<PAGE> 1
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 MARCH 31, 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
- - --------------------------------------------------------------------------------
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995........................................................ 3
Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995...................................................... 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995...................................................... 6
Notes to Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 13
</TABLE>
2
<PAGE> 3
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 10,584 $ 17,889
Accounts receivable, net of allowance for doubtful accounts of
$4,182 at March 31, 1996 and $3,945 at December 31, 1995 ... 41,380 40,164
Inventories:
Raw materials and work in process ......................... 23,817 22,984
Supplies and service parts ................................ 6,254 6,425
Finished goods ............................................ 16,213 13,990
Prepaid income taxes ......................................... 2,737 2,737
Prepayments and other current assets ......................... 2,143 3,015
--------- ---------
Total current assets ...................................... 103,128 107,204
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET
Land and land improvements ................................... 3,370 3,353
Buildings and building improvements .......................... 18,314 18,157
Machinery and equipment ...................................... 62,895 61,007
Furniture and fixtures ....................................... 5,858 5,517
Leasehold improvements ....................................... 2,601 2,477
Rental equipment ............................................. 735 917
Assets held under capital leases ............................. 322 348
Construction in progress ..................................... 863 1,696
--------- ---------
94,958 93,472
Accumulated depreciation ..................................... (52,030) (49,817)
--------- ---------
Property, plant and equipment, net ........................... 42,928 43,655
--------- ---------
GOODWILL ........................................................ 28,055 28,153
FINANCING AND ACQUISITION FEES .................................. 7,725 7,938
OTHER INTANGIBLE ASSETS ......................................... 3,799 3,866
OTHER NON-CURRENT ASSETS ........................................ 2,993 3,030
--------- ---------
Total assets ................................................. $ 188,628 $ 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 MARCH 31, DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings ........................................................ $ 5,723 $ 6,734
Current portion of capital lease obligations ................................. 117 117
Accounts payable and overdrafts .............................................. 11,132 10,712
Advance billings ............................................................. 5,914 6,070
Deferred income tax liabilities .............................................. 2,550 2,550
Other current liabilities:
Accrued interest ........................................................... 3,167 6,319
Accrued salaries, wages, vacation pay, commissions and bonus ............... 6,726 8,976
Income and other taxes ..................................................... 4,597 4,070
Reorganization ............................................................. 2,895 4,600
Other ...................................................................... 8,540 7,730
--------- ---------
Total current liabilities .............................................. 51,361 57,878
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS .................................... 100,235 100,352
POSTEMPLOYMENT BENEFITS LIABILITY ............................................... 5,762 5,662
--------- ---------
Total liabilities ............................................................ 157,358 163,892
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 1,000 shares authorized, 1,000 shares issued and
outstanding ............................................................... -- --
Paid in capital .............................................................. 30,303 30,303
Cumulative translation adjustment ............................................ (1,368) (1,558)
Retained earnings ............................................................ 2,335 1,209
--------- ---------
Total stockholder's equity ................................................ 31,270 29,954
--------- ---------
Total liabilities and stockholder's equity ............................. $ 188,628 $ 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
March 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales .................................. $ 62,295 $ 61,147
Cost of goods sold ......................... 36,077 37,336
-------- --------
26,218 23,811
Selling, general and administrative expenses 19,036 19,474
Research and development expenses .......... 2,151 2,260
-------- --------
Operating income ........................ 5,031 2,077
Interest (expense) income, net ............. (3,346) 242
Other non-operating (expense) income, net .. 72 (265)
-------- --------
Income before provision for income taxes 1,757 2,054
Provision for income taxes ................. 631 850
-------- --------
Net income .............................. $ 1,126 $ 1,204
======== ========
Weighted average number of shares ....... 1,000 --
========
Earnings per share ...................... $ 1,126 --
========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
MONARCH MARKING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1996 1995
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 1,126 $ 1,204
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization ................................. 3,051 1,940
Other, net .................................................... 88 --
Changes in components of working capital:
(Increase) decrease in accounts receivable .................... (1,216) 1,100
Increase in inventories ....................................... (2,885) (1,412)
Decrease (increase) in prepayments and other current assets ... 872 (294)
Increase in accounts payable and overdrafts ................... 420 3,593
Decrease in advance billings .................................. (156) (26)
(Decrease) increase in other accrued liabilities .............. (5,769) 530
Net impact of eliminating assets not sold/liabilities not acquired -- (4,556)
-------- -------
Net cash provided by (used in) operating activities ........... (4,469) 2,079
-------- -------
Cash flows from investing activities:
Capital additions ................................................ (1,708) (1,969)
-------- -------
Net cash used in investing activities ......................... (1,708) (1,969)
-------- -------
Cash flows from financing activities:
Repayment on revolving credit facility ........................... (1,011) --
Repayment of capital lease obligations ........................... (117) (110)
-------- -------
Net cash used in financing activities ......................... (1,128) (110)
-------- -------
Net decrease in cash ....................................... (7,305) --
Cash and cash equivalents, beginning of period ...................... 17,889 --
-------- -------
Cash and cash equivalents, end of period ............................ $ 10,584 $ --
======== =======
Cash paid for interest .............................................. $ 6,348 $ 9
======== =======
Cash paid for taxes ................................................. $ 218 $ 488
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
MONARCH MARKING SYSTEMS, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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") provides for an adjustment to
the purchase price under certain circumstances. The Company has advised Pitney
Bowes that it believes it is entitled to a purchase price adjustment in its
favor, and Pitney Bowes similarly advised the Company that it believes it is
entitled to a purchase price adjustment in its favor. Because the Company and
Pitney Bowes were unable to resolve these differences, the dispute has been
referred to a mutually satisfactory accounting firm, which is expected to
resolve such differences, in accordance with the terms of the Omnibus Purchase
Agreement. At this time, the Company can make no determination as to the amount
of the adjustment, if any, that will be made to the purchase price. The Company
intends to pursue vigorously its rights under the Omnibus Purchase Agreement.
