CADMUS COMMUNICATIONS CORP/NEW - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)

(X)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

( )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-12954

CADMUS COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

Virginia		54-1274108
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1801 Bayberry Court, Suite 200

Richmond, Virginia 23226

(Address of principal executive offices including zip code)

(Registrant’s telephone number, (804) 287-5680 including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 30, 2003
Common Stock, $.50 Par Value		9,007,092

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

INDEX

		Page Number
Part I	Financial Information

	Item 1. Financial Statements

	Condensed Consolidated Balance Sheets — March 31, 2003 (unaudited) and June 30, 2002	3

	Condensed Consolidated Statements of Operations (unaudited) — Three and Nine Months Ended March 31, 2003 and 2002	4

	Condensed Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended March 31, 2003 and 2002	5

	Condensed Consolidated Statements of Shareholders’ Equity — March 31, 2003 (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	14

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	22

	Item 4. Controls and Procedures	22

Part II.	Other Information

	Item 1. Legal Proceedings	23

	Item 6. Exhibits and Reports on Form 8-K	23

Signatures		24
Certifications		25

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	March 31, 2003			June 30, 2002
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,815		$	1,196
Accounts receivable (net of allowance for doubtful accounts of $2,616 at March 31, 2003 and $1,962 at June 30, 2002)		36,191			34,845
Inventories		21,155			19,545
Deferred income taxes		1,857			3,653
Prepaid expenses and other		5,292			4,791

Total current assets		66,310			64,030

Property, plant, and equipment (net of accumulated depreciation of $136,838 at March 31, 2003 and $134,908 at June 30, 2002)		106,923			119,989
Assets held for sale		1,657			4,051
Goodwill and other intangibles, net		111,487			167,788
Other assets		14,781			13,737

TOTAL ASSETS	$	301,158		$	369,595


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	35,311		$	38,322
Accrued expenses and other current liabilities		28,985			24,966
Current maturities of long-term debt		13,800			—
Restructuring reserve		1,433			1,127

Total current liabilities		79,529			64,415


Long-term debt, less current maturities		133,859			157,246
Other long-term liabilities		26,907			29,300
Deferred income taxes		5,940			7,120

Total liabilities		246,235			258,081

Shareholders’ equity:
Common stock ($.50 par value; authorized shares-16,000,000 shares; issued and outstanding shares- 9,007,092 at March 31, 2003 and 8,992,092 at June 30, 2002)		4,503			4,496
Capital in excess of par value		67,957			67,805
Unearned compensation		(137	)		(77	)
Retained earnings (deficit)		(16,408	)		40,282
Accumulated other comprehensive loss		(992	)		(992	)

Total shareholders’ equity		54,923			111,514


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	301,158		$	369,595

See accompanying Notes to Condensed Consolidated Financial Statements.

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,					Nine Months Ended March 31,
	2003		2002			2003			2002
Net sales	$	113,437	$	112,656		$	332,558		$	338,259

Operating expenses:
Cost of sales		91,313		91,989			269,229			277,712
Selling and administrative		13,536		12,130			39,245			36,936
Amortization		—		1,174			—			3,551
Restructuring and other charges		1,130		—			10,051			—

		105,979		105,293			318,525			318,199

Operating income		7,458		7,363			14,033			20,060

Interest and other expenses:
Interest		3,617		3,773			11,072			12,107
Securitization costs		131		220			495			911
Other, net		133		72			264			230

		3,881		4,065			11,831			13,248

Income from continuing operations before income taxes		3,577		3,298			2,202			6,812
Income tax expense		1,405		1,750			1,239			3,372

Income from continuing operations		2,172		1,548			963			3,440
(Loss) from discontinued operations		—		(1,205	)		—			(1,236	)
Cumulative effect of a change in accounting principle		—		—			(56,301	)		—

Net income (loss)	$	2,172	$	343		$	(55,338	)	$	2,204


Earnings per common share—basic
Income from continuing operations	$	.24	$	.17		$	.11		$	.38
(Loss) from discontinued operations		—		(.13	)		—			(.14	)
Cumulative effect of a change in accounting principle		—		—			(6.25	)		—

Net income (loss) per share	$	.24	$	.04		$	(6.14	)	$	.24

Weighted-average common shares outstanding		9,007		8,960			9,006			8,953


Earnings per common share—diluted
Income from continuing operations	$	.24	$	.17		$	.11		$	.38
(Loss) from discontinued operations		—		(.13	)		—			(.14	)
Cumulative effect of a change in accounting principle		—		—			(6.24	)		—

Net income (loss) per share	$	.24	$	.04		$	(6.13	)	$	.24

Weighted-average common shares outstanding		9,034		9,053			9,024			9,019

Cash dividends per common share	$	.05	$	.05		$	.15		$	.15

See accompanying Notes to Condensed Consolidated Financial Statements.

