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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 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 or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
950 Third Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 593-2009
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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The aggregate market value of the common stock of Indesco
International, Inc. held by non-affiliates of Indesco International, Inc. is
inapplicable as the common stock of Indesco International, Inc. is privately
held.
The number of shares of common stock of Indesco International, Inc.
outstanding on March 31, 1999 was 200.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Registration Statement on Form
S-4 (File No. 333-52657) and the Company's Form 10-Q for the quarterly
period ended July 5, 1998 .
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INDESCO INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1998
Page
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PART I
Item 1. Business................................................................... 4
Item 2. Properties................................................................. 11
Item 3. Legal Proceedings.......................................................... 12
Item 4. Submission to Matters to a Vote of Security Holders........................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 12
Item 6. Selected Financial Data.................................................... 13
Item 7. Management's Discussions and Analysis of Financial Condition and Results
of Operations ............................................................. 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.................. 19
Item 8. Financial Statements and Supplementary Data................................ 19
Item 9. Changes In and Disagreements With Accountants and
Financial Disclosure....................................................... 20
PART III
Item 10. Directors and Executive Officers of Registrant............................. 20
Item 11. Executive Compensation..................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 23
Item 13. Certain Relationships and Related Transactions............................. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 26
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PART I
ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K ("Form 10-K"), the terms
"Company" and "Indesco" refer to Indesco International, Inc., a Delaware
corporation, and its subsidiaries, AFA Products, Inc.("AFA"), Continental
Sprayers International, Inc. ("CSI") and AFA Polytek, B.V. ("Polytek").
The Company
The Company, created by the combination of CSI, AFA and Polytek, is a leader
in the design, manufacture and sale of liquid dispensing products, primarily
plastic trigger sprayers, used in household consumer product applications (hard
surface cleaning, laundry and lawn and garden products) and in industrial
applications (automotive, janitorial and sanitation markets). The Company's
products are sold to (i) multinational, national and regional manufacturers of
brand name and private label consumer products and (ii) independent distributors
of containers and packaging products. The Company generated net sales of
$107,565,000 for the year ended December 31, 1998 (reflecting results for the
twelve months ended December 31, 1998 for the Company, AFA and Polytek and
results of CSI for the eleven month period beginning February 1, 1998, the
effective date of the acquisition by the Company of CSI.) On a proforma basis,
after giving effect to the acquisition of CSI as if it had been effected on
January 1, 1998, the Company generated net sales of $112,411,000 for the twelve
months ended December 31, 1998. (See Notes to the Company's Consolidated
Financial Statements for further description of the Company and the transactions
leading to the acquisitions of its subsidiaries.)
North America is the principal market for trigger sprayers, accounting for
approximately two thirds of the estimated 1.8 billion units sold worldwide. The
North American market includes large multinational and national manufacturers of
brand name consumer products, smaller manufacturers of brand name, private label
and specialty products for consumer and industrial use and marketers of
general-purpose liquid spray containers that are sold in empty form. The large
consumer products manufacturers are served directly by a limited number of
trigger sprayer producers that can meet their high volume, product innovation
and consistent quality requirements. Other customers are served both directly by
trigger sprayer manufacturers and indirectly by independent distributors that
can process smaller volume orders and provide more personalized service support.
Outside North America, the principal market for trigger sprayers is in Western
Europe, which consists of major multinational customers and smaller
manufacturers of consumer products.
CSI is a leading supplier of trigger sprayers to large national and
multinational consumer products manufacturers. CSI also manufactures and sells
finger-actuated plastic pumps for nationally branded soaps and lotions. AFA is
focused on serving independent container and packaging distributors as well as
smaller manufacturers of brand name and private label consumer products. AFA is
the nation's leading supplier of trigger sprayers to independent distributors,
which typically purchase in smaller volumes but at higher margins than large
multinational consumer products companies. Polytek produces and markets trigger
sprayers principally in Europe, and also performs custom injection molding
services for European manufacturers of plastic packaging, consumer and
industrial products.
Subsequent to the acquisition of CSI in February 1998, the Company began the
process of integrating the operations, sales, and marketing of its three
subsidiaries. Operations has been consolidated under William Driggers, formerly
President of CSI, who was appointed Chief Operating Officer of the Company
effective November 1998. Sales and marketing have been consolidated under David
Guinta, who was appointed Executive Vice President Sales and Marketing of the
Company, effective November 1998. To utilize more efficiently the Company's
domestic and foreign manufacturing and assembly capacity, the Company (i) in
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November 1998, moved its U.K. assembly and distribution operation to the Polytek
facility in Holland and (ii) in December 1998, the Company began the transfer of
its El Paso, Texas and Juarez, Mexico production to AFA's North Carolina and
Costa Rica plants. The Company expects to close its Texas and Mexico plants
during 1999 and has reserved $5,344,000 for expenses in connection with these
closedowns. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 12 to the Company's Consolidated Financial
Statements.
The Company, incorporated in August 1997, is a wholly-owned subsidiary of
Indesco Holdings Co. ("Parent"). The Parent was formed in July 1997 to acquire,
through a wholly-owned subsidiary, certain assets and liabilities of AFA,
located in Forest City, North Carolina. Concurrent with this transaction, a
stockholder of the Parent and an affiliate of another stockholder of the Parent
acquired the outstanding capital stock of Polytek, based in The Netherlands. In
February 1998, the Company acquired, through a wholly-owned subsidiary, certain
assets and liabilities of CSI, a division of Contico International, Inc.
Concurrent with the CSI acquisition, AFA and Polytek became wholly-owned
subsidiaries of the Company.
The Products
Trigger Sprayers
Trigger sprayers are essential components of commonly used products in
household and industrial applications throughout the world. CSI's trigger
sprayer products are known for having external vents, low actuation force,
consumer customized spray patterns and a broad range of product compatibility.
