(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF   THE SECURITIES EXCHANGE ACT OF 1934

Yes

x

No

o

Class

Outstanding at October 31, 2002

Common Stock, $.50 Par Value

9,007,092

Page Number

Part I.

Financial Information

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets –
September 30, 2002 (unaudited) and June 30, 2002

3

Condensed Consolidated Statements of Income (unaudited) –
Three Months Ended September 30, 2002 and 2001

4

Condensed Consolidated Statements of Cash Flows (unaudited) –
Three Months Ended September 30, 2002 and 2001

5

Condensed Consolidated Statements of Shareholders’ Equity –
September 30, 2002 (unaudited) and June 30, 2002

6

Notes to Condensed Consolidated Financial Statements (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

Item 4.

Controls and Procedures

16

Part II.

Other Information

Item 1.

Legal Proceedings

16

Item 6.

Exhibits and Reports on Form 8-K

16

September 30,
2002

June 30,
2002

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

1,537

$

1,196

Accounts receivable, net

30,812

34,845

Inventories

20,717

19,545

Deferred income taxes

3,516

3,653

Prepaid expenses and other

5,157

4,791

Total current assets

61,739

64,030

Property, plant, and equipment (net of accumulated depreciation of $138,739 at September 30, 2002 and $135,921 at June 30, 2002)

121,833

124,040

Goodwill and other intangibles, net

111,487

167,788

Other assets

14,767

13,737

TOTAL ASSETS

$

309,826

$

369,595

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

36,459

$

38,322

Accrued expenses and other current liabilities

25,197

24,966

Restructuring reserve

891

1,127

Total current liabilities

62,547

64,415

Long-term debt, less current maturities

155,095

157,246

Other long-term liabilities

29,380

29,300

Deferred income taxes

6,007

7,120

Total liabilities

253,029

258,081

Shareholders’ equity:

Common stock ($.50 par value; authorized shares-16,000,000 shares; issued and outstanding shares - 9,007,092 at September 30, 2002 and 8,992,092 at June 30, 2002)

4,503

4,496

Capital in excess of par value

67,957

67,805

Unearned compensation

(173

)

(77

)

Retained earnings (deficit)

(14,498

)

40,282

Accumulated other comprehensive loss

(992

)

(992

)

Total shareholders’ equity

56,797

111,514

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

309,826

$

369,595

Three Months Ended
September 30,

2002

2001

Net sales

$

105,425

$

111,249

Operating expenses:

Cost of sales

85,482

92,483

Selling and administrative

12,747

11,711

Amortization

—  

1,203

98,229

105,397

Operating income

7,196

5,852

Interest and other expenses:

Interest

3,763

4,379

Securitization costs

188

383

Other, net

62

72

4,013

4,834

Income from continuing operations before income taxes

3,183

1,018

Income tax expense

1,210

457

Income from continuing operations

1,973

561

(Loss) from discontinued operations

—  

(39

)

Cumulative effect of a change in accounting principle

(56,301

)

—  

Net income (loss)

$

(54,328

)

$

522

Earnings per share – basic:

Income from continuing operations

$

.22

$

.06

Loss from discontinued operations

—  

—  

Cumulative effect of a change in accounting principle

(6.25

)

—  

Net income (loss) per share

$

(6.03

)

$

.06

Weighted-average common shares outstanding

9,005

8,944

Earnings per share – diluted:

Income from continuing operations

$

.22

$

.06

Loss from discontinued operations

—  

—  

Cumulative effect of a change in accounting principle

(6.24

)

—  

Net income (loss) per share

$

(6.02

)

$

.06

Weighted-average common shares outstanding

9,030

9,009

Cash dividends per common share

$

.05

$

.05

Three Months Ended
September 30,

2002

2001

Operating Activities

Net income (loss)

$

(54,328

)

$

522

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

4,913

6,337

Cumulative effect of a change in accounting principle for goodwill

56,301

—  

Other, net

(976

)

