SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K/A
------------
AMENDMENT TO CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Amendment No. 1 to Current Report on Form 8-K
Date of Report (Date of earliest event reported) April 1, 1999
CADMUS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 0-12954 54-1274108
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification Number)
</TABLE>
6620 WEST BROAD STREET, SUITE 240, RICHMOND, VIRGINIA 23230
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (804) 287-5680
--------------
<PAGE>
EXPLANATORY NOTE: THIS FORM 8-K/A AMENDS ITEM 2 AND ITEM 7 IN THE CURRENT REPORT
ON FORM 8-K FOR CADMUS COMMUNICATIONS CORPORATION FILED ON APRIL 15, 1999 TO
PROVIDE THE FINANCIAL STATEMENTS REQUIRED BY ITEM 7 AND TO PROVIDE OTHER
DISCLOSURE.
1
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
ACQUISITION OF MELHAM HOLDINGS INC.
On April 1, 1999, Cadmus Communications Corporation ("Cadmus" or the "Company")
consummated the purchase of all of the outstanding stock of Melham Holdings,
Inc. ("Melham"), a Delaware corporation. The purchase was pursuant to the terms
of a Stock Purchase Agreement, dated April 1, 1999 (the "Agreement"), by and
among Cadmus Communications Corporation, Melham U.S. Inc., Purico (IOM) Limited,
and Paul F. Mack. Immediately prior to consummation of the transactions
contemplated by the Agreement, Melham U.S. Inc., Purico (IOM) Limited, and Paul
F. Mack (collectively the "Sellers") owned 100% of Melham. The acquisition of
Melham is being accounted for by Cadmus as a purchase.
The principal operating subsidiary of Melham is Mack Printing Company ("Mack"),
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. Immediately prior to consummation of the
transactions contemplated by the Agreement, Melham Holdings, Inc. indirectly
owned approximately 85% of Mack through Melham, Inc., a Delaware corporation. In
connection with the consummation of the transactions contemplated by the
Agreement, Mack repurchased approximately 15% of its then-outstanding equity
securities from other securityholders and repaid certain indebtedness to such
securityholders pursuant to the terms of a Stock and Note Purchase Agreement.
The purchase price of $201 million consisted of approximately $110 million in
bridge financing notes issued to J.P Morgan Venture Corporation, First Union
Investors, Inc. and the Sellers, approximately $66 million in cash, which was
used to repay certain indebtedness of Mack, approximately 1.2 million shares of
the Company's common stock and approximately $6.4 million in newly-issued
subordinated notes of the Company. The Company expects to refinance the bridge
financing notes in the fiscal fourth quarter.
In connection with the transactions contemplated by the Agreement, the Company
elected Mr. Nathu R. Puri, a majority shareholder of Melham U.S. Inc. and Purico
(IOM) Limited, to the Board of Directors of the Company to serve until the next
annual meeting of shareholders of the Company. As a result of the transactions
contemplated by the Agreement, Mr. Puri, directly or indirectly through Purico
(IOM) Limited and Melham U.S. Inc., received as consideration an aggregate of
approximately $11.2 million in cash, approximately 1.06 million shares of the
Company's common stock, approximately $5.8 million in subordinated notes of the
Company and approximately $52.9 million in bridge financing notes of the
Company. In addition, following the closing of the transactions contemplated by
the Agreement, the Company caused Mack to pay Mr. Puri a cash bonus of $500,000,
which had been accrued prior to the closing. Pursuant to the Agreement, the
Sellers, including Purico (IOM) Limited and Melham U.S. Inc., agreed that during
the "Standstill Period" (as defined below) such entity or person will not (i)
directly or indirectly "solicit" proxies or become a "participant" in any
"election contest" (as such terms are used in Regulation 14A under the
Securities Exchange Act) relating to the election of directors of the Company or
seek to advise, encourage or influence any person or entity with respect to the
voting of any shares of any class of capital stock of the Company, (ii) form,
join or in any way participate in a "group" (which, for purposes of the
Agreement, shall have the meaning set forth in Section 13(d)(3) of the
Securities Exchange Act) with respect to any shares of any class of capital
