1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 5, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER 333-52657
INDESCO INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3987915
(State of Incorporation) (I.R.S. Employer Identification No.)
950 Third Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 593-2009
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (October 1, 1998)
Common Stock 200 par value $0.01
2
INDESCO INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED JULY 5, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets at
December 31, 1997 (Predecessor) and
July 5, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Six Months Ended
July 6, 1997 (Predecessor) and July 5, 1998, respectively 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the Six Months Ended
July 6, 1997 (Predecessor) and July 5, 1998 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings. 22
ITEM 5. Other Matters. 22
ITEM 6. Exhibits and Reports on Form 8-K. 23
SIGNATURE 24
3
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JULY 6, 1997 AND JULY 5, 1998
4
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (See Note 1)
December 31, 1997 and July 5, 1998
(in Thousands)
ASSETS
AFA HOLDINGS CO.
DECEMBER 31, JULY 5, 1998
1997 (UNAUDITED)
--------------- ------------
Current Assets:
Cash and Cash Equivalents $ 1,051 $ 1,140
Accounts Receivable 6,821 18,985
Inventories 9,918 14,689
Prepaid Expenses and Other Assets 605 609
--------- ---------
Total Current Assets 18,395 35,423
Property and Equipment, Net 28,009 56,951
Excess Cost Over Fair Value of Net Assets Acquired, Net 6,365 69,593
Patents and Other Intangibles, Net 5,834 4,979
Deferred Financing Costs 1,628 5,424
Other Assets 656 658
--------- ---------
TOTAL ASSETS $ 60,887 $ 173,028
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 2,379 $ 641
Notes Payable 4,762 2,217
Accounts and Drafts Payable 2,410 8,052
Income Taxes Payable -- 88
Other Accrued Expenses 3,334 8,138
--------- ---------
Total Current Liabilities 12,885 19,136
Subordinated Debt 3,000
Long-Term Debt 41,154 156,087
Deferred Income Taxes 632 459
--------- ---------
Total Liabilities 57,671 175,682
Commitments and Contingencies
Stockholders' Equity:
Common Stock, Authorized 3,000 Shares of $.01 Par Value;
200 Shares Issued and Outstanding in 1998 242
Additional Paid-in Capital 4,320 5,062
Accumulated Deficit (1,374) (7,745)
Accumulated Other Comprehensive Income 28 29
--------- ---------
Total Stockholders' Equity 3,216 (2,654)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,887 $ 173,028
========= =========
The accompanying notes are an integral part of the financial statements.
5
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (See Note 1)
For the Three and Six Months Ended July 6, 1997 and July 5, 1998
(Unaudited)
(In Thousands)
WTI, INC. AND WTI, INC. AND
SUBSIDIARIES INDESCO SUBSIDIARIES INDESCO
(PREDECESSOR TO INTERNATIONAL, INC. (PREDECESSOR TO INTERNATIONAL, INC.
INDESCO HOLDINGS CO.) AND SUBSIDIARIES INDESCO HOLDINGS CO.) AND SUBSIDIARIES
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JULY 6, 1997 JULY 5, 1998 JULY 6, 1997 JULY 5, 1998
-------------------- ------------------- --------------------- -------------------
Net Sales $ 14,388 $ 31,701 $ 29,537 $ 56,717
Cost of Sales 9,991 21,337 20,876 39,262
-------- -------- -------- --------
Gross Profit 4,397 10,364 8,661 17,455
Operating Expenses:
Selling, General and
Administrative Expenses 1,654 3,694 3,133 6,377
Research and Development 76 382 96 402
Amortization of Intangibles 407 724 851 1,257
-------- -------- -------- --------
Total Operating Expenses 2,137 4,800 4,080 8,036
-------- -------- -------- --------
Income From Operations 2,260 5,564 4,581 9,419
Other Expense (Income):
Interest 954 4,446 1,960 7,821
Other (26) 76 (280) 125
-------- -------- -------- --------
Total Other Expense, Net 928 4,522 1,680 7,946
-------- -------- -------- --------
Income Before Extraordinary
Item And Provision for Income
Taxes 1,332 1,042 2,901 1,473
Provision for Income Taxes 126 68 292 239
-------- -------- -------- --------
Income Before Extraordinary Item 1,206 974 2,609 1,234
Extraordinary Item - Loss on Early
Extinguishment of Debt -0- 5,167 -0- 7,605
-------- -------- -------- --------
NET INCOME (LOSS) $ 1,206 $ (4,193) $ 2,609 $ (6,371)
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
6
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (See Note 1)
For the Six Months Ended July 6, 1997 and July 5, 1998
(Unaudited)
(In Thousands)
WTI, INC. AND
SUBSIDIARIES INDESCO
(PREDECESSOR TO INTERNATIONAL, INC.
