<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission file number 33-95470
--------
MONARCH MARKING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0861226
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 MONARCH LANE
MIAMISBURG, OHIO 45342
(Address of principal executive offices) (Zip Code)
(513) 865-2123
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. COMMON STOCK, $.01 PAR
VALUE: 1,000 SHARES
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1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 3
and December 31, 1995........................................................
Consolidated Statements of Operations for the three months ended
September 30, 1996 and September 30, 1995.................................... 5
Consolidated Statements of Operations for the nine months ended
September 30, 1996, the three months ended September 30, 1995 and
the six months ended June 29, 1995........................................... 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996, the three months ended September
30, 1995 and the six months ended June 29, 1995.............................. 7
Notes to Consolidated Financial Statements...................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 16
Item 6. Exhibits and Reports on Form 8-K................................................ 16
</TABLE>
2
<PAGE> 3
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 13,327 $ 17,889
Accounts receivable, net of allowance for doubtful accounts of
$3,974 at September 30, 1996 and $3,945 at December 31, 1995 42,553 40,164
Inventories:
Raw materials and work in process ......................... 23,992 22,984
Supplies and service parts ................................ 6,107 6,425
Finished goods ............................................ 16,027 13,990
Future income tax benefits ................................... 2,737 2,737
Prepayments and other current assets ......................... 3,010 3,015
--------- ---------
Total current assets ...................................... 107,753 107,204
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements ................................... 3,380 3,353
Buildings and building improvements .......................... 18,624 18,157
Machinery and equipment ...................................... 65,575 61,007
Furniture and fixtures ....................................... 6,190 5,517
Leasehold improvements ....................................... 2,733 2,477
Rental equipment ............................................. 741 917
Assets held under capital leases ............................. 654 348
Construction in progress ..................................... 1,130 1,696
--------- ---------
99,027 93,472
Accumulated depreciation ..................................... (56,385) (49,817)
--------- ---------
Property, plant and equipment, net ........................... 42,642 43,655
--------- ---------
GOODWILL ........................................................ 28,894 28,153
FINANCING AND ACQUISITION FEES .................................. 8,186 7,938
OTHER INTANGIBLE ASSETS ......................................... 3,665 3,866
OTHER NON-CURRENT ASSETS ........................................ 3,432 3,030
--------- ---------
Total assets ................................................. $ 194,572 $ 193,846
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY SEPTEMBER 30 DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings .................................................... $ 5,238 $ 6,734
Current portion of capital lease obligations ............................. 118 117
Accounts payable and overdrafts .......................................... 10,246 10,712
Advance billings ......................................................... 6,511 6,070
Deferred income tax liabilities .......................................... 2,550 2,550
Other current liabilities:
Accrued interest ....................................................... 3,155 6,319
Accrued salaries, wages, vacation pay, commissions and bonus ........... 8,913 8,976
Income and other taxes ................................................. 5,449 4,070
Reorganization ......................................................... 1,463 4,600
Other .................................................................. 9,041 7,730
--------- ---------
Total current liabilities .......................................... 52,684 57,878
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ................................ 100,236 100,352
POSTEMPLOYMENT BENEFITS LIABILITY ........................................... 5,562 5,662
--------- ---------
Total liabilities .................................................. 158,482 163,892
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized, 1,000 shares issued and
outstanding.............................................................. -- --
Paid in capital .......................................................... 30,606 30,303
Cumulative translation adjustment ........................................ (1,333) (1,558)
Retained earnings ........................................................ 6,817 1,209
--------- ---------
Total stockholder's equity ............................................ 36,090 29,954
--------- ---------
Total liabilities and stockholder's equity ......................... $ 194,572 $ 193,846
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net sales .................................. $ 65,259 $ 65,531
Cost of goods sold ......................... 36,740 41,619
-------- --------
28,519 23,912
Selling, general and administrative expenses 18,770 17,966
Research and development expenses .......... 2,730 2,121
-------- --------
Operating income ........................ 7,019 3,825
Interest (expense) income, net ............. (3,352) (3,388)
Other non-operating income, net ............ 252 154
