Exhibit 99.2
Consolidated Financial Statements
Melham Holdings, Inc.
AS OF DECEMBER 31, 1998 AND 1997
AND FOR THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
Melham Holdings, Inc.
Consolidated Financial Statements
As of December 31, 1998 and 1997 and for the three
years in the period ended December 31, 1998
CONTENTS
Report of Independent Auditors...............................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.................2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.........................................4
Consolidated Statements of Changes in (Deficiency in Assets)
Stockholders' Equity for the years ended December 31, 1998, 1997 and
1996 ..................................................................5
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996 ...............................................6
Notes to Consolidated Financial Statements...................................7
Report of Independent Auditors
The Board of Directors and Stockholders
Melham Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Melham Holdings,
Inc. (a 90%-owned subsidiary of Purico (IOM) Limited) as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
(deficiency in assets) stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Melham Holdings,
Inc. as of December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 19, 1999, except for Note 14, as to
which the date is April 1, 1999
1.
Melham Holdings, Inc.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
DECEMBER 31
1998 1997
---- ----
ASSETS
Current assets:
Cash $ 450 $ 320
Accounts receivable, less allowance of
$1,426 in 1998 and $1,283 in 1997 24,427 18,511
Inventories 10,590 8,900
Prepaid expenses and other 1,165 1,088
Deferred income taxes 1,692 1,872
Recoverable income taxes 282 463
---------- --------
Total current assets 38,606 31,154
Property, plant, and equipment, at cost:
Land 761 761
Buildings 12,988 12,588
Machinery and equipment 80,516 65,513
Construction in progress 1,714 488
------ ------
95,979 79,350
Less accumulated depreciation 46,937 40,142
------ -------
49,042 39,208
Excess of cost over net assets of businesses
acquired, net of amortization 32,730 17,415
Deferred financing costs, net of amortization 2,733 2,725
Deferred income taxes 900 1,393
Other assets 920 684
=========== ========
$ 124,931 $92,579
=========== ========
DECEMBER 31
1998 1997
---- ----
LIABILITIES AND DEFICIENCY IN ASSETS Current liabilities:
Trade accounts payable $ 7,841 $ 6,365
Other accrued expenses 6,176 6,320
Accrued payroll costs 4,822 4,609
Accrued pension contribution 714 1,299
Income taxes payable 38 -
Current portion of long-term debt 7,472 5,011
--------- --------
Total current liabilities 27,063 23,604
Long-term debt, excluding current portion 98,026 72,245
Deferred credits and other liabilities:
Pension liabilities 5,842 5,344
Postretirement benefits 16,715 17,850
Customer deposits and other 608 642
Due to affiliates 35 45
--------- --------
23,200 23,881
--------- --------
Total liabilities 148,289 119,730
Deficiency in assets:
Series A Preferred Stock, $0.01 par value (stated
at $100 liquidation value),
authorized 100,000 shares, issued 62,263
shares in 1998 and 44,288 shares in 1997 6,226 4,429
Common Stock, $0.01 par value, authorized
50,000 shares, issued 40,000 shares in 1998
and 1997 - -
Additional paid-in capital 3,983 3,983
Retained-earnings deficit (33,357) (35,563)
Accumulated other comprehensive loss (210) -
--------- -------
Total deficiency in assets (23,358) (27,151)
--------- -------
$ 124,931 $ 92,579
========= ========
SEE ACCOMPANYING NOTES.
2.
Melham Holdings, Inc.
Consolidated Statements of Operations
(in thousands)
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- --------- --------
Net sales $ 135,674 $ 119,120 $ 111,670
Cost of sales:
Materials and outside services 34,025 27,030 25,045
Other operating costs 70,350 63,557 58,927
----------- ----------- ---------
104,375 90,587 83,972
----------- ----------- ---------
Gross profit 31,299 28,533 27,698
Selling, general, and administrative
expenses 16,974 14,269 13,412
Recapitalization expenses - 7,405 -
----------- ----------- --------
Operating income 14,325 6,859 14,286
Interest expense 9,440 7,375 3,129
Miscellaneous income, net (84) (157) (156)
----------- ----------- --------
9,356 7,218 2,973
----------- ----------- --------
Earnings before income taxes and minority
interest 4,969 (359) 11,313
Provision for income taxes 2,124 36 4,339
Minority interest - (443) 577
----------- ----------- ---------
Net income $ 2,845 $ 48 $ 6,397
=========== =========== =========
SEE ACCOMPANYING NOTES.
3.
Melham Holdings, Inc.
