1
EXHIBIT 99.2
AUDITED FINANCIAL STATEMENTS OF RITTENHOUSE L.L.C.
- --------------------------------------------------
RITTENHOUSE, L.L.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Rittenhouse, L.L.C.
We have audited the accompanying consolidated balance sheets of RITTENHOUSE,
L.L.C. (an Illinois limited liability corporation) as of December 31, 1999 and
1998, and the related statements of operations, members' equity and cash flows
for the years ended December 31, 1999, 1998 and 1997. 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 auditing standards generally accepted
in the United States. 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 financial position of Rittenhouse, L.L.C. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999, 1998 and 1997, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
April 5, 2000
(except with respect to the matter discussed in
Note 13, as to which the date is April 17, 2000)
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RITTENHOUSE, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
- ------------------------------------------------------------ ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 707,265 $ 1,549,916
Accounts receivable, less allowance for doubtful accounts
of $833,065 and $598,289 in 1999 and 1998,
respectively 16,217,973 13,497,059
Notes receivable-affiliates and other 945,065 372,003
Inventories, net 13,994,827 11,050,227
Prepaid expenses and other current assets 884,802 606,776
----------- -----------
Total current assets 32,749,932 27,075,981
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Building and leasehold improvements 1,050,182 982,298
Machinery and equipment 14,827,764 14,509,094
Office equipment 2,271,557 2,270,945
Automobiles 80,197 80,197
Computer equipment and software 2,792,154 2,781,512
----------- -----------
21,021,854 20,624,046
Less - Accumulated depreciation and amortization 14,331,659 12,974,505
----------- -----------
Total property, plant and equipment, net 6,690,195 7,649,541
----------- -----------
OTHER ASSETS:
Cash surrender value of life insurance, net of loans 354,505 1,194,742
Other long-term assets 112,272 124,406
----------- -----------
Total other assets 466,777 1,319,148
Total assets $39,906,904 $36,044,670
=========== ===========
The accompanying notes to financial statements
are an integral part of these balance sheets.
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RITTENHOUSE, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
LIABILITIES AND MEMBERS' EQUITY 1999 1998
- ------------------------------------------------ ----------- -----------
CURRENT LIABILITIES:
Drafts outstanding $ 1,005,558 $ 1,283,895
Line-of-credit facilities 10,600,000 10,724,000
Accounts payable 9,678,154 4,533,585
Accrued salaries, wages and commissions 1,957,360 1,874,147
Other accrued liabilities 2,080,513 3,189,714
----------- -----------
Total current liabilities 25,321,585 21,605,341
NOTES PAYABLE-employees 230,000 460,000
DEFERRED INCOME TAXES 25,048 26,262
DEFERRED COMPENSATION 1,272,597 1,206,734
COMMITMENTS AND CONTINGENCIES
MEMBERS EQUITY' 13,057,674 12,746,333
----------- -----------
Total liabilities and members' equity $39,906,904 $36,044,670
=========== ===========
The accompanying notes to financial statements
are an integral part of these balance sheets.
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RITTENHOUSE, L.L.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------- ------------- -------------
NET SALES $ 139,105,842 $ 136,637,285 $ 146,000,281
COST OF GOODS SOLD 106,030,343 105,457,837 112,620,009
------------- ------------- -------------
Gross profit 33,075,499 31,179,448 33,380,272
OPERATING EXPENSES:
Selling expenses 18,358,472 16,648,950 16,691,034
General and administrative expenses 11,910,768 11,491,784 13,524,438
------------- ------------- -------------
Operating income 2,806,259 3,038,714 3,164,800
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net (1,193,644) (971,577) (1,218,500)
Other 30,313 85,836 425,304
------------- ------------- -------------
Other expense, net (1,163,331) (885,741) (793,196)
------------- ------------- -------------
Income before income taxes 1,642,928 2,152,973 2,371,604
INCOME TAX EXPENSE 102,587 77,511 65,852
------------- ------------- -------------
Net Income $ 1,540,341 $ 2,075,462 $ 2,305,752
============= ============= =============
The accompanying notes to financial statements
are an integral part of these statements.
