EXHIBIT 13
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
- ---------------------------------------------------------- ---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- (as adjusted, see note 1) -------------
OPERATIONS
Net sales $393,823 $384,942 $ 336,655 $279,641 $ 247,730
Cost of sales 304,014 299,840 258,947 209,259 184,488
Gross profit 89,809 85,102 77,708 70,382 63,242
Selling and administrative expenses 62,141 63,123 61,204 52,172 48,824
Operating income
- as reported 23,718 2,280 16,504 18,210 12,518
- before restructuring charge(3) 27,668 21,979 16,504 18,210 14,418
Income (loss) before income taxes, extraordinary item and
cumulative effect of changes in accounting principles
- as reported 14,780 (7,436) 10,547 12,838 7,533
- before restructuring charge(3) 18,730 12,263 10,547 12,838 9,433
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles(4)
- as reported 9,090 (5,217) 6,591 7,575 4,565
- before restructuring charge(3) 11,541 7,556 6,591 7,575 5,665
Net income (loss)(4)
- as reported 9,090 (5,217) 5,796 7,575 4,966
- before restructuring charge(3) 11,541 7,556 5,796 7,575 6,066
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA(5)
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles(4)
- as reported $ 1.11 $ (.65) $ .88 $ 1.22 $ .75
- before restructuring charge(3) 1.41 .94 .88 1.22 .93
Net income (loss)(4)
- as reported 1.11 (.65) .77 1.22 .82
- before restructuring charge(3) 1.41 .94 .77 1.22 1.00
Cash dividends .20 .20 .20 .20 .20
Shareholders' equity 13.86 12.85 13.72 10.41 9.31
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital(3) $ 35,315 $ 49,774 $ 60,517 $ 33,286 $ 26,033
Property, plant and equipment, net 133,836 118,621 116,365 84,570 77,072
Goodwill and other intangibles, net 48,158 42,572 52,846 8,281 7,617
Total assets 291,752 266,916 283,723 172,443 160,906
Short-term borrowings 2,100 1,650 3,323 3,775 --
Long-term debt, including current maturities 99,655 94,469 106,801 56,342 58,440
Total shareholders' equity 109,816 100,643 108,528 62,755 55,706
Total capital 211,571 196,762 218,652 122,872 114,146
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Gross profit margin 22.8% 22.1% 23.1% 25.2% 25.5%
Operating income margin(3) 7.0% 5.7% 4.9% 6.5% 5.8%
Effective tax rate 38.5% 38.4% 37.5% 41.0% 39.9%
Sales to average total capital 1.9 1.9 2.0 2.4 2.3
Current ratio(3) 1.5 2.0 2.2 1.8 1.7
Debt as a percent of total capital 48.1% 48.8% 50.4% 48.9% 51.2%
Operating income return on average total capital(3) 13.6% 10.6% 9.7% 15.4% 13.3%
Net income return on average shareholders' equity (3)(4) 11.0% 7.2% 6.8% 12.8% 11.3%
- --------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Weighted-average common shares outstanding 8,176 8,035 7,495 6,195 6,085
Shares outstanding at fiscal year end 7,921 7,830 7,908 6,030 5,984
Stock market price data:
High $ 28 $ 17 3/4 $ 29 7/8 $ 24 3/4 $ 19 1/2
Low 14 12 1/4 13 1/4 14 1/2 8 1/2
Close (at fiscal year end) 24 1/4 15 1/2 15 3/8 23 5/8 17 3/4
Number of associates (approximate) 3,000 3,000 3,200 2,400 2,400
- --------------------------------------------------------------------------------------------------------------------------------
(1) During the fourth quarter of fiscal 1998, the Company changed its method of
accounting for certain of its inventories from the last-in, first-out
method to the first-in, first-out method. As required by generally
accepted accounting principles, the Company has retroactively adjusted
prior years' financial statements for the change. This table reflects the
retroactively adjusted financial statements for the change. The
restatement had no effect on net income in fiscal 1998, increased the net
loss in fiscal 1997 by $194,000 or $0.02 per share, increased net income
in fiscal 1996 by $87,000 or $0.01 per share, increased net income in
fiscal 1995 by $96,000 or $0.01 per share, and decreased net income in
fiscal 1994 by $242,000, or $0.04 per share.
(2) Certain reclassifications were made to prior years' amounts to conform to
current year presentation.
(3) Excludes the effects of restructuring charges of $3.95 million ($2.5
million net of tax) in fiscal 1998, $19.7 million ($12.7 million after
tax) in fiscal 1997, and $1.9 million ($1.1 million after tax) in fiscal
1994.
(4) After extraordinary loss on early extinguishment of debt in fiscal 1996 of
$0.8 million (net of tax) and income from cumulative effect of changes in
accounting principles in fiscal 1994 of $0.4 million (net of tax).
(5) Income per share data assumes dilution.
- -------
21
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GENERAL
Cadmus Communications Corporation provides customers with integrated,
end-to-end information and communications solutions. These end-to-end solutions
involve a full range of creative, production and distribution services. The
Company is organized around two business sectors: Professional Communications,
serving customers who publish information and Marketing Communications, serving
customers who convey marketing messages. Headquartered in Richmond, Virginia,
Cadmus is the 22nd largest graphic communications company in North America.
ORGANIZATIONAL STRUCTURE
The Company's current organizational structure was effected during fiscal 1997,
when it announced a major restructuring plan designed to exit or reshape those
businesses that were not performing or were not core to its strategy, and to
create a more efficient and cost effective organizational structure. In
conjunction with the restructuring, the Company reorganized its organizational
and operational structure to form Cadmus Marketing Communications and Cadmus
Professional Communications. The Company's previous organizational structure
consisted of the Periodicals, Graphic Communications, Marketing, and Publishing
groups.
Cadmus Marketing Communications provides commercial printing, graphic
solutions, print and broadcast advertising, direct marketing, catalog and
collateral design, publication development, financial communication, point of
purchase, specialty packaging and promotional printing, software duplication
and distribution, and interactive services to customers who convey marketing
messages. Cadmus Professional Communications provides a full range of
composition, editorial, production, distribution, and related services for
publishers of scientific, technical, and medical journals, magazines, trade
association publications and commercial publications.
RESULTS OF OPERATIONS
The following table presents the major components from the Consolidated
Statements of Income as a percent of sales for the three fiscal years discussed
herein:
Years Ended June 30
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
(as adjusted - (as adjusted -
note 1) note 1)
- ---------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 77.2 77.9 76.9
----- ----- -----
Gross profit 22.8 22.1 23.1
Selling and administrative expenses 15.8 16.4 18.2
Restructuring charge 1.0 5.1 --
----- ----- -----
Operating income 6.0 0.6 4.9
Interest expense 1.9 2.0 1.5
Other expenses, net 0.3 0.5 0.3
----- ----- -----
Income (loss) before income taxes and extraordinary item 3.8 ( 1.9) 3.1
Income tax expense (benefit) 1.5 ( 0.6) 1.2
----- ----- -----
Income (loss) before extraordinary item 2.3 ( 1.3) 1.9
Extraordinary loss on early extinguishment of debt, net of tax -- -- 0.2
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) 2.3% ( 1.3)% 1.7%
- ---------------------------------------------------------------------------------------------------------------------
(1) During the fourth quarter of fiscal 1998, the Company changed its method of
accounting for certain of its inventories from the last-in, first-out method
to the first-in, first-out method. As required by generally accepted
accounting principles, the Company has retroactively adjusted prior years'
financial statements for the change. This table reflects the retroactively
adjusted financial statements for the change. The restatement had no effect on
net income in fiscal 1998 and increased the net loss in fiscal 1997 by
$194,000 or $0.02 per share. See Note 4 in the Notes to Consolidated Financial
Statements.
-------
22
- --------------------------------------------------------------------------------
Each of these major components is discussed in additional detail in the
subsections below:
RESTRUCTURING ACTIVITIES
In April 1998, the Company acquired Germersheim, Inc., an Atlanta-based
national point of purchase marketing service provider. During the fourth
quarter of fiscal 1998, the Company recorded a one-time restructuring charge of
$3.95 million ($2.5 million net of tax) related to the integration of
Germersheim, Inc. with its existing point of purchase operations. The charge
included costs to consolidate facilities, eliminate duplicate assets, and
provide severance costs.