Consolidated Statements of Changes in (Deficiency in Assets)
Stockholders' Equity
(in thousands, except share data)
ACCUMULATED
SERIES A ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL (DEFICIT) LOSS TOTAL
----- ----- ------- --------- ---- -----
Balance at January 1, 1996 $ - $ - $ 500 $ (6,023) $ - $ (5,523)
Net income (1) - - - 6,397 - 6,397
Preferred Stock dividends - - - (102) - (102)
-------- ------- --------- --------- ----------- ---------
Balance at December 31, 1996 - - 500 272 - 772
Net income (1) - - - 48 - 48
Issuance of 40,000 shares of Common Stock and
Warrants - - 3,483 - - 3,483
Issuance of 40,000 shares of Series A Preferred
Stock 4,000 - - - - 4,000
Common Stock dividends - - - (35,500) - (35,500)
Series A Preferred Stock dividends - - - (383) - (383)
Issuance of 4,288 shares of Series A Preferred
Stock as payment of interest 429 - - - - 429
--------- ------- --------- -------- ----------- --------
Balance at December 31, 1997 4,429 - 3,983 (35,563) - (27,151)
Comprehensive income (loss):
Net income - - - 2,845 - 2,845
Other comprehensive income (loss) net of
tax, minimum pension liability - - - - (210) (210)
--------
Comprehensive income - - - - - 2,635
Series A Preferred Stock dividends 989 - - (639) - 350
Issuance of 8,084 shares of Series A Preferred
Stock as payment of interest 808 - - - - 808
--------- ------- --------- --------- ----------- --------
Balance at December 31, 1998 $ 6,226 $ - $ 3,983 $ (33,357) $ (210) $ (23,358)
========= ======= ========= ========= =========== ========
(1) Equals comprehensive income for the year.
SEE ACCOMPANYING NOTES.
4.
Melham Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 2,845 $ 48 $ 6,397
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest - (443) 577
Depreciation 7,258 6,138 5,944
Amortization, including deferred 1,164 831 198
financing costs
Provision for loss on accounts receivable 258 233 341
Provision (benefit) for deferred income 815 4 (154)
taxes
Write-off of deferred financing costs - 455 -
Loss on sale of assets 12 7 (244)
Series A Preferred Stock issued in lieu
of payment of interest 808 429 -
Changes in operating assets and
liabilities, net of effect of business
acquired:
Accounts receivable (820) (1,383) 675
Inventories 341 (953) 1,222
Prepaid expenses and other 49 26 80
Income taxes 210 (488) 275
Trade accounts payable (44) 1,733 409
Accrued liabilities and other (490) 2,097 (178)
Accrued pension (573) (625) (26)
Postretirement benefits (1,135) (994) (1,267)
Other (120) (389) 35
--------- --------- --------
Net cash provided by operating activities 10,578 6,726 14,284
INVESTING ACTIVITIES
Acquisition of businesses (33,111) (19,137) -
Proceeds from sale of assets 11 14 2,916
Capital expenditures (5,001) (5,655) (6,465)
--------- --------- --------
Net cash used in investing activities (38,101) (24,778) (3,549)
FINANCING ACTIVITIES
Recapitalization and refinancing transactions:
Proceeds from issuance of long-term debt - 81,514 -
Repayment of debt - (23,534) -
Proceeds from sale of Common Stock - 2,710 -
Proceeds from sale of Series A Preferred - 4,000 -
Stock
Common Stock dividends - (35,500) -
Principal payments on long-term debt (5,183) (5,391) (9,611)
Proceeds from debt financing 19,611 923 -
Proceeds from line of credit 143,020 179,910 130,635
Repayments of line of credit (129,321) (182,056) (131,553)
Payment of deferred financing costs (464) (3,081) -
Cash dividends - - (102)
Change in due to affiliates (10) (1,163) (108)
-------- --------- --------
Net cash provided by (used in) financing
activities 27,653 18,332 (10,739)
-------- --------- --------
Increase (decrease) in cash 130 280 (4)
Cash at beginning of year 320 40 44
======== ========= ========
Cash at end of year $ 450 $ 320 $ 40
======== ========= ========
SEE ACCOMPANYING NOTES.
5.
Melham Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Melham Holdings, Inc. (the "Company"), which is a 90%-owned subsidiary of Purico
(IOM) Limited ("Purico"), was incorporated on February 26, 1997 and was
initially capitalized primarily by issuing its capital stock in exchange for all
of the outstanding capital stock of Melham, Inc. The controlling shareholders of
the Company and Melham, Inc. were the same before and after the transaction.
Therefore, the historical basis of Melham, Inc.'s consolidated assets and
liabilities is carried over in the accompanying consolidated financial
statements, and the combination of the two entities is accounted for similar to
the pooling-of-interests method of accounting for business combinations. The
results of operations of all companies are combined for all periods presented.
The Company's principal operating business is Mack Printing Company ("Mack"),
which it indirectly owns 85% through Melham, Inc. Mack is a full-service printer
that produces a wide variety of short- to medium-run magazines and journals
generally for customers in the mid-Atlantic and northeast regions of the United
States. Generally, the Company does not require collateral as a condition of
sale.
The Company's other operating business is Vital Public Information, Inc.