-------- --------
Income before provision for income taxes 3,919 591
Provision for income taxes ................. 1,509 191
-------- --------
Net income .............................. $ 2,410 $ 400
======== ========
Weighted average number of shares ....... 1,000 1,000
======== ========
Earnings per share ...................... $ 2,410 $ 400
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Prior Year
----------
Nine months ended Three months ended | Six months ended
September 30, 1996 September 30, 1995 | June 29, 1995
------------------ ------------------ | -------------
<S> <C> <C> <C>
Net sales............................................. $ 192,610 $ 65,531 | $ 126,410
Cost of goods sold.................................... 109,812 41,619 | 77,102
---------- ---------- | ----------
82,798 23,912 | 49,308
Selling, general and administrative expenses.......... 57,207 17,966 | 39,436
Research and development expenses..................... 7,172 2,121 | 4,529
Non-recurring charges for adjustments to |
operating items.................................... -- -- | 6,123
---------- ---------- | ----------
Operating income (loss)............................ 18,419 3,825 | (780)
Interest (expense) income, net........................ (10,012) (3,388) | 713
Other non-operating (expense) income, net............. 550 154 | (300)
---------- ---------- | ----------
Income (loss) before provision for income taxes.... 8,957 591 | (367)
Provision for income taxes............................ 3,350 191 | (133)
---------- ---------- | ----------
Net income (loss).................................. $ 5,607 $ 400 | $ (234)
========== ========== | ==========
Weighted average number of shares.................. 1,000 1,000 |
========== ========== |
Earnings per share................................. $ 5,607 $ 400 |
========== ========== |
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Prior Year
----------
Nine months ended Three months ended | Six months ended
September 30, 1996 September 30, 1995 | June 29, 1995
------------------ ------------------ | -------------
<S> <C> <C> <C>
Cash flows from operating activities: |
Net income (loss) .................................... $ 5,607 $ 400 | $ (234)
Adjustments to reconcile net income to cash provided . |
by operating activities: .......................... |
Non-recurring charges for adjustments to operating |
items ........................................... -- -- | 6,123
Depreciation and amortization ..................... 9,330 2,555 | 3,930
Increase in equity earnings ....................... (203) -- | (182)
Deferred income tax provision ..................... -- -- | (2,150)
Other, net ........................................ (173) (84) | 4
Changes in components of working capital: ............ |
(Increase) in accounts receivable ................. (2,389) (4,299) | (149)
(Increase) decrease in inventories ................ (2,727) 7,346 | 2,557
Decrease in prepayments and other current assets .. 5 570 | 25
Increase (decrease) in accounts payable and ....... |
overdrafts ....................................... (466) 28 | (631)
Increase in advance billings ...................... 441 358 | 80
(Decrease) increase in other accrued liabilities .. (3,673) 1,424 | 6,843
Net impact of eliminating assets not sold/liabilities |
not acquired.......................................... -- -- | (11,249)
Net cash provided by (used in) operating activities 5,752 8,298 | 4,967
-------- -------- | --------
Cash flows from investing activities: ................... |
Capital additions .................................... (6,143) (986) | (3,657)
Increase in acquisition costs ........................ (2,863) -- | --
-------- -------- | --------
Net cash used in investing activities ............. (9,006) (986) | (3,657)
-------- -------- | --------
Cash flows from financing activities: ................... |
Shareholder's contribution ........................... 303 3,493 | --
Repayment of revolving credit facility borrowings .... (1,496) (532) | --
Repayment of capital lease obligations ............... (115) (10) | (110)
-------- -------- | --------
Net cash used in financing activities ............. (1,308) 2,951 | (110)
-------- -------- | --------
Net (decrease) increase in cash ................ (4,562) 10,263 | 1,200
Cash and cash equivalents, beginning of period .......... 17,889 1,200 | --
-------- -------- | --------
Cash and cash equivalents, end of period ................ $ 13,327 $ 11,463 | $ 1,200
======== ======== | ========
Cash paid for interest .................................. $ 13,025 $ 195 | $ 38
======== ======== | ========
Cash paid for taxes ..................................... $ 2,724 $ 798 | $ 4,280
======== ======== | ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 8
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, unless otherwise noted)
(Unaudited)
1. THE COMPANY
Monarch Marking Systems, Inc. (the "Company") operates in the United States,
Australia, Canada, France, Germany, Hong Kong, Mexico, Singapore and the United
Kingdom. The Company is a manufacturer and marketer of marking equipment and
supplies. The Company also sells, directly and through distributors, marking
equipment and supplies in 75 other countries around the world. The Company
manufactures, markets and distributes (i) tabletop label dispensers and
handheld, mechanical labeling guns which print pressure-sensitive price and
other identification labels and affix them onto merchandise for retailers and
(ii) electronic bar code printers which are used in a wide range of retail and
industrial applications, including inventory management and distribution
systems. The Company also manufactures and markets supplies used in both its
conventional labelers and bar code printers and provides extensive service to
its installed base of machines.