During the fourth quarter of fiscal 1997, the Company adopted a
restructuring plan that impacted a number of its operations. The plan included
the following actions: closure of the Baltimore promotional printing facility
and the Long Beach-based direct marketing agency; consolidation of Atlanta and
Richmond-based interactive divisions and certain journal fulfillment and
distribution operations; realignment of certain management, production and
administrative personnel; write-down of certain tangible and intangible assets;
and exiting certain nonstrategic customer relationships and product lines. In
connection with the restructuring plan, the Company recorded a restructuring
charge of $19.9 million ($12.9 million net of tax) in the fourth quarter of
fiscal 1997. Operations that were discontinued as a result of the restructuring
reported sales of $16.4 million and $15.9 million in fiscal 1997 and fiscal
1996, respectively. The fiscal 1997 restructuring charge was offset by a $0.3
million restructuring gain ($0.2 million net of tax) recorded in the first
quarter of fiscal 1997 related to the restructuring of the former publishing
operations.
COMPARISON OF FISCAL 1998 WITH FISCAL 1997
Sales rose 2% to $393.8 million for fiscal 1998. Adjusted for businesses
discontinued in connection with the 1997 restructuring and for the 1998
acquisition of Germersheim, Inc., sales growth was 7%.
Sales for the Professional Communications sector were $203 million for
1998, essentially flat with sales in 1997. This flat performance was due to
lower paper prices and the planned downsizing of the magazine product line,
offset by increases in sales in trade association/educational institution
publications and a 1% increase in journal sales.
Sales for the Marketing Communications sector were $199 million for fiscal
1998, compared to $184 million for fiscal 1997, representing an increase of 8%.
Adjusting for the impact of discontinued operations and the Germersheim, Inc.,
acquisition, sales increased by 17%. This increase in Marketing Communications
sales was led primarily by the (i) Specialty Packaging and Promotional group,
which recorded a 19% increase in sales, (ii) CadmusCom, which posted an 18%
increase in agency fees, (iii) the Financial Communications group, which
recorded a 31% sales increase, and (iv) strong performance by the Graphic
Solutions and Point of Purchase groups, particularly in the latter half of the
fiscal year. The solid growth in the packaging and promotional product line,
due primarily to growth from new customers, occurred despite disruption in
first quarter production related to the relocation of this operation to a
newly-constructed facility. The revenue increase in the CadmusCom group was
driven by a 32% increase in Direct Marketing agency fees resulting from new
account development and growth from existing customers, a 19% increase in
Custom Publishing agency fees due to growth from existing customers, and an
increase in catalog design and photography agency fees due to increased
billings to existing customers. The growth in the Financial Communications
group was driven by strong capital markets activity, growth in mutual fund
services, and growth in full service banking relationships.
Gross profit margins for the Company improved to $89.8 million in fiscal
1998, or 22.8% of sales, up from $85.1 million, or 22.1% of sales in the prior
year. This increase was primarily attributable to the benefits resulting from
restructuring actions taken by the Company in the fourth quarter of fiscal
1997, a favorable change in product mix, and lower paper prices.
Selling and administrative expenses were $62.1 million for fiscal 1998,
representing a decrease of $1 million from the prior year. As a percent of
sales, selling and administrative expenses decreased from 16.4% in fiscal 1997
to 15.8% in this fiscal year. This improvement was driven by efficiencies
resulting from restructuring actions taken by the Company in the fourth quarter
of fiscal 1997.
Operating income was $23.7 million for fiscal 1998, as compared to $2.3
million for fiscal 1997. Operating income was affected by restructuring charges
taken of $3.95 million and $19.7 million in fiscal 1998 and 1997, respectively.
Operating income, before restructuring charges, rose to $27.7 million, or 7% of
sales, from $22.0 million, or 5.7% of sales in the prior year. This increase in
operating margins was driven by a 110 basis point improvement over last year in
the Professional Communications sector and a 200 basis point improvement over
fiscal 1997 in the Marketing Communications sector.
- --------------
23
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
Interest expense decreased to $7.6 million in fiscal 1998 from $7.8
million in 1997, primarily due to lower average debt levels for the Company
throughout the year.
The effective tax rate was 38.5% in fiscal 1998, compared to 29.8% in
fiscal 1997. The increase in the effective tax rate is due primarily to the
income tax benefit recognized in fiscal 1997 as a result of the net
restructuring charge.
COMPARISON OF FISCAL 1997 WITH FISCAL 1996
Fiscal 1997 net sales increased 14.3% to $384.9 million from $336.7 million in
fiscal 1996. Professional Communications sales increased by 26.4% and Marketing
Communications sales rose by 7.2%. Offsetting these increases were lower
publishing sales resulting from the sale of the consumer publishing business
during the first quarter of fiscal 1997. Fiscal 1997 net sales were flat with
fiscal 1996 when adjusted for the impact of acquisitions, divestitures, and
lower paper prices.
The 26.4% increase in Professional Communications sales was primarily due
to the acquisition of Lancaster Press, Inc. in the fourth quarter of fiscal
1996, and continued growth in other research journal operations. Excluding
Lancaster sales and the impact of lower paper prices, other research journal
revenues increased by 3.0%. Magazine sales declined by 27.3% as a result of the
Company's decision to refocus its sales mix and discontinue relationships with
nonstrategic customers and also as a result of lower paper prices. In
connection with the 1997 restructuring actions, the magazine product line has
been integrated with research journals.
Marketing Communications sales rose 7.2%, driven by a full year's
inclusion of sales from Cadmus Technology Solutions (formerly, The Software
Factory) which was purchased during the second quarter of fiscal 1996, and
internal growth. Specialty Packaging and Promotional Printing sales rose by
22.9% in fiscal 1997 as compared to 1996 due to the inclusion of Cadmus
Technology Solutions and continued growth from existing clients. Financial
Communications sales increased 22.8%, primarily due to continued strength in
financial markets, an increase in shareholder communication sales, and growth
in full-service contracts with financial institutions. These increases were
partially offset by a 16.5% decline in Point of Purchase revenues due to lower
sales to quick service restaurant and beverage customers, the loss of a
significant account during fiscal 1997, and a longer than anticipated selling
cycle for new business. CadmusCom sales were flat as the inclusion of sales
from CadmusCom Richmond was more than offset by lower sales from the Company's
custom publishing, direct marketing and interactive operations. The decline in
direct marketing sales was the result of the Company's decision to change the
sales mix to higher margin, lower volume creative services revenues from lower
margin, higher volume production revenues.
Gross profit margin was 22.1% of sales in fiscal 1997 compared to 23.1% in
fiscal 1996. The margin decline was due to margin erosion in the Company's
point of purchase, interactive, and custom publishing operations, which
resulted from the combination of lower sales and higher production costs. Cost
of sales also was negatively impacted by excess capacity at certain Marketing
Communications printing facilities. These factors were partially offset by
significant gross margin improvement in Professional Communications resulting
from improved sales mix, continued efficiency improvements from the Richmond
manufacturing facility and the successful integration of Lancaster operations.
Selling and administrative expenses declined to 16.4% of sales compared to
18.2% in fiscal 1996. The decrease in the selling and administrative expense
ratio in 1997 was primarily attributable to the full-year impact of the
acquisition of Lancaster, which had a lower selling and administrative expense
ratio than the Company in the aggregate, and to cost control measures
implemented in fiscal 1997.
Interest expense increased by $2.6 million, or 51.4% in fiscal 1997, due
to additional debt incurred to fund the acquisition of Lancaster during the
fourth quarter of fiscal 1996.
Other expenses increased by $1.1 million in fiscal 1997 due to additional
amortization of goodwill related to fiscal 1996 acquisitions.
The effective tax rate was 29.8% in fiscal 1997 compared to 37.5 % in
fiscal 1996. The decrease in the effective tax rate is due primarily to the
income tax benefit recognized as a result of the restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company has the financial resources and access to
capital necessary to fund internal growth and acquisitions. The Company's major
demands on capital are for investments in property, plant and equipment,
working capital, and acquisitions.
Net cash provided by operating activities in fiscal 1998 increased to
$35.3 million, from $31.6 million in fiscal 1997. The increase was due
primarily to the Company's continued focus on management of working capital.
