<PAGE>
Cadmus Communications Corporation and Subsidiaries
Selected Financial Data(1)
The following data should be read in conjunction with the financial statements
of the Company and consolidated management's discussion and analysis that appear
elsewhere in this report.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Years Ended June 30
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2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
OPERATING DATA
Net sales $496,311 $443,045 $393,823 $384,942 $336,655
Cost of sales 388,103 352,970 304,014 299,840 258,947
--------------------------------------------------------------------
Gross profit 108,208 90,075 89,809 85,102 77,708
Selling and administrative expenses 66,034 61,733 63,872 65,104 62,288
Restructuring and other charges, net 36,544 -- 3,950 19,699 --
Net gain on divestitures -- (9,521) - -- --
--------------------------------------------------------------------
Operating income 5,630 37,863 21,987 299 15,420
Interest expense and securitization costs (see Note 8) 24,491 12,204 7,601 7,788 5,144
Interest rate swap settlement charges -- 2,101 -- -- --
Other, net (660) (498) (394) (53) (271)
--------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item (18,201) 24,056 14,780 (7,436) 10,547
Income tax expense (benefit) (2,191) 9,414 5,690 (2,219) 3,956
Extraordinary loss on early extinguishment of debt, net of tax -- 929 -- -- 795
--------------------------------------------------------------------
Net income (loss) $(16,010) $ 13,713 $ 9,090 $ (5,217) $ 5,796
------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA, BEFORE ONE-TIME ITEMS (2)
Operating income $ 42,174 $ 28,342 $ 25,937 $ 19,998 $ 15,420
Income, before one-time items 10,732 10,133 11,541 7,556 6,591
EBITDA (4) 68,881 49,835 44,776 38,239 30,254
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PER SHARE DATA (3)
Income (loss) before extraordinary item
-as reported $ (1.78) $ 1.76 $ 1.11 $ (.65) $ .88
-before one time items (2) 1.19 1.22 1.41 .94 .88
Net income (loss) per share
-as reported (1.78) 1.65 1.11 (.65) .77
-before one time items (2) 1.19 1.22 1.41 .94 .88
Cash dividends .20 .20 .20 .20 .20
Shareholders' equity 13.12 15.15 13.86 12.85 13.72
EBITDA (2) (4) 7.66 5.98 5.48 4.76 4.04
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FINANCIAL POSITION
Working capital, before impact of securitization program $ 55,029 60,329 $ 30,937 $ 42,162 $ 60,517
Property, plant and equipment, net 150,979 173,085 133,836 118,621 116,365
Goodwill and other intangibles, net 182,823 198,570 48,158 42,572 52,846
Total assets 423,184 523,846 291,752 266,916 283,723
Total debt 201,705 275,879 101,755 96,119 110,124
Total shareholders' equity 117,942 136,533 109,816 100,643 108,528
Total capital 319,647 412,412 211,571 196,762 218,652
Free cash flow (5) 30,820 2,873 11,114 11,366 (12,606)
------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Gross profit margin 21.8% 20.3% 22.8% 22.1% 23.1%
Operating income margin (2) 8.5% 6.4% 6.6% 5.2% 4.6%
Effective tax rate (2) 41.5% 39.1% 38.5% 38.4% 37.5%
Debt as a percentage of total capital 63.1% 66.9% 48.1% 48.8% 50.4%
Operating income return on average total capital (2) 11.5% 10.6% 12.7% 9.6% 9.0%
Return on average shareholders' equity (2) 8.4% 8.4% 11.0% 7.2% 7.7%
------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Weighted-average common shares outstanding 8,990 8,336 8,176 8,035 7,495
Shares outstanding at fiscal year end 8,938 9,011 7,921 7,830 7,908
Stock market price data:
High $ 15 $ 25 $ 28 $ 17 3/4 $ 29 7/8
Low 6 1/8 12 5/8 14 12 1/4 13 1/4
Close (at fiscal year end) 9 3/4 13 3/4 24 1/4 15 1/2 15 3/8
Number of associates (approximate) 3,500 4,100 3,000 3,000 3,200
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</TABLE>
(1) Certain reclassifications were made to prior years' amounts to conform to
current year presentation.
(2) Excludes the effects of the following charges: restructuring and other
charges of $36.5 million ($26.7 million net of tax), $3.95 million ($2.5
million net of tax), and $19.7 million ($12.7 million net of tax) in fiscal
2000, 1998 and 1997, respectively; net gain on divestitures in fiscal 1999
of $9.5 million ($5.8 million net of tax); interest rate swap settlement
charges in fiscal 1999 of $2.1 million ($1.3 million net of tax) and
extraordinary loss on the early extinguishment of debt of $1.5 million
($0.9 million net of tax) and $1.3 million ($0.8 million net of tax) in
fiscal 1999 and 1996, respectively.
(3) Income per share data assumes dilution.
(4) Earnings before interest, taxes, depreciation, amortization and
securitization costs
(5) Net cash flow before financing activities, exclusive of the impact of
restructuring related items, business acquisitions, and business
divestitures.
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Management's Discussion and Analysis
GENERAL
Headquartered in Richmond, Virginia, Cadmus Communications Corporation (the
"Company") provides integrated graphic communications services to professional
publishers, not-for-profit societies and corporations. Cadmus is the largest
provider of production services to scientific, technical and medical ("STM")
journal publishers in the world, the fourth largest publications printer in
North America, and a leading national provider of specialty packaging. The
Company also offers commercial printing, fulfillment and distribution services,
software duplication, and catalog design and photography.
ORGANIZATIONAL STRUCTURE
In the fiscal 2001 report, Cadmus' financials will reflect the Company's
concentration on its four primary markets (as defined in the narrative portion
of this publication); Cadmus Professional Communications (journals), CadmusMack
(magazines), Cadmus Port City Press (books & directories), and The Whitehall
Group (packaging).
The data in this financial section is historical, however, and therefore
reflects the Company's fiscal 2000 organizational structure which consisted of
two business groups: the Professional Communications Group, serving customers
who publish information, and the Marketing Communications Group, serving
customers who convey marketing messages.
The Professional Communications Group is comprised of three primary product
lines: STM journals, special interest and trade magazines, and books and
directories. The Professional Communications Group 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 compact disc based electronic archiving, electronic peer review and
online publishing. The Marketing Communications Group focuses on the creation,
production and distribution of graphic communications. Product lines include
specialty packaging, commercial printing, fulfillment and distribution services,
software duplication, and catalog design and photography.
SIGNIFICANT TRANSACTIONS
Fiscal 2000 Restructuring. During the first quarter of fiscal 2000, the Company
adopted a restructuring plan intended to effect planned synergies in connection
with its April 1999 acquisition of the Mack Printing Group ("Mack") and focus
the Company's resources on the professional communications and specialty
packaging markets. As of June 30, 2000, these actions had taken place:
. the Atlanta-based Cadmus Point of Purchase ("POP") business unit was
closed in October 1999;
. the work flows of two composition facilities in Lancaster,
Pennsylvania were substantially integrated;
. the Richmond-based marketing agency was closed in July 1999, and the
Charlotte-based agency was sold in September 1999;
. corporate functions and overhead were consolidated, including
eliminating overhead costs associated with the Marketing
Communications Group and eliminating certain overhead within the
Professional Communications Group.
The divested and closed operations contributed $14.4 million in sales, and
incurred operating losses of $2.4 million, pre-tax, or $(0.15) per share, net of
tax, in fiscal 2000.
The Company expects all restructuring actions to be completed by December
31, 2000.
Fiscal 2000 Retirement of Chairman, President and Chief Executive Officer. In
May, the Company announced the retirement of C. Stephenson Gillispie, Jr. as
chairman, president and chief executive officer and as a director effective June
30, 2000. The Company effected a retirement agreement with Mr. Gillispie, and
recorded a special charge of $2.4 million (pre-tax) in the fourth quarter as a
result. The agreement provided for salary continuation payments (including
benefits), additional retirement benefits, and certain health and welfare
continuation benefits.
Fiscal 2000 Receivables Securitization Program. On October 26, 1999, the Company
entered into a receivables securitization program 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 $55 million. These transactions are
accounted for as a sale of accounts receivable. At June 30, 2000, $44.3 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.
Fiscal 1999 Acquisition of Mack Printing Company. On April 1, 1999, the Company
acquired Mack Printing Company ("Mack") by purchasing all of the capital stock
of its parent company, Melham Holdings, Inc., for approximately $201 million.
The Company financed the purchase with $66.0 million of senior bank debt, $70.0
million in bridge financing notes issued to the prior owners of Melham, $40.0
million in bridge financing notes issued to two banks, $6.4 million of junior
subordinated notes and approximately 1.2 million shares of the Company's common
stock (valued at approximately $16.3 million). Mack produces short- to medium-
run magazines and journals, generally for customers in the mid-Atlantic and
northeast regions of the United States. Mack's operating results have been
included in the Company's consolidated results of operations since the date of
acquisition.
<PAGE>
Fiscal 1999 Divestitures of Financial Communications and Custom Publishing
Product Lines. In the third quarter of fiscal 1999, the Company divested its
financial communications and custom publishing product lines. Net cash proceeds
from these transactions totaled $32.3 million and resulted in a pre-tax net gain
of $9.5 million. For the twelve months ended June 30, 1999, net sales for the
divested operations were $34.5 million and operating losses totaled $1.1
million.
Fiscal 1998 Acquisition of Germersheim, Inc, and Related Restructure. In 1998,
the Company acquired Germersheim, Inc., an Atlanta-based point of purchase
provider, and recorded an acquisition-related restructuring charge of $4.0
million ($2.5 million net of tax) related to the integration of Germersheim with
its existing point of purchase operations.
