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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2003



OR



| ̈ | 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



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CADMUS COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)



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|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)



(804) 287-5680

(Registrants telephone number, including area code)



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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 ̈No  x



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 October 31, 2003
|----------------------------- |  | -------------------------------
|Common Stock, $0.50 Par Value |  | 9,069,092                      



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##### Table of Contents

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

INDEX



|           |  |                                                                                                             |  |                                                                                       |  | PageNumber
|---------- |  | ----------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------
|           |  |                                                                                                            
|Part I.    |  | Financial Information                                                                                       |  |                                                                                      
|           |  |                                                                                                             | 
|           |  | Item 1.                                                                                                     |  | Financial Statements                                                                  |  |           
|           |  |                                                                                                            
|           |  | Condensed Consolidated Balance Sheets September 30, 2003 (unaudited) and June 30, 2003                     |  | 3                                                                                    
|           |  |                                                                                                            
|           |  | Condensed Consolidated Statements of Operations (unaudited) Three Months Ended September 30, 2003 and 2002 |  | 4                                                                                    
|           |  |                                                                                                            
|           |  | Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended September 30, 2003 and 2002 |  | 5                                                                                    
|           |  |                                                                                                            
|           |  | Condensed Consolidated Statements of Shareholders Equity September 30, 2003 (unaudited) and June 30, 2003 |  | 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                            |  | 17        
|           |  |                                                                                                             | 
|           |  | Item 4.                                                                                                     |  | Controls and Procedures                                                               |  | 17        
|           |  |                                                                                                            
|Part II.   |  | Other Information                                                                                           |  |                                                                                      
|           |  |                                                                                                             | 
|           |  | Item 1.                                                                                                     |  | Legal Proceedings                                                                     |  | 18        
|           |  |                                                                                                             | 
|           |  | Item 6.                                                                                                     |  | Exhibits and Reports on Form 8-K                                                      |  | 18        
|           |  |                                                                                                            
|Signatures |  |                                                                                                             |  | 19                                                                                   



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                   |  | September 30, 2003 |         |   | June 30, 2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ------------- | -
|                                                                                                                                                                   | 
|                                                                                                                                                                   |  | (Unaudited)        |         |   |               |  
|ASSETS                                                                                                                                                             |  |                    |         |   |               |  
|Current assets:                                                                                                                                                    |  |                    |         |   |               |  
|Cash and cash equivalents                                                                                                                                          |  | $                  | 1,327   |   |               | $
|Accounts receivable (net of allowance for doubtful accounts of $2,612 at September 30, 2003 and $2,089 at June 30,
2003)                                           |  |                    | 32,624  |   |               |  
|Inventories                                                                                                                                                        |  |                    | 21,467  |   |               |  
|Deferred income taxes                                                                                                                                              |  |                    | 983     |   |               |  
|Prepaid expenses and other                                                                                                                                         |  |                    | 8,935   |   |               |  
|                                                                                                                                                                   |  |                    |         |   |               |  
|Total current assets                                                                                                                                               |  |                    | 65,336  |   |               |  
|                                                                                                                                                                   |  |                   
|Property, plant, and equipment, net                                                                                                                                |  |                    | 108,523 |   |               |  
|Assets held for sale                                                                                                                                               |  |                    | 525     |   |               |  
|Goodwill, net                                                                                                                                                      |  |                    | 109,884 |   |               |  
|Other intangibles, net                                                                                                                                             |  |                    | 4,627   |   |               |  
|Other assets                                                                                                                                                       |  |                    | 19,618  |   |               |  
|                                                                                                                                                                   |  |                    |         |   |               |  
|TOTAL ASSETS                                                                                                                                                       |  | $                  | 308,513 |   |               | $
|                                                                                                                                                                   |  |                    |         |   |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                               |  |                    |         |   |               |  
|Current liabilities:                                                                                                                                               |  |                    |         |   |               |  
|Current maturities of long-term debt                                                                                                                               |  | $                  | 16,000  |   |               | $
|Accounts payable                                                                                                                                                   |  |                    | 35,345  |   |               |  
|Accrued expenses and other current liabilities                                                                                                                     |  |                    | 29,575  |   |               |  
|Restructuring reserve                                                                                                                                              |  |                    | 713     |   |               |  
|                                                                                                                                                                   |  |                    |         |   |               |  
|Total current liabilities                                                                                                                                          |  |                    | 81,633  |   |               |  
|                                                                                                                                                                   |  |                    |         |   |               |  
|Long-term debt, less current maturities                                                                                                                            |  |                    | 133,541 |   |               |  
|Other long-term liabilities                                                                                                                                        |  |                    | 59,073  |   |               |  
|                                                                                                                                                                   |  |                    |         |   |               |  
|Total liabilities                                                                                                                                                  |  |                    | 274,247 |   |               |  
|                                                                                                                                                                   |  |                   
|Shareholders equity:                                                                                                                                              |  |                    |         |   |               |  
|Common stock ($0.50 par value; authorized shares-16,000,000 shares; issued and outstanding shares- 9,066,592 at September 30, 2003
and 9,049,592 at June 30, 2003) |  |                    | 4,533   |   |               |  
|Capital in excess of par value                                                                                                                                     |  |                    | 68,493  |   |               |  
|Unearned compensation                                                                                                                                              |  |                    | (462    | ) |               |  
|Retained earnings (deficit)                                                                                                                                        |  |                    | (13,511 | ) |               |  
|Accumulated other comprehensive loss:                                                                                                                              |  |                    |         |   |               |  
|Foreign currency translation                                                                                                                                       |  |                    | 1       |   |               |  
|Minimum pension liability                                                                                                                                          |  |                    | (24,788 | ) |               |  
|                                                                                                                                                                   |  |                    |         |   |               |  
|Total shareholders equity                                                                                                                                         |  |                    | 34,266  |   |               |  
|                                                                                                                                                                   |  |                    |         |   |               |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                         |  | $                  | 308,513 |   |               | $
|                                                                                                                                                                   |  |                    |         |   |               |  



See
accompanying Notes to Condensed Consolidated Financial Statements.