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RITTENHOUSE, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
BALANCE, January 2, 1997 $ --
Members' contributions 18,597,084
Net income 2,305,752
Distributions (7,058,737)
------------
BALANCE, December 31, 1997 13,844,099
Members' contributions 66,000
Net income 2,075,462
Distributions (3,239,228)
------------
BALANCE, December 31, 1998 12,746,333
Members' contributions 66,000
Net income 1,540,341
Distributions (1,295,000)
------------
BALANCE, December 31, 1999 $ 13,057,674
============
The accompanying notes to financial statements
are an integral part of these statements.
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RITTENHOUSE, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,540,341 $ 2,075,462 $ 2,305,752
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 1,753,978 1,971,272 1,769,240
Gain on disposal of fixed assets (40,735) -- --
Provision for deferred income taxes (12,312) (21,050) (301,900)
Compensation expense related to the issuance
of equity interest 66,000 66,000 --
Changes in operating assets and liabilities-
Accounts receivable, net (2,720,914) 1,339,632 1,326,740
Inventories, net (2,944,600) 864,645 2,149,006
Prepaid expenses and other current assets (289,124) 72,788 17,969
Other assets 852,371 (172,211) (44,822)
Drafts outstanding (278,337) 1,283,895 --
Accounts payable 5,144,569 (1,723,639) (948,781)
Accrued salaries, wages and commissions 83,213 (868,659) 320,739
Deferred compensation 65,863 22,353 92,680
Other accrued liabilities (1,109,201) (447,647) 51,404
------------ ------------ ------------
Net cash provided by operating
activities 2,111,112 4,462,841 6,738,027
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition, net of cash -- (918,000) --
Purchase of property and equipment, net (731,701) (1,315,187) (826,327)
Notes receivable (573,062) (215,219) 295,282
Investments -- -- (65,551)
------------ ------------ ------------
Net cash used in financing activities (1,304,763) (2,448,406) (596,596)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contribution -- -- 6,602,695
Payments of notes payable (230,000) -- (4,325,000)
Net borrowings under line of credit facilities (124,000) 1,015,480 398,840
Preferred distribution (1,295,000) (3,239,228) (3,058,737)
Return of capital payment on preferred interest -- -- (4,000,000)
------------ ------------ ------------
Net cash used in financing activities (1,649,000) (2,223,748) (4,382,202)
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (842,651) (209,313) 1,759,229
CASH AND CASH EQUIVALENTS, beginning of year 1,549,916 1,759,229 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 707,265 $ 1,549,916 $ 1,759,229
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Noncash members' contributions $ -- $ -- $ 11,994,389
Cash paid for interest 1,100,694 1,013,560 1,129,308
Cash paid for income taxes 96,300 94,623 39,688
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
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RITTENHOUSE, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Rittenhouse L.L.C. (the "Company"), an Illinois limited liability
corporation, was formed on January 2, 1997, for the purpose of succeeding
to the operations of Rittenhouse Paper Company (an S Corporation). The
Company has a term life through December 31, 2070, is treated as a
partnership for tax purposes and has adopted a December 31 year-end. The
Company is an international converter of supplies for business machines
including paper rolls, ribbons, labels and forms. Paper rolls are sold for
use in cash registers, offices, facsimile and banking applications. Ribbons
are sold for use in cash registers, information systems, other financial
equipment and labeling systems. Labels are produced and sold to supermarket
retailers for product identification and bar coding applications. Specialty
forms are manufactured and sold for point-of-use applications.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
All intercompany and interdivisional accounts and transactions have been
eliminated and no intercompany or interdivisional profits are included in
the financial statements.
CASH AND CASH EQUIVALENTS
The Company invests surplus funds in short-term interest-bearing financial
instruments. The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated, net of applicable reserves, at the lower of cost or
market, with cost being determined under the first-in, first-out method.
Inventories are composed of the following at December 31, 1999 and 1998:
1999 1998
----------- -----------
Raw materials $ 7,939,146 $ 6,343,957
Work in process 262,428 128,536
Finished goods 6,524,890 5,215,174
Reserves (731,637) (637,440)
----------- -----------
$13,994,827 $11,050,227
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PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Expenditures for major
renewals and betterments that extend the useful lives of property, plant
and equipment are capitalized. Expenditures for repair and maintenance are
charged to expense as incurred. Depreciation and amortization are provided
using the straight-line method for the related property as follows:
ASSET DESCRIPTION ASSET LIFE
------------------------------- ----------------------------
Machinery and equipment 10 years
Office equipment 5-10 years
Automobiles 5 years
Computer equipment and software 5 years
Leasehold improvements Shorter of life of the lease
or asset
Upon retirement or disposal, the asset cost and related accumulated
depreciation are removed from the accounts and the net amount, less
proceeds, is charged or credited to operations.