RESULTS OF OPTIONS
The following discussion and analysis of the financial condition and results of
operations covers periods prior to the acquisition of Mack, the refinancing of
the former senior credit facility and the issuance of the senior subordinated
notes. As a result of those transactions, the Company now has 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.
The following table summarizes the consolidated results of operations for
the periods indicated, as well as the percentages of categories relative to net
sales.
<TABLE>
<CAPTION>
Years Ended June 30
------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $496.3 100.0% $443.0 100.0% $393.8 100.0%
Cost of sales 388.1 78.2 352.9 79.7 304.0 77.2
------------------------------------------------------------------------------------------------------------------------------------
Gross profit 108.2 21.8% 90.1 20.3% 89.8 22.8%
------------------------------------------------------------------------------------------------------------------------------------
Selling and administrative expenses 66.0 13.3 61.7 13.9 63.8 16.2
Restructuring and other charges 36.6 7.4 -- -- 4.0 1.0
Net gain on divestitures -- -- (9.5) (2.2) -- --
------------------------------------------------------------------------------------------------------------------------------------
Operating income 5.6 1.1% 37.9 8.6% 22.0 5.6%
------------------------------------------------------------------------------------------------------------------------------------
Interest expense 23.0 4.6 12.2 2.8 7.6 1.9
Securitization costs 1.5 .3 -- -- -- --
Interest rate swap settlement charges -- -- 2.1 .5 -- --
Other, net (.7) (.1) (.4) (.1) (.4) (.1)
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item (18.2) (3.7)% 24.0 5.4% 14.8 3.8%
Income tax expense (benefit) (2.2) (.5) 9.4 2.1 5.7 1.5
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
extraordinary item (16.0) (3.2)% 14.6 3.3% 9.1 2.3%
Extraordinary loss (net of tax) -- -- .9 0.2 -- --
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(16.0) (3.2)% $ 13.7 3.1% $ 9.1 2.3%
------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 16.5 3.3)% $ 18.5 4.2% $ 33.6 8.5%
</TABLE>
Comparison of Fiscal 2000 with Fiscal 1999
Net Sales
Sales for fiscal 2000 were $496.3 million, a 12% increase from sales of $443.0
million in fiscal 1999. The increase was driven by the incremental contribution
from the Mack acquisition, and by double-digit sales growth from the specialty
packaging business. Adjusted for the acquisition of Mack, as well as the fiscal
2000 and 1999 divestitures (the divested operations), net sales growth was 5%
for the year.
Professional Communications Group net sales rose 49% to $365.0 million
during fiscal 2000. This increase was primarily attributable to the acquisition
of Mack and net sales growth in the STM journal product line. Adjusted for the
acquisition of Mack, net sales growth was 1%. The relatively flat level of sales
resulted from higher than normal customer attrition in the first half of the
fiscal year.
Net sales for the Marketing Communications Group decreased by 34% for
fiscal 2000, from $198.4 million to $131.3 million, primarily due to the impact
of the divested operations. Adjusted for the divested operations, net sales
growth was 13%. The Company's specialty packaging business recorded a 21%
increase in sales for fiscal 2000. These increases were due primarily to the
addition of new customers and expanded volume in existing accounts. The graphic
solutions business experienced a 4% decline in sales compared to the prior year
due to competitive pressure in the commercial printing market. The divested
operations had $12.3 million in sales for fiscal 2000, compared to $92.9 million
in the prior year.
<PAGE>
Gross Profit
Gross profit margins increased to 21.8% for fiscal 2000, compared to 20.3% for
fiscal 1999, due to an improvement in margins in the Professional Communications
Group, partially offset by lower margins in the Marketing Group. Professional
Communications Group gross profit margins increased to 23.6% in fiscal 2000,
from 22.8% in fiscal 1999. This increase was primarily attributable to the
inclusion of Mack for fiscal 2000, savings resulting from restructuring actions,
and higher plant utilization resulting from volume gains and improved plant
efficiencies. Within the Marketing Communications Group, the specialty packaging
product line and graphic solutions product line each experienced declines in
margins primarily due to excess capacity resulting from the sale of the
Company's financial printing operations.
Selling and Administrative Expenses
Selling and administrative expenses expressed as a percentage of net sales
declined to 13.3% in fiscal 2000 from 13.9% for fiscal 1999. This improvement
was largely attributable to net sales growth, favorable impact resulting from
restructuring actions involving the integration of Mack, the divestiture of
certain marketing businesses, continued cost containment and reduced corporate
overhead costs. Partially offsetting these benefits was higher goodwill
amortization expense related to the Mack acquisition.
Restructuring and Other Charges
In fiscal 2000, the Company recorded restructuring charges totaling $34.1
million ($25.5 million net of taxes). Total restructuring and other charges
included the write-off of intangible assets related to the Company's point of
purchase ("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, asset write-downs of $8.5 million, involuntary termination
costs of $5.3 million, contract termination costs of $3.2 million, and other
post closure shutdown costs of $0.5 million. Involuntary termination costs
relate to approximately 220 associates located within the POP business, the
Professional Communications Group, and the corporate location.
The Company also recorded a special charge of $2.4 million (pre-tax) in the
fourth quarter of fiscal 2000 related to the retirement of the Company's
chairman, president and chief executive officer.
In fiscal 1999, the Company sold its Charlotte-based financial
communications product line and its custom publishing product line. The two
sales resulted in a net pre-tax gain of $9.5 million.
Operating Income
The Company recorded operating income of $5.6 million for fiscal 2000 compared
to $37.9 million in fiscal 1999. The decline in operating income was due
primarily to two factors: (1) restructuring and other charges of $36.5 million
recorded in fiscal 2000 and (2) a net gain of $9.5 million recorded in fiscal
1999 related to the divestiture of the Company's financial communications and
custom publishing product lines. Adjusted for one-time items, operating income
rose 49% to $42.2 million, from $28.3 million last year, due primarily to the
full-year inclusion of Mack and the elimination of losses from the divested
operations. Operating margins, before one-time items, improved to 8.5% of sales
in fiscal 2000, compared to 6.4% of sales in fiscal 1999.
Interest Expense and Income Taxes
Interest expense increased $10.8 million for fiscal 2000 over 1999 due to higher
debt levels resulting from the acquisition of Mack, along with higher interest
rates on the Company's senior credit facility and senior subordinated notes
issued in connection with the Mack acquisition. The Company reduced debt by
$29.9 million during fiscal 2000, exclusive of debt reduction due to the
receivables securitization program. The effects of lower debt levels on interest
expense were offset by higher short-term interest rates in fiscal 2000. In
addition, the Company incurred costs of $1.5 million in fiscal 2000 under its
receivables securitization program. These costs 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. During the fourth quarter of fiscal
2000, Mack's receivables were brought into the receivables securitization
program.
The Company recognized income tax expense (benefit) at an effective tax
rate of (12.0%) for the year, compared to a rate of 39.2% for fiscal 1999. The
reduction in the effective tax rate is largely attributable to the
non-deductibility of restructuring charges associated with the write-off of
certain intangible assets. Excluding the effects of restructuring and one-time
charges, the effective tax rate was 41.5% and 39.1% for fiscal years 2000 and
1999, respectively.
Comparison of Fiscal 1999 with Fiscal 1998
Net Sales
Net sales increased 12% to $443.0 million from $393.8 million for fiscal 1998.
The increase was driven primarily by the acquisition of Mack, growth from the
STM journal, graphic solutions and specialty packaging and promotional printing
product lines, and the inclusion of twelve months of Germersheim's point of
purchase operations in fiscal 1999. Partially offsetting these increases were
the impact of lower paper prices, and the impact of the divested operations.
Adjusted for the acquisition of Mack and Germersheim and for the divestitures of
the financial communications and custom publishing product lines (fiscal 1999
divested businesses), net sales growth was 6% for the year.
Professional Communications Group net sales rose 21% to $245.5 million
during fiscal 1999. This increase was primarily attributable to the acquisition
of Mack and net sales growth in the STM journal product line, offset partially
by lower magazine net sales and lower paper prices. Adjusted for the acquisition
of Mack, and the impact of lower paper prices, net sales growth was 3%. The
decline in magazines sales was due principally to the decision to discontinue
serving certain non-strategic magazine accounts in fiscal 1998.
<PAGE>
Net sales for the Marketing Communications Group increased by 4% for fiscal
1999, from $191.1 million to $198.4 million. Adjusted for the acquisition of
Germersheim and for the fiscal 1999 divested businesses, net sales growth was
14%. This internal net sales growth increase was primarily driven by
double-digit growth in the graphic solutions and specialty packaging and
promotional printing product lines. The increases in these product lines 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.
Gross Profit
Gross profit margins declined to 20.3% for fiscal 1999, compared to 22.8% for
fiscal 1998, as an increase in margins in the Professional Communications Group
was offset by a decline in the Marketing Communications Group. Professional
Communications Group gross profit margins increased to 22.8% in fiscal 1999,
from 21.9% in fiscal 1998. This increase was primarily attributable to the
inclusion of Mack in the fourth quarter of fiscal 1999. Adjusting for the
acquisition of Mack, the Professional Communications Group gross profit margins
rose to 22.1%. Marketing Communications Group gross profit margins declined from
23.8% to 16.9%. This decrease was due to a significant decline in gross margins
in the Company's point of purchase business and in the fiscal 1999 divested
businesses.
Selling and Administrative Expenses
Selling and administrative expenses expressed as a percentage of net sales
declined to 13.9% in fiscal 1999 from 16.2% for fiscal 1998. This improvement
was largely attributable to net sales growth, favorable change in revenue mix as
a result of the acquisition of Mack and divestiture of the financial
communications and custom publishing businesses, continued cost containment,
reduced corporate overhead costs, and lower incentive compensation and
discretionary benefits.
