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Cadmus Communications Corporation
2001 Financial Information
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Contents
1 Selected Financial Data
2 Management's Discussion and Analysis
8 Selected Quarterly Data
9 Consolidated Statements of Operations
10 Consolidated Balance Sheets
11 Consolidated Statements of Cash Flows
12 Consolidated Statements of Shareholders' Equity
13 Notes to Consolidated Financial Statements
25 Report of Independent Public Accountants
26 Board of Directors & Management Team
27 Operating Locations
28 Shareholder Information
Cadmus Communications Corporation and Subsidiaries
Selected Financial Data/(2)/
The following data should be read in conjunction with the consolidated financial
statements of the Company and management's discussion and analysis that appear
elsewhere in this report.
(Dollars in thousands, except per share data) Years Ended June 30
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2001 2000 1999 1998 1997
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OPERATING DATA
Net sales (see Note 1) $ 526,290 $ 552,692 $ 493,074 $ 436,278 428,471
Cost of sales (see Note 1) 433,071 444,304 402,998 346,469 343,369
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Gross profit 93,219 108,388 90,076 89,809 85,102
Selling and administrative expenses 58,142 66,071 60,425 63,872 65,104
Restructuring and other charges, net 19,905 36,544 -- 3,950 19,699
Net gain on divestitures -- -- (9,521) -- --
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Operating income 15,172 5,773 39,172 21,987 299
Interest expense and securitization costs (see Note 8) 22,414 24,491 12,204 7,601 7,788
Interest rate swap settlement charges -- -- 2,101 -- --
Other, net (65) (517) 811 (394) (53)
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Income (loss) before income taxes and extraordinary item (7,177) (18,201) 24,056 14,780 (7,436)
Income tax expense (benefit) (687) (2,191) 9,414 5,690 (2,219)
Extraordinary loss on early extinguishment of debt, net of tax -- -- 929 -- --
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Net income (loss) $ (6,490) $ (16,010) $ 13,713 $ 9,090 (5,217)
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OPERATING DATA, BEFORE ONE-TIME ITEMS/(2)/
Operating income $ 35,077 $ 42,317 $ 29,651 $ 25,937 19,998
Income, before one-item items 6,975 10,732 10,133 11,541 7,556
EBITDA /(4)/ 61,271 68,881 49,835 44,776 38,239
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PER SHARE DATA/(3)/
Income (loss) before extraordinary item as reported $ (0.73) $ (1.78) $ 1.76 $ 1.11 (.65)
before one time items/(2)/ 0.78 1.19 1.22 1.41 .94
Net income (loss) per share as reported (0.73) (1.78) 1.65 1.11 (.65)
before one time items/(2)/ 0.78 1.19 1.22 1.41 .94
Cash dividends .20 .20 .20 .20 .20
Shareholders' equity 12.26 13.12 15.15 13.86 12.85
EBITDA /(2)/ /(4)/ 6.86 7.66 5.98 5.48 4.76
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FINANCIAL POSITION
Working capital, before impact of securitization program $ 41,840 $ 55,029 $ 60,329 $ 30,937 42,162
Property, plant and equipment, net 138,002 150,979 173,085 133,836 118,621
Goodwill and other intangibles, net 172,436 182,823 198,570 48,158 42,572
Total assets 397,428 423,184 523,846 291,752 266,916
Total debt 182,987 201,705 275,879 101,755 96,119
Total shareholders' equity 109,558 117,942 136,533 109,816 100,643
Total capital 292,545 319,647 412,412 211,571 196,762
Free cash flow/(5)/ 24,708 30,820 2,873 11,114 11,366
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SELECTED RATIOS
Gross profit margin (see Note 1) 17.7% 19.6% 18.3% 20.6% 19.9%
Operating income margin/(2)/ 6.7% 7.7% 6.0% 5.9% 4.7%
Effective tax rate/(2)/ 45.2% 41.5% 39.1% 38.5% 38.4%
Debt as a percentage of total capital 62.6% 63.1% 66.9% 48.1% 48.8%
Operating income return on average total capital/(2)/ 11.5% 11.6% 10.6% 12.7% 9.6%
Return on average shareholders' equity/(2)/ 6.1% 8.4% 8.4% 11.0% 7.2%
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OTHER DATA
Weighted-average common shares outstanding 8,938 8,990 8,336 8,176 8,035
Shares outstanding at fiscal year end 8,938 8,938 9,011 7,921 7,830
Stock market price data:
High $ 12.300 $ 15.000 $ 25.000 $ 28.000 17.750
Low 5.500 6.125 12.625 14.000 12.250
Close (at fiscal year end) 11.110 9.750 13.750 24.250 15.500
Number of associates (approximate) 3,400 3,500 4,100 3,000 3,000
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(1) Certain reclassifications were made to prior years' amounts to conform to
current year presentation. See Note 1 to consolidated financial statements.
(2) Excludes the effects of the following charges: restructuring and other
charges of $19.9 million ($13.5 million net of tax), $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 2001, 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) in fiscal
1999.
(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.
F-1
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 content management and 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 products and services.
ORGANIZATIONAL STRUCTURE
The Company is focused around its core Publication Services business, which
provides products and services to both not-for-profit and commercial publishers
in three primary product lines: STM journals, special interest and trade
magazines, and books and directories. Publication Services provides a full range
of content management, editorial, prepress, printing, warehousing, and
distribution services under the division names of Cadmus Professional
Communications, CadmusMack, and Port City Press. In addition to its core
business, the Company provides high quality specialty packaging, assembly,
fulfillment and distribution, as well as creative marketing services.
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.
All periods presented in the following analysis have been reclassified to
conform to the current year presentation.
SIGNIFICANT TRANSACTIONS
Fiscal 2001 Restructuring. The Company recorded restructuring and other charges
totaling $19.9 million ($13.5 million net of taxes) in fiscal 2001. These
charges related to the consolidation of the Company's Atlanta-based
technology-related logistics operations, the consolidation of two Richmond-based
commercial and magazine printing operations, the continued consolidation of
duplicate facilities in Publications Services, and other actions to reduce
operating costs. Restructuring and other charges for fiscal 2001 also included
$2.7 million related to the final settlement of certain post-closing
contingencies and other facility closure costs associated with the sale of the
Company's Dynamic Diagrams subsidiary. The divested and closed operations
contributed $35.9 million in sales and incurred operating losses of $3.0 million
(pre-tax) in fiscal 2001. The Company expects these restructuring actions to be
completed by mid-fiscal 2002.
Fiscal 2000 Restructuring. In fiscal 2000, the Company recorded restructuring
and other charges totaling $34.1 million ($25.5 million net of taxes). These
charges related to a restructuring plan intended to (1) effect additional
planned synergies in connection with its April 1999 acquisition of the Mack
Printing Group ("Mack") and (2) focus the Company's resources on the markets
within Publication Services and the specialty packaging market. These actions
included:
. Closing the Atlanta-based Cadmus Point of Purchase ("POP") business unit in
October 1999 ;
. Integrating the workflows of two composition facilities in Lancaster,
Pennsylvania;
. Closing the Richmond-based marketing agency in July 1999,
and divesting the Charlotte-based agency in September 1999;
. Consolidating corporate functions and overhead, including eliminating
certain overhead within Publication Services and eliminating overhead costs
associated with the former Marketing Communications group.
The divested and closed operations contributed $15.4 million in sales and
incurred operating losses of $2.3 million (pre-tax) in fiscal 2000. All fiscal
2000 restructuring actions are substantially complete. The remaining $1.3
million restructuring reserve balance for fiscal 2000 restructuring actions
consists of $0.3 million for involuntary termination costs, $0.3 million for
contract termination costs, and $0.7 million for other post closure shutdown
costs.
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, and recorded a
special charge of $2.4 million in the fourth quarter of fiscal 2000 related to
the agreement. The agreement provided for salary continuation payments
(including benefits), additional retirement benefits, and certain health and
welfare continuation benefits.
Fiscal 2000 Receivables Securitization Program. In fiscal 2000, the Company
entered into a receivables securitization program. Under the program, the
Company entered into an agreement to sell, on a revolving basis, certain of its
accounts receivable to a wholly-owned 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 up to a maximum of $55 million. These
transactions are accounted for as a sale of accounts receivable.