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended March 31,
	2003			2002
Operating Activities
Net income (loss)	$	(55,338	)	$	2,204
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,527			19,182
Cumulative effect of a change in accounting principle for goodwill		56,301			—
Loss on disposal of discontinued operations, net of tax		—			1,205
Restructuring and other charges		10,051			—
Other, net		955			682

		26,496			23,273

Changes in assets and liabilities, excluding debt:
Accounts receivable, net		1,876			4,620
Inventories		(1,623	)		2,752
Accounts payable and accrued expenses		4,219			9,131
Restructuring payments		(2,974	)		(3,928	)
Pension payments		(4,499	)		(141	)
Other, net		(550	)		924

		(3,551	)		13,358

Net cash provided by operating activities		22,945			36,631


Investing Activities
Purchases of property, plant, and equipment		(9,559	)		(8,776	)
Proceeds from sales of property, plant, and equipment		3,350			3,691
Net proceeds from divested operations		—			1,500

Net cash used in investing activities		(6,209	)		(3,585	)


Financing Activities
Net proceeds from (payments on) sale of accounts receivable		(3,310	)		(4,567	)
Repayment of long-term revolving credit facility		(11,500	)		(26,400	)
Repayment of long-term borrowings		—			(2,572	)
Dividends paid		(1,352	)		(1,342	)
Proceeds from exercise of stock options		45			348

Net cash used in financing activities		(16,117	)		(34,533	)

Increase (decrease) in cash and cash equivalents		619			(1,487	)
Cash and cash equivalents at beginning of period		1,196			3,130

Cash and cash equivalents at end of period	$	1,815		$	1,643

See accompanying Notes to Condensed Consolidated Financial Statements.

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

	Common Stock			Capital in Excess of Par Value		Unearned Compensation			Accumulated Other Comprehensive (Loss)			Retained Earnings (Deficit)			Total
*(in thousands)*	Shares	Par Value		Capital in Excess of Par Value		Unearned Compensation			Accumulated Other Comprehensive (Loss)			Retained Earnings (Deficit)			Total
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	8,992		4,496		67,805		(77	)		(992	)		40,282			111,514
(the following data is unaudited)
Net loss (and comprehensive loss)	—		—		—		—			—			(55,338	)		(55,338	)
Cash dividends—$.15 per share	—		—		—		—			—			(1,352	)		(1,352	)
Shares issued upon exercise of stock options	5		2		43		—			—			—			45
Restricted stock award	10		5		109		(60	)								54

Balance at March 31, 2003	9,007	$	4,503	$	67,957	$	(137	)	$	(992	)	$	(16,408	)	$	54,923

See accompanying Notes to Condensed Consolidated Financial Statements.

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying unaudited condensed 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 March 31, 2003, 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.

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.

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 within the Publisher Services segment was impaired. The Specialty Publications reporting unit 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, there had been volume and pricing pressures that resulted in lower operating profits and cash flows. Therefore, the earnings forecasts for future periods prepared as of July 1, 2002 reflect the impact of these items in the discounted cash flow computation for the Specialty Publications reporting unit, which resulted in a computed value that was lower than the carrying value. As a result, the Company recorded an impairment charge of $56.3 million related to this reporting unit 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 Operations.

The Company had $111.5 million of goodwill and other intangible assets, net of $9.7 million accumulated amortization, at March 31, 2003, and $167.8 million, net of $13.4 million accumulated amortization, at June 30, 2002, which related to the Company’s Publisher Services segment.

The following summary presents the Company’s unaudited consolidated net income (loss) and diluted earnings per share for the three and nine months ended March 31, 2003, and its unaudited pro forma consolidated net income and diluted earnings per share for the three and nine months ended March 31, 2002, as if SFAS No. 142’s amortization provisions had been in effect for the periods presented:

(In thousands)	Three Months Ended March 31, 2003 (unaudited)				Three Months Ended March 31, 2002 (unaudited pro forma)
	Total		Per Share		Total			Per Share
Reported income from continuing operations	$	2,172	$	.24	$	1,548		$	.17
Add back: goodwill amortization		—		—		1,174			.13

Adjusted income from continuing operations		2,172		.24		2,722			.30
(Loss) from discontinued operations		—		—		(1,205	)		(.13	)
Cumulative effect of a change in accounting principle		—		—		—			—

Adjusted net income (loss)	$	2,172	$	.24	$	1,517		$	.17

(In thousands)	Nine Months Ended March 31, 2003 (unaudited)					Nine Months Ended March 31, 2002 (unaudited pro forma)
Reported income from continuing operations	963		$	.11		3,440		$	.38
Add back: goodwill amortization	—			—		3,551			.40

Adjusted income from continuing operations	963			.11		6,991			.78
(Loss) from discontinued operations	—			—		(1,236	)		(.14	)
Cumulative effect of a change in accounting principle	(56,301	)		(6.24	)	—			—

Adjusted net income (loss)	(55,338	)	$	(6.13	)	5,755		$	.64

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.

