EXHIBIT 13
Cadmus Communications Corporation
2003 FINANCIAL INFORMATION
To request a copy of the Form 10-K, call 1-877-4-CADMUS,
e-mail webmaster@cadmus.com, or write
Cadmus Communications Corporation,
Investor Relations, Suite 200,
1801 Bayberry Court, Richmond, VA 23226
CONTENTS
Selected Financial Data...................................................F-1
Selected Financial Data - Reconciliation of GAAP to Non-GAAP Measures.....F-2
Management's Discussion and Analysis......................................F-3
Selected Quarterly Data..................................................F-16
Selected Quarterly Data - Reconciliation of GAAP to Non-GAAP Measures....F-17
Consolidated Statements of Operations....................................F-18
Consolidated Balance Sheets..............................................F-19
Consolidated Statements of Cash Flows....................................F-20
Consolidated Statements of Shareholders' Equity..........................F-21
Notes to Consolidated Financial Statements...............................F-22
Report of Independent Auditors...........................................F-39
Cadmus Communications Corporation and Subsidiaries
SELECTED FINANCIAL DATA
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.
Years Ended June 30,
--------------------------------------------------------------------
(Dollars in thousands, except per share data) 2003 2002 2001 2000 1999(1)
-------- -------- -------- -------- --------
OPERATING DATA (see Note 1 to
Consolidated Financial Statements)
Net sales $446,919 $447,279 $526,290 $552,692 $493,074
Cost of sales 362,801 365,873 433,071 444,304 402,998
Selling and administrative expenses 51,443 54,029 58,142 66,071 60,425
Restructuring and other charges 12,015 -- 19,905 36,544 --
Net gain on divestitures -- -- -- -- (9,521)
-------- -------- -------- -------- --------
Operating income 20,660 27,377 15,172 5,773 39,172
Interest expense and securitization costs 15,236 17,203 22,414 24,491 13,707
Interest rate swap settlement charges -- -- -- -- 2,101
Other, net 347 292 (65) (517) 811
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes 5,077 9,882 (7,177) (18,201) 22,553
Income tax expense (benefit) 2,410 4,891 (687) (2,191) 8,840
-------- -------- -------- -------- --------
Income (loss) from continuing operations 2,667 4,991 (6,490) (16,010) 13,713
Loss from discontinued operations, net of tax(2) -- (1,236) -- -- --
Cumulative effect of change in
accounting principle (56,301) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $(53,634) $ 3,755 $ (6,490) $(16,010) $ 13,713
-------- -------- -------- -------- --------
PER SHARE DATA(3)
Income (loss) from continuing operations $ 0.30 $ 0.55 $ (0.73) $ (1.78) $ 1.65
Net income (loss) (5.94) 0.41 (0.73) (1.78) 1.65
Cash dividends 0.20 0.20 0.20 0.20 0.20
-------- -------- -------- -------- --------
FINANCIAL POSITION
Goodwill and other intangibles, net $114,755 $167,788 $172,436 $182,823 $198,570
Total assets 304,926 369,595 397,428 423,184 523,846
Total debt 146,805 157,246 182,987 201,705 275,879
Total shareholders' equity 32,408 111,514 109,558 117,942 136,533
Total capital 179,213 268,760 292,545 319,647 412,412
-------- -------- -------- -------- --------
SELECTED RATIOS
Operating income margin 4.6% 6.1% 2.9% 1.0% 7.9%
Effective tax rate 47.5% 49.5% 9.6% 12.0% 39.2%
-------- -------- -------- -------- --------
OTHER DATA
Weighted-average common shares outstanding 9,028 9,049 8,938 8,990 8,336
Shares outstanding at fiscal year end 9,050 8,992 8,938 8,938 9,011
Stock market price data:
High $ 11.970 $ 14.640 $ 12.300 $ 15.000 $ 25.000
Low 7.040 6.750 5.500 6.125 12.625
Close (at fiscal year end) 8.890 11.220 11.110 9.750 13.750
Number of associates (approximate) 2,800 3,000 3,400 3,500 4,100
-------- -------- -------- -------- --------
(1) In accordance with Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13 and Technical Corrections," the Company has
reclassified a $1.5 million ($0.9 million net of tax) loss on early
extinguishment of debt from extraordinary loss on early extinguishment
of debt to interest expense, and the corresponding tax effect, in the
above schedule.
(2) The Company did not reclassify the results of the Creative Marketing
division as a discontinued operation in prior years because the
changes that would result from a reclassification would not be
material to the consolidated financial statements for those years. See
Note 1 to Consolidated Financial Statements.
(3) Income per share data assumes dilution.
F-1
Cadmus Communications Corporation and Subsidiaries
SELECTED FINANCIAL DATA - RECONCILIATION OF GAAP TO NON-GAAP MEASURES
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. In addition to results presented in
accordance with generally accepted accounting principles ("GAAP"), the Company
has included certain non-GAAP financial measures to provide information to
assist investors in understanding the underlying operational performance of the
Company. Refer to the Use of GAAP and Non-GAAP Measures section of Management's
Discussion and Analysis for additional information on these measures.
Years Ended June 30,
-----------------------------------------------------------------------
(Dollars in thousands, except per share data) 2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
SELECTED NON-GAAP MEASURES
Operating income, as reported $ 20,660 $ 27,377 $ 15,172 $ 5,773 $ 39,172
Amortization -- 4,724 5,060 5,261 2,884
Restructuring and other charges 12,015 -- 19,905 36,544 --
Net gain on divestitures -- -- -- -- (9,521)
-------- -------- -------- -------- --------
Operating income, as adjusted 32,675 32,101 40,137 47,578 32,535
-------- -------- -------- -------- --------
Income (loss) from continuing
operations, as reported 2,667 4,991 (6,490) (16,010) 13,713
Income tax expense (benefit) 2,410 4,891 (687) (2,191) 8,840
Amortization -- 4,724 5,060 5,261 2,884
Restructuring and other charges 12,015 -- 19,905 36,544 --
Net gain on divestitures -- -- -- -- (9,521)
-------- -------- -------- -------- --------
Income from continuing operations before
income taxes, as adjusted 17,092 14,606 17,788 23,604 15,916
Income tax expense, as adjusted 6,495 4,891 5,753 7,611 5,174
-------- -------- -------- -------- --------
Income from continuing operations, as adjusted 10,597 9,715 12,035 15,993 10,742
-------- -------- -------- -------- --------
Net income (loss), as reported (53,634) 3,755 (6,490) (16,010) 13,713
Cumulative effect of a change in accounting
principle for goodwill 56,301 -- -- -- --
Discontinued operations -- 1,236 -- -- --
Income tax expense (benefit) 2,410 4,891 (687) (2,191) 8,840
Interest 14,602 16,093 19,666 23,002 13,707
Securitization costs 634 1,110 2,748 1,489 --
Interest rate swap settlement charges -- -- -- -- 2,101
Depreciation 19,325 20,399 21,069 20,786 18,111
Amortization -- 4,724 5,060 5,261 2,884
Restructuring and other charges 12,015 -- 19,905 36,544 --
Net gain on divestitures -- -- -- -- (9,521)
-------- -------- -------- -------- --------
EBITDA(1) $ 51,653 $ 52,208 $ 61,271 $ 68,881 $ 49,835
-------- -------- -------- -------- --------
PER SHARE DATA(2)
Net income (loss) as reported $ (5.94) $ 0.41 $ (0.73) $ (1.78) $ 1.65
Cumulative effect of change in accounting
principle for goodwill 6.24 -- -- -- --
Discontinued operations -- 0.14 -- -- --
Amortization -- 0.52 0.57 0.58 0.35
Restructuring and other charges, net of tax 0.87 -- 1.51 2.97 --
Net gain on divestitures, net of tax -- -- -- -- (0.70)
-------- -------- -------- -------- --------
Income, as adjusted $ 1.17 $ 1.07 $ 1.35 $ 1.77 $ 1.30
-------- -------- -------- -------- --------
SELECTED RATIOS
Operating income margin, as reported 4.6% 6.1% 2.9% 1.0% 7.9%
Amortization -- 1.1 0.9 1.0 0.6
Restructuring and other charges 2.7 -- 3.8 6.6 --
Net gain on divestitures -- -- -- -- (1.9)
-------- -------- -------- -------- --------
Operating income margin, as adjusted 7.3% 7.2% 7.6% 8.6% 6.6%
-------- -------- -------- -------- --------
Net income (loss) margin, as reported (12.0)% 0.8% (1.2)% (2.9)% 2.8%
Cumulative effect of a change in
accounting principle for goodwill 12.6 -- -- -- --
Discontinued operations -- 0.3 -- -- --
Income tax expense (benefit) 0.5 1.1 (0.1) (0.4) 1.8
Interest 3.3 3.6 3.7 4.2 2.8
Securitization costs 0.1 0.2 0.5 0.3 --
Interest rate swap settlement charges -- -- -- -- 0.4
Depreciation 4.4 4.6 4.0 3.7 3.6
Amortization -- 1.1 0.9 1.0 0.6
Restructuring and other charges 2.7 -- 3.8 6.6 --
Net gain on divestitures -- -- -- -- (1.9)
-------- -------- -------- -------- --------
EBITDA(1) margin 11.6% 11.7% 11.6% 12.5% 10.1%
-------- -------- -------- -------- --------
(1) Earnings before interest, taxes, depreciation, amortization and
securitization costs. The Company also excludes the cumulative effect
of a change in accounting principle, discontinued operations and the
impact of restructuring and other charges from the computation of
EBITDA.
(2) Income per share data assumes dilution.
F-2
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Headquartered in Richmond, Virginia, Cadmus Communications Corporation (the
"Company" or "Cadmus") provides end-to-end integrated graphic communications
services to professional publishers, not-for-profit societies and corporations.
Cadmus is the world's largest provider of content management and production
services to scientific, technical and medical ("STM") journal publishers, the
fifth largest periodicals printer in North America, and a leading provider of
specialty packaging and promotional printing services.
ORGANIZATIONAL STRUCTURE
The Company is focused on two segments. The Publisher Services segment provides
products and services to both not-for-profit and commercial publishers in three
primary product lines: STM journals, special interest and trade magazines, and
professional books and directories. Publisher Services provides a full range of
content management, editorial, prepress, printing, reprinting, warehousing and
distribution services under the division names of Cadmus Professional
Communications and Cadmus Specialty Publications. During fiscal 2003, Cadmus
Port City Press became a part of Cadmus Professional Communications due to
operational and organizational changes. The Company's Specialty Packaging
segment provides high quality specialty packaging and promotional printing,
assembly, fulfillment and distribution services to consumer product and other
customers.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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 at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. The Company considers the following accounting policies
to be critical policies which involve various estimation processes:
- Allowance for doubtful accounts
- Valuation of intangible assets and goodwill
- Pension and other post retirement benefits
- Income taxes
- Discontinued operations
- Self-insurance reserves
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Cadmus' policy with respect to its
trade and notes receivable is to maintain an adequate allowance or reserve for
doubtful accounts for estimated losses from the inability of customers or
noteholders to make required payments. The Company's process to estimate the
collectibility of its trade accounts receivable balances consists of two steps.
First, the Company evaluates specific accounts for which it has information
that the customer may have an inability to meet its financial obligations
(e.g., bankruptcy). In these cases, the Company uses its judgment, based on
available facts and circumstances, and records a specific allowance for that
customer against the receivable to reflect the amount it expects to ultimately
collect. Second, the Company establishes an additional reserve for all
customers based on a range of percentages applied to aging categories, based on
management's best estimate. The Company periodically evaluates the adequacy of
its reserves on notes receivable based on the available facts and circumstances
at the time. If the financial condition of Cadmus' customers or noteholders
were to deteriorate and result in an impairment of their ability to make
payments, additional allowances could be required.
VALUATION OF INTANGIBLE ASSETS AND GOODWILL. Through fiscal 2002, the
Company amortized costs in excess of fair value of net assets of businesses
acquired (goodwill) using the straight-line method over a period not to exceed
40 years. Accordingly, recoverability was reviewed if events or changes in
circumstances indicated that the carrying amount may not be recovered.
Recoverability was determined by comparing the undiscounted net cash flows of
the assets to which the goodwill applied to the net book value, including
goodwill, of those assets.
Effective July 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
which requires companies to discontinue amortizing goodwill and to perform
annual impairment tests. In completing the transitional impairment test
required by SFAS No. 142, the Company tested the net goodwill balances
attributable to each of its reporting units for indications of impairment by
comparing the fair value of each reporting unit to its carrying value. Fair
value was determined using discounted cash flow estimates for each reporting
unit in accordance with the provisions of SFAS No. 142. The preparation of such
discounted cash flow estimates requires significant management judgment with
respect to operating profit, growth rates, appropriate discount rates and
residual values. Based on the initial impairment test as of July 1, 2002, the
Company determined that goodwill related to its Specialty Publications division
within the Publisher Services segment was impaired.
F-3
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The Specialty Publications division primarily serves customers in the
special-interest magazine market, which had been negatively impacted by the
significant downturn in advertising spending (as a result of cost reduction
initiatives undertaken by advertisers) resulting in fewer page counts and
correspondingly lower net sales. In addition, due to excess capacity in the
magazine printing industry, volume and pricing pressures also resulted in lower
operating profits and cash flows. As a result, the discounted cash flow
analysis for the Specialty Publications division produced a value that was
lower than carrying value. Accordingly, the Company recorded an impairment
charge of $56.3 million representing the entire balance of goodwill for this
division in the first quarter of fiscal 2003. This charge is reflected as a
cumulative effect of a change in accounting principle in the accompanying
Consolidated Statements of Operations.
The Company completed its annual impairment test for fiscal 2003 as of
April 1, 2003 in a manner consistent with its initial impairment test. As a
result of the annual impairment test performed as of April 1, 2003, there were
no indications of impairment and no adjustments to the carrying amount of
goodwill were required. The total balance of goodwill as of June 30, 2003
relates to the Company's Publisher Services segment.
PENSION AND OTHER POST RETIREMENT BENEFITS. The Company sponsors
certain pension and other post retirement plans covering associates who meet
eligibility requirements. Several factors are used to calculate the expense and
liability related to the plans. These factors include assumptions determined by
the Company about the discount rate, expected return on plan assets, and rate
of future compensation increases. In addition, the Company's actuarial
consultants use subjective factors such as withdrawal and mortality rates to
estimate the impact of these trends on expense and liability amounts. The
actuarial assumptions used by the Company may differ materially from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants. While the
Company believes its assumptions are appropriate, significant differences in
actual experience or significant changes in the Company's assumptions may
materially affect its pension and other post retirement obligations and its
future expense. Two developments affected the Company's pension plan during
fiscal 2003. Equity markets declined, which resulted in a decrease in the fair
value of the plan's assets. In addition, as a result of a lower interest rate
environment, the Company's discount rate used in the fiscal 2003 actuarial
valuation was lower than the fiscal 2002 discount rate, resulting in an
increase to the discounted value of the Company's pension liability. As a
result, the Company recorded an additional minimum pension liability in
accordance with SFAS No. 87, "Employer's Accounting for Pensions" totaling
$36.2 million ($23.8 million net of taxes) upon completion of its annual
pension valuations. The adjustment to the additional minimum pension liability
was included in other accumulated comprehensive loss as a direct charge to
shareholders' equity, net of related tax effects. Also in fiscal 2003, the
Company's board of directors adopted a plan to freeze the Company's defined
benefit pension plan to mitigate the volatility in pension expense and required
cash contributions expected in future years. As a result of this event, a
pension curtailment charge of $0.7 million was recognized and is included in
restructuring and other charges in the Consolidated Statements of Operations.
The Company expects to contribute approximately $8 million in cash to the
defined benefit pension plan in fiscal 2004.