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 (then valued at approximately $16.3 million). Mack was a full-service
publications printer that produced a wide variety of short- to medium-run
F-2
magazines and journals, generally for customers in the mid-Atlantic and
northeast regions of the United States. The results of operations of Mack have
been included in the Company's consolidated results of operations since the date
of acquisition.
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.
RESULTS OF OPERATIONS
The following table summarizes the consolidated results of operations for the
periods indicated, as well as the percentages of categories relative to net
sales. In July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs." EITF 00-10 requires companies to classify
as revenues any shipping and handling fees billed to customers. Previously,
shipping revenues and shipping expenses were included in cost of sales. All
periods presented in the consolidated statements of operations have been
reclassified to conform to the current year presentation (see Note 1 to
Consolidated Financial Statements).
Years Ended June 30,
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(Dollars in millions) 2001 2000 1999
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Net sales (Note 1) $ 526.3 100.0% $ 552.7 100.0% $ 493.1 100.0%
Cost of sales (Note 1) 433.1 182.3 444.3 80.4 403.0 81.7
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Gross profit 93.2 17.7% 108.4 19.6% 90.1 18.3%
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Selling and administrative expenses 58.1 11.0 66.1 11.9 60.5 12.3
Restructuring and other charges 19.9 3.8 36.5 6.6 -- --
Net gain on divestitures -- -- -- -- (9.5) (1.9)
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Operating income 15.2 2.9% 5.8 1.1% 39.1 7.9%
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Interest expense 19.7 3.7 23.0 4.2 12.2 2.4
Securitization costs 2.7 0.5 1.5 0.3 -- --
Interest rate swap settlement charges -- -- -- -- 2.1 0.4
Other income, net -- -- (0.5) (0.1) 0.8 0.2
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Income (loss) before income taxes and extraordinary item (7.2) (1.3)% (18.2) (3.3)% 24.0 4.9%
Income tax expense (benefit) (0.7) (0.1) (2.2) (0.4) 9.4 1.9
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Income (loss) before extraordinary item (6.5) (1.2)% (16.0) (2.9)% 14.6 3.0%
Extraordinary loss (net of tax) -- -- -- -- 0.9 0.2
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Net income (loss) $ (6.5) (1.2)% $ (16.0) (2.9)% $ 13.7 2.8%
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Capital expenditures $ 15.9 3.0 % $ 16.5 3.0 % $ 18.5 3.8%
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Comparison of Fiscal 2001 with Fiscal 2000
Net Sales
Net sales for fiscal 2001 totaled $526.3 million, as compared to $552.7 million
in fiscal 2000. Excluding the impact of divested and closed operations, net
sales totaled $490.4 million, a 4% increase over the prior year of $470.6
million.
Publication Services (STM journals, special interest magazines, and books
and directories) sales for fiscal 2001 totaled $452.4 million, as compared to
$450.1 million in fiscal 2000. Adjusted for divested and closed operations, net
sales for Publication Services during fiscal 2001 increased 5% to $426.3 million
from $406.1 million in the prior year. This increase in sales reflected growth
in STM journal services and books and directories sales that was offset in part
by a decline in special interest magazine sales. The increase in STM journal
sales included double-digit growth in content management revenues primarily as a
result of increased total page count. The increase in professional books and
directories sales was attributable to growth from existing customers and net new
business. The decline in special interest magazine sales was primarily the
result of a reduction in advertising pages and continued softness in the U. S.
economy.
Other Services sales for fiscal 2001 totaled $73.9 million, as compared to
$102.6 million in fiscal 2000. Excluding the impact of divested and closed
operations, net sales for Other Services during fiscal 2001 declined 1% to $64.1
million from $64.5 million in the prior year. The decline in sales was
attributable to lower specialty packaging sales, resulting from an industry-wide
slowdown and reduced purchases by high-tech customers.
F-3
Cadmus Communications Corporation and Subsidiaries
Management's Discussion and Analysis (continued)
Gross Profit
Gross profit margins decreased to 17.7% for fiscal 2001 compared to 19.6% for
fiscal 2000. The margin decline was a result of additional costs associated with
certain strategic and operational initiatives in the STM journal services
division, the decline in specialty packaging sales, losses incurred in the
Company's Atlanta-based packaging logistics and Graphic Solutions operations
that have now been closed, and pricing and competitive pressures from a
consolidating customer base.
Selling and Administrative Expenses
Selling and administrative expenses expressed as a percentage of net sales
declined to 11.0% in fiscal 2001 from 11.9% in fiscal 2000. The improvement was
due to the favorable impact of fiscal 2000 and 2001 restructuring actions, lower
management incentive costs, the effects in fiscal 2001 of a one-time $1.5
million gain recognized under Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities," and a $0.9
million reduction in pension expense resulting from the demutualization of one
of the Company's pension investments.
Restructuring and Other Charges
The Company recorded restructuring and other charges totaling $19.9 million
($13.5 million net of taxes) in fiscal 2001. Total restructuring and other costs
consisted of asset write-downs of $5.5 million, the write-off of intangible
assets related primarily to the Company's Atlanta-based packaging logistics
operation totaling $4.0 million, involuntary termination costs of $3.7 million,
contract termination costs of $3.4 million, and other post-closure shutdown
costs of $0.6 million. Involuntary termination costs relate to approximately 250
employees. Year-to-date restructuring and other charges for fiscal 2001 also
included $2.7 million related to the final settlement of certain post-closing
contingencies and other facility closure costs associated with the sale of the
Company's Dynamic Diagrams subsidiary. The Company expects these restructuring
actions to be completed by mid-fiscal 2002.
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 POP
division of $11.1 million, the $6.2 million write-off of redundant manufacturing
software resulting from the integration of Mack, a $0.7 million net gain from
the closure and divestiture of the two marketing businesses, 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 related to approximately 220 associates
located within the POP division, Publication Services, and the corporate
location. All fiscal 2000 restructuring actions are substantially complete. The
remaining $1.3 million restructuring reserve balance for fiscal 2000
restructuring actions consists of $0.3 million for involuntary termination
costs, $0.3 million for contract termination costs, and $0.7 million for other
post closure shutdown costs.
The Company also recorded a special charge of $2.4 million in the fourth
quarter of fiscal 2000 related to the retirement of the Company's president and
chief executive officer.
Operating Income
Operating income was $15.2 million for fiscal 2001 compared to $5.8 million for
fiscal 2000. Excluding restructuring and other charges, operating income was
$35.1 million for fiscal 2001 compared to $42.3 million for fiscal 2000. The
decline in operating income before restructuring and other charges was primarily
the result of the following: (1) operating losses from the Company's Atlanta-
based packaging logistics and Graphic Solutions businesses that have now been
closed or consolidated with other businesses, (2) declines in special interest
magazine and specialty packaging sales, and (3) continued spending on content
management and related operational initiatives.
Interest Expense, Securitization Costs and Income Taxes
Interest expense and securitization costs totaled $22.4 million, a decrease of
$2.1 million from $24.5 million in fiscal 2000. This net decrease is a result of
lower debt levels, overall lower interest rates, and the interest rate benefit
from expansion of the Company's receivables securitization. The Company reduced
debt by $25.0 million during fiscal 2001, net of debt reduction due to the
receivables securitization program.
The Company recognized an income tax benefit at an effective tax rate of
9.6% for fiscal 2001 compared to an effective tax rate of 12.0% in fiscal 2000.
The variation in rates was primarily attributable to the impact of non-tax
deductible goodwill amortization. Excluding restructuring and other charges, the
effective tax rate for fiscal 2001 was 45.2% for fiscal 2001, compared to 41.5%
for fiscal 2000.
Comparison of Fiscal 2000 with Fiscal 1999
Net Sales
Sales for fiscal 2000 were $552.7 million, a 12% increase from sales of $493.1
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, net sales rose to $365.6 million, a 4% increase from
$350.5 million in the prior year.
Publication Services net sales increased 40% to $450.1 million during
fiscal 2000, from $321.3 million in 1999. This increase was primarily
attributable to the acquisition of Mack and net sales growth in the STM journal
services division, offset by a decline in special interest magazine sales.
Adjusted for the acquisition of Mack, net sales totaled $278.6 million in fiscal
2000, a
F-4
1% increase over $276.0 million in fiscal 1999. The relatively flat level of
sales resulted from higher than normal customer attrition in the first half of
fiscal 2000.