INDESCO HOLDINGS CO.) AND
SUBSIDIARIES
JULY 6, 1997 JULY 5, 1998
-------------------- ----------------
Cash Flows From Operating Activities:
Net Income (Loss) $ 2,609 $ (6,371)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation 1,778 3,190
Amortization 851 1,273
Foreign Currency Transaction Gains (316) (7)
Write-off of Deferred Financing Costs 6,654
Changes in Operating Assets and Liabilities:
Accounts Receivable (1,153) (12,252)
Inventories 40 249
Prepaid Expenses and Other Assets (278) 896
Accounts and Drafts Payable 716 3,345
Income Taxes Payable (584) (318)
Other Accrued Expenses 1,050 2,639
--------- ---------
Total Adjustments 2,104 5,669
--------- ---------
Net Cash Provided (Used) by Operating Activities 4,713 (702)
Cash Flows From Investing Activities:
Acquisition of CSI, Net of Cash Acquired (92,931)
Expenditures for Property, Plant and Equipment (1,930) (3,396)
Disposal of Property, Plant and Equipment 23 14
Other (70) (101)
--------- ---------
Net Cash Used by Investing Activities (1,977) (96,414)
Cash Flows From Financing Activities:
Proceeds from Senior Subordinated Notes 145,000
Proceeds from Term Loans 1,155 135,000
Repayment of Long-Term Debt (1,177) (175,904)
Payments of Deferred Financing Costs (10,954)
Net (Repayment) Borrowings Under Revolving Credit Agreement (1,782) 6,569
Return of Capital to Parent (2,500)
--------- ---------
Net Cash Provided (Used) by Financing Activities (1,804) 97,211
Effect of Exchange Rate Changes on Cash (81) (6)
--------- ---------
Net Increase in Cash and Cash Equivalents 851 89
Cash and Cash Equivalents at Beginning of Year 838 1,051
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,689 $ 1,140
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Interest $ 281 $ 2,782
========= =========
Income Taxes $ 1,280 $ 392
========= =========
The accompanying notes are an integral part of the financial statements
7
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Indesco International, Inc. (the "Company"), is a wholly owned
subsidiary of Indesco Holdings Co., formerly Afa Holdings Co.
("Parent"). The Company manufactures and sells finger activated liquid
dispensing devices ("trigger sprayers"). The Parent was formed in July,
1997 to acquire, through a wholly-owned subsidiary, the assets and
liabilities of AFA Products, Inc. ("AFA"), located in Forest City,
North Carolina. Concurrent with this transaction, a stockholder of the
Parent and affiliate of another stockholder of the Parent acquired the
outstanding capital stock of AFA Polytek B.V. ("Polytek") based in The
Netherlands. AFA and Polytek were formerly operating subsidiaries of
W.T.I., Inc. ("WTI" or "Predecessor"). In addition, effective February
1, 1998, the Company acquired certain assets and liabilities of
Continental Sprayer and Affiliates ("CSI"), a division of Contico
International, Inc. for approximately $93 million (see Note 3).
Concurrent with the CSI acquisition, Polytek became a wholly-owned
subsidiary of the Company.
The accompanying condensed consolidated balance sheet as of July 5,
1998 includes the accounts of Indesco International, Inc. and its
subsidiaries (AFA, Polytek and CSI) as compared to the balance sheet as
of December 31, 1997 of Afa Holdings Co. (now known as Indesco Holdings
Co.) which includes the accounts of the Parent, AFA and Polytek.
The accompanying condensed consolidated statement of operations of
Indesco International, Inc. includes the accounts of Indesco
International, Inc. and its subsidiaries, AFA and Polytek, for the
three and six months ended July 5, 1998 and the results of operations
of CSI from its acquisition on February 1, 1998. The 1997 condensed
consolidated statement of operations reflect the financial results of
WTI for the three and six months ended July 6, 1997, which include the
results of operations of AFA and Polytek.
The Company's balance sheet, statements of operations and cash flows
for 1998 are not directly comparable to those of its Predecessor for
the corresponding 1997 periods.
The unaudited condensed consolidated balance sheet as of July 5, 1998
and the condensed consolidated statements of operations and cash flows
for the three and six months ended July 5, 1998 and July 6, 1997, in
the opinion of management, have been prepared on the same basis as the
related company's audited financial statements and include all
significant adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the results of the
interim periods. The data disclosed in the notes to the financial
statements for these periods are also unaudited. Certain information
and footnote disclosure normally included in the Company's annual
financial statements have been condensed or omitted. The condensed
consolidated financial statements and notes thereto should be read in
conjunction with the related annual audited financial statements and
notes thereto. Results for the three and six months ended July 5, 1998
are not necessarily indicative of the results that may be expected for
the entire year.
8
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(2) SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared
using the accounting policies disclosed in the audited year-end
financial statements.
Foreign Currency Translation
Assets and liabilities of Polytek are translated at exchange rates in
effect at the balance sheet dates. Items of revenue and expense are
translated at average exchange rates during the periods. Translation
adjustments, resulting from translating the Polytek and the CSI United
Kingdom financial statements into dollars, are reported in the equity
section of the accompanying balance sheet under the caption
"Accumulated Other Comprehensive Income."
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, is effective for years beginning after December
15, 1997. This statement requires that an enterprise classify items of
other comprehensive income by their nature in the financial statements
and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. During the three months ended 1997
and 1998, total comprehensive income (loss) amounted to $813 and
($4,175), respectively. During the six months ended July 6, 1997 and
July 5, 1998, total comprehensive income (loss) amounted to $1,334 and
($6,370), respectively.
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related Information, is effective for
years beginning after December 15, 1997. This statement requires that a
public business enterprise report financial and descriptive information
about its reportable business segments. Management of the Company
believes that the future adoption of this statement will not have a
significant impact on the Company's consolidated financial position,
results of operations or cash flows, but will result in additional
disclosures.