Operating Income
Operating income rose 72% for fiscal 1999 to $37.9 million from $22.0 million in
fiscal 1998, driven primarily by the net gain realized on the divestiture of the
financial communications and custom publishing product lines in 1999, and the
inclusion of Mack. Adjusted for the $9.5 million pre-tax net gain on the
divestitures, the operating results of the divested operations, the
restructuring charge of $4.0 million taken in fiscal 1998, and the acquisitions
of Mack and Germersheim, operating income rose 12%.
Interest Expense and Income Taxes
Interest expense increased $4.6 million for fiscal 1999 over 1998 due to higher
debt levels resulting primarily from the refinancing of the former senior credit
facility and issuance of senior subordinated notes in connection with the
acquisition of Mack. The effective income tax rate was 39.2% for fiscal 1999 and
38.5% for fiscal 1998.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was $41.5 million for fiscal 2000, as
compared to $18.4 million for 1999, representing a $23.1 million increase in
cash provided by operating activities. This increase was due to the full-year
results of Mack as well as an overall decrease in working capital requirements
from fiscal 1999. This cash flow improvement was partially offset by an increase
in cash restructuring outflows related to the fiscal 2000 restructuring plan,
and by an increase in the required cash contribution to fund certain employee
benefit plans.
Net cash provided by operating activities was $18.4 million for fiscal
1999, as compared to $35.3 million for 1998, representing a $16.9 million
reduction in cash provided by operating activities. This change was primarily
due to an increase in working capital demands in fiscal 1999, which included:
(1) an increase in receivables due to higher net sales to customers; (2) a
reduction in accounts payable due to final payments in 1999 on certain
production equipment purchased in late fiscal 1998; and (3) the payment of
fiscal year 1998 sales and management incentives. The 1999 decrease in cash
provided by operating activities as compared to fiscal 1998 was partially offset
by a reduction in cash outflows related to the restructuring plans and by a
decrease in the required cash contribution to fund certain employee benefit
plans.
Investing Activities
Net cash used in investing activities was $8.5 million for fiscal 2000, compared
to $172.5 million used in 1999 and $38.5 million in 1998. Net proceeds from the
sale of the Charlotte-based marketing agency in fiscal 2000 totaled $3.7
million. Proceeds from the sale of property, plant and equipment totaled $5.5
million in fiscal 2000, and related primarily to the sale of a manufacturing
facility and related equipment in the point of purchase business. Capital
expenditures were $16.5 million in fiscal 2000 and included investments
primarily in prepress and manufacturing equipment, and new business and
manufacturing systems. The Company estimates that capital expenditures for
fiscal 2001 will total approximately $20.0 million.
Net cash used in investing activities was $172.5 million for fiscal 1999.
During fiscal 1999, cash used to fund the acquisitions of Mack, Dynamic
Diagrams, Inc., certain assets of Beacon Press and Imagelink, Inc. totaled
$188.8 million. This usage was partially offset by the receipt of $32.3 million
in net proceeds from the sale of the financial communications and custom
publishing product lines. Capital expenditures for fiscal 1999 were $18.5
million, and consisted primarily of investments in new presses and manufacturing
equipment, and new business and manufacturing systems.
Net cash used in investing activities totaled $38.5 million in fiscal 1998.
Investing activities in 1998 included $33.6 million for capital expenditures
and $11.1 million to fund acquisitions. Partially offsetting these uses was $6.8
<PAGE>
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
the Charlotte manufacturing and fulfillment facilities.
Financing Activities
Net cash provided by financing activities was $31.6 million for fiscal 2000.
Short-term borrowings and cash provided by operating activities were used to
fund working capital requirements, to pay down $29.9 million in debt (exclusive
of the securitization program), and to fund $1.8 million in dividend payments.
At June 30, 2000, $44.3 million of accounts receivable had been sold under
the Company's receivables securitization program 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.
Net cash provided by financing activities was $159.1 million for fiscal
1999. On April 1, 1999, in conjunction with the Mack acquisition, the Company
entered into a new $200.0 million senior bank credit agreement with a group of
seven banks. The new senior bank credit facility consists of a $55.0 million,
five-year amortizing term loan facility and a $145.0 million, five-year
revolving credit facility. The proceeds from this agreement provided additional
funding for the Mack acquisition and replaced an existing $160.0 million credit
agreement. Initial borrowings under this new facility totaled $155 million. Of
this amount, approximately $66 million was used to finance the purchase price of
Mack, with the remainder used to pay off borrowings under the former senior
credit facility and to pay up-front costs associated with the financing of Mack.
These up-front costs included $7.4 million in costs related to the refinancing
of the credit facility, issuance of the bridge notes, and issuance of the senior
subordinated notes, and $2.1 million in interest rate swap settlement charges.
The remainder of the Mack purchase was financed with proceeds from the issuance
of $110.0 million in bridge financing notes, $6.4 million of junior subordinated
notes and approximately 1.2 million shares of the Company's common stock. On
June 1, 1999, the Company redeemed the bridge notes with the proceeds from the
sale of $125.0 million of senior subordinated notes. Additional uses of funds in
fiscal 1999 include the repurchase of shares of the common stock for $3.9
million, and dividend payments of $1.6 million.
Net cash provided by financing activities in 1998 totaled $3.0 million.
Bank credit facility borrowings were utilized to fund investing activities in
excess of net cash provided by operating activities.
Total debt at June 30, 2000, was $201.7 million, down from $275.9 million
at June 30, 1999. The Company's debt to total capital ratio was 63.1% at June
30, 2000, down 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 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 sources
will provide sufficient liquidity and capital resources to meet its 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.
MARKET RISK
At June 30, 2000, the Company had two fixed-to-floating interest rate swap
agreements outstanding with an aggregate notional amount of $40.0 million. These
swaps were entered into in June 2000 in conjunction with the termination and
amendment of swaps that were entered into in fiscal 1999. The new swaps had
similar terms and conditions to hedge against changes in the fair market value
of the 9.75% senior subordinated notes due in 2009. Under the terms of this
agreement, the Company receives interest payments at a fixed rate of 9.75%. The
Company pays interest at a variable rate that is based on three-month LIBOR plus
a spread for each of the swap agreements. The initial term of these swap
agreements expires in fiscal 2009, and the banks have an option to terminate the
agreements in fiscal 2004. The fair value of the Company's interest rate swap
contracts (which is not recognized in the consolidated financial statements) at
June 30, 2000 was negative $1.3 million.
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 Company
continually monitors its positions and the credit rating of its counterparties
and limits the amount of agreements it enters into with any one party.
Management does not anticipate nonperformance by the counterparties; however, if
incurred, any such loss would be immaterial. Additional information on the
hedging instruments is provided in Note 7 of Notes to Consolidated Financial
Statements.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Information in the previous discussion relating to Cadmus' future
prospects and performance are "forward-looking statements" and, as such, are
subject to 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. The
information included in this release is representative only on the date hereof,
and the Company undertakes no obligation to update any forward-looking
statements made.
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Selected Quarterly Data (unaudited)(1)
<TABLE>
<CAPTION>
(In thousands, except per share data) 2000 Quarters Ended
------------------------------------------------------------------------------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $124,757 $131,396 $121,706 $118,452
Gross profit 25,842 28,891 27,972 25,503
Net income (loss) (12,633) (7,269) 1,849 2,043
Per share data:(2)
Net income (loss) (1.39) (0.81) .21 .23
Cash dividends .05 .05 .05 .05
Operating data, before one time items:(3)
Value added revenue(4) $ 84,867 $ 88,412 $ 85,810 $ 82,913
Operating income 8,391 10,974 11,187 11,622
Income 1,512 2,680 3,246 3,294
EBITDA(5) 15,540 17,114 18,133 18,094
Free cash flow(6) 12,736 (2,270) 16,224 4,130
Income per share(2) $ .17 $ .30 $ .36 $ .37
EBITDA per share(2)(5) 1.72 1.90 2.02 2.02
Stock market price data:
High $ 15 $ 12 3/4 $ 10 1/8 $ 10 7/8
Low 8 6 1/8 6 5/8 6 3/4
Close 11 1/8 8 1/2 8 7/8 9 3/4
1999 Quarters Ended
------------------------------------------------------------------------------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 99,784 $108,811 $100,001 $134,449
Gross profit 20,749 21,828 19,753 27,745
Income before extraordinary items 2,531 3,121 7,527 1,463
Net income 2,531 3,121 7,527 534
Per share data:(2)
Net income .31 .39 .94 .06
Cash dividends .05 .05 .05 .05
Operating data, before one time items:(3)
Value added revenue(4) $ 62,639 $ 66,072 $ 63,325 $ 89,836
Operating income 6,126 6,956 4,846 10,414
Income 2,531 3,121 1,719 2,762
Free cash flow(6) (10,761) 7,162 (4,503) 10,975
EBITDA(5) 11,132 11,977 9,212 17,514
Income per share(2) .31 .39 .22 .30
EBITDA per share(2)(5) 1.36 1.49 1.16 1.92
Stock market price data:
High $ 25 $ 19 7/8 $ 19 1/4 $ 15
Low 18 1/2 15 5/8 12 5/8 12 5/8
Close 19 1/2 18 7/8 14 3/8 13 3/4
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain reclassifications were made to prior years' amounts to conform to
current year presentation.
(2) Income per share data assumes dilution.
(3) Excludes the effects of the following charges: restructuring and other
charges of $36.5 million ($26.7 million net of tax) in fiscal 2000; net
gain on divestitures in fiscal 1999 of $9.5 million ($5.8 million net of
tax); interest rate swap settlement charges in fiscal 1999 of $2.1 million
($1.3 million net of tax) and extraordinary loss on the early
extinguishment of debt in fiscal 1999 of $1.5 million ($0.9 million net of
tax).
(4) Net sales less the cost of materials, primarily paper and ink.