69

5,910

6,928

Changes in assets and liabilities, excluding debt:

Accounts receivable, net

4,889

(2,746

)

Inventories

(1,172

)

(290

)

Accounts payable and accrued expenses

1,463

9,667

Restructuring payments

(207

)

(2,124

)

Pension payments

(3,513

)

(22

)

Other, net

869

991

2,329

5,476

Net cash provided by operating activities

8,239

12,404

Investing Activities

Purchases of property, plant, and equipment

(2,768

)

(2,334

)

Proceeds from sales of property, plant, and equipment

33

635

Net cash used in investing activities

(2,735

)

(1,699

)

Financing Activities

Repayment of long-term revolving credit facility

(3,900

)

(5,400

)

Net payments on receivables securitization program

(856

)

(4,615

)

Dividends paid

(452

)

(447

)

Proceeds from exercise of stock options

45

152

Net cash used in financing activities

(5,163

)

(10,310

)

Increase in cash and cash equivalents

341

395

Cash and cash equivalents at beginning of period

1,196

3,130

Cash and cash equivalents at end of period

$

1,537

$

3,525

(in thousands)

Common Stock

Capital in
Excess of
Par Value

Unearned
Income

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings
(Deficit)

Total

Shares

Par
Value

Balance at June 30, 2001

8,938

$

4,469

$

67,363

$

—  

$

(593

)

$

38,319

$

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 - $.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 (the following data is unaudited)

8,992

4,496

67,805

(77

)

(992

)

40,282

111,514

Net loss (and comprehensive loss)

—  

—  

—  

—  

—  

(54,328

)

(54,328

)

Cash dividends - $.05 per share

—  

—  

—  

—  

—  

(452

)

(452

)

Shares issued upon exercise of stock options

5

2

43

—  

—  

—  

45

Restricted stock award

10

5

109

(96

)

—  

—  

18

Balance at September 30, 2002

9,007

$

4,503

$

67,957

$

(173

)

$

(992

)

$

(14,498

)

$

56,797

1.

The accompanying unaudited consolidated financial statements of Cadmus Communications Corporation (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial reporting, and with applicable quarterly reporting regulations of the Securities and Exchange Commission.  They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and, accordingly, should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2002.

In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of interim financial information have been included.  The results of operations for the period ended September 30, 2002, are not necessarily indicative of results for the entire fiscal year.

Certain previously reported amounts have been reclassified to conform to the current-year presentation.

2.

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 annually or sooner 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.  The Company had $111.5 million of goodwill and other intangible assets at September 30, 2002, and $167.8 million at June 30, 2002.  Accumulated amortization at September 30, 2002 and June 30, 2002 was $9.7 million and $13.4 million, respectively.

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 to determine if the remaining balance of goodwill or other intangible assets should be reduced to estimated fair values.  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 these impairment tests as of July 1, 2002, the Company determined that goodwill related entirely to its Specialty Publications reporting unit (special interest magazines) within the Publisher Services segment was impaired.  As a result, the Company recorded an impairment charge of $56.3 million in the first quarter of fiscal 2003.  This charge is reflected as a cumulative effect of a change in accounting principle in the accompanying Condensed Consolidated Statements of Income.

The following summary presents the Company’s unaudited consolidated net income (loss) and diluted earnings per share for the three months ended September 30, 2002 and its unaudited pro forma consolidated net income and diluted earnings per share for the three months ended September 30, 2001.

Three Months Ended
September 30,
(unaudited)

2002

2001
(proforma)

Reported income from continuing operations

$

1,973

$

561

Add back:  goodwill amortization

—  

1,203

Adjusted income from continuing operations

1,973

1,764

(Loss) from discontinued operations

—  

(39

)

Cumulative effect of a change in accounting principle

(56,301

)

—  

Adjusted net income (loss)

$

(54,328

)

$

1,725

Earnings per share – diluted:

Reported income from continuing operations

$

.22

$

.06

Add back:  goodwill amortization

—  

.14

Adjusted income from continuing operations

.22

.20

(Loss) from discontinued operations

—  

(.01

)

Cumulative effect of a change in accounting principle

(6.24

)

—  

Adjusted net income (loss) per share

$

(6.02

)

$

.19

3.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued 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 adopted SFAS No. 144 in the third quarter of fiscal 2002 in connection with the sale of its Atlanta-based Creative Marketing division.  As a result, the Company has reclassified the results of its Creative Marketing division as a discontinued operation for fiscal 2002.

