Exhibit 13
Cadmus Communications Corporation and Subsidiaries
SELECTED FINANCIAL DATA(1)
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
- ---------------------------------------------------------------- ---------------------------
1999 1998
---- ----
OPERATING DATA
Net sales $443,045 $393,823
Cost of sales 353,973 304,014
-------- --------
Gross profit 89,072 89,809
Selling and administrative expenses 60,730 63,872
Restructuring charge, net -- 3,950
Net gain on divestitures (9,521) --
-------- --------
Operating income 37,863 21,987
Interest expense 12,204 7,595
Interest rate swap settlement charges 2,101 --
Other, net (498) (388)
-------- --------
Income (loss) before income taxes and extraordinary item 24,056 14,780
Income tax expense (benefit) 9,414 5,690
Extraordinary loss on early extinguishment of debt, net of tax 929 --
-------- --------
Net income (loss) $ 13,713 $ 9,090
- ---------------------------------------------------------------- -------- --------
OPERATING DATA, BEFORE ONE TIME ITEMS(2)
Operating income $ 28,342 $ 25,937
Income 10,133 11,541
EBITDA 49,835 44,769
- ---------------------------------------------------------------- -------- --------
PER SHARE DATA(3)
Income (loss) before extraordinary item
- as reported $ 1.76 $ 1.11
- before one time items(2) 1.22 1.41
Net income (loss) per share
- as reported 1.65 1.11
- before one time items(2) 1.22 1.41
Cash dividends .20 .20
Shareholders' equity 15.15 13.86
EBITDA(2) 5.98 5.48
- ---------------------------------------------------------------- -------- --------
FINANCIAL POSITION
Working capital $ 60,329 $ 30,937
Property, plant and equipment, net 173,085 133,836
Goodwill and other intangibles, net 198,570 48,158
Total assets 523,846 291,752
Total debt 275,879 101,755
Total shareholders' equity 136,533 109,816
Total capital 412,412 211,571
- ---------------------------------------------------------------- -------- --------
SELECTED RATIOS
Gross profit margin 20.1% 22.8%
Operating income margin(2) 6.4% 6.6%
Effective tax rate(2) 39.1% 38.5%
Debt as a percent of total capital 66.9% 48.1%
Operating income return on average total capital(2) 10.6% 12.7%
Income return on average shareholders' equity (2) 8.4% 11.0%
- ---------------------------------------------------------------- -------- --------
OTHER DATA
Weighted-average common shares outstanding 8,336 8,176
Shares outstanding at fiscal year end 9,011 7,921
Stock market price data:
High $ 25 $ 28
Low 12 5/8 14
Close (at fiscal year end) 13 3/4 24 1/4
Number of associates (approximate) 4,100 3,000
- ---------------------------------------------------------------- -------- --------
(Dollars in thousands, except per share data) Years Ended June 30
- ---------------------------------------------------------------- ----------------------------------------
1997 1996 1995
---- ---- ----
OPERATING DATA
Net sales $384,942 $336,655 $279,641
Cost of sales 299,840 258,947 209,259
-------- -------- --------
Gross profit 85,102 77,708 70,382
Selling and administrative expenses 65,104 62,288 52,736
Restructuring charge, net 19,699 -- --
Net gain on divestitures -- -- --
-------- -------- --------
Operating income 299 15,420 17,646
Interest expense 7,788 5,144 5,351
Interest rate swap settlement charges -- -- --
Other, net (53) (271) (543)
-------- -------- --------
Income (loss) before income taxes and extraordinary item (7,436) 10,547 12,838
Income tax expense (benefit) (2,219) 3,956 5,263
Extraordinary loss on early extinguishment of debt, net of tax -- 795 --
-------- -------- --------
Net income (loss) $ (5,217) $ 5,796 $ 7,575
- ---------------------------------------------------------------- -------- -------- --------
OPERATING DATA, BEFORE ONE TIME ITEMS(2)
Operating income $ 19,998 $ 15,420 $ 17,646
Income 7,556 6,591 7,575
EBITDA 38,239 30,254 30,321
- ---------------------------------------------------------------- -------- -------- --------
PER SHARE DATA(3)
Income (loss) before extraordinary item
- as reported $ (.65) $ .88 $ 1.22
- before one time items(2) .94 .88 1.22
Net income (loss) per share
- as reported ( .65) .77 1.22
- before one time items(2) .94 .88 1.22
Cash dividends .20 .20 .20
Shareholders' equity 12.85 13.72 10.41
EBITDA(2) 4.76 4.04 4.89
- ---------------------------------------------------------------- -------- -------- --------
FINANCIAL POSITION
Working capital $ 42,162 $ 60,517 $ 33,286
Property, plant and equipment, net 118,621 116,365 84,570
Goodwill and other intangibles, net 42,572 52,846 8,281
Total assets 266,916 283,723 172,443
Total debt 96,119 110,124 60,117
Total shareholders' equity 100,643 108,528 62,755
Total capital 196,762 218,652 122,872
- ---------------------------------------------------------------- -------- -------- --------
SELECTED RATIOS
Gross profit margin 22.1% 23.1% 25.2%
Operating income margin(2) 5.2% 4.6% 6.3%
Effective tax rate(2) 38.4% 37.5% 41.0%
Debt as a percent of total capital 48.8% 50.4% 48.9%
Operating income return on average total capital(2) 9.6% 9.0% 14.9%
Income return on average shareholders' equity (2) 7.2% 7.7% 12.8%
- ---------------------------------------------------------------- -------- -------- --------
OTHER DATA
Weighted-average common shares outstanding 8,035 7,495 6,195
Shares outstanding at fiscal year end 7,830 7,908 6,030
Stock market price data:
High $ 17 3/4 $29 7/8 $24 3/4
Low 12 1/4 13 1/4 14 1/2
Close (at fiscal year end) 15 1/2 15 3/8 23 5/8
Number of associates (approximate) 3,000 3,200 2,400
- ---------------------------------------------------------------- -------- -------- --------
(1) Certain reclassifications were made to prior years' amounts to conform to
current year presentation.
(2) Excludes the effects of the following one-time charges: restructuring
charges of $3.95 million ($2.5 million net of tax), and $19.7 million ($12.7
million net of tax) in fiscal 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 $1.5 million ($.9 million net of tax) and $1.3 million ($.8 million
net of tax) in fiscal 1999 and 1996, respectively.
(3) Income per share data assumes dilution.
25
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Headquartered in Richmond, Virginia, Cadmus Communications Corporation provides
customers with integrated, end-to-end information and communications solutions.
The Company is organized around two primary business sectors: Professional
Communications serving customers who publish information, and Marketing
Communications serving customers who convey marketing messages. Cadmus is the
largest printer and producer of scientific, technical and medical ("STM")
journals and publications in the United States, and is a leading national
printer and producer of special interest magazines, point of purchase materials
and specialty packaging materials. Additional Cadmus services include commercial
printing, advertising, direct marketing, software duplication, catalog
production and interactive media.
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
connection with the restructuring, the Company reorganized its organizational
and operational structure into two business sectors: Professional Communications
and Marketing Communications. The company's previous organizational structure
consisted of the Periodicals, Graphic Communications, Marketing and Publishing
groups.
Cadmus Professional Communications is comprised of primarily two product
lines: STM journal services and special interest magazines, serving both
not-for-profit and commercial publishers. Cadmus Professional Communications
provides a full range of composition, editorial, prepress, printing, warehousing
and distribution services. In addition, this sector provides a full complement
of digital products and services, including website design and architecture,
content management, Internet and CD-ROM based electronic archiving, electronic
peer review and online publishing.
Cadmus Marketing Communications focuses on the creation, production and
distribution of graphic communications and marketing services. Major product
lines include point of purchase marketing materials, specialty packaging and
promotional printing production, graphic solutions, software duplication,
catalog design and photography, commercial printing, direct marketing and
fulfillment and distribution services.
SIGNIFICANT TRANSACTIONS
Acquisition of Mack Printing Company. On April 1, 1999, the Company acquired the
Mack Printing Company ("Mack") by purchasing all of the capital stock of its
parent company, Melham Holdings, Inc., for approximately $201 million. Mack is a
full-service publications printer that produces a wide variety of shortto
medium-run 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. Mack's net sales since acquisition were $40.5 million and
operating income was $5.6 million.
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.
Acquisition of Germersheim, Inc, and Related Restructure. In April 1998,
the Company acquired Germersheim, Inc., an Atlanta-based point of purchase
provider. In June 1998, the Company recorded an acquisition-related
restructuring charge of $4.0 million ($2.5 million net of tax) related to the
integration of Germersheim with its existing point of purchase operations. The
charge included costs to consolidate facilities, eliminate redundant assets and
provide severance. These actions were initiated in fiscal 1998 and have been
completed.
Fiscal 1997 Restructuring. During the fourth quarter of fiscal 1997, the
Company adopted a restructuring plan that impacted a number of the operations.