3



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##### Table of Contents

CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                     |  | Three Months EndedSeptember 30, |        
|------------------------------------------------------------------------------------ |  | ------------------------------- | -------
|                                                                                     |  | 2003                            |        
|Net sales                                                                            |  | $                               | 106,909
|                                                                                     |  |                                 |        
|Operating expenses:                                                                  |  |                                 |        
|Cost of sales                                                                        |  |                                 | 87,743 
|Selling and administrative                                                           |  |                                 | 11,965 
|Restructuring and other charges                                                      |  |                                 | 114    
|                                                                                     |  |                                 |        
|                                                                                     |  |                                 | 99,822 
|                                                                                     |  |                                 |        
|Operating income                                                                     |  |                                 | 7,087  
|                                                                                     |  |                                
|Interest and other expenses:                                                         |  |                                 |        
|Interest                                                                             |  |                                 | 3,443  
|Securitization costs                                                                 |  |                                 | 121    
|Other, net                                                                           |  |                                 | 42     
|                                                                                     |  |                                 |        
|                                                                                     |  |                                 | 3,606  
|                                                                                     |  |                                 |        
|Income before income taxes and cumulative effect of a change in accounting principle |  |                                 | 3,481  
|                                                                                     |  |                                
|Income tax expense                                                                   |  |                                 | 1,381  
|                                                                                     |  |                                 |        
|Income before cumulative effect of a change in accounting principle                  |  |                                 | 2,100  
|                                                                                     |  |                                
|Cumulative effect of a change in accounting principle                                |  |                                 |       
|                                                                                     |  |                                 |        
|Net income (loss)                                                                    |  | $                               | 2,100  
|                                                                                     |  |                                 |        
|Earnings per share  basic:                                                          |  |                                 |        
|Income before cumulative effect of a change in accounting principle                  |  | $                               | 0.23   
|Cumulative effect of a change in accounting principle                                |  |                                 |       
|                                                                                     |  |                                 |        
|Net income (loss) per share                                                          |  | $                               | 0.23   
|                                                                                     |  |                                 |        
|Weighted-average common shares outstanding                                           |  |                                 | 9,059  
|                                                                                     |  |                                 |        
|Earnings per share  diluted:                                                        |  |                                 |        
|Income before cumulative effect of a change in accounting principle                  |  | $                               | 0.23   
|Cumulative effect of a change in accounting principle                                |  |                                 |       
|                                                                                     |  |                                 |        
|Net income (loss) per share                                                          |  | $                               | 0.23   
|                                                                                     |  |                                 |        
|Weighted-average common shares outstanding                                           |  |                                 | 9,121  
|                                                                                     |  |                                 |        
|Cash dividends per common share                                                      |  | $                               | 0.05   
|                                                                                     |  |                                 |        



See
accompanying Notes to Condensed Consolidated Financial Statements.



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CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                         |  | Three Months EndedSeptember 30, |       
|---------------------------------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                                         |  | 2003                            |       
|Operating Activities                                                                     |  |                                 |       
|Net income (loss)                                                                        |  | $                               | 2,100 
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                 |       
|Depreciation and amortization                                                            |  |                                 | 4,935 
|Cumulative effect of a change in accounting principle for goodwill                       |  |                                 |      
|Restructuring and other                                                                  |  |                                 | 114   
|Other, net                                                                               |  |                                 | 395   
|                                                                                         |  |                                 |       
|                                                                                         |  |                                 | 7,544 
|                                                                                         |  |                                 |       
|Changes in assets and liabilities that provided (used) cash:                             |  |                                 |       
|Accounts receivable, net                                                                 |  |                                 | (873  
|Inventories                                                                              |  |                                 | 880   
|Accounts payable and accrued expenses                                                    |  |                                 | 7,770 
|Restructuring payments                                                                   |  |                                 | (511  
|Contributions to retirement plans                                                        |  |                                 | (8,113
|Other, net                                                                               |  |                                 | (2,079
|                                                                                         |  |                                 |       
|                                                                                         |  |                                 | (2,926
|                                                                                         |  |                                 |       
|Net cash provided by operating activities                                                |  |                                 | 4,618 
|                                                                                         |  |                                 |       
|Investing Activities                                                                     |  |                                 |       
|Purchases of property, plant, and equipment                                              |  |                                 | (5,538
|Proceeds from sales of property, plant, and equipment                                    |  |                                 | 404   
|                                                                                         |  |                                 |       
|Net cash used in investing activities                                                    |  |                                 | (5,134
|                                                                                         |  |                                 |       
|Financing Activities                                                                     |  |                                 |       
|Proceeds from (repayment of) long-term revolving credit facility                         |  |                                 | 3,200 
|Net payments on receivables securitization program                                       |  |                                 | (1,628
|Dividends paid                                                                           |  |                                 | (454  
|Proceeds from exercise of stock options                                                  |  |                                 | 159   
|                                                                                         |  |                                 |       
|Net cash provided by (used in) financing activities                                      |  |                                 | 1,277 
|                                                                                         |  |                                 |       
|Increase in cash and cash equivalents                                                    |  |                                 | 761   
|                                                                                         |  |                                
|Cash and cash equivalents at beginning of period                                         |  |                                 | 566   
|                                                                                         |  |                                 |       
|Cash and cash equivalents at end of period                                               |  | $                               | 1,327 
|                                                                                         |  |                                 |       