("VPI"), which was formed on September 19, 1997 and continues in the start-up
stage. The Company owns a 90% interest in VPI. VPI currently publishes self-help
books for sale and distribution through supermarket-continuity programs on a
consignment basis. VPI had no sales through December 31, 1998 and it had total
assets of $2,155 and $79 at December 31, 1998 and 1997, respectively, consisting
primarily of inventory. VPI is subject to the risks and uncertainties that are
normal to a start-up company. Although VPI has a definitive marketing plan for
its business concept and products, there is no assurance that the plan or VPI's
products will be accepted in the marketplace. If not accepted in the
marketplace, it is unlikely VPI will be able to realize the full carrying amount
of its assets.
6.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated. Because Mack had a deficit in assets as a result of the
recapitalization in 1997 (Note 13), subsequent to the recapitalization, the
Company has not reflected in its results of operations any share of earnings or
loss otherwise attributable to Mack's 15% minority shareholders. In addition to
its ownership of 85% of Mack's common stock, the Company owns all of Mack's
outstanding preferred stock, which had a liquidation value of $21,765 and
$19,176 at December 31, 1998, and 1997, respectively. The Mack preferred stock
pays cumulative dividends of 13% on the senior preferred stock and 14% on the
junior preferred stock. Net income of Mack would be reduced by the preferred
stock dividends and credited to the Company before determining the amount
allocable to the minority interests.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost or market. Mack paper inventories
included in raw material and work-in-process, amounting to $4,586 and $5,559 at
December 31, 1998 and 1997, respectively, are determined using the last-in,
first-out (LIFO) method. At December 31, 1998 and 1997, the LIFO value of the
inventory approximated the FIFO value. The cost of all other inventories is
determined using the first-in, first-out (FIFO) method.
VPI's inventories at December 31, 1998 and 1997 include work-in-process and
finished goods. Included in work-in-process inventory is editorial development
costs associated with the development of three new publications. Inventory is
valued at cost.
7.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The major classes of inventory are:
DECEMBER 31
1998 1997
------------------------------------------------
MACK VPI MACK VPI
------------------------------------------------
Raw materials $ 5,155 $ - $ 5,471 $ -
Supplies and other 191 - 137 -
Work-in-process 3,489 481 3,024 47
Finished goods 95 1,179 221 -
==================================================
$ 8,930 $ 1,660 $ 8,853 $ 47
==================================================
PROPERTY, PLANT, AND EQUIPMENT
Depreciation of property, plant, and equipment is computed over estimated useful
lives using the straight-line method.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
Excess of cost over net assets of businesses acquired ("goodwill") by Mack
($16,778 and $1,045, net of accumulated amortization of $423 and $256 at
December 31, 1998 and 1997, respectively) is primarily the result of the
acquisition of Port City Press, Inc. in 1998. The balance of goodwill ($15,952
and $16,370, net of accumulated amortization of $731 and $313 at December 31,
1998 and 1997, respectively) resulted from the 1997 acquisition by Melham, Inc.
of Mack's capital stock owned by minority interests, which increased Melham,
Inc.'s ownership in Mack's common stock to 85% from 55%. Goodwill is being
amortized on a straight-line basis over 40 years. The carrying value of goodwill
is evaluated periodically in relation to the operating performance and expected
future undiscounted cash flows of the underlying businesses.
8.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the lives of the respective debt
obligations, using the interest method for the Term Loans and Debenture and the
straight-line method for the Revolver. Accumulated amortization at December 31,
1998 and 1997 was $812 and $356, respectively.
REVENUE RECOGNITION
Substantially all revenue is recognized when products are shipped to customers.
COMPREHENSIVE INCOME
As of December 31, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which established
standards for the reporting and display of comprehensive income and its
components in financial statements. Comprehensive income is defined in the
Statement as net income plus other comprehensive income, which for the Company
consists only of a minimum pension liability. Comprehensive (loss) income is
reported by the Company in the consolidated statement of changes in (deficiency
in assets) stockholders' equity. Prior years' financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
INTERNAL USE SOFTWARE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE. The Company adopted the SOP
during 1998. The SOP requires the capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. The adoption
of this SOP did not have a material effect on the results of operations or
financial position.
9.
3. ACQUISITION
On September 2, 1998, Mack acquired all of the outstanding stock of Port City
Press, Inc. ("PCP") based in Baltimore, Maryland for an aggregate purchase price
of $33,536. PCP is a full-service printer servicing the association, medical,
legal, reference and scientific book market as well as the business directory
and catalog market. The acquisition has been accounted for under the purchase
method and, accordingly, is included in the consolidated financial statements
from the date of acquisition. The aggregate purchase price was allocated to the
net assets based on their estimated fair values. The excess of the purchase
price over the fair value of net assets acquired of approximately $16,324 is
being amortized over forty years on a straight-line basis. This acquisition was
funded by increasing Mack's Term Loan under its Credit Facility and available
borrowings under the Revolver portion of the Credit Facility.