The plan included:
o the closing of the Baltimore promotional printing facility and the Long
Beach-based direct marketing agency;
o the consolidation of the Atlanta and Richmond-based interactive
divisions;
o the consolidation of two STM journal fulfillment and distribution
operations;
o the realignment of management, production and administrative personnel
due to the realignment of the businesses;
o the write-down of certain tangible and intangible assets; and
o the exit from certain nonstrategic customer relationships and product
lines.
26
In connection with this restructuring plan, the Company recorded a restructuring
charge of $19.9 million ($12.9 million net of tax). Operations that were
discontinued as a result of the restructuring had net sales of $16.4 million in
fiscal 1997. 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 consumer publishing
product line. These restructuring actions are substantially complete.
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations covers periods prior to the acquisition of Mack, the refinancing of
the former senior credit facility and the issuance of the senior subordinated
notes. As a result of those transactions, the Company now has a different
capital structure. Accordingly, the results of operations for periods subsequent
to the consummation of these transactions will not necessarily be comparable to
prior periods.
The following table summarizes the consolidated results of operations for
the periods indicated, as well as the percentages of categories relative to net
sales.
Years Ended June 30
-----------------------------------------------------------------------------------
Dollars in millions 1999 1998 1997
- ------------------------------------- ------------------------- -------------------------- --------------------------
Net sales $ 443.0 100.0% $ 393.8 100.0% $ 384.9 100.0%
Cost of sales 353.9 79.9 304.0 77.2 299.8 77.9
- ------------------------------------- -------- ------ --------- ----- -------- -----
Gross profit 89.1 20.1% 89.8 22.8% 85.1 22.1%
- ------------------------------------- -------- ------ --------- ----- -------- -----
Selling and administrative expenses 60.7 13.7 63.8 16.2 65.1 16.9
Restructuring charge, net -- -- 4.0 1.0 19.7 5.1
Net gain on divestitures (9.5) (2.2) -- -- -- --
- ------------------------------------- -------- ------ --------- ----- -------- -----
Operating income 37.9 8.6% 22.0 5.6% 0.3 0.1%
- ------------------------------------- -------- ------ --------- ----- -------- -----
Interest expense 12.2 2.8 7.6 1.9 7.8 2.0
Interest rate swap settlement
charges 2.1 .5 -- -- -- --
Other expenses, net (0.4) (0.1) (0.4) (0.1) (0.1) --
- ------------------------------------- -------- ------ --------- ----- -------- -----
Income (loss) before income taxes
and extraordinary item 24.0 5.4% 14.8 3.8% (7.4) (1.9)%
Income tax expense (benefit) 9.4 2.1 5.7 1.5 (2.2) (0.6)
- ------------------------------------- -------- ------ --------- ----- -------- -----
Income (loss) before
extraordinary item 14.6 3.3% 9.1 2.3% (5.2) (1.3)%
Extraordinary loss (net of tax) 0.9 0.2 -- -- -- --
- ------------------------------------- -------- ------ --------- ----- -------- -----
Net income (loss) $ 13.7 3.1% $ 9.1 2.3% $ (5.2) (1.3)%
- ------------------------------------- -------- ------ --------- ----- --------- -----
Capital expenditures $ 18.5 4.1% $ 33.6 7.5% $ 22.9 5.9 %
27
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Comparison of Fiscal 1999 with Fiscal 1998
Net Sales
Net sales increased 12% to $443.0 million from $393.8 million for fiscal 1998.
The increase was driven primarily by the acquisition of Mack, growth from the
STM journal, graphic solutions and specialty packaging and promotional printing
product lines, and the inclusion of twelve months of Germersheim's point of
purchase operations in fiscal 1999. Partially offsetting these increases were
the impact of lower paper prices, and the impact of the divested operations.
Adjusted for the acquisition of Mack and Germersheim and for the divestitures of
the financial communications and custom publishing product lines, net sales
growth was 6% for the year.
Professional Communications sector net sales rose 21% to $245.5 million
during fiscal 1999. This increase was primarily attributable to the acquisition
of Mack and net sales growth in the STM journal product line, offset partially
by lower magazine net sales and lower paper prices. Adjusted for the acquisition
of Mack, and the impact of lower paper prices, net sales growth was 3%. The
decline in magazines sales was due principally to the decision to discontinue
serving certain non-strategic magazine accounts in fiscal 1998.
Net sales for the Marketing Communications sector increased by 4% for
fiscal 1999, from $191.1 million to $198.4 million. Adjusted for the acquisition
of Germersheim and for the divestitures of the financial communications and
custom publishing product lines, net sales growth was 14%. This internal net
sales growth increase was primarily driven by double-digit growth in the graphic
solutions and specialty packaging and promotional printing product lines. The
increases in these product lines were generally attributable to the addition of
new clients, increased work from existing clients and the expansion of
manufacturing and selling capacity within these businesses.
Gross Profit
Gross profit margins declined to 20.1% for fiscal 1999, compared to 22.8% for
fiscal 1998, as an increase in margins in the Professional Communications sector
was offset by a decline in the Marketing Communications sector. Professional
Communications sector gross profit margins increased to 22.8% in fiscal 1999,
from 21.9% in fiscal 1998. This increase was primarily attributable to the
inclusion of Mack in the fourth quarter of fiscal 1999. Adjusting for the
acquisition of Mack, the Professional Communications sector gross profit margins
rose to 22.1%. Marketing Communications sector gross profit margins declined
from 23.8% to 16.9%. This decrease was primarily attributable to a significant
decline in gross margins in the Company's point of purchase business and in the
divested businesses.
Selling and Administrative Expenses
Selling and administrative expenses expressed as a percentage of net sales
declined to 13.7% in fiscal 1999 from 16.2% for fiscal 1998. This improvement
was largely attributable to net sales growth, favorable change in revenue mix as
a result of the acquisition of Mack and divestiture of the financial
communications and custom publishing product lines, continued cost containment,
reduced corporate overhead costs, and lower incentive compensation and
discretionary benefits.
Operating Income
Operating income rose 72% for fiscal 1999 to $37.9 million from $22.0 million in
fiscal 1998, driven primarily by the net gain realized on the divestiture of the
financial communications and custom publishing product lines in 1999, and the
inclusion of Mack. Adjusted for the $9.5 million pre-tax net gain on the
divestitures, the operating results of the divested operations, the
restructuring charge of $4.0 million taken in fiscal 1998, and the acquisitions
of Mack and Germersheim, operating income rose 12%.
Interest Expense and Income Taxes
Interest expense increased $4.6 million for fiscal 1999 over 1998 due to higher
debt levels resulting primarily from the refinancing of the former senior credit
facility and issuance of senior subordinated notes in connection with the
acquisition of Mack. The effective income tax rate was 39.2% for fiscal 1999 and
38.5% for fiscal 1998.
Comparison of Fiscal 1998 with Fiscal 1997
Net Sales
Net sales rose 2% to $393.8 million for fiscal 1998 from $384.9 million in
fiscal 1997. Adjusted for businesses discontinued in connection with the 1997
restructuring and for the 1998 acquisition of Germersheim, net sales growth was
7%.
Net sales for the Professional Communications sector were $202.7 million
for fiscal 1998, which were relatively unchanged from fiscal 1997. This was due
to lower paper prices and the intentional downsizing of the magazine product
line. These declines in net sales were
28
offset by increases in trade association/educational publications and a 1%
increase in STM journal net sales.
Net sales for the Marketing Communications sector were $191.1 million for
fiscal 1998 compared to $179.2 million for fiscal 1997, representing an increase
of 7%. Adjusting for the impact of discontinued operations and the acquisition
of Germersheim, net sales increased 15%. This increase in Marketing Communi-
cations' net sales was led primarily by: (1) a 19% increase in net sales from
the specialty packaging and promotional printing product line; (2) an 18%
increase in agency fees from the marketing services product line; (3) a 31%
increase from the financial communications product line; and (4) strong
performances by the graphic solutions and point of purchase product lines,
particularly in the latter half of the fiscal year. The net sales increase in
the marketing services product line 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 product line was driven by strong capital markets
activity, growth in mutual fund services and growth in full service banking
relationships.
Gross Profit
The gross profit margin improved to 22.8% in fiscal 1998 from 22.1% in the prior
year. This increase was primarily attributable to the benefits resulting from
restructuring actions that the Company took in the fourth quarter of fiscal
1997, a favorable change in product mix and lower paper prices.
Selling and Administrative Expenses
Selling and administrative expenses were $63.8 million for fiscal 1998,
representing a decrease of $1.3 million from the prior year. As a percentage of
net sales, selling and administrative expenses decreased to 16.2% from 16.9%
last year. This improvement was driven by efficiencies resulting from
restructuring actions that the Company took in the fourth quarter of fiscal
1997.
Operating Income
Operating income was $22.0 million for fiscal 1998, as compared to $0.3 million
for fiscal 1997. Operating income was affected by restructuring charges of $4.0
million and $19.7 million in fiscal 1998 and 1997, respectively. Operating
income before restructuring charges rose to $26.0 million, or 6.6% of net sales,
from $20.0 million, or 5.2% of net sales in the prior year. This increase in
operating income was driven by improvement from both the Professional Communi-
cations and Marketing Communications sectors.