The purchase price has been preliminarily allocated to the net assets of the
business based on estimated fair values at the Acquisition date with the excess
of purchase price over fair value allocated to goodwill. The purchase price
allocation will be revised when the purchase price dispute is resolved. The
preliminary allocation of the purchase price to the assets and liabilities
acquired is as follows:
<TABLE>
<S> <C>
Allocation of purchase price:
Current assets $101,231
Property, plant and equipment, net 41,960
Goodwill 29,215
Financing fees 6,400
Other intangible assets 6,266
Other non-current assets 2,315
Severance and other organization costs (7,740)
Liabilities assumed (41,347)
--------
Total purchase price $138,300
========
</TABLE>
7
<PAGE> 8
2. INTERIM FINANCIAL INFORMATION
The accompanying unaudited interim consolidated financial statements of the
Company have been prepared by the Company. 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 the Company, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary to present fairly the financial
position of the Company as of March 31, 1996, and the results of its operations
and cash flows for the three months ended March 31, 1996. These adjustments
include only normal recurring adjustments to results of operations for the three
months ended March 31, 1996. The Company has eliminated all significant
intercompany transactions. Management believes that comparisons of the Company's
results of operations for the three months ended March 31, 1996 to the three
months ended March 31, 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
long-term senior notes (the "Notes"). 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 March 31,
1996, the Company had borrowed $5.7 million under the revolving credit
agreement. The Notes are unsecured, bear interest at a rate of 12.5% and mature
in 2003.
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 or result of operations.
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.
8
<PAGE> 9
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 or its
results of operations.
5. PRO FORMA DISCLOSURES
The pro forma results of operations for the three months ended March 31, 1995
reflect purchase accounting adjustments assuming the acquisition occurred at the
beginning of the period. These pro forma results, shown below, are unaudited:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Three months ended
March 31, 1995
--------------
<S> <C>
Net sales............................................................... $61,147
Net income ............................................................. 660
Earnings per share...................................................... 660
</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.
9
<PAGE> 10
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 has advised Pitney Bowes that it believes it is
entitled to a purchase price adjustment in its favor and Pitney Bowes has
similarly advised the Company that it believes that it is entitled to a purchase
price adjustment in its favor. Because the Company and Pitney Bowes were unable
to resolve these differences, the dispute has been referred to a mutually
satisfactory accounting firm, which is expected to resolve such differences, in
accordance with the terms of the Omnibus Purchase Agreement. At this time, the
Company can make no determination as to the amount of the adjustment, if any,
that will be made to the purchase price. The Company intends to pursue
vigorously its rights under the Omnibus Purchase Agreement.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 compared to three months ended March 31, 1995.
Management believes that comparisons of the Company's results of operations for
the three months ended March 31, 1996 to the three months ended March 31, 1995
are not meaningful. As the ownership of the Company changed effective June 30,
1995, the results of operations for the three months ended March 31, 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 results of operations for the three
months ended March 31, 1996 to the pro forma results of operations for the three
months ended March 31, 1995.
This discussion is presented below.
Three Months Ended March 31, 1996 Compared to the Pro Forma Three Months Ended
March 31, 1995.