Other Services sales for fiscal 2000 totaled $102.6 million, as compared to
$171.8 million in fiscal 1999. The decrease was primarily due to the impact of
the divested operations. Excluding the impact of fiscal 2000 and 1999
divestitures, net sales for Other Services during fiscal 2000 increased 16.9% to
$87.1 million, from $74.5 million in 1999. The Company's specialty packaging
business recorded a 16.5% increase in sales for fiscal 2000. This increase was
due primarily to the addition of new customers and expanded volume in existing
accounts. The divested operations had sales of $15.5 million, and $97.3 million
in fiscal 2000 and 1999, respectively.
Gross Profit
Gross profit margins increased to 19.6% for fiscal 2000, compared to 18.3% for
fiscal 1999. The improvement in margins was primarily attributable to the
inclusion of Mack for the entire year in fiscal 2000, savings resulting from
restructuring actions, and higher plant utilization resulting from volume gains
and improved plant efficiencies. Partially offsetting this increase were
declines in margins for the specialty packaging and graphic solutions divisions
due to excess capacity resulting from the sale of the Company's financial
printing operations.
Selling and Administrative Expenses
Selling and administrative expenses declined to 11.9% of net sales in fiscal
2000 from 12.3% for fiscal 1999. This improvement was largely attributable to
net sales growth, the 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 and other charges totaling
$36.5 million ($26.7 million net of taxes). 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 $5.8 million for fiscal 2000 compared
to $39.1 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 divisions. Adjusted for these one-time items, operating income
rose 43% to $42.3 million, from $29.6 million in the prior 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 7.7%
of sales in fiscal 2000, compared to 6.0% 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, including the impact of 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.
The Company recognized an income tax benefit at an effective tax rate of
12.0% for fiscal 2000, compared to income tax expense at an effective rate of
39.2% for fiscal 1999. The variation in the effective tax rate is largely
attributable to the non-tax deductibility of restructuring charges associated
with the write-off of goodwill. 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.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was $36.5 million for fiscal 2001,
compared to $41.5 million for fiscal 2000. Included in cash provided by
operating activities are pension plan payments of $5.8 million in 2001 and $2.0
million in 2000, and restructuring payments of $7.4 million and $8.8 million for
each respective year. Additionally, in fiscal 2000 the Company received $2.6
million in proceeds from loans and death benefits on certain executive life
insurance policies owned by the Company. Adjusted for pension plan payments,
restructuring payments and the life insurance proceeds, net cash provided by
operating activities remained level at $49.7 million in each of fiscal years
2001 and 2000.
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 included in fiscal 2000 results 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.
F-5
Cadmus Communications Corporation and Subsidiaries
Management's Discussion and Analysis (continued)
Investing Activities
Net cash used in investing activities totaled $13.0 million in fiscal 2001.
Capital expenditures were $15.9 million and included investments in digital
prepress equipment, manufacturing equipment, and new business and manufacturing
systems. Partially offsetting these expenditures was $3.4 million in proceeds
from the sale of the Company's former POP manufacturing facility in Atlanta and
the sale of certain manufacturing equipment. During fiscal 2001, the Company
made a $3.1 million strategic investment in Xyvision Enterprise Solutions, Inc.,
a leading innovator and developer of XML content management and publishing
software. The Company also realized net proceeds of $4.2 million related to the
sale of its Dynamic Diagrams business. The Company estimates that capital
expenditures for fiscal 2002 will total approximately $20 million.
Net cash used in investing activities was $8.5 million for fiscal 2000.
Capital expenditures totaled $16.5 million and included investments primarily in
prepress and manufacturing equipment, and new business and manufacturing
systems. Proceeds from the sale of property, plant and equipment totaled $5.5
million, and related primarily to the sale of a manufacturing facility and
related equipment in the POP division. Net proceeds from the sale of the
Charlotte-based marketing agency totaled $3.7 million.
For fiscal 1999, net cash used in investing activities was $172.5 million.
Acquisitions for the year totaled $188.8 million and primarily included the
Company's purchase of Mack. Partially offsetting the impact of acquisitions was
the receipt of net proceeds totaling $32.3 million from the sale of the
financial communications and custom publishing divisions. 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.
Financing Activities
Net cash used in financing activities was $26.8 million for fiscal 2001. Short-
term borrowings and cash provided by operating activities were used to fund
working capital requirements, to pay down $25.0 million in debt (including the
impact of the securitization program), and to fund $1.8 million in dividend
payments.
On June 21, 2001, the Company entered into a $105.0 million amended and
restated senior bank credit agreement with a group of seven banks. The amended
revolving credit agreement amended and restated the Company's April 1, 1999,
senior bank credit agreement which originally consisted of a $55.0 million,
five-year amortizing term loan facility and a $145.0 million, five-year
revolving credit facility. The amended and restated senior bank credit facility
agreement, which limits the Company's revolving credit availability to $78.0
million, can be increased to $105.0 million with the approval of banks having at
least two-thirds of the aggregate commitment. The facility is secured by
substantially all of the Company's real, personal, and mixed property, is
jointly 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.
The amended and restated senior bank credit facility will terminate on
March 31, 2004. The original 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 to Consolidated
Financial Statements).
At June 30, 2001 and 2000, approximately $38.0 million and $44.3 million,
respectively, of net accounts receivable had been sold under the accounts
receivable securitization program and reflected as a reduction of accounts
receivable.
Net cash used in 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 (net of the
securitization program), and to fund $1.8 million in dividend payments.
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 $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 this agreement provided additional funding for the
Mack acquisition and replaced an existing $160.0 million credit agreement, which
consisted of a $40.0 million term loan facility and a $120.0 million revolving
credit facility, entered into in October 1996. 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
included the repurchase of shares of common stock for $3.9 million, and dividend
payments of $1.6 million.
F-6
Total debt at June 30, 2001, was $183.0 million, down from $201.7 million
at June 30, 2000. The Company's debt-to-total capital ratio was 62.6% at June
30, 2001, down from 63.1% at June 30, 2000, primarily due to the reduction in
overall debt levels offset by the impact on equity resulting from restructuring
charges recognized in fiscal 2001.
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 July 1, 2000, the Company had two fixed-to-floating interest rate swap
agreements which, when adjusted to fair value, resulted in a gain of $0.8
million in the first quarter of fiscal 2001. In the second quarter of fiscal
2001, the Company recorded an additional gain of $0.7 million to adjust to fair
value. The Company terminated all of its interest rate swap agreements in the
second quarter of fiscal 2001. Additional information on the Company's hedging
arrangements is provided in Note 7 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 overall economic environment in North America, (2) the ability of the
Company to develop and market new capabilities and services to take advantage of
changes in the STM journals publishing process and the Company's content
management business, (3) continuing competitive pricing in the markets in which
the Company competes, (4) the gain or loss of significant customers or the
decrease in demand from existing customers, (5) the ability of the Company to
continue to obtain improved efficiencies and lower overall production costs, (6)
changes in the Company's product sales mix, (7) the impact of industry
consolidation among key customers, (8) the ability to successfully complete
certain consolidation initiatives and effect other restructuring actions, and
(9) the ability of the Company to operate profitably and effectively with high
levels of indebtedness. 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.
F-7
Cadmus Communications Corporation and Subsidiaries
Selected Quarterly Data (unaudited)/(1)/
(In thousands, except per share data) 2001 Quarters Ended
--------------------------------------------------------------------------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
--------------------------------------------------------------------------------------------------------------------------------
Net sales (see Note 1) $ 128,742 $ 140,180 $ 135,617 $ 121,751
Gross profit 24,850 24,438 22,880 21,051
Net income (loss) 2,251 1,860 (9,544) (1,057)
Per share data:/(2)/
Net income (loss) .25 .21 (1.07) (.12)
Cash dividends .05 .05 .05 .05
Operating data, before one-time items:/(3)/
Operating income 10,524 10,552 7,030 6,971
Income 2,694 2,824 504 953
EBITDA/(4)/ 17,202 17,102 13,674 13,293
Free cash flow/(5)/ 2,333 (2,385) 13,231 11,529
Income per share/(2)/ .30 .32 .06 .11
EBITDA per share/(4)/ 1.92 1.91 1.53 1.49
Stock market price data:
High $ 9.875 $ 9.125 $ 11.125 $ 12.300
Low 7.375 5.500 7.000 8.375
Close 8.125 9.125 10.625 11.110
2000 Quarters Ended
--------------------------------------------------------------------------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
--------------------------------------------------------------------------------------------------------------------------------
Net sales (see Note 1) $ 138,929 $ 146,322 $ 135,533 $ 131,908
Gross profit 26,060 28,456 27,708 26,164
Net income (loss) (12,633) (7,269) 1,849 2,043
Per share data:/(2)/
Net income (loss) (1.40) (0.81) .21 .23
Cash dividends .05 .05 .05 .05
Operating data, before one-time items:/(3)/
Operating income 8,513 11,001 11,301 11,502
Income 1,512 2,680 3,246 3,294
EBITDA/(4)/ 15,540 17,123 18,122 18,096
Free cash flow/(5)/ 12,736 (2,270) 16,224 4,130
Income per share/(2)/ .17 .30 .36 .37
EBITDA per share/(4)/ 1.72 1.90 2.02 2.02
Stock market price data:
High $ 15.000 $ 12.750 $ 10.125 $ 10.875
Low 8.000 6.125 6.375 6.750
Close 11.125 8.500 8.875 9.750
--------------------------------------------------------------------------------------------------------------------------------
(1) Certain reclassifications were made to prior years' amounts to conform to
current year presentation. See Note 1 to Consolidated Financial Statements.