4.

Basic earnings per share is computed on the basis of weighted-average common shares outstanding from the date of issue.  Diluted earnings per share is computed on the basis of weighted-average common shares outstanding plus common shares contingently issuable upon exercise of dilutive stock options.  Incremental shares for dilutive stock options (computed under the treasury stock method) were 25,000 and 65,000 for the three months ended September 30, 2002 and 2001, respectively.

5.

Components of net inventories at September 30, 2002 and June 30, 2002, were as follows (in thousands):

September 30,
2002

June 30,
2002

(unaudited)

Raw materials and supplies

$

8,231

$

8,829

Work in process

10,720

9,424

Finished goods

1,766

1,292

$

20,717

$

19,545

6.

Long-term debt at September 30, 2002 and June 30, 2002, consisted of the following (in thousands):

September 30,
2002

June 30,
2002

(unaudited)

Senior bank credit facility, due 2004

$

21,400

$

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

2,280

531

Total long-term debt

$

155,095

$

157,246

7.

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:  scientific, technical and medical (“STM”) journals, special interest and trade magazines, and books and directories.  Publisher Services provides a full range of content management, editorial, prepress, printing, warehousing and distribution services under the division names of Cadmus Professional Communications, Cadmus Specialty Publications (formerly CadmusMack), and Cadmus Port City Press.  In addition, the Company’s Specialty Packaging segment provides high quality specialty packaging, assembly, fulfillment and distribution services to consumer product and other customers.

The accounting policies for the segments are the same as those described in Note 1 “Significant Accounting Policies” in the Company’s fiscal 2002 Annual Report on Form 10-K.  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 charges and other charges.  Intergroup sales are not significant.  The Company manages income taxes on a consolidated basis.

Summarized segment data is as follows:

(In thousands)

Publisher
Services

Specialty
Packaging

Total
Segments

Three Months Ended September 30, 2002:

Net sales

$

93,156

$

12,269

$

105,425

Operating income

9,487

273

9,760

Three Months Ended September 30, 2001:

Net sales

$

99,586

$

11,663

$

111,249

Operating income  (loss)

9,231

(96

)

9,135

A reconciliation of segment data to consolidated data is as follows:

Three Months Ended
September 30,

(In thousands)

2002

2001

Earnings from operations:

Reportable segment operating income

$

9,760

$

9,135

Amortization of goodwill

—  

(1,203

)

Unallocated shared services and other expenses

(2,563

)

(2,020

)

(Loss) on sale of fixed assets

(1

)

(60

)

Interest expense

(3,763

)

(4,379

)

Securitization costs

(188

)

(383

)

Other

(62

)

(72

)

Income from continuing operations before income taxes

$

3,183

$

1,018

8.

For the three months ended September 30, 2002, the Company made severance payments totaling $0.2 million to approximately 20 associates, and paid approximately $0.1 million in contract termination and other post-closure shutdown costs.  All restructuring actions are substantially complete.  The $0.9 million restructuring reserve remaining at September 30, 2002 consists of $0.4 million for involuntary termination costs for approximately 20 associates, and $0.5 million for contract termination costs and other post-closure shutdown costs which will be paid out according to contract or severance agreements.

9.