The following unaudited pro forma information has been prepared assuming the
acquisition had taken place on January 1, 1997:
YEAR ENDED DECEMBER 31
1998 1997
--------- ----------
Net sales $ 160,015 $ 153,798
Net income (loss) 3,186 (825)
The unaudited pro forma information includes adjustments for interest expense
that would have been incurred to finance the purchase, additional depreciation
based on the estimated fair value of the property, plant, and equipment
acquired, and the amortization of the intangible assets arising from the
transaction. The unaudited pro forma financial information is not necessarily
indicative of the results of operations that would have been achieved had the
transaction been effected on the assumed date.
10.
4. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31
1998 1997
--------- ----------
Fixed-rate term note (9.78%), payable in quarterly
installments through January 1, 2003 $ 14,440 $ 17,997
Floating-rate term note payable in quarterly
installments through April 1, 2004:
At LIBOR plus 2.75% (7.94% at December 31, 1998)
31,000 19,000
At Prime plus 0.75% (8.50% at December 31, 1998)
5,310 503
Borrowings under revolving credit facility expiring
April 1, 2004: At LIBOR
plus 2.25% (7.59% at December 31, 1998)
13,500 2,000
At Prime plus 0.25% (8.00% at December 31, 1998)
3,209 1,010
Subordinated notes (12.0%), face value $25,000 (net of
unamortized discount of $341 in 1998 and $382 in
1997) with warrants to purchase 15,464 shares
of common stock 24,659 24,618
Fixed-rate equipment note (8.08%) payable in
monthly installments through September 5, 2001 594 856
Fixed-rate equipment note (7.40%) payable in
monthly installments through February 1, 2002 504 -
Promissory notes payable to shareholders (11%) due
March 27 and March 31, 2007 (net of unamortized
discount of $653 in 1998 and $728 in 1997),
interest payable quarterly 11,347 11,272
Promissory notes payable to shareholder (8%), due
in 2001 935 -
------------ ----------
105,498 77,256
Less current portion 7,472 5,011
============ ==========
$ 98,026 $ 72,245
============ ==========
11.
4. LONG-TERM DEBT (CONTINUED)
During 1998, in conjunction with the acquisition of Port City Press, Inc., Mack
amended its credit agreement ("Credit Facility") to increase the available
borrowings to $80,000. The Credit Facility consists of $52,000 in amortizing
Term Loans and a Revolver. The Term Loans and Revolver are secured by liens on
substantially all of Mack's tangible and intangible property. Borrowings under
the Revolver are limited to the lesser of (a) $80,000 minus the Term Loans, the
equipment notes and outstanding letters of credit, with such amount not to
exceed $25,000 or (b) a borrowing base of 85% of Mack's eligible receivables
(essentially excludes greater-than-60-day-past-due amounts) plus the lesser of
$7,500 or 75% of Mack's raw materials inventories plus 60% of work-in-process
inventories minus outstanding letters of credit. As of December 31, 1998,
approximately $8,000 of additional borrowings were available under the Credit
Facility.
At Mack's option, borrowings under the Term Loans may bear interest at a rate
based on the London Interbank Offered Rate ("LIBOR") plus 2.75%, the lender's
prime rate plus .75%, or at a fixed rate as quoted by the lender, and borrowings
under the Revolver may bear interest at a rate based on LIBOR plus 2.25% or at
the lender's prime rate plus .25%. Borrowings subject to the LIBOR-rate option
must remain outstanding for a term not to exceed six months. Mack may obtain a
.25% interest-rate reduction on the Term Notes and Revolver by meeting certain
provisions and making certain prepayments. In addition, Mack is required to pay
a commitment fee of .25% on the unused portion of the Credit Facility.
Mack has outstanding letters of credit at December 31, 1998 and 1997 of $940,
and $1,140, respectively, primarily for its workers' compensation program. The
letters of credit, which may not exceed $3,000, are secured by Mack's Revolver.
Mack issued a subordinated debenture (the "Debenture") in 1997 in the principal
amount of $25,000. The Debenture is due on March 31, 2007 and is subordinated to
Mack's obligations under the Credit Facility. The Debenture was recorded at
$24,587, with the $413 balance ascribed to the warrants and Mack common stock
issued to the investor. If, upon the fifth anniversary of the debenture, any
amounts under the debenture remain outstanding, Mack shall issue to the warrant
holder 15,464 shares of Mack common stock at par value. The debt discount is
amortized over the ten-year term of the Debenture. Interest is payable on the
Debenture semi-annually at 12% per annum.
12.
4. LONG-TERM DEBT (CONTINUED)
Interest due on the 11% Promissory Notes payable to shareholders may be paid, at
the Company's option, 60% in shares of the Company's Series A Preferred Stock.
At issuance, the creditor shareholder for $10,800 of Promissory Notes received a
warrant to purchase 5,000 shares of the Company's Common Stock at $100 per
share. The warrant expires in 2007. At the time of issuance, the Company valued
the warrant at $783, which was credited to Additional Paid-in Capital, and is
classified as a reduction of the carrying amount of the note. The discount is
being amortized to interest expense over the life of the note.
Under the Credit Facility and Debenture, Mack is required to maintain minimum
levels of tangible net worth and fixed-charge coverage ratios, each as defined.