Interest Expense and Income Taxes
Interest expense decreased to $7.6 million in fiscal 1998 from $7.8 million in
fiscal 1997, primarily due to the lower average debt levels throughout the year.
The effective income tax rate was 38.5% for fiscal 1998 and 29.8% for fiscal
1997 (38.4% excluding the effects of fiscal 1997 restructuring charges).
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was $18.4 million for fiscal 1999, as
compared to $35.3 million for 1998, representing a $16.9 million reduction in
cash provided by operating activities. This change was primarily due to an
increase in working capital demands in fiscal 1999, which included: (1) an
increase in receivables due to higher net sales to customers; (2) a reduction
in accounts payable due to final payments in 1999 on certain production
equipment purchased in late fiscal 1998; and (3) the payment of fiscal year 1998
sales and management incentives. The decrease in cash provided by operating
activities as compared to the prior year was partially offset by a reduction in
cash outflows related to the restructuring plans announced in the fourth
quarters of fiscal years 1998 and 1997 and by a decrease in the required cash
contribution to fund certain employee benefit plans.
Investing Activities
Net cash used in investing activities was $172.5 million for fiscal 1999,
compared to $38.5 million used in 1998 and $15.5 million in 1997. During fiscal
1999, cash used to fund the acquisitions of Mack, Dynamic Diagrams, Inc.,
certain assets of Beacon Press and Imagelink, Inc. totaled $188.8 million. This
usage was partially offset by the receipt of $32.3 million in net proceeds from
the sale of the financial communications and custom publishing product lines.
Capital expenditures for fiscal 1999 were $18.5 million, and consisted primarily
of investments in new presses and manufacturing equipment, and new business and
manufacturing systems. Currently, the Company has $3.6 million in commitments
for capital expenditures. The Company estimates that capital expenditures for
fiscal 2000 will total approximately $20.0 million.
29
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Net cash used in investing activities totaled $38.5 million in fiscal 1998.
Investing activities in 1998 included $33.6 million for capital expenditures and
$11.1 million to fund acquisitions. Partially offsetting these uses was $6.8
million in proceeds from sales of property, plant and equipment, primarily
related to the sale of manufacturing facilities in Charlotte and Baltimore.
Significant capital expenditures included three new presses and the expansion of
the Charlotte manufacturing and fulfillment facilities.
Net cash used in investing activities in fiscal 1997 totaled $15.5 million.
Included in this amount were capital expenditures of $22.9 million, which were
partially offset by proceeds of $6.5 million from the sale of the consumer
publishing product line and sales of property, plant and equipment of $2.9
million.
Financing Activities
Net cash provided by financing activities was $159.1 million for fiscal 1999, as
compared to cash provided of $3.0 million for fiscal 1998 and cash used of $17.1
million in 1997.
On April 1, 1999, in conjunction with the Mack acquisition, the Company
entered into a new $200.0 million senior bank credit agreement with a group of
seven banks. The new senior bank credit facility consists of a $55.0 million,
five-year amortizing term loan facility and a $145.0 million, five-year
revolving credit facility. The proceeds from this agreement provided additional
funding for the Mack acquisition and replaced an existing $160.0 million credit
agreement, 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 include the repurchase of shares of the common
stock for $3.9 million, and dividend payments of $1.6 million.
Net cash provided by financing activities in 1998 totaled $3.0 million.
Bank credit facility borrowings were utilized to fund investing activities in
excess of net cash provided by operating activities.
Net cash used in financing activities in fiscal 1997 totaled $17.1 million.
The Company used the excess of cash provided by operating activities less cash
used in investing activities to repay debt.
Total debt at June 30, 1999, was $275.9 million, up from $101.8 million at
June 30, 1998. As a result of the increased debt level, the debt to total
capital ratio increased to 66.9% at June 30, 1999, from 48.1% at June 30, 1998.
Following the acquisition of Mack, the divestiture of the financial
communications and custom publishing product lines, the refinancing of the
former senior credit facility, the issuance of the senior subordinated debt, and
the application of the net proceeds therefrom, the primary cash requirements of
the Company will be for debt service, capital expenditures and working capital.
The primary sources of liquidity will be cash flow provided by operations and
unused capacity under the senior credit facility. The Company believes that
these funds will provide sufficient liquidity and capital resources to meet the
anticipated debt service requirements, capital expenditures and working capital
needs through fiscal 2000. The future operating performance and the ability to
service or refinance the Company's debt depends on the ability to implement the
business strategy and on general economic, financial, competitive, legislative,
regulatory and other factors, many of which are beyond the control of the
Company.
Market Risk
At June 30, 1999, the Company had various fixed-to-floating interest rate swap
agreements outstanding with an aggregate notional amount of $40.0 million. These
interest rate swap agreements were entered into in fiscal 1999 to convert $40.0
million of the 9.75% senior subordinated notes due in 2009 to floating-rate
debt. Under the terms of the interest rate swap agreement, the Company receives
interest payments at a fixed rate ranging from 7.1% to 7.2%. The Company pays
interest at a variable rate that is based on three-month LIBOR for each of the
swap agreements. The initial term of these swap agreements expires in fiscal
2009, and the banks have an option to terminate the agreements in fiscal 2002.
The fair value of these contracts (which is
30
not recognized in the consolidated financial statements) at June 30, 1999, was
zero.
At June 30, 1999, the Company had no floating-to-fixed interest rate swap
agreements. On April 1, 1999, the Company terminated floating-to-fixed interest
rate swap agreements with an aggregate notional amount of $70.0 million that
were outstanding at June 30, 1998. In connection with the termination of these
agreements, the Company incurred a pretax charge of $2.1 million in the fourth
quarter of fiscal 1999 recorded as a separate line item in the Consolidated
Statements of Income.
The Company entered into an interest rate cap agreement in May 1999 to
limit its interest rate exposure on the new $200.0 senior bank credit agreement.
The agreement provides 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. The Company paid a one-time amount of $0.1 million
for this agreement, which is being amortized over the 2-year life of the
agreement. In exchange, the Company will receive 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. At June 30, 1999, this agreement had a fair market
value of approximately $0.1 million.
The notional amount of each swap contract or interest rate cap agreement
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 agreement at
current market rates. The Company continually monitors its positions and the
credit rating of its counterparties and limits the amount of agreements it
enters into with any one party. Management does not anticipate nonperformance by
the counterparties. However, if incurred, any such loss would be immaterial.
Additional information on the hedging instruments is provided in Note 7 of Notes
to Consolidated Financial Statements.
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 that the operations will not be
adversely impacted by Year 2000 software failures and is preparing for the Year
2000. The Company is engaged in an ongoing analysis and remediation of the Year
2000 exposure. Mack, which the Company acquired on April 1, 1999, was engaged in
its own analysis of its Year 2000 exposure at the time the Company acquired
them. The Company is actively continuing the process that Mack started and is
aggressively integrating Mack's Year 2000 response model into the Company's
model, which is discussed below. Because each company's Year 2000 model has
operated separately up to this point, the Company has presented separate
discussions of each.
Cadmus
In April 1998, the Company designated a formal Year 2000 monitoring team to
coordinate, identify, evaluate and implement changes to computer systems and
applications necessary to achieve a Year 2000 date conversion with minimal
effect on customers or disruption to business operations. Cadmus' Year 2000
response model includes the following four phases, each of which are explained
more fully below:
o problem awareness;
o inventory;
o assessment; and
o remediation, testing and implementation.
Problem Awareness: During the problem awareness phase, the Company held
training sessions for management on potential effects of the change to the
year 2000 and notified the employees that the Company was aware of and
addressing the problem. This phase was completed in October 1998.
Inventory: During this phase, the monitoring team conducted site level
inventories of systems and equipment to survey assets and software for potential
compliance problems. Information technology systems and operational systems
(presses, environmental controls, telecommunications equipment, etc.) were
addressed. These continually updated inventories formed the basis of the site
level remediation, testing and implementation efforts. All formal system
inventories were completed by November 1998.
Assessment: In the assessment phase, the Company analyzed the results of
the inventories and concluded that the risk of having non-compliant systems was
low. The assessment phase was completed by
November 1998.
Remediation, Testing and Implementation: This phase began in mid 1998.
Year 2000 remediation activities have proceeded largely according to plan. At
present, all of Cadmus' major financial, manufacturing and administrative
systems are believed to be Year 2000 compliant. In fact, with the exception of
fewer than a
31
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
dozen remaining assets, which are to receive upgrades or be replaced during the
fall of 1999, remediation of mission critical systems has been completed under
Cadmus' plan. Business continuity plans are being prepared to mitigate the
impact of unforeseen problems.
Based upon ongoing dialogue with vendors and customers, the Company now
believes that the most reasonably likely worst case Year 2000 scenario may
involve spot failures of third party infrastructure services such as
transportation or utilities. The Company is implementing a plan for ongoing
collaboration with vendors and customers to mitigate the impact of those
potential outages. It is expected that this plan will continue to evolve based
upon information that is available till a time immediately preceding January 1,
2000.
The Company estimates the total cost of achieving Year 2000 compliance to
be $0.4 million to $0.6 million in excess of the normal software upgrades and
replacements. Most of these costs were incurred during fiscal 1999. The
remainder will be incurred in the first half of fiscal 2000 and will be expensed
through operations.
