999, and the Company
sold its Charlotte-based agency operation in September, 1999.
. The Company consolidated certain corporate functions, including
eliminating the overhead associated with its Marketing Communications
sector.
The Company expects an additional pre-tax charge of approximately $2 million in
the third quarter of fiscal 2000, related to the additional reductions in force
in connection with the restructuring plan, and anticipates all restructuring
actions will be completed over the next 12 months.
Cadmus is the largest provider of production services to scientific, technical
and medical journal publishers in the world, the fourth largest publications
printer in North America, and a leading national provider of specialty packaging
products and services.
10
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The following table presents the major components from the Condensed
Consolidated Statements of Income as a percent of net sales for the three and
six months periods ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1999 1998 1999 1998
------- ------ ------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 78.0 79.9 78.6 79.6
----- ----- ----- ------
Gross profit 22.0 20.1 21.4 20.4
Selling and administrative expenses 13.6 13.7 13.8 14.1
Restructuring and other charges 12.2 - 12.7 -
----- ----- ----- ------
Operating income (loss) (3.8) 6.4 (5.1) 6.3
Interest expense 4.4 1.9 4.7 2.0
Securitization costs 0.3 - 0.2 -
Other expenses (income), net 0.1 (0.2) (0.2) (0.1)
----- ----- ----- ------
Income (loss) before income taxes (8.6) 4.7 (9.8) 4.4
Income tax expense (benefit) (3.1) 1.8 (2.0) 1.7
----- ----- ----- ------
Net income (loss) (5.5)% 2.9% (7.8)% 2.7%
===== ===== ===== ======
</TABLE>
Sales
Sales for the second quarter of fiscal 2000 were $131.4 million, a 21% increase
from sales of $108.8 million in the second quarter of fiscal 1999. Sales for the
first six months of fiscal 2000 increased 23% to $256.2 million. The increase
for the three and six-month periods was driven by double-digit sales growth from
the specialty packaging and graphic solutions businesses, as well as the
incremental contribution from the Mack acquisition. Adjusted for the acquisition
of Mack, and businesses divested since a year ago, net sales increased 9% for
the three and six months periods ended December 31, 1999.
Professional Communications sales rose 79% and 75% for the second quarter and
first six months of fiscal 2000, respectively, compared to the prior year.
Adjusted for the acquisition of Mack, sales decreased by 3% for both the second
quarter and six months ended December 31, 1999. The primary causes for the
decrease in sales were lower paper prices and lower than expected net new
business.
In the Marketing Communications group, the Company's specialty packaging
business recorded an increase in sales of 48% in the second quarter of fiscal
2000, and a 44% increase in sales year to date over the prior year. The graphic
solutions business experienced a 10% increase in sales for both the second
quarter and first six months of fiscal 2000, compared to the prior year. These
increases were due primarily to expanded volume in both new and existing
accounts. Divested and closed operations contributed $2.9 million and $12.3
million in sales to the second quarter and first six months of fiscal 2000,
respectively, compared to $29.6 million and $57.1 million in the corresponding
periods of the prior year.
Gross Profit
Gross profit increased to 22.0% and 21.4% of net sales for the second quarter
and first six months of fiscal 2000, respectively, compared to 20.1% and 20.4%
for the same periods of fiscal 1999. The improvement in gross profit margins was
the result of the inclusion of Mack in the first two quarters of fiscal 2000.
11
<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses, as a percentage of net sales, were 13.6%
for the second quarter of fiscal 2000, and remained relatively unchanged from
the same period of the prior year. Year to date, selling and administrative
expenses totaled $35.4 million, up 20% from $29.5 million in the prior year. For
the first six months of fiscal 2000, selling and administrative expenses, as a
percentage of sales, decreased to 13.8% from 14.1% last year. This decline was
primarily attributable to the favorable impact resulting from the acquisition of
Mack and divestitures in the marketing business. Partially offsetting these
benefits was higher goodwill amortization expense related to the Mack
acquisition.
Restructuring and Other Charges
In October 1999, the Company announced organizational changes and a
restructuring plan intended to 1) effect additional planned synergies in
connection with its April 1999 acquisition of Mack and 2) focus the Company's
resources on the professional communications and specialty packaging markets.