On June 29, 1995 the Company was acquired by and merged with Monarch Acquisition
Corp. (the "Acquisition"). Prior to this date, the Company was operated as a
wholly owned subsidiary of Pitney Bowes, Inc. ("Pitney Bowes"). Certain assets
and liabilities not integral to the business, including certain real property,
intercompany accounts with Pitney Bowes and its subsidiaries, certain cash
accounts, investments in affiliates, intercompany loans, certain income taxes
payable and the base material business, were retained by Pitney Bowes upon sale
of the Company.
The aggregate purchase price for the Company, including related fees and
expense, was approximately $138,300. The purchase price and such fees and
expenses were funded with (i) an initial borrowing of approximately $8,000 under
a revolving credit agreement, (ii) the net proceeds from the offering of senior
notes of $100,000, (iii) $30,000 of common equity contributed in equal portions
by Odyssey Partners, L.P. and Paxar Corporation through Monarch Holdings, Inc.
("Holdings") and (iv) $300 of common equity contributed by the Company's
Chairman of the Board through Holdings.
The Omnibus Purchase Agreement between the Company and Pitney Bowes relating to
the Acquisition (the "Omnibus Purchase Agreement") provided for an adjustment to
the purchase price under certain circumstances. The Company has advised Pitney
Bowes that it believed it was entitled to a purchase price adjustment in its
favor, and Pitney Bowes similarly advised the Company that it believed it was
entitled to a purchase price adjustment in its favor. This dispute was referred
to arbitration for settlement. In September 1996, the arbitrator concluded that
a decrease in the purchase price of $11.2 million was warranted. Pitney Bowes
has commenced legal action to appeal this decision. (See further discussion in
Part II, Item I - Legal Proceedings.) Accordingly, the Company has not yet
revised the allocation of the purchase price to reflect the arbitration
settlement.
8
<PAGE> 9
The following table summarizes the allocation of the purchase price to the
assets and liabilities acquired. The purchase price allocation will be revised
at a future date when this legal action is resolved.
<TABLE>
Allocation of purchase price:
<S> <C>
Current assets $101,231
Property, plant and equipment, net 41,960
Goodwill 29,952
Financing fees 6,400
Other intangible assets 7,871
Other non-current assets 2,315
Severance and other organization costs (10,082)
Liabilities assumed (41,347)
--------
Total purchase price $138,300
========
</TABLE>
2. INTERIM FINANCIAL INFORMATION
The accompanying unaudited interim consolidated financial statements have been
prepared by Company management. While management believes that the procedures
followed in the preparation of the interim information are reasonable, the
accuracy of some estimated amounts is dependent upon facts that will exist or
calculations that will be accomplished later in the fiscal year. In addition,
certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted in accordance with the rules of the Securities
and Exchange Commission. The Company believes the disclosures made are adequate
to make the information presented not misleading; however, these interim
financial statements should be read in conjunction with the Company's
consolidated financial statements included in the Company's Report on Form 10-K
for the year ended December 31, 1995 filed with the Securities and Exchange
Commission.
