Exhibit 99.2
Performance Chemicals & Ingredients
Company D/B/A SensoryEffects and
Subsidiaries
Consolidated Financial Statements
With
Independent Auditor's Report
December 31, 2013
Page | |
| Independent Auditor's Report | 1 |
| Financial Statements | |
| Consolidated Balance Sheets | 3 |
| Consolidated Statements of Income | 4 |
| Consolidated Statements of Stockholders' Equity | 5 |
| Consolidated Statements of Cash Flows | 6 |
| Notes to Consolidated Financial Statements | 7 |
Independent Auditor's Report
Board of Directors
Performance Chemicals & Ingredients Company
d/b/a SensoryEffects and Subsidiaries
St. Louis, Missouri
We have audited the accompanying consolidated financial statements of Performance Chemicals & Ingredients Company d/b/a SensoryEffects and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
MEMBER AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS AND AN INDEPENDENT FIRM
ASSOCIATED WITH THE NORTH AMERICAN REGION OF MOORE STEPHENS INTERNATIONAL LIMITED
KNOWN INTERNATIONALLY AS MOORE STEPHENS BROWN SMITH WALLACE, LLC
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Performance Chemicals & Ingredients Company d/b/a SensoryEffects and Subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Brown Smith Wallace, LLC
St. Louis, Missouri
April 11, 2014
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
December 31, 2013 and 2012
| 2013 | 2012 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 5,352,692 | $ | 4,845,507 | ||||
| Trade accounts receivable, net | 25,582,901 | 16,512,603 | ||||||
| Inventories | 26,760,614 | 22,196,546 | ||||||
| Other receivables, current | 22,984 | 637,518 | ||||||
| Prepaid income taxes | 605,086 | 3,012,424 | ||||||
| Deferred income taxes | 979,369 | 941,553 | ||||||
| Prepaid expenses and other assets | 203,710 | 110,194 | ||||||
| Total Current Assets | 59,507,356 | 48,256,345 | ||||||
| Property, Plant and Equipment, net | 42,981,980 | 24,743,390 | ||||||
| Intangible Assets, net | 2,343,428 | 3,574,431 | ||||||
| Goodwill | 21,606,154 | 258,074 | ||||||
| Other Assets | 1,525,397 | 1,113,535 | ||||||
| TOTAL ASSETS | $ | 127,964,315 | $ | 77,945,775 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities | ||||||||
| Current maturities of long-term debt | $ | 19,216,671 | $ | 14,305,282 | ||||
| Trade accounts payable | 11,209,451 | 7,550,020 | ||||||
| Accrued salaries, bonuses, and payroll taxes | 3,152,084 | 1,796,088 | ||||||
| Accrued expenses | 2,199,686 | 1,623,535 | ||||||
| Total Current Liabilities | 35,777,892 | 25,274,925 | ||||||
| Line-of-Credit | 4,000,000 | 6,000,000 | ||||||
| Long-Term Debt, less current maturities | 53,681,395 | 34,355,566 | ||||||
| Deferred Income Taxes | 4,217,892 | 2,217,093 | ||||||
| Total Liabilities | 97,677,179 | 67,847,584 | ||||||
| Stockholders' Equity | ||||||||
| Common stock, $.01 par value, 10,000 shares authorized and 4,550 shares issued and outstanding | 45 | 45 | ||||||
| Additional paid-in capital | (2,529,469 | ) | (2,529,469 | ) | ||||
| Retained earnings | 32,816,560 | 12,627,615 | ||||||
| Total Stockholders' Equity | 30,287,136 | 10,098,191 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 127,964,315 | $ | 77,945,775 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
| 2013 | 2012 | |||||||
| Net sales | $ | 208,454,654 | $ | 164,479,842 | ||||
| Cost of sales | 156,988,948 | 126,300,918 | ||||||
| Gross profit | 51,465,706 | 38,178,924 | ||||||
| Operating expenses | ||||||||
| Selling expenses | 5,031,395 | 4,612,573 | ||||||
| Research and development expenses | 1,872,562 | 1,721,450 | ||||||
| General and administrative expenses | 10,196,347 | 9,392,691 | ||||||
| 17,100,304 | 15,726,714 | |||||||
| Income from operations | 34,365,402 | 22,452,210 | ||||||
| Other income (expense) | ||||||||
| Interest expense | (3,414,491 | ) | (3,625,255 | ) | ||||
| Interest income | 9,685 | 13,289 | ||||||
| Loss on disposal of assets | (64,957 | ) | (109,977 | ) | ||||
| Miscellaneous expense | (44,553 | ) | (35,000 | ) | ||||
| (3,514,316 | ) | (3,756,943 | ) | |||||
| Income before income taxes | 30,851,086 | 18,695,267 | ||||||
| Income tax expense | (10,662,141 | ) | (6,037,907 | ) | ||||
| NET INCOME | $ | 20,188,945 | $ | 12,657,360 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Common stock | Additional paid-in capital | Treasury stock | Retained earnings | Total stockholders' equity (deficit) | ||||||||||||||||
| Balance at December 31, 2011 | $ | 40 | $ | (6,237,025 | ) | $ | - | $ | - | $ | (6,236,985 | ) | ||||||||
| Net income | - | - | - | 12,657,360 | 12,657,360 | |||||||||||||||
| Stock options exercised | 5 | 1,114,192 | - | - | 1,114,197 | |||||||||||||||
| Tax benefit from stock options exercised | - | 2,566,202 | - | - | 2,566,202 | |||||||||||||||
| Shares repurchased | - | - | (42,049 | ) | - | (42,049 | ) | |||||||||||||
| Retirement of shares | - | (12,304 | ) | 42,049 | (29,745 | ) | - | |||||||||||||
| Stock option compensation expense | - | 39,466 | - | - | 39,466 | |||||||||||||||
| Balance at December 31, 2012 | 45 | (2,529,469 | ) | - | 12,627,615 | 10,098,191 | ||||||||||||||
| Net income | - | - | - | 20,188,945 | 20,188,945 | |||||||||||||||
| Balance at December 31, 2013 | $ | 45 | $ | (2,529,469 | ) | $ | - | $ | 32,816,560 | $ | 30,287,136 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Years ended December 31, 2013 and 2012
| 2013 | 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 20,188,945 | $ | 12,657,360 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 5,280,895 | 5,271,339 | ||||||
| Amortization of debt issuance costs | 427,675 | 325,912 | ||||||
| Allowance for doubtful accounts | 139,000 | (34,200 | ) | |||||
| Loss on disposal of property and equipment | 64,957 | 109,977 | ||||||
| Share-based compensation expense | - | 39,466 | ||||||
| Deferred income taxes | 1,962,983 | 136,975 | ||||||
| (Increase) decrease in operating assets: | ||||||||
| Trade accounts receivable | (9,209,298 | ) | (4,203,233 | ) | ||||
| Prepaid expenses and other current assets | (93,516 | ) | 302,472 | |||||
| Prepaid income taxes | 2,407,338 | 177,114 | ||||||
| Inventories | (259,682 | ) | 248,457 | |||||
| Other receivables | 614,534 | 541,290 | ||||||
| Increase in operating liabilities: | ||||||||
| Trade accounts payable | 3,659,431 | 3,123,846 | ||||||
| Accrued payroll | 1,355,996 | 686,253 | ||||||
| Accrued expenses | 406,523 | 133,551 | ||||||
| Net cash provided by operating activities | 26,945,781 | 19,516,579 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (2,357,439 | ) | (2,663,292 | ) | ||||
| Proceeds from disposal of equipment | 4,000 | 244,317 | ||||||
| Purchase of Flavors From Florida, Inc. assets | - | (2,945,946 | ) | |||||
| Purchase of Quality Ingredients Corporation assets | (45,482,838 | ) | - | |||||
| Net cash used in investing activities | (47,836,277 | ) | (5,364,921 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net payments on line-of-credit | (2,000,000 | ) | (2,000,000 | ) | ||||
| Proceeds from long-term debt | 36,855,000 | - | ||||||
| Payments on long-term debt | (12,617,782 | ) | (11,415,133 | ) | ||||
| Debt issuance costs | (839,537 | ) | - | |||||
| Shares repurchased | - | (42,049 | ) | |||||
| Stock options exercised | - | 1,114,197 | ||||||
| Net cash provided by (used in) financing activities | 21,397,681 | (12,342,985 | ) | |||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 507,185 | 1,808,673 | ||||||
| Cash and cash equivalents, beginning of year | 4,845,507 | 3,036,834 | ||||||
| Cash and cash equivalents, end of year | $ | 5,352,692 | $ | 4,845,507 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
December 31, 2013
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies |
A summary of the Company's organization, operations, and significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:
Organization
Performance Chemicals & Ingredients Company, d/b/a SensoryEffects ("PCI" or "the Company") was formed in 2005. PCI owns and operates companies acquired via asset purchases as follows:
In an asset purchase transaction dated May 2006, SensoryEffects Powder Systems, Inc., a wholly-owned subsidiary of PCI, acquired rights, title and interest to certain assets of Diehl, Inc. (an Ohio corporation).