Working capital reductions generated $3.6 million in cash during fiscal 1998,
as compared to $6.1 million during fiscal 1997. Working capital reductions in
fiscal 1998 resulted principally from decreases in accounts receivable (net of
acquisitions), as the Company continued to focus on shortening the collection
-----------
24
- --------------------------------------------------------------------------------
period of accounts receivable, as well as increases in accounts payable and
accrued expenses, resulting primarily from the deferral of payments on certain
major equipment purchases. Working capital was used to fund increased
work-in-process inventory levels at year end, as well as payments to fund the
restructuring actions from fiscal 1998 and 1997. Net cash provided by operating
activities in fiscal 1997 increased to $31.6 million, from $13.8 million in
fiscal 1996. This increase was due primarily to the reduction of cash
requirements to fund the Company's working capital investment. Working capital
reductions generated $6.1 million in cash during fiscal 1997, as compared to
the use of $10.5 million during fiscal 1996 to fund the Company's working
capital. Working capital reductions in 1997 resulted principally from decreases
in accounts receivable, due to improvements in the Company's credit and
collection efforts and accounts receivable mix, and in inventory, due primarily
to the Company's successful efforts to reduce the level of paper inventory
balances.
Net cash used in investing activities totaled $38.5 million during 1998,
as compared to $15.5 million in fiscal 1997. Cash used in fiscal 1998 included
$33.6 million to fund fiscal 1998 capital expenditures and $11.1 million to
acquire Germersheim, Inc. Major capital projects for fiscal 1998 included two
new presses (a full size web press and a six-unit press) and a die cutter to
support the Company's Specialty Packaging and Promotional product line, the
expansion of the Company's Charlotte manufacturing and fulfillment facilities,
a new sheetfeed press for the journal business, and investment in new business
and manufacturing systems. These cash outlays were partially offset by the
proceeds of $6.8 million from the sale of two of the Company's manufacturing
facilities in Charlotte and Baltimore. During fiscal 1997, net cash used for
investing activities included $22.9 million to fund capital expenditures,
offset by proceeds of $6.5 million resulting from the sale of the Company's
consumer publishing division. The Company anticipates that capital spending in
fiscal 1999 will be approximately $20 to $22 million.
Net cash provided by financing activities was $3.0 million in fiscal 1998,
compared to net cash used in financing activities of $17.1 million in fiscal
1997. During fiscal 1998, the Company repaid $5 million in debt, and paid $1.6
million in cash dividends. Net cash used in financing activities in fiscal 1997
included primarily the repayment of $14.0 million in debt and $1.6 million in
cash dividends.
Total indebtedness at June 30, 1998 was $99.7 million, up from $94.5
million at June 30, 1997. Debt as a percent of total capital decreased to 48.1%
at the end of fiscal 1998 from 48.8% at the end of fiscal 1997.
In October 1996, the Company entered into a new $160 million bank credit
agreement with six major banks. This credit agreement consists of a $40 million
term loan facility, expiring in 2003, and a $120 million revolving credit
facility, expiring in 2001. This agreement replaced an existing $115 million
bank credit agreement entered into with four of the same banks in January 1996.
Using the additional capacity available under the new agreement, the Company
repaid $40 million of 6.74% senior unsecured notes which were borrowed from two
insurance companies during fiscal 1994 primarily to fund 1994 acquisitions.
Bank borrowings under the bank credit agreement at June 30, 1998, totaled $93.5
million, leaving $63.5 million available under the facility.
Total outstanding long-term debt at June 30, 1998, included approximately
$95 million in variable rate obligations. As of June 30, 1998, the Company had
outstanding interest rate swap agreements that effectively convert $53.7
million of the Company's variable rate obligations to fixed rate obligations.
The effect of the swaps was an increase in interest expense of $1.3 million in
fiscal 1998. These contracts expire between fiscal 1999 and fiscal 2003. As of
June 30, 1998, the interest rate swaps had a net fair value of negative $2.0
million. The notional amount of each swap contract does not represent exposure
to credit loss. In the event of default by the counterparties, the risk, if
any, is the cost of replacing the swap agreement at current market rates. The
Company continually monitors its positions and the credit rating of its
counterparties and limits the amount of agreements it enters into with any one
party. Management does not anticipate nonperformance by the counterparties;
however, if incurred, any such loss would be immaterial. Additional information
on the interest rate swaps is provided in Note 7 of Notes to Consolidated
Financial Statements.
The Company's debt agreements contain covenants regarding fixed charge
coverage and net worth and contain other restrictions, including limitations of
additional borrowings, and the acquisition, disposition and securitization of
assets. The Company was in compliance with all debt covenants at June 30, 1998.
Management believes that its cash flows from operations, together with its
borrowing capacity under the credit facility, are sufficient to fund its
planned capital expenditures, working capital needs, dividends, stock
repurchases, acquisitions, and other cash requirements. Management also
believes the Company's credit facility could be amended to provide additional
cash resources, if needed.
- --------------
25
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR 2000 ISSUE
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00." This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures, and is in the process of
preparing for the Year 2000. A formal Year 2000 Monitoring Team has been
designated to coordinate, identify, evaluate, and implement changes to computer
systems and applications necessary to achieve a Year 2000 date conversion with
minimal effect on customers or disruption to business operations. Both
information technology ("IT") systems and operational systems (presses,
environmental control, telecommunications equipment, etc.) are being addressed.
The Company believes that the risk of having non-compliant systems is low.
Planned financial and administrative system upgrades and replacements (which
are Year 2000 compliant) are in process, and will be complete by March 31,
1999. The Company has two higher level manufacturing systems that also are
being replaced. However, because the replacement systems are not expected to be
operational by the Year 2000, the Company is making Year 2000 programming
modifications to the two existing major legacy manufacturing systems.
Programming modifications are currently in process, and are expected to be
completed, tested, and placed back into production by March 31, 1999. Formal
inventories and Year 2000 assessments of all other systems are expected to be
complete by October 1, 1998. Results to date indicate low risk for
non-compliance. Remediation, testing and implemention (for other systems
requiring remediation) is expected to be completed by March 31, 1999.
The Company believes that its most reasonably, likely worst-case Year 2000
scenario may involve non-compliant vendors or non-compliant customers who may
experience business outages. Accordingly, the Company is currently
communicating with all third parties with which it has a material relationship
(including vendors, financial institutions and customers) and identifying
potentially non-compliant parties. The Company then will compile a list of non-
compliant parties for the purpose of assessing the degree of exposure and risk.
Contingency plans specific to those parties (including, with respect to
vendors, alternative vendor relationships) will be developed at that time. This
process is expected to be complete during the second quarter of fiscal 1999.
The Company estimates the total cost of achieving Year 2000 compliance to
be in the range of $400,000 to $600,000 over the cost of normal software
upgrades and replacements. Some of these costs already have been incurred
during fiscal 1998. The remainder will be incurred in fiscal 1999, and will be
expensed through operations.
THE PREVIOUS DISCUSSIONS CONTAIN FORWARD-LOOKING INFORMATION. READERS ARE
CAUTIONED THAT SUCH INFORMATION INVOLVES RISKS AND UNCERTAINTIES, INCLUDING
THOSE CREATED BY GENERAL MARKET CONDITIONS, COMPETITION AND THE POSSIBILITY
THAT EVENTS MAY OCCUR THAT LIMIT THE ABILITY OF THE COMPANY TO MAINTAIN OR
IMPROVE ITS OPERATING RESULTS OR EXECUTE ITS STRATEGY. ALTHOUGH THE COMPANY
BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS ARE
REASONABLE, ANY OF THE ASSUMPTIONS COULD BE INACCURATE, AND THEREFORE, THERE
CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN WILL
PROVE TO BE ACCURATE. THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED
AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND
PLANS OF THE COMPANY WILL BE ACHIEVED.