See
accompanying Notes to Condensed Consolidated Financial Statements.



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CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(In thousands, except per share data)



|                                                                     |  | Common Stock |  | Capital inExcess ofPar Value |       | UnearnedCompensation |   |        | RetainedEarnings(Deficit) |   |      | AccumulatedOtherComprehensiveLoss |  |   | Total   |  
|-------------------------------------------------------------------- |  | ------------ |  | ---------------------------- | ----- | -------------------- | - | ------ | ------------------------- | - | ---- | --------------------------------- |  | - | ------- | -
|                                                                     |  | Shares       |  | ParValue                     |       |                      |   |        |                          
|Balance at June 30, 2002                                             |  | 8,992        |  | $                            | 4,496 |                      | $ | 67,805 |                           | $ | (77  | )                                 |  | $ | 40,282  |  
|Net loss                                                             |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | (53,634 | )
|Change in minimum pension liability net of $12,448 in deferred taxes |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   |        |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|Comprehensive loss                                                   |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|Cash dividends - $0.20 per share                                     |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | (1,805  | )
|Shares issued upon exercise of stock options                         |  | 5            |  |                              | 2     |                      |   | 43     |                           |   |     |                                   |  |   |        |  
|Restricted stock award                                               |  | 53           |  |                              | 27    |                      |   | 494    |                           |   | (437 | )                                 |  |   |        |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|Balance at June 30, 2003 (the following data is unaudited)           |  | 9,050        |  |                              | 4,525 |                      |   | 68,342 |                           |   | (514 | )                                 |  |   | (15,157 | )
|Net income                                                           |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | 2,100   |  
|Foreign currency translation                                         |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   |        |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|Comprehensive income                                                 |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|Cash dividends - $0.05 per share                                     |  |             |  |                              |      |                      |   |       |                           |   |     |                                   |  |   | (454    | )
|Shares issued upon exercise of stock options                         |  | 17           |  |                              | 8     |                      |   | 151    |                           |   |     |                                   |  |   |        |  
|Amortization of unearned compensation                                |  |             |  |                              |      |                      |   |       |                           |   | 52   |                                   |  |   |        |  
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  
|Balance at September 30, 2003                                        |  | 9,067        |  | $                            | 4,533 |                      | $ | 68,493 |                           | $ | (462 | )                                 |  | $ | (13,511 | )
|                                                                     |  |              |  |                              |       |                      |   |        |                           |   |      |                                   |  |   |         |  



See
accompanying Notes to Condensed Consolidated Financial Statements.



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CADMUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | The accompanying unaudited condensed consolidated financial statements of Cadmus Communications Corporation and Subsidiaries (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, 2003.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 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.



|2. | The Company entered into a joint venture agreement with Datamatics Technologies Limited (Datamatics) on June 30, 2003, resulting in an increase in intangible assets of
$3.3 million, which will be amortized using the straight-line method over a five year period. Annual amortization expense for these assets is expected to be approximately $0.7 million per year. Other intangibles totaling $1.5 million at September
30, 2003 and June 30, 2003, respectively, relate to assets recognized in connection with the Companys adjustment of its minimum pension liability.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | 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 62,000 and 25,000 for the
three months ended September 30, 2003 and 2002, respectively.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | Components of net inventories at September 30, 2003 and June 30, 2003, were as follows (in thousands):
|-- | ------------------------------------------------------------------------------------------------------



|                           |  | September 30, 2003 (unaudited) |        | June 30, 2003
|-------------------------- |  | ------------------------------ | ------ | -------------
|                           | 
|Raw materials and supplies |  | $                              | 7,615  |              
|Work in process            |  |                                | 11,765 |              
|Finished goods             |  |                                | 2,087  |              
|                           |  |                                |        |              
|                           |  | $                              | 21,467 |              
|                           |  |                                |        |              



|5. | Long-term debt at September 30, 2003 and June 30, 2003, consisted of the following (in thousands):
|-- | --------------------------------------------------------------------------------------------------



|                                                  |  | September 30,2003 (unaudited) |         | June 30,2003
|------------------------------------------------- |  | ----------------------------- | ------- | ------------
|                                                  | 
|Senior bank credit facility, due 3/31/04          |  | $                             | 16,000  |             
|9.75% Senior subordinated notes, due 6/1/09       |  |                               | 125,000 |             
|11.5% Subordinated promissory notes, due 3/31/10  |  |                               | 6,415   |             
|Fair market value of interest rate swap agreement |  |                               | 2,126   |             
|                                                  |  |                               |         |             
|Total debt                                        |  |                               | 149,541 |             
|Less current maturies of long-term debt           |  |                               | 16,000  |             
|                                                  |  |                               |         |             
|Total long-term debt                              |  | $                             | 133,541 |             
|                                                  |  |                               |         |             