stock of the Company, or (iii) otherwise act in concert with others to seek to
change the control of or exercise control over the policies, management or Board
of Directors of the Company or to amend its Articles of Incorporation; provided,
that the Sellers, including Purico (IOM) Limited and Melham U.S. Inc., shall not
be prohibited from voting in accordance with the recommendation of the Board of
Directors of the Company on any proposal for the merger, consolidation or sale
of the Company; and provided, further that nothing in such provision of the
Agreement will limit or restrict in any way the right of Mr. Puri to vote on any
matter before the Board of Directors of the Company. The "Standstill Period"
commenced on April 1, 1999 and will end on the earlier of : (i) April 1, 2001;
or (ii) the date on which the Board of Directors of the Company agrees to
recommend (or ceases to oppose) the consummation of any unsolicited tender or
exchange offer for securities representing more than 50% of the "Total Voting
2
<PAGE>
Power" of the Company, or takes any action to induce or materially facilitate
such a tender or exchange offer (including by redeeming any rights outstanding
under any stockholder rights plan). "Total Voting Power" with respect to the
Company means the voting power in the general election of directors of the
Company of all outstanding securities entitled to vote generally in the election
of directors of the Company. Pursuant to the Agreement, each of the Sellers,
including Purico (IOM) Limited and Melham U.S. Inc., also has agreed that during
the Standstill Period, such person or entity shall (a) vote all of its shares of
common stock of the Company held by them in any annual or special election of
directors of the Company in favor of those nominees recommended by the
management of the Company, (b) vote all of such shares held by them in any vote
to consider the removal from office of a director of the Company (other than Mr.
Puri) in accordance with the recommendations of the management of the Company
and (c) vote all of such shares held by them in any vote of common stock of the
Company or any other matter in accordance with the recommendations of the
management of the Company, except with respect to a vote on any charter
amendment that would eliminate or reduce the rights of the common stock of the
Company. Also pursuant to the Agreement, each of the Sellers, including Purico
(IOM) Limited and Melham U.S. Inc., agreed to certain transfer restrictions on
the shares of the Company's common stock and the subordinated notes of the
Company. The Company granted the Sellers certain "piggyback" registration rights
with respect to the common stock issued in the transactions, beginning April 1,
2000.
The purchase price was established through arms-length negotiations among the
parties. The cash purchase price paid at closing was funded under a new
five-year $200 million revolving credit/term loan facility provided by a group
of lenders for which Wachovia Bank, N.A., acted as agent, NationsBank, N.A.
acted as documentation agent and First Union National Bank acted as syndication
agent.
The facilities of Mack include its headquarters in Easton, Pennsylvania with
manufacturing facilities located in Easton, Ephrata, and East Stroudsburg,
Pennsylvania, as well as in Baltimore, Maryland. Cadmus intends to continue to
use these facilities for the same or similar purposes.
3
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
See Exhibit 99.2, Consolidated financial statements of Melham
Holdings, Inc. as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998, and Exhibit
99.3, Consolidated interim financial statements of Melham
Holdings, Inc. as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 (unaudited).
(b) Pro Forma Financial Information
See Exhibit 99.1, Unaudited Pro Forma Consolidated Financial Data
(c) Exhibits
Exhibit 2.1* Stock Purchase Agreement dated April 1, 1999, by and
among Cadmus Communications Corporation, Melham U.S. Inc.,
Purico (IOM) Limited, and Paul F. Mack - The schedules and
exhibits to this Agreement are omitted in accordance with the
instructions to Item 601 (b) (2) of Regulation S-K. A
listing of such schedules and exhibits is found in the Agreement
and Cadmus hereby undertakes to supply the Securities
and Exchange Commission supplementally with a copy of any such
exhibits upon request.