(2) Income per share data assumes dilution.
(3) Excludes the effects of restructuring and other charges of $19.9 million
($13.5 million net of tax) and $36.5 million ($26.7 million net of tax) in
fiscal 2001 and 2000, respectively.
(4) Earnings before interest, taxes, depreciation, amortization and
securitization costs.
(5) Net cash flow before financing activities, exclusive of restructuring
related items, business acquisitions, and business divestitures.
F-8
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data) Years Ended June 30
--------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
Net sales (Note 1) $ 526,290 $ 552,692 $ 493,074
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of sales (Note 1) 433,071 444,304 402,998
Selling and administrative 58,142 66,071 60,425
Restructuring and other charges 19,905 36,544 --
Net gain on divestitures -- -- (9,521)
--------------------------------------------------------------------------------------------------------------------------------
511,118 546,919 453,902
--------------------------------------------------------------------------------------------------------------------------------
Operating income 15,172 5,773 39,172
--------------------------------------------------------------------------------------------------------------------------------
Interest and other expenses:
Interest 19,666 23,002 12,204
Securitization costs (Note 8) 2,748 1,489 --
Interest rate swap settlement charges (Note 7) -- -- 2,101
Other, net (65) (517) 811
--------------------------------------------------------------------------------------------------------------------------------
22,349 23,974 15,116
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item (7,177) (18,201) 24,056
Income tax expense (benefit) (687) (2,191) 9,414
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (6,490) (16,010) 14,642
Extraordinary loss on early extinguishment
of debt (net of income tax benefit of $574) -- -- 929
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (6,490) $ (16,010) $ 13,713
--------------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic:
Income (loss) before extraordinary item $ (.73) $ (1.78) $ 1.79
Extraordinary loss on early extinguishment of debt -- -- (.11)
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (.73) $ (1.78) $ 1.68
--------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 8,938 8,990 8,156
--------------------------------------------------------------------------------------------------------------------------------
Earnings per share - diluted:
Income (loss) before extraordinary item $ (.73) $ (1.78) $ 1.76
Extraordinary loss on early extinguishment of debt -- -- (.11)
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (.73) $ (1.78) $ 1.65
================================================================================================================================
Weighted-average common shares outstanding, assuming dilution 8,938 8,990 8,336
================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-9
Cadmus Communications Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data) At June 30
---------------------------------------------------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 3,130 $ 6,411
Accounts receivable, less allowance for doubtful
accounts ($1,741 in 2001 and $2,347 in 2000) (Note 8) 33,662 31,992
Inventories 24,863 25,297
Deferred income taxes 5,690 4,882
Prepaid expenses and other 5,922 7,926
---------------------------------------------------------------------------------------------------------------------------------
Total current assets 73,267 76,508
---------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 138,002 150,979
Goodwill and other intangibles, net 172,436 182,823
Other assets 13,723 12,874
---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 397,428 $ 423,184
---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 2,572 $ 118
Accounts payable 28,021 28,467
Accrued expenses and other current liabilities 32,580 34,490
Restructuring reserve 6,253 2,704
---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 69,426 65,779
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 180,415 201,587
Other long-term liabilities 29,823 30,750
Deferred income taxes 8,206 7,126
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 287,870 305,242
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.50 par value; authorized shares-16,000,000;
issued and outstanding shares - 8,938,000 in 2001 and 2000) 4,469 4,469
Capital in excess of par value 67,363 67,363
Retained earnings 38,319 46,598
Accumulated other comprehensive loss (593) (488)
---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 109,558 117,942
---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 397,428 $ 423,184
---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-10
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands) Years Ended June 30
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (6,490) $ (16,010) $ 13,713
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 26,129 26,047 20,995
Restructuring and other charges 19,905 36,544 --
Net gain on divestitures -- -- (9,521)
Other, net 1,306 (857) 2,137
-----------------------------------------------------------------------------------------------------------------------------------
40,850 45,724 30,354
-----------------------------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities, excluding
debt and effects of acquisitions:
Accounts receivable, excluding effects of securitization 3,598 12,536 (5,892)
Inventories (29) 4,513 1,988
Accounts payable and accrued expenses 2,086 (15,522) (6,023)
Restructuring reserve (due to cash payments) (7,401) (8,815) (2,071)
Other current assets 1,827 2,419 530
Other long-term liabilities (due to pension plan payments) (5,795) (2,021) (1,277)
Other, net 1,355 2,692 766
-----------------------------------------------------------------------------------------------------------------------------------
(4,359) (4,198) (11,979)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 36,491 41,526 18,375
-----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (15,911) (16,484) (18,506)
Proceeds from sales of property, plant and equipment 3,355 5,495 2,426
Payments for businesses acquired -- -- (188,834)
Investment in unconsolidated businesses (3,132) -- --
Net proceeds from sale of divested businesses 4,207 3,683 32,320
Other, net (1,484) (1,242) 140
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,965) (8,548) (172,454)
-----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from (repayment of) short-term borrowings, net -- -- (2,100)
Proceeds from (net payments on) receivables securitization program (6,300) 44,300 --
Proceeds from long-term borrowings -- -- 61,415
Proceeds from long-term revolving credit facility -- -- 100,000
Proceeds from bridge loans -- -- 110,000
Repayment of long-term borrowings (118) (1,424) (38,692)
Repayment of long-term revolving credit facility (18,600) (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 (1,789) (1,795) (1,633)
Repurchase and retirement of common stock -- -- (3,864)
Proceeds from exercise of stock options -- 34 29
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (26,807) (31,635) 159,147
-----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,281) 1,343 5,068
Cash and cash equivalents at beginning of year 6,411 5,068 --
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,130 $ 6,411 $ 5,068
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-11
Cadmus Communications Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Capital in Other
Par Excess of Retained Comprehensive
(In thousands) Shares Value Par Value Earnings Income (Loss) Total
------------------------------------------------------------------------------------------------------------------------------
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
net of $235 in deferred taxes -- -- -- -- (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
net of $112 in deferred taxes -- -- -- -- (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
Net loss -- -- -- (6,490) -- (6,490)
Change in minimum pension liability,
net of $55 in deferred taxes -- -- -- -- (105) (105)
----------
Comprehensive loss (6,595)
----------
Cash dividends - $.20 per share -- -- -- (1,789) -- (1,789)
------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 8,938 $ 4,469 $ 67,363 $ 38,319 $ (593) $ 109,558
==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-12
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation. The consolidated financial statements include the
accounts and operations of Cadmus Communications Corporation and Subsidiaries
(the "Company"), a Virginia corporation. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Nature of Operations. Headquartered in Richmond, Virginia, Cadmus Communications
Corporation provides integrated graphic communications services to professional
publishers, not-for-profit societies, and corporations. The Company is focused
around its core Publication Services business, which provides products and
services to both not-for-profit and commercial publishers in three primary
product lines: STM journals, special interest and trade magazines, and books and
directories. Publication Services provides a full range of content management,
editorial, prepress, printing, reprinting, warehousing and distribution services
under the division names of Cadmus Professional Communications, CadmusMack, and
Port City Press. In addition to its core business, the Company provides high
quality specialty packaging, assembly, fulfillment and distribution, as well as
creative marketing services. Cadmus is the largest provider of content
management and production services to STM journal publishers in the world, the
fourth largest publications printer in North America, and a leading national
provider of specialty packaging products and services.