Basic earnings per share is computed on the basis of weighted-average common shares outstanding from the date of issue. Diluted earnings per share is computed on the basis of weighted-average common shares outstanding plus common shares contingently issuable upon the exercise of dilutive stock options. Incremental shares for dilutive stock options (computed under the treasury stock method) were 26,000 and 17,000 for the three and nine months ended March 31, 2003, respectively, and 93,000 and 66,000 for the three and nine months March 31, 2002, respectively.

Components of net inventories at March 31, 2003 and June 30, 2002, were as follows (in thousands):

	March 31, 2003 (unaudited)		June 30, 2002
Raw materials and supplies	$	7,328	$	8,829
Work in process		11,295		9,424
Finished goods		2,532		1,292

	$	21,155	$	19,545

Long-term debt at March 31, 2003 and June 30, 2002, consisted of the following (in thousands):

	March 31, 2003 (unaudited)			June 30, 2002
Senior bank credit facility, due 3/31/04	$	13,800		$	25,300
9.75% Senior subordinated notes, due 6/1/09		125,000			125,000
11.5% Subordinated promissory notes, due 3/31/10		6,415			6,415
Fair market value of interest rate swap agreement		2,444			531

Total debt		147,659			157,246
Less current maturies of long-term debt		(13,800	)		—

Total long-term debt	$	133,859		$	157,246

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. Both the senior bank credit facility and the senior subordinated notes contain a covenant that places restrictions on the ability of the Company to pay dividends. The senior bank credit facility 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 (earnings before interest, taxes, depreciation and amortization) ratio exceeds 3.0 to 1.0. Currently, the Company’s total debt-to-EBITDA ratio exceeds 3.0 to 1.0 and, therefore, the Company is limited under this agreement to an annual dividend rate of $0.20 per share. 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. Currently, the Company’s restricted payments pool is sufficient to cover expected dividends and, therefore, the Company is not currently impacted by the limitation of this covenant.

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: scientific, technical and medical (“STM”) journals, special interest and trade magazines, and professional 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. The Specialty Packaging segment provides high quality specialty packaging and promotional printing, assembly, fulfillment and distribution services to consumer product and other customers.

The accounting policies for the segments conform to 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. 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
Three Months Ended March 31, 2003:
Net sales	$	97,955	$	15,482	$	113,437
Operating income		10,742		782		11,524

Three Months Ended March 31, 2002:
Net sales	$	98,203	$	14,453	$	112,656
Operating income		9,365		1,021		10,386

Nine Months Ended March 31, 2003:
Net sales	$	289,275	$	43,283	$	332,558
Operating income		30,792		1,466		32,258

Nine Months Ended March 31, 2002:
Net sales	$	299,097	$	39,162	$	338,259
Operating income		29,298		1,284		30,582

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

	Three Months Ended March 31,						Nine Months Ended March 31,
*(In thousands)*	2003			2002			2003			2002
Earnings from operations:

Reportable segment operating income	$	11,524		$	10,386		$	32,258		$	30,582
Amortization of goodwill		—			(1,174	)		—			(3,551	)
Unallocated shared services and other expenses		(2,649	)		(1,835	)		(7,836	)		(6,545	)
Loss on sale of fixed assets		(287	)		(14	)		(338	)		(426	)
Restructuring and other charges		(1,130	)		—			(10,051	)		—

Total operating income		7,458			7,363			14,033			20,060
Interest expense		(3,617	)		(3,773	)		(11,072	)		(12,107	)
Securitization costs		(131	)		(220	)		(495	)		(911	)
Other expenses		(133	)		(72	)		(264	)		(230	)

Income from continuing operations before income taxes	$	3,577		$	3,298		$	2,202		$	6,812

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 2000, the Company adopted a restructuring plan intended to (1) effect additional planned synergies in connection with its April 1999 acquisition of the Mack Printing group (“Mack”), and (2) focus the Company’s resources on the markets within the Publisher Services segment and the specialty packaging market. These actions resulted in a charge of $34.1 million ($25.5 million net of taxes) and included:

•

Closure of the Atlanta-based Cadmus Point of Purchase (“POP”) business in October 1999,

•

Integration of two composition facilities in Lancaster, Pennsylvania,

•

Closure of the Richmond-based marketing agency in July 1999, and divestiture of the Charlotte-based agency in September 1999 and

•

Consolidation of corporate functions and overhead, including elimination of certain overhead within the Publisher Services segment and elimination of overhead costs associated with the former Marketing Communications group.