The restructuring plan has the following broad components:
. closing the Atlanta-based Cadmus Point of Purchase business unit;
. implementing additional, planned synergies associated with the
integration of Mack;
. divesting the Company's Richmond- and Charlotte-based marketing agencies
. consolidating certain corporate functions and overhead
As of December 31, 1999, the following restructuring actions had taken place:
. The POP business unit was closed in October, 1999.
. The consolidation of two composition facilities in Lancaster,
Pennsylvania was substantially completed.
. The Richmond agency business was closed in July, 1999, and the Company
sold its Charlotte-based agency operation in September, 1999.
. The Company consolidated certain corporate functions, including
eliminating the overhead associated with its Marketing Communications
sector.
The Company recorded first quarter restructuring and other charges totaling
$16.6 million ($14.1 million net of taxes). These charges included the write-
off of intangible assets related to the Company's POP business of $11.1 million,
the write-off of redundant manufacturing software resulting from the integration
of Mack of $6.2 million, and a net gain from the closure and divestiture of the
two marketing businesses of $0.7 million.
The Company recorded second quarter restructuring and other charges totaling
$16.0 million ($10.0 million net of taxes). These charges related to the
closure of the company's POP business, the consolidation of two composition
facilities, and the consolidation of certain corporate functions and overhead.
Total restructuring and other charges in the second quarter consisted of asset
write-downs of $7.9 million, involuntary termination costs of $4.5 million,
contract termination costs of $3.0 million, and other post closure shutdown
costs of $0.6 million. Involuntary termination costs relate to approximately
170 associates located primarily at the POP business, two composition
facilities, and the corporate location. For the six month period ended December
31, 1999, the company made severance payments totaling $2.1 million to
approximately 150 associates. The $5.5 million restructuring reserve at
December 31, 1999 is comprised of the following: $2.4 million for involuntary
termination costs, $1.7 million for contract termination costs, and $1.4 million
for other post closure shutdown costs.
The Company expects an additional pre-tax charge of approximately $2 million in
the third quarter of fiscal 2000, related to the additional reductions in force
in connection with the restructuring plan, and anticipates all restructuring
actions will be completed over the next 12 months.
12
<PAGE>
Operating Income
The Company recorded an operating loss of $5.0 million for the second quarter of
fiscal 2000 and a $13.2 million operating loss for the six month period ended
December 31, 1999, due to restructuring charges related to actions taken in the
first two quarters of fiscal 2000. Excluding restructuring and other charges,
operating income rose to 8.4% and 7.6% of net sales for the second quarter and
first six months of fiscal 2000, up from 6.4% and 6.3% of net sales in the prior
year.
Interest and Other Expenses and Income Taxes
Interest expense increased $3.8 million and $7.8 million for the second quarter
and first six months of fiscal 2000 over the same periods in fiscal 1999. The
increase in interest expense was due primarily to higher debt levels resulting
from the acquisition of Mack, higher interest rates on the Company's senior
credit facility and senior subordinated notes issued in conjunction with the
Mack acquisition, and higher short-term interest rates in fiscal 2000.
As a result of its implementation of a receivables securitization program with
its leading lenders, the Company incurred $0.4 million in securitization costs
in the second quarter of fiscal 2000. These fees vary based on commercial paper
rates plus a margin, providing a lower effective rate than that available under
the Company's senior bank credit facility.
The Company recognized income tax benefits at an effective income tax rate of
35.5% and 21.0% for the second quarter and first six months of fiscal 2000,
respectively, compared to an income tax rate of 38.5% in the comparable periods
of fiscal 1999. The reduction in the effective tax rate for the first six
months of fiscal 2000 is largely attributable to the non-deductibility of
restructuring charges associated with the write-off of certain intangible
assets.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating Activities
Net cash provided by operating activities for the first six months of fiscal
2000 totaled $18.6 million, compared to $3.2 million for the first six months of
fiscal 1999. This improvement was primarily attributable to increased earnings
before depreciation, amortization and restructuring charges, partially offset by
deferred taxes. Changes in assets and liabilities required $3.1 million in cash
during the first six months of fiscal 2000 due to a seasonal increase in
receivables and cash outlays related to the Company's restructuring plan. This
$11.4 million improvement compared to the first six months of fiscal 1999 was
attributable to 1) improved receivable and inventory management, 2) lower sales
and management incentives in the first half of fiscal 2000, and 3) proceeds
received from loans and death benefits on certain executive life insurance
policies owned by the Company.