On an ongoing basis, the Company reviews long-lived assets for impairment
whenever events or circumstances indicate that carrying amounts may not be
recoverable. To date, no such events or changes in circumstances have
occurred. If such events or changes in circumstances occur, the Company
will recognize an impairment loss if the undiscounted future cash flows
expected to be generated by the asset (or acquired business) are less than
the carrying value of the related asset. The impairment loss would adjust
the asset to its fair value.
INCOME TAXES
The Company is a limited liability company whereby the members are
individually responsible for income taxes that result from the operations
of the Company. The provision for income taxes represents state replacement
and income tax obligations of the Company. If the Company were to terminate
its limited liability status at December 31, 1999, a deferred income tax
asset would be recorded. Items giving rise to the potential deferred
incomes taxes are summarized as follows:
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1999 1998
---------- ----------
Deferred income tax assets-
Receivables $ 333,226 $ 222,116
Inventories 292,655 254,976
Accrued vacation 144,400 162,014
Deferred compensation 509,039 482,694
Workers' compensation 161,090 289,718
Sales and real estate taxes 70,919 172,973
Other reserves -- 125,539
---------- ----------
1,511,329 1,710,029
Deferred incomes tax liabilities-
Fixed assets (1,010,000) (1,010,000)
---------- ----------
Total net deferred tax assets $ 501,329 $ 700,029
========== ==========
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product to the customer.
Revenue is stated net of applicable discounts and allowances.
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 at
the date of the financial statements and the reported amounts of revenues
and expenses during the fiscal year. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
reflected on the accompanying balance sheet approximate fair value due to
the short-term nature of these assets and liabilities. The carrying value
of the Company's debt obligations reasonably approximates their fair values
as the stated interest rate approximates current market interest rates of
debt with similar terms.
CONCENTRATION OF CREDIT RISK
The Company sells to several national office and general retail
merchandisers and national service companies. Two of these customer account
balances represented 18% and 7% and 19% and 10% of total accounts
receivable as of December 31, 1999 and 1998, respectively, and 14% and 9%,
13% and 12% and 12% and 10% of sales for the years ended December 31, 1999,
1998 and 1997, respectively.
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3. BUSINESS ACQUISITION
In May, 1998, the Company acquired certain assets of a company. This
acquisition was accounted for as a purchase and, accordingly, the purchased
assets have been recorded at their estimated fair market values at the date
of the acquisition. The purchase price, as adjusted, of approximately
$918,000 exceeded the fair market value of net assets acquired, resulting
in goodwill of approximately $75,000.
4. DEBT
As of December 31, 1999, the Company has a revolving line-of-credit
facility with two participating banks to borrow up to a maximum of
$23,000,000, with interest based on a combination of LIBOR and prime rate
(8.5% at December 31, 1999). The line-of-credit facility has an outstanding
balance of $10,600,000 and is secured by all of the assets of the Company.
The financial covenants required by the line of credit for the Company were
met at December 31, 1999 and 1998.
Notes payable at December 31, 1999 and 1998, consists of payables of
$230,000 and $460,000, respectively, to employees due on August 31, 2005,
bearing interest at Company's principal line-of-credit rate (8.5% and 7.75%
at December 31, 1999 and 1998, respectively), with interest payable
quarterly.
5. INTEREST RATE SWAP
The Company entered into an interest rate swap agreement with Harris Trust
and Savings Bank in January, 1997. The Company committed to pay Harris Bank
6.17% interest on $12,000,000 for one year, $8,000,000 for two years and
$4,000,000 for five years. In exchange, Harris will pay the 90-day LIBOR
rate less 150 basis points for the same terms. The impact on interest
expense from execution of the swap agreement was to increase interest
expense by $48,600, $45,000 and $48,000 for the years ended December 31,
1999, 1998 and 1997, respectively. The fair value of the interest rate swap
as of December 31, 1999, was $0.