In an asset purchase transaction dated February 13, 2008, SensoryEffects Flavor Company, d/b/a SensoryEffects Flavor Systems, a wholly-owned subsidiary of PCI, acquired rights, title, and interest to certain assets of Givaudan Flavors, Inc. (a Missouri corporation).
In an asset purchase transaction dated October 24, 2008, SensoryEffects Cereal Systems, Inc., a wholly-owned subsidiary of PCI, acquired rights, title, and interest to certain assets of US Foods, LLC (a Nebraska limited liability company).
On June 23, 2011, the Company started SensoryEffects International Sales, Inc., an Interest Charge Domestic International Sales Corporation (IC-DISC). The IC-DISC is a wholly-owned subsidiary of PCI.
PCI has completed various acquisitions and divestitures (see Note N) through asset purchases and has consolidated the associated activities into the existing companies.
Nature of Operations
The Company was formed to acquire and manage food ingredient businesses.
SensoryEffects Powder Systems (a Delaware corporation; "SEPS") manufactures various food products, including non-dairy creamers and powdered vegetable shortenings. Revenues from SEPS represent approximately 51% of consolidated net sales.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
December 31, 2013
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Nature of Operations (Continued)
SensoryEffects Flavor Systems (a Delaware corporation; "SEFS") is a leading supplier of flavor systems consisting primarily of liquid and dry flavor bases for various food and beverage products, flavor and color inclusions and specialty powders. Revenues from SEFS represent approximately 34% of consolidated net sales.
SensoryEffects Cereal Systems (a Delaware corporation; "SECS") is a leading supplier of complex, multi-inclusion cereals and ingredients including organic, natural, gluten- free, and nutraceutical products. Revenues from SECS represent approximately 15% of consolidated net sales.
As a part of its normal course of business, the Company grants credit to its customers. The Company's products are sold domestically and internationally.
Principles of Consolidation
The accompanying consolidated financial statements for the years ended December 31, 2013 and 2012 include the accounts of Performance Chemicals & Ingredients Company, d/b/a SensoryEffects, and its wholly-owned subsidiaries, SensoryEffects Powder Systems and its wholly-owned subsidiary, SEPS Reading, LLC; SensoryEffects Flavor Systems; SensoryEffects Cereal Systems; and SensoryEffects International Sales, Inc. All significant intercompany balances and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company's cash and cash equivalents are on deposit with two domestic financial institutions. At times, bank deposits may be in excess of federally insured limits.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Trade Accounts Receivable
Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. The Company extends credit terms to its customers in varying durations depending on the Company's business relationship with a given customer. As of December 31, 2013 and 2012, the net accounts receivable balance includes an allowance for doubtful accounts of $338,000 and $199,000, respectively.
Inventories
Inventories of raw materials, work in process, and finished goods are stated at the lower of standard cost (which approximates actual cost using the first-in, first-out method) or market. The Company evaluates the need to record adjustments to inventories on a regular basis. Inventories in excess of estimated usage requirements and potential spoilage are written down to an estimated net realizable value. Inherent in the estimates of net realizable value are estimates related to future manufacturing schedules, customer demand, and ultimate realization of potentially excess inventories.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Major renewals and betterments are capitalized and maintenance and repairs which do not improve or extend the life of the respective assets are charged against earnings in the current period.
Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives on a straight-line basis. Amortization of leasehold improvements is provided for on a straight-line basis over the lesser of the length of the related lease or the estimated useful lives of the assets. In computing its taxable income, the Company uses the methods as prescribed by the Internal Revenue Code. Depreciation and amortization expense pertaining to property, plant and equipment in 2013 and 2012 totaled $4,049,892 and $3,513,931, respectively.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Intangible Assets
Intangible assets totaling $9,222,508 comprised of patents, trademarks, license agreements, formulae, and customer relationships, have been acquired in conjunction with various asset purchases (see Note N). These intangibles are being amortized on a straight-line basis over periods of 4 to 10 years. Amortization expense pertaining to these intangibles totaled $1,231,003 and $1,757,408 for the years ended December 31, 2013 and 2012, respectively (see Note C).
Impairment of Long Lived Assets
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. In the opinion of management, no such impairment existed as of December 31, 2013.
Revenue Recognition
The Company records revenue as products are shipped and title passes. Revenue recognition is deferred for advance payments made by customers.
Shipping and Handling Costs
All fees charged to the Company's customers for shipping and handling, and the associated costs, are included in net sales and are classified as such in the accompanying consolidated financial statements. All shipping and handling costs incurred by the Company for purchases of inventory are considered to be a part of the cost of goods sold and are classified as such in the accompanying consolidated financial statements.
Goodwill
Goodwill reflected on the balance sheet represents the excess of the cost of the acquired entities over the amounts assigned to the assets acquired and any liabilities assumed. In order to comply with guidance provided under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, Intangibles-Goodwill and Other, goodwill will not be amortized and will be evaluated annually, or on an interim basis if warranted by events or circumstances, for impairment by applying fair-value based tests considering the present value of future cash flows. In the opinion of management, no such impairment existed at December 31, 2013 and 2012.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Research and Development
Research and development costs are expensed as incurred. The Company incurred $1,872,562 and $1,721,450 in 2013 and 2012, respectively, for research and development costs.
Equity Incentive Plan
The Company has adopted the fair value recognition provisions of FASB ASC 718, Stock Compensation., which establishes accounting and reporting standards for share- based payment transactions with employees, including equity incentive plans. Under this pronouncement, compensation expense is recognized over the associated vesting period and is based on the fair market value of the stock options on the grant date.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. State income tax returns are filed separately or consolidated depending on the individual state.
Income tax expense includes the federal, state, and local taxes currently payable and deferred taxes arising from the temporary differences between income for financial reporting and income tax purposes. These temporary differences result primarily from different methods of accounting for depreciation, accounts receivable, inventory, intangibles including goodwill, patents, and a supply agreement, and accrued and prepaid expenses.
The Company has addressed the provisions of ASC 740-10, Accounting for Income Taxes. In that regard, the Company has evaluated its tax positions, expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings and believes that no provision for income taxes is necessary, at this time, to cover any uncertain tax positions. The Company's tax return for the year ended December 31, 2012 is currently under audit by the Internal Revenue Service. The Company believes it is no longer subject to examination by major tax jurisdictions for years ended prior to December 31, 2010.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was $682,684 and $749,268 for 2013 and 2012, respectively.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Cost of Debt Issuance
Costs associated with the issuance of debt instruments are capitalized and amortized over the terms of the respective financing arrangements. If debt is retired early, the related unamortized costs are written off in the period the debt is retired. Capitalized costs net of accumulated amortization totaled $1,525,397 and $1,113,535 at December 31, 2013 and 2012, respectively. Amortization expense pertaining to these costs totaled $427,675 and $325,912 for the years ended December 31, 2013 and 2012, respectively, and is included in interest expense in the accompanying consolidated statements of income.
Subsequent Events
The Company has evaluated all subsequent events through April 11, 2014, the date the consolidated financial statements were available to be issued.
| Note B - | Inventories |
The composition of inventories at December 31, 2013 and 2012 follows:
| 2012 | ||||||||
| Raw materials | $ | 10,870,449 | $ | 12,237,391 | ||||
| Work in process | 310,173 | 270,775 | ||||||
| Finished goods | 15,579,992 | 9,688,380 | ||||||
| $ | 26,760,614 | $ | 22,196,546 | |||||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note C - | Intangible Assets |
At December 31, 2013, the gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows:
| Gross | Accumulated | |||||||||||
| Assets | Amortization | Net | ||||||||||
| Patents and trademarks | $ | 1,098,766 | $ | (514,580 | ) | $ | 584,186 | |||||
| License agreements | 1,697,000 | (1,697,000 | ) | - | ||||||||
| Formulae and customer relationships | 6,426,742 | (4,667,500 | ) | 1,759,242 | ||||||||
| Total | $ | 9,222,508 | $ | (6,879,080 | ) | $ | 2,343,428 | |||||
At December 31, 2012, the gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows:
| Gross | Accumulated | |||||||||||
| Assets | Amortization | Net | ||||||||||
| Patents and trademarks | $ | 1,098,766 | $ | (419,700 | ) | $ | 679,066 | |||||
| License agreements | 1,697,000 | (1,654,575 | ) | 42,425 | ||||||||
| Formulae and customer relationships | 6,426,742 | (3,573,802 | ) | 2,852,940 | ||||||||
| Total | $ | 9,222,508 | $ | (5,648,077 | ) | $ | 3,574,431 | |||||
Estimated amortization expense over the next five years is as follows:
Year ending December 31, | Amount | ||||
| 2014 | $ | 957,725 | |||
| 2015 | 643,140 | ||||
| 2016 | 325,719 | ||||
| 2017 | 188,144 | ||||
| 2018 | 89,877 | ||||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note C - | Intangible Assets (Continued) |
The Company's future cash flows are not materially impacted by its ability to extend or renew agreements related to its amortizable intangible assets. The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. In the opinion of management, no material impairment existed as of December 31, 2013 and 2012.