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 technology-related 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 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.

In January 2003, 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 $8.9 million ($5.9 million net of taxes) in the second quarter of fiscal 2003, and $1.1 million ($0.7 million net of taxes) in the third quarter of fiscal 2003. These charges are included in restructuring and other charges on the Condensed Consolidated Statements of Operations.

A summary of the restructuring and other charges, and activities against these charges follows:

*(in thousands)*	Write-off of Intangible Assets			Loss on Disposal of Assets			Employee Severance Costs			Other Exit Costs			Business Divestitures			Total
FY 2000 provision	$	11,018		$	14,769		$	5,301		$	3,776		$	(715	)	$	34,149
Costs Incurred		(11,018	)		(14,769	)		(4,500	)		(1,874	)		715			(31,446	)

June 30, 2000 Accrual		—			—			801			1,902			—			2,703

FY 2001 provision		3,968			5,471			3,738			4,023			2,706			19,906
Costs incurred		(3,968	)		(5,471	)		(2,193	)		(2,018	)		(2,706	)		(16,356	)

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					7,002			2,015			1,034						10,051
Costs incurred					(6,771	)		(1,765	)		(1,209	)					(9,745	)

March 31, 2003 Accrual	$	—		$	231		$	701		$	501		$	—		$	1,433

Fiscal 2000 and 2001 Restructuring and other charges:

Write-off of intangible assets consisted of goodwill related to the closure of the Company’s POP business in fiscal 2000, and the closure of the Company’s Atlanta-based packaging logistics operation in fiscal 2001.

Loss on disposal of assets for fiscal 2000 included a $6.2 million write-off of redundant manufacturing software resulting from the integration of Mack, a $6.8 million loss on disposal of assets pursuant to the closure of POP, and a $1.7 million loss on disposal of assets due to the consolidation of workflows within the Publisher Services segment. 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 for both years 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 2000 included involuntary termination costs related to approximately 220 employees located within the POP business, the Cadmus Professional Communications division, and the corporate location. As of June 30, 2000, almost all of the employees had been terminated and severance benefits begun. Employee severance costs for fiscal 2001 included involuntary termination costs related to approximately 250 employees 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 employees had been terminated, and severance payments begun. During the year ended June 30, 2002, most of the remaining employees were terminated. The severance remaining to be paid at March 31, 2003, relates to fiscal 2001 restructuring actions, approximates $0.2 million and is expected to be paid by the end of fiscal 2003.

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 March 31, 2003 related to fiscal 2001 restructuring actions approximate $ 0.4 million, and are expected to be paid by the end of fiscal 2003.

Business divestitures included a net gain from the closure and divestiture of the two marketing businesses in fiscal 2000, and a loss on the sale of Dynamic Diagrams in fiscal 2001. Fiscal 2000 and 2001 restructuring actions are substantially complete.

Fiscal 2003 Restructuring and other charges:

One-time employee severance costs totaled $2.0 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 March 31, 2003, substantially all of these employees had been terminated and severance payments totaled $1.5 million. Severance remaining to be paid at March 31, 2003, related to fiscal 2003 restructuring actions, approximates $0.5 million, and is expected to be paid by mid fiscal 2004.

Loss on impairment or disposal of assets for fiscal 2003 totaled $7.0 million and included a $5.2 million loss on assets to be disposed of due to the closure of the East Stroudsburg, Pennsylvania, facility and the Easton, Pennsylvania, reprint departments and a $1.8 million loss on impairment of assets related to a former operating facility in Richmond, Virginia, which has been sold. Write-downs 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. The Company estimates that there will be additional charges related to impairments or disposals ranging from $0.2 to $1.2 million, as planned equipment moves allow for the retirement of other equipment. These costs are expected to be incurred by fiscal 2004.

Other exit costs totaled $1.0 million and included contract termination costs and other costs incurred to close the East Stroudsburg facility. Other exit costs remaining at March 31, 2003 that related to fiscal 2003 restructuring actions totaled $0.1 million. The Company anticipates that it will incur additional other exit costs ranging from $0.4 to $0.8 million in fiscal 2004, primarily related to relocating fixed assets.