Mack
The Company has substantially completed the problem awareness, inventory and
assessment process for all Mack entities and has made progress in their
remediation.
Prior to its acquisition, Mack recognized the need to ensure that their
business operations would not be adversely affected by the Year 2000 and was
aware of the time-sensitive nature of the problem. Mack formulated and commenced
a comprehensive plan to address all known aspects of the Year 2000 problem:
information systems, production and facilities equipment, suppliers and
customers. The Company is currently continuing this plan. The Company is in the
process of testing Mack's information technology systems, as well as all other
systems and verifying that vendor-supplied or outsourced systems will be Year
2000 compliant. Any systems that are not compliant will be repaired or replaced.
The Company is also making inquiries of Mack's customers and suppliers to assess
their Year 2000 readiness. In collaboration with former Mack executives, the
Company has estimated that Mack will complete this process prior to October
1999.
The identifiable costs of assessing and modifying Mack's computer software
and hardware and its production facilities and equipment, incurred as of June
30, 1999, were $2.4 million, of which approximately $1.9 million was incurred
prior to acquisition. The estimated costs yet to be incurred are approximately
$1.5 million. In conjunction with the purchase of Mack, $2.0 million of the
purchase price has been placed in escrow to cover the expected Year 2000 costs.
The current assessment (and therefore the escrow) does not include costs related
to software and hardware replaced in the normal course of business other than
replacements accelerated due to the Year 2000 issue.
The Company believes that the most reasonably likely worst-case Year 2000
scenario for Mack may involve non-compliant vendors or non-compliant customers
who may experience business outages. Accordingly, the Company is currently
communicating with all third parties with which Mack has a material relationship
(including vendors, financial institutions and customers) and identifying
potentially non-compliant parties. The Company is compiling 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) are being developed. The Company
expects to complete this entire process for Mack by November 1999.
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.
32
Cadmus Communications Corporation and Subsidiaries
SELECTED QUARTERLY DATA (unaudited)(1)
(In thousands, except per share data) 1999 Quarters Ended
- ------------------------------------------------------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
- ------------------------------------------------------------------------------------------------------------
Net sales $99,784 $108,811 $100,001 $ 134,449
Gross profit 20,665 21,531 19,406 27,470
Income before extraordinary items 2,531 3,121 7,527 1,463
Net income 2,531 3,121 7,527 534
Per share data:(3)
Income before extraordinary items $ .31 $ .39 $ .94 $ .16
Net income .31 .39 .94 .06
Cash dividends .05 .05 .05 .05
Operating data, before one-time items:(2)
Operating income $ 6,126 $ 6,956 $ 4,846 $ 10,414
Income 2,531 3,121 1,719 2,762
Income per share (3) .31 .39 .22 .30
Stock market price data:
High $ 25 $ 19 7/8 $ 19 1/4 $ 15
Low 18 1/2 15 5/8 12 5/8 12 5/8
Close 19 1/2 18 7/8 14 3/8 13 3/4
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
Net income 2,036 2,919 3,275 860
Per share data: (3)
Net income $ .25 $ .36 $ .40 $ .10
Cash dividends .05 .05 .05 .05
Operating data, before one-time items: (2)
Operating income $ 5,260 $ 6,366 $ 7,081 $ 7,230
Income 2,036 2,919 3,275 3,311
Income per share (3) .25 .36 .40 .40
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
- ------------------------------------------- -------- -------- -------- ---------
(1) Certain reclassifications were made to prior years' amounts to conform to
current year presentation.
(2) Excludes the effects of the following one-time charges: restructuring
charges of $3.95 million ($2.5 million net of tax), in fiscal 1998; net gain
on divestitures in fiscal 1999 of $9.5 million ($5.8 million net of tax);
interest rate swap settlement charges in fiscal 1999 of $2.1 million ($1.3
million net of tax) and extraordinary loss on the early extinguishment of
debt in fiscal 1999 of $1.5 million ($.9 million net of tax).
(3) Income per share data assumes dilution.
33
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) Years Ended June 30
- -------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------
Net sales $ 443,045 $ 393,823 $ 384,942
- -------------------------------------------------------------------------------------------
Operating expenses:
Cost of sales 353,973 304,014 299,840
Selling and administrative 60,730 63,872 65,104
Restructuring charge, net -- 3,950 19,699
Net gain on divestitures (9,521) -- --
- -------------------------------------------------------------------------------------------
405,182 371,836 384,643
- -------------------------------------------------------------------------------------------
Operating income 37,863 21,987 299
Interest and other expenses:
Interest 12,204 7,595 7,788
Interest rate swap settlement charges 2,101 -- --
Other, net (498) (388) (53)
- -------------------------------------------------------------------------------------------
13,807 7,207 7,735
- -------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item 24,056 14,780 (7,436)
Income tax expense (benefit) 9,414 5,690 (2,219)
- -------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 14,642 9,090 (5,217)
Extraordinary loss on early extinguishment
of debt (net of income tax benefit of $574) 929 -- --
- -------------------------------------------------------------------------------------------
Net income (loss) $ 13,713 $ 9,090 $ (5,217)
- -------------------------------------------------------------------------------------------
Earnings per share--basic:
Income (loss) before extraordinary item $ 1.79 $ 1.16 $ (.66)
Extraordinary loss on early extinguishment
of debt (.11) -- --
- -------------------------------------------------------------------------------------------
Net income (loss) $ 1.68 $ 1.16 $ (.66)
- -------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 8,156 7,860 7,900
- -------------------------------------------------------------------------------------------
Earnings per share--diluted:
Income (loss) before extraordinary item $ 1.76 $ 1.11 $ (.65)
Extraordinary loss on early extinguishment
of debt (.11) -- --
- -------------------------------------------------------------------------------------------
Net income (loss) $ 1.65 $ 1.11 $ (.65)
- -------------------------------------------------------------------------------------------
Weighted-average common shares outstanding,
assuming dilution 8,336 8,176 8,035
- -------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
34
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) At June 30
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,068 $ --
Accounts receivable, less allowance for doubtful
accounts ($3,081 in 1999 and $2,575 in 1998) 92,532 70,571
Inventories 30,586 25,610
Deferred income taxes 5,842 3,832
Prepaid expenses and other 6,230 4,107
- --------------------------------------------------------------------------------------
Total current assets 140,258 104,120
- --------------------------------------------------------------------------------------
Property, plant and equipment, net 173,085 133,836
Goodwill and other intangibles, net 198,570 48,158
Other assets 11,933 5,638
- --------------------------------------------------------------------------------------
TOTAL ASSETS $ 523,846 $ 291,752
- --------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 2,100
Current maturities of long-term debt 6,637 6,431
Accounts payable 42,017 41,981
Accrued expenses 31,275 18,293
Restructuring reserve -- 4,378
- --------------------------------------------------------------------------------------
Total current liabilities 79,929 73,183
- --------------------------------------------------------------------------------------
Long-term debt, less current maturities 269,242 93,224
Other long-term liabilities 29,426 8,867
Deferred income taxes 8,716 6,662
Shareholders' equity:
Common stock ($.50 par value; authorized shares--
16,000,000; issued and outstanding shares--9,011,000
in 1999 and 7,921,000 in 1998) 4,505 3,961
Capital in excess of par value 68,001 53,532
Retained earnings 64,403 52,323
Accumulated other comprehensive income (loss) (376) --
- --------------------------------------------------------------------------------------
Total shareholders' equity 136,533 109,816
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 523,846 $ 291,752
- --------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
35
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended June 30
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 13,713 $ 9,090 $ (5,217)
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 20,995 18,444 18,188
Restructuring charge -- 3,950 19,699
Net gain on divestitures (9,521) -- --
Other, net 2,137 1,676 (5,468)
- ------------------------------------------------------------------------------------------------------------
30,354 33,160 27,202
- ------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities, excluding
debt and effects of acquisitions:
Accounts receivable, net (5,892) 4,675 5,544
Inventories 1,988 (4,158) 4,455
Accounts payable and accrued expenses (6,023) 7,873 (3,071)
Restructuring reserve (due to cash payments) (2,071) (4,745) (2,850)
Other current assets 530 (138) 2,018
Other long-term liabilities (due to pension plan payments) -- (1,774) (3,400)
Other, net (511) 414 1,742
- ------------------------------------------------------------------------------------------------------------
(11,979) 2,147 4,438
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,375 35,307 31,640
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (18,506) (33,588) (22,883)
Proceeds from sales of property, plant and equipment 2,426 6,765 2,860
Payments for businesses acquired (188,834) (11,139) (482)
Net proceeds from sale of divested businesses 32,320 -- 6,500
Other, net 140 (543) (1,520)
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (172,454) (38,505) (15,525)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from (repayment of) short-term borrowings, net (2,100) 450 (1,673)
Proceeds from long-term borrowings 61,415 -- 40,415
Proceeds from long-term revolving credit facility 100,000 8,500 18,000
Proceeds from bridge loans 110,000 -- --
Repayment of long-term borrowings (38,692) (5,018) (70,747)
Repayment of long-term revolving credit facility (71,500) -- --
Proceeds from issuance of senior subordinated notes 125,000 -- --
Repayment of bridge loans (110,000) -- --
Financing costs paid (7,407) -- --
Interest rate swap settlement charges (2,101) -- --
Dividends paid (1,633) (1,572) (1,581)
Repurchase and retirement of common stock (3,864) (118) (1,185)
Proceeds from exercise of stock options 29 772 98
Other, net -- -- (399)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 159,147 3,014 (17,072)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 5,068 (184) (957)
Cash and cash equivalents at beginning of year -- 184 1,141
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,068 $ -- $ 184
- ------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
36
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Capital in Other
Common Stock Excess of Retained Comprehensive
(In thousands) Shares Amount Par Value Earnings Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 7,908 $ 3,954 $ 52,971 $ 51,603 $ -- $ 108,528
Net loss -- -- -- (5,217) -- (5,217)
Cash dividends--$.20 per share -- -- -- (1,581) -- (1,581)
Repurchase and retirement
of common stock (88) (44) (1,141) -- -- (1,185)
Net shares issued upon exercise
of stock options 10 5 93 -- -- 98
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 7,830 3,915 51,923 44,805 -- 100,643
Net income -- -- -- 9,090 -- 9,090
Cash dividends--$.20 per share -- -- -- (1,572) -- (1,572)
Repurchase and retirement of
common stock (8) (4) (114) -- -- (118)
Issuance of common stock for
business acquisition 41 21 980 -- -- 1,001
Net shares issued upon exercise
of stock options 58 29 743 -- -- 772
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 7,921 3,961 53,532 52,323 -- 109,816
Net income -- -- -- 13,713 -- 13,713
Change in minimum pension
liability -- -- -- -- (376) (376)
---------
Comprehensive income 13,337
---------
Cash dividends--$.20 per share -- -- -- (1,633) -- (1,633)
Repurchase and retirement of
common stock (201) (101) (3,763) -- -- (3,864)
Issuance of common stock for
business acquisitions 1,288 644 18,204 -- -- 18,848
Net shares issued upon exercise
of stock options 3 1 28 -- -- 29
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 9,011 $ 4,505 $ 68,001 $ 64,403 $ (376) $ 136,533
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
37
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 customers with integrated, end-to-end information and
communications solutions. The Company is organized around two primary business
sectors: Professional Communications, serving customers who publish information,
and Marketing Communications, serving customers who convey marketing messages.