| Note D - | Other Receivables |
The Company's SEFS subsidiary had an agreement with a customer which pertains to reimbursement for specific equipment purchased and used in production by SEFS. The reimbursement had been structured such that payments are derived based on a surcharge applied to pounds of qualifying product purchased by the customer and pursuant to minimum volumes defined in the agreement. At December 31, 2012, the total amount receivable under this agreement was $628,084, and is included in the accompanying consolidated balance sheets as other receivables, current. The entire amount outstanding was collected during 2013.
| Note E - | Property, Plant and Equipment |
Property, plant and equipment consist of the following:
| 2013 | 2012 | |||||||
| Land | $ | 668,635 | $ | 518,635 | ||||
| Buildings and improvements | 10,013,988 | 8,959,419 | ||||||
| Leasehold improvements | 207,846 | 199,138 | ||||||
| Machinery and equipment | 47,695,582 | 26,507,919 | ||||||
| Office equipment | 1,576,266 | 1,511,412 | ||||||
| Construction in progress | 665,186 | 940,518 | ||||||
| 60,827,503 | 38,637,041 | |||||||
| Less accumulated depreciation and amortization | (17,845,523 | ) | (13,893,651 | ) | ||||
| $ | 42,981,980 | $ | 24,743,390 | |||||
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Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note F - | Line-of-Credit and Long-Term Debt |
In June 2011, the Company approved a plan to amend and restate its corporate indebtedness, pursuant to a recapitalization, and consequently restructured the credit agreement and then outstanding long-term debt held with Texas Capital Bank and The Private Bank and Trust Company. As part of the recapitalization, the Company elected to make payments to existing stockholders and option holders of the Company. On August 30, 2013, the Company approved a plan to amend this credit agreement to finance the acquisition of certain assets and liabilities of Quality Ingredients Corporation (See Note N). The amended and restated credit agreement includes financing commitments with Texas Capital Bank, The PrivateBank and Trust Company, Green Bank, Enterprise Bank & Trust, The F&M Bank & Trust Company, and City Bank Texas. The agreement included additional borrowings on the term note of $36,855,000.
Line-of-credit and long-term debt at December 31, 2013 and 2012 consisted of the following:
| 2013 | 2012 | |||||||
| Texas Capital Bank; revolving line-of-credit, borrowing limited to the lesser of $25,000,000 or the available borrowing base, calculated monthly, as specified in the agreement; collateralized by accounts receivable and inventory; due June 2, 2016 with interest payable monthly based on LIBOR or the prime rate plus an applicable margin. At December 31, 2013, the Company had $4,000,000 outstanding at the LIBOR based rate of 5.0%. | $ | 4,000,000 | $ | 6,000,000 | ||||
| Texas Capital Bank; dated June 2, 2011 and refinanced August 30, 2013; collateralized by substantially all corporate assets; interest due and payable quarterly at a variable rate based on LIBOR or the prime rate plus an applicable margin. The interest rate was 5.0% at December 31, 2013; quarterly principal payments of $2,812,500 due through March 31, 2016 with final balloon payment due June 2, 2016. | $ | 72,187,500 | $ | 44,359,500 | ||||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note F - | Line-of-Credit and Long-Term Debt (Continued) |
| Seller financed note dated September 3, 2009; collateralized by land and building; payable in monthly installments of $6,660, including interest at 4.0% with final payment and all unpaid principal due in September 2015. | 696,903 | 747,837 | ||||||
| Givaudan Flavors, Inc. note dated February 13, 2008; guaranteed by Highlander Partners, L.P.; interest only payments quarterly at the rate of 6% per annum; note matured February 12, 2013 with all then outstanding principal and interest paid. | - | 3,500,000 | ||||||
| City of Defiance, Ohio dated April 9, 2007; collateralized by specific components of manufacturing equipment; principal payable in monthly installments of $3,446 including principal and interest at 4.25% per annum; note matures May 2014. | 13,663 | 53,511 | ||||||
| 72,898,066 | 48,660,848 | |||||||
| Less current maturities | (19,216,671 | ) | (14,305,282 | ) | ||||
| $ | 53,681,395 | $ | 34,355,566 |
Year ending December 31, | |||||
| 2014 | $ | 19,216,671 | |||
| 2015 | 11,893,895 | ||||
| 2016 | 41,787,500 | ||||
| $ | 72,898,066 | ||||
-16-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note F - | Line-of-Credit and Long-Term Debt (Continued) |
The Texas Capital Bank credit agreement contains various covenants pertaining to the Company's EBITDA, leverage ratio, current ratio, and debt service coverage ratio. At December 31, 2013 and 2012, the Company was in compliance with these covenants. The credit agreement also requires an additional principal payment to be made annually based on 50% of the Company's excess cash flow as defined in the agreement. The Company is expected to make this additional payment of $7,900,000 on May 15, 2014. This amount has been included in the current portion of long-term debt in the accompanying consolidated balance sheets.
| Note G - | Equity |
In June 2012, a key employee exercised stock options to purchase 2.0 shares of common stock for $12,304 (see Note H). PCI immediately bought back the shares of common stock for $42,049. Upon repurchasing the stock, it was determined by the Company's Board of Directors ("the Board") that the shares would be retired as is reflected in the accompanying consolidated statements of stockholders' equity.
| Note H - | Stock Options |
In 2007, the Board established the "2007 Performance Chemicals & Ingredients Company Equity Incentive Plan" (the "Plan"), under which incentive stock options and nonqualified stock options can be granted to employees, members of the Board, and non- employee directors. The Plan indicates that the maximum number of shares of common stock originally authorized to be issued was 646,000, subsequently adjusted to 646 pursuant to a reverse stock split. The Board is the administrator of the Plan and has the authority to grant options, adjust the grant or exercise price of the options, or to delegate their authority to another governing body.
Options are exercisable subject to the following vesting schedule: 25% shall vest on the first anniversary of the date of the grant; 6.25% shall vest on the first day of the fourth calendar month following the month in which the first anniversary of the date of grant occurs; the remainder shall vest ratably at 6.25% on the first day of each third month thereafter until all options are fully vested or any unvested options are forfeited. The exercise price of the options shall not be less than the fair market value of the Company's common stock on the date of grant. No options were granted under the Plan during 2013 or 2012.
-17-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note H - | Stock Options (Continued) |
Effective with the inception of the Plan, the Company adopted the fair value recognition provisions of FASB ASC 718, Stock Compensation. Pursuant to FASB ASC 718, the Company determines the fair value of stock options using the Black-Scholes valuation model. FASB ASC 718 requires the Company to recognize expense over the service period for options that are expected to vest and record adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
As a result of the prescribed vesting schedule, the Company deemed stock-based compensation expense in 2013 and 2012, related to stock options previously granted, to be $0 and $39,466, respectively. As of December 31, 2013, all outstanding options are vested and all compensation cost has been recognized. During 2012, three employees and one former employee exercised a total of 532.619 options at a total price of $1,114,197.
The following is an analysis of options to purchase shares of the Company's stock issued and outstanding as of December 31, 2013 and 2012:
Number of Units | Weighted Average | |||||||
| Balance as of December 31, 2011 | 553.380 | $ | 2,198 | |||||
| Granted | - | - | ||||||
| Exercised | (532.619 | ) | 2,092 | |||||
| Forfeited | (6.175 | ) | 6,152 | |||||
| Balance as of December 31, 2012 | 14.586 | $ | 4,386 | |||||
| Granted | - | - | ||||||
| Forfeited | - | - | ||||||
| Balance as of December 31, 2013 | 14.586 | $ | 4,386 | |||||
At December 31, 2013, vested, exercisable options were outstanding for 14.586 shares at a weighted average exercise price of $4,386. These options have a weighted-average remaining contractual term of 4.1 years.
As shown above 532.619 stock options were exercised during the year ended December 31, 2012. Of this amount, 455.108 of the options were non-qualified stock options. Upon exercise of these options, the Company recorded an increase in prepaid income taxes of $2,566,202 and a corresponding credit to additional paid-in capital to record the associated income tax benefit related to the transaction. The impact of this transaction was treated as a non-cash transaction in the accompanying consolidated statements of cash flows
-18-
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note H - | Stock Options (Continued) |
Number of Options | Weighted Average | |||||||
| Nonvested Options | ||||||||
| Nonvested options, December 31, 2011 | 28.813 | $ | 1,522 | |||||
| Granted | - | - | ||||||
| Forfeited | (6.175 | ) | 1,522 | |||||
| Vested | (22.638 | ) | 1,522 | |||||
| Nonvested options, December 31, 2012 | - | $ | - | |||||
| Nonvested options, December 31, 2013 | - | $ | - | |||||
In March, 2012, the Company adopted the Performance Chemicals & Ingredients Company Stock Appreciation Incentive Plan. The plan was formed to further the economic interest of the Company by providing deferred compensation incentives and to enhance the long-term performance and retention of the key employees selected to participate. The Company granted 80 units under this plan. The units vest upon the earlier of a change in control or an initial public offering and will be recognized as compensation expense at this time. Upon vesting, the plan administrator shall determine the fair market value of the units and unit-holders shall be entitled to any appreciation in the fair market value of those units that occurred from the effective grant date through the date of the change in control or initial public offering.