6. RELATED-PARTY TRANSACTIONS
The Company is affiliated with several partnerships which lease buildings
and equipment to the Company. The majority of the lessors are preferred
members.
The Class A member has a 49% interest in a joint venture agreement with
Rittenhouse Latino America S.A. de C.V. ("Latino"). The following
represents the transactions between the Company and Latino:
1999 1998 1997
-------- -------- --------
Accounts receivable $ 27,000 $ 700 $ 20,000
Note receivable 136,000 -- 61,000
Sales to affiliates 64,000 18,000 84,000
======== ======== ========
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7. MEMBERS' EQUITY
The members' equity was composed of the following interests:
CLASS A CLASS B CLASS C OTHER TOTAL
----------- ---------- -------- -------- -----------
Balance January 2,
1997 $ -- $ -- $ -- $ -- $ --
Members'
contributions 13,442,445 5,000,000 154,639 -- 18,597,084
Net income 2,305,752 -- -- -- 2,305,752
Distributions (7,058,737) -- -- -- (7,058,737)
----------- ---------- -------- -------- -----------
Balance December 31,
1997 8,689,460 5,000,000 154,639 -- 13,844,099
Members'
contributions -- -- -- 66,000 66,000
Net income 2,075,462 -- -- -- 2,075,462
Distributions (3,239,228) -- -- -- (3,239,228)
----------- ---------- -------- -------- -----------
Balance December 31,
1998 7,525,694 5,000,000 154,639 66,000 12,746,333
Members'
contributions -- -- -- 66,000 66,000
Net income 1,540,341 -- -- -- 1,540,341
Distributions (1,295,000) -- -- -- (1,295,000)
----------- ---------- -------- -------- -----------
Balance December 31,
1999 $ 7,771,035 $5,000,000 $154,639 $132,000 $13,057,674
=========== ========== ======== ======== ===========
Rittenhouse Paper Company ("RPC") contributed substantially all of its
assets and liabilities (cost basis of $14,597,084) to the Company in
exchange for a 19.4% Class B common interest and 100% Class A preferred
interest in the Company. This transaction has been accounted for at the
historical cost of the net assets contributed. The preferred interest
carries an annual cumulative preferred distribution premium of 12.5% of its
undistributed capital contribution, determined based upon the estimated
fair market value of assets contributed ($35,125,000). The amount to be
paid is limited to the amount of taxable income reported by the Company in
any given year. During 1997, the Company made a return of capital
distribution of $4,000,000 to the Class A preferred interest to RPC.
During 1998, the Company granted a 6% common interest to an independent
consultant and an 8% common interest to other key employees/executives of
the Company. In order to receive the 6% common interest, the independent
consultant needs to achieve certain targeted goals as defined by the
agreement. The Company believes that the likelihood of achieving these
goals is remote and as such has not recorded any compensation expense
related to this 6% common interest that was granted to the independent
consultant. The granting of the equity interest resulted in the dilution of
ownership for the members who hold the Class B common interest. In
conjunction with the equity interest granted in 1998, RPC Class B common
interest was diluted from 19.4% to 16.6%.
Certain officers of the Company who also have an ownership interest in RPC
own 66.4% of Class B common interest with 3% of Class C common interest
held by key employees/executives of the Company. The other common interests
are entitled to lesser rights than the
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Class B and Class C common interest and are held 6% by an independent
consultant and 8% by other key employees/executives of the Company.
Income, remaining after the cumulative preferred distribution, or losses
are allocated to members based on the provisions outlined in the Company's
operating agreement.
Unpaid preferred distributions from prior years receive preference and are
paid prior to payment of current preferred distributions. As of
December 31, 1999, the Company had unpaid preferred distributions of
$4,500,650.
8. EMPLOYEE BENEFITS
The Company maintains a profit sharing plan for all eligible employees not
participating in a union-negotiated plan. There were no contributions to
the plan for 1999 or 1998. The contribution to the plan is at the
discretion of Company management.
The Company maintains a 401(k) savings plan whereby all employees may elect
to make contributions pursuant to a salary reduction agreement upon meeting
age and length-of-service requirements. The Company makes matching
contributions based upon a percentage of employee contributions. The
Company is obligated to contribute 25% of an employees voluntary salary
contributions limited to a maximum contribution of 1% of the participant's
wages. For the years ended December 31, 1999, 1998 and 1997, the Company
contributed approximately $333,000, $118,000 and $117,000, respectively.