(3) ACQUISITIONS
(a) AFA and Polytek
The acquisition of AFA for an aggregate purchase price of $46,938
(including expenses of $1,926), and the acquisition of Polytek for
approximately $800 and refinancing of debt of approximately $7,900,
resulted in the following financial position:
9
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(3) ACQUISITIONS (CONTINUED)
ASSETS
Cash and Receivables $ 7,526
Inventories 11,223
Fixed Assets 28,646
Patents 6,000
Other Assets 2,885
Goodwill 6,615
-------
$62,895
=======
LIABILITIES AND EQUITY
Current Liabilities $ 5,620
Bank Debt 48,771
Subordinated Debt 3,000
Other Liabilities 942
Equity 4,562
-------
$62,895
=======
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to
the assets purchased and liabilities assumed based upon the fair values
at the date of acquisition.
(b) Acquisition of Continental Sprayers and Affiliates
Effective February 1, 1998, the Company acquired CSI for $92,947 in
cash, paid outstanding debt of AFA of $39,567 and paid fees of $5,439.
Such amounts were paid through the issuance of term loans of $135,000
and borrowings under a revolving credit facility.
The assets acquired and liabilities assumed of CSI are as follows:
Cash $ 16
Inventory 5,035
Fixed Assets 28,776
Other Assets 1,115
Goodwill 60,962
Payables (2,957)
--------
PURCHASE PRICE $ 92,947
========
10
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(3) ACQUISITIONS (CONTINUED)
The acquisitions have been accounted for using the purchase method of
accounting. The Company increased the value of inventory $850 in
accordance with Accounting Principles Board Opinion No. 16 and has
recorded fixed assets and identifiable intangibles at their net
historical book value, pending completion of appraisals. Differences,
if any, between these amounts and the amounts resulting from appraisals
and valuations of these assets, which have not yet been completed, will
be reflected as adjustments to goodwill, which may increase or decrease
related depreciation and amortization charges.
Condensed proforma unaudited results of operations of the Company
before extraordinary items for the six month periods ended July 6, 1997
and July 5, 1998 as if the transactions had occurred on January 1, 1997
are as follows:
SIX MONTH PERIODS ENDED
------------------------------
JULY 5, 1998 JULY 6, 1997
------------ ------------
Net Sales $ 61,563 $ 61,819
========= ========
Net Income $ 1,557 $ 1,944
========= ========
(4) INVENTORIES
The components of inventories as of December 31, 1997 and July 5,
1998 are summarized as follows:
DEC 31, 1997 JULY 5, 1998
------------ ------------
Raw Material $ 2,172 $ 3,059
Work-in-Process 3,346 6,202
Finished Goods 4,400 5,428
-------- --------
$ 9,918 $ 14,689
======== ========
11
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(5) DEBT
Debt consists of the following:
JULY 5, 1998
------------
Total Working Capital Borrowings (a) $ 2,217
========
LONG-TERM DEBT
Working Capital line of credit, dollar denominated
bearing interest at 8.66 percent at July 5, 1998 (b) $ 6,500
Senior subordinated notes, dollar denominated
bearing interest at 9.75 percent at July 5, 1998 (c) 145,000
ABN/AMRO loan, guilder denominated, bearing
interest at 6.10 percent at July 5, 1998 (d) 3,873
Senior mortgage note, guilder denominated, payable in
quarterly principal installments (175,000 guilders per
annum), bearing interest at 5.50 percent at July
5, 1998 (e) 1,163
Installment notes payable, guilder denominated, bearing
interest at rates ranging from 7.10 percent
to 7.75 percent at July 5, 1998 192
--------
156,728
Less: Current Portion 641
--------
Total Long-Term Debt $156,087
========
Working Capital Borrowings
At December 31, 1997, the Company had loans (the "Agreements" and "Term
Loans") with a U.S. lender and a Dutch bank that provided for working
capital lines of credit (the "Agreement"), denominated in both dollars
and guilders.
(a) Netherlands
Borrowings under the guilder denominated line of credit had maximum
limit of 11,000 guilders ($5,419 at July 5, 1998 and $5,429 at December
31, 1997). Interest payments on the guilder denominated line of credit
are due quarterly. Borrowings under the guilder line of credit are
collateralized by a lien on certain real property of Polytek. This line
of credit contains certain prohibitions, the most significant of which
related to minimum net worth requirements.
12
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(5) DEBT (CONTINUED)
Long-Term Debt
(b) U.S.
Borrowings under the dollar denominated working capital line of credit,
which had a maximum amount of $7,000 were limited to 85 percent of
eligible accounts receivable (as defined), and 60 percent of eligible
inventories (as defined). In February 1998, the Company entered into a
new revolving credit facility and retired the U.S. working capital line
of credit, which was in place at December 31, 1997.
Interest payments on the new dollar denominated working capital line of
credit, obtained in February 1998, are required monthly, beginning
February 28, 1998 at a rate of LIBOR, plus 3.00 percent. Effective
April 23, 1998, the Company obtained under its domestic revolving
credit facility additional availability of $5.0 million in excess of
the Borrowing Base (but in no event more than $30 million). This
additional availability is available to the Company through April 30,
1999. At the same time, the interest rate under this revolving credit
facility was reduced to LIBOR, plus 2.25%. This dollar denominated
working capital line of credit contains certain covenants, the most
restrictive of which limit capital expenditures, set forth maximum
leverage ratios and set forth minimum debt coverage ratios and earnings
requirements.