----------
26
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY DATA (UNAUDITED)
- --------------------------------------------------------------------------------
(In thousands, except per share data)
- -------------------------------------------------------------------------------------------------------
1998 QUARTERS ENDED Sept 30 Dec 31 Mar 31 June 30
- -------------------------------------------------------------------------------------------------------
Net sales $ 92,362 $ 96,048 $101,234 $ 104,179
Gross profit 20,548 21,667 23,722 23,871
Restructuring charge -- -- -- (3,950)
Operating income 5,690 6,800 7,515 3,713
Net income 2,036 2,919 3,275 860
Net income per share(2) $ .25 $ .36 $ .40 $ .10
Cash dividends per share .05 .05 .05 .05
Stock market price data:
High $ 22 $ 23 $ 25 7/8 $ 28
Low 14 19 3/4 19 3/4 23 3/8
Close 20 1/2 20 1/2 23 3/4 24 1/4
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
1997 QUARTERS ENDED
(as adjusted, see note 1) Sept 30 Dec 31 Mar 31 June 30
- -------------------------------------------------------------------------------------------------------
Net sales $ 93,922 $ 97,232 $ 97,018 $ 96,770
Gross profit 21,215 21,065 21,400 21,422
Restructuring gain (charge) 250 -- -- (19,949)
Operating income (loss) 5,364 5,890 5,472 (14,446)
Net income (loss) 1,694 2,182 1,849 (10,942)
Net income (loss) per share(2) $ .21 $ .27 $ .23 $ (1.36)
Cash dividends per share .05 .05 .05 .05
Stock market price data:
High $ 17 3/4 $ 17 3/4 $ 17 $ 15 7/8
Low 12 1/4 14 3/4 13 1/4 12 1/2
Close 16 3/4 15 1/2 14 1/8 15 1/2
- -------------------------------------------------------------------------------------------------------
(1) During the fourth quarter of fiscal 1998, the Company changed its method of
accounting for certain of its inventories from the last-in, first-out method
to the first-in, first-out method. As required by generally accepted
accounting principles, the Company has retroactively adjusted prior years'
financial statements for the change. This table reflects the retroactively
adjusted financial statements for the change. The restatement had no effect on
net income in fiscal 1998 and increased the net loss in fiscal 1997 by
$194,000 or $0.02 per share.
(2) Net income (loss) per share assumes dilution.
- -------
27
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(In thousands, except per share data) Years Ended June 30
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
(as adjusted - (as adjusted -
Note 4) Note 4)
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 393,823 $ 384,942 $ 336,655
- ----------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of sales 304,014 299,840 258,947
Selling and administrative 62,141 63,123 61,204
Restructuring charge, net 3,950 19,699 --
- ----------------------------------------------------------------------------------------------------------------
370,105 382,662 320,151
- ----------------------------------------------------------------------------------------------------------------
Operating income 23,718 2,280 16,504
Interest and other expenses:
Interest 7,595 7,788 5,144
Other, net 1,343 1,928 813
- ----------------------------------------------------------------------------------------------------------------
8,938 9,716 5,957
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item 14,780 (7,436) 10,547
Income tax expense (benefit) 5,690 (2,219) 3,956
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 9,090 (5,217) 6,591
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $487) -- -- (795)
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,090 $ (5,217) $ 5,796
- ----------------------------------------------------------------------------------------------------------------
Earnings per share - basic:
Income (loss) before extraordinary item $ 1.16 $ (.66) $ .91
Extraordinary loss on early extinguishment of debt -- -- ( .11)
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.16 $ (.66) $ .80
- ----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 7,860 7,900 7,249
- ----------------------------------------------------------------------------------------------------------------
Earnings per share - diluted:
Income (loss) before extraordinary item $ 1.11 $ (.65) $ .88
Extraordinary loss on early extinguishment of debt -- -- ( .11)
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.11 $ (.65) $ .77
- ----------------------------------------------------------------------------------------------------------------
Weighted-average common shares
outstanding - assuming dilution 8,176 8,035 7,495
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-------
28
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(In thousands, except share data) At June 30
- -----------------------------------------------------------------------------------------------------------
1998 1997
(as adjusted -
ASSETS Note 4)
- -----------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ -- $ 184
Accounts receivable, less allowance for doubtful accounts
($2,575 in 1998 and $2,250 in 1997) 70,571 69,093
Inventories 25,610 20,673
Deferred income taxes 3,832 7,789
Prepaid expenses and other 4,107 3,969
- -----------------------------------------------------------------------------------------------------------
Total current assets 104,120 101,708
- -----------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 133,836 118,621
Goodwill and other intangibles, net 48,158 42,572
Other assets 5,638 4,015
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 291,752 $ 266,916
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term borrowings $ 2,100 $ 1,650
Current maturities of long-term debt 6,431 5,017
Accounts payable 41,981 29,593
Accrued expenses 18,293 15,674
Restructuring reserve 4,378 7,612
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 73,183 59,546
- -----------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 93,224 89,452
Other long-term liabilities 8,867 7,811
Deferred income taxes 6,662 9,464
Shareholders' equity:
Common stock ($.50 par value; authorized shares-16,000,000; issued and
outstanding shares - 7,921,000 in 1998 and 7,830,000 in 1997) 3,961 3,915
Capital in excess of par value 53,532 51,923
Retained earnings 52,323 44,805
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 109,816 100,643
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 291,752 $ 266,916
- -----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -------
29
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In thousands) Years Ended June 30
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
(as adjusted - (as adjusted -
Note 4) Note 4)
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 9,090 $ (5,217) $ 5,796
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt -- -- 795
Depreciation and amortization 18,444 18,188 14,563
Restructuring charge 3,950 19,699 --
Deferred income taxes 679 (5,580) 1,836
Other, net 997 112 1,942
- -------------------------------------------------------------------------------------------------------------------------------
33,160 27,202 24,932
- -------------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities, excluding debt and effects of acquisitions:
Accounts receivable, net 4,675 5,544 (7,064)
Inventories (4,158) 4,455 (2,735)
Accounts payable and accrued expenses 7,873 (3,071) 1,680
Restructure reserve (due to cash payments) (4,745) (2,850) --
Other current assets (138) 2,018 (2,391)
Other long-term liabilities (due to pension plan payments) (1,774) (3,400) (300)
Other, net 414 1,742 (302)
- -------------------------------------------------------------------------------------------------------------------------------
2,147 4,438 (11,112)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,307 31,640 13,820
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of consumer publishing division -- 6,500 --
Purchases of property, plant and equipment (33,588) (22,883) (25,289)
Proceeds from sales of property, plant and equipment 6,765 2,860 651
Purchase of license agreement -- (482) --
Payments for businesses acquired (11,139) -- (73,372)
Other, net (543) (1,520) (303)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (38,505) (15,525) (98,313)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from stock offering, net -- -- 38,376
Penalty on early extinguishment of debt -- -- (1,282)
Proceeds from (repayment of) short-term borrowings, net 450 (1,673) (452)
Proceeds from long-term revolving credit facility 8,500 18,000 30,000
Proceeds from long-term borrowings -- 40,415 32,724
Repayment of long-term borrowings (5,018) (70,747) (12,502)
Dividends paid (1,572) (1,581) (1,485)
Repurchase and retirement of common stock (118) (1,185) --
Proceeds from exercise of stock options 772 98 631
Other, net -- (399) (602)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,014 (17,072) 85,408
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (184) (957) 915
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 184 1,141 226
Cash and cash equivalents at end of year $ -- $ 184 $ 1,141
- -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-------
30
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION. The consolidated financial statements include the
accounts and operations of Cadmus Communications Corporation and Subsidiaries
(the "Company"), a Virginia corporation. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
NATURE OF OPERATIONS. The Company is an integrated communications company
offering products and services in the areas of marketing communications and
professional communications.
REVENUE RECOGNITION. Substantially all products are produced to customer
specifications. The Company recognizes revenue when service projects are
completed or products are shipped.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash balances
and highly liquid investments with an original maturity of three months or
less.
INVENTORIES. Inventories are valued at the lower of cost or market. Inventory
costs have been determined by the first-in, first-out method (see Note 4).
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost, net of accumulated 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 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, 1998 and 1997 was $8.1 million and $6.4
million, respectively.
INCOME TAXES. The Company uses the asset and liability method of Statement of
Financial 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.
EARNINGS PER SHARE. During the second quarter of fiscal 1998, the Company
adopted SFAS No. 128, "Earnings per Share," which establishes new standards for
computing and presenting earnings per share. The impact of adopting the new
standard was not material. Basic earnings per share is computed on the basis of
weighted-average common shares outstanding from the date of issue. Diluted
earnings per share is computed on the basis of weighted-average common shares
outstanding plus common shares contingently issuable upon the exercise of
dilutive stock options. Incremental shares for dilutive stock options, computed
under the treasury stock method, were 316,000, 135,000, and 246,000, in fiscal
1998, 1997, and 1996, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other
- -------
31
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106."