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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. At September 30, 2003, the Companys total debt-to-EBITDA ratio exceeded 3.0 to 1.0 and, therefore, the Company was limited under this agreement to an annual dividend rate of $0.20
per share. The senior subordinated notes include a computation for a restricted payments pool out of which dividends may be paid. The balance of the restricted payments pool is increased based on net income, cash proceeds from the issuance of stock
and cash proceeds from the receipt of equity contributions and is reduced based on payment of dividends or other restricted payments. The Company may continue to pay dividends to the extent there is a positive balance in the restricted payments pool
in excess of the scheduled dividend. At September 30, 2003, the Companys restricted payments pool was sufficient to cover expected dividends and, therefore, the Company was not impacted by the limitation of this covenant.



|6. | 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 books and directories. Publisher Services provides a full range of content management, editorial, prepress, printing, reprinting,
warehousing and distribution services under the division names of Cadmus Professional Communications and Cadmus Specialty Publications. Due to operational and organizational changes, Cadmus Port City Press became a part of Cadmus Professional
Communications during fiscal 2003. In addition, certain shared services and other expenses have been allocated to the Publisher Services segment. 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
2003 Annual Report on Form 10-K. The Company primarily evaluates the performance of its operating segments based on operating income, excluding 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)                         |  | PublisherServices |        | SpecialtyPackaging |   | Total 
|-------------------------------------- |  | ----------------- | ------ | ------------------ | - | ------
|Three Months Ended September 30, 2003: |  |                   |        |                    |   |       
|Net sales                              |  | $                 | 92,309 |                    | $ | 14,600
|Operating income                       |  |                   | 8,679  |                    |   | 354   
|Three Months Ended September 30, 2002: |  |                   |        |                    |   |       
|Net sales                              |  | $                 | 93,156 |                    | $ | 12,269
|Operating income                       |  |                   | 9,487  |                    |   | 273   



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



|                                               |  | Three Months Ended September 30, |       
|---------------------------------------------- |  | -------------------------------- | ------
|                                              
|(In thousands)                                 |  | 2003                             |       
|Earnings from operations:                      |  |                                  |       
|Reportable segment operating income            |  | $                                | 9,033 
|Unallocated shared services and other expenses |  |                                  | (1,823
|Loss on sale of fixed assets                   |  |                                  | (9    
|Restructuring and other charges                |  |                                  | (114  
|Interest expense                               |  |                                  | (3,443
|Securitization costs                           |  |                                  | (121  
|Other, net                                     |  |                                  | (42   
|                                               |  |                                  |       
|Income before income taxes                     |  | $                                | 3,481 
|                                               |  |                                  |       



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|7. | 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 fiscal 2003 and subsequently.



In fiscal 2003, the Company announced several actions to rationalize
capacity and improve utilization within the Publisher Services segment, particularly in its special-interest magazine operation. These actions included closure of the special interest magazine facility in East Stroudsburg, Pennsylvania, closure of
the reprint department in Easton, Pennsylvania and relocation of certain manufacturing equipment to other facilities within the Company.



The Company also announced changes in the operating and management structure of the Company. In connection with these fiscal 2003 actions, the Company
recorded pre-tax charges of $0.1 million ($0.1 million net of taxes) in the first quarter of fiscal 2004. These charges are included in restructuring and other charges in the Condensed Consolidated Statements of Operations.



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



|(in thousands)             |  | Loss onDisposalof Assets |        |   | EmployeeSeveranceCosts |   |        | OtherExitCosts |  |   | Total  |  
|-------------------------- |  | ------------------------ | ------ | - | ---------------------- | - | ------ | -------------- |  | - | ------ | -
|June 30, 2002 Accrual      |  |                          |       |   |                        |   | 451    |                |  |   | 676    |  
|                           |  |                          |        |  
|FY 2003 provision          |  |                          | 7,831  |   |                        |   | 2,363  |                |  |   | 1,152  |  
|Costs incurred             |  |                          | (7,831 | ) |                        |   | (1,979 | )              |  |   | (1,553 | )
|                           |  |                          |        |   |                        |   |        |                |  |   |        |  
|June 30, 2003 Accrual      |  | $                        |       |   |                        | $ | 835    |                |  | $ | 275    |  
|                           |  |                          |        |  
|FY 2004 provision          |  |                          |       |   |                        |   | (27    | )              |  |   | 141    |  
|Costs incurred             |  |                          |       |   |                        |   | (336   | )              |  |   | (175   | )
|                           |  |                          |        |   |                        |   |        |                |  |   |        |  
|September 30, 2003 Accrual |  | $                        |       |   |                        | $ | 472    |                |  | $ | 241    |  
|                           |  |                          |        |   |                        |   |        |                |  |   |        |  



Loss on impairment or
disposal of assets for fiscal 2003 totaled $7.8 million and included a $6.2 million loss on assets to be disposed of due to the closure of the East Stroudsburg, Pennsylvania facility and the Easton, Pennsylvania reprint department and a $1.6 million
loss on impairment of assets related to a former operating facility in Richmond, Virginia, which has been sold. 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.