A one percentage-point change in the long-term rate of return on plan
assets would have a $0.8 million impact on the 2004 pension expense and no
impact on the accumulated benefit obligation. A one percentage-point change in
the discount rate would have the following impact on 2004 pension expense and
accumulated benefit obligation, respectively:
Change in discount rate:
1-Percentage Point
(In thousands) Increase Decrease
-------- --------
Effect on 2004 pension expense $ (1,043) $ 1,219
Effect on accumulated benefit obligation (15,759) 19,727
INCOME TAXES. As part of the process of preparing the consolidated
financial statements, the Company is required to estimate income taxes in each
of the jurisdictions in which the Company operates. In addition to estimating
the actual current tax liability, the Company must assess future tax effects of
temporary differences between the tax bases of assets and liabilities and
amounts reported in the accompanying Consolidated Balance Sheets, and operating
loss carryforwards. Such differences result in deferred tax assets and
liabilities, which are recorded on the Company's Consolidated Balance Sheets.
Management then assesses the likelihood that deferred tax assets will be
recovered from future taxable income, and, to the extent recovery is not
considered likely, establishes a valuation allowance against those assets. The
valuation allowance is based on estimates of future taxable income by
jurisdictions in which the Company operates and the period over which the
deferred tax assets will be recoverable. Judgment is involved in determining
the provision for income taxes, the deferred tax assets and liabilities, and
any valuation allowance recorded against the net deferred tax assets.
F-4
To the extent that actual results differ from management's estimates,
new information results in changes to estimates, or there is a material change
in the actual tax rates or time period within which the underlying temporary
differences become taxable or deductible, the Company may need to establish an
additional valuation allowance or adjust the effective tax rate which could
materially impact the Company's financial position and results of operations.
DISCONTINUED OPERATIONS. In the third quarter of fiscal 2002, the
Company recorded a $1.2 million loss, net of taxes, in connection with the sale
of its Atlanta-based Creative Marketing division. The Company has reported the
sale as a discontinued operation for fiscal 2002. The Company did not
reclassify the results of the Creative Marketing division as a discontinued
operation in prior years because the changes that would result from a
reclassification would not be material to the consolidated financial statements
for fiscal 2001. In addition, the impact of reclassifying would have no impact
on the Company's compliance with loan covenants or other contractual
requirements, and no significant impact on earnings trends.
SELF-INSURANCE RESERVES. The Company is self-insured for both medical
and workers' compensation claims. The Company engages third party firms to
provide claims processing for its medical and workers' compensation claims, and
to calculate ultimate loss projections relative to its workers' compensation
claims. The Company records its reserves for medical and workers' compensation
claims based on the information supplied by the third party firms. The
Company's policy is to adjust its workers' compensation reserve based on an
analysis of individual claims at each reporting date. The Company maintains a
medical reserve for claims incurred but not reported based on its best estimate
of its ultimate cost of settling all claims incurred as of the reporting date.
SIGNIFICANT TRANSACTIONS
In addition to the goodwill impairment charge and the pension information
discussed previously, the Company considers the following to be significant
transactions:
RESTRUCTURING AND OTHER EXPENSES. Over the course of the past several
years, the Company has focused its operations around the Publisher Services and
Specialty Packaging segments. As a result, the Company has exited non-strategic
businesses and concentrated its resources on these two segments in an attempt
to develop targeted solutions for its customers and to differentiate its
products and services from its competitors. The information that follows will
further describe the specific actions the Company took during fiscal 2003.
In the second quarter of fiscal 2003, the Company announced several
actions to rationalize capacity and improve utilization within the Publisher
Services segment, particularly in its special interest magazine operation.
These included closure of the special interest magazine facility in East
Stroudsburg, Pennsylvania, closure of the reprint department in Easton,
Pennsylvania, and relocation of certain manufacturing equipment to other
facilities within the Company. The Company also announced changes in the
operating and management structure of the Company. In connection with these
fiscal 2003 actions, the Company recorded pre-tax charges of $12.0 million
($7.9 million net of taxes), which included a pension curtailment charge of
$0.7 million. These charges are included in restructuring and other charges on
the Consolidated Statements of Operations. The Company anticipates that it will
incur additional other exit costs of up to $0.6 million in fiscal 2004,
primarily related to relocating fixed assets. Fiscal 2003 restructuring actions
are expected to be completed by mid fiscal 2004.
JOINT VENTURE. On June 30, 2003, the Company entered into a joint
venture agreement with Datamatics Technologies Limited ("Datamatics"), a
leading business processing outsource service provider in India, resulting in
the formation of KnowledgeWorks Global Limited ("KGL"). KGL provides a full
range of content processing, content management and related services to STM
publishers and other organizations around the world. Pursuant to the terms of
the agreement, the Company purchased an 80% ownership interest in KGL and
Datamatics has the remaining 20% ownership interest. The Company contributed
$3.1 million related to KGL, and recorded additional set-up costs for the
joint venture.
KGL has recently established a facility in Chennai, India to
complement KGL's Mumbai, India facility. The Chennai facility should be in full
production by January 2004 and will provide a range of highly automated content
services for books and periodicals, including copy editing, issue management,
composition, SGML/XML processing, and data conversion. The formation of KGL and
the establishment of the Chennai facility are extensions of the offshore
initiative the Company began in 2001. The Company anticipates that these
offshore operations will allow it to expand production capacity, reduce
turnaround times, lower overall costs, and grow its content management business
in markets outside of North America and in markets other than scholarly
publishing.
F-5
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
RESULTS OF OPERATIONS
The following table presents the major components from the Consolidated
Statements of Operations as a percent of net sales for the fiscal years ended
June 30, 2003, 2002, and 2001, respectively. Results of operations for fiscal
2002 reflect the Company's sale of its Atlanta-based Creative Marketing
operation, which has been reported as a discontinued operation.
Years Ended June 30,
---------------------------------------------------------------------
(Dollars in millions) 2003 2002 2001
------------------ ----------------- ------------------
Net sales $446.9 100.0% $447.3 100.0% $526.3 100.0%
Cost of sales 362.8 81.2 365.9 81.8 433.1 82.3
Selling and administrative
expenses 51.4 11.5 54.0 12.1 58.1 11.0
Restructuring and other charges 12.0 2.7 -- -- 19.9 3.8
------ ----- ------ ---- ------ -----
Operating income 20.7 4.6% 27.4 6.1% 15.2 2.9%
------ ----- ------ ---- ------ -----
Interest expense 14.6 3.3 16.1 3.6 19.7 3.7
Securitization costs 0.6 0.1 1.1 0.2 2.7 0.5
Other, net 0.4 0.1 0.3 0.1 -- --
------ ----- ------ ---- ------ -----
Income (loss) from continuing operations
before income taxes 5.1 1.1% 9.9 2.2% (7.2) (1.3)%
Income tax expense
(benefit) 2.4 0.5 4.9 1.1 (0.7) (0.1)
------ ----- ------ ---- ------ -----
Income (loss) from continuing 2.7 0.6% 5.0 1.1% (6.5) (1.2)%
operations
Loss from discontinued
operations, net of tax -- -- (1.2) (0.3) -- --
Cumulative effect of change in
accounting principle (56.3) (12.6) -- -- -- --
------ ----- ------ ---- ------ -----
Net income (loss) $(53.6) (12.0)% $ 3.8 0.8% $ (6.5) (1.2)%
------ ----- ------ ---- ------ -----
Capital expenditures $ 15.6 3.5% $ 12.0 2.7% $ 15.9 3.0%
------ ----- ------ ---- ------ -----
F-6
In addition to results presented in accordance with generally accepted
accounting principles ("GAAP"), the Company has included certain non-GAAP
financial measures to provide information to assist investors in understanding
the underlying operational performance of the Company. Refer to the Use of GAAP
and Non-GAAP Measures later in this section for additional information on these
measures. The following table presents certain non-GAAP measures as a percent of
net sales and should be read in conjunction with the consolidated financial
statements of the Company.
Years Ended June 30,
--------------------------------------------------------------
(Dollars in millions) 2003 2002 2001
----------------- -------------- ----------------
Operating income, as reported $20.7 4.6% $27.4 6.1% $15.2 2.9%
Amortization -- -- 4.7 1.1 5.1 0.9
Restructuring and other charges 12.0 2.7 -- -- 19.9 3.8
----- ---- ----- ---- ----- -----
Operating income, as adjusted $32.7 7.3% $32.1 7.2% $40.1 7.6%
----- ---- ----- ---- ----- -----
Income (loss) from continuing
operations, as reported $ 2.7 0.6% $ 5.0 1.1% $(6.5) (1.2)%
Income tax expense (benefit) 2.4 0.5 4.9 1.1 (0.7) (0.1)
Amortization -- -- 4.7 1.1 5.1 0.9
Restructuring and other charges 12.0 2.7 -- -- 19.9 3.8
----- ---- ----- ---- ----- -----
Income (loss) from continuing
operations before income taxes,
as adjusted 17.1 3.8 14.6 3.3 17.8 3.4
Income tax expense, as adjusted 6.5 1.5 4.9 1.1 5.8 1.1
----- ---- ----- ---- ----- -----
Income (loss) from continuing
operations, as adjusted $10.6 2.4% $ 9.7 2.2% $12.0 2.3%
----- ---- ----- ---- ----- -----
Net income (loss), as reported $(53.6) (12.0)% $ 3.8 0.8% $(6.5) (1.2)%
Cumulative effect of change in
accounting principle for goodwill 56.3 12.6 -- -- -- --
Discontinued operations -- -- 1.2 0.3 -- --
Income tax expense (benefit) 2.4 0.5 4.9 1.1 (0.7) (0.1)
Interest 14.6 3.3 16.1 3.6 19.7 3.7
Securitization costs 0.6 0.1 1.1 0.2 2.7 0.5
Depreciation 19.3 4.4 20.4 4.6 21.1 4.0
Amortization -- -- 4.7 1.1 5.1 0.9
Restructuring and other charges 12.0 2.7 -- -- 19.9 3.8
----- ---- ----- ---- ----- -----
EBITDA(1) $51.7 11.6% $52.2 11.7% $61.3 11.6%
----- ---- ----- ---- ----- -----
(1) Earnings before interest, taxes, depreciation, amortization and
securitization costs. The Company also excludes the cumulative effect
of a change in accounting principle, discontinued operations and the
impact of restructuring and other charges from the computation of
EBITDA.
Comparison of Fiscal 2003 with Fiscal 2002
NET SALES
Net sales for fiscal 2003 were $446.9 million, compared to $447.3 million in
fiscal 2002, essentially flat year over year. Within the Publisher Services
segment, which includes STM journal services, special interest magazines and
books and directories, net sales totaled $388.5 million for fiscal 2003,
compared to $395.4 million in the prior year, a decline of 2%. Growth in STM
journal services was offset by declines in special interest magazines and
books and directories due primarily to continued volume and pricing
pressures caused by customer consolidation and industry overcapacity as well as
softness in advertising within the special interest magazine division. Net
sales for the Specialty Packaging segment were $58.4 million for fiscal 2003,
compared to $51.9 million in fiscal 2002, an increase of 13%. The increase in
net sales for this segment was attributable to new business wins, particularly
in the health care market.
COST OF SALES
Cost of sales decreased to 81.2% of net sales for fiscal 2003, compared to
81.8% of net sales for fiscal 2002. The improvement was a result of better
product mix in the STM journal services and Specialty Packaging operations,
company-wide cost reduction efforts, improved facility efficiencies and
improved offshore workflows within the Publisher Services segment.
F-7
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses as a percentage of net sales were 11.5% and
12.1% for the years ended June 30, 2003 and 2002, respectively. The decrease in
selling and administrative expenses was primarily attributable to the
discontinuation of goodwill amortization. Amortization expense totaled $4.7
million, or 1.1% of net sales, in fiscal 2002. Other factors contributing to the
year-over-year change in selling and administrative expenses were higher costs
in fiscal 2003 for management incentives, additional accruals for bad debt
expense, and costs incurred in connection with marketing programs and sales
training.
RESTRUCTURING AND OTHER EXPENSES
As previously discussed in Significant Transactions, in fiscal 2003, the
Company recorded restructuring and other charges totaling $12.0 million ($7.9
million net of taxes). These charges included a pension curtailment charge of
$0.7 million.
OPERATING INCOME
Operating income for fiscal 2003 was $20.7 million, compared to $27.4 million
in fiscal 2002. Operating results for fiscal 2003 included $12.0 million in
restructuring and other charges, while fiscal 2002 results included
amortization expense of $4.7 million. In order to provide consistent
comparisons of year-over-year operating results, the following reconciliation
is provided:
(Dollars in thousands) 2003 % of Sales 2002 % of Sales
-------- ---------- ------- ----------
Operating income, as reported $20,660 4.6% $27,377 6.1%
Amortization expense -- -- 4,724 1.1
Restructuring and other charges 12,015 2.7 -- --
------- --- ------- ---
Operating income, as adjusted $32,675 7.3% $32,101 7.2%
------- --- ------- ---
Factors contributing to the increase in operating income, as adjusted,
from fiscal 2002 were improved product mix, operating efficiencies, and
offshore workflows within the Publisher Services segment offset by increases in
sales, marketing and administrative expenses.
INTEREST AND OTHER EXPENSES
Interest and securitization costs declined to $15.2 million in fiscal 2003,
compared to $17.2 in fiscal 2002. The decrease in interest expense was due
primarily to lower debt levels in fiscal 2003, lower year-over-year short-term
interest rates, and the impact of the Company's interest rate swap agreement.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations before income taxes totaled $5.1 million for
fiscal 2003 compared to $9.9 million for fiscal 2002. These results reflect the
impact of $12.0 million in restructuring and other charges reported for the
fiscal year ended June 30, 2003, and amortization expense totaling $4.7 million
for the fiscal year ended June 30, 2002, respectively. In order to provide
consistent comparisons of year-over-year results, the following reconciliation
is provided:
(Dollars in thousands) 2003 % of Sales 2002 % of Sales
------- ---------- ------- ----------
Income from continuing operations before
income taxes, as reported $ 5,077 1.1% $ 9,882 2.2%
Amortization expense -- -- 4,724 1.1
Restructuring and other charges 12,015 2.7 -- --
------- --- ------- ---
Income from continuing operations before
income taxes, as adjusted $17,092 3.8% $14,606 3.3%
------- --- ------- ---
INCOME TAXES
The Company's income tax expense on continuing operations for fiscal 2003 was at
an effective tax rate of 47.5%, compared to an effective tax rate of 49.5% for
fiscal 2002. For fiscal 2003, the amount of tax expense from continuing
operations differs from the amount obtained by application of the statutory U.S.
rates to income from continuing operations primarily due to the effect of
certain non-deductible restructuring charges and the impact of state income
taxes. For fiscal 2002, income tax expense differs from the amount obtained by
application of the statutory U.S. rate due primarily to the impact of
non-deductible goodwill amortization.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Through fiscal 2002, the Company amortized costs in excess of fair value of net
assets of businesses acquired (goodwill) using the straight-line method over
periods not to exceed 40 years. Recoverability was reviewed if events or
changes in circumstances indicated that the carrying amount might not be
recovered. Recoverability was determined by comparing the undiscounted net cash
flows of the assets to which the goodwill applied to the net book value,
including goodwill, of those assets.
F-8
Effective July 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," which requires companies to discontinue
amortizing goodwill and to perform annual impairment tests. In completing the
transitional impairment test required by SFAS No. 142, the Company tested the
net goodwill balances attributable to each of its reporting units for
indications of impairment by comparing the fair value of each reporting unit to
its carrying value. Fair value was determined using discounted cash flow
estimates for each reporting unit in accordance with the provisions of SFAS No.