Fiscal 2003 restructuring actions are expected to be completed by mid fiscal 2004.

At March 31, 2003, 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 $2.4 million and $0.5 million as of March 31, 2003 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 reduction of interest expense of $0.4 million and $0.4 million for the three-month periods ended March 31, 2003 and 2002, respectively, and a reduction of $1.0 million and $0.6 million for the nine-month periods ended March 31, 2003 and 2002, respectively.

10.

The Company uses an accounts receivable securitization program to fund some of its working capital requirements. At March 31, 2003 and June 30, 2002, approximately $26.2 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. 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.

Assets held for sale at March 31, 2003, include $1.7 million in property, plant and equipment primarily related to the Company’s closure of its facility in East Stroudsburg, Pennsylvania and its reprint department in Easton, Pennsylvania. Assets held for sale at June 30, 2002, relate to a former operating facility in Richmond, Virginia. All of the assets held for sale are part of the Publisher Services segment.

12.

In June 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends the disclosure requirements of SFAS No. 123 “Accounting for Stock-Based Compensation,” and requires the Company to include pro forma income disclosures for stock based compensation in its interim financial statements. The Company adopted SFAS No.146 in the third quarter of fiscal 2003. Under the Company’s incentive stock plans, selected employees and nonemployee directors may be 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 employees) of the stock at the date the options are granted. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted by the provisions of SFAS No. 123, the Company continues to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based awards. 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 earnings resulting from the plans.

The following information is provided solely in connection with the disclosure requirements of SFAS No. 123. If the Company had elected to recognize compensation cost related to its stock options in accordance with the provisions of SFAS No. 123, net income (loss) would be as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Net income (loss) as reported	$	2,172		$	343		$	(55,338	)	$	2,204

Deduct: total stock-based employee compensation expense determined under fair value method of all awards, net of related tax effects		(122	)		(127	)		(420	)		(454	)


Pro forma net income (loss)	$	2,050		$	216		$	(55,758	)	$	1,750


Earnings (loss) per common share—basic
As reported	$	0.24		$	0.04		$	(6.14	)	$	0.24
Proforma	$	0.23		$	0.02		$	(6.19	)	$	0.20

Earnings (loss) per common share—diluted
As reported	$	0.24		$	0.04		$	(6.13	)	$	0.24
Proforma	$	0.23		$	0.02		$	(6.18	)	$	0.19

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Headquartered in Richmond, Virginia, Cadmus Communications Corporation (“Cadmus” or the “Company”) 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 journals, special interest and trade magazines, and professional 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 and promotional printing, assembly, fulfillment and distribution services to consumer product and other customers.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Except as noted below, there have been no material changes to the information concerning the Company’s “Application of Critical Accounting Policies” as previously reported in the Company’s Report on Form 10-K for the year ended June 30, 2002.

Pension and other postretirement benefits. The Company sponsors pension and other postretirement plans covering employees 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 postretirement obligations and its future expense. Two developments have affected the Company’s pension plan recently. Equity markets have declined, which has 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 expects that the discount rate to be used in the fiscal 2003 actuarial valuation will be 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 anticipates that it may need to record a significant additional minimum pension liability in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 87 “Employer’s Accounting for Pensions,” upon completion of its annual pension valuation. Any adjustment to the additional minimum pension liability would be included in other comprehensive loss as a direct charge to stockholders’ equity with no effect on net income.

RESULTS OF OPERATIONS

The following table presents the major components from the Condensed Consolidated Statements of Operations as a percent of net sales for the three and nine-month periods ended March 31, 2003 and 2002, 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.

	Three Months Ended March 31,				Nine Months Ended March 31,
	2003		2002		2003		2002
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	80.5		81.7		81.0		82.1
Selling and administrative expenses	11.9		10.8		11.8		11.0
Amortization expense	—		1.0		—		1.0
Restructuring and other charges	1.0		—		3.0		—

Operating income	6.6		6.5		4.2		5.9
Interest expense	3.2		3.3		3.4		3.6
Securitization costs	0.1		0.2		—		0.2
Other, net	0.1		0.1		0.1		0.1

Income from continuing operations before income taxes	3.2		2.9		0.7		2.0
Income tax expense	1.3		1.5		0.4		1.0

Income from continuing operations	1.9		1.4		0.3		1.0
(Loss) from discontinued operations, net of tax	—		(1.1	)	—		(0.4	)

Cumulative effect of a change in accounting principle	—		—		(16.9	)	—

Net income (loss)	1.9	%	0.3	%	(16.6	%)	0.6	%

Net sales

Net sales for the third quarter of fiscal 2003 were $113.4 million, a 1% increase, compared to $112.7 million in the same period last year. The increase was primarily attributable to growth in STM services and specialty packaging sales offset in part by lower special interest magazine revenues. Net sales for the first nine months of fiscal 2003 totaled $332.6 million compared to $338.3 million for the same period of fiscal 2002.