Cadmus is the largest printer and producer of scientific, technical and medical
("STM") journals and publications in the United States, and is a leading
national printer and producer of special interest magazines, point of purchase
materials and specialty packaging materials. Additional Cadmus services include
commercial printing, advertising, direct marketing, software duplication,
catalog production and interactive media.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash balances
and highly liquid investments with an original maturity of three months or less.
REVENUE RECOGNITION. Substantially all products are produced to customer
specifications. The Company recognizes revenue when service projects are
completed or products are shipped.
INVENTORIES. Inventories are valued at the lower of cost, as determined using
the first-in, first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at cost,
net of accumulated depreciation. Major renewals and improvements are
capitalized, whereas ordinary maintenance and repair costs are expensed as
incurred. Gains or losses on disposition of assets are reflected in earnings and
the related asset costs and accumulated depreciation are removed from the
respective accounts. Depreciation is calculated by the straight-line method
based on useful lives of 30 years for buildings and improvements, and 3 to 10
years for machinery, equipment and fixtures.
GOODWILL. The Company amortizes costs in excess of fair value of net assets of
businesses acquired using the straight-line method over a period not to exceed
40 years. Recoverability is reviewed annually or sooner if events or changes in
circumstances indicate that the carrying amount may exceed fair value. If
recoverability is deemed to be potentially impaired, recoverability is then
determined by comparing the undiscounted net cash flows of the assets to which
the goodwill applies to the net book value including goodwill of those assets.
Accumulated amortization at June 30, 1999 and 1998, was $11.0 million and $8.1
million, respectively. Amortization expense was $2.9 million, $1.7 million and
$2.0 million for fiscal years 1999, 1998 and 1997, respectively.
EARNINGS PER SHARE. 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 180,000, 316,000, and 135,000, in fiscal
1999, 1998 and 1997, respectively.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
INCOME TAXES. The Company uses the asset and liability method of Statement of
Financial Accounting Standards ("SFAS") No. 109 to account for income taxes.
SFAS No. 109 requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial reporting basis and tax basis of assets and liabilities.
38
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In fiscal 1999, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components.
Comprehensive income for the Company consists of net income and minimum pension
liability adjustments.
Effective June, 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
requires the Company to report information about its operating segments
according to the management approach for determining reportable segments. This
approach is based on the way management organizes segments within a company for
making operating decisions and assessing performance. SFAS No. 131 also
establishes standards for supplemental disclosure about products and services,
geographical areas and major customers. The Company defines its operating
segments as "sectors." Sector results have been reported for the years presented
and are described in Note 12.
Effective June, 30, 1999, the Company adopted SFAS No. 132 "Employers'
Disclosure about Pensions and Other Postretirement Benefits -- an amendment to
FASB Statements No. 87, No. 88, and No. 106," which standardizes the disclosure
requirements for pensions and other postretirement benefits. The Company, as
required by SFAS No. 132, has restated the prior year disclosures for
comparative purposes. The new disclosures are presented in Note 9.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires derivative
instruments to be recorded in the balance sheet at their fair value with changes
in fair value being recognized in earnings unless specific hedging accounting
criteria are met. The Company plans to adopt this pronouncement in fiscal 2001.
Management believes that the adoption of this pronouncement will not 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
In April 1998, the Company acquired Germersheim, Inc., an Atlanta-based point of
purchase display provider. In June 1998, the Company recorded an
acquisition-related restructuring charge of $4.0 million ($2.5 million net of
tax) related to the integration of Germersheim with the existing point of
purchase operations. The charge included costs to consolidate facilities,
eliminate redundant assets and provide severance. These actions were initiated
in fiscal 1998 and have been completed.
During the fourth quarter of fiscal 1997, the Company adopted a
restructuring plan that impacted a number of the operations. The plan included:
the closing of the Baltimore promotional printing facility and the Long
Beach-based direct marketing agency; the consolidation of the Atlanta and
Richmond-based interactive divisions; the consolidation of two STM journal
fulfillment and distribution operations; the realignment of management,
production and administrative personnel due to the realignment of the
businesses; the write-down of tangible and intangible assets; and the exit from
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 have
been substantially completed.
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.
39
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS
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
is the Mack Printing Company ("Mack"), a full-service printer that produces a
wide variety of short- to medium-run magazines and journals generally for
customers in the mid-Atlantic and northeast regions of the United States. The
Company financed the purchase with $66.0 million of senior bank debt, $70.0
million in bridge financing notes issued to the prior owners of Melham, $40.0
million in bridge financing notes issued to two banks, $6.4 million of junior
subordinated notes and approximately 1.2 million shares of the Company's common
stock (valued at approximately $16.3 million). The Company redeemed the bridge
notes with $110.0 million of the proceeds from the sale of $125.0 million of
senior subordinated notes on June 1, 1999. Mack, based in Easton, Pennsylvania,
has three production facilities in Pennsylvania and one in Maryland. (see note
7)
The acquisition of Mack was accounted for under the purchase method, and
accordingly, the costs of the acquisition were allocated to the assets acquired
and liabilities assumed based on their respective fair values. Goodwill of
$149.6 million is being amortized by the straight-line method over 40 years. The
results of operations of Mack has been included in the Company's consolidated
results of operations since the date of acquisition.
The unaudited consolidated results of operations on a pro forma basis, as
though Mack had been acquired as of the beginning of fiscal years 1999 and 1998,
are as follows:
- -------------------------------------------------------------------------
(In thousands, except per share data) 1999 1998
- -------------------------------------------------------------------------
Net sales $ 560,914 $ 553,647
Income before extraordinary item 14,804 10,311
Net income 13,875 10,311
Earnings per share, assuming dilution:
Income before extraordinary item $ 1.61 $ 1.10
Net income 1.51 1.10
- -------------------------------------------------------------------------
In conjunction with the acquisition of Mack, the Company expects to incur
certain costs to integrate Mack into its existing Professional Communications
sector. These costs are expected to include costs to consolidate duplicate
functions, to consolidate duplicate assets, to consolidate duplicate operations,
and to provide for severance and relocation costs for certain employees. The
process of planning these actions and quantifying these costs was not fully
complete at June 30, 1999. The Company anticipates that it will record a
comprehensive restructuring charge in fiscal 2000.
As part of this process, the Company identified that both Mack and Cadmus
were engaged in separate projects to replace existing manufacturing and
information systems. The Company began evaluating these projects in fiscal 1999
to decide whether to continue implementing both, or to consolidate efforts
towards one project. This evaluation was completed in August, 1999. Based upon
this evaluation, the Company decided to discontinue the implementation of its
existing systems project, and proceed with the Mack systems project. Costs
related to the discontinued project are included in fixed assets as of June 30,
1999, and are currently being evaluated as to their fair market value and
realizability. The Company currently anticipates that the fiscal 2000 charge to
write down costs associated with this discontinued project will be between $5.5
and $6.0 million.