Employee severance costs for fiscal 2003 totaled $2.4 million and related primarily 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 September 30, 2003, all of these associates had been terminated and severance payments totaled $2.1 million. Severance costs remaining at September 30, 2003 relate to fiscal
2003 restructuring actions.



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##### Table of Contents

Other exit costs for fiscal 2003 totaled $1.2 million and included contract termination costs and other
costs incurred to close the East Stroudsburg facility. Other exit costs remaining at September 30, 2003 that related to fiscal 2003 restructuring actions totaled $0.1 million. The Company also has $0.2 million in unsettled contract issues remaining
in other exit costs related to fiscal 2001 restructuring actions. The Company anticipates that it will incur additional other exit costs of up to $0.3 million in fiscal 2004 related to fiscal 2003 restructuring actions, which are expected to be
completed in fiscal 2004.



|8. | At September 30, 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 counterparty has an option to terminate the agreement
beginning in fiscal 2004. Under the swap agreement, the Company receives interest payments at a fixed rate of 9.75% and pays interest at a variable rate that is based on six-month LIBOR plus a spread. The six-month LIBOR rate is reset each December
1 and June 1. The swap agreement is an effective hedge. The fair value of the Companys interest rate swap agreement was $2.1 million and $2.6 million at September 30, 2003 and June 30, 2003, respectively, which is recorded in the Condensed
Consolidated Balance Sheets in other assets with an offset in long-term debt in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Companys strategy to effectively convert fixed rate
financing to variable rate financing through the use of this swap agreement resulted in a reduction of interest expense of $0.4 million and $0.3 million for the three-month periods ended September 30, 2003 and 2002, respectively.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. | The Company uses an accounts receivable securitization program to fund some of its working capital requirements. At September 30, 2003 and June 30, 2003, approximately $25.0 million
and $26.7 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 the proceeds used to repay a corresponding amount of borrowing under the Companys senior bank credit facility.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | Assets held for sale at September 30, 2003 and June 30, 2003 include 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. All of the assets held for sale are part of the Publisher Services segment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. | Under the Companys incentive stock plans, which expired on or before June 30, 2003, selected associates and non-employee directors were granted options to purchase its common
stock at prices not less than the fair market value (or not less than 85% of the fair market value in the case of non-qualified stock options granted to associates) of the stock at the date the options were granted.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, pro forma net income (loss) would be as follows:



|                                                                                                                                     |  | Three Months Ended September 30, |      
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | -----
|                                                                                                                                    
|                                                                                                                                     |  | 2003                             |      
|Net income (loss) as reported                                                                                                        |  | $                                | 2,100
|                                                                                                                                     |  |                                 
|Deduct: total stock-based employee compensation expense determined under fair value method of all awards, net of related tax
effects |  |                                  | (145 
|                                                                                                                                     |  |                                  |      
|Pro forma net income (loss)                                                                                                          |  | $                                | 1,955
|                                                                                                                                     |  |                                  |      
|Earnings (loss) per common share  basic                                                                                             |  |                                  |      
|As reported                                                                                                                          |  | $                                | 0.23 
|Pro forma                                                                                                                            |  | $                                | 0.22 
|                                                                                                                                     |  |                                 
|Earnings (loss) per common share - diluted                                                                                           |  |                                  |      
|As reported                                                                                                                          |  | $                                | 0.23 
|Pro forma                                                                                                                            |  | $                                | 0.21 



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL



Headquartered in Richmond, Virginia, Cadmus Communications Corporation and Subsidiaries (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 books and directories. Publisher Services provides a full range of content management, editorial, prepress, printing, reprinting,
warehousing and distribution services under the division names of Cadmus Professional Communications and Cadmus Specialty Publications. Due to operational and organizational changes, Cadmus Port City Press became a part of Cadmus Professional
Communications during fiscal 2003. 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



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, 2003.



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-month periods ended September 30, 2003 and 2002, respectively.



|                                                                                     |  | Three Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | -
|                                                                                     |  | 2003                            |  
|Net sales                                                                            |  | 100.0                           | %
|Cost of sales                                                                        |  | 82.1                            |  
|Selling and administrative expenses                                                  |  | 11.2                            |  
|Restructuring and other charges                                                      |  | 0.1                             |  
|                                                                                     |  |                                 |  
|Operating income                                                                     |  | 6.6                             |  
|Interest expense                                                                     |  | 3.2                             |  
|Securitization costs                                                                 |  | 0.1                             |  
|Other                                                                                |  |                                |  
|                                                                                     |  |                                 |  
|Income before income taxes and cumulative effect of a change in accounting principle |  | 3.3                             |  
|Income tax expense                                                                   |  | 1.3                             |  
|                                                                                     |  |                                 |  
|Income before cumulative effect of a change in accounting principle                  |  | 2.0                             |  
|Cumulative effect of a change in accounting principle                                |  |                                |  
|                                                                                     |  |                                 |  
|Net income (loss)                                                                    |  | 2.0                             | %
|                                                                                     |  |                                 |  



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##### Table of Contents

Net sales



Net sales for the first quarter of fiscal 2004 were $106.9 million, a 1% increase, compared to $105.4 million in the same
period last year. The increase was primarily attributable to growth in content services and STM services and specialty packaging sales.