The agreements also contain covenants which, among other things, restrict
capital expenditures, mergers, acquisitions, additional borrowings, operating
leases, and dividends.
Mack's Credit Facility provides for principal pay downs based upon an excess
cash flow provision which resulted in $1,990 being classified as currently due
at December 31, 1998. Aggregate maturities of long-term debt are as follows:
1999 $ 7,472
2000 5,997
2001 7,276
2002 6,029
2003 6,000
Thereafter 72,724
----------
Total $105,498
==========
The Company made interest payments of $7,564, $5,442, and $3,167 in 1998, 1997,
and 1996, respectively.
13.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial obligations compared to the
recorded amounts as of December 31 are as follows:
1998 1997
-----------------------------------------------
RECORDED FAIR VALUE RECORDED FAIR VALUE
AMOUNT AMOUNT
-----------------------------------------------
Fixed-rate term note $ 14,440 $ 16,365 $ 17,997 $ 18,589
Floating-rate term note payable 36,310 36,310 19,503 19,503
Revolving lines of credit 16,709 16,709 3,010 3,010
Fixed-rate equipment note payable 504 506 - -
Fixed-rate equipment note payable 594 558 856 852
Debenture 24,659 24,659 24,618 24,618
Promissory Notes payable to shareholders
12,282 12,282 11,272 11,272
================================================
$ 105,498 $ 107,389 $ 77,256 $ 77,844
================================================
The fair values of these obligations are estimated based on borrowing rates
currently available to the Company for loans with similar terms and maturities.
The fair value of these borrowings does not reflect estimated fees that would be
incurred if the debt were refinanced. The fair value of the Debenture and the
Promissory Notes payable to shareholders are not readily determinable due to the
nature of the instruments.
14.
6. INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries.
Income tax expense consists of the following:
CURRENT DEFERRED TOTAL
------- -------- -----
1998:
Federal $ 1,146 $ 782 $ 1,928
State 163 33 196
------------------------------------------------
Total $ 1,309 $ 815 $ 2,124
================================================
1997
Federal $ - $ (18) $ (18)
State 32 22 54
------------------------------------------------
Total $ 32 $ 4 $ 36
================================================
1996:
Federal $ 3,888 $ (134) $ 3,754
State 605 (20) 585
------------------------------------------------
Total $ 4,493 $ (154) $ 4,339
================================================
The provision for income taxes differs from the amount of tax expense which
would result from using the federal tax rate of 35% as follows:
1998 1997 1996
--------------------------------------------
Statutory federal income tax $ 1,739 $ (126) $ 3,960
State income taxes, net of
federal tax benefit 127 35 380
Permanent difference 213 161 35
Other 45 (34) (36)
--------------------------------------------
$ 2,124 $ 36 $ 4,339
============================================
15.
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets at
December 31, 1998 include approximately $132 related to the minimum pension
liability, which is included in accumulated other comprehensive loss.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
DECEMBER 31
1998 1997
-------- -------
Deferred tax assets:
Vacation and compensation $ 843 $ 820
Employee benefits 9,046 9,847
Bad debts 536 499
Net operating loss and alternative
minimum tax credit carry forward - 423
Other 177 43
------- -------
Total deferred tax assets 10,602 11,632
Deferred tax liabilities:
Fixed assets (7,036) (7,072)
Inventory valuation (24) (472)
Other (209) (82)
------- ------
Total deferred tax liabilities (7,269) (7,626)
Valuation allowance (741) (741)
------- -------
Net deferred tax assets $ 2,592 $ 3,265
======= =======
Income tax payments amounted to $1,089, $508, and $4,225 in 1998, 1997, and 1996
respectively.
16.
7. PREFERRED STOCK
In conjunction with its initial capitalization, the Company issued 40,000 shares
of its 12% Series A Preferred Stock. Dividends on the Series A Preferred Stock
are payable annually, on the 15th day of December, in an amount equal to the
stated rate times the liquidation value of $100 per share. All dividend payments
are to be made either in cash or by issuance of additional shares of Series A
Preferred Stock, at the Company's option. All dividends, whether paid in cash or
in shares, accrue from the date of issuance and are cumulative. During 1998, the
Company paid the 1998 and 1997 dividends with 9,891 shares of Series A Preferred
Stock. Additionally, dividends of $33 and $383 were accrued at December 31, 1998
and 1997, respectively. The terms of the Company's 11% Promissory Notes provide
for interest to be paid either in cash or by issuance of additional shares of
Series A Preferred Stock at the Company's option. During 1998 and 1997,
respectively, the Company issued 8,084 and 4,288 shares of Series A Preferred
Stock in lieu of payment of interest on the Promissory Notes.
The shares of Series A Preferred Stock are non-voting. The Company, at the
option of the Board of Directors, may at any time redeem the Series A Preferred
Stock for cash equal to the liquidation value of $100 per share, plus any
accumulated and unpaid dividends, whether or not earned or declared. In the
event of any liquidation, dissolution, or winding up of the affairs of the
Company, whether voluntary or involuntary, each issued and outstanding share of
Series A Preferred Stock will entitle the holder to payment at the rate of $100
per share.