In October 1998, the Company acquired the assets of Beacon Press, which
included printing presses, as well as electronic prepress and bindery equipment.
In February 1999, the Company acquired Dynamic Diagrams, Inc., a Web information
architecture firm which develops visual site mapping, and graphically designs
sites for customers. In February, 1999, the Company acquired certain equipment
and inventory, and assumed certain leases from Imagelink, Inc., a provider of
prepress services to the point of purchase operation. The Company paid $5.8
million for these acquisitions, consisting of approximately $5.2 million in cash
and 33,000 shares of the Company's common stock.
1999 Divestitures
On March 1, 1999, the Company sold its Charlotte-based financial communications
product line to R.R. Donnelley & Sons for a net purchase price of $32.3 million.
The sale included all of Cadmus Financial Communications' assets
40
and operations connected with marketing, selling and distributing mutual fund,
shareholder and other SEC-related communication services. The assets sold
included certain receivables, inventory, and machinery and equipment which were
specific to the business of marketing, selling and distribution of financial
printing services, mutual fund printing services, shareholder communications
printing services, and activities related thereto. The sale resulted in a pretax
gain of $12.3 million. On February 26, 1999, the Company sold its Custom
Publishing product line 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.
1998 Acquisitions
On April 1, 1998, the Company acquired Germersheim, Inc., an Atlanta-based
national point of purchase marketing service provider for $13.7 million. The
agreement provided for additional contingent consideration payable to the seller
based upon future performance of the business. 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 the
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. During fiscal 1999, contingent consideration of $0.7
million was accrued pursuant to the purchase agreement. The contingent
consideration was accounted for as an adjustment to the purchase price and
increased goodwill, accordingly.
1997 Divestiture
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)
4. INVENTORIES
Inventories as of June 30, 1999 and 1998 consisted of the following:
(In thousands) 1999 1998
- ------------------------------------------------------
Raw materials and supplies $ 9,389 $ 4,841
Work in process:
Materials 6,507 6,567
Other manufacturing costs 10,978 11,331
Finished goods 3,712 2,871
- ------------------------------------------------------
Inventories $ 30,586 $ 25,610
- ------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 1999 and 1998 consisted of the
following:
(In thousands) 1999 1998
- -----------------------------------------------------------------
Land and improvements $ 7,620 $ 6,041
Buildings and improvements 58,380 49,985
Machinery, equipment and fixtures 222,467 185,079
- -----------------------------------------------------------------
Total property, plant and equipment 288,467 241,105
Less: Accumulated depreciation 115,382 107,269
- -----------------------------------------------------------------
Property, plant and equipment, net $ 173,085 $ 133,836
- -----------------------------------------------------------------
41
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 are as
follows: 2000 - $7.3 million; 2001 - $5.6 million; 2002 - $4.9 million; 2003 -
$3.5 million; 2004 - $2.9 million and thereafter - $22.5 million.
Total rental expense charged to operations was $6.8 million, $6.5 million,
and $7.0 million in fiscal 1999, 1998 and 1997, respectively. Substantially all
such rental expense represented the minimum rental payments under operating
leases.
Depreciation expense was $18.1 million, $16.7 million, and $16.2 million
for fiscal 1999, 1998 and 1997, respectively. Commitments outstanding for
capital expenditures at June 30, 1999 totaled $3.6 million.
6. OTHER BALANCE SHEET INFORMATION
Accrued expenses at June 30, 1999 and 1998 included $12.9 million and $12.7
million, respectively, in accrued compensation expense.
Other long-term liabilities consist principally of amounts recorded under
deferred compensation arrangements with certain executive officers and other
employees and amounts recorded under the pension and other postretirement
benefit plans (see Note 9).
7. DEBT
Long-term debt at June 30, 1999 and 1998 consisted of the following:
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------------------
Senior Bank Credit Facility:
Term loan facility, weighted-average interest rate of 6.63% $ 53,750 $ 37,000
Revolving credit facility, weighted-average interest rate of 6.47% 85,000 56,500
9.75% Senior Subordinated Notes, due 2009 125,000 --
11.5% Subordinated Promissory Notes, due 2010 6,415 --
Tax-exempt variable rate industrial development bonds, weighted-
average interest rate of 3.34%, due 2016 1,600 1,600
Mortgage payable, 10%, due 2002 2,640 2,669
Other 1,474 1,886
- -------------------------------------------------------------------------------------------------
Total long-term debt 275,879 99,655
Less: Current maturities of long-term debt 6,637 6,431
- -------------------------------------------------------------------------------------------------
Long-term debt $ 269,242 $ 93,224
- -------------------------------------------------------------------------------------------------
Senior Bank Credit Facility -- On April 1, 1999, in conjunction with the Mack
acquisition (see Note 3), the Company entered into a new $200.0 million senior
bank credit agreement with a group of seven banks. The new senior bank credit
facility consists of a $55.0 million, five-year amortizing term loan facility
and a $145.0 million, five-year revolving credit facility. The proceeds from
this facility 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. The senior bank credit facility 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.
42
A summary of the term, interest rate spreads and commitment fees for the
new $200.0 million senior bank credit facility and the former $160.0 million
credit facility follows.
New $200 Million Former $160 Million
Credit Facility Credit Facility
- ----------------------------------------------------------------------
Term loan facility 5 Years 7 Years
Revolving credit facility 5 Years 5 Years
Interest Rate Spreads:
LIBOR Loans 1.75% - 3.25% 0.175% - 0.875%
Prime Rate Loans 0.250% - 1.250% 0.000% - 0.000%
Commitment Fee Rate 0.375% - 0.625% 0.125% - 0.30%
- ----------------------------------------------------------------------
The revolving credit facility under the new senior bank credit facility will
terminate on March 31, 2004. The term loan facility under the senior bank credit
facility will amortize in scheduled quarterly installments beginning in June
1999 and mature on March 31, 2004. Interest rates under the new senior bank
credit facility will be 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 will be
determined by reference to a total debt-to-EBITDA (earnings before interest,
taxes, depreciation and amortization) ratio.
The new 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, 1999.
The expenses related to the issuance of debt are capitalized and amortized
to interest expense over the lives of the related debt. During fiscal 1999, the
Company wrote off deferred financing costs of approximately $0.4 million in the
fourth quarter of fiscal 1999 that had been capitalized in connection with the
former bank credit facility. The write-off has been included in the
extraordinary item in the Consolidated Statements of Income.
Senior Subordinated Notes -- On June 1, 1999, the Company issued senior
subordinated notes in the aggregate principal amount of $125.0 million. Interest
is payable semi-annually on June 1 and December 1 of each year, beginning
December 1, 1999, at an annual rate of 9.75%. The senior subordinated notes have
no required principal payments prior to maturity on June 1, 2009. The notes
constitute unsecured senior subordinated obligations of the Company. The Company
can redeem the senior subordinated notes, in whole or in part, on or after June
1, 2004, at redemption prices which range from 100% to 104.875%, plus accrued
and unpaid interest. In addition, prior to June 1, 2002, the Company can redeem
up to 35% of the senior subordinated notes at 109.75% of the principal amount
thereof, plus accrued and unpaid interest, with the net cash proceeds from
certain common stock offerings. Each holder of the senior subordinated notes has
the right to require the Company to repurchase the notes at a purchase price of
101% of the principal amount, plus accrued and unpaid interest thereon, upon the
occurrence of certain events constituting a change of control of the Company.
The net proceeds of the senior subordinated notes were used to repay $110.0
million of bridge financing notes issued on April 1, 1999, in conjunction with
the Company's purchase of Mack Printing, with the balance of the proceeds
repaying revolving bank borrowings under the new senior bank credit facility.
The senior bank credit facility repayments did not permanently reduce the
commitments thereunder. The $110.0 million of bridge financing notes consisted
of $70.0 million in bridge financing notes issued to the sellers of Mack and
$40.0 million in bridge financing notes issued to two financial institutions.
The bridge financing notes, which were issued on April 1, 1999, and repaid on
June 1, 1999, had a 10-year term with interest based on LIBOR. The repayment of
the bridge financing notes resulted in the write-off of deferred financing costs
of approximately $1.1 million in the fourth quarter of fiscal 1999. The
write-off has been included in the extraordinary item in the Consolidated
Statements of Income.
The senior subordinated notes contain certain covenants regarding the ratio
of debt-to-EBITDA and contain other restrictions, including limitations of
additional borrowings, and the acquisition, disposition and securitization of
assets. The Company was in compliance with all covenants under the senior
subordinated note indenture at June 30, 1999.
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.
43
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest is payable monthly on the first day of each month beginning May 1,
1999, at an annual rate of 11.5%. The subordinated promissory notes have no
required principal payments prior to maturity on March 31, 2010. The notes are
subordinated in right of payment to the prior payment in full in cash of all of
the Company's senior and senior subordinated debt.
The Company can redeem the subordinated promissory notes, in whole or in
part, on or after March 31, 2004, at 100% of the principal amount thereof, plus
accrued interest 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, 1999
and 1998, approximated their recorded values.