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.
Shipping and Handling Fees. In July 2000, the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board reached a consensus on
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF 00-10
requires companies to classify as revenues any shipping and handling fees billed
to customers. Previously, shipping and postage revenues and shipping and postage
expenses were included in cost of sales. All periods presented in the
Consolidated Statements of Operations have been reclassified to conform to the
current year presentation. The adoption of this standard increased net sales and
cost of sales by approximately $53.2 million, $56.4 million and $50.0 million
for 2001, 2000 and 1999, respectively.
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, 2001 and 2000, was $11.6 million and $10.5
million, respectively. Amortization expense was $5.1 million, $5.3 million, and
$2.9 million for fiscal years 2001, 2000, and 1999, respectively.
On June 30, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" which significantly changed the accounting for goodwill and
intangible assets. SFAS No. 142 requires the following:
. Goodwill is no longer amortized over its estimated useful life. Rather,
goodwill will be subject to at least an annual assessment for impairment by
applying a fair-value-based test. Annual goodwill impairment losses will be
classified as a component of income from continuing operations.
. Acquired intangible assets should be separately recognized if the benefit
of the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. A
recognized intangible asset shall be amortized over its useful life.
The Company is currently evaluating the impact of adopting the new
pronouncement effective July 1, 2001. Impairment losses, if any, recognized as a
result of the transitional goodwill impairment test will be recognized as the
effect of a change in accounting principle.
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 in fiscal 2001 and 2000, and 180,000 in fiscal 1999.
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.
F-13
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 2001 Restructuring. The Company recorded restructuring and other charges
totaling $19.9 million ( $13.5 million net of taxes) in fiscal 2001. These
charges related to the consolidation of the Company's Atlanta-based
technology-related logistics operations, the consolidation of two Richmond-based
commercial and magazine printing operations, the continued consolidation of
duplicate facilities in the Publications Services segment, and other actions to
reduce operating costs. Total restructuring and other costs consisted of asset
write-downs of $5.5 million, the write-off of intangible assets related
primarily to the Company's Atlanta-based packaging logistics operation totaling
$4.0 million, involuntary termination costs of $3.7 million, contract
termination costs of $3.4 million and other post-closure shutdown costs of $0.6
million. Involuntary termination costs relate to approximately 250 employees.
Year to date restructuring and other charges for fiscal 2001 also included $2.7
million related to the final settlement of certain post-closing contingencies
and other facility closure costs associated with the sale of the Company's
Dynamic Diagrams subsidiary. The Company expects these restructuring actions to
be completed by mid-fiscal 2002.
The $6.3 million restructuring reserve at June 30, 2001 is comprised of the
following from the fiscal 2001 and fiscal 2000 restructuring actions: $2.3
million for involuntary termination costs for approximately 200 associates, $2.7
million for contract termination costs, and $1.3 million for other post closure
shutdown costs. For the twelve-month period ended June 30, 2001, the Company
made severance payments totaling $2.7 million to approximately 250 associates.
Fiscal 2000 Restructuring. During the first quarter of fiscal 2000, the Company
adopted a restructuring plan intended to (1) effect additional planned synergies
in connection with its April 1999 acquisition of the Mack Printing Group
("Mack"), and (2) focus the Company's resources on the markets within the
Publication Services segment and the specialty packaging market. These actions
included:
. Closing the Atlanta-based Cadmus Point of Purchase ("POP") business unit in
October 1999.
. Integrating the workflows of two composition facilities in Lancaster,
Pennsylvania.
. Closing the Richmond-based marketing agency in July 1999, and divesting the
Charlotte-based agency in September 1999.
. Consolidating corporate functions and overhead, including eliminating
certain overhead within the Publication Services segment and eliminating
overhead costs associated with the former Marketing Communications group.
The Company recorded restructuring charges totaling $34.1 million ($25.5
million net of taxes) in fiscal 2000. Total restructuring and other charges
included the write-off of intangible assets related to the Company's POP
business of $11.1 million, the write-off of redundant manufacturing software
resulting from the integration of Mack of $6.2 million, 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 related to approximately
220 associates located within the POP business, the former Professional
Communications Group, and the corporate location. All fiscal 2000 restructuring
actions are substantially complete. The remaining $1.3 million restructuring
reserve balance for fiscal 2000 restructuring actions consists of $0.3 million
for involuntary termination costs, $0.3 million for contract termination costs,
and $0.7 million for other post closure shutdown costs.
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
retirements, 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 provided 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 in the fourth quarter of
fiscal 2000 related to the items above.
3. ACQUISITIONS AND DIVESTITURES
2001 Divestitures. On September 29, 2000, the Company sold its Dynamic Diagrams
division. Dynamic Diagrams provided web design and online content services to
corporations and STM journal publishers. Net proceeds from the sale totaled
approximately $4.2 million resulting in a pre-tax loss of $2.7 million.
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 produced 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
F-14
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 (then 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 have 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 year 1999, are as
follows:
-------------------------------------------------------------------------
(In thousands, except per share data) 1999
-------------------------------------------------------------------------
Net sales $ 610,941
Income before extraordinary item 14,804
Net income 13,875
Earnings per share, assuming dilution:
Income before extraordinary item $ 1.61
Net income 1.51
-------------------------------------------------------------------------
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 developed visual site mapping, and graphically designed
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 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
distributing financial printing services, mutual fund printing services,
shareholder communications printing services, and activities related thereto.
The sale resulted in a pretax 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 pretax loss of $2.8
million.
4. INVENTORIES
Inventories as of June 30, 2001 and 2000, consisted of the following:
-------------------------------------------------------------------------
(In thousands) 2001 2000
-------------------------------------------------------------------------
Raw materials and supplies $ 9,772 $ 9,171
Work in process 13,613 14,894
Finished goods 1,478 1,232
-------------------------------------------------------------------------
Inventories $ 24,863 $ 25,297
-------------------------------------------------------------------------
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of June 30, 2001 and 2000, consisted of the
following:
-------------------------------------------------------------------------
(In thousands) 2001 2000
-------------------------------------------------------------------------
Land and improvements $ 6,961 $ 7,252
Buildings and improvements 55,437 57,686
Machinery, equipment and fixtures 205,267 209,802
-------------------------------------------------------------------------
Total property, plant and equipment 267,665 274,740
Less: Accumulated depreciation 129,663 123,761
-------------------------------------------------------------------------
Property, plant and equipment, net $ 138,002 $ 150,979
-------------------------------------------------------------------------
As of June 30, 2001, the Company had granted liens on and security
interests in substantially all of the Company's real, personal, and mixed
property in connection with its senior bank credit facility.
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 as of June 30, 2001 are as follows: 2002 - $7.3
million; 2003 - $5.7 million; 2004 - $4.8 million; 2005 - $4.1 million; 2006 -
$3.3 million and thereafter -$15.0 million.
Total rental expense charged to operations was $7.8 million, $7.8 million,
and $6.8 million, in fiscal 2001, 2000, and 1999, respectively. Substantially
all such rental expense represented the minimum rental payments under operating
leases.
F-15
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Depreciation expense was $21.1 million, $20.8 million, $18.1 million, for
fiscal 2001, 2000, and 1999, respectively. Commitments outstanding for capital
expenditures at June 30, 2001, totaled $4.8 million.
6. OTHER BALANCE SHEET INFORMATION
Accrued expenses and other liabilities at June 30, 2001 included $14.3 in
accrued compensation expense. Accrued expenses and other liabilities at June 30,
2000 included $12.0 in accrued compensation expense and $5.0 million in accrued
pension liability currently payable.
Other long-term liabilities consist principally of amounts recorded under
deferred compensation arrangements with certain executive officers and other
employees and amounts recorded under the pension and other postretirement
benefit plans (see Note 10).