(5) Earnings before interest, taxes, depreciation, amortization and
securitization costs
(6) Net cash flow before financing activities, exclusive of restructuring
related items, business acquisitions, and business divestitures.
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
(In thousands, except per share data) Years Ended June 30
--------------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Net sales $496,311 $443,045 $393,823
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expenses:
Cost of sales 388,103 352,970 304,014
Selling and administrative 66,034 61,733 63,872
Restructuring and other charges 36,544 -- 3,950
Net gain on divestitures -- (9,521) --
--------------------------------------------------------------------------------------------------------------------
490,681 405,182 371,836
--------------------------------------------------------------------------------------------------------------------
Operating income 5,630 37,863 21,987
--------------------------------------------------------------------------------------------------------------------
Interest and other expenses:
Interest 23,002 12,204 7,601
Securitization costs (Note 8) 1,489 -- --
Interest rate swap settlement charges -- 2,101 --
Other, net (660) (498) (394
--------------------------------------------------------------------------------------------------------------------
23,831 13,807 7,207
--------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item (18,201) 24,056 14,780
Income tax expense (benefit) (2,191) 9,414 5,690
--------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (16,010) 14,642 9,090
Extraordinary loss on early extinguishment
of debt (net of income tax benefit of $574) -- 929 --
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $(16,010) $ 13,713 $ 9,090
--------------------------------------------------------------------------------------------------------------------
Earnings per share--basic:
Income (loss) before extraordinary item $ (1.78) $ 1.79 $ 1.16
Extraordinary loss on early extinguishment of debt -- (.11) --
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.78) $ 1.68 $ 1.16
--------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 8,990 8,156 7,860
--------------------------------------------------------------------------------------------------------------------
Earnings per share--diluted:
Income (loss) before extraordinary item $ (1.78) $ 1.76 $ 1.11
Extraordinary loss on early extinguishment of debt -- (.11) --
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.78) $ 1.65 $ 1.11
--------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding,
assuming dilution 8,990 8,336 8,176
--------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands, except share data) At June 30
-------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,411 $ 5,068
Accounts receivable, less allowance for doubtful
accounts--($2,347 in 2000 and $3,081 in 1999) (Note 8) 31,992 92,532
Inventories 25,297 30,586
Deferred income taxes 4,882 5,842
Prepaid expenses and other 7,926 6,230
-------------------------------------------------------------------------------------------------------------
Total current assets 76,508 140,258
-------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 150,979 173,085
Goodwill and other intangibles, net 182,823 198,570
Other assets 12,874 11,933
-------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $423,184 $523,846
-------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 118 $ 6,637
Accounts payable 28,467 42,017
Accrued expenses and other current liabilities 34,490 31,275
Restructuring reserve 2,704 --
-------------------------------------------------------------------------------------------------------------
Total current liabilities 65,779 79,929
-------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 201,587 269,242
Other long-term liabilities 30,750 29,426
Deferred income taxes 7,126 8,716
Shareholders' equity:
Common stock ($.50 par value; authorized shares--
16,000,000; issued and outstanding shares--8,938,000
in 2000 and 9,011,000 in 1999) 4,469 4,505
Capital in excess of par value 67,363 68,001
Retained earnings 46,598 64,403
Accumulated other comprehensive loss (488) (376)
-------------------------------------------------------------------------------------------------------------
Total shareholders' equity $117,942 $136,533
-------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $423,184 $523,846
-------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30
-----------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(16,010) $ 13,713 $ 9,090
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of debt -- 929 --
Interest rate swap settlement charges -- 2,101 --
Depreciation and amortization 26,047 20,995 18,444
Restructuring and other charges 36,544 -- 3,950
Net gain on divestitures -- (9,521) --
Other, net (857) 2,137 1,676
-----------------------------------------------------------------------------------------------
45,724 30,354 33,160
-----------------------------------------------------------------------------------------------
Changes in operating assets and liabilities, excluding
debt and effects of acquisitions:
Accounts receivable, excluding effects of securitization 12,536 (5,892) 4,675
Inventories 4,513 1,988 (4,158)
Accounts payable and accrued expenses (15,522) (6,023) 7,873
Restructuring reserve (due to cash payments) (8,815) (2,071) (4,745)
Other current assets 2,419 530 (138)
Other long-term liabilities (due to pension plan payments) (2,021) (1,277) (1,774)
Other, net 2,692 766 414
-----------------------------------------------------------------------------------------------
(4,198) (11,979) 2,147
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,526 18,375 35,307
-----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (16,484) (18,506) (33,588)
Proceeds from sales of property, plant and equipment 5,495 2,426 6,765
Payments for businesses acquired -- (188,834) (11,139)
Net proceeds from sale of divested businesses 3,683 32,320 --
Other, net (1,242) 140 (543)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (8,548) (172,454) (38,505)
-----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from (repayment of) short-term borrowings, net -- (2,100) 450
Proceeds from sale of accounts receivable 44,300 -- --
Proceeds from long-term borrowings -- 61,415 --
Proceeds from long-term revolving credit facility -- 100,000 8,500
Proceeds from bridge loans -- 110,000 --
Repayment of long-term borrowings (1,424) (38,692) (5,018)
Repayment of long-term revolving credit facility (71,150) (71,500) --
Proceeds from issuance of senior subordinated notes -- 125,000 --
Repayment of bridge loans -- (110,000) --
Repayment of tax-exempt bonds (1,600) -- --
Financing costs paid -- (7,407) --
Interest rate swap settlement charges -- (2,101) --
Dividends paid (1,795) (1,633) (1,572)
Repurchase and retirement of common stock -- (3,864) (118)
Proceeds from exercise of stock options 34 29 772
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (31,635) 159,147 3,014
-----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,343 5,068 (184)
Cash and cash equivalents at beginning of year 5,068 -- 184
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,411 $ 5,068 $ --
-----------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other
Par Excess of Retained Comprehensive
(In thousands) Shares Value Par Value Earnings Income (Loss) Total
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 7,830 $3,915 $51,923 $44,805 $ -- $100,643
Net income -- -- -- 9,090 -- 9,090
Cash dividends--$.20 per share -- -- -- (1,572) -- (1,572)
Repurchase and retirement
of common stock (8) (4) (114) -- -- (118)
Issuance of common stock for
business acquisition 41 21 980 -- -- 1,001
Net shares issued upon exercise
of stock options 58 29 743 -- -- 772
----------------------------------------------------------------------------------------------------------------------------
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 13,337
-------
Cash dividends--$.20 per share -- -- -- (1,633) -- (1,633)
Repurchase and retirement
of common stock (201) (101) (3,763) -- -- (3,864)
Issuance of common stock for
business acquisitions 1,288 644 18,204 -- -- 18,848
Net shares issued upon exercise
of stock options 3 1 28 -- -- 29
----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 9,011 4,505 68,001 64,403 (376) 136,533
Net loss -- -- -- (16,010) -- (16,010)
Change in minimum pension liability -- -- -- -- (112) (112)
-------
Comprehensive loss (16,122)
-------
Cash dividends--$.20 per share -- -- -- (1,795) -- (1,795)
Retirement of common stock (76) (38) (670) -- -- (708)
Net shares issued upon exercise
of stock options 3 2 32 -- -- 34
----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 8,938 $4,469 $67,363 $46,598 $(488) $117,942
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<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 inter-company accounts
and transactions have been eliminated in consolidation.
Nature of Operations. Headquartered in Richmond, Virginia, Cadmus
Communications Corporation provides integrated graphic communications services
to professional publishers, not-for-profit societies and corporations. During
fiscal 2000, the Company was organized around two primary business groups:
Professional Communications, serving customers who publish information, and
Marketing Communications, serving customers who convey marketing messages.
Cadmus is the largest provider of production services to scientific, technical
and medical ("STM") journal publishers in the world, the fourth largest
publications printer in North America, and a leading national provider of
specialty packaging. Additional Cadmus services include commercial printing,
fulfillment and distribution services, software duplication, and catalog design
and photography.
Cash and Cash Equivalents. Cash and cash equivalents include all cash
balances and highly liquid investments with an original maturity of three months
or less.
Revenue Recognition. Substantially all products are produced to customer
specifications. The Company recognizes revenue when service projects are
completed or products are shipped.
Inventories. Inventories are valued at the lower of cost, as determined
using the first-in, first-out method, or market.
Property, Plant and Equipment. Property, plant and equipment is stated at
cost, net of accumulated depreciation. Major renewals and improvements are
capitalized, whereas ordinary maintenance and repair costs are expensed as
incurred. Gains or losses on disposition of assets are reflected in earnings and
the related asset costs and accumulated depreciation are removed from the
respective accounts. Depreciation is calculated by the straight-line method
based on useful lives of 30 years for buildings and improvements, 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 circumstances indicate that the carrying amount may exceed fair
value. If recoverability is deemed to be potentially impaired, recoverability is
then determined 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, 2000 and 1999, was $10.5 million
and $11.0 million, respectively. Amortization expense was $5.3 million, $2.9
million, and $1.7 million for fiscal years 2000, 1999, and 1998, respectively.
Earnings Per Share. Basic earnings per share is computed on the basis of
weighted-average common shares outstanding. Diluted earnings per share is
computed on the basis of weighted-average common shares outstanding plus common
shares contingently issuable upon the exercise of dilutive stock options.
Incremental shares for dilutive stock options, computed under the treasury stock
method, were 0, 180,000 and 316,000 in fiscal 2000, 1999 and 1998, respectively.
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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Income Taxes. The Company uses the asset and liability method of Statement
of Financial Accounting Standards ("SFAS") No. 109 to account for income taxes.
SFAS No. 109 requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial reporting basis and tax basis of assets and liabilities.
Reclassifications. Certain previously reported amounts have been
reclassified to conform to the current-year presentation.