142. Based on the initial impairment test as of July 1, 2002, the Company
determined that goodwill related to its Specialty Publications division within
the Publisher Services segment was impaired. The Specialty Publications
division primarily serves customers in the special interest magazine market,
which had been negatively impacted by the significant downturn in advertising
spending (as a result of cost reduction initiatives undertaken by advertisers)
resulting in fewer page counts and correspondingly lower net sales. In
addition, due to excess capacity in the magazine printing industry, volume and
pricing pressures also resulted in lower operating profits and cash flows. As a
result, the discounted cash flow analysis for the Specialty Publications
division produced a value that was lower than carrying value. Accordingly, the
Company recorded an impairment charge of $56.3 million representing the entire
balance of goodwill for this division in the first quarter of fiscal 2003. This
charge is reflected as a cumulative effect of a change in accounting principle
in the accompanying Consolidated Statements of Operations.
DISCONTINUED OPERATIONS
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" in the third quarter of fiscal 2002 in connection with the
sale of its Atlanta-based Creative Marketing division. As a result of its
adoption of this statement, the Company has reclassified the results of its
Creative Marketing operation as a discontinued operation for fiscal 2002 (see
Application of Critical Accounting Policies).
EARNINGS PER SHARE
Net income (loss) per share, assuming dilution, totaled $(5.94) in fiscal 2003
and $0.41 in fiscal 2002. In order to provide consistent comparisons of
year-over-year results, the following reconciliation is provided which reflects
the impact of the cumulative effect of a change in accounting principle for
goodwill, discontinued operations, amortization expense, and restructuring and
other charges, net of tax, on earnings per share for the fiscal years ended
June 30, 2003 and 2002, respectively:
2003 2002
----- -----
Earnings per share, assuming dilution:
Net income (loss), as reported $(5.94) $0.41
Cumulative effect of a change in
accounting principle for goodwill 6.24 --
Discontinued operations -- 0.14
Amortization expense -- 0.52
Restructuring and other charges, net of taxes 0.87 --
----- -----
Earnings per share assuming dilution,
as adjusted $1.17 $1.07
----- -----
EBITDA
EBITDA for fiscal 2003 was $51.7 million compared to $52.2 million in fiscal
2002. The Company defines EBITDA as earnings before interest, taxes,
depreciation, amortization and securitization costs. The Company also excludes
the cumulative effect of a change in accounting principle, discontinued
operations, and the impact of restructuring and other charges from the
computation. The Company believes EBITDA is a useful measure of operating
performance before the impact of investing and financing transactions, making
comparisons between companies'earnings power more meaningful and providing
consistent comparisons of the Company's performance. In order to provide
consistent comparisons of year-over-year EBITDA, the following reconciliation
is provided:
(Dollars in thousands) 2003 % of Sales 2002 % of Sales
-------- ---------- -------- ----------
Net income (loss), as reported $(53,634) (12.0)% $ 3,755 0.8%
Cumulative effect of a change in
accounting principle 56,301 12.6 -- --
Discontinued operations -- -- 1,236 0.3
Income taxes 2,410 0.5 4,891 1.1
Interest 14,602 3.3 16,093 3.6
Securitization costs 634 0.1 1,110 0.2
Depreciation 19,325 4.4 20,399 4.6
Amortization -- -- 4,724 1.1
Restructuring and other charges 12,015 2.7 -- --
-------- ---- -------- ----
EBITDA $ 51,653 11.6% $ 52,208 11.7%
-------- ---- -------- ----
F-9
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
COMPARISON OF FISCAL 2002 WITH FISCAL 2001
NET SALES
Net sales for fiscal 2002 were $447.3 million, compared to $526.3 million in
fiscal 2001, a decline of 15%, due primarily to the impact of divested and
closed operations in fiscal 2002 and 2001 related to the Company's former
Atlanta-based technology related logistics operations, the closure and
consolidation of one of the Company's Richmond-based commercial and magazine
printing operations, and the sale of the Atlanta-based Creative Marketing
division. Within the Publisher Services segment, which includes STM journal
services, special interest magazines and books and directories, net sales
totaled $395.4 million for fiscal 2002, compared to $452.4 million in the prior
year, a decline of 13%. The remaining decline in year-over-year sales separate
from the divested and closed operations for the Publisher Services segment was
largely due to volume and pricing pressures as a result of customer
consolidation, overcapacity and reduced demand in a weak economy, as well as
continued softness in advertising pages that impacted the Specialty
Publications division. Net sales for the Specialty Packaging segment were $51.9
million for fiscal 2002, compared to $59.1 million in fiscal 2001, a decrease
of 12%. The decrease in sales compared to the prior year was primarily the
result of the shutdown of the Company's Atlanta-based logistics operations in
fiscal 2001.
COST OF SALES
Cost of sales decreased to 81.8% of net sales for fiscal 2002, compared to
82.3% of net sales for fiscal 2001. The improvement was primarily attributable
to company-wide cost reduction efforts, improvement in facility efficiencies
and improved product mix within the Specialty Packaging segment, offset in part
by a reduction in sales revenues due to continued pricing pressures and
decreased advertising revenues in the Specialty Publications division.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses as a percentage of net sales were 12.1% and
11.0% for the years ended June 30, 2002 and 2001, respectively. The increased
percentage in fiscal 2002 reflected the impact of declining sales in fiscal
2002 and the effects in fiscal 2001 of a $1.5 million gain recognized under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and a $0.9 million gain resulting from the demutualization of one of the
Company's pension investments.
RESTRUCTURING AND OTHER EXPENSES
The Company recorded restructuring and other charges totaling $19.9 million
($13.5 million net of taxes) in fiscal 2001. Total restructuring and other
costs consisted of asset write-downs of $5.5 million, the write-off of
intangible assets related primarily to the Company's Atlanta-based logistics
operations totaling $4.0 million, involuntary termination costs of $3.7
million, contract termination costs of $3.4 million, and other post-closure
shutdown costs of $0.6 million. Involuntary termination costs related to
approximately 250 associates. Restructuring and other charges for fiscal 2001
also included $2.7 million related to the final settlement of certain
post-closing contingencies and other facility closure costs associated with the
sale of the Company's Dynamic Diagrams subsidiary.
OPERATING INCOME
Operating income for fiscal 2002 was $27.4 million, compared to $15.2 million
in fiscal 2001. Operating margins were favorably impacted by company-wide cost
reduction efforts and improved facility efficiencies, which helped to mitigate
the negative impacts of continued pricing pressures and reduction in
advertising pages within the Publisher Services segment. Fiscal 2001 results
reflect the impact of $19.9 million in restructuring and other charges. In
order to provide consistent comparisons of year-over-year operating results,
the following reconciliation is provided:
(Dollars in thousands) 2002 % of Sales 2001 % of Sales
------- ---------- ------- ----------
Operating income, as reported $27,377 6.1% $15,172 2.9%
Amortization expense 4,724 1.1 5,060 0.9
Restructuring and other charges -- -- 19,905 3.8
------- --- ------- ---
Operating income, as adjusted $32,101 7.2% $40,137 7.6%
------- --- ------- ---
INTEREST AND OTHER EXPENSES
Interest and securitization costs declined to $17.2 million in fiscal 2002,
compared to $22.4 in fiscal 2001. The decline in interest expense was
attributable to lower debt levels, lower year-over-year short-term interest
rates and the impact of the Company's interest rate swap agreement. Interest
expense for fiscal 2002 included $0.3 million in deferred loan cost write-offs
in connection with an amendment to the Company's senior bank credit facility.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income (loss) from continuing operations before income taxes totaled $9.9
million for fiscal 2002, compared to $(7.2) million for fiscal 2001. These
results reflect the impact of $19.9 million in restructuring and other charges
reported for fiscal 2001, and
F-10
amortization expense totaling $4.7 million and $5.1 million for fiscal years
2002 and 2001, respectively. In order to provide consistent comparisons of
year-over-year results, the following reconciliation is provided:
(Dollars in thousands) 2002 % of Sales 2001 % of Sales
-------- ---------- -------- ----------
Income (loss) from continuing operations before
income taxes, as reported $ 9,882 2.2% $ (7,177) (l.3)%
Amortization expense 4,724 1.1 5,060 0.9
Restructuring and other charges -- -- 19,905 3.8
-------- --- -------- ----
Income from continuing operations before
income taxes, as adjusted $ 14,606 3.3% $ 17,788 3.4%
-------- --- -------- ----
INCOME TAXES
The Company's income tax expense on continuing operations for fiscal 2002 was
at an effective tax rate of 49.5%, compared to an income tax benefit at an
effective tax rate of 9.6% for fiscal 2001. The effective tax rate for fiscal
2001 reflects the impact of restructuring and other charges recorded. The
variation in rates was primarily attributable to the impact of non-tax
deductible goodwill amortization and the recognition of certain state net
operating loss carry-forwards in fiscal 2001.
DISCONTINUED OPERATIONS
In the third quarter of fiscal 2002, the Company recorded a $1.2 million loss,
net of taxes, in connection with the sale of its Atlanta-based Creative
Marketing division. The Company has reported the sale as a discontinued
operation in fiscal 2002 (see Application of Critical Accounting Policies).
EARNINGS PER SHARE
Net income per share, assuming dilution, totaled $0.41 in fiscal 2002, compared
to a net loss per share of $(0.73) in fiscal 2001. In order to provide
consistent comparisons of year-over-year results, the following reconciliation
is provided which reflects the impact of discontinued operations, amortization
expense, and restructuring and other charges, net of tax, on earnings per share
for the fiscal years ended June 30, 2002 and 2001, respectively:
2002 2001
----- ------
Earnings per share, assuming dilution:
Net income (loss), as reported $0.41 $(0.73)
Discontinued operations 0.14 --
Amortization expense 0.52 0.57
Restructuring and other charges, net of taxes -- 1.51
----- ------
Earnings per share assuming dilution, as adjusted $1.07 $ 1.35
EBITDA
EBITDA for fiscal 2002 was $52.2 million compared to $61.3 million in fiscal
2001. The Company defines EBITDA as earnings before interest, taxes,
depreciation, amortization and securitization costs. The Company also excludes
the cumulative effect of a change in accounting principle, discontinued
operations, and the impact of restructuring and other charges from the
computation. The Company believes EBITDA is a useful measure of operating
performance before the impact of investing and financing transactions, making
comparisons between companies' earnings power more meaningful and providing
consistent comparisons of the Company's performance. In order to provide
consistent comparisons of year-over-year EBITDA, the following reconciliation
is provided:
(Dollars in thousands) 2002 % of Sales 2001 % of Sales
-------- ---------- -------- ----------
Net income (loss), as reported $ 3,755 0.8% $ (6,490) (1.2%)
Discontinued operations 1,236 0.3 -- --
Income taxes 4,891 1.1 (687) (0.1)
Interest 16,093 3.6 19,666 3.7
Securitization costs 1,110 0.2 2,748 0.5
Depreciation 20,399 4.6 21,069 4.0
Amortization 4,724 1.1 5,060 0.9
Restructuring and other charges -- -- 19,905 3.8
-------- ---- -------- ----
EBITDA $ 52,208 11.7% $ 61,271 11.6%
-------- ---- -------- ----
F-11
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
USE OF GAAP AND NON-GAAP MEASURES
In addition to results presented in accordance with generally accepted
accounting principles ("GAAP"), the Company has included in this report the
following non-GAAP financial measures: (1) "operating income" adjusted to
exclude restructuring and other charges of $12.0 million and $19.9 million in
fiscal years ended June 30, 2003 and 2001, respectively, and adjusted to add
amortization expense of $4.7 million and $5.1 million in fiscal years ended
June 30, 2002 and 2001, respectively, (2) "income from continuing operations
before income taxes" adjusted in the same manner and for the same items as
operating income, (3) "earnings per share" adjusted to exclude restructuring
and other charges in the same manner as operating income for fiscal year 2003,
and to exclude the impact in fiscal 2003 of the $56.3 million cumulative effect
of a change in accounting principle, which was recorded upon the Company's
adoption of SFAS No. 142; adjusted to add the impact of the amortization
expense described in operating income above and exclude the impact of the loss
from discontinued operations of $1.2 million for fiscal 2002; and adjusted for
fiscal 2001 to add the impact of the amortization expense described in
operating income above and exclude restructuring and other charges in the same
manner as operating income for fiscal year 2003; and (4) "EBITDA" and "EBITDA
margin" as a percent of net sales with EBITDA being defined by the Company as
earnings before interest, taxes, depreciation, amortization and securitization
costs. The Company also excludes the cumulative effect of a change in
accounting principle, discontinued operations, and the impact of restructuring
and other charges from the computation of EBITDA. For each non-GAAP financial
measure, the Company has presented the most directly comparable GAAP financial
measure and has reconciled the non-GAAP financial measure with such comparable
GAAP financial measure.
These non-GAAP financial measures provide useful information to
investors to assist in understanding the underlying operational performance of
the Company. Specifically, (1) the exclusion of restructuring and other charges
permits comparisons of results for on-going business facilities under the
current operating structure; (2) the exclusion of amortization expense in
fiscal 2002 and 2001 provides consistent comparisons, as amortization expense
is not recorded in fiscal 2003 upon adoption of SFAS No. 142, and
year-over-year comparisons would be positively inflated without the adjustment,
(3) the exclusion of the cumulative effect of a change in accounting principle
permits comparisons without the impact of financial results driven solely by
the adoption of new accounting pronouncements, (4) the exclusion of the impact
of discontinued operations permits comparisons for continuing business
operations; and (5) EBITDA and EBITDA margin as a percent of net sales are
useful measures of operating performance before the impact of investing and
financing transactions, making comparisons between companies' earnings power
more meaningful and providing consistent period-over-period comparisons of the
Company's performance. In addition, the Company uses these non-GAAP financial
measures internally to measure its on-going business performance and in reports
to bankers to permit monitoring of the Company's ability to repay outstanding
liabilities.
Liquidity and Capital Resources
OPERATING ACTIVITIES
Net cash provided by operating activities for fiscal year 2003 totaled $32.1
million, compared to $41.0 million in fiscal 2002. This $8.9 million decrease
was primarily attributable to working capital changes and $5.6 million in
contributions to the Company's pension plan. The most significant working
capital changes relate to timing of certain payments to the Company's larger
vendors and increases in inventory levels to satisfy demands of a new health
care customer. The decrease in accounts receivable is primarily attributable to
improved collection experience with customer accounts. The year-over-year
decrease in net cash provided by operating activities was partially offset by a
$0.6 million decrease in restructuring payments. The Company expects to
contribute approximately $8 million in cash to the defined benefit pension plan
in fiscal 2004.
Net cash provided by operating activities was $41.0 million for fiscal
2002, compared to $36.5 million for fiscal 2001. The $4.5 million improvement
was primarily attributable to reduced working capital commitments as a result
of inventory reduction initiatives, disbursements management, a decrease in
required cash contributions to the Company's pension plan and a decrease in
restructuring payments made.
INVESTING ACTIVITIES
Net cash used in investing activities was $15.6 million for the fiscal year
2003, compared to $6.8 million in the prior year. Capital expenditures for the
fiscal year 2003 totaled $15.6 million compared to $12.0 million for 2002, and
included investments primarily in software and product development for content
management services, new business and operating systems, digital prepress
equipment and building and equipment improvements. Proceeds from the sale of
property, plant and equipment in fiscal 2003 totaled $3.4 million, and related
primarily to the sale of a Richmond facility and a press at the Company's East
Stroudsburg, Pennsylvania location. Also during fiscal 2003, the Company
invested $3.1 million in a joint venture formed with Datamatics Technologies
Limited, a leading business processing outsource service provider in India, and
recorded additional set-up costs for the joint venture. The Company estimates
that capital expenditures for fiscal 2004 will be approximately $14.0 million
to $17.0 million.
F-12
Proceeds from the sale of property, plant and equipment in fiscal 2002
totaled $3.7 million, and related primarily to the sale of a composition
facility located in Akron, Pennsylvania, a press at the Company's Charlotte
facility, and a warehouse located in Lancaster, Pennsylvania. Net proceeds from
divested operations totaled $1.5 million and related to the sale of the
Company's Atlanta-based Creative Marketing division.