Net sales in the Publisher Services segment, which includes the STM journal, special interest magazine, and books and directories businesses, were $98.0 million in the third quarter of fiscal 2003 compared to $98.2 million in the comparable period of the prior year. For the nine months ended March 31, 2003, net sales in the Publisher Services segment were $289.3 million compared to $299.1 million in the corresponding period of the prior year. Growth in STM services was offset by declines in special interest magazines and books and directories due primarily to continued volume and pricing pressures and softness in advertising within the special interest magazine division.

Net sales in the Specialty Packaging segment totaled $15.5 million in the third quarter of fiscal 2003 compared to $14.5 million the prior year, an increase of 7%. For the nine-month period ended March 31, 2003, net sales grew to $43.3 million from $39.2 million, an increase of 11%, as compared to the corresponding period of the prior year. The increase in net sales for this segment was attributable to new business wins, particularly in the healthcare market.

Cost of Sales

Cost of sales decreased to 80.5% of net sales for the third quarter of fiscal 2003, compared to 81.7% of net sales in fiscal 2002, and decreased to 81.0% of net sales for the first nine months of fiscal 2003, compared to 82.1% of net sales for the same period of fiscal 2002. The improvement was a result of better product mix in the STM journals and Specialty Packaging divisions, company-wide cost reduction efforts, improved facility efficiencies and improved offshore workflows within the Publisher Services segment.

Selling and Administrative Expenses

Selling and administrative expenses totaled $13.5 million, or 11.9% of net sales, for the third quarter of fiscal 2003, compared to $12.1 million, or 10.8% of net sales, for the same period of fiscal 2002. For the first nine months of fiscal 2003, selling and administrative expenses totaled $ 39.2 million, or 11.8% of net sales, compared to $36.9 million, or 11.0% of net sales, in the corresponding period of the prior year. The increase in selling and administrative expenses was primarily attributable to higher costs in fiscal 2003 for management incentives and consulting fees, additional accruals for bad debt expense, fixed asset write-offs, and costs incurred in connection with marketing programs and sales training, offset in part by lower sales commissions and depreciation.

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 to determine if the remaining balance of goodwill or other intangible assets should be reduced to estimated fair values. As a result of its adoption of this statement, the Company recorded an impairment charge of $56.3 million in the first quarter of fiscal 2003, and discontinued amortizing its remaining goodwill. Amortization expense totaled $1.2 million and $3.6 million, or 1.0% and 1.0% of net sales, in the third quarter and first nine months of fiscal 2002, respectively.

Restructuring and Other Charges

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.

In January 2003, 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 $8.9 million ($5.9 million net of taxes) in the second quarter of fiscal 2003, and $1.1 million ($0.7 million net of taxes) in the third quarter of fiscal 2003, which are included in restructuring and other charges on the Condensed Consolidated Statements of Operations. These charges also included a $ 1.8 million loss on impairment of assets related to a former operating facility in Richmond, Virginia, which was later sold.

Operating Income

The Company reported operating income of $7.5 million and $14.0 million for the three-and nine-months periods ended March 31, 2003, respectively, compared to $7.4 million and $20.1 million in the comparable periods of fiscal 2002. Operating results for the three and nine months periods ended March 31, 2003 included $1.1 million and $10.1 million in restructuring and other charges, respectively, while fiscal 2002 results included amortization expense of $1.2 million and $3.6 million for the three- and nine-months periods ended March 31, 2002, respectively. In order to provide consistent comparisons of year over year operating results, the following reconciliation is provided:

	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)	2003		2002		2003		2002
Operating income, as reported	$	7,458	$	7,363	$	14,033	$	20,060
Amortization expense		—		1,174		—		3,551
Restructuring and other charges		1,130		—		10,051		—

Operating income, as adjusted	$	8,588	$	8,537	$	24,084	$	23,611

Factors contributing to the year over year increase in operating income, as adjusted, included improved product mix and operating efficiencies in fiscal 2003, offset in part by lower sales volume, pricing pressures and increased sales, marketing and administrative expenses.

Interest and Other Expenses

Interest expense and securitization costs in the third quarter of fiscal 2003 declined to $3.7 million compared to $4.0 million in the prior year. For the first nine months of fiscal 2003, interest expense and securitization costs declined to $11.6 million from $13.0 million in the prior year. The decrease in interest expense was due primarily to lower debt levels in fiscal 2003 and lower year-over-year short-term interest rates.

