ITEM 1. BUSINESS
Introduction
Cadmus Communications Corporation, a Virginia corporation, ("Cadmus" or the "Company"), provides customers with integrated, end-to-end information and communications solutions. These end-to-end solutions involve a full range of creative, production and distribution services. The Company is organized around two business sectors: Professional Communications, serving customers who publish information, and Marketing Communications, serving customers who convey marketing messages. Headquartered in Richmond, Virginia, Cadmus is the 22nd largest graphic communications company in North America.
Cadmus was formed in 1984 through the merger of The William Byrd Press, Incorporated ("Byrd"), a leading regional publications printer in Virginia, and Washburn Graphics, Inc. ("Washburn"), a graphic arts firm based in North Carolina. Since the merger, Cadmus has grown through enhancement of existing products, internal development of new products, and acquisitions. The Company's principal executive offices are located at 6620 West Broad Street, Suite 240, Richmond, Virginia 23230, and its telephone number is (804) 287-5680. The Company's Internet address is http://www.cadmus.com. Unless the context otherwise requires, references herein to Cadmus or the Company shall refer to Cadmus Communications Corporation and its consolidated subsidiaries.
Cadmus began as a printing organization that, through strategic mergers and acquisitions, Cadmus has augmented this core printing competency with full creative expertise, distribution, and fulfillment capabilities. The most significant acquisitions to date include the following: in 1986, American Graphics Inc., a company located in Atlanta, Georgia, providing graphic design services, promotional printing and production of point of purchase advertising materials; in 1987, Three Score, Inc., an Atlanta-based company offering retail and other direct mail catalog design and production services; in 1992, Marblehead Communications, Inc., a Boston, Massachusetts, custom publisher of newsletters and magazines; in 1993, the assets of the Waverly Press Division of Waverly, Inc., a division located in Baltimore and Easton, Maryland, engaged in the printing of scientific, technical, and medical journals; in 1995, certain assets of The Software Factory, Inc., an Atlanta-based provider of software packaging and media duplication services; in 1996, Lancaster Press, Inc. and its subsidiaries, a Pennsylvania-based producer of scientific, technical and medical journals, and O'Keefe Marketing, a Richmond-based advertising and marketing service provider; and in 1998, Germersheim, Inc., an Atlanta-based national point of purchase marketing service provider.
Cadmus is organized today to provide customers with a full range of communication alternatives. It offers end-to-end services by combining its core competency of production with the ability to create and distribute products.
Organizational Structure
The Company's current organizational structure was effected during fiscal 1997, when it announced a major restructuring plan designed to exit or reshape those businesses that were not performing or were not core to its strategy, and to create a more efficient and cost effective organizational structure. In conjunction with the restructuring, the Company reorganized its organizational and operational structure to form Cadmus Marketing Communications and Cadmus Professional Communications. The Company's previous organizational structure consisted of the Periodicals, Graphic Communications, Marketing, and Publishing groups.
Cadmus Marketing Communications provides commercial printing, graphic solutions, print and broadcast advertising, direct marketing, catalog and collateral design, publication development, financial communications, point of purchase, specialty packaging and promotional printing, software duplication and distribution, and interactive services to customers who convey marketing messages. Cadmus Professional Communications provides a full range of composition, editorial, production, distribution, and related services for publishers of scientific, technical, and medical journals, magazines, trade association publications and commercial publications.
Product Lines
Product offerings as of June 30, 1998 were organized around the sectors of Marketing Communications and Professional Communications.
Cadmus Marketing Communications
Cadmus Marketing Communications includes end-to-end marketing services under the following product lines: CadmusCom, Cadmus Financial Communications, Cadmus Graphic Solutions, Cadmus Point of Purchase, Cadmus Specialty Packaging and Promotional Printing, and Cadmus Technology Solutions. Marketing Communications generated approximately 49% of the Company's net sales in fiscal 1998.
CadmusCom. CadmusCom is an integrated marketing organization that provides creative development and integrated marketing strategies for its clients. Its tactical capabilities include branding research and implementation, marketing strategy, print and broadcast advertising, direct marketing, catalog and collateral design, communications design, custom publishing and new media. CadmusCom is comprised of five divisions that provide these services: Cadmus Custom Publishing (formerly Marblehead Communications), Cadmus Direct Marketing, Cadmus Identity Marketing, CadmusCom Atlanta (formerly Cadmus 3-Score, catalog production and design services), and CadmusCom Richmond (formerly O'Keefe Marketing, advertising and new media).