2. RESTRUCTURING AND OTHER CHARGES
Fiscal 2000 Restructuring. During the first quarter of fiscal 2000, the Company
adopted a restructuring plan intended to effect planned synergies in connection
with its April 1999 acquisition of the Mack Printing Group ("Mack") and focus
the Company's resources on the professional communications and specialty
packaging markets. As of June 30, 2000, these actions had taken place:
. the Atlanta-based Cadmus Point of Purchase ("POP") business unit was
closed in October 1999;
. the work flows of two composition facilities in Lancaster,
Pennsylvania were substantially integrated;
. the Richmond-based marketing agency was closed in July 1999, and its
Charlotte-based agency was sold in September 1999;
. Corporate functions and overhead were consolidated, including
eliminating overhead costs associated with its Marketing
Communications Group and eliminating certain overhead within the
Professional Communications Group.
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company expects all restructuring actions to be completed by December
31, 2000.
The Company recorded restructuring charges totaling $34.1 million ($25.5
million net of taxes). Total restructuring and other charges included the write-
off of intangible assets related to the Company's point of purchase ("POP")
business of $11.1 million, the write-off of redundant manufacturing software
resulting from the integration of Mack of $6.2 million, a net gain from the
closure and divestiture of the two marketing businesses of $0.7 million, asset
write-downs of $8.5 million, involuntary termination costs of $5.3 million,
contract termination costs of $3.2 million, and other post closure shutdown
costs of $0.5 million. Involuntary termination costs relate to approximately 220
associates located within the POP business, the Professional Communications
Group, and the corporate location.
For the twelve-month period ended June 30, 2000, the Company made severance
payments totaling $4.5 million. The $2.7 million restructuring reserve at June
30, 2000, is comprised of the following: $0.8 million for involuntary
termination costs, $0.9 million for contract termination costs, and $1.0 million
for other post closure shutdown costs. The Company expects all restructuring
actions to be completed by December 31, 2000.
In May 2000, the Company announced the retirement of C. Stephenson
Gillispie, Jr. as chairman, president and chief executive officer and as a
director effective June 30, 2000. In connection with the announced retirement,
the Company effected a retirement agreement with Mr. Gillispie. The agreement
provided for salary continuation payments (including benefits), additional
retirement benefits, and certain health and welfare continuation benefits. In
addition, under the terms of the agreement, all unexercised Cadmus stock options
held by Mr. Gillispie, which totaled 244,200 shares at March 31, 2000, were
cancelled. The agreement also provides for ongoing consultation by Mr. Gillispie
and contains certain restrictive covenants which prohibit Mr. Gillispie from
competing, either directly or indirectly, with the Company or becoming a party
to any transaction which would effect a "change in control" of the Company. The
Company recorded a special charge of $2.4 million (pre-tax) in the fourth
quarter related to the items above.
Fiscal 1998 Restructuring. In 1998, the Company recorded an acquisition-related
restructuring charge of $4.0 million ($2.5 million net of tax) related to the
integration of Germersheim Inc., an Atlanta-based point of purchase display
provider, with the existing point of purchase operations.
3. ACQUISITIONS AND DIVESTITURES
1999 Acquisitions
On April 1, 1999, the Company purchased all of the outstanding stock of Melham
Holdings, Inc. ("Melham"), a Delaware corporation. Melham's operating subsidiary
was 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. The Company
financed the purchase with $66.0 million of senior bank debt, $70.0 million in
bridge financing notes issued to the prior owners of Melham, $40.0 million in
bridge financing notes issued to two banks, $6.4 million of junior subordinated
notes and approximately 1.2 million shares of the Company's common stock (valued
at approximately $16.3 million). The Company redeemed the bridge notes with
$110.0 million of the proceeds from the sale of $125.0 million of senior
subordinated notes on June 1, 1999. Mack, based in Easton, Pennsylvania, has
three production facilities in Pennsylvania and one in Maryland. (see Note 7).
The acquisition of Mack was accounted for under the purchase method, and
accordingly, the costs of the acquisition were allocated to the assets acquired
and liabilities assumed based on their respective fair values. Goodwill of
$150.8 million is being amortized by the straight-line method over 40 years. The
results of operations of Mack has been included in the Company's consolidated
results of operations since the date of acquisition.
The unaudited consolidated results of operations on a pro forma basis, as
though Mack had been acquired as of the beginning of fiscal years 1999 and 1998,
are as follows:
-----------------------------------------------------------------
(In thousands, except per share data) 1999 1998
-----------------------------------------------------------------
Net sales $560,914 $553,647
Income before extraordinary item 14,804 10,311
Net income 13,875 10,311
Earnings per share, assuming dilution:
Income before extraordinary item $ 1.61 $ 1.10
Net income 1.51 1.10
-----------------------------------------------------------------
In October 1998, the Company acquired the assets of Beacon Press, which
included printing presses, as well as electronic prepress and bindery equipment.
In February 1999, the Company acquired Dynamic Diagrams, Inc., a Web information
architecture firm, which develops visual site mapping, and graphically designs
sites for customers. In February 1999, the Company acquired certain equipment
and inventory, and assumed certain leases from Imagelink, Inc, a provider of
prepress services to the point of purchase operation. The Company paid $5.8
million for these acquisitions, consisting of approximately $5.2 million in cash
and 33,000 shares of the Company's common stock.
1999 Divestitures
On March 1, 1999, the Company sold its Charlotte-based financial communications
product line to R.R. Donnelley & Sons for a net purchase price of $32.3 million.
The sale
<PAGE>
included all of Cadmus Financial Communications' assets and operations connected
with marketing, selling and distributing mutual fund, shareholder and other SEC-
related communication services. The assets sold included certain receivables,
inventory, and machinery and equipment which were specific to the business of
marketing, selling and distribution of financial printing services, mutual fund
printing services, shareholder communications printing services, and activities
related thereto. The sale resulted in a pre-tax gain of $12.3 million. On
February 26, 1999, the Company sold its Custom Publishing business to a Boston-
based relationship marketing company owned by the former president of Custom
Publishing. In connection with this sale, the Company recorded a net pre-tax
loss of $2.8 million.
4. INVENTORIES
Inventories as of June 30, 2000 and 1999, consisted of the
following:
-----------------------------------------------------------------
(In thousands) 2000 1999
-----------------------------------------------------------------
Raw materials and supplies $ 9,171 $ 9,389
Work in process 14,894 17,485
Finished goods 1,232 3,712
-----------------------------------------------------------------
Inventories $25,297 $ 30,586
-----------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 2000 and 1999,
consisted of the following:
------------------------------------------------------------------
(In thousands) 2000 1999
------------------------------------------------------------------
Land and improvements $ 7,252 $ 7,620
Buildings and improvements 57,686 58,380
Machinery, equipment and fixtures 209,802 222,467
------------------------------------------------------------------
Total property, plant and equipment 274,740 288,467
Less: Accumulated depreciation 123,761 115,382
------------------------------------------------------------------
Property, plant and equipment, net $150,979 $173,085
------------------------------------------------------------------
The Company leases office, production and storage space, and equipment under
various noncancelable operating leases. A number of leases contain renewal
options and some contain purchase options. Certain leases require the Company to
pay utilities, taxes, and other operating expenses. Future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of June 30, 2000, are as
follows: 2001 - $7.5 million; 2002 - $5.6 million; 2003 - $4.8 million; 2004 -
$4.4 million; 2005 - $3.9 million and thereafter - $18.9 million.
Total rental expense charged to operations was $7.8 million, $6.8 million,
and $6.5 million, in fiscal 2000, 1999, and 1998, respectively. Substantially
all such rental expense represented the minimum rental payments under operating
leases.
Depreciation expense was $20.8 million, $18.1 million, $16.7 million, for
fiscal 2000, 1999, and 1998, respectively. Commitments outstanding for capital
expenditures at June 30, 2000, totaled$1.7 million.
6. OTHER BALANCE SHEET INFORMATION
Accrued expenses and other liabilities at June 30, 2000, included $12.0 million
in accrued compensation expense and $5.0 million in accrued pension liability
currently payable. Accrued expenses and other liabilities at June 30, 1999,
included $12.9 million in accrued compensation expense.
Other long-term liabilities consist principally of amounts recorded under
deferred compensation arrangements with certain executive officers and other
employees and amounts recorded under the pension and other post-retirement
benefit plans (see Note 10).
7. DEBT
Long-term debt at June 30, 2000 and 1999, consisted of the
following:
--------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------
Senior Bank Credit Facility:
Term loan facility, weighted-average
interest rate of 8.39% $ -- $ 53,750
Revolving credit facility,
weighted-average interest
rate of 8.81% 67,600 85,000
9.75% Senior Subordinated Notes,
due 2009 125,000 125,000
11.5% Subordinated Promissory
Notes, due 2010 6,415 6,415
Tax-exempt variable rate industrial
development bonds, weighted-average
interest rate of 3.49% -- 1,600
Mortgage payable, 10%, due 2002 2,608 2,640
Other 82 1,474
--------------------------------------------------------------------
Total long-term debt 201,705 275,879
Less: Current maturities of long-term debt 118 6,637
--------------------------------------------------------------------
Long-term debt $201,587 $269,242
--------------------------------------------------------------------
Senior Bank Credit Facility -- On April 1, 1999, in conjunction with the
Mack acquisition (see Note 3), the Company entered into a 200.0 million senior
bank credit agreement with a group of seven banks. The senior bank credit
facility consisted of a 55.0 million, five-year amortizing term loan facility
and a $145.0 million, five-year revolving credit facility. The proceeds from the
senior bank credit facility provided additional funding for the Mack acquisition
and replaced an existing $160.0 million credit agreement. The senior bank credit
facility is jointly
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
and severally guaranteed by each of the Company's present and future significant
subsidiaries and is secured by a pledge of the capital stock of present and
future significant subsidiaries.
