RICHMOND, Va., Oct. 24 -- Cadmus Communications Corporation today reported net sales of $105.4 million and income of $2.0 million, or $0.22 per share, for the first quarter of its fiscal year 2003, before the impact of the cumulative effect of a change in accounting principle for goodwill. See Note (A) below. Highlights were as follows: * Net sales declined 5% compared to last year's first quarter (3% decline excluding the impact of changes in paper prices and the pass-through costs of freight and postage) as growth in scientific, technical and medical ("STM") services and specialty packaging was offset by a decline in special interest magazines; * Operating income was $7.2 million compared to $7.1 million last year and operating margins increased from 6.3% to 6.8% of revenues; * Pre-tax income rose 43% over last year's first quarter; * Income from continuing operations and earnings per share increased 12% and 10%, respectively, year over year, despite a higher effective tax rate this year; * EBITDA margin increased to 11.4% compared to 10.8% in last year's first quarter; * Interest expense combined with securitization costs decreased 17% compared to last year's first quarter; * Total debt (including securitization) decreased by $4.8 million during the quarter. Bruce V. Thomas, president and chief executive officer, remarked, "We are pleased with the progress of our differentiation strategy. Our most highly differentiated division, serving STM publishers, showed growth and has several large new business prospects. We have begun the process of re-allocating resources and assets to support our growth in this attractive and stable market. Our specialty packaging operation also showed growth and margin expansion. In addition, this division recently was awarded significant new business in the pharmaceutical market, which we believe should sustain our growth and improve profitability in this segment. By contrast, we have not seen any improvement in demand in our special interest magazine business, as the industry-wide page count reduction continues in response to the prolonged downturn in advertising spending. We will continue to reduce costs and rationalize capacity to offset the on-going soft demand." Thomas continued, "The first quarter is seasonally our soft quarter; however, we showed progress in continuing to differentiate our products and services from our competitors during the quarter. This differentiation is translating into improved new business activity and backlogs. For the year, we believe we can achieve year over year and sequential quarter-to-quarter improvement throughout the year. Finally, as we have done for the past two years, we intend to continue to reduce our debt levels while investing prudently in our differentiation strategies." First Quarter Operating Results Review Net sales for the fiscal first quarter totaled $105.4 million compared with $111.2 million last year, a decline of 5%. Excluding the impact of changes in paper prices and the pass-through costs of freight and postage, net sales decreased 3%. Publisher Services segment (STM services, special interest magazines, and professional books and directories) sales were $93.2 million, down 6% from $99.6 million (down 4% excluding paper, freight and postage impact), primarily because of continued softness in advertising and volume and pricing pressures. Specialty Packaging segment sales were $12.3 million, an increase of 5% from $11.7 million (up 8% excluding paper, freight and postage impact). Despite lower net sales, both value-added sales and gross profit margins increased over the prior year. As a result, operating income was $7.2 million in the first quarter compared to $7.1 million last year and operating margins increased to 6.8% of sales from 6.3% last year. Cash flow from operations was used to reduce total debt (including $28.7 million related to securitization) by $4.8 million for the quarter. Income from continuing operations for the first quarter totaled $2.0 million, or $0.22 per share, compared with $1.8 million, or $0.20 per share, last year.