Exhibit 2.2 * Stock and Note Purchase Agreement dated April 1, 1999, by and
among Mack Printing Company, Mack Printing Group, Inc., Science
Craftsman Incorporated, Port City Press, Inc., Melham, Inc., and
G.S. Mezzanine Partners, L.P., G.S. Mezzanine Partners Offshore,
L.P., Stone Street Fund 1997, L.P., and Bridge Street Fund 1997,
L.P.
Exhibit 23.1 Consent of Ernst & Young LLP
Exhibit 99.1 Unaudited Pro Forma Consolidated Financial Data Relating to
the Acquisition of Melham Holdings, Inc.
Exhibit 99.2 Consolidated financial statements of Melham Holdings, Inc.
as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998.
Exhibit 99.3 Consolidated interim financial statements of Melham
Holdings, Inc. as of March 31, 1999 and for the three months
ended March 31, 1999 and 1998 (unaudited).
* Filed as an Exhibit to our Current Report on Form 8-K
filed on April 15, 1999.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on May 13, 1999.
CADMUS COMMUNICATIONS CORPORATION
By: /s/ David E. Bosher
------------------------------
David E. Bosher
Vice President and Treasurer
5
<PAGE>
EXHIBIT INDEX
-------------
NUMBER EXHIBIT
2.1* Stock Purchase Agreement dated April 1, 1999, by and among
Cadmus Communications Corporation, Melham U.S. Inc., Purico (IOM)
Limited, and Paul F. Mack.
2.2* Stock and Note Purchase Agreement dated April 1, 1999, by
and among Mack Printing Company, Mack Printing Group, Inc.,
Science Craftsman Incorporated, Port City Press, Inc., Melham,
Inc., and G.S. Mezzanine Partners, L.P., G.S. Mezzanine Partners
Offshore, L.P., Stone Street Fund
1997, L.P., and Bridge Street Fund 1997, L.P.
23.1 Consent of Ernst & Young LLP
99.1 Unaudited Pro Forma Consolidated Financial Data Relating to the
Acquisition of Melham Holdings, Inc.
99.2 Consolidated financial statements of Melham Holdings, Inc. as of
December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998.
99.3 Consolidated interim financial statements of Melham Holdings,
Inc. as of March 31, 1999 and for the three months ended March
31, 1999 and 1998 (unaudited).
* Filed as an Exhibit to our Current Report on Form 8-K
filed on April 15, 1999.
6
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements No.
333-69185, 333-69183, 333-39185, 033-50871, 333-23099, 33-87690, 33-56653,
33-10214 and 2-90742 of Cadmus Communications Corporation of our report dated
February 19, 1999, except for Note 14, as to which the date is April 1, 1999,
with respect to the consolidated financial statements of Melham Holdings, Inc.
included in this Form 8-K/A of Cadmus Communications Corporation.
/s/ Ernst & Young LLP
--------------------------
Philadelphia, Pennsylvania
May 7, 1999
EXHIBIT 99.1
CADMUS COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The accompanying unaudited pro forma consolidated financial data is based upon
the historical consolidated financial statements for Cadmus Communications
Corporation and Melham Holdings, Inc., adjusted to give effect to (1) our
acquisition of Melham Holdings, Inc. that is being accounted for as a purchase
and is described in Item 2 of this Form 8-K/A, (2) our sale of Cadmus Financial
Communications and Cadmus Custom Publishing, and (3) the refinancing of our
former senior credit facility, as if they had occurred at the beginning of the
earliest period presented with respect to the summary unaudited pro forma
consolidated statements of income and as of March 31, 1999, to the extent the
transactions had not occurred by such date (excluding the divestitures of Cadmus
Financial Communications and Cadmus Custom Publishing, which occurred in March
and February, 1999, respectively) with respect to the summary unaudited pro
forma consolidated balance sheet data. The unaudited pro forma consolidated
statements of income are not necessarily indicative of the results that would
have been achieved if those transactions had occurred on the date indicated. The
pro forma adjustments give effect to available information and assumptions that
management believes are reasonable. The pro forma adjustments to reflect the
purchase accounting for the acquisition of Melham Holdings, Inc. are tentative
and subject to change. The unaudited pro forma consolidated financial
information should be read in conjunction with historical consolidated financial
statements of Cadmus Communications Corporation and the notes thereto and the
historical consolidated financial statements of Melham Holdings, Inc. and the
notes thereto, included elsewhere herein.