A summary of the term, interest rate spreads and commitment fees for the
$200.0 million senior bank credit facility and the former $160.0 million credit
facility follows.
Former
$200 Million $160 Million
Credit Facility Credit Facility
-----------------------------------------------------------------
Term loan facility 5 Years 7 Years
Revolving credit facility 5 Years 5 Years
Interest Rate Spreads:
LIBOR Loans 1.750% - 3.250% 0.175% - 0.875%
Prime Rate Loans 0.250% - 1.250% 0.000% - 0.000%
Commitment Fee Rate 0.375% - 0.625% 0.125% - 0.300%
-----------------------------------------------------------------
The revolving credit facility under the senior bank credit facility will
terminate on March 31, 2004. The term loan facility under the senior bank credit
facility was to amortize in scheduled quarterly installments beginning in June
1999 and maturing on March 31, 2004. During the year ended June 30, 2000, the
Company repaid the outstanding balance of the term loan facility in full with
proceeds from the asset securitization program (see Note 8). Interest rates
under the senior bank credit facility are a function of either LIBOR or prime
rate. The senior bank credit facility requires the Company to pay unused
commitment fees with respect to the revolving credit facility. The unused
commitment fee rate will be determined by reference to a total debt-to-EBITDA
(earnings before interest, taxes, depreciation and amortization) ratio.
The senior bank credit facility contains certain covenants regarding the
ratio of debt-to-EBITDA, fixed charge coverage and net worth, and contains other
restrictions, including limitations of additional borrowings, and the
acquisition, disposition and securitization of assets. The Company was in
compliance with all covenants under this facility at June 30, 2000.
The expenses related to the issuance of debt are capitalized and amortized
to interest expense over the lives of the related debt. During fiscal 1999, the
Company wrote off deferred financing costs of approximately $0.4 million in the
fourth quarter of fiscal 1999 that had been capitalized in connection with the
former bank credit facility. The write-off was included in the extraordinary
item in the Consolidated Statements of Income.
Senior Subordinated Notes -- On June 1, 1999, the Company issued senior
subordinated notes in the aggregate principal amount of $125.0 million. Interest
is payable semi-annually on June 1 and December 1 of each year, beginning
December 1, 1999, at an annual rate of 9.75%. The senior subordinated notes have
no required principal payments prior to maturity on June 1, 2009. The notes
constitute unsecured senior subordinated obligations of the Company. The Company
can redeem the senior subordinated notes, in whole or in part, on or after June
1, 2004, at redemption prices which range from 100% to 104.875%, plus accrued
and unpaid interest. In addition, prior to June 1, 2002, the Company can redeem
up to 35% of the senior subordinated notes at 109.75% of the principal amount
thereof, plus accrued and unpaid interest, with the net cash proceeds from
certain common stock offerings. Each holder of the senior subordinated notes has
the right to require the Company to repurchase the notes at a purchase price of
101% of the principal amount, plus accrued and unpaid interest thereon, upon the
occurrence of certain events constituting a change of control of the Company.
The net proceeds of the senior subordinated notes were used to repay $110.0
million of bridge financing notes issued on April 1, 1999, in conjunction with
the Company's purchase of Mack Printing, with the balance of the proceeds
repaying revolving bank borrowings under the senior bank credit facility. The
senior bank credit facility repayments did not permanently reduce the
commitments thereunder. The $110.0 million of bridge financing notes consisted
of $70.0 million in bridge financing notes issued to the sellers of Mack and
$40.0 million in bridge financing notes issued to two financial institutions.
The bridge financing notes, which were issued on April 1, 1999, and repaid on
June 1, 1999, had a 10-year term with interest based on LIBOR. The repayment of
the bridge financing notes resulted in the write-off of deferred financing costs
of approximately $1.1 million in the fourth quarter of fiscal 1999. The write-
off has been included in the extraordinary item in the Consolidated Statements
of Income.
The senior subordinated notes contain certain covenants regarding the ratio
of debt-to-EBITDA and contain other restrictions, including limitations of
additional borrowings, and the acquisition, disposition and securitization of
assets. The Company was in compliance with all covenants under the senior
subordinated note indenture at June 30, 2000.
Subordinated Promissory Notes -- On April 1, 1999, in conjunction with the
Mack acquisition, the Company issued subordinated promissory notes in the
aggregate principal amount of $6.4 million to the sellers of Mack. Interest is
payable monthly on the first day of each month beginning May 1, 1999, at an
annual rate of 11.5%. The subordinated promissory notes have no required
principal payments prior to maturity on March 31, 2010. The notes are
subordinated in right of payment to the prior payment in full in cash of all of
the Company's senior and senior subordinated debt.
The Company can redeem the subordinated promissory notes, in whole or in
part, on or after March 31, 2004, at 100% of the principal amount thereof, plus
accrued interest
<PAGE>
thereon. Upon the occurrence of certain events constituting a change of control
of the Company, the Company must first satisfy the obligations under the
provisions of the senior debt agreements and then may repurchase the
subordinated promissory notes at a purchase price of 100% of the principal
amount, plus accrued interest thereon.
Other Disclosures -- The fair value of long-term debt as of June 30, 2000
and 1999, approximated their recorded values.
Maturities of long-term debt are as follows: 2001-$0.1 million; 2002-$2.6
million; 2003-$0.0 million; 2004-$67.6 million; 2005-$0.0 million;
thereafter-$131.4 million. The net book value of all encumbered properties as of
June 30, 2000 and 1999, totaled $4.0 million and $4.1 million, respectively.
The Company incurred interest expense of $23.2 million, $12.5 million,
and $8.2 million for fiscal 2000, 1999 and 1998, respectively, of which $0.2
million for 2000, $0.3 million for 1999, and $0.6 million for 1998 were
capitalized. In addition, for fiscal 1999, the Company incurred and paid $2.1
million in termination fees on certain interest rate swap agreements discussed
below. Interest paid, net of amounts capitalized, totaled $23.2 million, $10.3
million and $7.7 million for fiscal 2000, 1999 and 1998, respectively.
Hedging Arrangements -- 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 exposure 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 is 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 or fixed rate financing
to variable rate financing through the use of the aforementioned swap agreements
resulted in a reduction of interest cost of $0.5 million in fiscal 2000 and
additional interest cost of $0.8 million in fiscal 1999 and $1.3 million in
fiscal 1998.
At June 30, 2000 and 1999, the Company had two fixed-to-floating interest
rate swap agreements outstanding with an aggregate notional amount of $40.0
million. These swaps were entered into in June 2000 in conjunction with the
termination and amendment of swaps that were entered into in fiscal 1999. The
new swaps had similar terms and conditions to hedge against changes in the fair
market value of the 9.75% senior subordinated notes due in 2009. Under the terms
of this agreement, the Company receives interest payments at a fixed rate of
9.75%. The Company pays interest at a variable rate that is based on three-month
LIBOR plus a spread for each of the swap agreements. The initial term of these
swap agreements expires in fiscal 2009, and the banks have an option to
terminate the agreements in fiscal 2004. The fair value of the Company's
interest rate swap contracts (which is not recognized in the consolidated
financial statements) at June 30, 2000 and 1999, was negative $1.3 million and
zero, respectively.
At June 30, 2000 and 1999, the Company had no floating-to-fixed interest
rate swap agreements. On April 1, 1999, the Company terminated floating-to-fixed
interest rate swap agreements with an aggregate notional amount of $70.0 million
that were outstanding at June 30, 1998. In connection with the termination of
these agreements, the Company incurred a pre-tax charge of $2.1 million in the
fourth quarter of fiscal 1999 recorded as a separate line item in the
Consolidated Statements of Income.
The notional amounts and applicable rates of the Company's interest rate
swap agreements were as follows:
--------------------------------------------------------------------------------
Paid Fixed,
Received Floating
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Notional amount:
Beginning balance $ -- $88,700 $88,700
New contracts -- -- --
Expired contracts -- (18,700) --
Terminated contracts -- (70,000) --
--------------------------------------------------------------------------------
Ending Balance $ -- $ -- $88,700
--------------------------------------------------------------------------------
Paid Floating,
Received Fixed
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Notional amount:
Beginning balance $40,000 $35,000 $35,000
New contracts 40,000 40,000 --
Expired contracts -- (35,000) --
Terminated contracts (40,000) -- --
--------------------------------------------------------------------------------
Ending Balance $40,000 $40,000 $35,000
--------------------------------------------------------------------------------
Weighted-Average
Interest Rates for 2000
--------------------------------------------------------------------------------
Type of swap: Paid Received
--------------------------------------------------------------------------------
Paid fixed, received floating -- --
Paid floating, received fixed 6.15% 7.37%
--------------------------------------------------------------------------------
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 Company
continually monitors its positions and the credit rating of its counterparties
and limits the amount of agreements it enters into with any one party.
Management does not anticipate nonperformance by the counterparties; however, if
incurred, any such loss would be immaterial.
The Company was a party to an interest rate cap agreement, which the
Company terminated effective August 1999. This agreement was entered into in May
1999 to limit the Company's interest rate exposure on the $200.0 million senior
bank credit agreement. The agreement provided a cap at 5.75% on 30-day LIBOR in
notional amounts of $30.0 million for the period May 1999 to May 2000 and $22.5
million for the period May 2000 to May 2001. Upon termination of this agreement
in August 1999, the Company realized a gain of approximately $0.2 million. The
gain was offset against the remaining unamortized balance of a one-time amount
of $0.1 million paid for this agreement, the net of which is being amortized
over the original 2-year life of the agreement. The Company received payment of
the 30-day LIBOR interest rate in excess of 5.75% on the notional amount of the
agreement over the course of the agreement prior to termination.