In the opinion of Company management, the accompanying unaudited consolidated
financial statements reflect all adjustments necessary to present fairly the
financial position of the Company as of September 30, 1996, and the results of
its operations for the three and nine months ended September 30, 1996 and its
cash flows for the nine months ended September 30, 1996. These adjustments
include only normal recurring adjustments to results of operations for the three
and nine months ended September 30, 1996. The Company has eliminated all
significant intercompany transactions. Management believes that comparisons of
the Company's results of operations for the nine months ended September 30, 1996
to the nine months ended September 30, 1995 are not meaningful because of the
change in ownership that became effective June 30, 1995.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
3. SHORT AND LONG-TERM BORROWINGS
In order to finance the Acquisition, the Company and its Canadian subsidiary
entered into a revolving credit agreement and the Company issued $100 million of
unsecured, 12.5% notes (the "Notes") which mature in 2003. The Revolving Credit
Facility permits borrowings in an amount not to exceed the lesser of $25 million
or the "Borrowing Base," as defined in the Revolving Credit Facility to include
a stated percentage of certain of the Company's inventories and accounts
receivable. Borrowings under the revolving credit agreement bear interest at a
rate equal to Bankers Trust Company's U.S. or Canadian prime rate, as the case
may be, plus 1.5%. The revolving credit agreement expires in 1998. At September
30, 1996, the Company had borrowed $5.2 million under the revolving credit
agreement.
9
<PAGE> 10
4. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits, none of which will, in the
opinion of management, have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
Pursuant to the Omnibus Purchase Agreement, Pitney Bowes has agreed to indemnify
the Company against certain scheduled environmental liabilities, including
liabilities related to the CERCLA sites discussed below, and claims arising from
environmental conditions described in written environmental assessments and
audits conducted since January 1, 1985, without any time limitations. Pitney
Bowes has also agreed to indemnify the Company against additional liabilities
arising from environmental claims or conditions resulting from the activities of
or existing on properties of the Company or Pitney Bowes prior to the closing
date of the Acquisition, provided that the Company must notify Pitney Bowes of
any such liabilities within five years of such closing date.
The Company's operations are subject to federal, state, local, and international
environmental laws and regulations that impose limitations on the discharge of
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances and
wastes. To the best of the Company's knowledge, the Company's operations are in
material compliance with the terms of all applicable environmental laws and
regulations as currently interpreted. The Company is currently investigating
soil and ground water contaminations at its facility in Pickering, Ontario,
Canada. The investigation is being performed subsequent to notification of and
will be conducted in accordance with the requirements of the Ontario Ministry of
Environment and Energy. The Company has removed contaminated soils and installed
ground water monitoring wells at the facility and is preparing for potential
additional investigation or remedial actions. The Company believes that, in
connection with the Acquisition, it is indemnified by Pitney Bowes for the costs
of the investigation and any necessary remediation at the Pickering facility.
Because discussions with the Ministry of Environment and Energy concerning
future remedial options have not yet commenced, the Company cannot at this time
estimate the potential costs of cleanup but, based on currently available
information and taking into consideration the indemnity from Pitney Bowes, the
Company believes that its liability with respect to the cleanup is unlikely to
have a material adverse effect on the Company's financial condition, its results
of operations, or cash flows.