-19-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note I - | Income Taxes |
Deferred income tax assets and liabilities result from future tax benefits and obligations related to the difference between the tax basis of assets and liabilities and the amounts reported in the financial statements. The Company classifies their deferred tax assets and liabilities between current and non-current based on the particular difference from which they arise. The deferred tax assets and liabilities at December 31, 2013 and 2012 are comprised of the following:
| 2013 | 2012 | |||||||
| Current deferred: | ||||||||
| Asset | $ | 1,025,073 | $ | 960,841 | ||||
| Liability | (45,704 | ) | (19,288 | ) | ||||
| $ | 979,369 | $ | 941,553 | |||||
| Long-term deferred: | ||||||||
| Asset | $ | 1,168,733 | $ | 990,873 | ||||
| Liability | (5,386,625 | ) | (3,207,966 | ) | ||||
| $ | (4,217,892 | ) | $ | (2,217,093 | ) | |||
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 (liabilities) were as follows at December 31:
| 2013 | 2012 | |||||||
| Current: | ||||||||
| Allowance for doubtful accounts | $ | 122,750 | $ | 71,136 | ||||
| Reserve for obsolete inventories | 749,336 | 739,537 | ||||||
| Inventory capitalization | 38,146 | 46,605 | ||||||
| Prepaid expenses | (45,704 | ) | (19,288 | ) | ||||
| Accrued expenses | 114,841 | 103,563 | ||||||
| 979,369 | 941,553 | |||||||
| Noncurrent: | ||||||||
| Property, plant and equipment | (4,641,510 | ) | (2,841,098 | ) | ||||
| Deferred stock compensation | 317 | 312 | ||||||
| IC-DISC commission income | (511,960 | ) | (263,444 | ) | ||||
| Organization costs | - | 1,266 | ||||||
| Intangible assets | 935,261 | 885,871 | ||||||
| (4,217,892 | ) | (2,217,093 | ) | |||||
| Net deferred taxes | $ | (3,238,523 | ) | $ | (1,275,540 | ) | ||
-20-
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note I - | Income Taxes (Continued) |
The consolidated provision for income taxes consists of the following at December 31:
| 2013 | 2012 | |||||||
| Current | $ | 8,699,158 | $ | 5,900,932 | ||||
| Deferred | 1,962,983 | 136,975 | ||||||
| Net provision for federal, state, and local income taxes | $ | 10,662,141 | $ | 6,037,907 | ||||
In 2013 and 2012, the Company's effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income from continuing operations primarily as a result of the domestic production activity deduction.
| Note J - | Related Party Transactions |
For the years ended December 31, 2013 and 2012, the Company incurred management fees and other general expenses to Highlander Partners, L.P. in the amount of $404,420 and $293,392, respectively. As of December 31, 2013 and 2012, the amount payable to Highlander and included in accrued expenses in the accompanying consolidated balance sheets was $215,384 and $139,580, respectively.
| Note K - | Employee Benefit Plans |
The Company sponsors a defined contribution 401(k) plan covering all employees who meet various eligibility requirements. Under the plan, the Company makes matching contributions and can elect to make additional discretionary contributions. The Company bears all costs of administrating the plan. As of January 1, 2011, the Company elected the Safe Harbor provision. For the years ended December 31, 2013 and 2012, the total employer contributions charged to operations were $458,805 and $386,680, respectively.
| Note L - | Commitments |
The Company leases equipment and operating facilities under operating leases expiring in various years through 2029. Rental expense charged to operations was $1,120,300 and $624,993 for 2013 and 2012, respectively.
-21-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note L - | Commitments (Continued) |
Lease Commitments (Continued)
Minimum future rental payments under non-cancelable operating leases as of December 31, 2013 for each of the next five years and thereafter are:
Year ending December 31, | Amount | |||
| 2014 | $ | 861,505 | ||
| 2015 | 859,756 | |||
| 2016 | 546,119 | |||
| 2017 | 343,009 | |||
| 2018 | 342,437 | |||
| Thereafter | 2,080,699 | |||
The Company has entered into purchase and pricing agreements that expire at various dates through 2015, some of which require various minimum purchases. These agreements are predominately related to commodity-based items and have been established in the ordinary course of business and have been based on the plants' anticipated supply needs to meet the demands of customers. All agreements are relatively short-term in nature and the Company does not expect them to materially impact the future consolidated financial position, results of operations, or cash flows.
| Note M - | Supplemental Cash Flow Information |
Cash paid during the year for:
| 2013 | 2012 | |||||||
| Interest | $ | 2,924,988 | $ | 3,331,301 | ||||
| Income taxes | $ | 6,492,177 | $ | 5,717,074 | ||||
-22-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
| Note N - | Business Combinations |
Quality Ingredients Corporation
SEPS entered into an Asset Purchase Agreement dated August 30, 2013 with Quality Ingredients Corporation (a Minnesota corporation), through which SEPS acquired inventory, equipment, real property, and intangible assets for a total purchase price of $45,482,838 (which includes corresponding working capital adjustments). The purchase of the assets was financed through borrowings of long-term debt and advances on the Company's line-of-credit. The goodwill of $21,348,080 arising from the acquisition consists largely of the added capacity and the ability of the Company to convert the existing low margin business to higher valued, higher margin customers and specialty products. All of the goodwill is expected to be deductible for income tax reporting purposes.
Following are the fair values of the assets acquired as of the date of the acquisition:
| Inventories | $ | 4,304,386 | ||
| Land | 150,000 | |||
| Building | 700,000 | |||
| Machinery and equipment | 19,150,000 | |||
| Goodwill | 21,348,080 | |||
| Accrued expenses | (169,628 | ) | ||
| $ | 45,482,838 |
Flavors From Florida, Inc.
SEFS entered into an Asset Purchase Agreement dated June 4, 2012 with Flavors From Florida, Inc. (a Florida corporation), through which SEFS acquired prepaid assets, inventory, equipment, and intangible assets for a total purchase price of $2,945,946.
Following are the fair values of the assets acquired as of the date of the acquisition:
| Prepaid assets | $ | 63,158 | ||
| Inventories | 1,428,261 | |||
| Machinery and equipment | 275,317 | |||
| Intangible assets | 1,179,210 | |||
| $ | 2,945,946 |
-23-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2013
| Note O - | Concentration |
The Company had one significant customer during the years ended December 31, 2013 and 2012 (those customers with annual revenues in excess of 10% of total revenue). Revenues from these customers totaled approximately $28,316,000 and $18,746,000 for the years ended December 31, 2013 and 2012, respectively. Amounts due from these customers at December 31, 2013 and 2012 totaled approximately $3,039,000, and $1,804,000, respectively.
| Note P - | Contingencies |
At various times the Company is involved in legal proceedings incidental to the conduct of its business. Management does not believe that these legal proceedings will result in a material impact to the Company's financial condition or results of operations.
| Note Q - | Subsequent Events |
On March 14, 2014, SEPS closed on an asset purchase agreement with Anderson Custom Processing, Inc. (a Minnesota corporation). The acquired assets include intellectual property, inventory, real property, and machinery and equipment. The agreement includes an aggregate purchase price of $8,705,000. The purchase of assets was funded with advances on the existing line-of-credit and cash. The acquisition was completed to allow the Company to increase its spray drying capabilities.
On March 31, 2014, the Company entered into a stock purchase agreement with Balchem Corporation (a Maryland corporation), agreeing to sell all of the outstanding shares of the Company's stock to Balchem Corporation (NASDAQ: BCPC) for $567,000,000. The purchase price is based on a debt-free, cash-free balance sheet and is subject to adjustment based on anticipated working capital targets. The transaction is subject to certain regulatory approvals and customary closing conditions. The transaction is expected to close within forty days from the date of the agreement.