Maturities of long-term debt are as follows: 2000 - $6.6 million; 2001 - $10.9
million; 2002 - $15.1 million; 2003 - $13.8 million; 2004 - $96.5 million;
thereafter - $133.0 million. The net book value of all encumbered properties as
of June 30, 1999 and 1998, totaled $4.1 million and $4.2 million, respectively.
The Company incurred interest expense of $12.2 million, $8.2 million, and
$8.5 million for fiscal 1999, 1998 and 1997, respectively, of which $0.3 million
for 1999, $0.6 million for 1998, and $0.7 million for 1997 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 $10.3 million, $7.7 million,
and $7.9 million for fiscal 1999, 1998 and 1997 respectively.
Hedging Arrangements -- The Company has a strategy to optimize the ratio of
the Company's fixed-to-variable rate financing consistent with maintaining an
acceptable level of exposure to the risk of interest rate fluctuations. To
achieve this mix, the Company, from time to time, enters into interest rate swap
agreements with various banks to exchange fixed and variable rate interest
payment obligations without the exchange of the underlying principal amounts
(the "notional amounts"). These agreements are hedged against the Company's
long-term borrowings and have the effect of converting the Company's long-term
borrowings from variable rate to fixed rate, or fixed rate to variable rate, as
required. The differential to be paid or received is accrued as interest rates
change and is recognized as an adjustment to interest expense related to the
debt. The related amount payable to or receivable from counterparties is
included in other liabilities or assets. The Company's strategy to effectively
convert variable rate financing to fixed rate financing through the use of the
aforementioned swap agreements resulted in additional interest cost of $0.9
million in fiscal 1999, $1.3 million in fiscal 1998, and $1.2 million in fiscal
1997.
At June 30, 1999, the Company had various fixed-to-floating interest rate
swap agreements outstanding with an aggregate notional amount of $40.0 million.
These swaps were entered into in fiscal 1999 to convert $40.0 million of the
9.75% senior subordinated notes due in 2009 to floating-rate debt. Under the
terms of this agreement, the Company receives interest payments at a fixed rate
ranging from 7.1% to 7.2%. The Company pays interest at a variable rate that is
based on three-month LIBOR for each of the swap agreements. The initial term of
these swap agreements expires in fiscal 2009, and the banks have an option to
terminate the agreements in fiscal 2002. The fair value of the Company's
interest rate swap contracts (which is not recognized in the consolidated
financial statements) at June 30, 1999 and 1998, was zero and negative $0.1
million, respectively.
At June 30, 1999, the Company had no floating-to-fixed interest rate swap
agreements. On April 1, 1999, the Company terminated floating-to-fixed interest
rate swap agreements with an aggregate notional amount of $70.0 million that
were outstanding at June 30, 1998. In connection with the termination of these
agreements, the Company incurred a pretax charge of $2.1 million in the fourth
quarter of fiscal 1999 recorded as a separate line item in the Consolidated
Statements of Income.
44
The notional amounts and applicable rates of the Company's interest rate swap
agreements were as follows:
- --------------------------------------------------------------------------------
Paid Fixed, Paid Floating,
Received Floating Received Fixed
- ----------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Notional amount:
Beginning balance $ 88,700 $ 88,700 $ 47,900 $ 35,000 $ 35,000 $ 35,000
New contracts -- -- 40,800 40,000 -- --
Expired contracts (18,700) -- -- (35,000) -- --
Terminated contracts (70,000) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Ending Balance $ -- $ 88,700 $ 88,700 $ 40,000 $ 35,000 $ 35,000
- ----------------------------------------------------------------------------------------------------------
Weighted-Average
Interest Rates for 1999
- --------------------------------------------------------------------------------
Type of swap: Paid Received
- --------------------------------------------------------------------------------
Paid fixed, received floating 6.9% 5.4%
Paid floating, received fixed 5.7% 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.
The Company entered into an interest rate cap agreement in May 1999 to
limit its interest rate exposure on the new $200.0 senior bank credit agreement.
The agreement provides 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. The Company paid a one-time amount of $0.1 million
for this agreement, which is being amortized over the 2-year life of the
agreement. In exchange, the Company will receive 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. At June 30, 1999, this agreement had a fair market
value of approximately $0.1 million.
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.
45
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Income tax expense (benefit), for the years ended June 30, 1999, 1998 and 1997
consisted of the following:
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------
Current:
Federal $6,509 $ 4,069 $ 2,878
State 1,462 1,098 483
- ----------------------------------------------------------------------
Total current 7,971 5,167 3,361
- ----------------------------------------------------------------------
Deferred:
Federal 687 456 (4,168)
State 182 67 (1,412)
- ----------------------------------------------------------------------
Total deferred 869 523 (5,580)
- ----------------------------------------------------------------------
Income tax expense (benefit) $8,840 $ 5,690 $ (2,219)
- ----------------------------------------------------------------------
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) 1999 1998 1997
- ------------------------------------------------------------------------------------------
Computed at statutory U.S. rate $ 7,540 $ 5,059 $ (2,573)
State income taxes, net of Federal tax benefit 333 341 (613)
Goodwill amortization 793 450 924
Research tax credit -- (50) (75)
Other 174 (110) 118
- ------------------------------------------------------------------------------------------
Income tax expense (benefit) $ 8,840 $ 5,690 $ (2,219)
- ------------------------------------------------------------------------------------------
Cash paid for income taxes totaled $3.4 million, $5.0 million, and $2.3
million, during fiscal 1999, 1998 and 1997, respectively.
The Company has state net operating loss carryforwards aggregating
approximately $37.8 million, which expire during fiscal years 2004 to 2013. 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 $0.3 million in fiscal 1999 and $0.1 million in fiscal 1998.
46
The tax effects of the significant temporary differences that comprise the
deferred tax assets and liabilities in the consolidated balance sheets at June
30, 1999 and 1998, are as follows:
(In thousands) 1999 1998
- ------------------------------------------------------------------
Assets:
Allowance for doubtful accounts $ 1,180 $ 1,067
Employee benefits 9,475 5,028
State net operating loss carryforwards 2,221 1,545
Goodwill 1,991 2,625
Accrued restructuring costs 75 2,133
Other 6,377 51
- ------------------------------------------------------------------
Gross deferred tax assets 21,319 12,449
- ------------------------------------------------------------------
Liabilities:
Property, plant, and equipment 22,544 14,171
Other 584 346
- ------------------------------------------------------------------
Gross deferred tax liabilities 23,128 14,517
- ------------------------------------------------------------------
Valuation allowance 1,065 762
- ------------------------------------------------------------------
Net liability $ 2,874 $ 2,830
- ------------------------------------------------------------------
9. PENSION PLANS AND OTHER POST RETIREMENT BENEFIT PLANS
The Company maintains separate retirement plans for its associates under the
Cadmus plans and Mack plans as a result of the April 1, 1999, acquisition of
Mack (see Note 3). It is anticipated that the Mack plans will be merged into the
Cadmus plans in fiscal 2000.
Pension Plans
The Company has defined benefit pension plans in effect that cover substantially
all employees, and participates in multiemployer retirement plans that provide
defined benefits to employees covered under collective bargaining agreements.
The Company also has in effect certain nonqualified, 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 multiemployer plan are generally based on a negotiated
labor contract. Contributions to the supplemental plans are provided through
charges to earnings sufficient to meet the projected benefit obligation.
Although the supplemental plans are nonfunded, the Company has acquired life
insurance contracts ($14.7 million face amount at June 30, 1999 and $14.5
million face amount at June 1998) intended to be adequate to fund future
benefits. The cash surrender value of these contracts, net of policy loans, was
$2.6 million and $2.2 million at June 30, 1999 and 1998, respectively, and is
included in other assets in the consolidated balance sheets. The Company's
contributions to its pension plans totaled $1.3 million, $1.8 million, and $3.4
million in fiscal 1999, 1998 and 1997, respectively.
Assets of the plans consist primarily of equity and debt securities, and
interest-bearing deposits under insurance contracts.
Post Retirement Plans
Employees of the Company under the Cadmus plans are eligible for retiree medical
coverage if they retire on or after attaining age 55 with ten or more years of
service. Benefits differ depending upon the date of retirement. For those
employees who retired prior to April 1, 1988, and are under age 65, coverage is
available at a cost to the retiree equal to the cost to the Company for an
active employee less the fixed Company subsidy. Once employees in this group
have reached age 65, coverage is available at a cost to the retiree equal to the
cost to the Company for a post-65 retiree less the fixed Company subsidy. For
those employees who retired on or after April 1, 1988, but before
47
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 1, 1994, coverage is available until age 65. The retiree contributes the
full active rate. Upon reaching age 65, coverage under the Company's plan
ceases. For those employees who retire on or after January 1, 1994, coverage is
available until age 65. The retiree contributes the full retiree rate, which is
equal to the cost to the Company for a pre-65 retired employee. Upon reaching
age 65, coverage under the Company's plan ceases.