(c) Senior Subordinated Notes
Effective February 1, 1998, the Company consummated the CSI
acquisition, refinanced the AFA debt of approximately $40 million in
its entirety and acquired all of the capital stock of Polytek. Funds
used for the CSI acquisition and the refinancing of the AFA debt were
provided by (a) the Term Loans, which consisted of (i) a $70.0 million
principal amount Tranche A Term Loan, bearing interest at LIBOR, plus
3.75 percent; and (ii) a $65.0 million Tranche B Term Loan, bearing
interest at LIBOR, plus 5.50 percent, and (b) $2.5 million of advances
under the Revolving Credit Facility, bearing interest at LIBOR, plus
3.00 percent.
On April 23, 1998, the Company issued $145,000 of 9.75 percent Senior
Subordinated Notes due April 15, 2008 (the "Notes"). The net proceeds
were used by the Company to refinance U.S. indebtedness, including
borrowings incurred in connection with the acquisition in February 1998
of substantially all of the assets of CSI, as previously mentioned in
Note (1). Interest on the Notes is payable semi-annually on April 15
and October 15, commencing October 15, 1998.
13
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(5) DEBT (CONTINUED)
(c) Senior Subordinated Notes (Continued)
The Notes will be redeemable at the option of the Company, in whole or
in part, on or after April 15, 2003, at certain specified redemption
prices, plus accrued and unpaid interest thereon to the redemption
date. In addition, at any time on or before April 15, 2001, the Company
may redeem up to 35 percent of the initial aggregate principal amount
of the Notes with the net proceeds of one or more equity offerings at a
redemption price equal to 109.75 percent of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of
redemption; provided that at least 65 percent of the initial aggregate
principal amount of the Notes remains outstanding. Upon a change of
control, the Company would be required to make an offer to purchase all
outstanding Notes at 101 percent of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase.
The Notes are unsecured senior subordinated obligations of the Company
and will be subordinated in right of payment to all existing and future
Senior Indebtedness of the Company, including indebtedness under its
Revolving Credit Facility. The Notes are ranked pari passu with all
existing and future senior subordinated indebtedness of the Company and
are ranked senior to all other existing and future Subordinated
Indebtedness of the Company. The Notes are fully and unconditionally
guaranteed, jointly and severally, on an unsecured senior subordinated
basis by each of the Company's existing and future U.S. subsidiaries.
The Notes are effectively subordinated to all existing and future
Senior Indebtedness of the Company's subsidiaries.
(d)ABN/AMRO Loan
Polytek has a credit facility with the ABN-AMRO Bank, The Netherlands.
This credit facility includes a loan of $4,187 as of July 5, 1998 and
$4,195 as of December 31, 1997 (8,500 guilders) requiring quarterly
payments of $102 through 2007. This Note is collateralized by a lien on
certain real property of Polytek. This Note contains certain
prohibitions, the most significant of which relate to minimum net worth
requirements.
(e) Senior Mortgage Note
In connection with the construction of a manufacturing facility,
Polytek obtained a 3,500 guilder mortgage from ABN-AMRO Bank, The
Netherlands. Borrowings under this Mortgage Agreement are
collateralized by a lien on certain real property of Polytek.
14
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(6) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
As previously mentioned in conjunction with the acquisition of CSI, the
Company repaid outstanding debt of approximately $40 million in
February 1998 and refinanced its term loan borrowing on April 23, 1998.
As a result, the Company expensed $6,654 of deferred financing costs
and $951 of prepayment penalties as an extraordinary loss.
(7) INCOME TAXES
Pre-tax loss after the effect of the extraordinary item for the six
months ended July 5, 1998 consists of:
1998
--------
United States $ (6,750)
Foreign 618
--------
TOTAL PRE-TAX LOSS $ (6,132)
========
The condensed consolidated statement of operations includes income
taxes on foreign subsidiary income and minimum state taxes. The Company
has recorded a full valuation allowance related to the potential tax
benefit of the net operating loss carryforward.
(8) RELATED PARTY TRANSACTIONS
Management Fees
Included in operating expenses for the six month period ended July 5,
1998 are approximately $150 for management fees and certain expenses
paid or payable to entities affiliated with the shareholders. As of
July 5, 1998 and December 31, 1997, the balance of unpaid fees, which
has been included in other accrued expenses in the accompanying balance
sheets approximated $75 and $125, respectively.
Effective February 4, 1998, the Company entered into a new management
agreement with an affiliate of one of the shareholders that provides
for annual payments of $300 and expires on July 29, 2008, subject to
renewal for successive five-year periods.
15
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions with Affiliates
The Company has a 41 percent ownership in an affiliate, which is
accounted for using the equity method. Earnings of the affiliate are
not material to the operations of the Company. During the six months
ended July 5, 1998 and year ended December 31, 1997, the Company
purchased molds from the affiliate for approximately $121 and $283,
respectively. During the six month period ended July 5, 1998, the
affiliate provided certain repairs and maintenance at a cost to the
Company of approximately $115. Included in accounts payable in the
accompanying balance sheet at July 5, 1998 and December 31, 1997 is
approximately $156 and $81, respectively, relating to these assets and
services provided by the affiliate.
Professional Services
The law firm of Gratch, Jacobs & Brozman, P.C., of which one of the
shareholders is a senior member, provides legal services on an ongoing
basis to the Company and its subsidiaries. For the six month period
ended July 5, 1998, the Company incurred fees of approximately $807 to
Gratch, Jacobs & Brozman, P.C.