Net sales in the Publisher Services segment, which includes the STM journal, special interest magazine, and books and directories businesses, were $92.3
million in the first quarter of fiscal 2004 compared to $93.2 million in the comparable period of the prior year. The decline of less than 1% was a result of continued softness in pricing and volume in the special interest magazine business offset
by continued growth in STM services.



Net sales in the
Specialty Packaging segment totaled $14.6 million in the first quarter of fiscal 2004 compared to $12.3 million the prior year, an increase of 19%. The increase in net sales for this segment was attributable to new business, particularly in the
healthcare market.



Cost of Sales



Cost of sales increased to 82.1% of net sales for the first quarter of
fiscal 2004, compared to 81.1% of net sales in fiscal 2003. The increase was primarily the result of ramp-up costs associated with the Companys India-based KnowledgeWorks Global Limited content services joint venture, the impact of Hurricane
Isabel, additional costs associated with the launch of the Companys Cadmus ArticleWorksTMservice and start up
costs related to the opening of the Companys Dominican Republic facility.



Selling and Administrative Expenses



Selling and administrative expenses totaled $12.0 million, or 11.2% of net sales, for the first quarter of fiscal 2004, compared to $12.7 million, or 12.1% of net sales, for the same period of fiscal 2003. The
decrease in selling and administrative expenses was primarily attributable to lower costs in fiscal 2004 for management incentives, lower payroll costs associated with the reduction in the number of associates, the favorable impact of a $0.3 million
gain from the demutualization of one of the Companys insurance carriers, and higher costs in fiscal 2003 related to marketing programs and sales training. The year over year improvement in selling and administrative costs was partially offset
by increases to the Companys bad debt reserve and amortization of a license agreement related to the Companys joint venture.



Restructuring and Other Charges



During 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.



Also during fiscal 2003, the Company 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 $0.1 million ($0.1 million net of taxes)
in the first quarter of fiscal 2004, which are included in restructuring and other charges in the Condensed Consolidated Statements of Operations.



Operating Income



The Company reported operating income of $7.1 million for the three-month period ended September 30, 2003, respectively, compared to $7.2 million in the
comparable period of fiscal 2003. Operating results for the three months ended September 30, 2003 included $0.1 million in restructuring and other charges. In order to provide consistent comparisons of year over year operating results, the following
reconciliation is provided:



|                                |  | Three Months Ended September 30, |      
|------------------------------- |  | -------------------------------- | -----
|(in thousands)                  |  | 2003                             |      
|Operating income, as reported   |  | $                                | 7,087
|Restructuring and other charges |  |                                  | 114  
|                                |  |                                  |      
|Operating income, as adjusted   |  | $                                | 7,201
|                                |  |                                  |      



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Interest and Other Expenses



Interest expense and securitization costs in the first quarter of fiscal 2004 declined to $3.6 million compared to $4.0
million in the prior year. The decrease in interest expense was due primarily to lower debt levels in the first quarter of fiscal 2004 and lower year over year short-term interest rates.



Income before Income Taxes and Cumulative Effect of a Change in Accounting Principle



Income before income taxes and cumulative effect of a change in accounting
principle totaled $3.5 million for the first quarter of fiscal 2004 compared to $3.2 million for the same period of fiscal 2003. These results reflect the impact of $0.1 million in restructuring and other charges reported for the three-month period
ended September 30, 2003. In order to provide consistent comparisons of year over year results, the following reconciliation is provided:



|                                                                                              |  | Three Months Ended September 30, | 
|--------------------------------------------------------------------------------------------- |  | -------------------------------- | 
|(in thousands)                                                                                |  | 2003                             | 
|Reported income before income taxes and cumulative effect of a change in accounting principle |  | 3,481                            | 
|Restructuring and other charges                                                               |  | 114                              | 
|                                                                                              |  |                                  | 
|Adjusted income before income taxes and cumulative effect of a change in accounting principle |  | 3,595                            | 
|                                                                                              |  |                                  | 



Income
Taxes



The Companys effective income tax rate
was 39.7% for the first quarter of fiscal 2004, compared to 38% in the first quarter of fiscal 2003. The amount of tax expense differs from the amount obtained by application of the statutory United States rates primarily due to the impact of state
income taxes in fiscal years 2004 and 2003, and the impact in fiscal 2004 of foreign operations, which are excluded from taxable domestic income.



Cumulative Effect of a Change in Accounting Principle



Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, which requires companies to discontinue amortizing goodwill and to perform annual impairment tests. In completing the transitional impairment test required by SFAS No. 142, the Company tested the net
goodwill balances attributable to each of its reporting units for indications of impairment by comparing the fair value of each reporting unit to its carrying value. Fair value was determined using discounted cash flow estimates for each reporting
unit in accordance with the provisions of SFAS No. 142. The preparation of such discounted cash flow estimates requires significant management judgement with respect to operating profit, growth rates, appropriate discount rates and residual values.
Based on the impairment test as of July 1, 2002, the Company determined that goodwill related to its Specialty Publications division within the Publisher Services segment was impaired. The Specialty Publications division primarily serves customers
in the special-interest magazine market, which had been negatively impacted by the significant downturn in advertising spending (as a result of cost reduction initiatives undertaken by advertisers) resulting in fewer page counts and correspondingly
lower net sales. In addition, due to excess capacity in the magazine printing industry, volume and pricing pressures also resulted in lower operating profits and cash flows. As a result, the discounted cash flow analysis for the Specialty
Publications division provided a value that was lower than carrying value. Accordingly, the Company recorded an impairment charge of $56.3 million representing the entire balance of goodwill for this division in the first quarter of fiscal 2003.
This charge is reflected as a cumulative effect of a change in accounting principle in the accompanying Condensed Consolidated Statements of Operations.