Investing Activities
Net cash used in investing activities was $5.5 million for the first six months
of fiscal 2000, as compared to $10.5 million in the prior year. Net proceeds
from the sale of the Charlotte-based direct marketing agency in fiscal 2000
totaled $4.1 million. Proceeds from the sale of property, plant and equipment
totaled $2.0 million, and related primarily to the sale of a manufacturing
facility in the POP business. These cash proceeds were partially offset by
capital expenditures of $9.4 million, which included investments primarily in
prepress and manufacturing equipment, and new business and manufacturing
systems. Capital expenditures for the first six months of fiscal 1999 totaled
$7.8 million. The Company estimates that capital expenditures for fiscal 2000
will approximate $20 million. In the first six months of fiscal 2000, the
Company incurred outlays of $2.2 million of additional payments made in
connection with its acquisition of Mack in April, 1999. Net cash used in
investing activities in fiscal 1999 also included $3.5 million of cash paid for
the purchase of the assets of Beacon Press, Incorporated.
13
<PAGE>
Financing Activities
Net cash used in financing activities was $17.2 million for the first six months
of fiscal 2000 compared to net cash provided by financing activities in fiscal
1999 of $7.6 million. Short-term borrowings and cash provided by operations
were used to fund working capital requirements, to pay down debt and long-term
leases, and to fund dividend payments.
On October 26, 1999, the Company entered into a receivables securitization
program. Under the program, the Company entered into an agreement to sell, on a
revolving basis, certain of its accounts receivable to a wholly-owned
subsidiary, which entered into an agreement to transfer, on a revolving basis,
an undivided percentage ownership interest in a designated pool of accounts
receivable to an unrelated third party purchaser up to a maximum of $35.0
million. These transactions are accounted for as a sale of accounts receivable.
At December 31, 1999, $27.3 million of accounts receivable had been sold and
reflected as a reduction of accounts receivable, the proceeds of which were used
to repay a corresponding amount of the term loan facility under the senior bank
credit facility.
For the six months ended December 31, 1998, the Company increased its borrowings
by $10.2 million. This increase was used primarily to fund the working capital
requirements and acquisitions described above, to fund the repurchase of common
stock for $3.9 million, and to fund dividend payments of $0.8 million.
Total debt at December 31, 1999, was $232.2 million, down $43.7 million from
$275.9 million at June 30, 1999. The Company's debt to capital ratio was 66.7%
at December 31, 1999, down slightly from 66.9% at June 30, 1999, primarily due
to the reduction in overall debt levels offset by the impact on equity resulting
from restructuring charges recognized in the first six months of fiscal 2000.
The primary cash requirements of the Company are for debt service, capital
expenditures, and working capital. The primary sources of liquidity will be
cash flow provided by operations and unused capacity under its senior credit and
receivables securitization facilities. The Company believes that these funds
will provide sufficient liquidity and capital resources to meet the anticipated
debt service requirements, capital expenditures, and working capital
requirements. The future operating performance and the ability to service or
refinance the Company's debt depends on the ability to implement the business
strategy and on general economic, financial, competitive, legislative,
regulatory and other factors, many of which are beyond the control of the
Company.
YEAR 2000 ISSUE
- ---------------
The Company's plan for identifying, evaluating and implementing changes to its
computer systems and applications necessary to achieve a Year 2000 date
conversion is presented under the caption "Management's Discussion and Analysis"
in the Company's 1999 Annual Report to Shareholders. While the Company
recognizes that some errors may not occur until later in the year, to date the
Company has experienced no adverse impact due to the potential errors from
software programs making calculations using the year 2000 date. The Company
estimates that the total cost of achieving Year 2000 compliance to be
approximately $1.6 million in excess of normal software upgrades and
replacements.