The Company is authorized to issue 250,000 shares of Series Preferred Stock of
which 100,000 has been reserved for the issuance of Series A Preferred Stock.
8. STOCK OPTIONS AND APPRECIATION RIGHTS
In 1997, in connection with the Recapitalization, Mack settled for cash all
outstanding stock options for $4,018 and for cash and installment payments all
stock appreciation rights for $2,200 ($1,600 in cash). The unpaid stock
appreciation rights of $600 were payable in two installments of $300 each, of
which $300 was paid in 1998 with the remainder due in 1999. Expenses incurred in
connection with the settlement of these stock options and stock appreciation
rights were $3,756 and $1,964, respectively. No awards were granted under the
these plans during the three-year period ended December 31, 1998.
17.
9. PENSION PLANS AND OTHER POST RETIREMENT BENEFITS
Mack has various retirement plans which cover substantially all employees.
Mack's defined benefit plans provide for payments under varying formulas.
Certain executives also participate in a supplemental plan, which is not funded.
Mack contributes to the plans in amounts not less than required under the
Employee Retirement Income Security Act of 1974.
In 1997, Mack merged its East Stroudsburg Typographical Union Local No. 943
Pension Plan into the Mack Printing Company Pension Plan.
Plan assets consist primarily of listed stocks and bonds and interest-bearing
deposits under insurance contracts.
Mack provides certain health care benefits for eligible retired employees and
their spouses. In addition, the Company provides fully paid life insurance
coverage with benefits ranging from $5 to $40 for all retirees. The retiree
health care plan is contributory for all retirees who were full-time regular
employees of Mack.
Since the adoption of Statement of Financial Accounting Standards No. 106 in
1993, Mack has introduced various amendments to its plan which have resulted in
a cumulative unrecognized gain at December 31, 1998 of $9,462. Amendments in
1994 yielded a gain of $13,373 and a 1996 amendment requiring all non-bargaining
and retired participants to be covered under one insurance plan resulted in a
gain of $4,379. In 1998, Mack amended its plan to cap its contribution for
retiree medical coverage. This amendment resulted in a gain of $1,461. These
amounts, after reduction for the 1997 acquisition of 30% of Mack's common stock
owned by then-minority shareholders, are being credited to expense on a
straight-line basis over periods ranging from 10 to 13 years-the average
expected years of future service to be rendered by active plan participants to
reach full eligibility.
The following table sets forth the plans' funded status and amounts recognized
in the Company's consolidated balance sheets:
18.
9. PENSION PLANS AND OTHER POST RETIREMENT BENEFITS (CONTINUED)
DECEMBER 31, 1998 DECEMBER 31, 1997
PLANS WITH PLANS WITH
ASSETS IN PLANS WITH ASSETS IN PLANS WITH
EXCESS OF ASSETS LESS EXCESS OF ASSETS LESS
BENEFIT THAN OTHER BENEFIT THAN BENEFIT OTHER
OBLIGATIONS BENEFIT BENEFITS TOTAL OBLIGATIONS OBLIGATIONS BENEFITS TOTAL
OBLIGATIONS
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning $1,238 $43,921 $ 5,860 $ 51,019 $1,242 $41,082 $ 6,046 $ 48,370
of year
Service cost 58 1,032 102 1,192 57 967 134 1,158
Interest cost 90 3,186 325 3,601 93 3,046 403 3,542
Plan participants' contributions - - 68 68 - - 71 71
Amendments - - (1,461) (1,461) - - - -
Actuarial gain/loss 152 3,100 485 3,737 104 1,040 (410) 734
Benefits paid (148) (2,728) (416) (3,292) (258) (2,214) (384) (2,856)
=========================================================================================
Benefit obligation at end of year $1,390 $48,511 $ 4,963 $ 54,864 $1,238 $43,921 $ 5,860 $ 51,019
=========================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at $1,479 $37,446 $ - $ 38,925 $1,540 $32,688 $ - $ 34,228
beginning of year
Actual return on plan assets 88 3,852 - 3,940 78 5,385 - 5,463
Employer contribution 119 1,397 - 1,516 119 1,587 - 1,706
Benefits paid (148) (2,728) - (2,876) (258) (2,214) - (2,472)
=========================================================================================
Fair value of plan assets at end $1,538 $39,967 $ - $ 41,505 $1,479 $37,446 $ - $ 38,925
of year
=========================================================================================
FUNDED STATUS AT END OF YEAR $ 148 $(8,543) $ (4,963) $(13,358) $ 246 $(6,475) $ (5,860) $(12,089)
Unrecognized net actuarial (gain) 380 2,301 (2,290) 391 234 (393) (2,860) (3,019)
loss
Unrecognized prior service cost 32 286 (9,462) (9,144) 33 323 (9,130) (8,774)
=========================================================================================
Prepaid (accrued) benefit cost $ 560 $(5,956) $(16,715) $(22,111) $ 513 $(6,545) $(17,850) $(23,882)
=========================================================================================
AMOUNTS RECOGNIZED IN THE
STATEMENTS OF FINANCIAL
POSITION CONSIST OF
Prepaid (accrued) benefit cost $ 560 $(5,956) $(16,715) $(22,111) $ 513 $(6,545) $(17,850) $(23,882)
Additional minimum liability - (485) - (485) - (170) - (170)
Intangible asset - 143 - 143 - 170 - 170
Accumulated other comprehensive - 342 - 342 - - - -
income
=========================================================================================
Net amount recognized at end of $ 560 $(5,956) $(16,715) $(22,111) $ 513 $(6,545) $(17,850) $(23,882)
year
=========================================================================================
19.