The Company was a party to interest rate lock option agreements prior to
the issuance of the 9.75% senior subordinated notes. The aggregate notional
amount of these agreements was $90.0 million. These options were terminated in
May 1999 prior to exercise. Upon termination of these agreements, the Company
realized a gain of approximately $0.5 million that is being amortized over the
10-year life of the senior subordinated notes.
Impact of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires derivative
instruments to be recorded in the balance sheet at their fair value with changes
in fair value being recognized in earnings unless specific hedging accounting
criteria are met.
The impact of SFAS No. 133 on the Company's financial statements will
depend on a variety of factors, including, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. The Company has adopted this pronouncement for fiscal year 2001 as
of July 1, 2000, and does not believe the effects of adoption will be material
to its financial position or results of operation.
8. ASSET SECURITIZATION
The Company entered into a receivables securitization program on October 26,
1999, which was amended on May 17, 2000 to include additional receivable
portfolios and to increase the program size. Under the program, the Company
entered into an agreement to sell, on a revolving basis, certain of its accounts
receivable to a wholly-owned bankruptcy-remote 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. The program was originally limited to a maximum of $35 million;
however, the purchase limit was increased to a maximum to $55 million as a
result of adding additional receivable portfolios to the program with the May
17, 2000 amendment. These transactions are accounted for as a sale of accounts
receivable.
At June 30, 2000, $44.3 million of net 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 Company's senior bank credit
facility, including payment in full of the remaining outstanding balance of the
term loan facility in May 2000. The fees arising from the securitization
transactions of $1.5 million for the fiscal year ended June 30, 2000, are
reported as securitization costs on the Consolidated Statements of Income. These
fees vary, based on the level of receivables sold and 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. INCOME TAXES
Income tax expense (benefit), for the years ended June 30, 2000, 1999, and 1998
consisted of the following:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Current:
Federal $(2,986) $6,509 $4,069
State 1,664 1,462 1,098
--------------------------------------------------------------------------------
Total current (1,322) 7,971 5,167
--------------------------------------------------------------------------------
Deferred:
Federal 1,345 687 456
State (2,214) 182 67
--------------------------------------------------------------------------------
Total deferred (869) 869 523
--------------------------------------------------------------------------------
Income tax expense (benefit) $(2,191) $8,840 $5,690
--------------------------------------------------------------------------------
<PAGE>
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:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Computed at statutory
U.S. rate $(6,189) $7,540 $5,059
State income taxes, net
of Federal tax benefit (363) 333 341
Goodwill amortization 4,682 793 450
Research tax credit -- -- (50)
Other (321) 174 (110)
--------------------------------------------------------------------------------
Income tax expense (benefit) $(2,191) $8,840 $5,690
--------------------------------------------------------------------------------
Cash paid for income taxes totaled $3.7 million, $3.4 million, and $5.0
million, during fiscal 2000, 1999, and 1998, respectively.
The Company has state net operating loss carryforwards aggregating
approximately $81.6 million, which expire during fiscal years 2004 to 2015. A
valuation allowance of $1.0 million has been established for state net operating
loss benefits that are not expected to be realized. The valuation allowance
decreased by $0.1 million in fiscal 2000 and increased by $0.3 million in fiscal
1999.
The tax effects of the significant temporary differences that comprise the
deferred tax assets and liabilities in the consolidated balance sheets at June
30, 2000 and 1999, are as follows:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Assets:
Allowance for doubtful accounts $ 917 $ 1,180
Employee benefits 11,925 9,475
State net operating loss
carryforwards 3,171 2,221
Goodwill 1,457 1,991
Accrued restructuring costs 1,057 75
Other 3,233 6,377
--------------------------------------------------------------------------------
Gross deferred tax assets 21,760 21,319
--------------------------------------------------------------------------------
Liabilities:
Property, plant, and equipment 22,465 22,544
Other 534 584
--------------------------------------------------------------------------------
Gross deferred tax liabilities 22,999 23,128
--------------------------------------------------------------------------------
Valuation allowance 1,005 1,065
--------------------------------------------------------------------------------
Net liability $ 2,244 $ 2,874
--------------------------------------------------------------------------------
10. PENSION PLANS AND OTHER POST RETIREMENT BENEFIT PLANS
The Company maintains separate retirement plans for its associates under the
Cadmus plans and Mack plans, as a result of the April 1, 1999, acquisition of
Mack (see Note 3). It is anticipated that the Mack plans will be merged into the
Cadmus plans in fiscal 2001.
Pension Plans
The Company has defined benefit pension plans in effect that cover substantially
all employees, and participates in multiemployer retirement plans that provide
defined benefits to employees covered under collective bargaining agreements.
The Company also has in effect certain nonqualified, non-funded supplemental
pension plans for certain key executives. 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 defined benefit plans sufficient to
meet the minimum funding requirements of applicable laws and regulations.
Contributions to the multiemployer plan are generally based on a negotiated
labor contract. Contributions to the supplemental plans are provided through
charges to earnings sufficient to meet the projected benefit obligation.
Although the supplemental plans are nonfunded, the Company has acquired life
insurance contracts ($13.8 million face amount at June 30, 2000, and $14.7
million face amount at June 30, 1999) intended to be adequate to fund future
benefits. The cash surrender value of these contracts, net of policy loans,
was $0.7 million and $2.6 million at June 30, 2000 and 1999, respectively, and
is included in other assets in the Consolidated Balance Sheets. The Company's
contributions to its pension plans totaled $2.0 million, $1.3 million, and $1.8
million in fiscal 2000, 1999 and 1998, respectively.
Assets of the plans consist primarily of equity and debt securities, and
interest-bearing deposits under insurance contracts.
Post Retirement Plans
Employees of the Company under the Cadmus plans 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, coverage is available at a cost to the retiree equal to the
cost to the Company for a post-65 retiree less the fixed Company subsidy. For
those
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
employees who retired on or after April 1, 1988, but before January 1, 1994,
coverage is available until age 65. The retiree contributes the full active
rate. Upon reaching age 65, coverage under the Company's plan ceases. 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.
The Mack plans provide certain healthcare benefits for eligible retired
employees and their spouses. In addition, the Company provides fully paid life
insurance coverage with benefits ranging from $5,000 to $40,000 for retirees
under the Mack plans. The retiree healthcare plan is contributory for all
retirees who were full-time regular employees of Mack.
The following table summarizes the funded status of the plans and the
amounts recognized in the Consolidated Balance Sheets, based upon actuarial
valuations:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Post Retirement
Pension Benefits Benefits
(In thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $104,378 $ 53,258 $ 5,279 $ 337
Service cost 4,099 3,794 76 28
Interest cost 7,531 4,604 313 111
Participant contributions -- -- 202 18
Plan amendments -- -- (1,747) --
Actuarial gain (6,658) (1,842) (49) (17)
Curtailments (638) -- -- --
Special termination benefits 518 -- -- --
Settlements (45) -- -- --
Business combinations -- 46,450 -- 4,952
Benefit payments (4,697) (1,886) (552) (150)
------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $104,488 $104,378 $ 3,522 $ 5,279
------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 83,475 $ 44,860 $ -- $ --
Actual return on plan assets 4,318 (561) -- --
Employer contribution 1,742 865 552 150
Benefit payments (4,697) (1,886) (552) (150)
Settlements (45) -- -- --
Business combinations -- 40,197 -- --
------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 84,793 $ 83,475 $ -- $ --
------------------------------------------------------------------------------------------------------------------------
Funded status $(19,694) $(20,903) $(3,522) $(5,279)
Unrecognized actuarial (gain) loss 2,996 6,772 (240) (207)
Unrecognized transition obligation (984) (1,065) -- --
Unrecognized prior service cost 325 343 (1,455) --
Contribution made between measurement date
and fiscal year end 788 478 -- --
------------------------------------------------------------------------------------------------------------------------
Net liability $(16,569) $(14,375) $(5,217) $(5,486)
------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 1,309 $ 984 $ -- $ --
Accrued liability (19,118) (16,452) (5,217) (5,486)
Intangible asset 435 506 -- --
Deferred tax asset 317 211 -- --
Minimum pension liability 488 376 -- --
------------------------------------------------------------------------------------------------------------------------
Net liability $(16,569) $(14,375) $(5,217) $(5,486)
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Weighted average assumptions were as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Discount rate 7.75% 7.25% 7.25%
Rate of increase in compensation 4.5 % 3.5 % 4.5 %
Long-term rate of return on plan assets 9.75% 9.75% 9.75%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The components of net periodic benefit cost for fiscal 2000, 1999 and 1998 for
all plans were as follows:
------------------------------------------------------------------------------------------------------------------------------------
Post Retirement
Pension Benefits Benefits
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands) 2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 4,099 $ 3,794 $ 2,550 $ 76 $ 28 $ --
Interest cost 7,531 4,604 3,288 313 111 27
Expected return on plan assets (7,901) (5,194) (3,392) -- -- --
Amortization of unrecognized
transition obligation or asset (81) (81) (81) -- -- --
Prior service cost recognized 22 22 6 (291) -- --
Recognized (gains) or losses 62 56 34 (17) (16) (20)
Special termination benefits 514 -- -- -- -- --
Contributions to multiemployer plans 52 67 64 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 4,298 $ 3,268 $ 2,469 $ 81 $ 123 $ 7
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $58.9 million, $51.7 million, and $38.9 million,
respectively, as of June 30, 2000, and $58.9 million, $51.9 million, and $42.4
million, respectively, as of June 30, 1999.
For purposes of determining the cost and obligation for post retirement
medical benefits, the Company has assumed a healthcare cost trend rate of 8.0%
for fiscal 2001, gradually decreasing to 6.0 % in the year 2005 and remaining
level thereafter. A one percentage-point change in assumed healthcare cost trend
rates would have the following effects:
---------------------------------------------------------------
1-Percentage Point
(In thousands) Increase Decrease
---------------------------------------------------------------
Effect on total of service
and interest cost components $15 $(12)
Effect on post retirement
benefit obligation 59 (56)
---------------------------------------------------------------
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
provides for individual subsidiary companies to make profit-sharing
contributions. The Company's expense under this plan was $1.6 million, $1.2
million, and $1.9 million in fiscal 2000, 1999, and 1998, respectively.