The previous discussions contain forward-looking information, as defined by the
Private Securities Litigation Reform Act of 1995, and, as such, are subject to
certain risks and uncertainties that could cause actual results to differ
materially. Potential risks and uncertainties include but are not limited to:
(1) the effective execution of the restructuring plan and the successful
integration of recent acquisitions, (2) continuing competitive pricing in the
markets in which the Company competes, (3) the gain or loss of significant
customers or the decrease in demand from existing customers, (4) the ability of
the Company to continue to obtain improved efficiencies and lower overall
production costs, (5) changes in the Company's product sales mix, (6) the
performance of new management and leadership teams in the Company and its
divisions, (7) the impact of industry consolidation among key customers, (8) the
ability of the Company to operate profitably and effectively with higher levels
of indebtedness, and (9) the ability to retain key employees and managers in
light of lower-than-planned incentives and benefits
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the information concerning the Company's
"Quantitative and Qualitative Disclosures about Market Risk" as previously
reported in the Company's Report on Form 10-K for the year ended June 30, 1999.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) At the 1999 Annual Meeting of Shareholders of the Company ("Annual
Meeting") held on November 18, 1999, 5,912,281 shares of the Company's
outstanding common stock were present in person or by proxy and
entitled to vote.
(b) At the Annual Meeting, the following matters were voted upon and
received the vote set forth below:
(1) Election of Class I Directors. Each nominee for director was
------------------------------
elected, having received the following vote:
Nominee For Abstain
------- --- -------
Nathu R. Puri 5,690,014 222,267
Jerry I. Reitman 5,691,013 221,268
Wallace Stettinius 5,690,259 222,022
Directors who will serve until the 2000 Annual Meeting include Frank
Daniels, C. Stephenson Gillispie, Jr., Bruce A. Walker and G. Waddy
Garrett.
Directors who will serve until the 2001 Annual Meeting include John C.
Purnell, Jr., Russell M. Robinson, II, John W. Rosenblum and David G.
Wilson, Jr.
(2) Ratification of designation of Arthur Andersen LLP as independent
-----------------------------------------------------------------
public accountants for current fiscal year. Designation of the auditors
-------------------------------------------
was ratified, having received the following vote:
For: 5,875,331
Against: 25,888
Abstain: 11,062
Broker Non-vote: ---
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K:
On October 15, 1999, the Company filed a Form 8-K, which included
the press release dated October 14, 1999 announcing the Company's
organizational changes and a restructuring plan intended to effect
additional, planned synergies in connection with the Company's
April 1999 acquisition of the Mack Printing Group and to focus the
Company's resources on the professional communications and
specialty packaging markets, as well as a copy of the prepared
remarks made on a conference call to analysts on the same date.
On November 2, 1999, the Company filed a Form 8-K, which included
the press release dated November 2, 1999 regarding fiscal 1999
first quarter financial results, as well as a copy of the prepared
remarks made on a conference call to analysts on the same date.
On November 19, 1999, the Company filed a Form 8-K, which included
the prepared remarks of the Company given by C. Stephenson
Gillispie, Jr., Chairman and Chief Executive Officer and Bruce V.
Thomas, Executive Vice President and Chief Operating Officer, at
the Company's 1999 Annual Meeting of Shareholders.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CADMUS COMMUNICATIONS CORPORATION
Date: February 11, 2000
/s/ C. Stephenson Gillispie, Jr.
--------------------------------
C. Stephenson Gillispie, Jr.
Chairman, President, and Chief Executive Officer
Date: February 11, 2000
/s/ David E. Bosher
-------------------
David E. Bosher
Sr. Vice President, Chief Financial Officer, and Treasurer
17
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CADMUS
COMMUNICATIONS CORPORATION'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 994
<SECURITIES> 0
<RECEIVABLES> 70,522
<ALLOWANCES> 2,981
<INVENTORY> 28,313
<CURRENT-ASSETS> 106,605
<PP&E> 275,908
<DEPRECIATION> 119,908
<TOTAL-ASSETS> 457,126
<CURRENT-LIABILITIES> 88,406
<BONDS> 220,090
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0
<COMMON> 4,507
<OTHER-SE> 111,257
<TOTAL-LIABILITY-AND-EQUITY> 457,126
<SALES> 256,153
<TOTAL-REVENUES> 256,153
<CGS> 201,420
<TOTAL-COSTS> 281,360
<OTHER-EXPENSES> (397)
<LOSS-PROVISION> 842
<INTEREST-EXPENSE> 11,997
<INCOME-PRETAX> (25,207)
<INCOME-TAX> (5,305)
<INCOME-CONTINUING> (19,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (19,902)
<EPS-BASIC> $(2.21)
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