On March 1, 1999, we sold our financial printing business, Cadmus Financial
Communications, to R.R. Donnelley & Sons Company for approximately $35.0 million
in cash. Under the terms of our agreement with Donnelley, we sold substantially
all of the assets associated with our financial printing business, including our
sales offices in New York, Baltimore, Richmond, Charlotte and Raleigh, as well
as our mutual fund fulfillment center in Charlotte. Also on March 1, 1999, we
sold our custom publishing business, Cadmus Custom Publishing, to Pohly &
Partners, Inc., a Boston-based relationship marketing company. Contributions to
EBITDA and net sales from our custom publishing operations were immaterial. The
sale of both of these businesses was driven by our continued focus on our core
markets, which we believe offer the best opportunity for growth, profitability
and market leadership.
On April 1, 1999, we entered into a new five-year, $200 million senior credit
facility, consisting of a $145 million revolving credit facility and a $55
million term loan facility. The proceeds of the loans under the senior credit
facility have been and will be used (1) to refinance indebtedness under our
former senior credit facility and certain other indebtedness, (2) to finance a
portion of the purchase price of the Melham Holdings, Inc. acquisition and
related transaction expenses, and (3) for general corporate purposes, including
working capital.
The senior credit facility is jointly and severally guaranteed by each of our
present and future significant subsidiaries and is secured by a pledge of all of
the capital stock of our present and future significant subsidiaries. The
revolving credit facility will terminate on March 31, 2004. The term loan
facility will be amortized in quarterly installments beginning June 30, 1999 and
will mature on March 31, 2004.
The borrowings under the senior credit facility bear interest for an initial
period of approximately seven and one-half months at either (1) the Base Rate
plus 0.50%, or (2) LIBOR plus 2.25%. Thereafter, interest rates on borrowings
under the senior credit facility will be equal to (1) the Base Rate, or (2)
LIBOR plus, in either case, a margin determined by reference to our total debt
to EBITDA ratio as it exists from time to time. Upon the occurrence of certain
events, including, without limitation, a default or an event of default under
the senior credit facility, the interest rates applicable to borrowings under
the senior credit facility will or may be increased as provided in the senior
credit facility documents.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
MELHAM
DOLLARS IN THOUSANDS ACQUISITION AND ADJUSTED
CADMUS MELHAM (1) REFINANCING PRO PRO FORMA
FORMA
ADJUSTMENTS
------ ---------- --------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 281 $ 70 $ -- $ 351
Accounts receivable, net 65,454 22,198 -- 87,652
Inventories 27,978 9,623 -- 37,601
Deferred income taxes 5,210 1,576 -- 6,786
Prepaid expenses and other 3,892 1,402 1,251(3) 6,545
--------- --------- ------------ --------
Total current assets 102,815 34,869 1,251 138,935
--------- --------- ------------ --------
Property, plant and equipment, net 126,907 50,001 (4,566)(1) 172,342
Goodwill and other intangibles, net 50,646 32,518 121,775(1) 204,939
Other assets 4,861 4,517 5,504(2) 12,274
(2,608)(1)
--------- --------- ------------ --------
Total assets $285,229 $121,905 $ 121,356 $528,490
========= ========= ============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 12,170 $ -- $ (12,170)(5) $ --
Current maturities of long-term debt 6,089 6,216 (6,216)(4) 5,089
(1,000)(6)
Accounts payable 35,577 6,374 -- 41,951
Accrued expenses 20,202 13,014 1,794(1) 35,010
Restructuring reserve 1,136 -- -- 1,136
--------- --------- ------------ --------
Total current liabilities 75,174 25,604 (17,592) 83,186
Long-term debt, less current 65,214 95,719 (95,719)(4) 269,552
maturities 204,338 (5)
Other long-term liabilities 10,510 23,077 (8,753)(1) 24,834
Deferred income taxes 13,788 -- -- 13,788
Shareholders' equity:
Common stock 3,923 -- 580(1) 4,503
Preferred stock -- 6,424 (6,424)(1) --
Capital in excess of par value 52,292 3,983 14,022(1) 70,297
Retained earnings 64,328 (32,902) 30,904(1)(3) 62,330
--------- ---------- ------------ --------
Total shareholders' equity 120,543 (22,495) 39,082 137,130
--------- ---------- ------------ --------
Total liabilities and shareholders'
equity $285,229 $121,905 $121,356 $528,490
========= ========== ============ ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(1) Represents the preliminary adjustments to record the acquisition of Melham
which is accounted for as a purchase.