Melham Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
9. PENSION PLANS AND OTHER POST RETIREMENT BENEFITS (CONTINUED)
YEAR ENDED DECEMBER 31
COMPONENTS OF NET PERIODIC BENEFIT COST: 1998 1997 1996
------------------------------------------
Service cost $ 1,192 $ 1,158 $ 1,193
Interest cost 3,601 3,542 3,443
Expected return on plan assets (3,615) (3,035) (2,742)
Amortization of prior service cost (1,065) (1,011) (1,318)
Amortization of net (gain)/loss (85) (143) (147)
Recognized net actuarial loss 21 9 -
===========================================
Net periodic benefit cost $ 49 $ 520 $ 429
===========================================
YEAR ENDED DECEMBER 31
WEIGHTED AVERAGE ASSUMPTIONS: 1998 1997 1996
----------------------------------------
Discount rate 6.75% 7.25% 7.50%
Expected return on plan assets 8.0% TO 9.5% 8.0% to 9.0% 8.0% to 9.0%
Rate of compensation increase 4.75% 4.75% 4.75%
Assumed health care cost trend rate 7.00% 7.00% 9.00%
The weighted-average health care cost trend rate is assumed to decrease
gradually to 6% by 1999 and remain at that level thereafter. The assumed health
care cost trend rate affects the amounts reported. For example: 1) increasing
the assumed health care cost trend rate by one percentage point would increase
the accumulated postretirement benefit obligation as of December 31, 1998 by
$296 and the aggregate of the service and interest cost components of the
postretirement benefit obligation for 1998 by $36; and 2) decreasing the assumed
health care cost trend rate by one percentage point would decrease the
accumulated postretirement benefit obligation as of December 31, 1998 by $252
and the aggregate of the service and interest cost components of the
postretirement benefit obligation for 1998 by $29.
Mack sponsors a defined contribution plan. For certain eligible employees, Mack
makes annual contributions of 4% of qualifying compensation. For certain
additional eligible employees, Mack will match employee contributions up to a
maximum of 2% of qualifying compensation. The expense under the defined
contribution plan was $784, $749 and $705 in 1998, 1997, and 1996, respectively.
In addition, Mack provides a defined contribution plan for two of its unions.
The contributions under this plan are based on a bargaining agreement and
amounted to $142, $145, $114 in 1998, 1997, and 1996, respectively.
10. COMMITMENTS AND CONTINGENCIES
Expenses under a services agreement and operating lease arrangements were
approximately $1,515, $1,123 and $843, for December 31, 1998, 1997 and 1996,
respectively. A summary of noncancelable, long-term commitments at December 31,
1998 follows:
20.
10. COMMITMENTS AND CONTINGENCIES (continued)
YEAR AMOUNT
1999 $ 2,375
2000 2,201
2001 2,072
2002 1,668
2003 1,025
Thereafter 18,966
=================
Total $ 28,307
=================
In December 1997, Mack entered into a five-year agreement with a vendor for
document management services. Since this agreement is essentially a replacement
and supplement for previous duplicating equipment leases, the expense
commitments under this arrangement are included above.
The Company has employment agreements with certain executives and one other
employee of its subsidiaries.
The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position.
As of December 31, 1998, the Company has entered into commitments for capital
expenditures totaling approximately $2,819.
Under the terms of the 1991 sale of the assets of Specialty Printers of America,
Inc. (SPA), Mack guaranteed the operating lease obligation ($444 at December 31,
1998) relating to SPA's manufacturing facility in the event that the buyer were
to default. The lease expires on January 10, 2002.
21.
11. RELATED PARTY TRANSACTIONS
The Company incurred interest and fees to affiliates for services rendered in
connection with financing arrangements and other matters. These fees are
included in the accompanying statement of operations as follows.
1998 1997 1996
--------------------------------------------
Interest $ 1,449 $ 1,072 $ 107
Management fees 360 28 210
Deferred financing fees 342 1,240 -
Recapitalization costs - 835 -
-------------------------------------------
$ 2,151 $ 3,175 $ 317
============================================
12. YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 issue exists because many software programs, computer hardware,
operating systems and microprocessor-based embedded controls in automated
equipment use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial and operational information incorrectly or
fail to operate.