Net cash used in investing activities totaled $13.0 million in fiscal
2001. Capital expenditures were $15.9 million and included investments in
digital prepress equipment, manufacturing equipment, and new business and
manufacturing systems. Partially offsetting these expenditures was $3.4 million
in proceeds from the sale of the Company's former point of purchase
manufacturing facility in Atlanta and the sale of certain manufacturing
equipment. During fiscal 2001, the Company made a $3.1 million strategic
investment in Xyvision Enterprise Solutions, Inc., a developer of XML content
management and publishing software. The Company also realized net proceeds of
$4.2 million related to the sale of its Dynamic Diagrams subsidiary.
FINANCING ACTIVITIES
Net cash used in financing activities was $17.2 million for fiscal year 2003,
compared to $36.2 million for the fiscal year 2002. Cash provided by operating
activities was used to pay down $12.5 million on the Company's revolving credit
facility and to fund $1.8 million in dividend payments. A higher subordinated
interest in the Company's accounts receivable securitization program reflected
changes in methods of calculating eligible receivables brought about by
amendments to the securitization program and certain negative trends in the
receivables aging during the year which have been a focus of management's
working capital initiatives. These factors contributed to a $2.9 million
reduction in funding under the Company's receivables securitization program.
On June 21, 2002, the Company amended its senior bank credit agreement
to provide for a $78.0 million revolving bank facility with a group of six
banks, reducing the commitment from the Company's $105.0 million amended and
restated senior bank credit agreement dated June 2001. The facility is secured
by substantially all of the Company's real, personal, and mixed property, is
jointly and severally guaranteed by each of the Company's present and future
significant subsidiaries, and is secured by a pledge of the capital stock of
present and future significant subsidiaries. The senior bank credit facility is
scheduled to mature on March 31, 2004. Management intends to, and anticipates
that it will be able to, refinance the senior bank credit facility prior to its
scheduled maturity.
The Company uses an accounts receivable securitization program to fund
some of its working capital requirements. At June 30, 2003 and 2002,
approximately $57.4 million and $59.6 million, respectively, of accounts
receivable had been sold on a revolving and non-recourse basis to the
wholly-owned, bankruptcy-remote subsidiary. At June 30, 2003 and 2002,
approximately $26.7 million and $29.5 million, respectively, of net accounts
receivable had been sold by the Company's wholly-owned, bankruptcy-remote
subsidiary without recourse to an unrelated third party purchaser under the
securitization program, and the sales were reflected in the Consolidated
Balance Sheets as a reduction of accounts receivable with the proceeds used to
repay a corresponding amount of borrowing under the Company's senior bank
credit facility. The Company's securitization program is an annual program
subject to one-year renewals each October. In the event the program expired
without renewal or was terminated, the Company has sufficient liquidity and
availability under its senior bank credit facility to fund its working capital
requirements.
Long-term debt at June 30, 2003, was $134.0 million, down $23.2
million from $157.2 million at June 30, 2002. Additionally, the Company has
$12.8 million in current maturities of long-term debt, scheduled to mature
March 31, 2004.
For the fiscal year ended June 30, 2002, the Company utilized cash
provided by operations to pay down $23.7 million on the Company's revolving
credit facility, to pay off a $2.6 million mortgage on the Company's Lancaster
facility, and to fund $1.8 million in dividend payments. At June 30, 2002 there
was a reduction of $8.5 million in funding under the Company's receivables
securitization program. The Company also received $0.4 million in proceeds from
the exercise of stock options.
Net cash used in financing activities was $26.8 million for fiscal
2001. Short-term borrowings and cash provided by operating activities were used
to fund working capital requirements, to pay down $25.0 million in debt (net of
debt reduction due to the receivables securitization program), and to fund $1.8
million in dividend payments.
The primary cash requirements of the Company are for debt service,
capital expenditures, working capital, taxes, pension funding and dividends.
The primary sources of liquidity are cash flow provided by operations and
unused capacity under its senior bank credit and receivables securitization
facilities. The Company's senior bank credit facility is scheduled to mature on
March 31, 2004. Management intends to, and anticipates that it will be able to,
refinance the senior bank credit facility prior to its scheduled maturity. 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. The Company
believes that these sources will provide sufficient liquidity and capital
resources to meet its operating requirements for capital expenditures and
working capital.
F-13
Cadmus Communications Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
MARKET RISK
At June 30, 2003 and 2002, the Company had one fixed-to-floating fair value
interest rate swap agreement outstanding with a notional amount of $35.0
million. This swap was entered into to convert $35.0 million of the Company's
9.75% senior subordinated notes due in fiscal 2009 to floating rate
debt. The initial term of the swap agreement expires in fiscal 2009, and the
counterparty has an option to terminate the agreement in fiscal 2004. Under the
swap agreement, the Company receives interest payments at a fixed rate of
9.75% and pays interest at a variable rate that is based on six-month
LIBOR plus a spread. The six-month LIBOR rate is reset each December 1 and June
1. The swap agreement is an effective hedge. The fair value of the Company's
interest rate swap agreement was $2.6 million and $0.5 million at June 30, 2003
and 2002, respectively, which is recorded in the Consolidated Balance Sheets in
other long term assets with an offset in long term debt in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." At
June 30, 2001, the Company had no fixed-to-floating interest rate swap
agreements outstanding. In December 2000, the Company terminated the two
fixed-to-floating interest rate swap agreements that had been outstanding at
June 30, 2000, with an aggregate notional amount of $40.0 million. These swaps
were entered into in June 2000 in conjunction with the termination and
amendment of swaps that were entered into in fiscal 1999. The swaps had similar
terms and conditions to hedge against changes in the fair market value of the
9.75% senior subordinated notes due in fiscal 2009. Under the terms of
this agreement, the Company received interest payments at a fixed rate of
9.75%. The Company paid interest at a variable rate that is based on
three-month LIBOR plus a spread for each of the swap agreements. The Company
recognized gains of $1.5 million in fiscal 2001 when the swaps were adjusted to
fair value.
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 should be immaterial. Additional
information on the hedging instruments is provided in Note 8 to the
Consolidated Financial Statements.
If short-term interest rates were to be either higher or lower by one
percentage point throughout fiscal 2004, and assuming the average amount
outstanding under the Company's senior bank credit facility were consistent
with fiscal 2003 and that the average interest rate paid by the Company on the
floating portion of its fair value interest rate swap agreement were to be
either higher or lower by one percentage point throughout fiscal 2004, the
Company's interest expense and income before taxes would change by
approximately $0.6 million. If program costs under the securitization program
were to be either higher or lower by one percentage point throughout fiscal
2004, and assuming the average amount outstanding under the Company's
securitization program were consistent with fiscal 2003, the Company's
securitization costs and income before taxes would change by approximately $0.3
million.
OFF BALANCE SHEET ITEMS
In the normal course of business, the Company is a party to certain off-balance
sheet arrangements including guarantees and indemnifications in connection with
divested or sold operations and financial instruments with off-balance sheet
risk, such as standby letters of credit and the accounts receivable
securitization program. Liabilities related to these arrangements are not
reflected in the Company's Consolidated Balance Sheets, and management does not
expect any material adverse effects on its financial condition, results of
operations or cash flows to result from these off-balance sheet arrangements.
The Company remains a guarantor on real estate lease obligations,
totaling approximately $0.4 million annually through September 2009, for a
facility in Atlanta related to the Creative Marketing division, which was sold
in the third quarter of fiscal 2002.
The Company maintains certain standby letters of credit to secure its
obligations for workers' compensation programs. At June 30, 2003, the Company
had $2.5 million of standby letters of credit outstanding and had no claims
against those letters of credit. The Company participates in an accounts
receivable securitization program (see Financing Activities within Management's
Discussion and Analysis and Note 9 to the Consolidated Financial Statements).
At June 30, 2003, approximately $26.7 million of net accounts receivable had
been sold and were reflected as a reduction of accounts receivable with the
proceeds used to repay a corresponding amount of borrowing under the Company's
senior bank credit facility.
F-14
OBLIGATIONS AND COMMITMENTS
The Company is a party to certain contractual obligations and commitments as
summarized in the following table.
Payments due by period
---------------------------------------------------------------------------------
Less than 1 to 4 to More than
(In thousands) Total 1 year 3 years 5 years 5 years
-------- --------- -------- ------- ---------
Long-term debt obligations $146,805 $ 12,800 $ -- $ -- $134,005
Operating lease obligations 38,633 6,487 10,433 6,998 14,715
Executive employment contracts 1,125 375 750 -- --
Unconditional purchase obligations 4,644 3,981 533 130 --
Other long-term liabilities 5,649 1,261 1,950 1,300 1,138
-------- -------- ------- ------ --------
Total contractual obligations and
and commitments $196,856 $ 24,904 $13,666 $8,428 $149,858
-------- -------- ------- ------ --------
In addition, the Company is required to make certain minimum
contributions to its defined benefit pension plan. The amount of any
contributions will directly depend upon future changes in investment values,
rates of returns, discount rates, plan benefits and design, and changes in
regulatory or legislative rules covering such plans, among other factors. The
Company's board of directors voted to freeze the Cadmus defined benefit pension
plan in fiscal 2003 in order to mitigate the volatility in pension expense and
required cash contributions expected in future years. The Company expects to
contribute approximately $8.0 million in cash to the defined benefit pension
plan in fiscal 2004, to mitigate, or perhaps eliminate, payments required to be
made to the plan in fiscal 2005. Management is unable to provide estimates of
contributions in future years based on the variable factors noted above.
Statements contained in the previous discussion and throughout this
report relating to Cadmus' future prospects and performance are
"forward-looking statements" that are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
by such statements. Factors that could cause actual results to differ
materially from management's expectations include but are not limited to: (1)
the overall economic environment, (2) the equity market performance and
interest rate environment, which can impact our pension liability, (3) our
ability to develop and market new capabilities and services to take advantage
of technology changes in the publishing process, especially for scientific,
technical and medical journals, (4) significant price pressure in the markets
in which we compete, (5) the loss of significant customers or the decrease in
demand from customers, (6) our ability to continue to obtain improved
efficiencies and lower production costs, (7) the financial condition and
ability to pay of certain customers, (8) the impact of industry consolidation
among key customers, and (9) our ability to operate effectively in markets
outside of North America. Other risk factors are detailed from time to time in
our Securities and Exchange Commission filings. The information provided in
this report is provided only as of the date of this report, and we undertake no
obligation to update any forward-looking statements made herein.
F-15
Cadmus Communications Corporation and Subsidiaries
SELECTED QUARTERLY DATA (unaudited)
2003 Quarters Ended (In thousands,
except per share data) Sept 30 Dec 31 Mar 31 June 30
--------- --------- ----------- -----------
Net sales $ 105,425 $ 113,696 $ 113,437 $ 114,361
Operating income (loss) 7,196 (621) 7,458 6,627
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle for goodwill 1,973 (3,182) 2,172 1,704
Cumulative effect of a change in accounting
principle for goodwill (56,301) -- -- --
Net income (loss) (54,328) (3,182) 2,172 1,704
Per share data:(1)
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle for goodwill 0.22 (0.35) 0.24 0.19
Cumulative effect of a change in accounting
principle for goodwill (6.24) -- -- --
Net income (loss) (6.02) (0.35) 0.24 0.19
Cash dividends 0.05 0.05 0.05 0.05
Stock market price data:
High $ 11.44 $ 11.75 $ 11.97 $ 11.00
Low 8.07 8.38 7.04 7.57
Close 9.64 11.11 8.00 8.89
Selected Non-GAAP Measures(2)
--------- --------- ----------- -----------
Operating income, as adjusted $ 7,196 $ 8,300 $ 8,588 $ 8,591
Income from continuing operations,
as adjusted 1,973 2,705 2,918 3,001
Income per share, as adjusted(1) 0.22 0.30 0.32 0.33
EBITDA(3) 12,047 13,052 13,248 13,306
2002 Quarters Ended (In thousands,
except per share data) Sept 30(4) Dec 31(4) Mar 31 June 30
---------- --------- ----------- -----------
Net sales $ 111,249 $ 114,354 $ 112,656 $ 109,020
Operating income 5,852 6,846 7,363 7,316
Income from continuing operations 561 1,332 1,548 1,550
Income (loss) from discontinued operations,
net of tax (39) 8 (1,205) --
Net income 522 1,340 343 1,550
Per share data:(1)
Income from continuing operations 0.06 0.15 0.17 0.17
Loss from discontinued operations -- -- (0.13) --
Net income 0.06 0.15 0.04 0.17
Cash dividends 0.05 0.05 0.05 0.05
Stock market price data:
High $ 12.16 $ 11.50 $ 12.00 $ 14.64
Low 6.75 7.90 10.15 10.95
Close 8.60 10.75 11.95 11.22
Selected Non-GAAP Measures(2)
--------- --------- ----------- -----------
Operating income, as adjusted $ 7,055 $ 8,019 $ 8,537 $ 8,490
Income from continuing operations, as adjusted 1,764 2,505 2,722 2,724
Income per share, as adjusted(1) 0.20 0.28 0.30 0.30
EBITDA(3) 12,035 13,016 13,803 13,354
(1) Income per share data assumes dilution.
(2) In addition to results presented in accordance with generally accepted
accounting principles ("GAAP"), the Company has included certain
non-GAAP financial measures to provide information to assist investors
in understanding the underlying operational performance of the
Company. Refer to the "Selected Quarterly Data - Reconciliation of
GAAP to Non-GAAP Measures" which follows this table for additional
information on these measures.
(3) Earnings before interest taxes, depreciation, amortization and
securitization costs. The Company also excludes the cumulative effect
of a change in accounting principle, discontinued operations and the
impact of restructuring and other charges from the computation of
EBITDA.
(4) Results of operations for fiscal year 2002 have been reclassified to
reflect the sale of the Company's Creative Marketing division as a
discontinued operation in the third quarter of fiscal 2002. See Note 1
to Consolidated Financial Statements.
F-16
Cadmus Communications Corporation and Subsidiaries
Selected Quarterly Data - Reconciliation of GAAP to Non-GAAP Measures
(unaudited)
In addition to results presented in accordance with generally accepted
accounting principles ("GAAP"), the Company has included certain non-GAAP
financial measures to provide information to assist investors in understanding
the underlying operational performance of the Company. Refer to the Use of GAAP
and Non-GAAP Measures section of Management's Discussion and Analysis for
additional information on these measures.