The total balance of goodwill as of September 30, 2003 and June 30, 2003, respectively, relates to the Companys Publisher Services segment.



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Earnings Per Share



The Company recorded net income of $0.23 per share for the first quarter of fiscal 2004 compared to a ($6.02) loss per share
in the first quarter of fiscal 2003. 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, and the cumulative effect of a change
in accounting principle for goodwill on earnings per share for the three months ended September 30, 2003 and 2002, respectively:



|                                                      |  | Three Months Ended September 30, |     
|----------------------------------------------------- |  | -------------------------------- | ----
|                                                      |  | 2003                             |     
|Earnings per share, assuming dilution:                |  |                                  |     
|Net income (loss), as reported                        |  | $                                | 0.23
|Cumulative effect of a change in accounting principle |  |                                  |    
|Restructuring and other charges, net of taxes         |  |                                  | 0.01
|                                                      |  |                                  |     
|Earnings per share, assuming dilution, as adjusted    |  | $                                | 0.24
|                                                      |  |                                  |     



EBITDA



EBITDA for the three months ended September 30, 2003 was
$12.1 million compared to $12.0 million in the comparable period of the prior year. The Company defines EBITDA as earnings before interest, taxes, depreciation, amortization and securitization costs. The Company also excludes the cumulative effect
of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation. The Company believes EBITDA is a useful measure of operating performance before the impact of investing and
financing transactions, making comparisons between companies earnings power more meaningful and providing consistent comparisons of the Companys performance. In order to provide consistent comparisons of year over year EBITDA, the
following reconciliation is provided:



|(Dollars in thousands)                                |  | 2004 |        | % of Sales |      |   | 2003 |   |         | % of Sales | 
|----------------------------------------------------- |  | ---- | ------ | ---------- | ---- | - | ---- | - | ------- | ---------- | 
|Net income (loss), as reported                        |  | $    | 2,100  |            | 2.0  | % |      | $ | (54,328 | )          | 
|Cumulative effect of a change in accounting principle |  |      |       |            |     |   |      |   | 56,301  |            | 
|Income taxes                                          |  |      | 1,381  |            | 1.3  |   |      |   | 1,210   |            | 
|Interest                                              |  |      | 3,443  |            | 3.2  |   |      |   | 3,763   |            | 
|Securitization costs                                  |  |      | 121    |            | 0.1  |   |      |   | 188     |            | 
|Depreciation                                          |  |      | 4,772  |            | 4.4  |   |      |   | 4,913   |            | 
|Amortization                                          |  |      | 163    |            | 0.2  |   |      |   |        |            | 
|Restructuring and other charges                       |  |      | 114    |            | 0.1  |   |      |   |        |            | 
|                                                      |  |      |        |            |      |   |      |   |         |            | 
|EBITDA                                                |  | $    | 12,094 |            | 11.3 | % |      | $ | 12,047  |            | 
|                                                      |  |      |        |            |      |   |      |   |         |            | 



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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 $0.1 million for the three month
period ended September 30, 2003, (2) income before cumulative effect of a change in accounting principle adjusted in the same manner and for the same items as operating income, (3) earnings per share adjusted to exclude the
restructuring and other charges in the same manner as operating income for the three months ended September 30, 2003, and to exclude the impact of the $56.3 million cumulative effect of a change in accounting principle for the three months ended
September 30, 2002, which was recorded upon the Companys adoption of SFAS No. 142; and (4) EBITDA and EBITDA margin as a percent of net sales with EBITDA being defined by the Company as earnings before interest, taxes,
depreciation, amortization and securitization costs. The Company also excludes the cumulative effect of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation of EBITDA. For
each non-GAAP financial measure, the Company has presented the most directly comparable GAAP financial measure and has reconciled the non-GAAP financial measure with such comparable GAAP financial measure.



These non-GAAP financial measures provide useful information to investors to
assist in understanding the underlying operational performance of the Company. Specifically, (1) the exclusion of restructuring and other charges permits comparisons of results for on-going business facilities under the current operating structure;
(2) the exclusion of 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 (3) EBITDA and EBITDA margin as a percent
of net sales are useful measures of operating performance before the impact of investing and financing transactions, making comparisons between companies earnings power more meaningful and providing consistent period-over-period comparisons of
the Companys performance. In addition, the Company uses these non-GAAP financial measures internally to measure its on-going business performance and in reports to bankers to permit monitoring of the Companys ability to repay outstanding
liabilities.



LIQUIDITY AND CAPITAL RESOURCES



Operating Activities



Net cash provided by operating activities for the first three months of
fiscal 2004 totaled $4.6 million, compared to $8.2 million in fiscal 2003. This $3.6 million decrease was primarily attributable to an increase in contributions to the Companys retirement plans, an increase in restructuring payments and other
working capital changes.