-24-
Performance Chemicals & Ingredients
Company D/B/A SensoryEffects and
Subsidiaries
Consolidated Financial Statements
With
Independent Auditors' Report
December 31, 2012
TABLE OF CONTENTS
Page | |
| Independent Auditor's Report | 1 |
| Financial Statements | |
| Consolidated Balance Sheets | 3 |
| Consolidated Statements of Income | 4 |
| Consolidated Statements of Stockholders' (Deficit) | 5 |
| Consolidated Statements of Cash Flows | 6 |
| Notes to Consolidated Financial Statements | 7 |
Independent Auditor's Report
Board of Directors
Performance Chemicals & Ingredients Company
d/b/a SensoryEffects and Subsidiaries
St. Louis, Missouri
We have audited the accompanying consolidated financial statements of Performance Chemicals & Ingredients Company d/b/a SensoryEffects and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of income, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
MEMBER AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS AND AN INDEPENDENT FIRM
ASSOCIATED WITH THE NORTH AMERICAN REGION OF MOORE STEPHENS INTERNATIONAL LIMITED
KNOWN INTERNATIONALLY AS MOORE STEPHENS BROWN SMITH WALLACE, LLC
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Performance Chemicals & Ingredients Company d/b/a SensoryEffects and Subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America,
/s/ Brown Smith Wallace, LLC
St. Louis, Missouri
April 18, 2013
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2012 and 2011
| 2012 | 2011 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 4,845,507 | $ | 3,036,834 | ||||
| Trade accounts receivable, net | 16,512,603 | 12,275,170 | ||||||
| Inventories | 22,196,546 | 21,016,742 | ||||||
| Other receivables, current | 637,518 | 478,808 | ||||||
| Prepaid income taxes | 3,012,424 | 623,336 | ||||||
| Deferred income taxes | 941,553 | 746,846 | ||||||
| Prepaid expenses and other assets | 110,194 | 349,508 | ||||||
| Total Current Assets | 48,256,345 | 38,527,244 | ||||||
| Other Receivables, net of current | - | 700,000 | ||||||
| Property, Plant and Equipment, net | 24,743,390 | 25,673,006 | ||||||
| Intangible Assets, net | 3,574,431 | 4,152,629 | ||||||
| Goodwill | 258,074 | 258,074 | ||||||
| Other Assets | 1,113,535 | 1,439,447 | ||||||
| TOTAL ASSETS | $ | 77,945,775 | $ | 70,750,400 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Current maturities of long-term debt | $ | 14,305,282 | $ | 11,415,133 | ||||
| Trade accounts payable | 7,550,020 | 4,426,174 | ||||||
| Accrued salaries, bonuses, and payroll taxes | 1,796,088 | 1,109,835 | ||||||
| Accrued expenses | 1,623,535 | 1,489,984 | ||||||
| Total Current Liabilities | 25,274,925 | 18,441,126 | ||||||
| Line-of-credit | 6,000,000 | 8,000,000 | ||||||
| Long-Term Debt, less current maturities | 34,355,566 | 48,660,848 | ||||||
| Deferred Income Taxes | 2,217,093 | 1,885,411 | ||||||
| Total Liabilities | 67,847,584 | 76,987,385 | ||||||
| Stockholders' Equity (Deficit) | ||||||||
| Common stock, $.01 par value, 10,000 shares authorized and 4,550 and 4,020 shares issued and outstanding | 45 | 40 | ||||||
| Additional paid-in capital | (2,529,469 | ) | (6,237,025 | ) | ||||
| Retained earnings | 12,627,615 | - | ||||||
| Total Stockholders' Equity (Deficit) | 10,098,191 | (6,236,985 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 77,945,775 | $ | 70,750,400 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-3-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2012 and 2011
| 2012 | 2011 | |||||||
| Net sales | $ | 164,479,842 | $ | 151,535,443 | ||||
| Cost of sales | 126,300,918 | 114,305,070 | ||||||
| Gross profit | 38,178,924 | 37,230,373 | ||||||
| Selling, general and administrative expenses | 15,726,714 | 20,763,809 | ||||||
| Income from operations | 22,452,210 | 16,466,564 | ||||||
| Other income (expense) | ||||||||
| Interest expense | (3,625,255 | ) | (3,407,736 | ) | ||||
| Interest income | 13,289 | 7,524 | ||||||
| Loss on disposal of assets | �� | (109,977 | ) | (70,674 | ) | |||
| Gain on acquisition | - | 1,525,461 | ||||||
| Miscellaneous expense | (35,000 | ) | (204,894 | ) | ||||
| (3,756,943 | ) | (2,150,319 | ) | |||||
| Income before income taxes | 18,695,267 | 14,316,245 | ||||||
| Income taxes | 6,037,907 | 4,646,105 | ||||||
| NET INCOME | $ | 12,657,360 | $ | 9,670,140 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-4-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2012 and 2011
Common stock | Additional paid-in capital | Subscription receivables | Treasury stock | Retained earnings | Total stockholders' equity (deficit) | |||||||||||||||||||
| Balance at December 31, 2010 | 40 | 5,891,910 | (108,696 | ) | - | 22,041,201 | 27,824,455 | |||||||||||||||||
| Net income | - | - | - | - | 9,670,140 | 9,670,140 | ||||||||||||||||||
| Dividend distribution | - | (12,554,928 | ) | - | - | (31,711,341 | ) | (44,266,269 | ) | |||||||||||||||
| Stock options exercised | - | 360,027 | - | - | - | 360,027 | ||||||||||||||||||
| Forgiveness of subscription receivables | - | - | 108,696 | - | - | 108,696 | ||||||||||||||||||
| Stock option compensation expense | - | 65,966 | - | - | - | 65,966 | ||||||||||||||||||
| Balance at December 31, 2011 | 40 | (6,237,025 | ) | - | - | - | (6,236,985 | ) | ||||||||||||||||
| Net income | - | - | - | - | 12,657,360 | 12,657,360 | ||||||||||||||||||
| Stock options exercised | 5 | 1,114,192 | - | - | - | 1,114,197 | ||||||||||||||||||
| Tax benefit from stock options exercised | - | 2,566,202 | - | - | - | 2,566,202 | ||||||||||||||||||
| Shares repurchased | - | - | - | (42,049 | ) | - | (42,049 | ) | ||||||||||||||||
| Retirement of shares | - | (12,304 | ) | - | 42,049 | (29,745 | ) | - | ||||||||||||||||
| Stock option compensation expense | - | 39,466 | - | - | - | 39,466 | ||||||||||||||||||
| Balance at December 31, 2012 | 45 | (2,529,469 | ) | - | - | 12,627,615 | 10,098,191 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-5-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2012 and 2011
| 2012 | 2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 12,657,360 | $ | 9,670,140 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 5,271,339 | 4,767,189 | ||||||
| Amortization of debt issuance costs | 325,912 | 521,140 | ||||||
| Allowance for doubtful accounts | (34,200 | ) | 32,200 | |||||
| Loss on disposal of property and equipment | 109,977 | 70,674 | ||||||
| Share-based compensation expense | 39,466 | 65,966 | ||||||
| Forgiveness of subscription receivables | - | 108,696 | ||||||
| Deferred income taxes | 136,975 | 155,923 | ||||||
| (Increase) decrease in operating assets: | ||||||||
| Trade accounts receivable | (4,203,233 | ) | 355,509 | |||||
| Prepaid expenses and other current assets | 302,472 | (18,060 | ) | |||||
| Prepaid income taxes | 177,114 | (273,194 | ) | |||||
| Inventories | 248,457 | (4,986,535 | ) | |||||
| Other receivables | 541,290 | (1,029,645 | ) | |||||
| Increase (decrease) in operating liabilities: | ||||||||
| Trade accounts payable | 3,123,846 | (1,726,398 | ) | |||||
| Accrued payroll | 686,253 | (359,426 | ) | |||||
Accrued expenses | 133,551 | (1,947,5-64 | ) | |||||
| Net cash provided by operating activities | 19,516,579 | 5,406,615 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (2,663,292 | ) | (1,991,365 | ) | ||||
| Proceeds from disposal of equipment | 244,317 | - | ||||||
| Purchase of Flavors From Florida, Inc. assets | (2,945,946 | ) | - | |||||
| Purchase of Dietrich's Specialty Processing, LLC assets | - | (6,237,652 | ) | |||||
| Net cash used in investing activities | (5,364,921 | ) | (8,229,017 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net proceeds (payments) on line-of-credit | (2,000,000 | ) | 6,000,000 | |||||
| Proceeds from long-term debt | - | 46,978,737 | ||||||
| Payments on long-term debt | (11,415,133 | ) | (5,458,631 | ) | ||||
| Debt issuance costs | - | (170,800 | ) | |||||
| Shares repurchased | (42,049 | ) | - | |||||
| Stock options exercised | 1,114,197 | 360,027 | ||||||
| Dividends paid | - | (44,266,269 | ) | |||||
| Net cash provided by (used in) financing activities | (12,342,985 | ) | 3,443,064 | |||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,808,673 | 620,662 | ||||||
| Cash and cash equivalents, beginning of year | 3,036,834 | 2,416,172 | ||||||
| Cash and cash equivalents, end of year | $ | 4,845,507 | $ | 3,036,834 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-6-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies |
A summary of the Company's organization, operations, and significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Organization
Performance Chemicals & Ingredients Company, d/b/a SensoryEffects ("PCI" or "the Company") was formed in 2005. PCI owns and operates companies acquired via asset purchases as follows:
In an asset purchase transaction dated May 2006, SensoryEffects Powder Systems, Inc., a wholly-owned subsidiary of PCI, acquired rights, title and interest to certain assets of Diehl, Inc. (an Ohio corporation).
In an asset purchase transaction dated February 13, 2008, SensoryEffects Flavor Company, d/b/a SensoryEffects Flavor Systems, a wholly-owned subsidiary of PCI, acquired rights, title, and interest to certain assets of Givaudan Flavors, Inc. (a Missouri corporation).