At September 30, 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 2009 to floating rate debt.  The initial term of this swap agreement expires in 2009, and the bank has an option to terminate the agreement in fiscal 2004.  The Company receives interest payments at a fixed rate of 9.75% and pays a variable interest rate that is based on six-month LIBOR plus a spread.  The six-month LIBOR rate is reset each December 1 and June 1.  Based on the change in interest rates during the quarter, the interest rate swap agreement had a positive value to the Company of $2.3 million and $0.5 million as of September 30, 2002 and June 30, 2002, respectively.  In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” this amount is recorded in other assets with an equal offset in long-term debt on the Condensed Consolidated Balance Sheets.  The Company’s strategy to effectively convert fixed rate financing to variable rate financing through the swap agreement resulted in a $0.3 million and $0.1 million reduction of interest expense for the three-month periods ended September 30, 2002 and 2001, respectively.

10.

The Company uses an accounts receivable securitization program to fund some of its working capital requirements.  At September 30, 2002 and June 30, 2002, approximately $28.7 million and $29.5 million, respectively, of net accounts receivable had been sold by the Company’s wholly owned, bankruptcy-

remote subsidiary to an unrelated third party purchaser under the securitization program.  The sales were reflected in the Condensed Consolidated Balance Sheets as a reduction of accounts receivable with proceeds used to repay a corresponding amount of borrowing under the Company’s senior bank facility.

11.

In June 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  This statement is effective for fiscal years beginning after June 15, 2002.  The Company adopted SFAS No. 143 in the first quarter of fiscal 2003.  There was no material effect on the Company’s consolidated results of operations or financial position as a result of adopting this statement.

12.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company adopted SFAS No. 145 in the first quarter of fiscal 2003.  The adoption of SFAS No. 145 did not have a material impact on the Company’s consolidated financial position or results of operations.

13.

On November 4, 2002, the Company announced several actions to rationalize capacity and improve utilization in its special-interest magazine operation.  Specifically, the Company announced that it will:

•

close its printing operation at East Stroudsburg, Pennsylvania effective November 4, 2002, and relocate the work produced there to its facilities in Easton, Pennsylvania and Richmond, Virginia;

•

close its reprint department in Easton, Pennsylvania and transfer this business to the Company’s existing reprint centers in Easton, Maryland and Lancaster, Pennsylvania; and

•

relocate certain other manufacturing equipment to other facilities within Cadmus to support growth and improve efficiencies in those operations.

These actions will eliminate approximately 200 positions or about 6% of the Company’s total workforce.  The Company plans to record an after-tax restructuring charge to net income in the range of $5 million to $8 million, predominantly in its second fiscal quarter.  The restructuring charge will include approximately $1 million of severance expenses.  The remaining $4 million to $7 million of non-cash charges will relate primarily to the write-down of assets at East Stroudsburg and certain other locations to estimated market values and other non-cash charges in connection with the redeployment of assets within the Publisher Services segment.

In connection with these actions, the Company plans to adopt SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” in the second quarter of fiscal 2003.  SFAS No.146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged, and requires costs associated with exit or disposal activities to be recognized when they are incurred.

•

close its printing operation at East Stroudsburg, Pennsylvania effective November 4, 2002, and relocate the work produced there to its facilities in Easton, Pennsylvania and Richmond, Virginia;

•

close its reprint department in Easton, Pennsylvania and transfer this business to the Company’s existing reprint centers in Easton, Maryland and Lancaster, Pennsylvania; and

•

relocate certain other manufacturing equipment to other facilities within Cadmus to support growth and improve efficiencies in those operations.

Three Months Ended
September 30,

2002

2001

Net sales

100.0

%

100.0

%

Cost of sales

81.1

83.1

Gross profit

18.9

16.9

Selling and administrative expenses

12.1

11.6

Operating income

6.8

5.3

Interest expense

3.6

3.9

Securitization costs

0.2

0.4

Other expenses, net

—  

0.1

Income from continuing operations before income taxes

3.0

0.9

Income tax expense

1.1

0.4

Income from continuing operations

1.9

0.5

Cumulative effect of a change in accounting principle for goodwill

(53.4

)

—  

Net income (loss)

(51.5%

)

0.5

%