7. DEBT
Long-term debt at June 30, 2001 and 2000 consisted of the following:
-----------------------------------------------------------------------------
(In thousands) 2001 2000
-----------------------------------------------------------------------------
Senior Bank Credit Facility:
Revolving credit facility,
weighted-average
interest rate of 8.91% $ 49,000 $ 67,600
9.75% Senior Subordinated Notes,
due 2009 125,000 125,000
11.5% Subordinated Promissory Notes,
due 2010 6,415 6,415
Mortgage payable, 10%, due 2002 2,572 2,608
Other -- 82
-----------------------------------------------------------------------------
Total long-term debt 182,987 201,705
Less: Current maturities of long-term debt 2,572 118
-----------------------------------------------------------------------------
Long-term debt $ 180,415 $ 201,587
-----------------------------------------------------------------------------
Senior Bank Credit Facility. On June 21, 2001, the Company entered into a $105.0
million amended and restated senior bank credit agreement with a group of seven
banks. The amended revolving credit agreement amended and restated the Company's
April 1, 1999, senior bank credit agreement which originally consisted of a
$55.0 million, five-year amortizing term loan facility, and a $145.0 million,
five-year revolving credit facility. The amended and restated senior bank credit
facility agreement, which limits the Company's revolving credit availability to
$78.0 million, can be increased to $105.0 million with the approval of banks
having at least two-thirds of the aggregate commitment. The facility is secured
by substantially all of the Company's real, personal and mixed property, is
jointly 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 interest rate spreads and commitment fees for the amended
and restated $105.0 million senior bank credit facility follows.
--------------------------------------------------------------------------------
Interest Rate Spreads:
LIBOR Loans 1.750% - 3.250%
Prime Rate Loans 0.250% - 1.250%
Commitment Fee Rate 0.375% - 0.625%
--------------------------------------------------------------------------------
Applicable interest rate spreads paid by the Company will fluctuate, within
the ranges above, based upon the Company's performance as measured by the total
debt-to-EBITDA ratio.
The amended and restated senior bank credit facility will terminate on
March 31, 2004. The original 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 is 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, 2001.
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 a
former bank credit facility. The write-off was included in the extraordinary
item in the Consolidated Statements of Operations.
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 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
F-16
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 Operations.
The senior subordinated notes contain certain covenants regarding the ratio
of EBITDA-to-interest expense 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, 2001.
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 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 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, 2001 and 2000
was $175.2 million and $190.5 million, respectively
Maturities of long-term debt are as follows: 2002- $2.6 million; 2003 -$0.0
million; 2004 - $49.0 million; 2005 - $0.0 million; 2006 - $0.0; thereafter -
$131.4 million. As of June 30, 2001, the Company had granted liens on and
security interests in substantially all of the Company's real, personal, and
mixed property in connection with its senior bank credit facility. As of June
30, 2000, the net book value of all encumbered properties totaled $4.0 million.
The Company incurred interest expense of $19.9 million, $23.2 million, and
$12.5 million for fiscal 2001, 2000, and 1999, respectively, of which $0.2
million for 2001, $0.2 million for 2000, and $0.3 million for 1999 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 $19.1 million, $23.2
million, and $10.3 million for fiscal 2001, 2000, and 1999, 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 each period and 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 $0.1
million and $0.5 million in fiscal 2001 and 2000, respectively, and additional
interest cost of $0.8 million in fiscal 1999.
At June 30, 2001, the Company had no fixed-to-floating interest rate swap
agreements outstanding. In December 2000, the Company terminated the two fixed-
to-floating interest rate swap agreements that had been outstanding at June 30,
2000, 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
received interest payments at a fixed rate of 9.75%. The Company paid interest
at a variable rate that is based on three-month LIBOR plus a spread for each of
the swap agreements. 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.
F-17
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
At June 30, 2001 and 2000, 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 pretax charge of $2.1 million in the
fourth quarter of fiscal 1999 recorded as a separate line item in the
Consolidated Statements of Operations.
The notional amounts and applicable rates of the Company's interest rate
swap agreements were as follows:
Paid Fixed,
Received Floating
--------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
--------------------------------------------------------------------------------
Notional amount:
Beginning balance $ -- $ -- $ 88,700
New contracts -- -- --
Expired contracts -- -- (18,700)
Terminated contracts -- -- (70,000)
--------------------------------------------------------------------------------
Ending Balance $ -- $ -- $ --
================================================================================
Paid Floating,
Received Fixed
--------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
--------------------------------------------------------------------------------
Notional amount:
Beginning balance $ 40,000 $ 40,000 $ 35,000
New contracts -- 40,000 40,000
Expired contracts -- -- (35,000)
Terminated contracts (40,000) (40,000) --
--------------------------------------------------------------------------------
Ending Balance $ -- $ 40,000 $ 40,000
================================================================================
Weighted-Average
Interest Rates for 2001
--------------------------------------------------------------------------------
Type of swap: Paid Received
--------------------------------------------------------------------------------
Paid floating, received fixed 9.50% 9.75%
================================================================================
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. Effective July 1, 2000, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative financial
instruments. The statement requires recognition of derivatives to be recorded in
the balance sheet at their fair value, and gains and losses resulting from
changes in the value of derivatives to be recognized through earnings unless
specific hedging criteria are met. At July 1, 2000, the Company had two
fixed-to-floating interest rate swap agreements which, when adjusted to fair
value, resulted in a gain of $0.8 million in the first quarter of fiscal 2001.
In the second quarter of fiscal 2001, the Company recorded an additional gain of
$0.7 million to adjust to fair value. The Company terminated all of its interest
rate swap agreements in the second quarter of fiscal 2001.
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 purchase limit of the program is $55 million. These transactions
are accounted for as a sale of accounts receivable. Under the terms of the
program, billings within these portfolios provide new receivables that are added
to the pool and collections reduce previously sold receivables. The Company
settles the net change each month with the unrelated third party purchaser.
At June 30, 2001 and 2000, approximately $62.0 million and $64.7 million,
respectively, of accounts receivable had been sold to the wholly-owned,
bankruptcy-remote subsidiary. At June 30, 2001 and 2000, approximately $38.0
million and $44.3 million, respectively, of net accounts receivable had been
sold by the wholly-owned, bankruptcy-remote subsidiary to the unrelated third
party purchaser 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 Company had a
subordinated interest in these accounts receivables of approximately $22.8
million and $19.7 million recorded on the balance sheet as of June 30, 2001 and
2000, respectively. In
F-18
addition, the Company had a receivable from the unrelated third party purchaser
of approximately $1.2 million and $0.7 million as of June 30, 2001 and 2000,
respectively. The retained interest in the accounts receivable sold are valued
at the carrying amount of the retained accounts receivable net of applicable
allowances for doubtful accounts, which approximates fair value.
The Company retains servicing responsibilities for all of the accounts
receivable, including those sold to the unrelated third party purchaser. The
Company does not receive fees for this service from the unrelated third party
and has no servicing asset or liability recorded. The fees arising from the
securitization transactions of $2.7 million and $1.5 million in fiscal 2001 and
2000, respectively, are reported as securitization costs on the Consolidated
Statements of Operations. 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, 2001, 2000, and 1999
consisted of the following:
--------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
--------------------------------------------------------------------------------
Current:
Federal $ (560) $ (2,986) $ 6,509
State 650 1,664 1,462
--------------------------------------------------------------------------------
Total current 90 (1,322) 7,971
--------------------------------------------------------------------------------
Deferred:
Federal 351 1,345 687
State (1,128) (2,214) 182
--------------------------------------------------------------------------------
Total deferred (777) (869) 869
--------------------------------------------------------------------------------
Income tax expense (benefit) $ (687) $ (2,191) $ 8,840
--------------------------------------------------------------------------------
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) 2001 2000 1999
--------------------------------------------------------------------------------
Computed at statutory U.S. rate $ (2,440) $ (6,189) $ 7,540
State income taxes, net of
Federal tax benefit (837) (363) 333
Goodwill amortization 2,642 4,682 793
Other (52) (321) 174
--------------------------------------------------------------------------------
Income tax expense (benefit) $ (687) $ (2,191) $ 8,840
--------------------------------------------------------------------------------
Cash paid for income taxes totaled $1.4 million, $3.7 million, and $3.4
million, during fiscal 2001, 2000, and 1999, respectively.
The Company has state net operating loss carryforwards aggregating
approximately $67.1 million, which expire during fiscal years 2004 to 2021. A
valuation allowance of $1.1 million has been established for state net operating
loss benefits that are not expected to be realized. The valuation allowance
increased by $0.1 million in fiscal 2001, and decreased by $0.1 million in
fiscal 2000.