5. PRO FORMA DISCLOSURES
Following are the unaudited pro forma results of operations assuming the
acquisition had occurred as of January 1, 1995:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Nine Months Ended
September 30, 1995
------------------
<S> <C>
Net sales..................................... $191,941
Net (loss).................................... $(58)
(Loss) per share.............................. $(58)
</TABLE>
Pro forma adjustments consist principally of additional interest expense on the
revolving line of credit and the Notes, cost savings from the Company's
reduction of headcount and changes to benefit plans pursuant to the
restructuring plan, incremental depreciation on property, plant and equipment
due to the write-up to fair value of these assets, incremental management fees
and incremental amortization of goodwill, financing fees and other intangibles
recorded in accordance with the purchase method of accounting.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On June 29, 1995, the Company was acquired by and merged with Monarch
Acquisition Corp., a corporation organized solely to acquire the Company from
Pitney Bowes (the Acquisition). The purchase price of $138.3 million, including
fees and expenses, was funded by an $8.0 million borrowing under a revolving
credit facilities (the "Revolving Credit Facility"), the issuance of $100.0
million of senior notes (the "Notes"), and $30.3 million of capital contributed
by the Company's principal stockholders.
POTENTIAL PURCHASE PRICE ADJUSTMENT
The Omnibus Purchase Agreement between the Company and Pitney Bowes related to
the Acquisition provides for an adjustment to the purchase price under certain
circumstances. The Company advised Pitney Bowes that it believed that it was
entitled to a purchase price adjustment in its favor and Pitney Bowes similarly
advised the Company that it believed that it was entitled to a purchase price
adjustment in its favor. This dispute was referred to arbitration for
settlement. In September 1996, the arbitrator concluded that a decrease in the
purchase price of $11.2 million was warranted. Pitney Bowes has commenced legal
action to appeal this decision. Accordingly, the Company has not yet revised the
allocation of the purchase price to reflect the arbitration settlement.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared to the Three Months Ended
September 30, 1995.
(Dollars in Millions)
(Unaudited)
Revenue. Total revenue decreased $.2 million, or .3%, to $65.3 million
for the three months ended September 30, 1996 from $65.5 million for the three
months ended September 30, 1995. Domestic revenue, which represented 67.5% of
total revenue for the 1996 period, decreased by $.5 million, or 1.1%, to $44.1
million in 1996 from $44.6 million in 1995. The domestic revenue decrease
resulted from conventional products partially offset by increases in the bar
code product sales and Service Bureau revenue. International revenues increased
by $.3 million or 1.0% to $21.2 million in 1996, primarily due to revenue growth
in Mexico, U.K., Australia and Hong Kong. The growth in these operations was
primarily due to increased sales of bar code products although Hong Kong's
growth is attributable solely to Service Bureau. The U.S. dollar strengthened
against the European currencies and the Peso, which created a negative exchange
impact.
Gross Profit. Total gross profit increased by $4.6 million, or 19.2%,
to $28.5 million for the three months ended September 30, 1996 from $23.9
million for the three months ended September 30, 1995. Gross profit as a percent
of sales increased to 43.7% in 1996 from 36.4% in 1995. The increase in gross
profit was attributable to the effects of better margins due to price increases
in the Company's products, especially related to the Service Bureau operations,
and reduced costs of purchased material. For the three months ended September
30, 1995, margins were unfavorably impacted by a $2.3 million charge due to the
amortization of a portion of the inventory write-up recorded at the acquisition
date. Further, the three months ended September 30, 1996 reflects $0.9 million
of incremental cost savings from the workforce reduction plan that was
implemented during the quarter ended September 30, 1995.
11
<PAGE> 12
Selling, General and Administrative ("SG&A"). SG&A expenses increased
by $.8 million, or 4.4%, to $18.8 million for the three months ended September
30, 1996 from $18.0 million for the three months ended September 30, 1995 due to
higher training, recruiting and relocation costs, offset by cost savings
resulting from the August 1995 workforce reduction. SG&A as a percentage of
revenue increased to 28.8% in 1996 from 27.4% in 1995.
Research and Development ("R&D"). R&D expenses increased by $0.6
million, or 28.6%, to $2.7 million for the three months ended September 30, 1996
from $2.1 million for the three months ended September 30, 1995. The increased
R&D spending was the result of increased product development costs for products
that should be released later in the year.