(9) SUBSEQUENT EVENTS
On August 17, 1998, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-4 with respect to its
9-3/4% Senior Subordinated Notes due 2008 ("New Notes") which are fully
and unconditionally guaranteed, jointly and severally, on an unsecured
senior subordinated basis, by the Subsidiary Guarantors. On September
16, 1998, the Company concluded its exchange offer and the New Notes
were exchanged for $145 million aggregate principal amount of the
Company's then outstanding 9-3/4% senior notes due 2008 ("Old Notes").
The terms of the New Notes are identical in all material respects to
those of the Old Notes except for certain transfer restrictions and
registrations rights relating to the Old Notes.
As of September 29, 1998, the Company entered into a new credit facility
(the "New Credit Facility") with First Union National Bank ("First
Union"). The New Credit Facility replaces the Company's Revolving Credit
Facility with NationsCredit Commercial Corporation (""NationsCredit")
and provides for up to $30.0 million of borrowings from time to time for
a term of five years. The Company's initial borrowing under the New
Credit Facility, on October 1, 1998, was approximately $4.9 million, the
proceeds of which were used to repay all outstanding indebtedness
(together with certain fees and expenses) of the Company under its
Revolving Credit Facility with NationsCredit. Indebtedness under the New
Credit Facility is secured by
16
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
a first priority security interest in all accounts receivable,
inventory, machinery and equipment of the Company and each of its
domestic subsidiaries. Indebtedness bears interest at a floating rate
based (at the Company's option) upon (i) LIBOR, plus an Applicable
margin ranging from 1.25% to 2.25% or (ii) the Base Rate (the greater
of the prime rate announced by First Union of the Federal Funds Rate
plus 0.50%), plus an applicable Margin ranging from 0.00% to 1.00%. The
New Credit Facility requires the Company to meet certain financial
tests at the end of each fiscal quarter, including a Funded
Indebtedness to EBITDA Ratio from the closing date through June 30,
2000 of 6.25:1.0, decreasing incrementally to 4.5:1.0 at July 1, 2002
and thereafter, and a Fixed Charge Coverage Ratio of not less than
1.0:1.0 for any fiscal period. The New Credit Facility also contains
covenants that include limitations on incurrence of debt, limitation of
permitted capital expenditures and limitations on investments and on
acquisitions.
In August 1998, Polytek settled an employment dispute with a Managing
Director and agreed to pay said former director 892 guilders
(approximately $440).
17
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations.
The results of operations of the Company for the three months and the six months
ended July 5, 1998, includes the results of operations of AFA and Polytek for
the entire period and the results of operations of CSI from February 1, 1998,
the date of its acquisition, through July 5, 1998. Financial results of WTI in
1997 do not include any results of operations for CSI. Accordingly, the
Company's results of operations for 1998 are not directly comparable to those of
WTI for 1997.
The following table sets forth selected operating data as a percentage of net
sales for the periods indicated.
THREE MONTHS ENDED
-------------------------------------------
WTI, INC. AND
SUBSIDIARIES INDESCO
(PREDECESSOR TO INTERNATIONAL, INC.
INDESCO HOLDINGS CO.) AND SUBSIDIARIES
JULY 6, 1997 JULY 5, 1998
--------------------- ------------------
Net Sales 100.0% 100.0%
Cost of Sales 69.4% 67.3%
----- -----
Gross Profit 30.6% 32.7%
Selling, General and Administrative Expenses 11.5% 11.7%
Research and Development Expenses .6% 1.2%
Amortization of Intangibles 2.8% 2.3%
----- -----
Income from Operations 15.7% 17.5%
Other Expense (Income) (.2%) .2%
Interest Expense 6.6% 14.0%
----- -----
Income Before Extraordinary Item and Provision
for Income Taxes 9.3% 3.3%
Provision for Income Taxes .9% .2%
----- -----
Income Before Extraordinary Item 8.4% 3.1%
Extraordinary Loss on Early Extinguishment of Debt 0.0% (16.3%)
----- -----
Net Income (Loss) 8.4% (13.2%)
----- -----
18
SIX MONTHS ENDED
----------------------------------------
WTI, INC. AND
SUBSIDIARIES INDESCO
(PREDECESSOR TO INTERNATIONAL, INC.
INDESCO HOLDINGS CO.) AND SUBSIDIARIES
JULY 6, 1997 JULY 5, 1998
--------------------- ---------------
Net Sales 100.0% 100.0%
Cost of Sales 70.7% 69.2%
----- -----
Gross Profit 29.3% 30.8%
Selling, General and Administrative Expenses 10.6% 11.3%
Research and Development Expenses .3% .7%
Amortization of Intangibles 2.9% 2.2%
----- -----
Income from Operations 15.5% 16.6%
Other Expense (Income) (.9%) .2%
Interest Expense 6.6% 13.8%
----- -----
Income Before Extraordinary Item and Provision
for Income Taxes 9.8% 2.6%
Provision for Income Taxes 1.0% .4%
----- -----
Income Before Extraordinary Item 8.8% 2.2%
Extraordinary Loss on Early Extinguishment of Debt 0.0% (13.4%)
----- -----
Net Income (Loss) 8.8% (11.2%)
----- -----
Three Months Ended July 5, 1998 compared to the Three Months Ended July 6, 1997
Net sales for the Second Quarter 1998 were $31.7 million, an increase of $17.3
million or 120.0%, compared to the corresponding 1997 period. The increase was
due primarily to the inclusion of CSI's net sales of approximately $17.1
million. Exclusive of the CSI results, net sales for the Second Quarter 1998
increased approximately $.2 million, due to an increase in Polytek sales. Net
sales for Polytek for the Second Quarter 1998 were $5.9 million compared to $5.6
million for the second quarter in 1997. Net sales for AFA decreased $.1 million
for the Second Quarter 1998 as compared to the Second Quarter 1997.