The tax effects of the significant temporary differences that comprise the
deferred tax assets and liabilities in the consolidated balance sheets at June
30, 2001 and 2000, are as follows:
-----------------------------------------------------------------------------
(In thousands) 2001 2000
-----------------------------------------------------------------------------
Assets:
Allowance for doubtful accounts $ 681 $ 917
Employee benefits 10,580 11,925
State net operating loss carryforwards 4,883 3,171
Goodwill -- 1,457
Accrued restructuring costs 2,707 1,057
Other 2,933 3,233
-----------------------------------------------------------------------------
Gross deferred tax assets 21,784 21,760
-----------------------------------------------------------------------------
Liabilities:
Goodwill 727 --
Property, plant, and equipment 20,801 22,465
Other 1,672 534
-----------------------------------------------------------------------------
Gross deferred tax liabilities 23,200 22,999
-----------------------------------------------------------------------------
Valuation allowance 1,100 1,005
-----------------------------------------------------------------------------
Net liability $ 2,516 $ 2,244
-----------------------------------------------------------------------------
10. PENSION PLANS AND OTHER POST RETIREMENT
BENEFIT PLANS
Effective January 1, 2001, the Mack Printing Company Pension Plan was merged
into the Cadmus Pension Plan. The Company maintains separate post retirement
benefit plans (medical and life insurance) for certain of its Cadmus and former
Mack employees.
Pension Plans. The Company has defined benefit pension plans in effect that
cover eligible employees, and participates in one multi-employer retirement plan
that provides defined benefits to employees covered under a collective
bargaining agreement. The Company also has in effect certain nonqualified,
nonfunded 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 multi-employer 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 ( $16.1 million face amount at June 30, 2001 and $13.8
million face amount at June 30, 2000) intended to be adequate to fund future
benefits. The cash surrender value of these contracts, net of policy loans, was
$0.8 million and $0.7 million at June 30, 2001 and 2000, respectively, and is
included in other assets in the consolidated balance sheets. The Company's
contributions to its pension
F-19
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
plans totaled $5.8 million, $2.0 million, and $1.3 million in fiscal 2001, 2000,
and 1999, respectively.
In fiscal 2001, the Company recognized a $0.9 million reduction in pension
expense resulting from the demutualization of one of the Company's pension
investments.
Assets of the plans consist primarily of equity and debt securities, and
interest-bearing deposits under insurance contracts.
Post Retirement Benefit Plans. Eligible Cadmus (non-Mack) employees of the
Company are eligible for retiree medical coverage for themselves and their
spouses 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 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 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.
Eligible Mack employees of the Company are eligible for retiree health care
benefits for themselves and their spouses. In addition, the Company provides
fully paid life insurance coverage with benefits ranging from $5,000 to $40,000
for certain Mack retirees. The retiree health care 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:
-----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Post Retirement Benefits
(In thousands) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 104,488 $ 104,378 $ 3,522 $ 5,279
Service cost 4,337 4,099 11 76
Interest cost 8,012 7,531 259 313
Participant contributions -- -- 349 202
Plan amendments 343 -- -- (1,747)
Actuarial (gain) loss 1,608 (6,658) 346 (49)
Curtailments -- (638) -- --
Special termination benefits -- 518 -- --
Settlements -- (45) -- --
Benefit payments (4,793) (4,697) (777) (552)
-----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 113,995 $ 104,488 $ 3,710 $ 3,522
-----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 84,793 $ 83,475 $ -- $ --
Actual return on plan assets 3,140 4,318 -- --
Employer contribution 6,502 1,742 777 552
Insurance demutualization 897 -- -- --
Benefit payments (4,793) (4,697) (777) (552)
Settlements -- (45) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 90,539 $ 84,793 $ -- --
-----------------------------------------------------------------------------------------------------------------------------------
Funded status $ (23,456) $ (19,695) $ (3,710) $ (3,522)
Unrecognized actuarial (gain) loss 9,042 2,997 127 (240)
Unrecognized transition obligation (903) (984) -- --
Unrecognized prior service cost 1,273 325 (874) (1,455)
Contribution made between measurement date and fiscal year end 81 788 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Net liability $ (13,963) $ (16,569) $ (4,457) $ (5,217)
-----------------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 1,581 $ 1,309 $ -- $ --
Accrued liability (16,802) (19,118) (4,457) (5,217)
Intangible asset 364 435 -- --
Deferred tax asset 302 317 -- --
Minimum pension liability 592 488 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Net liability $ (13,963) $ (16,569) $ (4,457) $ (5,217)
-----------------------------------------------------------------------------------------------------------------------------------
F-20
Weighted average assumptions were as follows:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Discount rate 7.50% 7.75% 7.25%
Rate of increase in compensation 5.00% 4.50% 3.50%
Long-term rate of return on plan assets 9.75% 9.75% 9.75%
--------------------------------------------------------------------------------
The components of net periodic benefit cost for fiscal 2001, 2000 and 1999 for
all plans were as follows:
------------------------------------------------------------------------------------------------------------------------------------
Post Retirement
Pension Benefits Benefits
------------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2001 2000 1999 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 4,337 $ 4,099 $ 3,794 $ 11 $ 76 $ 28
Interest cost 8,012 7,531 4,604 259 313 111
Expected return on plan assets (8,308) (7,901) (5,194) -- -- --
Amortization of unrecognized
transition obligation or asset (81) (81) (81) -- -- --
Prior service cost recognized 44 22 22 (582) (291) --
Recognized (gains) or losses 89 62 56 (21) (17) (16)
Insurance demutualization (897) -- -- -- -- --
Amortization of unrecognized gain (6) -- -- -- -- --
Special termination benefits -- 514 -- -- -- --
Contributions to multiemployer plans 53 52 67 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3,243 $ 4,298 $ 3,268 $ (333) $ 81 $ 123
------------------------------------------------------------------------------------------------------------------------------------
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 $109.5 million, $98.4 million, and $85.2 million,
respectively, as of June 30, 2001, and $58.9 million, $51.7 million, and $38.9
million, respectively, as of June 30, 2000.
For purposes of determining the cost and obligation for post-retirement
medical benefits, the Company has assumed a health care cost trend rate of 7.5%
for fiscal 2002, gradually decreasing to 6.0% in the year 2005 and remaining
level thereafter. A one percentage-point change in assumed health care cost
trend rates would have the following effects:
--------------------------------------------------------------------------------
1-Percentage Point
(In thousands) Increase Decrease
--------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 6 $ (5)
Effect on post retirement benefit obligation 57 (54)
--------------------------------------------------------------------------------
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 $2.3
million, $2.2 million, and $1.3 million in fiscal 2001, 2000, and 1999,
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, 2001, 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 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.
F-21
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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. The
Company has 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 2001, 2000, and
1999 in accordance with the provisions of SFAS No. 123, net loss would have been
$6.5 million in fiscal 2001 [( $0.73) per share], net loss of $16.7 million in
fiscal 2000 [( $1.85) per share], and net income of $12.8 million in fiscal 1999
( $1.53 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 2001, 2000, and 1999,
respectively: risk-free interest rates of 5.25%, 6.62%, and 5.22% dividend
yields of 2.22%, 2.25%, and 1.52% volatility factors of .4531, .4516, and .340,
and an expected life of 8 years. The weighted-average fair value of options was
$3.75, $3.86, and $3.92 per option during fiscal 2001, 2000, and 1999,
respectively.
A summary of the Company's stock option activity and related information
for the fiscal years ended June 30, 2001, 2000, and 1999 follows:
------------------------------------------------------------------------------------------------------------------------------------
Weighted-Average
Number of Option Price Exercise
Shares Per Share Price
------------------------------------------------------------------------------------------------------------------------------------
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
Granted 255,000 7.54 to $9.560 9.05
Lapsed or canceled (200,000) 8.25 to $26.88 14.19
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2001 1,171,000 $ 7.54 to $26.88 $ 13.03
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Exercisable at June 30:
2001 501,000 $ 7.54 to $26.88 $ 14.96
------------------------------------------------------------------------------------------------------------------------------------
F-22
The weighted-average remaining contractual life of options outstanding at
June 30, 2001 is 7 years. At June 30, 2001, 255,486 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, 2001:
------------------------------------------------------------------------------------------------------------------------------------
Weighted-
Number of Average Weighted- Weighted-
Range of Options Remaining Average Currently Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
$ 7.54 to $13.25 803,000 7.9 $ 10.18 254,000 $11.16
14.25 to 19.19 259,000 5.1 16.43 197,000 17.11
20.63 to 26.88 109,000 6.6 26.01 50,000 25.84
------------------------------------------------------------------------------------------------------------------------------------
13. SEGMENT AND RELATED INFORMATION
The Company is focused around its core Publication Services business, which
provides products and services to both not-for-profit and commercial publishers
in three primary product lines: STM journals, special interest and trade
magazines, and books and directories. Publication Services provides a full range
of content management, editorial, prepress, printing, reprinting, warehousing
and distribution services under the division names of Cadmus Professional
Communications, CadmusMack, and Port City Press. In addition to its core
business, the Company provides high quality specialty packaging, assembly,
fulfillment and distribution, as well as creative marketing services. 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. All
periods presented in the following tables have been reclassified to conform to
the current year presentation.