SELECTED NON-GAAP MEASURES (In thousands, except per share data)
2003 Quarters Ended Sept 30 Dec 31 Mar 31 June 30
-------- -------- -------- --------
Operating income (loss), as
reported $ 7,196 $ (621) $ 7,458 $ 6,627
Restructuring and
other charges -- 8,921 1,130 1,964
-------- -------- -------- --------
Operating income, as adjusted $ 7,196 $ 8,300 $ 8,588 $ 8,591
-------- -------- -------- --------
Income (loss) from continuing operations,
as reported $ 1,973 $ (3,182) $ 2,172 $ 1,704
Income tax expense (benefit) 1,210 (1,376) 1,405 1,171
Restructuring and other charges -- 8,921 1,130 1,964
-------- -------- -------- --------
Income from continuing operations
before income taxes, as adjusted 3,183 4,363 4,707 4,839
Income tax expense, as adjusted 1,210 1,658 1,789 1,838
-------- -------- -------- --------
Income from continuing operations, as adjusted $ 1 ,973 $ 2,705 $ 2,918 $ 3,001
-------- -------- -------- --------
Net income (loss) per share, as
reported(1) $ (6.02) $ (0.35) $ 0.24 $ 0.19
Cumulative effect of change in accounting
principle for goodwill 6.24 -- -- --
Restructuring and other
charges, net of tax -- 0.65 0.08 0.14
-------- -------- -------- --------
Income per share, as adjusted $ 0.22 $ 0.30 $ 0.32 $ 0.33
-------- -------- -------- --------
Net income (loss), as reported $(54,328) $ (3,182) $ 2,172 $ 1,704
Cumulative effect of a change in
accounting principle for goodwill 56,301 -- -- --
Income tax expense (benefit) 1,210 (1,376) 1,405 1,171
Interest 3,763 3,692 3,617 3,530
Securitization costs 188 176 131 139
Depreciation 4,913 4,821 4,793 4,798
Restructuring and other
charges -- 8,921 1,130 1,964
-------- -------- -------- --------
EBITDA(2) $ 12,047 $ 13,052 $ 13,248 $ 13,306
-------- -------- -------- --------
2002 Quarters Ended Sept 30(3) Dec 31(3) Mar 31 June 30
---------- --------- -------- --------
Operating income, as reported $ 5,852 $ 6,846 $ 7,363 $ 7,316
Amortization 1,203 1,173 1,174 1,174
-------- -------- -------- --------
Operating income, as adjusted $ 7,055 $ 8,019 $ 8,537 $ 8,490
-------- -------- -------- --------
Income from continuing operations,
as reported $ 561 $ 1,332 $ 1,548 $ 1,550
Income tax expense 457 1,164 1,750 1,520
Amortization 1,203 1,173 1,174 1,174
-------- -------- -------- --------
Income from continuing operations
before income taxes, as adjusted 2,221 3,669 4,472 4,244
Income tax expense, as adjusted 457 1,164 1,750 1,520
-------- -------- -------- --------
Income from continuing operations, as adjusted $ 1 ,764 $ 2,505 $ 2,722 $ 2,724
-------- -------- -------- --------
Net income per share, as reported(1) $ 0.06 $ 0.15 $ 0.04 $ 0.17
Discontinued operations -- -- 0.13 --
Amortization 0.14 0.13 0.13 0.13
-------- -------- -------- --------
Income per share, as adjusted $ 0.20 $ 0.28 $ 0.30 $ 0.30
-------- -------- -------- --------
Net income, as reported $ 522 $ 1,340 $ 343 $ 1,550
Discontinued operations 39 (8) 1,205 --
Income tax expense 457 1,164 1,750 1,520
Interest 4,379 3,955 3,773 3,986
Securitization costs 383 309 220 198
Depreciation 5,052 5,083 5,338 4,926
Amortization 1,203 1,173 1,174 1,174
-------- -------- -------- --------
EBITDA(2) $ 12,035 $ 13,016 $ 13,803 $ 13,354
-------- -------- -------- --------
(1) Income per share data assumes dilution.
(2) Earnings before interest, taxes, depreciation, amortization and
securitization costs. The Company also excludes the cumulative effect
of a change in accounting principle, discontinued operations and the
impact of restructuring and other charges from the computation of
EBITDA.
(3) Results of operations for fiscal year 2002 have been reclassified to
reflect the sale of the Company's Creative Marketing division as a
discontinued operation in the third quarter of fiscal 2002. See Note 1
to Consolidated Financial Statements.
F-17
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,
-----------------------------------------
(In thousands, except per share data) 2003 2002 2001
--------- --------- ---------
Net sales $ 446,919 $ 447,279 $ 526,290
--------- --------- ---------
Operating expenses:
Cost of sales 362,801 365,873 433,071
Selling and administrative 51,443 54,029 58,142
Restructuring and other charges 12,015 -- 19,905
--------- --------- ---------
426,259 419,902 511,118
Operating income 20,660 27,377 15,172
--------- --------- ---------
Interest and other expenses:
Interest 14,602 16,093 19,666
Securitization costs 634 1,110 2,748
Other, net 347 292 (65)
--------- --------- ---------
15,583 17,495 22,349
--------- --------- ---------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change
in accounting principle for goodwill 5,077 9,882 (7,177)
Income tax expense (benefit) 2,410 4,891 (687)
--------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of a change in accounting
principle for goodwill 2,667 4,991 (6,490)
Loss from discontinued operations, net of $40
in income taxes -- (1,236) --
Cumulative effect of a change in accounting
principle for goodwill (56,301) -- --
--------- --------- ---------
Net income (loss) $ (53,634) $ 3.755 $ (6,490)
--------- --------- ---------
Earnings per share - basic:
Income (loss) from continuing operations $ 0.30 $ 0.56 $ (0.73)
Loss from discontinued operations -- (0.14) --
Cumulative effect of change in accounting
principle for goodwill (6.25) -- --
--------- --------- ---------
Net income (loss) $ (5.95) $ 0.42 $ (0.73)
--------- --------- ---------
Weighted-average common shares outstanding 9,012 8,962 8,938
--------- --------- ---------
Earnings per share - diluted:
Income (loss) from continuing operations $ 0.30 $ 0.55 $ (0.73)
Loss from discontinued operations -- (0.14) --
Cumulative effect of change in accounting principle
for goodwill (6.24) -- --
--------- --------- ---------
Net income (loss) $ (5.94) $ 0.41 $ (0.73)
--------- --------- ---------
Weighted-average common shares outstanding, assuming dilution 9,028 9,049 8,938
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements
F-18
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At 30, June
-------------------------
(In thousands, except share data) 2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 566 $ 1,196
Accounts receivable, less allowance for doubtful
accounts ($2,089 in 2003 and $1,962 in 2002) 30,123 34,845
Inventories 22,347 19,545
Deferred income taxes 1,981 3,653
Prepaid expenses and other 6,947 4,791
--------- ---------
Total current assets 61,964 64,030
--------- ---------
Property, plant and equipment, net 107,853 119,989
Assets held for sale 842 4,051
Goodwill, net 109,884 166,185
Other intangibles, net 4,871 1,603
Other assets 19,512 13,737
--------- ---------
TOTAL ASSETS $ 304,926 $ 369,595
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 12,800 $ --
Accounts payable 33,681 38,322
Accrued expenses and other current liabilities 31,255 24,966
Restructuring reserve 1,110 1,127
--------- ---------
Total current liabilities 78,846 64,415
--------- ---------
Long-term debt, less current maturities 134,005 157,246
Other long-term liabilities 59,667 36,420
--------- ---------
Total liabilities 272,518 258,081
--------- ---------
Shareholders' equity:
Common stock ($0.50 par value; authorized shares-
16,000,000; issued and outstanding shares- 9,049,592
in 2003 and 8,992,092 in 2002) 4,525 4,496
Capital in excess of par value 68,342 67,805
Unearned compensation (514) (77)
Retained earnings (deficit) (15,157) 40,282
Accumulated other comprehensive loss (24,788) (992)
--------- ---------
Total shareholders' equity 32,408 111,514
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 304,926 $ 369,595
--------- ---------
See accompanying Notes to Consolidated Financial Statements
F-19
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
------------------------------------------
(In thousands) 2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $(53,634) $ 3,755 $ (6,490)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 19,325 25,282 26,129
Restructuring and other charges 12,015 -- 19,905
Loss on disposal of discontinued operations -- 1,205 --
Cumulative effect of change in accounting principle
for goodwill 56,301 -- --
Other, net 3,808 2,153 1,306
-------- -------- --------
37,815 32,395 40,850
-------- -------- --------
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable, excluding effects of securitization 7,524 3,695 3,598
Inventories (2,815) 2,861 (29)
Accounts payable and accrued expenses 1,462 7,135 2,086
Restructuring payments (3,532) (4,110) (7,401)
Other current assets (2,161) 1,091 1,827
Pension payments (5,626) (2,053) (5,795)
Other, net (559) 23 1,355
-------- -------- --------
(5,707) 8,642 (4,359)
-------- -------- --------
Net cash provided by operating activities 32,108 41,037 36,491
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (15,636) (12,017) (15,911)
Proceeds from sales of property, plant and equipment 3,397 3,696 3,355
Investment in unconsolidated businesses -- -- (3,132)
Investment in joint venture (3,349) -- --
Net proceeds from sale of divested businesses -- 1,500 4,207
Other, net -- -- (1,484)
-------- -------- --------
Net cash used in investing activities (15,588) (6,821) (12,965)
-------- -------- --------
FINANCING ACTIVITIES
Net payments on receivables securitization program (2,890) (8,453) (6,300)
Repayment of long-term borrowings -- (2,572) (118)
Repayment of long-term revolving credit facility (12,500) (23,700) (18,600)
Dividends paid (1,805) (1,792) (1,789)
Proceeds from exercise of stock options 45 367 --
-------- -------- --------
Net cash used in financing activities (17,150) (36,150) (26,807)
-------- -------- --------
Decrease in cash and cash equivalents (630) (1,934) (3,281)
Cash and cash equivalents at beginning of year 1,196 3,130 6,411
-------- -------- --------
Cash and cash equivalents at end of year $ 566 $ 1,196 $ 3,130
-------- -------- --------
See accompanying Notes to Consolidated Financial Statements
F-20
Cadmus Communications Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Capital in Retained Other
Par Excess of Unearned Earnings Comprehensive
(in thousands) Shares Value Par Value Compensation (Deficit) Loss Total
------ --------- --------- ------------ --------- ------------- ---------
Balance at June 30, 2000 8,938 $ 4,469 $ 67,363 $ -- $ 46,598 $ (488) $ 117,942
Net loss -- -- -- -- (6,490) -- (6,490)
Change in minimum pension liability
net of $55 in deferred taxes -- -- -- -- -- (105) (105)
---------
Comprehensive loss (6,595)
---------
Cash dividends - $0.20 per share -- -- -- -- (1,789) -- (1,789)
----- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2001 8,938 4,469 67,363 -- 38,319 (593) 109,558
Net income -- -- -- -- 3,755 -- 3,755
Change in minimum pension liability,
net of $266 in deferred taxes -- -- -- -- -- (399) (399)
---------
Comprehensive income 3,356
---------
Cash dividends - $0.20 per share -- -- -- -- (1,792) -- (1,792)
Shares issued upon exercise
of stock options 39 20 347 -- -- -- 367
Restricted stock award 15 7 95 (77) -- -- 25
----- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2002 8,992 4,496 67,805 (77) 40,282 (992) 111,514
Net loss -- -- -- -- (53,634) -- (53,634)
Change in minimum pension liability,
net of $12,448 in deferred taxes -- -- -- -- -- (23,796) (23,796)
---------
Comprehensive loss (77,430)
---------
Cash dividends - $0.20 per share -- -- -- -- (1,805) -- (1,805)
Shares issued upon exercise
of stock options 5 2 43 -- -- 45
Restricted stock awards 53 27 494 (437) -- -- 84
----- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2003 9,050 $ 4,525 $ 68,342 $ (514) $ (15,157) $ (24,788) $ 32,408
----- --------- --------- --------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements
F-21
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" or "Cadmus"), a Virginia corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS. Headquartered in Richmond, Virginia, Cadmus provides
end-to-end integrated graphic communications services to professional
publishers, not-for-profit societies and corporations. Cadmus is the world's
largest provider of content management and production services to scientific,
technical and medical ("STM") journal publishers, the fifth largest periodicals
printer in North America, and a leading provider of specialty packaging and
promotional printing services. The Company is focused around its Publisher
Services segment, which provides products and services to both not-for-profit
and commercial publishers in three primary product lines: STM journal services,
special interest and trade magazines, and books and directories. Publisher
Services provides a range of content management, editorial, prepress, printing,
reprinting, warehousing and distribution services under the division names of
Cadmus Professional Communications and Cadmus Specialty Publications. During
fiscal 2003, Cadmus Port City Press became a part of Cadmus Professional
Communications due to operational and organizational changes. The Company's
Specialty Packaging segment provides high quality specialty packaging,
assembly, fulfillment and distribution services to consumer product and other
customers.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash balances
and highly liquid investments with an original maturity of three months or
less.
REVENUE RECOGNITION. Substantially all products are produced to customer
specifications. The Company recognizes revenue when service projects are
completed or products are shipped.
SHIPPING AND HANDLING FEES. Shipping and postage fees recorded in net sales
totaled approximately $42.1 million, $40.2 million and $53.2 million for fiscal
2003, 2002 and 2001, respectively.
DISCONTINUED OPERATIONS. In August 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. This statement is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. The
Company early adopted SFAS No. 144 in the third quarter of fiscal 2002. In the
third quarter of fiscal 2002, the Company recorded a $1.2 million loss, net of
taxes, in connection with the sale of its Atlanta-based Creative Marketing
division. The Company has reported the sale as a discontinued operation for
fiscal 2002. The Company did not reclassify the results of the Creative
Marketing division as a discontinued operation in prior years because, as
displayed in the table below, the changes that would result from a
reclassification would not be material to the consolidated financial statements
for fiscal 2001. In addition, the impact of reclassifying would have no impact
on the Company's compliance with loan covenants or other contractual
requirements, and no significant impact on earnings trends.
Income
Fiscal 2001 (In thousands) Sales (Loss) EPS
-------- -------- ------
As reported $526,290 $ (6,490) $(0.73)
Impact of Creative Marketing 14,774 342 0.04
-------- -------- ------
As Adjusted $511,516 $ (6,832) $(0.77)
-------- -------- ------
INVENTORIES. Inventories are valued at the lower of cost, as determined using
the first-in, first-out method, or market.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Cadmus' policy with respect to its trade and
notes receivable is to maintain an adequate allowance or reserve for doubtful
accounts for estimated losses from the inability of its customers or
noteholders to make required payments. The Company's process to estimate the
collectibility of its trade accounts receivable balances consists of two steps.
First, the Company evaluates specific accounts for which it has information
that the customer may have an inability to meet its financial obligations
(e.g., bankruptcy). In these cases, the Company uses its judgment, based on
available facts and circumstances, and records a specific allowance for that
customer against the receivable to reflect the amount it expects to ultimately
collect. Second, the
F-22
Company establishes an additional reserve for all customers based on a range of
percentages applied to aging categories, based on management's best estimate.
The Company periodically evaluates the adequacy of its reserves on notes
receivable based on the available facts and circumstances at the time. If the
financial condition of Cadmus' customers or noteholders were to deteriorate and
result in an impairment of their ability to make payments, additional
allowances could be required.
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 operations
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. When indicators of impairment are
present, management is required to evaluate the recoverability of long-lived
tangible assets by reviewing current and projected undiscounted cash flows of
such assets.
GOODWILL AND OTHER INTANGIBLES. Through fiscal 2002, the Company amortized
costs in excess of fair value of net assets of businesses acquired (goodwill)
using the straight-line method over a period not to exceed 40 years.
Accordingly, recoverability was reviewed if events or changes in circumstances
indicated that the carrying amount might not be recovered. Recoverability was
determined by comparing the undiscounted net cash flows of the assets to which
the goodwill applied to the net book value, including goodwill, of those
assets. Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
effective July 1, 2002, the Company evaluated the remaining balance of its
goodwill by reporting unit using estimated discounted cash flows to determine
fair value. This evaluation will occur annually (see Note 6).
As discussed in Note 3, the Company entered into a joint venture
agreement with Datamatics Technologies Limited ("Datamatics") on June 30, 2003,
resulting in an increase in intangible assets of $3.3 million, which will be
amortized using the straight-line method over a five year period. Annual
amortization expense for these assets is expected to be approximately $0.7
million per year. Other intangibles totaling $1.5 million and $1.6 million for
fiscal years ended June 30, 2003 and 2002, respectively, relate to assets
recognized in connection with the Company's adjustment of its minimum pension
liability (see Note 11).
When indicators of impairment are present, management evaluates the
recoverability of finite-lived intangible assets by reviewing current and
projected undiscounted cash flows of such assets.
EARNINGS PER SHARE. Basic earnings per share is computed on the basis of
weighted-average common shares outstanding. Diluted earnings per share is
computed on the basis of weighted-average common shares outstanding plus common
shares contingently issuable upon the exercise of dilutive stock options.
Incremental shares for dilutive stock options, computed under the treasury
stock method, totaled 16,000 and 87,000 in fiscal 2003 and 2002, respectively.