Income from Continuing Operations before Income Taxes

Income from continuing operations before income taxes totaled $3.6 million for the third quarter of fiscal 2003 compared to $3.3 million for the same period of fiscal 2002. For the first nine months of fiscal 2003, the income from continuing operations before income taxes totaled $2.2 million compared to $6.8 million in the corresponding period of the prior year. These results reflect the impact of $1.1 million and $10.1 million in restructuring and other charges reported for the three- and nine-months periods ended March 31, 2003, and amortization expense of $1.2 million and $3.6 million for the three- and nine-months periods ended March 31, 2002, respectively. In order to provide consistent comparisons of year over year results, the following reconciliation is provided:

	Three Months Ended March 31,				Nine Months Ended March 31,
(in thousands)	2003		2002		2003		2002
Income from continuing operations before income taxes, as reported	$	3,577	$	3,298	$	2,202	$	6,812
Amortization expense		—		1,174		—		3,551
Restructuring and other charges		1,130		—		10,051		—

Income from continuing operations before income taxes, as adjusted	$	4,707	$	4,472	$	12,253	$	10,363

Income Taxes

The Company’s effective income tax rate was 39.3% for the third quarter and 56.3% for the first nine months of fiscal 2003, respectively. 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 a lower tax benefit recognized on restructuring charges and the impact of state income taxes. For fiscal 2002, the effective income tax rate was 53.1% and 49.5% for the third quarter and first nine months, respectively. Income tax expense for fiscal 2002 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

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 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 within the Publisher Services segment was impaired. The Specialty Publications reporting unit 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, there had been volume and pricing pressures that resulted in lower operating profits and cash flows. Therefore, the earnings forecasts for future periods prepared as of July 1, 2002 reflect the impact of these items in the discounted cash flow computation for the Specialty Publications reporting unit, which resulted in a computed value that was lower than the carrying value. As a result, the Company recorded an impairment charge of $56.3 million related to this reporting unit 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 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.

Earnings Per Share

The Company recorded net income of $0.24 per share for the third quarter of fiscal 2003 compared to $0.04 per share in the third quarter of fiscal 2002. For the nine months ended March 31, 2003, the Company recorded a $(6.13) loss per share compared to net income of $0.24 per share for the nine months ended March 31, 2002. In order to provide consistent comparisons of year over year results, the following reconciliation is provided which reflects the impact of restructuring and other charges, discontinued operations, and the cumulative effect of a change in accounting principle for goodwill on earnings per share for the three- and nine-months ended March 31, 2003 and 2002, respectively:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2003		2002		2003			2002
Earnings per share, assuming dilution:
Net income (loss), as reported	$	0.24	$	0.04	$	(6.13	)	$	0.24
Cumulative effect of a change in accounting principle		—		—		6.24			—
Discontinued operations		—		0.13		—			0.14
Amortization expense		—		0.13		—			0.40
Restructuring and other charges, net of taxes		0.08		—		0.73

Earnings per share, assuming dilution, as adjusted	$	0.32	$	0.30	$	0.84		$	0.78

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 $1.1 million and $10.1 million for the three and nine month periods ended March 31, 2003, respectively, and adjusted to add amortization expense of $1.2 million and $3.6 million for the three and nine month periods ended March 31, 2002, (2) “income from continuing operations before income taxes” adjusted in the same manner and for the same items as operating income, and (3) “earnings per share” adjusted to exclude the restructuring and other charges in the same manner as operating income for the three and nine month periods ended March 31, 2003, and to exclude the impact of the $56.3 million cumulative effect of a change in accounting principle for the nine months ended March 31, 2003, which was recorded upon the Company’s adoption of SFAS No. 142; for fiscal 2002, earnings per share was adjusted by adding the impact of the amortization expense described in operating income above and excluding the impact of the loss from discontinued operations of $1.2 million for both the three and nine months ended March 31, 2002. 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 most directly 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 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, and (4) the exclusion of the impact of discontinued operations permits comparisons for continuing business operations. 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 the first nine months of fiscal 2003 totaled $22.9 million, compared to $36.6 million in fiscal 2002. This $13.7 million decrease was primarily attributable to working capital changes and $4.5 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 healthcare customer. The increase in accounts receivable is primarily attributable to the lower level of funding under the securitization program which is discussed below under Financing Activities. The year over year decrease in net cash provided by operating activities was partially offset by a $1.0 million decrease in restructuring payments.