The Mack plans provide certain health care benefits for eligible retired
employees and their spouses. In addition, the Company provides fully paid life
insurance coverage with benefits ranging from $5,000 to $40,000 for retirees
under the Mack plans. 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:
Post Retirement
Pension Benefits Benefits
- --------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 53,193 $ 40,766 $ 337 $ 356
Service cost 3,794 2,550 28 --
Interest cost 4,604 3,288 111 27
Participant contributions -- -- 18 --
Plan amendments -- 331 -- --
Actuarial (gain) loss (1,842) 7,780 (17) 19
Special termination benefits -- 54 -- --
Business combinations 46,450 -- 4,952 --
Benefit payments (1,821) (1,576) (150) (65)
- --------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 104,378 $ 53,193 $ 5,279 $ 337
- --------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 44,860 $ 35,057 $ -- $ --
Actual return on plan assets (561) 9,546 -- --
Employer contribution 865 1,768 150 65
Benefit payments (1,886) (1,511) (150) (65)
Business combinations 40,197 -- -- --
- --------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 83,475 $ 44,860 $ -- $ --
- --------------------------------------------------------------------------------------------------------------
Funded status $ (20,903) $ (8,333) $ (5,279) $ (337)
Unrecognized actuarial (gain) loss 6,772 2,915 (207) (206)
Unrecognized transition asset (obligation) (1,065) (1,145) -- --
Unrecognized prior service cost 343 365 -- --
Contribution made between measurement date
and fiscal year end 478 -- -- --
- --------------------------------------------------------------------------------------------------------------
Net amount recognized $ (14,375) $ (6,198) $ (5,486) $ (543)
- --------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 984 $ 427 $ -- $ --
Accrued liability (16,452) (7,202) (5,486) (543)
Intangible asset 506 577 -- --
Deferred tax asset 211 -- -- --
Minimum pension liability 376 -- -- --
- --------------------------------------------------------------------------------------------------------------
Net amount recognized $ (14,375) $ (6,198) $ (5,486) $ (543)
- --------------------------------------------------------------------------------------------------------------
48
Weighted average assumptions were as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate 7.25% 7.25% 8.25%
Rate of increase in compensation 3.5% 4.5% 4.5%
Long-term rate of return on plan assets 9.75% 9.75% 9.0%
- --------------------------------------------------------------------------------
The components of net periodic benefit cost for fiscal 1999, 1998 and 1997 for
all plans were as follows:
Post Retirement
Pension Benefits Benefits
- -------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Service cost $ 3,794 $ 2,550 $ 2,341 $ 28 $ -- $ --
Interest cost 4,604 3,288 2,783 111 27 19
Expected return on plan assets (5,194) (3,392) (2,729) -- -- --
Amortization of unrecognized
transition obligation or asset (81) (81) (81) -- -- --
Prior service cost recognized 22 6 -- -- -- --
Recognized (gains) or losses 56 34 (5) (16) (20) (46)
Contributions to multiemployer plans 67 64 59 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3,268 $ 2,469 $ 2,368 $ 123 $ 7 $ (27)
- -------------------------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $58.9 million, $51.9 million, and $42.4 million,
respectively, as of June 30, 1999, and $5.6 million, $4.4 million and $0.0,
respectively, as of June 30, 1998.
For purposes of determining the cost and obligation for post retirement
medical benefits, the Company has assumed a healthcare cost trend rate of 6.5%
for fiscal 2000, gradually decreasing to 5.75% in the year 2002 and remaining
level thereafter. A one percentage-point change in assumed healthcare cost trend
rates would have the following effects:
1-Percentage Point
(In thousands) Increase Decrease
- ------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 9 $ (8)
Effect on post retirement benefit obligation 260 (223)
- ------------------------------------------------------------------------------------
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 $1.2 million, $1.9 million and $1.8
million in fiscal 1999, 1998 and 1997, respectively.
10. 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.
49
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999, 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.
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.
11. 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 1999 and 1998
in accordance with the provisions of SFAS No. 123, net income would have been
$12.8 million in fiscal 1999 ($1.53 per share, assuming dilution) and $8.4
million in fiscal 1998 ($1.03 per share, assuming dilution) and the net loss
would have been $5.5 million in 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 1999, 1998 and 1997, respectively: risk-free interest
rates of 5.22%, 5.97%, and 6.61%; dividend yields of 1.52%, 0.82% and 1.42%;
volatility factors of .340, .340 and .390, and an expected life of 8 years. The
weighted-average fair value of options was $3.92, $11.52, and $6.71 per option
during fiscal 1999, 1998 and 1997, respectively.
50
A summary of the Company's stock option activity and related information
for the fiscal years ended June 30, 1999, 1998 and 1997 follows:
- --------------------------------------------------------------------------------
Weighted-Average
Number of Option Price Exercise
Shares Per Share Price
- --------------------------------------------------------------------------------
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
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
- --------------------------------------------------------------------------------
Exercisable at June 30:
1997 403,000 $ 8.25 to $ 24.05 $ 11.44
1998 590,000 8.25 to 26.88 13.67
1999 752,000 8.25 to 26.88 13.56
- --------------------------------------------------------------------------------
The weighted-average remaining contractual life of options outstandinat June
30, 1999 is 7 years. At June 30, 1999, 187,205 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, 1999:
Weighted-
Numbers of Average Weighted-
Range of Outstanding Remaining Weighted-Average Currently Average
Exercise Prices Options Life (years) Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------
$ 8.25 to $ 13.25 570,000 6.6 $ 11.25 449,000 $ 10.54
4.25 to 19.19 467,000 7.0 16.55 262,000 16.76
20.63 to 28.00 218,000 8.3 25.18 41,000 26.12
- ------------------------------------------------------------------------------------------------------
12. SECTOR AND RELATED INFORMATION
The Company is organized around two business sectors: Professional
Communications, serving customers who publish information, and Marketing
Communications, serving customers who convey marketing messages. Cadmus
Professional Communications is comprised of two product lines: STM journal
services and special interest magazines, serving both not-for-profit and
commercial publishers. Cadmus Professional Communications provides a
51
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
full range of composition, editorial, prepress, printing, warehousing and
distribution services. In addition, this sector provides a full complement of
digital products and services, including website design and architecture,
content management, Internet and compact disc based electronic archiving,
electronic peer review and online publishing. Cadmus Marketing Communications
focuses on the creation, production and distribution of graphic communications
and marketing services for Fortune 1000 companies. Major product lines include
point of purchase marketing materials, specialty packaging and promotional
printing production. In addition, this sector offers software duplication,
advertising, catalog design and photography, commercial printing, direct
marketing and fulfillment and distribution services.
The accounting policies for the sectors are the same as those described in
Note 1. The Company primarily evaluates the performance of its operating sectors
based upon operating income, excluding amortization of goodwill and
restructuring charges. Intersector sales for fiscal 1998 and 1997, are not
significant. The Company manages income taxes on a consolidated basis.
Summarized sector data for fiscal 1999, 1998 and 1997 are as follows:
- ------------------------------------------------------------------------------
Professional Marketing
(In thousands) Communications Communications Total
- ------------------------------------------------------------------------------
1999
Net sales $245,505 $ 198,360 $ 443,865
Sales between sectors (820) -- (820)
Depreciation and amortization 12,223 8,162 20,385
Operating income 37,123 999 38,122
Total assets 368,729 127,395 496,124
Capital expenditures 7,147 9,856 17,003
1998
Net sales $202,694 $ 191,129 $ 393,823
Depreciation and amortization 10,135 7,751 17,886
Operating income 29,220 7,785 37,005
Total assets 137,010 138,219 275,229
Capital expenditures 8,293 23,030 31,323
1997
Net sales $203,414 $ 181,528 $ 384,942
Depreciation and amortization 9,671 7,816 17,487
Operating income 26,833 3,216 30,049
Total assets 136,932 111,704 248,636
Capital expenditures 5,338 14,900 20,238
- ------------------------------------------------------------------------------
52
Summarized sector data for fiscal 1999, 1998 and 1997 are as follows:
- ------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Earnings from operations:
Reportable sector operating income $ 38,122 $ 37,005 $ 30,049
Amortization of goodwill (2,884) (1,731) (1,981)
Unallocated shared services and other expenses (6,896) (9,337) (8,070)
Restructuring charge, net -- (3,950) (19,699)
Gain on divestitures, net 9,521 -- --
Interest expense, net (12,204) (7,595) (7,788)
Interest rate swap settlement charges (2,101) -- --
Other income, net 498 388 53
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and Extraordinary item $ 24,056 $ 14,780 $ (7,436)
- ------------------------------------------------------------------------------------------------------
The difference between reportable sector amounts and consolidated total
amounts for assets, depreciation and amortization, and capital expenditures are
attributable to the Company's shared services division.
The Company has no foreign operations. There were no revenues from a single
external customer which amounted to 10% or more of the Company's revenues.
13. RELATED PARTIES
The Company elected the 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, 1999, 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 1999 totaled $0.9
million.
14. 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, 1999 and 1998, the
Company had no significant concentrations of credit risk.
15. 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.
53
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, 1999 and 1998, and the related consolidated statements of income, cash flows
and shareholders' equity for each of the three years in the period ended June
30, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Richmond, Virginia
August 9, 1999
54