Investing Activities



Net cash used in investing activities was $5.1 million for
the first three months of fiscal 2004 compared to $2.7 million in the prior year. Capital expenditures for the first three months of fiscal 2004 totaled $5.5 million compared to $2.8 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 2004 totaled $0.4 million, and related
primarily to the sale of a press at the Companys Charlotte, North Carolina location. The Company estimates that capital expenditures for fiscal 2004 will be approximately $14 to $17 million.



Financing Activities



Net cash provided by financing activities was $1.3 million for the first
three months of fiscal 2004 compared to $5.2 million used in financing activities for the first three months of fiscal 2003. A $7.8 million planned cash contribution to the Companys defined benefit pension plan and $5.5 million in capital
spending in the first quarter of fiscal 2004, partially offset by cash from operating activities, resulted in a $3.2 million increase in additional borrowing under the Companys long-term revolving credit facility. The Company does not
anticipate making further contributions to the defined benefit pension plan in fiscal year 2004. A higher subordinated interest in the Companys accounts receivable securitization program reflected changes in methods of calculating eligible
receivables brought about by amendments to the securitization program and certain negative trends in the receivables aging during the year which have been a focus of managements working capital initiatives. These factors contributed to a
$1.6 million reduction in funding under the Companys receivables securitization program.



15



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##### Table of Contents

At September 30, 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 counterparty has an option to terminate the agreement beginning in fiscal 2004. Under the swap agreement, the Company receives interest payments at a fixed rate of 9.75% and pays interest at a variable rate that is based on six-month
LIBOR plus a spread. The six-month LIBOR rate is reset each December 1 and June 1. The swap agreement is an effective hedge. The fair value of the Companys interest rate swap agreement was $2.1 million and $2.6 million at September 30, 2003
and June 30, 2003, respectively, which is recorded in the Condensed Consolidated Balance Sheets in other assets with an offset in long-term debt in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Companys strategy to effectively convert fixed rate financing to variable rate financing through the use of this swap agreement resulted in a reduction of interest expense of $0.4 million and $0.3 million for the
three-month periods ended September 30, 2003 and 2002, respectively.



For the three months ended September 30, 2002, the Company utilized cash provided by operations to pay down $3.9 million on the Companys revolving credit facility and to fund $0.5 million in dividend payments.
Lower sales and funding rates at September 30, 2002 resulted in a reduction of $0.9 million in funding under the Companys receivables securitization program.



The Company uses an accounts receivable securitization program to fund some of its working capital requirements. At
September 30, 2003 and June 30, 2003, approximately $25.0 million and $26.7 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 the proceeds used to repay a corresponding amount of borrowing under the Companys
senior bank credit facility.



Long-term debt at September 30,
2003 totaled $133.5 million, compared to $134.0 million at June 30, 2003. Additionally, the Company had $16.0 million and $12.8 million in current maturities of long-term debt at September 30, 2003 and June 30, 2003, respectively, 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 that could cause actual results to differ materially from those expressed or implied by such statements. Factors
that could cause actual results to differ materially from managements expectations include but are not limited to: (1) the overall economic environment, (2) the equity market performance and interest rate environment, which can impact our
pension liability, (3) our ability to develop and market new capabilities and services to take advantage of technology changes in the publishing process, especially for scientific, technical and medical journals, (4) significant price pressure in
the markets in which we compete, (5) the loss of significant customers or the decrease in demand from customers, (6) our ability to continue to obtain improved efficiencies and lower production costs, (7) the financial condition and ability to pay
of certain customers, (8) the impact of industry consolidation among key customers, and (9) our ability to operate effectively in markets outside of North America. Other risk factors are detailed from time to time in our other 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.



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##### Table of Contents

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, 2003. 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
September 30, 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, including the Companys
chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the
Companys chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures were operating effectively to ensure that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934, as amended, is recorded, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Additionally, no significant changes in
the Companys internal control over financial reporting occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.



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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



The
Company is not presently involved in any litigation, nor to its knowledge is any litigation threatened against the Company or its subsidiaries, that in managements opinion, would result in any material adverse effect on the Companys
consolidated financial position or results of operations, or which is not expected to be covered by the Companys liability insurance.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



a) Exhibits:



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



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



| | 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).
| | ---- | --------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).
| | ---- | --------------------------------------------------------------------



| | 32 | Certification Pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer and Chief Financial Officer.
| | -- | --------------------------------------------------------------------------------------------------------



b) Reports on Form 8-K:



On July 30, 2003, the Company filed a report on Form 8-K furnishing its July 30, 2003 press release announcing its fiscal
2003 fourth quarter financial results.



On September 3, 2003,
the Company filed a report on Form 8-K regarding Amendment No. 2 to the Companys Rights Agreement with Wachovia Bank and attaching its July 28, 2003 press release regarding the Companys expansion of its Content Services Operations in
India.



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##### Table of Contents

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: |  | November 12, 2003                    
|----- |  | -------------------------------------
|      | 
|      |  | /s/ Bruce V. Thomas                  
|      |  | Bruce V. Thomas                      
|      |  | President and Chief Executive Officer
|      |  | (principal executive officer)        





|Date: |  | November 12, 2003                                
|----- |  | -------------------------------------------------
|      | 
|      |  | /s/ Paul K. Suijk                                
|      |  | Paul K. Suijk                                    
|      |  | Senior Vice President and Chief Financial Officer
|      |  | (principal financial officer)                    



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