9. COMMITMENTS AND CONTINGENCIES
U.S. and Canadian antitrust authorities have conducted joint investigations
into alleged price fixing in the facsimile paper industry. RPC, a related
party, was named as an uncharged participant by the Canadian authorities.
All matters related to the Canadian investigation were resolved as to the
RPC. No charges have been asserted by the U.S. nor are any anticipated.
RPC has been named in a civil lawsuit in Canada in connection with the
antitrust investigations discussed above. RPC intends to vigorously defend
its position and, based on the advice of counsel, believes no material
damage will result.
Rittenhouse Latino-America S.A. de C.V. has a $600,000 line-of-credit
arrangement, of which approximately three-quarters has been utilized. The
Company is a guarantor of this credit arrangement.
The Company has an indirect lease obligation in connection with financing
obtained by various partnerships leasing buildings and equipment to them.
In accordance with the Company's insurance program, a standby letter of
credit is maintained. As of December 31, 1999, the Company has a $500,000
letter of credit available for insurance premium adjustments.
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10. DEFERRED COMPENSATION
The company has two deferred compensation obligations totalling $1,272,597
and $1,206,734 as of December 31, 1999 and 1998, respectively. The first
deferred compensation agreement is with a principal officer/stockholder,
and payment of obligation principal and interest has been postponed
indefinitely. The debt will continue to bear interest at 8% per annum. At
December 31, 1999, a total of $1,042,597 was due to the
officer/stockholder.
The second deferred compensation agreement is with an employee. The Company
is obligated to pay the employee $230,000 on August 31, 2005. The agreement
requires interest to accrue at the Company's per annum revolving credit
facility rate and payment of interest each quarter. At December 31, 1999, a
total of $230,000 was due to the employee.
These agreements are subordinated to any debts due a bank or commercial
lending institution.
11. LEASE OBLIGATIONS
The Company leases certain manufacturing facilities, machinery and
equipment, telephones and computer hardware under operating leases. These
leases expire at various dates in the future. Total rent expense, exclusive
of taxes, insurance and maintenance of the facilities and equipment for the
years ended December 31, 1999, 1998 and 1997, was approximately $2,642,000,
$2,530,000 and $2,269,000, respectively, of which approximately $2,038,000,
$2,265,000 and $1,761,000, respectively, was paid to related parties.
As of December 31, 1999, the future minimum payments under these lease
obligations are as follows:
Year ending-
2000 $2,704,190
2001 2,053,330
2002 1,553,957
2003 1,136,956
2004 1,104,840
Thereafter 1,389,588
----------
Total minimum future
lease payments $9,942,861
==========
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12. VALUATION AND QUALIFYING ACCOUNTS
The following tables summarize the activity of the allowance for doubtful
accounts and the reserve for excess and obsolete inventory during 1999 and
1998:
BALANCE BALANCE
ALLOWANCE FOR BEGINNING ACCOUNTS ADDITIONS END OF
DOUBTFUL ACCOUNTS OF YEAR WRITTEN OFF TO ACCOUNT YEAR
--------------------------------- --------- ----------- ---------- -------
Allowances for doubtful accounts
activity for the year ended
December 31, 1997 $ 521,231 $ 318,381 $ 466,742 $ 669,592
Allowance for doubtful accounts
activity for the year ended
December 31, 1998 669,592 208,571 137,268 598,289
Allowance for doubtful accounts
activity for the year ended
December 31, 1999 598,289 328,348 563,124 833,065
========== ========== ========== ==========
RESERVE FOR
OBSOLETE INVENTORY
---------------------------------
Reserve for excess and obsolete
inventory activity for the year
ended December 31, 1997 $ -- $ -- $1,600,000 $1,600,000
Reserve for excess and obsolete
inventory activity for the year
ended December 31, 1998 1,600,000 1,086,920 124,360 637,440
Reserve for excess and obsolete
inventory activity for the year
ended December 31, 1999 637,440 408,271 502,468 731,637
========== ========== ========== ==========
13. SUBSEQUENT EVENT
On April 17, 2000, the Company was acquired, along with other related
parties, for approximately $57,000,000 in cash plus a contingent
consideration based on certain EBITDA targets for the year ended
December 31, 2000.
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