The purchase price for pro forma purposes is as follows:
<TABLE>
<S> <C>
1,200,000 shares of Cadmus common stock $ 18,585
Cash 66,000
Junior seller notes 6,415
Bridge loan 110,000
Estimated transaction costs 1,794
--------
$202,794
========
The purchase price has been allocated for pro forma purposes as follows:
Working Capital $ 15,481
Long-term, assets, excluding goodwill 47,344
Goodwill 154,293
Long-term liabilities (14,324)
--------
$202,794
========
</TABLE>
The above allocation of acquisition costs is preliminary and may change
upon final determination of the fair value of the assets acquired and
liabilities assumed.
(2) Represents adjustments to deferred loan costs related to the refinancing
of the former senior credit facility and the elimination of the Melham
long-term debt that was repaid in conjunction with the acquisition.
(3) Includes a payment to terminate certain interest rate swaps associated
with the former credit facility and to write-off deferred costs associated
with repaid debt.
(4) Represents an adjustment to eliminate the current and long-term debt of
Melham that was repaid in conjunction with the acquisition.
(5) Represents debt incurred to partially finance the acquisition of Melham.
(6) Represents $1 million decrease in current maturities of long-term debt due
to different maturities for senior credit facility.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------------------------------------
Adjust for
DOLLARS IN Cadmus Adjusted Melham Port City Adjusted Pro Forma
THOUSANDS, EXCEPT Cadmus Divestiture Cadmus Holdings, Inc. Acquisition(1) Melham Adjustments(3) Pro Forma
PER SHARE DATA ------ ----------- -------- -------------- -------------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales $308,596 $(31,188) $277,408 $112,378 $5,588 $117,966 $ (97) $395,277
Cost of sales 246,994 (24,296) 222,698 86,002 4,110 90,112 (4,009)(4)(5) 308,801
Selling and
administrative
expenses 43,674 (6,741) 36,933 15,070 1,060(2) 16,130 1,732(5)(6) 54,795
Net gain on
divestiture (9,521) 9,521 - - - - - -
-------- --------- ------ ------- ------ ------- --------- --------
Operating income 27,449 (9,672) 17,777 11,306 418 11,724 2,180 31,681
Interest expense 6,085 (1,453) 4,632 7,841 554(2) 8,395 4,280(7) 17,307
Other, net (66) - (66) (5) (4) (9) (22) (97)
-------- --------- ------ -------- ----- ------ --------- --------
Income (loss)
before income
taxes 21,430 (8,219) 13,211 3,470 (132) 3,338 (2,078) 14,471
Provision for
income taxes 8,251 (3,164) 5,087 1,468 (53) 1,415 66(8) 6,568
-------- --------- ------ -------- ----- ------ -------- --------
Net income $ 13,179 $ (5,055) $ 8,124 $ 2,002 $ (79) $ 1,923 $(2,144) $ 7,903
======== ========= ======= ======== ====== ======= ========= ========
Earnings per share:
Basic $1.67 $1.03 $0.87
Diluted $1.63 $1.01 $0.86
Weighted average
shares
outstanding-basic 7,872,000 7,872,000 1,162,000(9) 9,034,000
Weighted average
shares outstanding-
diluted 8,073,000 8,073,000 1,162,000(9) 9,235,000
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Income
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JUNE 30, 1998
----------------------------------------------------------------------------------------
Adjust for
DOLLARS IN Cadmus Adjusted Melham Port City Adjusted Pro Forma
THOUSANDS, EXCEPT Cadmus Divestitures Cadmus Holdings, Inc. Acquisition (3) Melham Adjustments (3) Pro Forma
PER SHARE DATA ------ ------------ -------- -------------- --------------- ------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales $393,823 $(54,406) $339,417 $123,699 $36,125 $159,824 $ - $499,241