Cadmus Financial Communications. Cadmus Financial Communications specializes in the creation, production and distribution of documents (electronic and traditional) to regulatory agencies and the investing community. In addition to the private and public business sectors, Cadmus Financial Communications primary markets include commercial and investment banking institutions, mutual fund companies, legal firms and insurance companies. Its products include corporate annual reports, securities offerings and corporate restructuring materials, mutual fund materials, SEC-related documentation, mutual fund reports, bank marketing materials, and other financially related collateral, electronic data and software programs. The product line also includes fulfillment and distribution services.
Cadmus Graphic Solutions. Cadmus Graphic Solutions integrates printing solutions with a wide variety of graphic communications services and consultation. Its target markets include Fortune 1000 companies, catalog publishers, associations, advertising agencies and retail organizations. Its primary products and services include catalogs, annual reports, promotional literature and digital products. Cadmus Graphic Solutions offers state-of-the-art commercial pre-press and printing, data archiving and management for repurposing content for the Internet and other electronic applications, finishing and binding, and a full array of mailing services.
Cadmus Point of Purchase. Cadmus Point of Purchase offers creative designs and promotional concepts, a full range of production capabilities for merchandising materials of all sizes and shapes, and distribution and fulfillment services that include maintaining a database of point of purchase requirements for each client's store locations. Its primary markets include the fast food, beverage, retail, hospitality and travel, and motorsports industries. This product line handles in-house design, print production and assembly, on-demand production services, kit-packing, fulfillment and database management.
Cadmus Specialty Packaging and Promotional Printing. Cadmus Specialty Packaging and Promotional Printing produces packages that serve as distinguishable advertising copy and collateral materials that communicate marketing messages. Its services include structural design, production and distribution of high-quality, full-color external and internal packaging, dimensional mailers, corporate identity materials, product literature, computer documentation and catalogs. Its primary markets include the apparel, technology, pharmaceutical, transportation, travel and furniture industries.
Cadmus Technology Solutions. Cadmus Technology Solutions is a turnkey operation for software solutions. It handles CD and floppy disk duplication, label printing, fulfillment and distribution, inventory and logistics management. This product line provides auxiliary services for clients in the high-tech industry and those who want to incorporate technology into customer offerings.
Cadmus Professional Communications
Cadmus Professional Communications includes the Cadmus Journal Services product line. Professional Communications generated approximately 51% of the Company's net sales in fiscal 1998.
Cadmus Journal Services. Cadmus Journal Services ("CJS") is a producer of scientific, technical and medical ("STM") journals. CJS forms partnerships with publishers, and thoroughly understands the publishing process and how information is used. CJS provides traditional composition, printing and distribution services as well as a full complement of digital and ancillary services. CJS offers customers Abstracts Online; CD-ROM services; CJSNet; composition services; content management; Digital Direct; EdiTech Services; Editorial Production Services; online publishing services; journal, magazine and reprint services; mail lists and postal support; Virtual Journals and Reference Books online; and World-Wide Destination Services.
Other Factors Affecting the Business of Cadmus
Seasonal Fluctuations Seasonal fluctuations occur in the overall demand for printing. Printing of both periodicals for the educational and scholarly market and promotional materials tends to decline in the summer months. Consumer publications tend to peak before Christmas and before Easter. Printing of interim financial statements clusters around the end of the first month in each calendar quarter and printing of annual reports tends to fall into the first and second calendar quarters. All of these factors combine to give Cadmus a seasonal pattern with the months October through June typically stronger than the months July through September.
Raw Materials The principal raw material used in Cadmus' business is paper. Significant stock inventories are not maintained except at Cadmus Journal Services, where a supply of roll paper stock is required to operate the web presses. The other companies generally purchase paper on a direct order basis for specific jobs. Cadmus purchases its paper requirements under agreements that guarantee tonnage and provide short range price protection for three to six month intervals. The price of paper charged to customers is subject to escalation so that, except in rare instances, Cadmus does not have exposure to changes in the cost of paper. The Company uses a variety of other raw materials including ink, film, offset plates, chemicals and solvents, glue, wire, and subcontracted components. In general, the Company has not experienced any significant difficulty in obtaining raw materials.
Competition Cadmus is subject to competition from a large number of companies, some of which have greater resources and capacity. In recent years, there has been an excess of capacity in the printing industry that has increased competition. Rapid technological change has brought new competitors to the marketplace. The markets served by Cadmus face competition based on a combination of factors including quality, service levels, and price.
Employees
As of July 31, 1998, Cadmus employed approximately 3,000 persons, approximately 9% of which are currently covered by collective bargaining agreements. Cadmus believes its relationship with its employees is excellent.