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
ACTUAL THREE ACTUAL THREE PRO FORMA
MONTHS ENDED MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue (Net Sales) $62.3 $61.1 $61.1
Gross profit 26.2 23.8 25.5
Selling, general and
administrative expense 19.0 19.5 18.8
Research and development
expenses 2.2 2.2 2.0
Operating income 5.0 2.1 4.7
Interest expense (income) 3.3 (.2) 3.3
Other non-operating
expense (income) (.1) .3 .3
Net income 1.1 1.2 .7
</TABLE>
10
<PAGE> 11
The pro forma results are unaudited and reflect purchase accounting adjustments
assuming the Acquisition occurred at the beginning of the period presented. Pro
forma adjustments consist of cost savings associated with the workforce
reduction program implemented in August 1995, interest expense on borrowings
utilized to finance the Acquisition, amortization of goodwill, financing and
other acquisition costs, incremental depreciation expense on the additional
value assigned to property, plant & equipment to record these assets at their
fair value at the Acquisition date, among other items. 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.
Revenue. Total revenue increased $1.2 million, or 2.0%, to $62.3
million for the three months ended March 31, 1996 from $61.1 million for the pro
forma three months ended March 31, 1995. Domestic revenue, which represented
67.6% of total revenue for the 1996 period, increased by $1.0 million, or 2.4%,
to $42.1 million in 1996 from $41.1 million in pro forma 1995. The domestic
revenue increase resulted from growth in bar code product sales and Service
Bureau, partially offset by decreased revenue from conventional products. The
bar code growth was driven by increased supplies sales as the Company continues
to capture a high percentage of the supplies business from its installed base of
printers. International revenue increased by $0.2 million, or 1.0%, to $20.2
million in 1996 primarily due to revenue growth in Europe and Canada which was
offset by a revenue decline in Mexico. The revenue growth in Europe and Canada
was due to increased sales of bar code products and the currency translation
effect of the weaker U.S. dollar. The revenue decline in Mexico was due to the
weak Mexican economy and devaluation of the peso.
Gross Profit. Total gross profit increased by $.7 million, or 2.7%, to
$26.2 million for the three months ended March 31, 1996 from $25.5 million for
the pro forma three months ended March 31, 1995. Gross profit as a percent of
sales increased to 42.1% in 1996 from 41.7% in 1995. The increase in gross
profit was attributable to the effects of increased revenues and better margins
due to price increases, especially related to the Service Bureau operations.
Selling, General and Administrative ("SG&A"). SG&A expenses increased
by $.2 million, or 1.1%, to $19.0 million for the three months ended March 31,
1996 from $18.8 million for the pro forma three months ended March 31, 1995 due
to increased variable costs (commissions) because of increased revenues. SG&A as
a percentage of revenue decreased to 30.5% in 1996 from 30.8% in 1995.
Research and Development ("R&D"). R&D expenses increased by $0.2
million, or 10.0%, to $2.2 million for the three months ended March 31, 1996
from $2.0 million for the pro forma three months ended March 31, 1995. The
increased R&D spending was the result of increased new product development.
Operating Income. Operating income increased $0.3 million, or 6.4%, to
$5.0 million for the three months ended March 31, 1996 from $4.7 million for the
pro forma three months ended March 31, 1995. The improved operating income was
largely driven by increased revenue and better margins.
Interest Expense (Income). For the three months ended March 31, 1996,
net interest expense was $3.3 million, the same as for the pro forma three
months ended March 31, 1995.
Net Income. Net income increased by $.4 million, or 71.4%, to $1.1
million for the three months ended March 31, 1996 from $.7 million for the pro
forma three months ended March 31, 1995 due primarily to the improved gross
margins and a more favorable impact due to movement in foreign currency rates.
The effective tax rate for the 1996 period decreased to 35.9% from 41.4% due to
1995 including certain non-deductible expenses that were not recurring in 1996.
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
11
<PAGE> 12
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 three months ended
March 31, 1996 to prior periods may not be meaningful due to the Acquisition. At
March 31, 1996, the Company had cash of $10.6 million and working capital of
$51.8 million. For the three months ended March 31, 1996 the Company had
negative cash flows of $7.3 million due primarily to the semi-annual payment of
interest on the Notes of $6.3 million, $1.0 million repayment under revolving
credit facility and increases in receivables and inventories due to current and
future sales growth.
The Company's capital expenditures for the three months ended March 31,
1996 were approximately $1.7 million. The Company's remaining capital
expenditure requirements for 1996 are projected to be approximately $8.3
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 $27.0 million as of each
fiscal quarter through June 1996, gradually increasing to $34 million by
September 30, 1997; (c) maintain a coverage ratio (as defined) of 1.2 to 1 for
March 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.
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.
12
<PAGE> 13
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibits required in accordance with Item 601 of Regulation S-K are incorporated
by reference herein as filed with the registrant's Registration Statement on
Form 10-K (file no. 33-95470).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarterly period ended March 31,
1996.
13
<PAGE> 14
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.
May 9, 1996 MONARCH MARKING SYSTEMS, INC.
By: /s/ John W. Paxton
---------------------------
John W. Paxton
President and Chief Executive Officer
May 9, 1996 By: /s/ Kenneth A. Cassady
---------------------------
Kenneth A. Cassady
Vice President and Chief Financial Officer
14
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