In fiscal 2001, incremental shares for dilutive stock options (computed under
the treasury stock method) were not included in the computation of diluted
earnings per share as their effect would have been anti-dilutive. These shares
totaled 18,000 for fiscal 2001.
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. In accordance with SFAS No. 109, the Company recognizes deferred
tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial reporting and tax bases of assets
and liabilities.
STOCK-BASED COMPENSATION. The Company has adopted the disclosure 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. All
option grants to date have been issued at fair market value on the date of
grant. As a result, the Company does not recognize charges to operations
resulting from the plans.
F-23
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If the Company had elected to recognize compensation cost related to
its stock options based on estimated fair value in accordance with the
provisions of SFAS No. 123, net income (loss) would have been as follows:
(In thousands, except per share amounts) 2003 2002 2001
---------- --------- ---------
Net income (loss), as reported $ (53,634) $ 3,755 $ (6,490)
Deduct: total stock-based employee compensation
expense determined under fair value method of all
awards, net of related tax effects (536) (567) (643)
---------- --------- ---------
Pro forma net income (loss) $ (54,170) $ 3,188 $ (7,133)
---------- --------- ---------
Earnings (loss) per common share - basic
As reported $ (5.95) $ 0.42 $ (0.73)
Pro forma $ (6.01) $ 0.36 $ (0.80)
Earnings (loss) per common share - diluted
As reported $ (5.94) $ 0.41 $ (0.73)
Pro forma $ (6.00) $ 0.35 $ (0.80)
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
2003 2002 2001
------- ------- -------
Assumptions:
Risk-free interest rate 5.22% 5.67% 5.97%
Dividend yield 1.91% 1.80% 1.76%
Volatility factor .3726 .3782 .3836
Expected life 8 years 8 years 8 years
RECLASSIFICATIONS. Certain previously reported amounts have been reclassified
to conform to the current-year presentation.
2. RESTRUCTURING AND OTHER CHARGES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at its fair value in the period in which the liability is incurred,
and provides for expanded financial statement disclosures. The Company adopted
SFAS No.146 in the second quarter of fiscal 2003. As such, the fiscal 2003
restructuring and other charges have been accounted for in accordance with the
provisions of SFAS No. 146, and the related disclosures have been expanded.
Over the course of the past several years, the Company has focused its
operations around the Publisher Services and Specialty Packaging segments. As a
result, the Company has exited non-strategic businesses and concentrated its
resources on these two segments in an attempt to develop targeted solutions for
its customers and to differentiate its products and services from its
competitors. The information that follows will further describe the specific
actions the Company took during this time.
In fiscal 2001, the Company recorded restructuring and other charges
totaling $19.9 million ($13.5 million net of taxes). These charges related to
the consolidation of the Company's Atlanta-based logistics operations, the
consolidation of two Richmond-based commercial and magazine printing
operations, other actions to reduce operating costs, and the final settlement
of certain post-closing contingencies and other facility closure costs
associated with the sale of the Company's Dynamic Diagrams subsidiary.
In fiscal 2003, the Company announced several actions to rationalize
capacity and improve utilization within the Publisher Services segment,
particularly in its special interest magazine operation. These included closure
of the special interest magazine facility in East Stroudsburg, Pennsylvania,
closure of the reprint department in Easton, Pennsylvania, and relocation of
certain manufacturing equipment to other facilities within the Company. The
Company also announced changes in the operating and management structure of the
Company. In connection with these fiscal 2003 actions, the Company recorded
pre-tax charges of $12.0 million ($7.9 million net of taxes), which included a
pension curtailment charge of $0.7 million. These charges are included in
restructuring and other charges in the Consolidated Statements of Operations.
F-24
A summary of the restructuring and other charges, and activities against these
charges follows:
Write-off of Loss on Employee Other
Intangible Disposal Severance Exit Business
(In thousands) Assets of Assets Costs Costs Divestitures Total
------------ --------- --------- -------- ------------ --------
June 30, 2000 Accrual $ -- $ -- $ 801 $ 1,902 $ -- $ 2,703
FY 2001 provision 3,968 5,471 3,738 4,023 2,705 19,905
Costs incurred (3,968) (5,471) (2,193) (2,018) (2,705) (16,355)
-------- -------- -------- -------- -------- --------
June 30, 2001 Accrual -- -- 2,346 3,907 -- 6,253
Costs incurred -- -- (1,895) (3,231) -- (5,126)
-------- -------- -------- -------- -------- --------
June 30, 2002 Accrual -- -- 451 676 -- 1,127
FY 2003 provision -- 7,831 2,363 1,152 -- 11,346
Costs incurred -- (7,831) (1,979) (1,553) -- (11,363)
-------- -------- -------- -------- -------- --------
June 30, 2003 Accrual $ -- $ -- $ 835 $ 275 $ -- $ 1,110
-------- -------- -------- -------- -------- --------
FISCAL 2001 RESTRUCTURING AND OTHER CHARGES:
Write-off of intangible assets consisted of goodwill related to the closure of
the Company's Atlanta-based logistics operations in fiscal 2001.
Loss on disposal of assets for fiscal 2001 included a $2.9 million
loss on disposal of assets due to the closure of the Atlanta-based
technology-related logistics operations, a $2.0 million loss on disposal of
assets due to the consolidation of the two Richmond-based commercial and
magazine printing operations, and a $0.6 million loss on disposal of assets due
to the continued consolidation of duplicate facilities in the Publisher
Services segment. Loss on disposal of assets related primarily to assets to be
sold. Write-downs were measured by the difference between the fair value of the
asset, as determined by appraisal or best current market value information
available at that time, and the net book value at the time of the restructuring
plan commitment date.
Employee severance costs for fiscal 2001 included involuntary
termination costs related to approximately 250 associates located within the
Atlanta-based logistics operations, the two Richmond-based printing operations,
and the Cadmus Professional Communications division. By June 30, 2001,
approximately 160 of these associates had been terminated, and severance
payments begun. During the year ended June 30, 2002, most of the remaining
associates were terminated.
Other exit costs consisted primarily of costs to pay off or terminate
existing leases, costs to exit contractual commitments, closure costs
associated with the shut-down of facilities, and incremental costs incurred as
a direct result of the restructuring actions that do not result in any future
economic benefit to the Company. Other exit costs remaining to be paid at June
30, 2003 related to fiscal 2001 restructuring actions approximate $0.2 million,
and are expected to be paid by the end of fiscal 2004.
Business divestitures included a loss on the sale of the Dynamic
Diagrams subsidiary in fiscal 2001. Fiscal 2001 restructuring actions are
substantially complete.
FISCAL 2003 RESTRUCTURING AND OTHER CHARGES:
Loss on impairment or disposal of assets for fiscal 2003 totaled $7.8 million
and included a $6.2 million loss on assets to be disposed of due to the closure
of the East Stroudsburg, Pennsylvania facility and the Easton, Pennsylvania
reprint department and a $1.6 million loss on impairment of assets related to a
former operating facility in Richmond, Virginia, which has been sold.
Writedowns were measured by the difference between the fair value of the
assets, as determined by appraisal or best current market value information
available, and the net book value of the asset.
One-time employee severance costs totaled $2.4 million and related to
approximately 190 associates whose positions were eliminated as a result of the
closure of the East Stroudsburg facility and Easton reprint operations and
changes in the operating and management structure of the Company. As of June
30, 2003, all of these associates had been terminated and severance payments
totaled $1.8 million. Severance costs remaining at June 30, 2003 that related
to fiscal 2003 restructuring actions totaled $0.8 million. In addition, the
Company recorded a pension curtailment charge of $0.7 million for fiscal 2003.
Other exit costs totaled $1.2 million and included contract
termination costs and other costs incurred to close the East Stroudsburg
facility. Other exit costs remaining at June 30, 2003 that related to fiscal
2003 restructuring actions totaled $0.1 million. The Company anticipates that
it will incur additional other exit costs of up to $0.6 million in fiscal 2004,
primarily related to relocating fixed assets.
Fiscal 2003 restructuring actions are expected to be completed by mid
fiscal 2004.
F-25
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DIVESTITURES
2003 Acquisitions. On May 28, 2003, the Company purchased $0.5 million of the
software assets of DocNet.com, Inc. and later rebranded the technology as
ArticleWorks(TM), a comprehensive content delivery and digital rights
management system that enables publishers and other content providers to
deliver content on demand in either printed or secure electronic formats.
On June 30, 2003, the Company entered into a joint venture agreement
with Datamatics Technologies Limited ("Datamatics"), a leading business
processing outsource service provider in India, resulting in the formation of
KnowledgeWorks Global Limited ("KGL"). KGL provides a full range of content
processing, content management and related services to STM publishers and other
organizations around the world. Pursuant to the terms of the agreement, the
Company invested $3.1 million in the KGL joint venture. The Company has an
80% ownership interest in the joint venture, and Datamatics has the remaining
20% ownership interest. As a result of the Company's controlling interest, the
Company has consolidated KGL's balance sheet and results of operations for
reporting purposes.
2002 Divestitures. On January 24, 2002, the Company sold its Atlanta-based
Cadmus Creative Marketing division to a strategic consultancy firm
headquartered in Richmond, Virginia. In connection with the sale, the Company
reported a $1.2 million loss on the sale of discontinued operations, net of
taxes (see Note 1).
2001 Divestitures. On September 29, 2000, the Company sold its Dynamic Diagrams
subsidiary. Dynamic Diagrams provided web design and online content services to
corporations and STM journal publishers. Net proceeds from the sale totaled
approximately $4.2 million, resulting in a pre-tax loss of $2.7 million. The
loss is included in restructuring and other charges in the Consolidated
Statements of Operations.
4. INVENTORIES
Inventories as of June 30, 2003 and 2002, consisted of the following:
(In thousands) 2003 2002
------- -------
Raw materials and supplies $10,242 $ 8,829
Work in process 9,431 9,424
Finished goods 2,674 1,292
------- -------
Inventories $22,347 $19,545
------- -------
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of June 30, 2003 and 2002, consisted of the
following:
(In thousands) 2003 2002
-------- --------
Land and improvements $ 5,822 $ 5,987
Buildings and improvements 49,868 50,635
Machinery, equipment and fixtures 190,995 198,275
-------- --------
Total property, plant and equipment 246,685 254,897
Less: Accumulated depreciation 138,832 134,908
-------- --------
Property, plant and equipment, net $107,853 $119,989
-------- --------
As of June 30, 2003 and 2002, the Company had granted liens on and
security interests in substantially all of the Company's real, personal, and
mixed property in connection with its senior bank credit facility (see Note 8).
The Company leases office, production, 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, 2003 are as
follows: 2004 - $6.5 million; 2005 - $5.4 million; 2006 - $5.0 million; 2007 -
$3.7 million; 2008 - $3.3 million; and thereafter - $14.7 million.
Total rental expense charged to operations was $7.1 million, $6.6
million, and $7.8 million, in fiscal 2003, 2002, and 2001, respectively.
Substantially all such rental expense represented the minimum rental payments
under operating leases.
Depreciation expense was $19.3 million, $20.4 million and $21.1
million for fiscal 2003, 2002, and 2001, respectively. Commitments outstanding
for capital expenditures at June 30, 2003 totaled $4.6 million.
F-26
ASSETS HELD FOR SALE. Property, plant, and equipment classified as assets held
for sale generally represent property that is under contract for sale and is
expected to close within the next twelve months. Assets held for sale at June
30, 2003 included land, building and equipment totaling $0.8 million related to
the closure of the Company's East Stroudsburg, Pennsylvania facility and the
Easton, Pennsylvania reprint department (see Note 2). Assets held for sale at
June 30, 2002 included land and a building totaling $4.1 million related to a
former operating facility in Richmond, Virginia, which was sold during the
third quarter of fiscal 2003.
6. GOODWILL
Effective July 1, 2002, the Company adopted SEAS No. 142, "Goodwill and Other
Intangible Assets," which requires companies to discontinue amortizing goodwill
and to perform annual impairment tests. In completing the transitional
impairment test required by SFAS No. 142, the Company tested the net goodwill
balances attributable to each of its reporting units for indications of
impairment by comparing the fair value of each reporting unit to its carrying
value. Fair value was determined using discounted cash flow estimates for each
reporting unit in accordance with the provisions of SFAS No. 142. The
preparation of such discounted cash flow estimates requires significant
management judgment with respect to operating profit, growth rates, appropriate
discount rates and residual values. Based on the initial impairment test as of
July 1, 2002, the Company determined that goodwill related to its Specialty
Publications division within the Publisher Services segment was impaired. The
Specialty Publications division primarily serves customers in the special
interest magazine market, which had been negatively impacted by the significant
downturn in advertising spending (as a result of cost reduction initiatives
undertaken by advertisers) resulting in fewer page counts and correspondingly
lower net sales. In addition, due to excess capacity in the magazine printing
industry, volume and pricing pressures also resulted in lower operating profits
and cash flows. As a result, the discounted cash flow analysis for the
Specialty Publications division produced a value that was lower than carrying
value. Accordingly, the Company recorded an impairment charge of $56.3 million
representing the entire balance of goodwill for this division in the first
quarter of fiscal 2003. This charge is reflected as a cumulative effect of a
change in accounting principle in the accompanying Consolidated Statements of
Operations.
The Company completed its annual impairment test for fiscal 2003 as of
April 1, 2003 in a manner consistent with its initial impairment test. As a
result of the annual impairment test performed as of April 1, 2003, there were
no indications of impairment, and no adjustments to the carrying amount of
goodwill were required. The total balance of goodwill as of June 30, 2003
relates to the Company's Publisher Services segment.
The following summary presents the Company's consolidated net loss and
diluted earnings (loss) per share for the fiscal year ended June 30, 2003, and
its pro forma consolidated adjusted net income (loss) and diluted earnings
(loss) per share for the fiscal years ended June 30, 2002, and 2001, as if SFAS
No. 142's amortization provisions had been in effect for the fiscal years
presented:
2003 2002 2001
(pro-forma) (pro-forma)
---------------------- ---------------------- ----------------------
(In thousands, except per share amounts) Total Per Share Total Per Share Total Per Share
-------- --------- -------- --------- -------- ---------
Reported income (loss) from continuing
operations before cumulative effect
of a change in accounting principle
for goodwill $ 2,667 $ 0.30 $ 4,991 $0.55 $ (6,490) $(0.73)
Add back: goodwill amortization -- -- 4,724 0.52 5,060 0.57
-------- ------ -------- ----- -------- ------
Adjusted income (loss) from continuing
operations before cumulative effect
of a change in accounting principle
for goodwill 2,667 0.30 9,715 1.07 (1,430) (0.16)
(Loss) from discontinued operations -- -- (1,236) (0.14) -- --
Cumulative effect of a change in
accounting principle for goodwill (56,301) (6.24) -- -- -- --
-------- ------ -------- ----- -------- ------
Adjusted net income (loss) $(53,634) $(5.94) $ 8,479 $0.93 $ (1,430) $(0.16)
-------- ------ -------- ----- -------- ------
7. OTHER BALANCE SHEET INFORMATION
Accrued expenses and other current liabilities included $14.7 million and $14.0
million in accrued compensation and other benefits expense at June 30, 2003 and
2002, respectively. Additionally, accrued expenses at June 30, 2003 included
$8.0 million related to the Company's expected contribution to the defined
benefit pension plan in fiscal 2004.
Other long-term liabilities consisted primarily of $36.9 million
related to the Company's pension plan (see Note 11) in fiscal 2003, other post
retirement benefits, and amounts recorded under deferred compensation
arrangements with certain executive officers and other associates.
