RICHMOND, Va., Oct. 30 -- Cadmus Communications Corporation, a leading provider of publisher services, today announced net sales of $106.9 million for the first quarter of its fiscal year 2004, an increase of 1% from $105.4 million in last year's first quarter. Operating income was $7.1 million, income before cumulative effect of a change in accounting principle(1) was $2.1 million, and net income was $2.1 million, or $0.23 per share, for the first quarter of fiscal 2004, compared with operating income of $7.2 million, income before cumulative effect of a change in accounting principle of $2.0 million, and a net loss of $54.3 million, or a loss of $6.02 per share, in the first quarter of fiscal 2003. Adjusted as described below,(2) operating income for the first quarter of fiscal 2004 was $7.2 million, essentially flat with the prior year period, and income before the cumulative effect of a change in accounting principle was $2.2 million, or $0.24 per share, for fiscal 2004, an increase from $2.0 million, or $0.22 per share, in last year's first quarter. Highlights for the first quarter were as follows: * Net sales increased 1% compared to last year's first quarter, led by strong growth in content services and continued growth in scientific, technical and medical ("STM") services and specialty packaging; * The Company invested in, and made substantial progress on, four growth-oriented initiatives: (i) the launch of its Cadmus ArticleWorks(TM) service, (ii) the opening of the Dominican Republic facility, (iii) the ramp-up of its India-based KnowledgeWorks Global Limited content services joint venture, and (iv) the addition of press capacity and equipment to the Company's journal print operations; * Despite a $7.8 million planned cash contribution the Company made to its frozen defined benefit pension plan and $5.5 million of capital spending, total debt (including securitization) increased by only $1.6 million during the quarter; and * Interest expense and securitization costs declined to $3.6 million for the fiscal first quarter, down from $4.0 million in last year's first quarter primarily due to lower debt levels in fiscal 2004 and lower year over year short-term interest rates. Bruce V. Thomas, president and chief executive officer, remarked, "Given the difficult market conditions that exist for traditional print and the substantial investment we made in our key growth-oriented initiatives, we are generally pleased with our performance this quarter. We achieved year over year improvement in our operating results and, through the four growth- oriented initiatives we undertook, we have positioned our business for better top-line growth as we go forward. The costs related to these initiatives, combined with downtime and disruption resulting from Hurricane Isabel and an increase in our accounts receivable bad debt reserve for our special interest magazines business, did negatively impact our margins during the quarter. However, the initiatives move us in the right direction strategically and have already created several new and exciting opportunities to expand our customer base and the markets that we serve. We are optimistic that we will see positive and potentially meaningful near-term results from these four key initiatives." Thomas further stated, "We are pleased that we have been able to sustain year over year top-line growth again this quarter despite difficult market conditions. Led by strong growth in our content services business, we again saw top-line growth in our STM services division. In addition, our Specialty Packaging segment registered another quarter of double-digit growth, fueled by growth in existing accounts as well as new customers and new business wins in the health care and nutrition sectors. This top-line growth was achieved despite downtime and disruption related to Hurricane Isabel, and more than offset softness in our special interest magazine business, which continues to be pressured by lower pricing and the continued excess capacity in the industry." Finally, Thomas noted, "We continue to make improvements in our working capital management to improve cash flows. During the first quarter, we made a $7.8 million cash contribution to our now frozen defined benefit pension plan. This contribution should eliminate future contributions in the near term and reduce overall future contributions. In addition, we invested $5.5 million in capital spending in connection with our STM journal services operations and equipment for our packaging business. Despite these substantial cash outflows, our overall debt increased only $1.6 million this quarter -- again, a positive indication of our more effective working capital management." First Quarter Operating Results Review Net sales for the fiscal first quarter totaled $106.9 million compared with $105.4 million last year, an increase of 1%. Publisher Services segment sales were $92.3 million, a decrease of less than 1% from $93.2 million last year, as a result of continued softness in pricing and volume in the special interest magazine business offset by continued growth in STM services. Specialty Packaging segment sales were $14.6 million, an increase of 19% from $12.3 million, as this division continued to obtain new projects and new customers, primarily in the healthcare market. Operating income, adjusted as described below, was $7.2 million or 6.7% of net sales in the first quarter, compared to $7.2 million or 6.8% of net sales last year.(3) Cash generated from operations, offset by the $7.8 million cash contribution to the now frozen defined benefit pension plan, resulted in an increase in total debt (including $25.0 million related to securitization) of $1.6 million for the quarter. Income before the cumulative effect of a change in accounting principle, adjusted as described below, totaled $2.2 million, or $0.24 per share, for the fiscal first quarter compared with $2.0 million, or $0.22 per share, in last year's first quarter. In connection with the previously announced restructuring program, the Company recorded a pre-tax cash charge of $0.1 million, or $0.01 per share, in the first quarter of fiscal 2004. Outlook for Fiscal 2004 Commenting on the Company's outlook for the remainder of fiscal 2004, Mr. Thomas stated, "We believe that we are in a position to sustain our track record of year over year improved earnings throughout fiscal 2004 and, assuming that industry and economic conditions do not deteriorate further and we obtain the expected benefits from our key initiatives, our target for fiscal 2004 remains unchanged. We expect total debt reduction for the fiscal year to be in the $4-8 million range, giving effect to the first quarter pension contribution."