Cost of sales 304,014 (36,306) 267,708 95,079 25,852 120,931 (5,305)(4)(5) 383,334
Selling and
administrative 62,141 (11,700) 50,441 15,038 6,673(2) 21,711 2,588(5)(6) 74,740
expenses
Restructuring 3,950 - 3,950 - - - - 3,950
charge, net
--------- ---------- --------- --------- ------- ------- ---------- ----------
Operating income 23,718 (6,400) 17,318 13,582 3,600 17,182 2,717 37,217
Interest expense 7,595 (2,039) 5,556 8,783 3,303(2) 12,086 4,818(7) 22,460
Other, net 1,343 - 1,343 (56) (281) (337) (20) 986
--------- ---------- --------- --------- ------- ------- --------- ----------
Income (loss)
before income taxes 14,780 (4,361) 10,419 4,855 578 5,433 (2,081) 13,771
Provision for
income taxes 5,690 (1,679) 4,011 2,086 230 2,316 364(8) 6,691
--------- ---------- ------- -------- ------- ------- --------- ----------
Net income $ 9,090 $ (2,682) $ 6,408 $ 2,769 $ 348 $ 3,117 $ (2,445) $ 7,080
========= ========== ======= ======= ======= ======= ========= ==========
Earnings per share:
Basic $1.16 $0.82 $0.78
Diluted $1.11 $0.78 $0.76
Weighted average 7,860,000 7,860,000 1,162,000(9) 9,022,000
shares outstanding-
basic
Weighted average 8,176,000 8,176,000 1,162,000(9) 9,338,000
shares outstanding-
diluted
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Income
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
1) Includes the results of operations of Port City Press, Inc. for the
periods prior to September 2, 1998, its date of acquisition by Melham
Holdings, Inc., adjusted as described in footnote (2).
2) Includes an increase in amortization expense resulting from purchase
accounting adjustments and additional interest expense on the debt
incurred to finance the acquisition of Port City Press, Inc. by Melham
Holdings, Inc., and adjustments for management fees charged by parent
and fringe benefits not continued:
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 MARCH 31, 1999
------------- --------------
Amortization expense $ 414 $ 69
Interest expense 3,129 527
Management fee charged by parent (800) (140)
Fringe benefits not continued (459) --
3) Includes the elimination of the results of VPI, Inc., a subsidiary of
Melham Holdings, Inc., which we did not acquire:
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 MARCH 31, 1999
------------- --------------
Net sales $ -- $ 97
Cost of sales -- 30
Selling and administrative expenses 217 372
------- ------
Operating loss (217) (305)
Interest expense -- 89
Other, net 20 22
------- ------
Loss before income taxes (237) (416)
Provision for income taxes (85) (147)
------- ------
Net loss $(152) $(269)
======= ======
4) Includes a decrease in cost of sales primarily related to
volume-related procurement savings based on our contractual purchase
programs for paper, pre-press supplies and freight:
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 MARCH 31, 1999
------------- --------------
Cost of sales $ 2,799 $ 2,099
<PAGE>
5) Includes a reduction in depreciation expense resulting from the
revaluation of assets and a change in depreciable lives arising from
purchase accounting adjustments:
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 MARCH 31, 1999
------------- --------------
Cost of sales $ 2,506 $ 1,879
Selling and administrative expenses 342 257
6) Includes an increase in selling and administrative expenses due to an
increase in pension costs and goodwill amortization (goodwill is
amortized over 40 years), which was partially offset by a decrease
related to the termination of certain management and consulting
agreements in connection with the acquisition of Mack.