The Company plans to adopt these three pronouncements in fiscal 1999. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The Company plans to adopt this pronouncement in fiscal
2000. These statements will affect the Company's financial statement
disclosures. Management believes that the adoption of these pronouncements is
not expected to have a material impact on the Company's financial position or
results of operations.
RECLASSIFICATIONS. Certain previously reported amounts have been reclassified
to conform to the current-year presentation.
2. RESTRUCTURING CHARGES
During the fourth quarter of fiscal 1998, the Company recorded a one-time
restructuring charge of $3.95 million ($2.5 million net of tax) related to the
integration of Germersheim, Inc. (see Note 3) with its existing point of
purchase operations. The charge included costs to consolidate facilities,
eliminate duplicate assets and provide severance costs. These actions were
initiated in fiscal 1998 and are expected to be completed within one year.
Management believes that the remaining restructuring reserve at June 30, 1998
of $3.2 million is adequate to complete the restructuring plan.
During the fourth quarter of fiscal 1997, the Company adopted a restructuring
plan that impacted a number of its operations. The plan included the following
actions: closure of the Baltimore promotional printing facility and the Long
Beach-based direct marketing agency; consolidation of Atlanta and
Richmond-based interactive divisions and certain journal fulfillment and
distribution operations; realignment of certain management, production and
administrative personnel; write-down of certain tangible and intangible assets;
and exiting certain nonstrategic customer relationships and product lines. In
connection with the restructuring plan, the Company recorded a restructuring
charge of $19.9 million ($12.9 million net of tax) in the fourth quarter of
fiscal 1997. The restructuring charge consisted of tangible and intangible
asset write-downs of $11.5 million, severance and other employee costs of $4.5
million, facility closure and consolidation costs of $2.9 million and exit
costs of $1.0 million. Severance and other employee costs relate to
approximately 250 associates at various operating and corporate facilities.
Operations that were discontinued as a result of the restructuring reported
sales of $16.4 million and $15.9 million in fiscal 1997 and fiscal 1996,
respectively. All restructuring actions were taken by the end of fiscal 1998.
The restructuring reserve balance remaining at June 30, 1998 totaled $1.2
million, and relates primarily to continuing excess rent and lease termination
costs related to the restructuring. Management believes the remaining
restructuring reserve is adequate to cover such costs.
The fiscal 1997 restructuring charge was offset by a $0.3 million restructuring
gain ($0.2 million net of tax) recorded in the first quarter of fiscal 1997
related to the restructuring of the former publishing operations. The $0.3
million gain consisted of a $0.7 million gain from the sale of the consumer
publishing operation, offset by a $0.4 million charge related to the strategic
repositioning of the custom publishing product line into the Marketing
Communications sector.
3. ACQUISITIONS AND DISPOSITIONS
On April 1, 1998, the Company acquired Germersheim, Inc., an Atlanta-based
national point of purchase marketing service provider. The $13.7 million
purchase price consisted of 41,195 shares of the Company's common stock, at an
aggregate value of $1 million, $11 million in cash payments (including direct
acquisition costs), and $1.7 million in debt (primarily capital lease
obligations). Of the $11 million in cash payments, $2 million was held in
escrow at June 30, 1998, as contingent consideration, and will only be released
if specified sales performance levels are met during each of the next two
years. The purchase agreement also provides for additional contingent
consideration payable to the seller based upon future profitability of the
business. Such contingent consideration has been excluded from the purchase
price above. The acquisition was accounted for under the purchase method and,
accordingly, the costs of the acquisition were allocated to the assets acquired
and the liabilities assumed based upon their respective fair values at the date
of purchase. The operating results of Germersheim, Inc. have been included in
the consolidated operating results since the date of acquisition.
In September 1996, the Company sold the net assets of its consumer publishing
division for total consideration of $6.5 million. The sale resulted in a pretax
gain of $0.7 million (see Note 2).
-------
32
- --------------------------------------------------------------------------------
In May 1996, the Company acquired all of the outstanding stock of Lancaster
Press, Inc. and Subsidiary, a Pennsylvania-based producer of scientific,
technical and medical journals, for total consideration, including assumed debt
and transaction costs, of approximately $58.7 million. Debt assumed included a
$2.7 million mortgage payable obligation. The acquisition was funded by
borrowings under the Company's revolving credit/term loan facility with its
banks (see Note 7).
In November 1995, the Company acquired substantially all of the assets and
assumed certain liabilities of The Software Factory, Inc., an Atlanta-based
provider of software packaging and media duplication services. The $14.1
million purchase price consisted of 79,681 shares of the Company's common
stock, at an aggregate value of $2.0 million, and $12.1 million in cash
payments, including direct acquisition costs. In fiscal 1996, the Company
acquired certain assets of four other companies. Total cash paid for these
acquisitions was $3.4 million.
The funds used to acquire fiscal 1996 acquisitions were primarily provided from
the proceeds of the issuance of 1.725 million shares of the Company's common
stock (see Note 11). All of the fiscal 1996 acquisitions were accounted for
under the purchase method and, accordingly, the costs of the acquisitions were
allocated to the assets acquired and liabilities assumed based on their
respective fair values. The results of operations of each of the acquired
companies have been included in the Company's consolidated results of
operations since each respective date of acquisition.
The unaudited consolidated results of operations on a pro forma basis, as
though Lancaster Press, Inc. and The Software Factory, Inc. had been acquired
as of the beginning of fiscal year 1996 are as follows:
1996
(In thousands, except per share data) (as adjusted, see Note 4)
- --------------------------------------------------------------------
Revenues $ 391,804
Income before extraordinary item 8,459
Net income 7,664
Earnings per share, assuming dilution:
Income before extraordinary item $ 1.13
Net income 1.02
=============================================================
4. INVENTORIES
Inventories as of June 30, 1998 and 1997 consist of the following:
(In thousands) 1998 1997
- -----------------------------------------------------
Raw materials and supplies $ 4,841 $ 5,341
Work in process:
Materials 6,567 2,838
Other manufacturing costs 11,331 9,451
Finished goods 2,871 3,043
- -----------------------------------------------------
Inventories $ 25,610 $ 20,673
=====================================================
During the fourth quarter of fiscal 1998, the Company changed its method of
accounting for certain of its inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. As of June 30, 1997, the
Company had valued approximately 15% of its inventories using LIFO. This change
standardizes the method of accounting for all Company inventory. As required by
generally accepted accounting principles, the Company has retroactively
adjusted prior years' financial statements for the change. The restatement had
no effect on net income in fiscal 1998, increased the net loss in fiscal 1997
by $194,000, or $0.02 per share, and increased net income in fiscal 1996 by
$87,000, or $0.01 per share. The restatement also had the effect of increasing
retained earnings as of June 30, 1995 by $873,000.
- -------
33
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 1998 and 1997 consist of the
following:
(In thousands) 1998 1997
- -----------------------------------------------------------------
Land and improvements $ 6,041 $ 5,040
Buildings and improvements 49,985 45,856
Machinery, equipment and fixtures 185,079 167,283
- -----------------------------------------------------------------
Total property, plant and equipment 241,105 218,179
Less: Accumulated depreciation 107,269 99,558
- -----------------------------------------------------------------
Property, plant and equipment, net $ 133,836 $ 118,621
=================================================================
Commitments outstanding for capital expenditures at June 30, 1998 totaled $9.9
million.
The Company leases office, production and storage space, and equipment under
various noncancelable operating leases. A number of leases contain renewal
options and some contain purchase options. Certain leases require the Company
to pay utilities, taxes, and other operating expenses. Future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of June 30, 1998 are as
follows: 1999 - $6.2 million; 2000 - $4.7 million; 2001 - $3.5 million; 2002 -
$3.0 million; 2003 - $2.7 million and thereafter - $4.4 million.
Total rental expense charged to operations was $6.5 million, $7.0 million, and
$5.7 million in fiscal 1998, 1997 and 1996, respectively. Substantially all
such rental expense represented the minimum rental payments under operating
leases.