Cost of sales for the Second Quarter 1998 were $11.3 million higher than the
Second Quarter 1997. This increase was due primarily to the inclusion of CSI's
results of operations. As a percentage of net sales, cost of sales were 67.3%
during the Second Quarter 1998 compared to the 69.4% for the corresponding
period in 1997. AFA and Polytek's cost of sales as a percentage of net sales
(exclusive of those attributable to CSI) were 71.9% in the Second Quarter 1998
compared to 69.6% for the corresponding period in 1997.
19
CSI's cost of sales as a percentage of net sales for the Second Quarter 1998 was
63.8%. CSI's cost of sales was beneficially impacted by reduced depreciation
expense and reduced material costs. As a result of the acquisition, depreciation
has been calculated utilizing new lives, but has not yet been affected by the
results of appraisals and valuations. Accordingly, CSI's depreciation expense
may change upon finalization of fixed asset valuations. The decrease in material
costs relates to renegotiated purchase contracts for raw materials.
Gross profit was $10.4 million for the Second Quarter 1998, an increase of $6.0
million over the corresponding period in 1997 that was due primarily to the
inclusion of CSI's results of operations.
Selling, general and administrative expenses and amortization of intangibles
were $4.4 million, or 13.9% of net sales for the Second Quarter 1998 compared to
$2.0 million, or 13.9% of net sales for the corresponding period 1997. The
increase of $2.4 million was primarily attributable to the inclusion of $1.7
million of expenses incurred by CSI and the costs associated with establishing
the Company's corporate office infrastructure. Research and development costs
increased $.3 million over the corresponding period in 1997.
Interest expense for the Second Quarter 1998 was $4.5 million compared to $1.0
million for the Second Quarter 1997. The increase is a result of interest
charges in the Second Quarter 1998 on retired debt previously incurred in
conjunction with the refinancing of the AFA debt and the financing of the
acquisitions of CSI and the issuance of the senior subordinated notes.
No U.S. tax liability is currently anticipated for 1998. Provision for taxes in
the 1998 and 1997 quarterly period relates to income from foreign operations and
state minimum taxes.
In the Second Quarter 1998, the Company incurred an additional extraordinary
expense of $5.2 million representing the write-off of unamortized deferred
financing fees and a prepayment penalty in conjunction with the prepayment in
April 1998 of indebtedness incurred in refinancing of the AFA acquisition debt
and the funds used in the acquisition of CSI.
Six Months Ended July 5, 1998 compared to the Six Months Ended July 6, 1997
Net sales for the six months ended July 5, 1998 were $56.7 million, an increase
of $27.2 million or 92.0%, compared to the corresponding 1997 period. The
increase was due primarily to the inclusion of CSI's net sales of approximately
$27.5 million for the period from February 1, 1998 to July 5, 1998. Exclusive of
the CSI results, net sales for the six months ended July 5, 1998 decreased
approximately $.3 million, due primarily to the effect of a stronger U.S. dollar
when translating sales from Dutch guilders for financial reporting purposes. Net
sales for Polytek for the six months ended July 5, 1998 were 24.4 million
guilders compared to 23.0 million guilders for the corresponding period in 1997.
However, translated to U.S. dollars, Polytek net sales were $12.0 million for
the Second Quarter 1998 compared to $12.2 million for the corresponding period
in 1997. Net sales for AFA did not significantly change on a year-to-year basis.
Cost of sales for the six months ended July 5, 1998 were $18.4 million higher
than the corresponding period in 1997. This increase was due solely to the
inclusion of CSI's results of operations for the period from February 1, 1998 to
July 5, 1998. As a percentage of net sales, cost of sales were 69.2% during the
first six months of 1998 compared to the 70.7% for the corresponding period in
1997. AFA and Polytek's cost of sales as a percentage of net sales (exclusive of
those attributable to CSI) were 71.2% during the first six months of 1998
compared to 70.7% for the corresponding period in 1997.
20
CSI's cost of sales as a percentage of net sales for the period February 1, 1998
through July 5, 1998 was 67.0% and were adversely affected by a one-time step-up
of $850,000 of inventory. This amount was expensed during the period from
February 1, 1998 to April 5, 1998. The percentage would have been approximately
63.9%, excluding this one-time charge. CSI's cost of sales was beneficially
impacted by reduced depreciation expense and reduced material costs. As a result
of the acquisition, depreciation has been calculated utilizing new lives, but
has not yet been affected by the results of appraisals and valuations.
Accordingly, CSI's depreciation expense may change upon finalization of fixed
asset valuations. The decrease in material costs relates to renegotiated
purchase contracts for raw materials.
Gross profit was $17.5 million for the six months ended July 5, 1998, an
increase of $8.8 million over the corresponding period in 1997 that was due
primarily to the inclusion of CSI's results of operations subsequent to its
acquisition on February 1, 1998, a $.1 million increase for AFA, net of a $.4
million decrease for Polytek related primarily to the aforementioned translation
change.