F-27
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT
Long-term debt at June 30, 2003 and 2002 consisted of the following:
(In thousands) 2003 2002
-------- --------
Senior Bank Credit Facility:
Revolving credit facility, weighted-average interest
rate of 4.46% $ 12,800 $ 25,300
9.75% Senior Subordinated Notes, due 2009 125,000 125,000
11.5% Subordinated Promissory Notes, due 2010 6,415 6,415
Fair market value of interest rate swap agreement 2,590 531
-------- --------
Total debt 146,805 157,246
Less: Current maturities of long-term debt 12,800 --
-------- --------
Long-term debt $134,005 $157,246
-------- --------
SENIOR BANK CREDIT FACILITY. On June 21, 2002, the Company amended its
senior bank credit agreement to provide for a $78.0 million revolving bank
facility with a group of six banks, reducing the commitment from the Company's
$105.0 million amended and restated senior bank credit agreement dated June
2001. The facility is secured by substantially all of the Company's real,
personal, and mixed property, is jointly and severally guaranteed by each of
the Company's present and future significant subsidiaries, and is secured by a
pledge of the capital stock of present and future significant subsidiaries. The
senior bank credit facility is scheduled to mature on March 31, 2004.
Management intends to, and anticipates that it will be able to, refinance the
senior bank credit facility prior to its scheduled maturity.
A summary of the interest rate spreads and commitment fees for the
senior bank credit facility follows:
Interest Rate Spreads:
LIBOR Loans 1.750% - 3.250%
Prime Rate Loans 0.250% - 1.250%
Commitment Fee Rate 0.375% - 0.625%
Applicable interest rate spreads paid by the Company will fluctuate,
within the ranges above, based upon the Company's performance as measured by
the total debt-to-EBITDA (earnings before interest, taxes, depreciation and
amortization) ratio. Interest rates under the senior bank credit facility are a
function of either LIBOR or prime rate. At June 30, 2003, the interest rates on
the Company's borrowings under its senior bank credit facility ranged from
3.87% to 5.25%. The senior bank credit facility requires the Company to pay
unused commitment fees with respect to the revolving credit facility. The
unused commitment fee rate is determined by reference to a total debt-to-EBITDA
ratio.
The senior bank credit facility contains certain covenants regarding
the ratio of debt-to-EBITDA, fixed charge coverage (EBITDA minus capital
expenditures divided by the sum of interest expense plus securitization costs
plus scheduled principal payments) and net worth, and contains other
restrictions, including limitations on additional borrowings, and the
acquisition, disposition and securitization of assets. The senior bank credit
facility also limits the Company's payment of dividends to an aggregate amount
per annum of $0.20 per share when the Company's total debt-to-EBITDA ratio
exceeds 3.0 to 1.0. At June 30, 2003, the Company's total debt-to-EBITDA ratio
exceeded 3.0 to 1.0, and, therefore, the Company was limited under this
agreement to an annual dividend rate of $0.20 per share. The Company was in
compliance with all covenants under this facility at June 30, 2003.
The expenses related to the issuance of debt are capitalized and
amortized to interest expense over the lives of the related debt. In June 2002,
as a result of amending its senior bank credit facility, the Company wrote off
a pro-rata portion of its deferred financing costs, in the amount of
approximately $0.3 million before income taxes, associated with reducing the
total commitment under the senior bank credit facility. The write-off was
included in interest expense in the Consolidated Statements of Operations.
SENIOR SUBORDINATED NOTES. On June 1, 1999, the Company issued senior
subordinated notes in the aggregate principal amount of $125.0 million.
Interest is payable semi-annually on June 1 and December 1 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. 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.
F-28
The senior subordinated notes contain certain covenants regarding the
ratio of EBITDA-to-interest expense and contain other restrictions, including
limitations of additional borrowings, and the acquisition, disposition, and
securitization of assets. The senior subordinated notes include a computation
for a restricted payments pool out of which dividends may be paid. The balance
of the restricted payments pool is increased based on net income, cash proceeds
from the issuance of stock and cash proceeds from the receipt of equity
contributions and is reduced based on payment of dividends or other restricted
payments. The Company may continue to pay dividends to the extent there is a
positive balance in the restricted payments pool in excess of the scheduled
dividend. At June 30, 2003, the Company's restricted payments pool was
sufficient to cover expected dividends and, therefore, the Company was not
impacted by the limitation of this covenant. The Company was in compliance with
all covenants under the senior subordinated note indenture at June 30, 2003.
SUBORDINATED PROMISSORY NOTES. On April 1, 1999, in conjunction with
the Mack acquisition, the Company issued subordinated promissory notes in the
aggregate principal amount of $6.4 million to the sellers of Mack. Interest is
payable monthly on the first day of each month at an annual rate of 11.5%. The
subordinated promissory notes have no required principal payments prior to
maturity on March 31, 2010. The notes are subordinated in right of payment to
the prior payment in full in cash of all of the Company's senior and senior
subordinated debt.
The Company can redeem the subordinated promissory notes, in whole or
in part, on or after March 31, 2004, at 100% of the principal amount thereof,
plus accrued interest thereon. Upon the occurrence of certain events
constituting a change of control of the Company, the Company must first satisfy
the obligations under the provisions of the senior debt agreements and then may
repurchase the subordinated promissory notes at a purchase price of 100% of the
principal amount, plus accrued interest thereon.
OTHER DISCLOSURES. The fair value of debt as of June 30, 2003 and 2002
was $151.9 million and $161.1 million, respectively. Fair value for the
Company's senior subordinated notes was determined based on quoted market
prices for the same or similar issues. The fair value of all other debt
instruments was estimated to approximate their recorded value as their
applicable interest rates approximate current market rates relative to the risk
associated with the respective instrument.
Maturities of long-term debt are as follows: 2004 - $12.8 million;
2005 - $0 million; 2006 - $0 million; 2007 - $0 million; 2008 - $0 million;
thereafter - $134.0 million. As of June 30, 2003 and 2002, the Company had
granted liens on and security interests in substantially all of the Company's
real, personal, and mixed property in connection with its senior bank credit
facility.
Interest paid totaled $14.7 million, $17.0 million and $19.1 million
for fiscal 2003, 2002, and 2001, respectively.
HEDGING ARRANGEMENTS. The Company has a strategy to optimize the ratio
of the Company's fixed-to-variable rate financing consistent with maintaining
an acceptable level of exposure to the risk of interest rate fluctuations. To
achieve this mix, the Company, from time to time, enters into interest rate
swap agreements with various banks to exchange fixed and variable rate interest
payment obligations without the exchange of the underlying principal amounts
(the "notional amounts"). These agreements are hedged against the Company's
long-term borrowings and have the effect of converting the Company's long-term
borrowings from variable rate to fixed rate, or fixed rate to variable rate, as
required. The differential to be paid or received is accrued each period and as
interest rates change and is recognized as an adjustment to interest expense
related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. The Company's
strategy to effectively convert variable rate financing to fixed rate financing
or fixed rate financing to variable rate financing through the use of these
swap agreements resulted in a reduction of interest cost of $1.3 million, $0.9
million and $0.1 million in fiscal 2003, 2002 and 2001, respectively.
At June 30, 2003 and 2002, the Company had one fixed-to-floating fair
value interest rate swap agreement outstanding with a notional amount of $35.0
million. This swap was entered into to convert $35.0 million of the Company's
9.75% senior subordinated notes due in fiscal 2009 to floating rate debt. The
initial term of the swap agreement expires in fiscal 2009, and the counterparty
has an option to terminate the agreement in fiscal 2004. Under the swap
agreement, the Company receives interest payments at a fixed rate of 9.75% and
pays interest at a variable rate that is based on six-month LIBOR plus a
spread. The six-month LIBOR rate is reset each December 1 and June 1. The swap
agreement is an effective hedge. The fair value of the Company's interest rate
swap agreement was $2.6 million and $0.5 million at June 30, 2003 and 2002,
respectively, which is recorded in the Consolidated Balance Sheets in other
long term assets with an offset in long term debt in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
At June 30, 2001, the Company had no fixed-to-floating interest rate
swap agreements outstanding. In December 2000, the Company terminated the two
fixed-to-floating interest rate swap agreements that had been outstanding at
June 30, 2000, with an aggregate notional amount of $40.0 million. These swaps
were entered into in June 2000 in conjunction with the termination and
amendment of swaps that were entered into in fiscal 1999. The swaps had similar
terms and conditions to hedge against changes in the fair market value of the
9.75% senior subordinated notes due in fiscal 2009. Under the terms of this
agreement, the Company received interest payments at a fixed rate of 9.75%. The
Company paid interest at a variable rate that is based on three-month LIBOR
plus a spread for each of the swap agreements. The Company recognized gains of
$1.5 million in fiscal 2001 when the swaps were adjusted to fair value.
F-29
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The notional amounts and applicable rates of the Company's interest
rate swap agreements were as follows:
Paid Floating, Received Fixed
------------------------------------------------
(In thousands) 2003 2002 2001
-------- -------- --------
Notional amount:
Beginning balance $ 35,000 $ -- $ 40,000
New contracts -- 35,000 --
Terminated contracts -- -- (40,000)
-------- -------- --------
Ending Balance $ 35,000 $ 35,000 $ --
-------- -------- --------
Weighted-Average
Interest Rates for 2003
-----------------------
Type of swap: Paid Received
------ ---------
Paid floating, received fixed 5.974% 9.75%
9. ASSET SECURITIZATION
The Company entered into a receivables securitization program on October 26,
1999, which was amended on May 17, 2000 to include additional receivable
portfolios and to increase the program size. Under the program, the Company
entered into an agreement to sell, on a revolving and non-recourse basis,
certain of its accounts receivable to a wholly-owned, bankruptcy-remote
subsidiary, which entered into an agreement to sell without recourse, on a
revolving basis, an undivided percentage ownership interest in a designated
pool of accounts receivable to an unrelated third party purchaser. The purchase
limit of the program is $45 million. These transactions are accounted for as a
sale of accounts receivable. Under the terms of the program, billings within
these portfolios provide new receivables that are added to the pool and
collections reduce previously sold receivables. The Company settles the net
change each month with the unrelated third party purchaser.
At June 30, 2003 and 2002, approximately $57.4 million and $59.6
million, respectively, of accounts receivable had been sold to the
wholly-owned, bankruptcy-remote subsidiary. At June 30, 2003 and 2002,
approximately $26.7 million and $29.5 million, respectively, of net accounts
receivable had been sold by the Company's wholly-owned, bankruptcy-remote
subsidiary without recourse to an unrelated third party purchaser under the
securitization program, and the sales are reflected in the Consolidated Balance
Sheets as a reduction of accounts receivable with the proceeds used to repay a
corresponding amount of borrowing under the Company's senior bank credit
facility. The Company had a subordinated interest in these accounts receivables
of approximately $33.9 million and $26.6 million recorded on the balance sheet
as of June 30, 2003 and 2002, respectively. In addition, the Company had a
payable to the unrelated third party purchaser of approximately $3.2 million as
of June 30, 2003 and a receivable from the unrelated third party purchaser of
$3.4 million as of June 30, 2002. The retained interest in the accounts
receivable sold is valued at the carrying amount of the retained accounts
receivable net of applicable allowances for doubtful accounts, which
approximates fair value.
The Company retains servicing responsibilities for all of the accounts
receivable, including those sold to the unrelated third party purchaser. The
Company does not receive fees for this service from the unrelated third party
and has no servicing asset or liability recorded. The fees arising from the
securitization transactions of $0.6 million and $1.1 million in fiscal 2003 and
2002, respectively, are reported as securitization costs in the Consolidated
Statements of Operations. These fees vary, based on the level of receivables
sold and commercial paper rates plus a margin, providing a lower effective rate
than that available under the Company's senior bank credit facility.
F-30
10. INCOME TAXES
Income tax expense (benefit) from continuing operations, for the years ended
June 30, 2003, 2002, and 2001 consisted of the following:
(In thousands) 2003 2002 2001
------- ------- -------
Current:
Federal $ (713) $ 2,884 $ (560)
State (217) 342 650
------- ------- -------
Total current (930) 3,226 90
------- ------- -------
Deferred:
Federal 2,593 1,563 351
State 747 102 (1,128)
------- ------- -------
Total deferred 3,340 1,665 (777)
------- ------- -------
Income tax expense (benefit) $ 2,410 $ 4,891 $ (687)
------- ------- -------
The amount of income tax expense (benefit) from continuing operations
differs from the amount obtained by application of the statutory U.S. rates to
income (loss) before income taxes for the reasons shown in the following table:
(In thousands) 2003 2002 2001
------- ------- -------
Computed at statutory U.S. rate $ 1,726 $ 3,360 $(2,440)
State income taxes, net of Federal tax benefit 350 138 (837)
Goodwill amortization -- 1,459 2,642
Other 334 (66) (52)
------- ------- -------
Income tax expense (benefit) $ 2,410 $ 4,891 $ (687)
------- ------- -------
Cash paid for income taxes totaled $1.5 million, $4.6 million, and
$1.4 million, during fiscal 2003, 2002, and 2001, respectively.
The Company has state net operating loss carryforwards aggregating
approximately $160 million, which expire during fiscal years 2005 to 2023. A
valuation allowance of $1.6 million has been established on the deferred tax
assets related to the state net operating loss benefits as their realization is
not more likely than not.
The tax effects of the significant temporary differences that comprise
the deferred tax assets and liabilities in the Consolidated Balance Sheets at
June 30, 2003 and 2002 are as follows:
(In thousands) 2003 2002
-------- --------
Assets:
Allowance for doubtful accounts $ 229 $ 767
Employee benefits 18,714 9,514
State net operating loss carryforwards 4,883 4,883
Accrued restructuring costs 898 519
Other 2,912 3,012
-------- --------
Gross deferred tax assets 27,636 18,695
-------- --------
Liabilities:
Goodwill 1,288 900
Property, plant, and equipment 18,229 18,679
Other 1,233 1,383
-------- --------
Gross deferred tax liabilities 20,750 20,962
-------- --------
Valuation allowance 1,570 1,200
-------- --------
Net asset (liability) $ 5,316 $ (3,467)
-------- --------
F-31
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. PENSION PLANS AND OTHER POST RETIREMENT BENEFIT PLANS
Pension Plans. The Company has certain defined benefit pension plans in effect
that cover eligible associates, and participates in one multi-employer
retirement plan that provides defined benefits to associates covered under a
collective bargaining agreement. The Company also has in effect certain
nonqualified, nonfunded supplemental pension plans for certain key executives.
All such defined benefit plans provide benefit payments using formulas based on
an associate's compensation and length of service, or stated amounts for each
year of service.
In fiscal 2003, the Company's board of directors voted to freeze the
Cadmus Pension Plan to mitigate the volatility in pension expense and required
cash contributions expected in future years. The Company recorded a $0.7
million pension curtailment loss in fiscal 2003 related to these actions. The
curtailment loss is included in restructuring and other charges in the
Consolidated Statements of Operations.
Also in fiscal 2003, the Company recorded an additional minimum
pension liability in accordance with SFAS No. 87, "Employer's Accounting for
Pensions" totaling $36.2 million ($23.8 million net of taxes) upon completion
of its annual pension valuations. The adjustment to the additional minimum
pension liability was included in other accumulated comprehensive loss as a
direct charge to shareholders' equity, net of related tax effects.
The Company makes contributions to its defined benefit plans
sufficient to meet the minimum funding requirements of applicable laws and
regulations. Contributions to the multi-employer plan are generally based on a
negotiated labor contract. The Company records charges to earnings sufficient
to meet the projected benefit obligation of its supplemental plans. The Company
has acquired life insurance contracts ($18.5 million face amount at June 30,
2003 and $17.4 million face amount at June 30, 2002), the proceeds of which are
intended to fund future operating expenditures, including benefits payable
under the supplemental plans. The cash surrender value of these contracts, net
of policy loans, was $2.1 million and $1.5 million at June 30, 2003 and 2002,
respectively, and is included in other assets in the Consolidated Balance
Sheets. The Company's contributions to its pension plans totaled $5.6 million,
$2.1 million, and $5.8 million in fiscal 2003, 2002, and 2001, respectively. In
fiscal 2001, the Company recognized a $0.9 million reduction in pension expense
resulting from the demutualization of one of the Company's pension investments.
