EX-99.2 3 ex99-2.txt AUDITED FINANCIAL STATEMENTS 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 -1- 2 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) -2- 3 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. -3- 4 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. -4- 5 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. -5- 6 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. -6- 7 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. -7- 8 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
-8- 9 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: -9- 10
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. -10- 11 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 ======== ======== ========
-11- 12 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 -12- 13 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. -13- 14 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 ==========
-14- 15 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. -15-