Depreciation expense was $16.7 million, $16.2 million, and $13.4 million for
fiscal 1998, 1997 and 1996, respectively.
6. OTHER BALANCE SHEET INFORMATION
Accrued expenses at June 30, 1998 and 1997 consist of the following:
(In thousands) 1998 1997
- --------------------------------------------
Compensation $ 12,737 $ 11,029
Deferred revenue 818 1,576
Other 4,738 3,069
- --------------------------------------------
Accrued expenses $ 18,293 $ 15,674
============================================
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 Notes 9 and 10).
-------
34
- --------------------------------------------------------------------------------
7. DEBT
Long-term debt at June 30, 1998 and 1997 consists of the following:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
Bank borrowings:
Term loan facility, weighted-average interest rate of 6.38% $ 37,000 $ 40,000
Revolving credit facility, weighted-average interest rate of 6.15% 56,500 48,000
Tax-exempt variable rate industrial development bonds, weighted-average
interest rate of 4.4%, due 2016 1,600 3,315
Mortgage payable, 10%, due 2002 2,669 2,696
Other 1,886 458
- --------------------------------------------------------------------------------------------------
Total long-term debt 99,655 94,469
Less: current maturities of long-term debt 6,431 5,017
- --------------------------------------------------------------------------------------------------
Long-term debt $ 93,224 $ 89,452
==================================================================================================
In October 1996, the Company entered into a new $160 million bank credit
agreement with six major banks. The $160 million bank credit agreement consists
of a $40 million term loan facility, expiring in 2003, and a $120 million
revolving credit facility, expiring in 2001. This agreement replaced an
existing $115 million bank credit agreement, consisting of a $30 million term
loan facility and an $85 million revolving credit facility, entered into with
four of the same banks in January 1996. The term of the facility, interest rate
spreads and commitment fees were essentially the same under both the current
and former bank credit agreements.
The term loan facility requires the Company to make quarterly installment
payments beginning January 1998 through expiration. The revolving credit
facility requires the Company to pay commitment fees at an annual rate ranging
from 1/8 to 1/4 of 1% (based on the level of certain debt covenants) of the
total amount of the facility. The rate of interest payable under the bank
credit agreement is a function of (i) LIBOR, (ii) prime rate or (iii) money
market rate, each as defined under the agreement.
Using the additional capacity available under the new $160 million bank credit
agreement, the Company repaid $40 million of 6.74% senior unsecured notes.
These notes were originally due in 2003. There was no prepayment penalty
associated with the debt retirement in fiscal 1997.
In December 1995, the Company retired $11.2 million principal of 9.76% senior
notes originally due June 2000 and recorded a $1.3 million ($0.8 million net of
tax) extraordinary loss relating to the early retirement of this debt. The
funds used for the debt retirement were provided from the proceeds of the
issuance of 1.725 million shares of the Company's common stock (see Note 11).
The Company's debt agreements contain covenants regarding fixed charge coverage
and net worth and contain other restrictions, including limitations of
additional borrowings, and the acquisition, disposition and securitization of
assets. The Company was in compliance with all debt covenants at June 30, 1998.
The fair value of long-term debt as of June 30, 1998 and 1997 approximated
their recorded values.
Maturities of long-term debt are as follows: 1999 - $6.4 million; 2000 - $6.4
million; 2001 - $6.4 million; 2002 - $66.3 million; 2003 - $8.3 million;
thereafter - $5.9 million. The net book value of all encumbered properties as
of June 30, 1998 and 1997 totaled $4.2 million and $4.4 million, respectively.
The Company had uncommitted bank lines of credit which provide for unsecured
borrowings of up to $10 million, of which $2.1 million was outstanding at June
30, 1998.
- -------
35
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company incurred interest costs of $8.2 million, $8.5 million, and $5.4
million for fiscal 1998, 1997 and 1996, respectively, of which $0.6 million for
1998, $0.7 million for 1997, and $0.3 million for 1996 were capitalized.
Interest paid, net of amounts capitalized, totaled $7.7 million, $7.9 million,
and $5.0 million for fiscal 1998, 1997 and 1996 respectively.
The Company has a strategy to optimize the ratio of the Company's
fixed-to-variable rate financing consistent with maintaining an acceptable
level of exposure to the risk of interest rate fluctuations. To achieve this
mix, the Company, from time to time, enters into interest rate swap agreements
with various banks to exchange fixed and variable rate interest payment
obligations without the exchange of the underlying principal amounts (the
"notional amounts"). These agreements are hedged against the Company's
long-term borrowings and have the effect of converting the Company's long-term
borrowings from variable rate to fixed rate, or fixed rate to variable rate, as
required. The differential to be paid or received is accrued as interest rates
change and recognized as an adjustment to interest expense related to the debt.
The related amount payable to or receivable from counterparties is included in
other liabilities or assets. The Company's strategy to effectively convert
variable rate financing to fixed rate financing through the use of the
aforementioned swap agreements resulted in additional interest cost of $1.3
million in fiscal 1998, $1.2 million in fiscal 1997, and $0.7 million in fiscal
1996.
At June 30, 1998, the Company had one fixed-to-floating interest rate swap
agreement outstanding with a notional amount of $35 million. This swap was
entered into in fiscal 1994 to convert $35 million of the 6.74% Senior Notes
due in 2003 to floating-rate debt. Under the terms of this agreement, the
Company receives interest payments at a fixed rate of 5.265% and pays interest
at a variable rate that is based on six-month LIBOR. The initial term of this
swap agreement expires in fiscal 1999, and is renewable at the bank's option
for an additional two years. The fair value of this contract (which is not
recognized in the consolidated financial statements) at June 30, 1998 and 1997
was negative $0.1 million, and negative $0.4 million, respectively. In fiscal
1997, the Company repaid the fixed rate debt hedged by this swap with variable
rate debt. To adjust the ratio of the Company's fixed to variable rate
financing, the Company entered into additional floating-to-fixed rate swap
agreements in fiscal 1997.
At June 30, 1998, the Company had various floating-to-fixed interest rate swap
agreements outstanding with notional amounts totaling $88.7 million. These
swaps effectively convert a portion of the Company's variable-rate debt and
aforementioned fixed-to-floating rate swap to a fixed-rate. The swap agreements
have individual notional amounts ranging from $6.5 million to $40 million.
Under the terms of each of the agreements, the Company receives interest
payments at a variable rate based on either 30-day or six-month LIBOR and pays
interest at a fixed rate ranging from 6.54% to 8.09%. The fair value of these
contracts (which is not recognized in the consolidated financial statements) at
June 30, 1998 and 1997 totaled negative $2.0 million and negative $1.1 million,
respectively. These swap agreements are scheduled to expire as follows: 1999:
$18.7 million; 2002: $40 million; 2003: $30 million.
------
36
- --------------------------------------------------------------------------------
The notional amounts and applicable rates of the Company's interest rate swap
agreements are as follows:
Paid Fixed, Paid Floating,
Received Floating Received Fixed
---------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Notional amount:
Beginning balance $ 88,700 $ 47,900 $ 17,375 $ 35,000 $ 35,000 $ 35,000
New contracts -- 40,800 37,900 -- -- --
Expired contracts -- -- (7,375) -- -- --
- -----------------------------------------------------------------------------------------------------
Ending Balance $ 88,700 $ 88,700 $ 47,900 $ 35,000 $ 35,000 $ 35,000
=====================================================================================================
Weighted-Average
Interest Rates for
1998
---------------------
Type of swap: Paid Received
- -------------------------------------------------------
Paid fixed, received floating 7.0% 5.8%
Paid floating, received fixed 5.9% 5.3%
======================================================
The notional amount of each swap contract does not represent exposure to credit
loss. In the event of default by the counterparties, the risk, if any, is the
cost of replacing the swap agreement at current market rates. The Company
continually monitors its positions and the credit rating of its counterparties
and limits the amount of agreements it enters into with any one party.
Management does not anticipate nonperformance by the counterparties; however,
if incurred, any such loss would be immaterial.