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, 1998 MARCH 31, 1999
------------- --------------
Selling and administrative expenses $ 962 $ 721
Amortization expense 3,044 2,283
7) Includes interest expense and amortization of deferred financing costs
on the debt incurred in connection with the acquisition of Mack.
8) Includes the assumed tax effect on the pro forma adjustments using an
effective tax rate of 38.5%, except for the non-deductible goodwill
amortization adjustment resulting from the acquisition Mack.
9) Includes shares issued to a Seller of Melham.
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
=========== ========
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
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
========= ========
</TABLE>
SEE ACCOMPANYING NOTES.
2.
<PAGE>
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.
<PAGE>
Melham Holdings, Inc.
Consolidated Statements of Changes in (Deficiency in Assets)
Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
ACCUMULATED
SERIES A ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL (DEFICIT) LOSS TOTAL
----- ----- ------- --------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
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)
========= ======= ========= ========= =========== ========
</TABLE>
(1) Equals comprehensive income for the year.
SEE ACCOMPANYING NOTES.
4.
<PAGE>
Melham Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
======== ========= ========
</TABLE>
SEE ACCOMPANYING NOTES.
5.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ----------
<S> <C> <C>
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
============ ==========
</TABLE>
11.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
RECORDED FAIR VALUE RECORDED FAIR VALUE
AMOUNT AMOUNT
-----------------------------------------------
<S> <C> <C> <C> <C>
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
================================================
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
9. PENSION PLANS AND OTHER POST RETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=========================================================================================
</TABLE>
19.
<PAGE>
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)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
COMPONENTS OF NET PERIODIC BENEFIT COST: 1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
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
===========================================
<CAPTION>
YEAR ENDED DECEMBER 31
WEIGHTED AVERAGE ASSUMPTIONS: 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
EXHIBIT 99.3
CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF MELHAM HOLDINGS INC.
AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<PAGE>
MELHAM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
---------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 70 $ 450
Accounts receivable, less allowance of
$1,234 in 1999 and $1,426 in 1998 22,198 24,427
Inventories 9,623 10,590
Prepaid expenses and other 1,128 1,165
Deferred income taxes 1,576 1,692
Recoverable income taxes 274 282
-------- ---------
Total current assets 34,869 38,606
Property, plant, and equipment, at cost:
Land 761 761
Buildings 12,926 12,988
Machinery and equipment 81,275 80,516
Construction in progress 3,955 1,714
-------- ---------
98,917 95,979
Less accumulated depreciation 48,916 46,937
-------- ---------
50,001 49,042
Excess of cost over net assets of businesses acquired,
net of amortization 32,518 32,730
Deferred financing costs, net of amortization 2,608 2,733
Deferred income taxes 1,045 900
Other assets 864 920
=================================
$ 121,905 $ 124,931
=================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND DEFICIENCY IN ASSETS Current liabilities:
Trade accounts payable $ 6,374 $ 7,841
Other accrued expenses 6,259 6,176
Accrued payroll costs 5,577 4,822
Accrued pension contribution 716 714
Income taxes payable 462 38
Current portion of long-term debt 6,216 7,472
-----------------------------
Total current liabilities 25,604 27,063
Long-term debt, excluding current portion 95,719 98,026
Deferred credits and other liabilities:
Pension liabilities 6,061 5,842
Postretirement benefits 16,441 16,715
Customer deposits and other 575 608
Due to affiliates - 35
------------------------------
23,077 23,200
------------------------------
Total liabilities 144,400 148,289
Deficiency in assets:
Series A Preferred Stock, $0.01 par value (stated at
$100 liquidation value),
authorized 100,000 shares, issued 64,243
shares in 1999 and 62,263 shares in 1998 6,424 6,226
Common Stock, $0.01 par value, authorized
50,000 shares, issued 40,000 shares in 1999
and 1998 - -
Additional paid-in capital 3,983 3,983
Retained-earnings deficit (32,692) (33,357)