Operating Income. Operating income increased $3.2 million to $7.0
million for the three months ended September 30, 1996 from $3.8 million for the
three months ended September 30, 1995. The improved operating income was largely
driven by higher product prices, reduced purchased material costs, no additional
amortization of the inventory write-up during 1996 and incremental cost savings
from the August 1995 workforce reduction.
Net Income. Net income increased by $2.0 million, or 500%, to $2.4
million for the three months ended September 30, 1996 from $.4 million for the
three months ended September 30, 1995 for the reasons discussed under "Operating
Income." The effective tax rate for the 1996 period increased to 38.5% from
32.3% due to an increase in the percentage of taxable income attributable to
countries with higher tax rates.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to the Pro Forma Nine Months Ended
September 30, 1995. Management believes that comparisons of the Company's actual
results of operations for the nine months ended September 30, 1996 to the nine
months ended September 30, 1995 are not meaningful. As the ownership of the
Company changed effective June 30, 1995, the results of operations for the nine
months ended September 30, 1996 include transactions arising from the
Acquisition and subsequent reorganization, such as interest expense on
borrowings, cost savings from the workforce reduction program, amortization of
goodwill, financing fees and other acquisition costs, increased depreciation
expense resulting from the write-up of assets to fair value, among other items.
Management believes that a more meaningful analysis is a comparison of the
actual results of operations for the nine months ended September 30, 1996 to the
pro forma results of operations for the nine months ended September 30, 1995.
This discussion is presented below.
<TABLE>
<CAPTION>
(Dollars in Millions)
(Unaudited)
ACTUAL NINE PRO FORMA
MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
Revenue (Net Sales) $192.6 $191.9
Gross profit 82.8 77.3
Selling, general and administrative expenses 57.2 55.5
Research and development expenses 7.2 6.1
Non-recurring charges for adjustments to operating items - 6.1
Operating income 18.4 9.6
Interest (expense) income (10.0) (9.7)
Other non-operating (expense) income .5 (.1)
Net income (loss) 5.6 (.1)
</TABLE>
The 1995 pro forma results are unaudited and reflect purchase accounting
adjustments assuming the Acquisition had occurred on January 1, 1995. Effective
January 1, 1995, the Company changed its method of allocating service costs and
research and development costs between cost of goods sold and selling, general
and administrative expenses.
12
<PAGE> 13
Revenues. Total revenue increased $.7 million, or .4%, to $192.6
million for the nine months ended September 30, 1996 from $191.9 million for the
pro forma nine months ended September 30, 1995. Domestic revenue, which
represented 67.8% of total revenue for the 1996 period, decreased by $1.2
million, or .9%, to $130.6 million in 1996 from $131.8 million in pro forma
1995. The decrease is due to the lower sales volume in the conventional product
line even though sales volume increases have been experienced in both the bar
code and Service Bureau product lines. International revenues increased by $1.9
million, or 3.2%, to $62.0 million in 1996 from $60.1 million in pro forma 1995.
Year to date growth in international revenues was due to the same reasons as the
3rd quarter growth.
Gross Profit. Total gross profit increased by $5.5 million, or 7.1%, to
$82.8 million for the nine months ended September 30, 1996 from $77.3 million
for the pro forma nine months ended September 30, 1995. Gross profit as a
percent of sales increased to 43.0% in 1996 from a pro forma 40.3% in 1995. The
increase in gross profit was attributable to the effects of higher product
prices, especially related to the Service Bureau operations, and lower raw
material costs. Additionally, for the nine months ended September 30, 1995,
margins were unfavorably impacted by a $2.3 million charge related to the
roll-out of a portion of the inventory write-up.
Selling, General and Administrative ("SG&A"). SG&A expenses increased
by $1.7 million, or 3.1% to $57.2 million for the nine months ended September
30, 1996 from $55.5 million for the pro forma nine months ended September 30,
1995. The increase is due to higher training, recruiting, commission and
relocation costs. SG&A as a percentage of revenue increased to 29.7% in 1996
from a pro forma 28.9% in 1995.