Selling, general and administrative expenses and amortization of intangibles
were $7.6 million, or 13.5% of net sales for the six months ended July 5, 1998
compared to $4.0 million, or 13.5% of net sales, for the corresponding period in
1997. The increase of $3.6 million is attributable to the inclusion of $3.1
million of expenses incurred by CSI subsequent to its acquisition on February 1,
1998 and the costs associated with establishing the Company's corporate office
infrastructure. Research and development costs increased $.3 million for 1998
over 1997.
Interest expense for the six months ended July 5, 1998 was $7.8 million compared
to $2.0 million for the corresponding period in 1997. The increase is a result
of interest charges in the Second Quarter 1998 on debt previously incurred to
finance the acquisitions of AFA, Polytek and CSI and the senior subordinated
notes issued on April 23, 1998.
No U.S. tax liability is currently anticipated for 1998. Provision for taxes in
the 1998 and 1997 quarterly periods relate to income from foreign operations and
state minimum taxes.
For the six months ended July 5, 1998, the Company incurred an extraordinary
expense of $7.6 million representing the write-off of unamortized deferred
financing fees and prepayment penalties in conjunction with the prepayment in
February 1998 of indebtedness incurred in July 1997 to fund the acquisition of
AFA and the prepayment in April 1998 of the debt associated with the refinancing
of the AFA acquisition debt and the debt related to the acquisition of CSI.
Liquidity and Capital Resources.
The Company acquired the assets and business of AFA in July 1997. The
acquisition was financed with bank debt, aggregating approximately $40.8
million, equity contributions and subordinated loans from stockholders of the
Parent and their affiliates. In August 1997, through an intermediate holding
company, a stockholder of the parent and an affiliate of another stockholder of
the Parent acquired all of the outstanding capital stock of Polytek. This
acquisition was financed with term loans and revolving credit facilities
aggregating approximately $7.9 million provided by ABN AMRO Bank and equity
contributions.
Polytek's credit facility with ABN-AMRO Bank includes a loan of 8.5 million
guilders. This loan is collateralized by a lien on certain real property of
Polytek. This loans contains certain restrictions the most significant of which
relates to minimum net worth requirements. This facility also includes a working
capital line of credit up to 11 million guilders ($5.4 million). As of July 5,
1998, Polytek's outstanding indebtedness under the working capital line of
credit was $2.2 million, with additional availability of $3.2 million.
21
In connection with the construction of a manufacturing facility in 1991, Polytek
obtained a 3.5 million guilder mortgage from ABN-AMRO Bank. Borrowings under
this mortgage agreement are collateralized by a lien on certain real property of
Polytek.
Effective February 1, 1998, the Company consummated the CSI acquisition,
refinanced in its entirety the debt incurred to acquire AFA and acquired all of
the capital stock of Polytek. Funds used for the CSI acquisition and the
refinancing of AFA's bank debt were derived from term loans provided by
affiliates of Nations Bank and consisted of (i) a $70 million principal amount
tranche A term loan bearing interest at Nations Bank's prime rate plus 3.75%,
and (ii) a $65 million tranche B term loan bearing interest at Nations Bank's
prime rate plus 5.5%, and advances under a revolving credit facility bearing
interest at a rate of LIBOR plus 3.0%. The tranche A and tranche B loans
required quarterly principal amortization payments beginning in June 1998 and
were scheduled to mature on December 31, 2003 and February 4, 2005,
respectively. The revolving credit facility, which matures on February 4, 2003,
provides for borrowings from time to time in an aggregate amount not to exceed
$30 million, subject to a Borrowing Base Formula. The facility contains certain
covenants, the most restrictive of which limits capital expenditures, sets forth
maximum leverage ratios, debt coverage and EBITDA ratios.
The net cash used by operating activities for the six months ended July 5, 1998,
resulted primarily from the combination of net loss before depreciation,
amortization, the write-off of deferred financing cost and increases in accounts
payable and accrued expenses, net of the effect of the increase in accounts
receivable of approximately $12.2 million. Of this increase in accounts
receivable, $10.9 million is attributable to an increase in accounts receivable
of CSI from zero at February 1, 1998 to $10.9 million at July 5, 1998 (the
Company did not acquire accounts receivable of CSI as of the acquisition date).
The net cash used in investing activities during the six months ended July 5,
1998 include amounts expended to effect the CSI acquisition (see Note 3) and
capital expenditures of $3.4 million.
The net cash provided from financing activities during the six months ended July
5, 1998 resulted primarily from the receipt of funds in conjunction with the
issuance of Senior Subordinated Notes (as more fully described in the following
paragraph) of $145 million utilized to refinance debt and make payments on the
outstanding line of credit debt, net of $5.5 million in financing cost and $2.5
million return of capital to Parent.
The Company issued $145 million of 9.75% Senior Subordinated Notes on April 23,
1998, due in 2008 (the "Notes"). The net proceeds were used by the Company to
refinance the U.S. indebtedness, including borrowings incurred in connection
with the acquisition in February 1998 of substantially all of the assets of CSI,
as previously mentioned in Notes 3 and 5. Concurrently with the issuance of the
Notes, the Company obtained under its domestic revolving credit facility
additional availability of $5.0 million in excess of the Borrowing Base (but in
no event more than $30 million). This additional availability is available to
the Company through April 30, 1999. At the same time, the interest rate under
this revolving credit facility was reduced to LIBOR plus 2.25%. At July 5, 1998,
the Company's outstanding borrowings under the revolving credit facility was
$6.5 million and there was additional availability thereunder of $9.7 million.