11. SHAREHOLDERS' EQUITY
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.
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 outstanding.
Shares may be repurchased from time to time in the open market or through
privately negotiated transactions. As of June 30, 2000, 297,000 shares had been
repurchased at fair market value under this authorization.
On February 13, 1999, the unexercised and outstanding rights issued under
the Company's 1989 shareholder rights plan expired. In February 1999, as part of
a new shareholder rights plan, the Board of Directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of common stock. The Rights become exercisable 10 days after a
person or group announces that it has acquired 20% or more of the Company's
common stock or commences an exchange or tender offer for shares of the
Company's common stock (an "Acquiring Person"). Any time prior to the tenth day,
the Board of Directors may redeem the Rights (in whole, but
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
not in part) for $.01 per Right (subject to anti-dilution adjustments) in cash
or the equivalent in shares of common stock. At any time prior to the expiration
of the redemption period, the Board may extend the period for redemption. The
Rights are not exercisable as long as the Board retains the right to redeem
them.
If the Board does not redeem the Rights, upon the expiration of the
redemption period, each Right will entitle the holder to buy one unit (one
one-thousandth of a share) of Series A Preferred Stock ($1.00 par value) at a
purchase price of $80 per share (the "Purchase Price"), subject to anti-dilution
adjustments. Once the Rights are exercisable, Rights held by an Acquiring Person
or affiliate or associate of an Acquiring Person are null and void and cannot be
exercised or exchanged by such person or group.
Once a person or group acquires 20% or more of the Company's common stock,
each Right will entitle the holder (other than an Acquiring Person), to acquire
shares of Series A Preferred Stock (or at the option of the Company, common
stock) at a 50% discount off the prevailing market price. Once a person or group
acquires 20% or more of the Company's common stock, if the Company is
consolidated with, or merged with or into, another entity so that the Company
does not survive or shares of the Company's common stock are exchanged for
shares of the other entity, or if 50% of the Company's earnings power is sold,
each Right will entitle the holder (other than an Acquiring Person) to purchase
securities of the merging or purchasing entity at a 50% discount off the
prevailing market price.
At any time, including after a party has become an Acquiring Person, the
Company may, at its option, issue shares of common stock in exchange for all or
some of the Rights (other than rights held by an Acquiring Person) at a rate of
one share of common stock per Right, subject to anti-dilution adjustments.
Unless earlier redeemed or exchanged, the Rights will expire on February 14,
2009.
12. STOCK OPTIONS
Under the Company's stock option plans, selected employees and nonemployee
directors 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
fiscal 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
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based awards. Accordingly, since
stock options 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
compensation cost related to its stock options granted in fiscal 2000, 1999 and
1998 in accordance with the provisions of SFAS No. 123, net loss would have been
$16.7 million in fiscal 2000 (($1.85) per share), net income of $12.8 million in
fiscal 1999 ($1.53 per share, assuming dilution) and $8.4 million in fiscal 1998
($1.03 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 weighted-average assumptions for fiscal 2000, 1999 and 1998,
respectively: risk-free interest rates of 6.62%, 5.22% and 5.97% dividend yields
of 2.25%, 1.52% and 0.82% volatility factors of .4516, .340 and .340, and an
expected life of 8 years. The weighted-average fair value of options was $3.86,
$3.92 and $11.52 per option during fiscal 2000, 1999 and 1998, respectively.
<PAGE>
<TABLE>
<CAPTION>
A summary of the Company's stock option activity and related information for the
fiscal years ended June 30, 2000, 1999 and 1998 follows:
-------------------------------------------------------------------------------------------------
Weighted-Average
Number of Option Price Exercise
Shares Per Share Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Exercised (3,000) 9.75 9.75
Granted 304,000 12.88 to 20.63 13.31
Lapsed or canceled (48,000) 9.63 to 26.88 13.29
-------------------------------------------------------------------------------------------------
Outstanding at June 30, 1999 1,255,000 8.25 to 28.00 15.87
Exercised (3,000) 9.75 to 12.88 10.07
Granted 229,000 8.81 to 12.88 8.96
Lapsed or canceled (365,000) 8.25 to 28.00 16.34
-------------------------------------------------------------------------------------------------
Outstanding at June 30, 2000 1,116,000 $ 8.25 to $ 26.88 $ 14.15
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Exercisable at June 30:
1998 590,000 $ 8.25 to $ 26.88 $ 13.67
1999 752,000 8.25 to 26.88 13.56
2000 562,000 8.25 to 26.88 13.59
-------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average remaining contractual life of options outstanding at
June 30, 2000, is 7 years. At June 30, 2000, 321,192 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 options outstanding at June 30, 2000:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Weighted-
Number of Average Weighted- Weighted-
Range of Options Remaining Average Currently Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.25 to $13.25 658,000 7.4 $ 10.63 325,000 $ 10.46
14.25 to 19.19 322,000 6.2 16.27 211,000 16.91
20.63 to 28.00 136,000 7.6 26.13 26,000 25.68
-----------------------------------------------------------------------------------------------------------
</TABLE>
13. SEGMENT AND RELATED INFORMATION
During fiscal 2000, the Company was organized around two business groups: the
Professional Communications Group, serving customers who publish information,
and the Marketing Communications Group, serving customers who convey marketing
messages. The Professional Communications Group is comprised of three primary
product lines: STM journals, special interest and trade magazines, and books and
directories. The Professional Communications Group 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 compact disc based electronic archiving, electronic peer review and
online publishing. The Marketing Communications Group focuses on the creation,
production and distribution of graphic communications. Product lines include
specialty packaging, commercial printing, fulfillment and distribution services,
software duplication, and catalog design and photography.
The accounting policies for the groups are the same as those described in
Note 1. The Company primarily evaluates the performance of its operating groups
based upon operating income, excluding amortization of goodwill and
restructuring charges. Intergroup sales for fiscal 2000 and
<PAGE>
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1998 are not significant. The Company manages income taxes on a consolidated
basis.
Summarized group data for fiscal 2000, 1999, and 1998 are
as follows:
-----------------------------------------------------------------
Professional Marketing
(In thousands) Communications Communications Total
-----------------------------------------------------------------
2000
Net sales $365,043 $131,268 $496,311
Depreciation and
amortization 19,306 6,077 25,383
Operating income 51,932 1,371 53,303
Total assets 310,759 65,112 375,871
Capital expenditures 11,772 4,673 16,445
1999
Net sales $245,505 $198,360 $443,865
Sales between groups (820) -- (820)
Depreciation and
amortization 12,223 8,162 20,385
Operating income 37,123 999 38,122
Total assets 368,729 127,395 496,124
Capital expenditures 7,147 9,856 17,003
1998
Net sales $202,694 $191,129 $393,823
Depreciation and
amortization 10,135 7,751 17,886
Operating income 29,220 7,785 37,005
Total assets 137,010 138,219 275,229
Capital expenditures 8,293 23,030 31,323
-----------------------------------------------------------------
Summarized group data for fiscal 2000, 1999, and 1998
are as follows:
-----------------------------------------------------------------
(In thousands) 2000 1999 1998
-----------------------------------------------------------------
Earnings from operations:
Reportable group
operating income $53,303 $38,122 $37,005
Amortization of goodwill (5,261) (2,884) (1,731)
Unallocated shared services
and other expenses, net (5,868) (6,896) (9,337)
Restructuring and
other charges (36,544) -- (3,950)
Gain on divestitures -- 9,521 --
Interest expense and
securitization costs (24,491) (12,204) (7,601)
Interest rate swap
settlement charges -- (2,101)
Other income, net 660 498 394
-----------------------------------------------------------------
Income (loss) before
income taxes and
extraordinary item $(18,201) $24,056 $14,780
-----------------------------------------------------------------
The difference between reportable group amounts and consolidated total
amounts for assets, depreciation and amortization, and capital expenditures are
attributable to the Company's shared services division.
The Company has no foreign operations. There were no revenues from a single
external customer which amounted to 10% or more of the Company's revenues.
14. RELATED PARTIES
The Company elected the former majority shareholder of Mack to the Board of
Directors (see Note 3). As a result of the purchase of Mack, this director,
directly or indirectly through owned companies, received as consideration an
aggregate of approximately $11.2 million in cash, approximately 1.1 million
shares of the Company's common stock, $5.8 million in subordinated notes of the
Company and approximately $52.9 million in bridge financing notes of the
Company. The bridge financing notes of $52.9 million were paid in the fourth
quarter of fiscal 1999 (see Note 7). As of June 30, 2000, there was $5.9 million
in subordinated notes payable and related accrued interest payable to this
director. Interest paid on the bridge notes and the subordinated notes during
fiscal 2000 and 1999 totaled $0.7 million and $0.9 million, respectively.
15. 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, 2000 and 1999, the
Company had no significant concentrations of credit risk.
16. CONTINGENCIES
The Company is party to various legal actions which are ordinary and incidental
to its business. Additionally, in connection with divestiture actions, the
Company guaranteed certain real estate lease obligations through 2003. While the
outcome of legal actions cannot be predicted with certainty, management believes
the outcome of any of these items, or all of them combined, will not have a
materially adverse effect on its consolidated financial position or results of
operations.
<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
Communications Corporation (a Virginia corporation), and subsidiaries as of June
30, 2000 and 1999, and the related consolidated statements of income, cash flows
and shareholders' equity for each of the three years in the period ended June
30, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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
Corporation and subsidiaries as of June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Richmond, Virginia
August 2, 2000