Research and Development ("R&D"). R&D expenses increased by $1.1
million, or 18.0%, to $7.2 million for the nine months ended September 30, 1996
from $6.1 million for the pro forma nine months ended September 30, 1995. The
increased R&D spending was the result of increased new product development.
Non-recurring charges. Charges of $6.1 million in 1995 represented
non-recurring adjustments to operating reserves, including adjustments for
excess and obsolete inventory, warranty, sales returns and workers'
compensation, among others.
Operating Income. Operating Income increased $8.8 million, or 91.7%, to
$18.4 million for the nine months ended September 30, 1995 from $9.6 million for
the pro forma nine months ended September 30, 1995. The improved operating
income was largely driven by the elimination of the 1995 non-recurring charges
and better gross profit margins in 1996 for the reasons previously identified.
Interest Expense (Income). Interest expense increased by $.3 million,
or 3.1%, to $10.0 million for the nine months ended September 30, 1996 from $9.7
million for the pro forma nine months ended September 30, 1995.
The increase was due to more interest income in 1995.
Other Non-Operating Income. Other Non-Operating Income increased $.6
million in 1996 to $.5 million of income from $.1 million of expense in 1995 due
primarily to 1995 having more unfavorable translation losses as compared to
1996.
Net Income. Net income increased by $5.7 million to $5.6 million for
the nine months ended September 30, 1996 from a loss of $.1 million for the pro
forma nine months ended September 30, 1995 due primarily to the non-recurring
charges in 1995 and the improved gross profit margins in 1996. The effective tax
rate for the 1996 period decreased to 37.4% from a pro forma 42.6% due to 1995
including certain non-deductible expenses which did not re-occur in 1996.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are expected to be cash
flow from operations and borrowings under the Revolving Credit Facility. It is
anticipated that the Company's principal uses of liquidity will be to provide
working capital, finance capital expenditures and meet debt service
requirements. The Revolving Credit Facility permits borrowings in an amount not
to exceed the lesser of $25.0 million or the "Borrowing Base," as defined in the
Revolving Credit Facility to include a stated percentage of certain of the
Company's inventories and accounts receivable.
Comparisons of the Company's cash flows during the nine months ended
September 30, 1996 to prior periods may not be meaningful due to the
Acquisition. At September 30, 1996, the Company had cash of $13.3 million and
working capital of $55.1 million. For the nine months ended September 30, 1996
the Company had negative cash flows of $4.6 million due primarily to a $6.3
million interest payment and increases in receivables and inventories.
The Company's capital expenditures for the nine months ended September
30, 1996 were approximately $6.1 million. The Company's remaining capital
expenditure requirements for 1996 are projected to be approximately $3.9
million, primarily related to improvements in production machinery and equipment
and computer equipment.
The Company's debt service requirements for the next three fiscal years
consist of payments of interest on the Notes aggregating $12.5 million per year
and payments of interest on amounts outstanding under the Revolving Credit
Facility. In addition, the Revolving Credit Facility matures in 1998, at which
time the Company will be obligated either to repay or refinance all amounts
outstanding under the Revolving Credit Facility.
The Company is highly leveraged. Debt service requirements associated
with the borrowings under the Revolving Credit Facility and the Notes have
increased the Company's liquidity requirements. Based on current operations and
anticipated improvements in operating performance, the Company believes that
cash flow from operations, together with available borrowings under the
Revolving Credit Facility, will be sufficient to carry on its business and to
meet its debt service and other liquidity requirements. If the Company is unable
to generate sufficient cash flow from operations in the future to meet the
principal and interest obligations on its indebtedness and to meet its other
commitments, the Company will be required to adopt one or more alternatives,
such as refinancing or restructuring its indebtedness, selling material assets
or operations, or seeking to raise additional material amounts of long-term debt
or equity capital, although the Company has no present intention of doing so in
the near future. The Company's ability to incur additional indebtedness is
restricted by the indenture governing the Notes (the "Indenture") and the
Revolving Credit Facility. In addition, there can be no assurance that any of
these actions could be effected on satisfactory terms, on terms that would
enable the Company to continue to satisfy its capital requirements or on terms
that would be permitted by the provisions of existing or future debt agreements.