Regulation The printing business uses or generates substantial quantities of inks, solvents, and other waste products that require disposal. Cadmus usually returns salvageable waste ink to its suppliers and contracts for the removal of other waste products. Cadmus believes it is in substantial compliance with all applicable air quality, waste disposal, and other environment-related rules and regulations, as well as with other general employee health and safety laws and regulations.
ITEM 2.
ITEM 2. PROPERTIES
The Company considers all of its properties, together with the related machinery and equipment contained therein, to be well-maintained, in good operating condition, and adequate for its present needs. The Company will expand as necessary for the continued development of its operations. The following table contains information regarding the Company's primary facilities as of June 30, 1998:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal actions that are ordinary and incidental to its business. While the outcome of legal actions cannot be predicted with certainty, management believes the outcome of any of these proceedings, or all of them combined, will not have a materially adverse effect on its consolidated financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Cadmus are elected by the Board of Directors ("Board") of the Company to serve one-year terms. The following table contains information about the executive officers of Cadmus:
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Cadmus common stock is traded in the over-the-counter market and has been quoted in the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") under the symbol "CDMS" since July 2, 1984 and in the NASDAQ National Market since April 16, 1985. Information with respect to market prices is presented on page 27 of the Annual Report and is incorporated herein by reference. As of August 31, 1998, the approximate number of beneficial holders of Cadmus common stock was 4,400, which includes stockholders recorded on security position listings. On August 12, 1998 Cadmus declared a regular quarterly cash dividend of $.05 per share, payable on September 4, 1998, to shareholders of record as of August 21, 1998. Additional information with respect to dividends declared is presented on page 27 of the Annual Report and is incorporated herein by reference. Cadmus anticipates that it will continue its policy of paying regular quarterly dividends. The amount of any future dividends will depend on general business conditions encountered by Cadmus, as well as the financial condition, earnings and capital requirements of Cadmus, and such other factors as the Board of Directors may deem relevant. For additional information regarding restrictions on payment of dividends, see the Notes to Consolidated Financial Statements (Note 7) referenced in Item 8 of this report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information presented under the caption "Selected Financial Data" on page 21 of the Annual Report to Shareholders is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information presented under the caption "Management's Discussion and Analysis" on pages 22 through 26 of the Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see the Notes to Consolidated Financial Statements (Note 7) referenced in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and subsidiaries contained on pages 28 through 45 of the Annual Report to Shareholders is incorporated herein by reference. The supplementary data regarding quarterly results presented under the caption "Selected Quarterly Data" on page 27 of the Annual Report to Shareholders is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Except as otherwise indicated, information called for by the following items under Part III is contained in the Proxy Statement for the Annual Meeting of Cadmus Stockholders ("Proxy Statement") to be mailed to the Stockholders on or about October 2, 1998.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the directors of the Registrant is contained on pages 5 through 9 and page 22 of the Proxy Statement and is incorporated herein by reference.
Executive Officers
For more information regarding the executive officers of Cadmus, see "Executive Officers of the Registrant" at the end of Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information on Executive Compensation is contained on pages 12 through 17 of the Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on Security Ownership of Certain Beneficial Owners and Management is contained on pages 2 through 5 of the Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on Certain Relationships and Related Transactions is contained on pages 10 through 12 of the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements incorporated by reference into item 8 of this report and the financial statement schedules filed as part of this report are listed in the Index to Financial Statements and Schedules on page 12 hereof.
(b) Reports on Form 8-K
On April 23, 1998, the Company filed a Form 8-K, which included the press release regarding fiscal 1998 third quarter financial results, as well as a copy of the prepared remarks made on a conference call to analysts on the same date.
(c) Exhibits
The Exhibits listed in the accompanying "Index of Exhibits" on pages 15 through 16 hereof are filed as a part of this report.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 25th day of September, 1998. CADMUS COMMUNICATIONS CORPORATION
/s/ C. Stephenson Gillispie, Jr. --------------------------------------------- C. Stephenson Gillispie, Jr. Chairman of the Board, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of the 25th day of September 1998.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The Consolidated Balance Sheets of Cadmus Communications Corporation and Subsidiaries as of June 30, 1998 and 1997, and the related Consolidated Statements of Income and Cash Flows for each of the three years in the period ended June 30, 1998, including the notes thereto, are included on pages 28 through 44 of the Registrant's Annual Report to Shareholders and are incorporated herein by reference. With the exception of the information incorporated by reference in numbered items 5, 6, 7 and 8, no other data appearing in the Annual Report is deemed to be "filed" as part of this 10K. The following additional financial data should be read in conjunction with these consolidated financial statements.