Assets of the plans consist primarily of equity and debt securities,
interest-bearing deposits in money market funds and insurance contracts.
Post Retirement Benefit Plans. The Company maintains separate post
retirement benefit plans (medical and life insurance) for certain of its Cadmus
and former Mack associates. Eligible Cadmus (non-Mack) associates are eligible
for retiree medical coverage for themselves and their spouses if they retire on
or after attaining age 55 with ten or more years of service. Benefits differ
depending upon the date of retirement.
Eligible Mack associates are eligible for retiree health care benefits
for themselves and their spouses. In addition, the Company provides fully paid
life insurance coverage with benefits ranging from $5,000 to $40,000 for
certain Mack retirees. The retiree health care plan is contributory for all
retirees who were full-time regular associates of Mack.
F-32
The following table summarizes the funded status of the plans and the
amounts recognized in the Consolidated Balance Sheets, based upon actuarial
valuations:
Pension Benefits Post Retirement Benefits
--------------------------- ---------------------------
(In thousands) 2003 2002 2003 2002
--------- --------- --------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $ 122,374 $ 113,995 $ 5,679 $ 3,710
Service cost 4,342 4,247 9 6
Interest cost 8,935 8,396 347 267
Participant contributions -- -- 793 553
Plan amendments -- 985 (1,154) --
Actuarial (gain) loss 27,959 691 (227) 2,108
Curtailments (15,223) -- -- --
Settlements (285) -- -- --
Benefit payments (6,501) (5,940) (1,149) (965)
--------- --------- --------- ---------
Benefit obligation at end of year $ 141,601 $ 122,374 $ 4,298 $ 5,679
--------- --------- --------- ---------
Fair value of plan assets at beginning of year $ 92,442 $ 90,539 $ -- $ --
Actual return on plan assets (6,860) 6,617 -- --
Employer contribution 6,463 1,226 1,149 965
Settlements (285) -- -- --
Benefit payments (6,501) (5,940) (1,149) (965)
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 85,259 $ 92,442 $ -- $ --
--------- --------- --------- ---------
Funded status $ (56,342) $ (29,932) $ (4,298) $ (5,679)
Unrecognized actuarial loss 40,078 11,665 1,581 2,211
Unrecognized transition (asset) (742) (823) -- --
Unrecognized prior service cost 1,279 2,110 (802) (291)
Contribution made between measurement date
and fiscal year end 60 935 -- --
--------- --------- --------- ---------
Net liability $ (15,667) $ (16,045) $ (3,519) $ (3,759)
--------- --------- --------- ---------
Prepaid benefit cost $ 1,792 $ 563 $ -- $ --
Accrued liability (56,768) (19,772) (3,519) (3,759)
Intangible asset 1,522 1,603 -- --
Accumulated other comprehensive loss 37,787 1,561 -- --
--------- --------- --------- ---------
Net liability $ (15,667) $ (16,045) $ (3,519) $ (3,759)
--------- --------- --------- ---------
Weighted average assumptions were as follows:
2003 2002 2001
---- ---- ----
Discount rate 6.00%* 7.50% 7.50%
Rate of increase in compensation 5.00% 5.00% 5.00%
Long-term rate of return on plan assets 8.90% 9.75% 9.75%
---- ---- ----
* The Cadmus Pension Plan used a measurement date of May 14, 2003, the
date the board of directors voted to freeze the plan. Accordingly, the
discount rate for that plan was 6.00%. The discount rate for all other
pension plans was 6.50%, based on a March 31, 2003 measurement date.
F-33
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The components of net periodic benefit cost for fiscal 2003, 2002 and 2001 for
all plans were as follows:
Post Retirement
Pension Benefits Benefits
(In thousands) 2003 2002 2001 2003 2002 2001
------- ------- ------- ------- ------- -------
Service cost $ 4,342 $ 4,247 $ 4,337 $ 9 $ 6 $ 11
Interest cost 8,935 8,396 8,012 347 267 259
Expected return on plan assets (8,964) (8,617) (8,308) -- -- --
Amortization of unrecognized transition
obligation or asset (81) (102) (81) -- -- --
Prior service cost recognized 162 148 44 (643) (582) (582)
Recognized (gains) or losses 94 68 89 403 (9) (21)
Insurance demutualization -- -- (897) -- -- --
Amortization of unrecognized gain -- -- (6) -- -- --
Curtailment loss 669 -- -- -- -- --
Contributions to multiemployer plans 37 48 53 -- -- --
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 5,194 $ 4,188 $ 3,243 $ 116 $ (318) $ (333)
------- ------- ------- ------- ------- -------
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 $140.1 million, $139.3 million, and
$83.7 million, respectively, as of June 30, 2003, and $121.0 million, $111.1
million, and $90.7 million, respectively, as of June 30, 2002.
For purposes of determining the cost and obligation for post retirement
medical benefits, the Company has assumed a health care cost trend rate of 12.0%
for fiscal 2003, gradually decreasing to 5.5% in the year 2012 and remaining
level thereafter. In fiscal 2002, the assumed health care cost trend rate was
12.5%.
A one percentage-point change in assumed health care cost trend rates
would have the following effects:
1-Percentage Point
(In thousands) Increase Decrease
-------- --------
Effect on total of service and interest cost components $ 5 $ (5)
Effect on post retirement benefit obligation 35 (33)
Defined Contribution Plan. The thrift savings plan enables associates
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 associates'
savings and fixed contributions for certain Mack union and non-union associates.
The Company's expense under this plan was $2.0 million, $1.5 million, and $2.3
million in fiscal 2003, 2002, and 2001, respectively.
12. 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.
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
$0.01 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
F-34
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.
13. INCENTIVE STOCK PLANS
Stock Options
Under the Company's incentive stock plans, which expired on or before June 30,
2003, selected associates and non-employee directors were granted options to
purchase its common stock at prices not less than the fair market value (or not
less than 85% of the fair market value in the case of non-qualified stock
options granted to associates) of the stock at the date the options were
granted.
A summary of the Company's stock option activity and related information for the
fiscal years ended June 30, 2003, 2002, and 2001 follows:
Weighted-Average
Number of Option Price Exercise
Shares Per Share Price
--------- --------------- ----------------
Outstanding at June 30, 2000 1,117,000 $8.25 to $26.88 $14.15
Granted 255,000 7.54 to 9.56 9.05
Lapsed or canceled (200,000) 8.25 to 26.88 14.19
--------- --------------- ------
Outstanding at June 30, 2001 1,172,000 7.54 to 26.88 13.03
Exercised (40,000) 9.00 to 9.50 9.30
Granted 252,000 7.43 to 12.56 10.94
Lapsed or canceled (147,000) 8.25 to 26.88 11.62
--------- --------------- ------
Outstanding at June 30, 2002 1,237,000 7.43 to 26.88 12.89
Exercised (5,000) 9.00 to 9.00 9.00
Granted 1 66,000 9.47 to 11.17 9.51
Lapsed or canceled (192,000) 8.81 to 26.88 14.39
--------- --------------- ------
Outstanding at June 30, 2003 1,206,000 $7.43 to $26.88 $12.20
--------- --------------- ------
Exercisable at June 30, 2001 501,000 $7.54 to $26.88 $14.96
Exercisable at June 30, 2002 537,000 $7.54 to $26.88 $15.90
Exercisable at June 30, 2003 518,000 $7.54 to $26.88 $15.23
--------- --------------- ------
F-35
Cadmus Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The weighted-average fair value of options issued was $4.85, $5.37, and
$5.77 per option during fiscal 2003, 2002, and 2001, respectively. The
weighted-average remaining contractual life of options outstanding at June 30,
2003 is 7 years. At June 30, 2003, 177,059 shares of authorized but unissued
common stock were reserved for issuance upon exercise of options granted 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, 2003:
Weighted-
Number of Average Weighted- Weighted-
Range of Options Remaining Average Currently Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
- --------------- ----------- ------------ -------------- ----------- --------------
$ 7.43 to $13.25 956,000 7.7 $10.24 268,000 $11.06
14.25 to 19.19 159,000 3.4 16.24 159,000 16.24
20.63 to 26.88 91,000 4.6 25.84 91,000 25.84
----------- ------------ -------------- ----------- --------------
Restricted Stock
Under provisions of the Company's 1990 Long Term Incentive Stock Plan (the
"Plan"), which expired on June 30, 2003, the Company could award restricted
shares of its common stock to provide incentive compensation to certain key
associates. As of June 30, 2003, 67,500 shares of restricted stock had been
granted and were outstanding (held by the Company) under the Plan. These shares
carry voting and dividend rights; however, sale of the shares is restricted
prior to vesting. The shares vest evenly over a three-year period from their
grant date, subject generally to continued employment. The accrual for shares
issued under the Plan is recorded at fair market value on the date of grant with
a corresponding charge to stockholders' equity representing the unearned portion
of the award. The unearned portion is amortized as compensation expense on a
straight-line basis over the related vesting period.
14. SEGMENT AND RELATED INFORMATION
The Company is focused on two segments. The Publisher Services segment provides
products and services to both not-for-profit and commercial publishers in three
primary product lines: STM journal services, special interest and trade
magazines, and professional books and directories. Publisher Services provides a
full range of content management, editorial, prepress, printing, reprinting,
warehousing and distribution services under the division names of Cadmus
Professional Communications and Cadmus Specialty Publications. Due to
operational and organizational changes, Cadmus Port City Press became a part of
Cadmus Professional Communications during fiscal 2003. The Company's Specialty
Packaging segment provides high quality specialty packaging and promotional
printing, assembly, fulfillment and distribution services to consumer product
and other customers.
Other sales, depreciation and amortization, operating income, total
assets and capital expenditures presented in the following table relate to the
Company's Atlanta-based Creative Marketing division, which was divested in
fiscal 2002.
The accounting policies for the segments are the same as those
described in Note 1. The Company primarily evaluates the performance of its
operating segments based on operating income excluding amortization of goodwill,
gains/losses on sales of assets, and restructuring and other charges. Intergroup
sales are not significant. The Company manages income taxes on a consolidated
basis.
F-36
Summarized segment data for fiscal 2003, 2002, and 2001 is as follows:
Publisher Specialty
(In thousands) Services Packaging Other Total
-------- --------- ----- -----
2003
NET SALES $388,490 $ 58,429 $ -- $446,919
DEPRECIATION AND AMORTIZATION 15,347 3,199 -- 18,546
OPERATING INCOME 41,877 1,709 -- 43,586
TOTAL ASSETS 209,206 30,644 -- 239,850
CAPITAL EXPENDITURES 9,087 4,065 -- 13,152
2002
Net sales $395,372 $ 51,907 $ -- $447,279
Depreciation and amortization 21,311 3,207 -- 24,518
Operating income (loss) 39,955 1,648 (20) 41,583
Total assets 292,457 27,917 529 320,903
Capital expenditures 8,083 2,946 84 11,113
2001
Net sales $452,358 $ 59,158 $ 14,774 $526,290
Depreciation and amortization 21,321 3,825 322 25,468
Operating income (loss) 47,542 (1,780) 1,034 46,796
Total assets 312,679 29,938 9,250 351,867
Capital expenditures 12,586 1,278 224 14,088
======== ======== ======== ========
A reconciliation of segment data to consolidated data for fiscal 2003, 2002, and
2001 is as follows:
(In thousands) 2003 2002 2001
-------- -------- --------
Earnings from operations:
Reportable segment operating income $ 43,586 $ 41,583 $ 46,796
Amortization of goodwill -- (4,724) (5,060)
Loss on sale of fixed assets (468) (474) (46)
Unallocated shared services and other expenses, net (10,443) (9,008) (6,613)
Restructuring and other charges (12,015) -- (19,905)
Interest expense, net (14,602) (16,093) (19,666)
Securitization costs (634) (1,110) (2,748)
Other, net (347) (292) 65
-------- -------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change
in accounting principle for goodwill $ 5,077 $ 9,882 $ (7,177)
======== ======== ========
The difference between reportable segment amounts and consolidated
total amounts for assets, depreciation and amortization, and capital
expenditures are attributable to the Company's shared services division. Assets
attributable to the Company's shared services division totaled $65.1 million,
$48.7 million and $45.6 million for fiscal years 2003, 2002 and 2001,
respectively. Depreciation and amortization expense attributable to the
Company's shared services division totaled $0.8 million, $0.6 million and $0.7
million for fiscal years 2003, 2002 and 2001, respectively. Capital expenditures
attributable to the Company's shared services division totaled $2.5 million,
$1.0 million and $2.0 million for fiscal years 2003, 2002 and 2001,
respectively.
F-37
Cadmus Communications Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTIES
The Company's shareholders elected the former majority shareholder of Mack to
the Board of Directors in 1999. As a result of the Company's purchase of Mack in
fiscal 1999, 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 promissory notes of the Company (see Note 8) 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. As of
June 30, 2003, there were $5.9 million in subordinated promissory notes payable
and related accrued interest payable to this director. Interest paid on the
subordinated promissory notes during fiscal 2003 and 2002 totaled $0.7 million
for each year.
In addition, this director is a majority shareholder of a company whose
indirect subsidiary leases a manufacturing and distribution facility in
Baltimore, Maryland to Cadmus' Port City Press subsidiary, which is a part of
Cadmus Professional Communications. The initial term of the lease agreement,
entered into in August 1998, is 20 years, with options available to the tenant
to extend the lease for four additional terms of five years each, with the rent
increasing approximately 14.5% every fifth year. Annual rent expense for the
Baltimore facility was approximately $1.0 million for each of fiscal years 2003,
2002 and 2001, respectively.
Another director of the Company is the president, and a shareholder, of
a law firm retained by Cadmus to perform legal services during fiscal years
2003, 2002 and 2001. Annual legal fees paid to this firm were $42,000, $94,000,
and $40,000 for fiscal years 2003, 2002, and 2001, respectively. It is
anticipated that the firm will continue to provide legal services to the Company
during fiscal year 2004.
16. 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, 2003 and 2002, the
Company had no significant concentrations of credit risk.
17. CONTINGENCIES
The Company is party to various legal actions which are ordinary and incidental
to its business. While the outcome of legal actions cannot be predicted with
certainty, management believes the outcome of any of these items, or all of them
combined, will not have a materially adverse effect on its consolidated
financial position or results of operations. Additionally, in connection with
divestiture actions, the Company guaranteed certain real estate lease
obligations totaling approximately $0.4 million annually through September 2009.
F-38
Cadmus Communications Corporation and Subsidiaries
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
Cadmus Communications Corporation:
We have audited the accompanying consolidated balance sheets of Cadmus
Communications Corporation and Subsidiaries as of June 30, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. 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. The consolidated
statements of operations, shareholders' equity and cash flows of Cadmus
Communications Corporation and Subsidiaries for the year ended June 30, 2001
were audited by other auditors who have ceased operations and whose report dated
August 1, 2001 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the 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 2003 and 2002 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Cadmus Communications Corporation and Subsidiaries at June
30, 2003 and 2002, and the consolidated results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 6 to the consolidated financial statements,
effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards (Statement) No. 142, Goodwill and Other Intangible Assets.
As discussed in Note 1 to the consolidated financial statements,
effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.
As discussed above, the financial statements of Cadmus Communications
Corporation and Subsidiaries as of June 30, 2001, and for the year then ended
were audited by other auditors who have ceased operations. As described in Note
6, these financial statements have been revised to include the transitional
disclosures required by Statement No. 142. Our audit procedures with respect to
the disclosures in Note 6 with respect to 2001 included (a) agreeing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill to the Company's underlying records obtained from management, and (b)
testing the mathematical accuracy of the reconciliation of adjusted net income
to reported net income, and the related earnings-per-share amounts. In our
opinion, the disclosures for 2001 in Note 6 are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the 2001 financial
statements of the Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 financial statements taken as a whole.
/s/ Ernst & Young LLP
Richmond, Virginia
July 25, 2003
F-39