Under the Indenture governing the Notes (currently the most restrictive
instrument governing the Company's Indebtedness), the Company currently may not
incur more than $10.0 million of additional indebtedness beyond the current
Revolving Credit Facility of $25 million, subject to certain limited exceptions.
In addition, the Revolving Credit Facility and the Indenture contain other
covenants that restrict the Company's operations. Under the Revolving Credit
Facility, the Company is also generally required to (a) maintain a ratio of
current assets (as defined) to current liabilities (as defined) of 1.2 to 1; (b)
maintain a consolidated net worth (as defined) of $29 million at each fiscal
quarter end through September 1996, gradually increasing to $34 million by
September 30, 1997; (c) maintain a coverage ratio (as defined) of 1.3 to 1 for
September 1996 increasing gradually to 1.5 to 1 beginning the quarter ended
March 1997; and (d) limit capital expenditures to $11.0 million per year.
14
<PAGE> 15
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and
international environmental laws and regulations that impose limitations on the
discharge of, and establish standards for the handling, generation, emission,
release, discharge, treatment, storage and disposal of, certain materials,
substances and wastes. The Company believes that its operations are in material
compliance with the terms of all applicable environmental laws and regulations
as currently interpreted. In the last three years, the Company's capital
expenditures for environmental compliance have been approximately $285,000, and
the Company currently has not budgeted for additional capital expenditures, but
the Company cannot predict with any certainty that such expenditures will not be
required because of changing compliance standards and techniques. In addition,
operating expenditures relating to environmental compliance have averaged
approximately $65,000 per year during each of the past three years, and the
Company expects to incur similar operating expenditures for environmental
compliance in the future.
15
<PAGE> 16
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings
(a) Pursuant to the Omnibus Purchase and Sale Agreement dated June 6, 1995,
wherein Monarch Acquisition Corp. acquired Monarch from Pitney Bowes,
Inc. ("Pitney Bowes"), the parties submitted to arbitration a dispute
concerning post-closing adjustments to the purchase price. On September
6, 1996, the arbitrator, Ernst & Young LLP, rendered a decision
reducing the $138.3 million purchase price by $11,228,000. On September
16, 1996, Monarch filed suit in the Supreme Court (New York County) of
the State of New York requesting that the arbitrator's decision be
confirmed and judgment be entered. Pitney Bowes cross-moved to vacate
the award. While Monarch cannot predict the outcome of this litigation,
it intends to vigorously pursue its claim.
(b) Suits have been filed by Monarch Marking Systems, Inc. (Monarch)
against Comtec Information Systems, Inc. (Comtec) in the U.S. District
Court, Southern District of Ohio, Western Division, in Dayton. The one
Monarch suit filed on October 15, 1996 alleges infringement of eight
Monarch patents involving its Pathfinder(R) product line, a federally
registered trademark and unfair competition. The other MonarcH suit was
filed on October 17, 1996 and seeks a declaratory judgment of
non-infringement, invalidity and unenforceability of a Comtec patent.
Comtec has filed suits against Monarch in U.S. District Court, District
of Rhode Island, in Providence alleging non-infringement, invalidity
and unenforceability of various Monarch patents and infringement of
their own patent.
Although Monarch cannot predict the outcome of this litigation, it
intends to pursue its claims and vigorously defend the claims brought
by Comtec.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarterly period ended September
30, 1996.
16
<PAGE> 17
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 thereunto duly authorized.
November 12, 1996 MONARCH MARKING SYSTEMS, INC.
By: /s/ John W. Paxton
------------------------------------------
John W. Paxton
President and Chief Executive Officer
November 12, 1996 By: /s/ Kenneth A. Cassady
------------------------------------------
Kenneth A. Cassady
Vice President and Chief Financial Officer
17
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