The Company expects to fund its domestic cash requirements with cash flow from
operations and borrowings under its domestic revolving credit facility. The
Company expects that Polytek will fund its cash requirements with cash flow from
its own operations and borrowings under the facilities with ABN AMRO.
The Company believes that net cash from operations, together with amounts
available under the revolving credit facility and the Polytek facility, will be
adequate to fund the payment of interest on its outstanding indebtedness as well
as its capital expenditure plans and working capital needs.
Management believes that inflation did not have a significant impact on
operations.
The information provided contains certain forward-looking statements and
information that are based on the beliefs of management, as well as assumptions
made by and information currently available to the Company's management.
22
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Settlement of Employment Dispute. In August 1998, Polytek
settled an employment dispute with a Managing Director and agreed to pay said
former director 892,000 guilders (approximately $440,000).
ITEM 5. Other Matters.
Exchange Offer.
On August 17, 1998, the Company filed with the Securities and
Exchange Commission a registration statement on Form S-4 with respect to its
9-3/4% Senior Subordinated Notes due 2008 ("New Notes") which are fully and
unconditionally guaranteed, jointly and severally, on an unsecured senior
subordinated basis, by the Subsidiary Guarantors. On September 16, 1998, the
Company concluded its exchange offer and the New Notes were exchanged for $145
million aggregate principal amount of the Company's then outstanding 9-3/4%
senior notes due 2008 ("Old Notes"). The terms of the New Notes are identical in
all material respects to those of the Old Notes except for certain transfer
restrictions and registrations rights relating to the Old Notes.
New Credit Facility.
General. As of September 29, 1998, the Company entered into a
new credit facility (the "New Credit Facility") with First Union National Bank
("First Union"). The New Credit Facility replaces the Company's Revolving Credit
Facility with NationsCredit Commercial Corporation ("NationsCredit"), provides
for up to $30.0 million of borrowings from time to time for a term of five years
and includes a subfacility for the issuance of letters of credit up to a maximum
aggregate amount at any one time outstanding not to exceed $2 million. The
Company's initial borrowing under the New Credit Facility, on October 1, 1998,
was approximately $4.9 million, the proceeds of which were used to repay all
outstanding indebtedness (together with certain fees and expenses) of the
Company under its Revolving Credit Facility with NationsCredit.
Security. Indebtedness under the New Credit Facility is
secured by a first priority security interest in all accounts receivable,
inventory, machinery and equipment (including molds) of the Company and each of
its domestic subsidiaries. In addition, the Company and each of its domestic
subsidiaries has granted a negative pledge with respect to certain other assets,
including real property, general intangibles and intellectual property
(including patents).
Interest. Indebtedness under the New Credit Facility bears
interest at a floating rate based (at the Company's option) upon (i) LIBOR (for
either one, two, three or six months), plus an Applicable Margin ranging from
1.25% to 2.25% (initially 1.75%) or (ii) the Base Rate (the greater of the Prime
Rate announced by First Union or the Federal Funds Rate plus 0.50%) plus an
Applicable Margin ranging from 0.00% to 1.00% (initially 0.50%).
Borrowing Base. The availability of borrowings under the New
Credit Facility is subject to a Borrowing Base equal to the sum of (i) 85% of
eligible accounts receivable, (ii) 60% of eligible inventory, (iii) 75% of the
orderly liquidation value of selected eligible machinery and equipment, (iv) 80%
of the cost of certain new machinery and equipment and (v) 60% of the cost
of the conversion of certain existing machinery and equipment.
Covenants. The New Credit Facility requires the Company to
meet certain financial tests at the end of each fiscal quarter, including a
Funded Indebtedness to EBITDA Ratio from the closing date through June 30, 2000
of 6.25:1.0, decreasing incrementally to 4.5:1.0 at July 1, 2002 and thereafter,
and a Fixed Charge Coverage Ratio of not less than 1.0:1.0 for any fiscal
period. The New Credit Facility also contains covenants that include, without
limitation: (i) required delivery of financial statements, other reports and
borrowing base certificates; (ii) limitation on liens; (iii) limitations on
mergers, consolidations and sales of assets; (iv) limitations on incurrence of
debt; (v) limitation on permitted capital expenditures; (vi) limitations on
restricted payments; (vii) limitations on investments and acquisitions; (viii)
limitations on transactions with affiliates; and (ix) limitations on changes in
the Company's line of business.
Events of Default; Remedies. The New Credit Facility provides
for customary events of default.
Election of Chief Financial Officer and Vice President.
Effective September 16, 1998, due to family considerations, Louis H. Dixey, Jr.
resigned from his positions as a Director and the Chief Financial Officer of the
Company. Mr. Dixey also resigned from all other offices held by him in the
Company and the Company's subsidiaries. By unanimous written consent of the
Company's Board of Directors, Peter Giallorenzo was elected to succeed Mr. Dixey
as the Chief Financial Officer and Vice President of the Company. Prior to
joining the Company and since 1988, Mr. Giallorenzo served as Senior Vice
President and Chief Operating Officer of Taro Pharmaceuticals.
24
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 10 and 27 are included with this report.
(b) No reports on Form 8-K were filed for the quarter ended July
5, 1998.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDESCO INTERNATIONAL, INC.
By: /s/ Peter Giallorenzo
--------------------------------------------
Peter Giallorenzo
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Date: October 1, 1998