8. INCOME TAXES
Income tax expense (benefit), for the years ended June 30, 1998, 1997, and 1996
consists of the following:
1998 1997 1996
(In thousands) (as adjusted, see Note 4)
- ----------------------------------------------------------------------
Current:
Federal $ 4,069 $ 2,878 $ 2,139
State 1,098 483 418
- ----------------------------------------------------------------------
Total current 5,167 3,361 2,557
- ----------------------------------------------------------------------
Deferred:
Federal 456 (4,168) 1,228
State 67 (1,412) 171
- ----------------------------------------------------------------------
Total deferred 523 (5,580) 1,399
- ----------------------------------------------------------------------
Income tax expense (benefit) $ 5,690 $ (2,219) $ 3,956
======================================================================
- -------
37
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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:
1998 1997 1996
(In thousands) (as adjusted, see Note 4)
- ------------------------------------------------------------------------------------------
Computed at statutory U.S. rate $ 5,059 $ (2,573) $ 3,591
State income taxes, net of Federal tax benefit 341 (613) 388
Goodwill amortization 450 924 251
Research tax credit (50) (75) (217)
Other (110) 118 (57)
- ------------------------------------------------ ------- --------- -------
Income tax expense (benefit) $ 5,690 $ (2,219) $ 3,956
================================================ ======= ========= =======
Cash paid for income taxes totaled $5.0 million, $2.3 million, and $2.4
million, for fiscal 1998, 1997, and 1996, respectively.
The Company has state net operating loss carryforwards aggregating
approximately $52.6 million, which expire during fiscal years 2004 to 2013. A
valuation allowance of $0.8 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 1998 and $0.2 million in fiscal
1997.
The tax effects of the significant temporary differences that comprise the
deferred tax assets and liabilities in the consolidated balance sheets at June
30, 1998 and 1997 are as follows:
1998 1997
(as adjusted,
(In thousands) see Note 4)
- ----------------------------------------------------------------------
Assets:
Allowance for doubtful accounts $ 1,067 $ 857
Employee benefits 5,028 3,510
State net operating loss carryforwards 1,545 1,354
Goodwill 2,625 2,576
Accrued restructuring costs 2,133 3,318
Other 51 308
- --------------------------------------------------------------------
Gross deferred tax assets 12,449 11,923
- --------------------------------------------------------------------
Liabilities:
Property, plant, and equipment 14,171 12,450
Other 346 501
- --------------------------------------------------------------------
Gross deferred tax liabilities 14,517 12,951
- --------------------------------------------------------------------
Valuation allowance 762 647
- --------------------------------------------------------------------
Net liability $ 2,830 $ 1,675
====================================================================
-------
38
- --------------------------------------------------------------------------------
9. RETIREMENT PLANS
DEFINED BENEFIT PLANS
The Company sponsors a noncontributory defined benefit pension plan that covers
substantially all employees, and participates in a multiemployer retirement
plan that provides defined benefits to employees covered under a collective
bargaining agreement (collectively, the "core plans"). The Company also
sponsors a supplemental pension plan for certain key executives (the
"supplemental plan"). All plans provide benefit payments using formulas based
on an employee's compensation and length of service, or stated amounts for each
year of service. The Company makes contributions to its core plans sufficient
to meet the minimum funding requirements of applicable laws and regulations.
The supplemental plan for key executives is a nonqualified, nonfunded pension
plan, and is provided for by charges to earnings sufficient to meet the
projected benefit obligation. Contributions to the multiemployer plan are
generally based on a negotiated labor contract. The Company's contributions
totaled $1.8 million, $3.4 million, and $0.3 million in fiscal 1998, 1997 and
1996, respectively. The core plans' assets consist primarily of equity and debt
securities.
The components of net pension costs for fiscal 1998, 1997, and 1996 for all
plans follow:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Present value of benefits earned $ 2,550 $ 2,341 $ 2,010
Interest cost on plan liabilities 3,288 2,783 2,305
Return on plan assets:
Actual (9,546) (3,567) (4,522)
Deferred 6,154 838 2,382
Net amortization (41) (86) (104)
Contributions to multiemployer plan 64 59 --
- ---------------------------------------------------------------------------
Net pension costs $ 2,469 $ 2,368 $ 2,071
===========================================================================
The actuarial assumptions used in determining net pension cost and the related
benefit obligations for all plans were as follows:
1998 1997 1996
-----------------------------------
Discount rate 7.25% 8.25% 8.25%
Rate of increase in compensation 4.5% 4.5% 4.5%
Long-term rate of return on plan assets 9.75% 9.0% 9.0%
- -------------------------------------------------------------------------------
- -------
39
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
A summary of the funded status of pension plans at June 30, 1998 and 1997
follows:
Core Plans Supplemental Plan
---------------------------------------------------
(In thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $ 38,612 $ 29,581 $ 4,073 $ 3,360
Nonvested benefits 2,498 1,733 362 341
- -------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 41,110 31,314 4,435 3,701
Effect of projected salary increases 6,516 4,975 1,132 868
- -------------------------------------------------------------------------------------------------------------
Projected benefit obligation 47,626 36,289 5,567 4,569
- -------------------------------------------------------------------------------------------------------------
Plan assets at market value 44,860 35,057 * *
- -------------------------------------------------------------------------------------------------------------
Excess of projected benefit obligation over plan assets 2,766 1,232 5,567 4,569
Unrecognized net asset (obligation) at transition 1,723 1,875 (578) (649)
Unrecognized prior service cost (365) (40) -- --
Unrecognized losses (1,609) (867) (1,306) (474)
Additional minimum pension liability -- 238 577 255
- -------------------------------------------------------------------------------------------------------------
Accrued pension costs $ 2,515 $ 2,438 $ 4,260 $ 3,701
=============================================================================================================
* The supplemental plan is technically a nonfunded plan. However, the Company
has acquired life insurance contracts ($14.5 million face amount at June 30,
1998 and 1997) intended to be adequate to fund future benefits. The cash
surrender value of these contracts, net of policy loans, was $2.2 million
and $1.9 million at June 30, 1998 and 1997, respectively, and is included in
other assets in the consolidated balance sheets.
DEFINED CONTRIBUTION PLAN
The thrift savings plan enables employees to save a portion of their earnings
on a tax-deferred basis and also provides for matching contributions from the
Company for a portion of the employees' savings. Additionally, the plan
provides for individual subsidiary companies to make profit-sharing
contributions. The Company's expense under this plan was $1.9 million in fiscal
1998, and $1.8 million in fiscal 1997 and fiscal 1996.
10. OTHER POSTRETIREMENT BENEFITS
All employees of the Company are eligible for retiree medical coverage if they
retire on or after attaining age 55 with ten or more years of service. Benefits
differ depending upon the date of retirement. For those employees who retired
prior to April 1, 1988, and are under age 65, coverage is available at a cost
to the retiree equal to the cost to the Company for an active employee less the
fixed Company subsidy. Once employees in this group have reached age 65,
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 under the Company's plan ceases and the retiree
becomes covered by Medicare. For those employees who retire on or after January
1, 1994, coverage is available until age 65. The retiree contributes the full
retiree rate, which is equal to the cost to the Company for a pre-65 retired
employee. Upon reaching age 65, coverage under the Company's plan ceases, and
the retiree becomes covered by Medicare.
-------
40
- --------------------------------------------------------------------------------
The following table sets forth the components of the accrued postretirement
benefit obligation as of June 30, 1998 and 1997:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation attributable to retirees $ 337 $ 356
Unrecognized net gain 206 274
- ----------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 543 $ 630
========================================================================================
Amounts recognized as net periodic postretirement benefit cost in fiscal 1998
and 1997 were not material.
The discount rate used in determining the accumulated postretirement benefit
obligation as of June 30, 1998 was 7.25%. The assumed healthcare cost trend
rate used in measuring the accumulated benefit obligation was 8% in fiscal
1998, gradually decreasing to 5.75% in the year 2003 and remaining level
thereafter. A one percentage-point increase in the assumed healthcare cost
trend rates would not change the accumulated postretirement benefit obligation.