In an asset purchase transaction dated October 24, 2008, SensoryEffects Cereal Systems, Inc., a wholly-owned subsidiary of PCI, acquired rights, title, and interest to certain assets of US Foods, LLC (a Nebraska limited liability company).
On June 23, 2011, the Company started SensoryEffects International Sales, Inc., an Interest Charge Domestic International Sales Corporation (IC-DISC). The IC-DISC is a wholly-owned subsidiary of PCI.
PCI has completed various acquisitions and divestitures (see Note N) through asset purchases and has consolidated the associated activities into the existing companies.
Nature of Operations
The Company was formed to acquire and manage food ingredient businesses.
SensoryEffects Powder Systems (a Delaware corporation; "SEPS") manufactures various food products, including non-dairy creamers and powdered vegetable shortenings. Revenues from SEPS represent approximately 49% of consolidated net sales.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
SensoryEffects Flavor Systems (a Delaware corporation; "SEFS") is a leading supplier of flavor systems consisting primarily of liquid and dry flavor bases for various food and beverage products, flavor and color inclusions and specialty powders. Revenues from SEFS represent approximately 33% of consolidated net sales.
SensoryEffects Cereal Systems (a Delaware corporation; "SECS") is a leading supplier of complex, multi-inclusion cereals and ingredients including organic, natural, gluten- free, and nutraceutical products. Revenues from SECS represent approximately 18% of consolidated net sales.
As a part of its normal course of business, the Company grants credit to its customers. The Company's products are sold domestically and internationally.
The accompanying consolidated financial statements for the years ended December 31, 2012 and 2011 include the accounts of Performance Chemicals & Ingredients Company, d/b/a SensoryEffects and its wholly-owned subsidiaries, SensoryEffects Powder Systems and its wholly-owned subsidiary, SEPS Reading, LLC; SensoryEffects Flavor Systems; SensoryEffects Cereal Systems; and SensoryEffects International Sales, Inc. All significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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.
For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company's cash and cash equivalents are on deposit with two domestic financial institutions. At times, bank deposits may be in excess of federally insured limits.
-8-
PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Trade Accounts Receivable
Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. The Company extends credit terms to its customers in varying durations depending on the Company's business relationship with a given customer. As of December 31, 2012 and 2011, the net accounts receivable balance includes an allowance for doubtful accounts of $199,000 and $233,200, respectively.
Inventories
Inventories of raw materials, work in process, and finished goods are stated at the lower of standard cost (which approximates actual cost using the first-in, first-out method) or market. The Company evaluates the need to record adjustments to inventories on a regular basis. Inventories in excess of estimated usage requirements and potential spoilage are written down to an estimated net realizable value. Inherent in the estimates of net realizable value are estimates related to future manufacturing schedules, customer demand, and ultimate realization of potentially excess inventories.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Major renewals and betterments are capitalized and maintenance and repairs which do not improve or extend the life of the respective assets are charged against earnings in the current period.
Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives on a straight-line basis. Amortization of leasehold improvements is provided for on a straight-line basis over the lesser of the length of the related lease or the estimated useful lives of the assets. In computing its taxable income, the Company uses the methods as prescribed by the Internal Revenue Code. Depreciation and amortization expense pertaining to property, plant and equipment in 2012 and 2011 totaled $3,513,931 and $3,148,417, respectively.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Intangible assets totaling $9,222,508 comprised of patents, trademarks, license agreements, formulae, and customer relationships, have been acquired in conjunction with various asset purchases (see Note N). These intangibles are being amortized on a straight-line basis over periods of 4 to 10 years. Amortization expense pertaining to these intangibles totaled $1,757,408 and $1,618,772 for the years ended December 31, 2012 and 2011, respectively (see Note C).
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. In the opinion of management, no such impairment existed as of December 31, 2012.
The Company records revenue as products are shipped and title passes. Revenue recognition is deferred for advance payments made by customers.
All fees charged to the Company's customers for shipping and handling, and the associated costs, are included in net sales and are classified as such in the accompanying consolidated financial statements. All shipping and handling costs incurred by the Company for purchases of inventory are considered to be a part of the cost of goods sold and are classified as such in the accompanying consolidated financial statements.
Goodwill reflected on the balance sheet represents the excess of the cost of the acquired entities over the amounts assigned to the assets acquired and any liabilities assumed. In order to comply with guidance provided under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, Intangibles-Goodwill and Other, goodwill will not be amortized and will be evaluated annually, or on an interim basis if warranted by events or circumstances, for impairment by applying fair-value based tests considering the present value of future cash flows. In the opinion of management, no such impairment existed at December 31, 2012 and 2011.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Research and development costs are expensed as incurred. The Company incurred $1,721,450 and $1,703,129 in 2012 and 2011, respectively, for research and development costs.
The Company has adopted the fair value recognition provisions of FASB ASC 718, Stock Compensation., which establishes accounting and reporting standards for share- based payment transactions with employees, including equity incentive plans. Under this pronouncement, compensation expense is recognized over the associated vesting period and is based on the fair market value of the stock options on the grant date.
The Company and its subsidiaries file a consolidated federal income tax return. State income tax returns are filed separately or consolidated depending on the individual state.
Income tax expense includes the federal, state, and local taxes currently payable and deferred taxes arising from the temporary differences between income for financial reporting and income tax purposes. These temporary differences result primarily from different methods of accounting for depreciation, accounts receivable, inventory, intangibles including goodwill, patents, and a supply agreement, and accrued and prepaid expenses.
The Company has addressed the provisions of ASC 740-10, Accounting for Income Taxes. In that regard, the Company has evaluated its tax positions, expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings and believes that no provision for income taxes is necessary, at this time, to cover any uncertain tax positions. The Internal Revenue Service has completed an audit of the tax return for the year ended December 31, 2008. The Company believes it is no longer subject to examination by major tax jurisdictions for years ended prior to December 31, 2009.
The Company expenses advertising costs as incurred. Advertising expense was $749,268 and $779,764 for 2012 and 2011, respectively.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note A - | Summary of Organization, Operations, and Significant Accounting Policies (Continued) |
Cost of Debt Issuance
Costs associated with the issuance of debt instruments are capitalized and amortized over the terms of the respective financing arrangements. If debt is retired early, the related unamortized costs are written off in the period the debt is retired. Capitalized costs net of accumulated amortization totaled $1,113,535 and $1,439,447 at December 31, 2012 and 2011, respectively. Amortization expense pertaining to these costs totaled $325,912 and $521,140 (which includes $243,912 write off due to retired debt) for the years ended December 31, 2012 and 2011, respectively, and is included in interest expense in the accompanying consolidated statements of income.
The Company has evaluated all subsequent events through April 18, 2013, the date the consolidated financial statements were available to be issued.
| Note B - | Inventories |
The composition of inventories at December 31, 2012 and 2011 follows:
| 2012 | 2011 | |||||||
| Raw materials | $ | 12,237,391 | $ | 11,263,426 | ||||
| Work in process | 270,775 | 85,908 | ||||||
| Finished goods | 9,688,380 | 9,667,408 | ||||||
| $ | 22,196,546 | $ | 21,016,742 | |||||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note C - | Intangible Assets |
At December 31, 2012, the gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows:
Gross Assets | Accumulated Amortization | Net | ||||||||||
| Patents and trademarks | $ | 1,098,766 | $ | (419,700 | ) | $ | 679,066 | |||||
| License agreements | 1,697,000 | (1,654,575 | ) | 42,425 | ||||||||
| Formulae and customer relationships | 6,426,742 | (3,573,802 | ) | 2,852,940 | ||||||||
| Total | $ | 9,222,508 | $ | (5,648,077 | ) | $ | 3,574,431 | |||||
At December 31, 2011, the gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows:
Gross Assets | Accumulated Amortization | Net | ||||||||||
| Patents and trademarks | $ | 1,098,766 | $ | (289,607 | ) | $ | 809,159 | |||||
| License agreements | 1,697,000 | (1,315,175 | ) | 381,825 | ||||||||
| Formulae and customer relationships | 5,247,532 | (2,285,887 | ) | 2,961,645 | ||||||||
| Total | $ | 8.043.298 | $ | (3,890,669 | ) | $ | 4,152,629 | |||||
Estimated amortization expense over the next five years is as follows:
Year ending December 31, | Amount | |||
| 2013 | $ | 1,231,006 | ||
| 2014 | 957,725 | |||
| 2015 | 643,140 | |||
| 2016 | 325,719 | |||
| 2017 | 188,144 | |||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note C - | Intangible Assets (Continued) |
The Company's future cash flows are not materially impacted by its ability to extend or renew agreements related to its amortizable intangible assets. The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. In the opinion of management, no material impairment existed as of December 31, 2012 and 2011.