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, gains/losses on
sales of assets, and restructuring and other charges. Intergroup sales for
fiscal 2001 and 2000 are not significant. The Company manages income taxes on a
consolidated basis.
Summarized group data for fiscal 2001, 2000, and 1999 are as follows:
--------------------------------------------------------------------------------
Publication Other
(In thousands) Services Services Total
--------------------------------------------------------------------------------
2001
Net sales $ 452,358 $ 73,932 $ 526,290
Depreciation and amortization 21,321 4,147 25,468
Operating income 47,542 (746) 46,796
Total assets 312,679 39,188 351,867
Capital expenditures 12,586 1,502 14,088
2000
Net sales $ 450,142 $ 102,550 $ 552,692
Depreciation and amortization 20,499 4,884 25,383
Operating income 52,112 1,191 53,303
Total assets 324,329 51,542 375,871
Capital expenditures 12,961 3,484 16,445
1999
Net sales $ 322,099 $ 171,795 $ 493,894
Sales between groups (820) -- (820)
Depreciation and amortization 13,277 7,108 20,385
Operating income 39,306 (1,184) 38,122
Total assets 389,990 106,134 496,124
Capital expenditures 9,690 7,313 17,003
--------------------------------------------------------------------------------
F-23
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Summarized group data for fiscal 2001, 2000, and 1999 are as follows:
--------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
--------------------------------------------------------------------------------
Earnings from operations:
Reportable group
operating income $ 46,796 $ 53,303 $ 38,122
Amortization of goodwill (5,060) (5,261) (2,884)
Unallocated shared services and
other expenses, net (6,613) (5,868) (6,896)
Restructuring and other charges (19,905) (36,544) --
Gain on divestitures -- -- 9,521
Interest expense and
securitization costs (22,414) (24,491) (12,204)
Interest rate swap settlement
charges -- -- (2,101)
Other income, net 19 660 498
--------------------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary item $ (7,177) $ (18,201) $ 24,056
--------------------------------------------------------------------------------
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 does not own any foreign operations. There were no revenues
from a single external customer that 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, 2001, 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 2001 and 2000 totaled $0.7 million for each year.
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, 2001 and 2000, 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.
F-24
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, 2001 and 2000, and the related consolidated statements of operations, cash
flows and shareholders' equity for each of the three years in the period ended
June 30, 2001. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Anderson LLP
Richmond, Virginia
August 1, 2001
F-25
Cadmus Communications Corporation and Subsidiaries
Board of Directors & Management Team
BOARD OF DIRECTORS
Thomas C. Norris G. Waddy Garrett Jerry I. Reitman Wallace Stettinius
Chairman President Vice Chairman Senior Executive Fellow at the
Cadmus Communications GWG Financial The Callahan Group School of Business, Virginia
Corporation Richmond, VA Chicago, IL Commonwealth University
Richmond, VA Former Chairman of Cadmus
Nathu R. Puri Russell M. Robinson, II Communications Corporation
Bruce V. Thomas Chairman Attorney-at-law Richmond, VA
President and Melton Medes Group President and Shareholder
Chief Executive Officer Nottingham, U.K. Robinson, Bradshaw & David G. Wilson, Jr.
Cadmus Communications Hinson, P.A. Group President
Corporation John C. Purnell, Jr. Charlotte, NC Cadmus Professional
Richmond, VA Executive Director Communications
Friends Association for Children James E. Rogers
Martina Bradford Richmond, VA President Richmond, VA
Corporate Vice President, SCI Investors Inc.
Global Public Affairs Richmond, VA
Lucent Technologies
Washington, D.C.
CORPORATE EXECUTIVES
Bruce Thomas Wayne Luck Bruce Willis
Chief Executive Officer, Chief Information Officer, Controller,
President Senior Vice President Vice President
Steve Hare Wayne Tennent Rob Potts
Chief Financial Officer Chief Administrative Officer Information Technology,
and Treasurer, and Corporate Secretary, Vice President
Executive Vice President Senior Vice President
BUSINESS LEADERS
Cadmus Professional CadmusMack Cadmus Port City Press Cadmus Whitehall Group
Communications Bob Sadler Dave Hajek Jerry Lux
Dave Wilson Group President Group President Group President
Group President Mark Ploucha
Joe Ward Executive Vice President
Executive Vice President
F-26
Cadmus Communications Corporation and Subsidiaries
Operating Locations
Cadmus Communications Corporation
Headquarters T 804-287-5680 Suite 200
F 804-287-6267 1801 Bayberry Court
1-877-4-CADMUS Richmond, VA 23226
Cadmus Creative Marketing
Headquarters Sales/Production/Service T 770-908-5650 5150 North Royal Atlanta Drive
F 770-908-5673 Tucker, GA 30084
1-800-258-1224
CadmusMack
Headquarters T 610-258-9111 1991 Northampton Street
F 610-250-7202 Easton, PA 18042
1-800-677-6225
Byrd (Richmond) Manuf/Sales/Service T 804-261-3000 2901 Byrdhill Road
F 804-266-1996 Richmond, VA 23228
Easton (PA) Manuf/Sales/Service T 610-258-9111 1991 Northampton Street
F 610-258-7202 Easton, PA 18042
1-800-677-6225
East Stroudsburg Manuf/Sales/Service T 570-421-9033 34 North Crystal Street
F 570-421-5929 East Stroudsburg, PA 18301
Cadmus Port City Press
Headquarters Manuf/Sales/Service T 410-486-3000 1323 Greenwood Road
F 410-486-0706 Baltimore, MD 21208
1-800-858-7678
Cadmus Professional Communications
Headquarters T 804-287-5680 Suite 200
F 804-287-5691 1801 Bayberry Court
Richmond, VA 23226
Baltimore Composition/Sales/Service T 410-850-0500 940 Elkridge Landing Road
F 410-648-2788 Linthicum, MD 21090
Easton (MD) Manuf/Sales/Service T 410-822-2870 500 Cadmus Lane
F 410-822-0438 Easton, MD 21601
1-800-257-7792
Lancaster Press Manuf/Sales/Service T 717-285-9095 3575 Hempland Road
F 717-285-7261 Lancaster, PA 17604
1-800-724-4400
Richmond Composition T 804-515-5147 2905 Byrdhill Road
F 804-264-0510 Richmond, VA 23228
Science Press Composition/ T 717-738-9300 300 W. Chestnut Street
Manuf/Sales/Service F 717-738-9424 Ephrata, PA 17522
Cadmus Whitehall Group
Headquarters Manuf/Sales/Service T 704-583-6600 2750 Whitehall Park Drive
F 704-583-6780 Charlotte, NC 28273
1-800-991-7225
F-27
Cadmus Communications Corporation and Subsidiaries
Shareholder Information
Corporate Office Transfer Agent
Suite 200 First Union National Bank of North Carolina
1801 Bayberry Court Customer Information Center
Richmond, Virginia 23226 Corporate Trust Division
Telephone 804-287-5680 1525 West W. T. Harris Blvd., Building 3C3
Toll Free 1-877-4-CADMUS Charlotte, North Carolina 28288
Web Site: www.cadmus.com
Independent Public Accountants
Shareholder and Analyst Contact Arthur Andersen LLP
Steve Hare Richmond, Virginia
Chief Financial Officer and Treasurer
E-mail: hares@cadmus.com Stock Listing
The NASDAQ National Market
Copies of the Corporation's Annual Report and Form 10-K Symbol: CDMS
may be obtained without charge by writing Steve Hare at
the address listed above.
F-28