The Company has recognized the need to ensure that its business operations will
not be adversely affected by the upcoming calendar Year 2000 and is cognizant of
the time sensitive nature of the problem. The Company has assessed or is in the
process of assessing how it may be impacted by Year 2000 and has formulated and
commenced a comprehensive plan to address all known aspects of the Year 2000
problem: information systems, production, and facilities equipment, suppliers
and customers. The Company is currently making inquiries of customers and
suppliers to assess their Year 2000 readiness. The Company is also in the
process of testing information technology ("IT") systems, as well as non-IT
systems, and verifying that vendor-supplied or outsourced systems will be Year
2000 compliant and will repair or replace any such systems found to be
non-compliant. Currently, the Company estimates that it has substantially
completed its assessment of how it may be impacted, is completely through the
development of plans to address the testing and remediation of its systems, and
has completed approximately 55% to 70% of its testing and remediation
activities. The Company estimates that it will complete this process prior to
October 1999.
The Company has not separately tracked its Year 2000 costs as a project, but
rather has incurred the costs in conjunction with normal sustaining activities.
The discretely identifiable costs incurred through December 31, 1998 of
completing the Company's Year 2000 assessment and of modifying its computer
software and hardware, as well as its production and facilities equipment, to be
Year 2000 compliant were approximately $1,800. The estimated costs yet to be
incurred are approximately $2,000. The current assessment does not include costs
related to software and hardware replaced in the normal course of business other
than replacements accelerated due to the Year 2000 issue.
22.
12. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED)
While the Company does not currently foresee any material problems, there can be
no assurance that The Company and its material suppliers and customers will be
Year 2000 compliant by January 1, 2000 and that any such non-compliance will not
have a material adverse effect on the Company.
The Company is in the process of developing contingency plans in the event that
any unresolved issues are identified.
13. FORMATION OF THE COMPANY
The Company was formed on February 26, 1997 with authorized capital of 50,000
shares of Common Stock and 250,000 shares of Series Preferred Stock (see Note
7). The Company was formally capitalized in March, 1997 through a series of
transactions with related entities as follows: 1) issued 5,000 shares of its
Common Stock to Purico in exchange for 500 shares of Melham, Inc. common stock
(constituting 100% of the capital stock of Melham, Inc.); 2) issued 31,000
shares of its Common Stock and 36,000 shares of Series A Preferred Stock to
Purico for $6,700; 3) issued 4,000 shares of its Common Stock, 4,000 shares of
its Series A Preferred Stock and a $1,200 11% promissory note to Mack's
president in exchange for Mack common stock (the Company subsequently
contributed the Mack common stock to Melham, Inc.); and 4) issued to Melham,
U.S., Inc. (an affiliated company) for $10,800 cash a $10,800 11% promissory
note and warrants to purchase 5,000 shares of Common Stock of the Company at
$100 per share. Prior to the exchange of common stock between the Company and
Purico, Melham, Inc. declared and paid to Purico a dividend on its common stock
totaling $35,500.
In 1997, Mack completed a recapitalization which resulted in changes in its
ownership and capital structure (the "Recapitalization"). Through a series of
transactions, Mack: (1) redeemed and retired all of the outstanding shares of
its Series A Preferred Stock ($760, which excludes the amount paid to Melham,
Inc.); (2) redeemed and retired all of the outstanding shares of its Common
Stock, except the shares owned by Melham, Inc. and a portion of the shares held
by the Company's president ($18,087); (3) effected the exchange of the
president's Common Stock for Common Stock of the new indirect parent company
(Melham Holdings, Inc.); (4) purchased all outstanding stock options ($4,018)
and settled all stock appreciation rights ($2,200).
An unrelated investor purchased for $25,000, 15% of Mack's common stock, Mack's
$25,000 subordinated debenture, and warrants to purchase 3% of Mack's common
stock. Mack also issued to Melham, Inc. shares of Mack cumulative senior and
junior preferred stock. As a result of these transactions, the Company increased
its ownership of Mack from 55% to 85% at a cost of $19,923, representing the net
amount paid to buy-out a 30% interest owned by minority stockholders, which was
accounted for under the purchase method of accounting. The total amount was
allocated $5,400 (before deferred income taxes of $2,160), to reduce the
recorded amount of postretirement benefits (Note 9) and the remainder to
goodwill (Note 2).
23
13. FORMATION OF THE COMPANY (CONTINUED)
Mack completed the financing for the Recapitalization by replacing its existing
bank credit facility with a new $65,000 arrangement (the "Credit Facility"),
consisting of a revolving credit agreement (the "Revolver") and $42,000 in term
loans (the "Term Loans").
14. SUBSEQUENT EVENT
On April 1, 1999, the stockholders of Melham Holdings, Inc. sold all of the
Company's Capital Stock owned by them to Cadmus Communications Corporation.
Coincident with the sale, the Company stockholders purchased all of the capital
stock of VPI owned by the Company. The Company also paid-off all long-term debt
and purchased all common stock of Mack owned by the minority stockholders of
Mack.
24