| Note D - | Other Receivables |
The Company's SEFS subsidiary has an agreement with a customer which pertains to reimbursement for specific equipment purchased and used in production by SEFS. The reimbursement has been structured such that payments are derived based on a surcharge applied to pounds of qualifying product purchased by the customer and pursuant to minimum volumes defined in the agreement. At December 31, 2012 and 2011, the total amount receivable under this agreement was $628,084 and $961,714, respectively. The entire amount outstanding as of December 31, 2012 is expected to be collected during 2013 and has been included in the accompanying consolidated balance sheets as other receivables, current. Current receivable under this agreement at December 31, 2011 was $411,714.
| Note E - | Property, Plant and Equipment |
Property, plant and equipment consist of the following:
| 2012 | 2011 | |||||||
| Land | $ | 518,635 | $ | 518,635 | ||||
| Buildings and improvements | 8,959,419 | 8,755,283 | ||||||
| Leasehold improvements | 199,138 | 113 060 | ||||||
| Machinery and equipment | 26,507,919 | 25,168,465 | ||||||
| Office equipment | 1,511,412 | 1,425,753 | ||||||
| Construction in progress | 940,518 | 190,963 | ||||||
| 38,637,041 | 36,172,159 | |||||||
| Less accumulated depreciation and amortization | (13,893,651 | ) | (10,499,153 | ) | ||||
| $ | 24,743,390 | $ | 25,673,006 | |||||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note F - | Line-of-Credit and Long-Term Debt |
Line-of-credit and long-term debt at December 31, 2012 and 2011 consisted of the following:
| 2012 | 2011 | |||||||
Line-of-Credit | ||||||||
| Texas Capital Bank; revolving line-of-credit, borrowing limited to the lesser of $25,000,000 or the available borrowing base, calculated monthly, as specified in the agreement; collateralized by accounts receivable and inventory; due June 2, 2016 with interest payable monthly based on LIBOR or the prime rate plus an applicable margin. At December 31, 2012, the Company had $6,000,000 outstanding at the LIBOR based rate of 5.0% and $0 outstanding at the prime based rate of 5.75%. | $ | 6,000,000 | $ | 8,000,000 | ||||
Long-Term Debt | ||||||||
| Texas Capital Bank; dated June 2, 2011; collateralized by substantially all corporate assets; interest due and payable quarterly at a variable rate based on LIBOR or the prime rate plus an applicable margin. The interest rate was 5.0% at December 31, 2012; quarterly principal payments of $2,250,000 due through March 31, 2016 with final balloon payment due June 2, 2016. | 44,359,500 | 55,687,500 | ||||||
| Seller financed note dated September 3, 2009; collateralized by land and building; payable in monthly installments of $6,660, including interest at 4.0% with final payment and all unpaid principal due in September 2015. | 747,837 | 796,776 | ||||||
| Givaudan Flavors, Inc. note dated February 13, 2008; guaranteed by Highlander Partners, L.P.; interest only payments quarterly at the rate of 6% per annum; note matures February 12, 2013 with all then outstanding principal and interest due and payable. | 3,500,000 | 3,500,000 | ||||||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note F - | Line-of-Credit and Long-Term Debt (Continued) |
| City of Defiance, Ohio dated April 9, 2007; collateralized by specific components of manufacturing equipment; principal payable in monthly installments of $3,446 including principal and interest at 4.25% per annum; note matures May 2014. | 53,511 | 91,705 | ||||||
| 48,660,848 | 60,075,981 | |||||||
| Less current maturities | (14,305,282 | ) | (11,415,133 | ) | ||||
| $ | 34,355,566 | $ | 48,660,848 |
Maturities on long-term debt are as follows:
Year ending December 31, | ||||
| 2013 | $ | 14,305,282 | ||
| 2014 | 9,066,672 | |||
| 2015 | 9,643,894 | |||
| 2016 | 15,645,000 | |||
| $ | 48,660,848 | |||
The Texas Capital Bank credit agreement contains various covenants pertaining to the Company's EBITDA, leverage ratio, current ratio, and debt service coverage ratio. At December 31, 2012 and 2011, the Company was in compliance with these covenants. The credit agreement also requires an additional principal payment to be made annually based on 50% of the Company's excess cash flow as defined in the agreement. The Company is expected to make this additional payment of $1,810,500 on April 30, 2013. This amount has been included in the current portion of long-term debt in the accompanying consolidated balance sheets.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note F - | Line-of-Credit and Long-Term Debt (Continued) |
In June 2011, the Company approved a plan to amend and restate its corporate indebtedness, pursuant to a recapitalization, and consequently restructured the credit agreement and then outstanding long-term debt held with Texas Capital Bank and The Private Bank and Trust Company. The amended and restated credit agreement includes financing commitments with Texas Capital Bank, The PrivateBank and Trust Company, Enterprise Bank & Trust, and The F&M Bank & Trust Company. As part of the recapitalization, the Company elected to make payments to existing stockholders and option holders of the Company (see Note G). The Company incurred costs associated with debt issuance in the amount of $1,629,563 of which $1,458,763 were financed as a component of the additional debt incurred. This component of the transaction was treated as a non-cash item in preparing the accompanying consolidated statements of cash flows for the year ended December 31, 2011.
| Note G - | Equity |
In June 2012, a key employee exercised stock options to purchase 2.0 shares of common stock for $12,304 (see Note H). PCI immediately bought back the shares of common stock for $42,049. Upon repurchasing the stock, it was determined by the Company's Board of Directors ("the Board") that the shares would be retired as is reflected in the accompanying consolidated statements of stockholders' equity (deficit).
During the year ended December 31, 2011, the Board declared and paid dividends of $11,012 per share of common stock outstanding. This resulted in dividends to the stockholders of the Company in the amount of $44,266,269. Due to these payments being in excess of the retained earnings and profits of the Company, the dividend was treated first as a return of earnings and profits, thereby reducing retained earnings to zero, and second as a return of contributed capital, in the accompanying consolidated statement of stockholders' equity (deficit). In addition to the stockholder dividend, the Company also elected to make payments to the existing stock option holders. For purposes of these payments, the Board elected to treat option holders as stockholders and consequently these individuals were paid $11,012 per stock option held in the Company. This resulted in payments in the amount of $6,093,755 to the option holders of the Company. These payments are included in selling, general and administrative expense in the accompanying consolidated statements of income for the year ended December 31, 2011.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note G - | Equity (Continued) |
During the year ended December 31, 2007, the Company issued 108,696 shares of common stock to an officer and a key employee of the Company in exchange for subscription receivables of $108,696 ($1.00 per share). Shares noted to carry restrictions due to the amount of subscription receivables outstanding. This balance due to the Company is shown as subscription receivables in the accompanying consolidated statements of stockholders' equity (deficit) at December 31, 2010. These amounts were forgiven during the year ended December 31, 2011.
| Note H - | Stock Options |
In 2007, the Board established the "2007 Performance Chemicals & Ingredients Company Equity Incentive Plan" (the "Plan"), under which incentive stock options and nonqualified stock options can be granted to employees, members of the Board, and non- employee directors. The Plan indicates that the maximum number of shares of common stock originally authorized to be issued was 646,000, subsequently adjusted to 646 pursuant to a reverse stock split. The Board is the administrator of the Plan and has the authority to grant options, adjust the grant or exercise price of the options, or to delegate their authority to another governing body.
Options are exercisable subject to the following vesting schedule: 25% shall vest on the first anniversary of the date of the grant; 6.25% shall vest on the first day of the fourth calendar month following the month in which the first anniversary of the date of grant occurs; the remainder shall vest ratably at 6.25% on the first day of each third month thereafter until all options are fully vested or any unvested options are forfeited. The exercise price of the options shall not be less than the fair market value of the Company's common stock on the date of grant. No options were granted under the Plan during 2012 or 2011.
Effective with the inception of the Plan, the Company adopted the fair value recognition provisions of FASB ASC 718, Stock Compensation. Pursuant to FASB ASC 718, the Company determines the fair value of stock options using the Black-Scholes valuation model. FASB ASC 718 requires the Company to recognize expense over the service period for options that are expected to vest and record adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note H - | Stock Options (Continued) |
As a result of the prescribed vesting schedule, the Company deemed stock-based compensation expense in 2012 and 2011, related to stock options previously granted, to be $39,466 and $65,966 (net of estimated forfeitures), respectively. As of December 31, 2012, all outstanding options are vested and all compensation cost has been recognized. During 2012, three employees and one former employee exercised a total of 532.619 options at a total price of $1,114,197. During 2011, two employees of the Company exercised a total of 58.522 options, at a total price of $360,027.