Investing Activities

Net cash used in investing activities was $6.2 million for the first nine months of fiscal 2003 compared to $3.6 million in the prior year. Capital expenditures for the first nine months of fiscal 2003 totaled $9.6 million compared to $8.8 million for the corresponding period of the prior year, and included investments primarily in new business and manufacturing 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 former East Stroudsburg, Pennsylvania location. The Company estimates that capital expenditures for fiscal 2003 will be approximately $14 to $16 million.

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.

Financing Activities

Net cash used in financing activities was $16.1 million for the first nine months of fiscal 2003 compared to $34.5 million for the first nine months of fiscal 2002. Cash provided by operating activities was used to pay down $11.5 million on the Company’s revolving credit facility and to fund $1.4 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 lower funding levels as a result of receivables aging primarily within the Specialty Publications division. These factors contributed to a $3.3 million reduction in funding under the Company’s receivables securitization program.

For the nine months ended March 31, 2002, the Company utilized cash provided by operations to pay down $26.4 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 $1.3 million in dividend payments. At March 31, 2002 there was a reduction of $4.6 million in funding under the Company’s receivables securitization program. The Company also received $0.3 million in proceeds from the exercise of stock options.

Long-term debt at March 31, 2003, was $133.9 million, down $23.3 million from $157.2 million at June 30, 2002. Additionally, the Company has $13.8 million in current maturities of long-term debt, scheduled to mature March 31, 2004.

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 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.

Statements contained in this report relating to Cadmus’ future prospects and performance are “forward-looking statements” that are subject to risks and uncertainties, both known and unknown, 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 projections, forecasts, estimates and expectations may include factors that are beyond the Company’s ability to control or estimate precisely, such as estimates of future market conditions and the behavior of other market participants. Other potential risks and uncertainties include but are not limited to: (1) the overall economic environment in North America, (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, (9) our ability to successfully complete certain consolidation initiatives and effect other restructuring actions, and (10) our ability to operate profitably and effectively with high levels of indebtedness. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Except as noted below, there have been no material changes to the information concerning the Company’s “Quantitative and Qualitative Disclosures about Market Risk” as previously reported in the Company’s Report on Form 10-K for the year ended June 30, 2002. Additional information concerning the Company’s quantitative and qualitative disclosures about market risk is included in Note 9 of the Notes to Condensed Consolidated Financial Statements and under the caption “Management’s Discussion and Analysis – Liquidity and Capital Resources” in this Report on Form 10-Q for the quarterly period ended March 31, 2003, and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management on a timely basis. As required, management evaluates the effectiveness of these disclosure controls and procedures on a quarterly basis, and has done so within 90 days of the filing of this quarterly report. Based on this evaluation, management, including the Company’s chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were operating effectively to ensure appropriate disclosure. Additionally, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, Cadmus and its subsidiaries are involved in various legal proceedings. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Company’s financial position, liquidity or results of operations.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a)	Exhibits:

	3.1	Restated Articles of Incorporation of Cadmus Communications Corporation, as amended. (1)

	3.2	Bylaws of Cadmus Communications Corporation, as amended. (2)

	10.18.3	First Amendment, dated as of March 27, 2003, to Second Amended and Restated Receivables Purchase Agreement dated as of November 20, 2002.

1.		Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 1993 (Commission File No. 0-12954).

2.		Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated July 23, 2001 (Commission File No. 0-12954).


b)	Reports on Form 8-K:

	On January 24, 2003, the Company filed a Form 8-K that included its January 23, 2003 press release announcing fiscal 2003 second quarter financial results, as well as a copy of the prepared notes used for remarks made during a conference call to analysts on the same date.

SIGNATURES

Pursuant to the requirements 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.

CADMUS COMMUNICATIONS CORPORATION

(Registrant)

Date:

May 12, 2003

/s/ BRUCE V. THOMAS

Bruce V. Thomas

President and Chief Executive Officer

Date:

May 12, 2003

/s/ PAUL K. SUIJK

Paul K. Suijk

Senior Vice President and Chief Financial Officer

Certification of CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided separately as correspondence with this filing.

CERTIFICATIONS

I, Bruce V. Thomas, certify that:

I have reviewed this quarterly report on Form 10-Q of Cadmus Communications Corporation;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 12, 2003		/s/ Bruce V. Thomas
		Bruce V. Thomas President and Chief Executive Officer

I, Paul K. Suijk, certify that:

I have reviewed this quarterly report on Form 10-Q of Cadmus Communications Corporation;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 12, 2003

/s/ PAUL K. Suijk

Paul K. Suijk

Senior Vice President and
Chief Financial Officer

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