11. SHAREHOLDERS' EQUITY
Shareholders' equity consists of the following:
Common Stock Capital in Excess Retained
(Dollars in thousands, except per share data) Shares Amount of Par Value Earnings
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 (as previously reported) 6,030,000 $ 3,015 $ 12,448 $ 46,419
Adjustment for the cumulative effect on prior years of
applying retroactively the new method of accounting for
inventory (see note 4) -- -- -- 873
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995, as adjusted 6,030,000 3,015 12,448 47,292
Net income (as adjusted, see note 4) -- -- -- 5,796
Cash dividends - $.20 per share -- -- -- (1,485)
Issuance of common stock 1,805,000 902 39,459 --
Net shares issued upon exercise of stock options 73,000 37 1,064 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996, as adjusted 7,908,000 3,954 52,971 51,603
Net loss (as adjusted, see note 4) -- -- -- (5,217)
Cash dividends - $.20 per share -- -- -- (1,581)
Repurchase of common stock (88,000) (44) (1,141) --
Net shares issued upon exercise of stock options 10,000 5 93 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997, as adjusted 7,830,000 3,915 51,923 44,805
Net income -- -- -- 9,090
Cash dividends - $.20 per share -- -- -- (1,572)
Repurchase of common stock (8,000) (4) (114) --
Issuance of common stock for business acquisition
(see note 3) 41,000 21 980 --
Net shares issued upon exercise of stock options 58,000 29 743 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 7,921,000 $ 3,961 $ 53,532 $ 52,323
===========================================================================================================================
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, 1998, 96,000 shares
had been repurchased under this authorization.
- -------
41
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
In November 1995, the Company completed the issuance of an additional 1.725
million shares of the Company's common stock through a public offering,
resulting in net proceeds (after deducting issuance costs) of $38.4 million.
The Company used the net proceeds to (i) repay the $11.2 million of 9.76%
Senior Notes due in June 2000, plus a $1.3 million ($0.8 million net of tax)
prepayment penalty, (ii) fund the cash portion of certain acquisitions and
(iii) repay short-term borrowings used to fund seasonal working capital needs.
In 1989 and 1990, the Board of Directors authorized the purchase of up to
200,000 shares of the Company's stock from time to time on the open market. The
shares, if and when purchased, may be used for the funding of employee benefit
plans. As of June 30, 1998, 133,000 shares had been repurchased under this
authorization.
In February 1989, as part of a shareholder rights plan, the Board of Directors
declared a dividend distribution of one preferred share purchase right for each
outstanding share of common stock. Each right entitles the shareholder to buy
one unit (one one-thousandth of a share) of Series A Preferred Stock at a
purchase price of $45 per share (the "Purchase Price"), subject to adjustment.
The rights will become exercisable initially if a person or group acquires or
announces a tender offer for 20% or more of the Company's common stock
("Acquiring Person"), at which time each right will be exercisable to purchase
one unit of Series A Preferred at the Purchase Price. At any time after a
person becomes an Acquiring Person, the Company may issue a share of common
stock in exchange for each right other than those held by the Acquiring Person.
If an Acquiring Person acquires 30% or more of the Company's common stock or an
Acquiring Person merges into or combines with the Company, each right will
entitle the holder, other than the Acquiring Person, upon payment of the
Purchase Price, to acquire Series A Preferred or, at the option of the Company,
common stock, having a market value equal to twice the Purchase Price. If the
Company is acquired in a merger or other business combination in which it does
not survive or if 50% of its earnings power is sold, each right will entitle
the holder, other than the Acquiring Person, to purchase securities of the
surviving company having a market value equal to twice the Purchase Price.
Unless redeemed earlier, the rights expire on February 13, 1999. The rights may
be redeemed by the Board of Directors at any time prior to the tenth day after
a person becomes an Acquiring Person, subject to the Board of Directors'
ability to extend or reinstate the redemption period under certain
circumstances. The rights may have certain anti-takeover effects. An Acquiring
Person will experience substantial dilution under certain circumstances.
However, the rights should not interfere with any merger or other business
combination approved by the Board of Directors because the rights are generally
redeemable at the discretion of the Board.
In addition to its common stock, the Company's authorized capital includes
1,000,000 shares of preferred stock ($1.00 par value), issuable in series, of
which 100,000 shares are designated as Series A Preferred.
12. STOCK OPTIONS
Under the Company's stock option plans, selected employees and nonemployee
directors may be granted options to purchase its common stock at prices equal
to the fair market value of the stock at the date the options are granted. In
fiscal 1997, the Company adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." As permitted by the provisions
of SFAS No. 123, the Company continues to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based awards. Accordingly, since
stock options are issued at fair market value on the date of grant, the Company
does not recognize charges to earnings resulting from the plans.
The following information is provided solely in connection with the disclosure
requirements of SFAS No. 123. If the Company had elected to recognize
compensation cost related to its stock options granted in fiscal 1998 and 1997
in accordance with the provisions of SFAS No. 123, there would have been a pro
forma net income of $8,436,000 in fiscal 1998 ($1.03 per share, assuming
dilution) and a pro forma net loss of $5,450,000 during fiscal 1997 (($0.68)
per share, assuming dilution). The fair value of these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal 1998 and 1997, respectively: risk-free
interest rates of 5.97% and 6.61%; dividend
-------
42
- --------------------------------------------------------------------------------
yields of 0.82% and 1.42%; volatility factors of .340 and .390 and an expected
life of 8 years. The weighted-average fair value of options was $11.52 and
$6.71 per option during fiscal 1998 and 1997, respectively.
A summary of the Company's stock option activity and related information for
the fiscal years ended June 30, 1998, 1997 and 1996 follows:
Number of Option Price Weighted-Average
Shares Per Share Exercise Price(A)
----------------------------------------------------------
Outstanding at June 30, 1995 607,000 $ 6.38 to $28.00
Exercised (73,000) 6.38 to 9.75
Granted 169,000 16.75 to 25.06
Lapsed or canceled (30,000) 16.75 to 25.06
- --------------------------------------------------------------------------------------
Outstanding at June 30, 1996 673,000 8.25 to 28.00 $ 14.12
Exercised (10,000) 9.81 9.81
Granted 258,000 13.18 to 16.13 14.06
Lapsed or canceled (24,000) 9.13 to 19.19 16.30
- --------------------------------------------------------------------------------------
Outstanding at June 30, 1997 897,000 8.25 to 28.00 14.08
Exercised (58,000) 9.00 to 17.13 13.21
Granted 251,000 16.14 to 26.88 24.46
Lapsed or canceled (88,000) 13.25 to 19.19 16.78
- --------------------------------------------------------------------------------------
Outstanding at June 30, 1998 1,002,000 $ 8.25 to $28.00 $ 16.50
- --------------------------------------------------------------------------------------
- -----
Exercisable at June 30:
1996 436,000 $ 8.25 to $24.05
1997 403,000 8.25 to 24.05 $ 11.44
1998 590,000 8.25 to 26.88 13.67
======================================================================================
(A) Disclosure of weighted-average exercise price information is required by
SFAS No. 123 for fiscal years beginning after December 15, 1995.
The weighted-average remaining contractual life of options outstanding at June
30, 1998 is 7 years. At June 30, 1998, 1,129,000 shares of authorized but
unissued common stock were reserved for issuance upon exercise of options
granted or grantable under the plans. Options are generally exercisable under
the plans for periods of 5 to 10 years from the date of grant. The following
table provides additional detail of the 1,002,000 options outstanding at June
30, 1998:
Weighted-
Number of Average Weighted- Number of Weighted-
Range of Options Remaining Average Options Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------
$ 8.25 to $13.25 322,000 4.0 $ 9.66 297,000 $ 9.36
14.25 to 19.19 465,000 8.0 16.50 252,000 16.73
24.05 to 28.00 215,000 9.2 26.75 41,000 26.12
=========================================================================================================
- -------
43
CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
different businesses and geographic regions. As of June 30, 1998 and 1997, the
Company had no significant concentrations of credit risk.
14. CONTINGENCIES
The Company is party to various legal actions which are ordinary and incidental
to its business. While the outcome of legal actions cannot be predicted with
certainty, management believes the outcome of any of these proceedings, or all
of them combined, will not have a materially adverse effect on its consolidated
financial position or results of operations.
-------
44
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, 1998 and 1997, and the related consolidated statements of income and
cash flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
As explained in Note 4 to the financial statements, the Company has given
retroactive effect to the change in accounting for certain of its inventories
from the last-in, first-out method to the first-in, first-out method.
/s/ ARTHUR ANDERSEN LLP
--------------------------
ARTHUR ANDERSEN LLP
Richmond, Virginia
July 28, 1998
- -------
45