The Company used the Black-Scholes option pricing model in calculating the fair value of options granted. The assumptions used in calculating the fair value of options issued have been summarized in the following table:
| Risk-free interest rate | 4.06% - 4.68% | |||
| Expected dividend yield | - | |||
| Expiration date | 10 years | |||
| Expected volatility | 0.00% | |||
| Forfeiture rate | 10% | |||
The following is an analysis of options to purchase shares of the Company's stock issued and outstanding as of December 31, 2012 and 2011:
Number of Units | Weighted Average Exercise Price | |||||||
| Balance as of January 1, 2011 | 611.902 | $ | 2,576 | |||||
| Granted | - | - | ||||||
| Exercised | (58.522 | ) | 6,152 | |||||
| Balance as of December 31, 2011 | 553.380 | $ | 2,198 | |||||
| Granted | - | $ | - | |||||
| Exercised | (532.619 | ) | 2,092 | |||||
| Forfeited | (6.175 | ) | 6,152 | |||||
| Balance as of December 31, 2012 | 14.586 | $ | 4,386 | |||||
At December 31, 2012, vested, exercisable options were outstanding for 14.586 shares at a weighted average exercise price of $4,386. These options have a weighted-average remaining contractual term of 5.1 years.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note H - | Stock Options (Continued) |
As shown above 532.619 stock options were exercised during the year ended December 31, 2012. Of this amount, 455.108 of the options were non-qualified stock options. Upon exercise of these options, the Company recorded an increase in prepaid income taxes of $2,566,202 and a corresponding credit to additional paid-in capital to record the associated income tax benefit related to the transaction. The impact of this transaction was treated as a non-cash transaction in the accompanying consolidated statements of cash flows.
Number of Options | Weighted Average | |||||||
| Nonvested Options | ||||||||
| Nonvested options, January 1, 2011 | 134.985 | $ | 1,033 | |||||
| Granted | ||||||||
| Vested | (106.172 | ) | 901 | |||||
| Nonvested options, December 31, 2011 | 28.813 | $ | 1,522 | |||||
| Granted | ||||||||
| Forfeited | (6.175 | ) | 1,522 | |||||
| Vested | (22.638 | ) | 1,522 | |||||
| Nonvested options, December 31, 2012 | - | $ | - | |||||
In March, 2012, the Company adopted the Performance Chemicals & Ingredients Company Stock Appreciation Incentive Plan. The plan was formed to further the economic interest of the Company by providing deferred compensation incentives and to enhance the long-term performance and retention of the key employees selected to participate. The Company granted 80 units under this plan. The units vest upon the earlier of a change in control or an initial public offering and will be recognized as compensation expense at this time. Upon vesting, the plan administrator shall determine the fair market value of the units and unit-holders shall be entitled to any appreciation in the fair market value of those units that occurred from the effective grant date through the date of the change in control or initial public offering.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note I - | Income Taxes |
Deferred income tax assets and liabilities result from future tax benefits and obligations related to the difference between the tax basis of assets and liabilities and the amounts reported in the financial statements. The Company classifies their deferred tax assets and liabilities between current and non-current based on the particular difference from which they arise. The deferred tax assets and liabilities at December 31, 2012 and 2011 are comprised of the following:
| 2012 | 2011 | |||||||
| Current deferred: | ||||||||
| Asset | $ | 960,841 | $ | 800,735 | ||||
| Liability | (19,288 | ) | (53,889 | ) | ||||
| $ | 941,553 | $ | 746,846 | |||||
| Long-term deferred: | ||||||||
| Asset | $ | 990,873 | $ | 958,301 | ||||
| Liability | (3,207,966 | ) | (2,843,712 | ) | ||||
| $ | (2,217,093 | ) | $ | (1,885,411 | ) | |||
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 (liabilities) were as follows at December 31:
| 2012 | 2011 | |||||||
| Current: | ||||||||
| Allowance for doubtful accounts | $ | 71,136 | $ | 84,652 | ||||
| Reserve for obsolete inventories | 739,537 | 511,048 | ||||||
| Inventory capitalization Prepaid expenses | 46,605 | 81,471 | ||||||
| Prepaid expenses | (19,288 | ) | (53,889 | ) | ||||
| Accrued expenses | 103,563 | 123,564 | ||||||
| 941,553 | 746,846 | |||||||
| Noncurrent: | ||||||||
| Property, plant and equipment | (2,841,098 | ) | (2,743,688 | ) | ||||
| Deferred stock compensation | 312 | 38,754 | ||||||
| Commission income | (263,444 | ) | (88,935 | ) | ||||
| Organization costs | 1,266 | 7,457 | ||||||
| Intangible assets | 885,871 | 901,001 | ||||||
| (2,217,093 | ) | (1,885,411 | ) | |||||
| Net deferred taxes | $ | (1,275,540 | ) | $ | (1,138,565 | ) | ||
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note I - | Income Taxes (Continued) |
The consolidated provision for income taxes consists of the following at December 31:
| 2012 | 2011 | |||||||
| Current | $ | 5,900,932 | $ | 4,490,182 | ||||
| Deferred | 136,975 | 155,923 | ||||||
| Net provision for federal, state, and local income taxes | $ | 6,037,907 | $ | 4,646,105 | ||||
In 2012 and 2011, the Company's effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income from continuing operations primarily because of permanent differences arising from the utilization of available tax credits.
| Note J - | Related Party Transactions |
For the years ended December 31, 2012 and 2011, the Company incurred management fees and other general expenses to Highlander Partners, L.P. in the amount of $293,392 and $241,966, respectively. As December 31, 2012 and 2011, the amount payable to Highlander and included in accrued expenses in the accompanying consolidated balance sheets was $139,580 and $130,078, respectively.
| Note K - | Employee Benefit Plans |
The Company sponsors a defined contribution 401(k) plan covering all employees who meet various eligibility requirements. Under the plan, the Company makes matching contributions and can elect to make additional discretionary contributions. The Company bears all costs of administrating the plan. As of January 1, 2011, the Company elected the Safe Harbor provision. For the years ended December 31, 2012 and 2011, the total employer contributions charged to operations was $386,680 and $356,449, respectively.
| Note L - | Commitments |
Lease Commitments
The Company leases equipment and an operating facility under operating leases expiring in various years through 2029. Rental expense charged to operations was $624,993 and $467,729 for 2012 and 2011, respectively.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note L - | Commitments (Continued) |
Lease Commitments (Continued)
Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of December 31, 2012 for each of the next five years and thereafter are:
Year ending December 31, | Amount | |||
| 2013 | $ | 378,066 | ||
| 2014 | 398,285 | |||
| 2015 | 399,985 | |||
| 2016 | 370,338 | |||
| 2017 | 309,529 | |||
| Thereafter | 2,392,446 | |||
Other Commitments
The Company has entered into purchase and pricing agreements that expire at various dates through 2014, some of which require various minimum purchases. These agreements are predominately related to commodity-based items and have been established in the ordinary course of business and have been based on the plants' anticipated supply needs to meet the demands of customers. All agreements are relatively short-term in nature and the Company does not expect them to materially impact the future consolidated financial position, results of operations, or cash flows.
| Note M- | Supplemental Cash Flow Information |
Cash paid during the year for:
| 2012 | 2011 | |||||||
| Interest | $ | 3,331,301 | $ | 2,807,597 | ||||
| Income taxes | $ | 5,717,074 | $ | 4,819,511 | ||||
| Note N - | Business Combinations |
As a result of an Asset Purchase Agreement dated June 4, 2012, SEFS acquired prepaid assets, inventory, equipment, and intangible assets from Flavors From Florida, Inc. (a Florida corporation) for a total purchase price of $2,945,946.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note N - | Business Combinations (Continued) |
Following are the fair values of the assets acquired as of the date of the acquisition:
| Prepaid assets | $ | 63,158 | ||
| Inventories | 1,428,261 | |||
| Machinery and equipment | 275,317 | |||
| Intangible assets | 1,179,210 | |||
| $ | 2,945,946 |
Dietrich's Specialty Processing, LLC
As a result of an Asset Purchase Agreement dated March 10, 2011, SEPS acquired machinery and equipment, building and land, inventory, and other miscellaneous assets and liabilities from Dietrich's Specialty Processing, LLC, (a Pennsylvania limited liability company) for a total purchase price of $6,237,652. The purchase of the assets was financed through the Company's line-of-credit.
Following are the fair values of the assets acquired and the liabilities assumed as of the date of the acquisition:
| Inventories | $ | 15,502 | ||
| Prepaid expenses | 14,876 | |||
| Land | 145,000 | |||
| Building | 1,100,000 | |||
| Machinery and equipment | 4,972,582 | |||
| Customer deposits | (10,308 | ) | ||
| $ | 6,237,652 |
| Note O - | Concentration |
The Company had one significant customer in 2012 (those customers with annual revenues in excess of 10% of total revenue). Gross billings to this customer totaled approximately $18,746,000 for the year ended December 31, 2012. Amounts due from this customer at December 31, 2012 totaled approximately $1,804,000. The Company had two significant customers in 2011. Gross billings to these customers totaled approximately $32,165,000 for the year ended December 31, 2011. Amounts due from these customers at December 31, 2011 totaled approximately $1,154,000.
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PERFORMANCE CHEMICALS & INGREDIENTS COMPANY D/B/A SENSORYEFFECTS AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2012
| Note P - | Contingencies |
At various times the Company is involved in legal proceedings incidental to the conduct of its business. Management does not believe that these legal proceedings will result in a material impact to the Company's financial condition or results of operations.
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