Accumulated other comprehensive loss (210) (210)
-------------------------------
Total deficiency in assets (22,495) (23,358)
-------------------------------
$ 121,905 $ 124,931
===============================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MELHAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
1999 1998
----------------------------
(UNAUDITED)
Net sales $ 39,484 $ 31,404
Cost of sales:
Materials and outside services 10,113 7,838
Other operating costs 19,961 16,219
----------------------------
30,074 24,057
----------------------------
Gross profit 9,410 7,347
Selling, general, and administrative
expenses 5,558 3,804
----------------------------
Operating income 3,852 3,543
Interest expense 2,728 2,171
Miscellaneous expense (income), net 35 (13)
----------------------------
2,763 2,158
----------------------------
Earnings before income taxes 1,089 1,385
Provision for income taxes 456 567
----------------------------
Net income $ 633 $ 818
============================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MELHAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
1999 1998
-----------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 633 $ 818
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,204 1,638
Amortization, including deferred 347 235
financing costs
(Benefit) provision for loss on accounts (123) 64
receivable
(Benefit) provision for deferred income (29) 288
taxes
Loss on sale of assets 43 6
Series A Preferred Stock issued in lieu
of payment of interest 198 214
Changes in operating assets and
liabilities:
Accounts receivable 2,352 1,939
Inventories (932) (474)
Prepaid expenses and other 3 (40)
Income taxes 403 208
Trade accounts payable (1,423) (2,981)
Accrued liabilities and other 1,017 (748)
Accrued pension 221 377
Postretirement benefits (274) (284)
Other 539 136
-------------------------
Net cash provided by operating activities 5,179 1,396
INVESTING ACTIVITIES
Proceeds from sale of assets 21 3
Capital expenditures (3,204) (539)
-------------------------
Net cash used in investing activities (3,183) (536)
FINANCING ACTIVITIES
Principal payments on long-term debt (2,282) (1,212)
Proceeds from debt financing 1,232 1,270
Proceeds from line of credit 43,435 35,060
Repayments of line of credit (44,726) (35,737)
Change in due to affiliates (35) 15
-------------------------
Net cash used in financing activities (2,376) (604)
-------------------------
(Decrease) increase in cash (380) 256
Cash at beginning of period 450 320
==========================
Cash at end of period $ 70 $ 576
==========================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MELHAM HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
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.
On April 1, 1999, the stockholders of the Company entered into a definitive
agreement to sell all shares of the Company to Cadmus Communications Corporation
(See Note 4).
2. INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary to present fairly the
financial position as of March 31, 1999, the results of operations for the three
months ended March 31, 1999 and 1998 and the cash flows for the three months
ended March 31, 1999 and 1998 have been included. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles, but which are not
required for interim reporting purposes, have been omitted. Operating results
for the three months ended March 31, 1999 are not necessarily indicative of the
results which may be expected for the year ending December 31, 1999. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included
elsewhere herein.
3. INVENTORIES
The major classes of inventories are as follows (in thousands):
MARCH 31, 1999 DECEMBER 31, 1998
-------------------------------------
Raw materials $ 4,922 $ 5,155
Supplies and other 148 191
Work-in-process 4,457 3,970
Finished goods 96 1,274
========================================
$ 9,623 $ 10,590
========================================
<PAGE>
MELHAM HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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 for
$201 million in cash, notes and stock, subject to certain closing conditions and
adjustments. Prior to the sale, the Company stockholders purchased all of the
capital stock of VPI owned by the Company. The VPI transaction occurred prior to
March 31, 1999 and, accordingly, the assets and liabilities of VPI are not
included in the March 31, 1999 balance sheet. The operating results of VPI for
the three months ended March 31, 1999 and 1998 were immaterial. The Company also
paid-off all long-term debt and purchased all common stock of Mack owned by the
minority stockholders of Mack; these transactions, and the impact of them, are
not reflected in the accompanying unaudited financial statements.