Page
Report of Independent Accountants on Schedule II...... 13
Financial Statement Schedules: *
II - Valuation and Qualifying Accounts .............. 14
* All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements, including the notes thereto.
Report of Independent Public Accountants on Schedule II
To the Shareholders and Board of Directors of Cadmus Communications Corporation
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Cadmus Communication Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated July 28, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Richmond, Virginia July 28, 1998
SCHEDULE II
CADMUS COMMUNICATIONS CORPORATION VALUATION AND QUALIFYING ACCOUNTS (in thousands)
(A) Uncollectible accounts charged off, net of recoveries.
(B) Includes allowance for doubtful accounts purchase accounting adjustments for fiscal 1996 acquisitions, which included Lancaster Press, Inc., and Subsidiary.
(C) Includes allowance for doubtful accounts purchase accounting adjustments for Lancaster Press, Inc., and Subsidiaries.
(D) Includes allowance for doubtful accounts purchase accounting adjustments for Germersheim, Inc.
INDEX OF EXHIBITS
3.1 Restated Articles of Incorporation of Cadmus Communications Corporation, as amended -- incorporated herein by reference from Exhibit 3.1 of the Form 10-K for the fiscal year ended June 30, 1993.
3.2 Bylaws of Cadmus Communications Corporation, as amended - incorporated herein by reference from Exhibit 3.2 of the Form 10-Q for the quarterly period ended December 31, 1997.
4.1 Cadmus agrees to furnish to the Commission upon request any instrument with respect to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10% of Cadmus total consolidated assets.
4.2 $160,000,000 Revolving Credit/Term Loan Facility Agreement dated as of October 15, 1996, incorporated herein by reference from Exhibit 4 of the Form 10-Q for the fiscal quarter ended September 30, 1997.
10.1 Cadmus Executive Incentive Plan dated November 11, 1997, filed herewith.
10.2 Cadmus Supplemental Executive Retirement Plan, as restated effective July 1, 1992 -- incorporated herein by reference from Exhibit 10.2 of Form SE dated September 25, 1992.
10.3 Cadmus 1984 Stock Option Plan -- incorporated herein by reference from Exhibit 10.3 of the Form 10-K for the fiscal year ended June 30, 1985 (Commission File No. 0-12954).
10.4 Cadmus 1992 Non-Employee Director Stock Compensation Plan -- incorporated herein by reference from Exhibit 10.5 of the Form SE dated September 25, 1992.
10.5 Cadmus 1997 Non-Employee Director Stock Compensation Plan, filed herewith.
10.6 Cadmus 1990 Long Term Stock Incentive Plan, as amended effective August 12, 1998, filed herewith.
10.7 Cadmus Deferred Compensation Plan, as amended through February 16, 1996, filed herewith.
10.8 Cadmus Non-Qualified Thrift Plan, as amended through March 26, 1997, filed herewith.
10.9 Employee Retention Agreement dated as of June 25, 1998, between Cadmus Communications Corporation and C. Stephenson Gillispie, Jr., filed herewith.
10.10 Employee Retention Agreement dated as of June 25, 1998, between Cadmus Communications Corporation and David E. Bosher, filed herewith.
10.11 Employee Retention Agreement dated as of June 25, 1998, between Cadmus Communications Corporation and Bruce V. Thomas, filed herewith.
10.12 Employee Retention Agreement dated as of June 25, 1998, between Cadmus Communications Corporation and John H. Phillips, filed herewith.
10.13 Employee Retention Agreement dated as of June 25, 1998, between Cadmus Communications Corporation and Edward B. Fernstrom, filed herewith.
10.14 Employee Retention Agreement dated as of June 25, 1998, between Cadmus Communications Corporation and Steven R. Isaac, filed herewith.
10.15 Employee Retention Agreement dated as of June 25, 1998, between Cadmus Communications Corporation and David G. Wilson, Jr., filed herewith.
10.16 Employee Retention Agreement dated as of August 11, 1998, between Cadmus Communications Corporation and Joseph J. Ward, filed herewith.
13. Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 1998 which are incorporated by reference in this report on Form 10K, filed herewith.
18. Letter re change in accounting principles, filed herewith.
21. Subsidiaries of the Registrant, filed herewith.
23. Consent of Arthur Andersen LLP, filed herewith.
24. Powers of Attorney, filed herewith.
27. Financial Data Schedule, filed herewith.
Note: Exhibits 10.1-10.16 are management contracts or compensatory plans and arrangements
Copies of exhibits listed above may be obtained by writing to David E. Bosher, Vice President and Treasurer, at P.O. Box 27367, Richmond, Virginia 23261-7367.