In addition, these sprayers are available in custom colors and with three nozzle
options: standard spray, fully adjustable spray or stream and foamer. All of
CSI's trigger sprayer products can be outfitted with customized shrouds that
enable customers to create a distinctive look for their packaging while
permitting CSI to employ a standard sprayer manufacturing platform to enhance
manufacturing cost effectiveness. CSI also has developed two basic models of
sprayers for use in chemical, janitorial, beauty supply, plant and garden and
other commercial applications. Both models are highly reliable and have
excellent longevity and chemical compatibility.
CSI's newest trigger sprayer model, the T-1000(TM), is currently being
introduced in Europe through the Polytek operation. The T-1000(TM), which is
designed to reduce manufacturing costs, incorporates a patented "Quick
Twist"(TM) closure system that improves customer fill line efficiency,
eliminates leakage during shipment of the customer's products, and eliminates
"back-off" (i.e., the undesirable loosening of the screw closure system
typically used in all conventional trigger sprayer products.)
AFA introduced the first trigger sprayer in 1959. Today, AFA's product line
includes seven basic sprayer models and over ten product line extensions. Its
trigger sprayers can be supplied with a variety of features, including
adjustable nozzles, turreted nozzles, a three way nozzle configuration, foaming
capabilities, high output, quick priming, a high torque cap, and non-leakage
protection during shipping. AFA also offers its customers a choice of over 150
different colors. Polytek manufactures three of the seven basic trigger sprayer
models offered by AFA, which is consistent with market demand in Europe. In
addition, the Company is now offering the CSI T-1000 (discussed above) and
T-8500 trigger sprayers in Europe. The T-8500 and the T-1000 are both being
manufactured at the Polytek facility.
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Dispensing Pumps
Finger actuated pump dispensers have long been utilized in commercial
applications, such as the food service industry, and gained popularity in
consumer applications with the introduction of liquid soap in the 1980s. Pump
dispenser usage has grown considerably in recent years, as new applications have
been developed, most notably in the markets for hair and skin care products.
The Company through CSI currently offers two types of liquid pump
dispensers: one for consumer applications and one for industrial applications.
The consumer dispenser unit provides accurate quantity dispensing and is
compatible with most liquids. This product is sold to several large customers in
the high-end segment of the liquid soap and hand lotion markets. CSI's
industrial pump dispenser is a versatile pump that can handle high-viscosity
liquids. It has an adjustable output and is constructed of polypropylene and
stainless steel for maximum chemical compatibility. This product is currently
used for cleaners, waxes, solvents and germicidal detergents.
The Company has continued its development of the Luxor(TM) pump dispenser, a
new low-cost, lightweight unit with improved valve technology. The product is
being developed to include the Company's proprietary "Quick Twist"(TM) closure
system and is designed to permit greater manufacturing and assembly efficiency.
The Company believes that this product will provide a superior alternative in
the market for liquid pump dispensers. The Company currently expects to offer
the product on a limited commercial basis later in 1999.
Custom Molding Services
The Company, through its Polytek operation, provides custom molding services
to European manufacturers of a variety of plastic components for both consumer
and industrial products. Polytek satisfies its customers' demands by offering
design and technological support, high volume capacity, ISO 9001 designation and
competitive pricing. By providing a "complete package" of custom molding
capabilities, Polytek has developed strong relationships with several large
multinational companies. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".)
Marketing and Distribution
In North America, sales to major national and multi-national consumer
products manufacturers are made on a direct basis through the Company's own
sales organization. Sales to smaller manufacturers and certain end users are
made directly and through the Company's network of more than 40 independent
container and packaging distributors. AFA has maintained long-standing
non-exclusive relationships with its North American distributors, most of which
for over ten years. In Europe, a majority of Polytek's trigger sprayers are sold
to and through distributors and commission paid agents. The Company's products
also are sold in the Pacific
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Rim market through licensing arrangements under which it receives royalties. In
1998, the amount of such royalties was immaterial. Most of the Company's
business in this market is in Japan, Thailand, Australia and New Zealand.
Customers
The Company has over 200 customers. Approximately 39% of the Company's
consolidated net sales for the twelve months ended December 31, 1998 were to its
ten largest customers. The Company previously reported the loss in 1998 of a
significant customer whose purchases from CSI for the twelve months ended
December 31, 1997 accounted for approximately 10.0% of the Company's net sales
on a proforma consolidated basis. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Competition
The markets for the Company's products are highly competitive. In North
America, the Company competes primarily with Calmar Inc., a subsidiary of St.
Gobain, and the Specialty Products division of Owens-Illinois, Inc. The European
markets for the Company's products are highly fragmented. In addition to the
presence of one North American competitor in Europe, Calmar Inc., there are a
number of other competitors, including Spraysol, Canyon Corporation and Guala.
The Company believes that it competes on the basis of its strong customer
relationships, its reputation for quality, reliability, performance and prompt
delivery, and the price of its products. In addition, many of the Company's
major customers are multinational companies that compete on a global basis with
worldwide brands and place increased emphasis on global sourcing of input
materials and components. Management believes that the Company's ability to
serve these customers globally from its North American and European production
bases will continue to be an important competitive factor.
Research and Development; Intellectual Property; Patents
The Company has over 300 patents, of which approximately 217 are active.
Many of the Company's products are protected by patents and the Company is
continually exploring opportunities for new patentable products through research
and development. In 1998, Research and Development expenses totalled
$1,068,000. While the Company believes that its patents are important to
its business and enhance its competitive
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position, the Company does not believe that the loss of any one particular
patent would have a material adverse effect on its business.
Raw Materials
The principal raw material used by the Company is plastic resin, primarily
polypropylene. Plastic resins are available from a number of suppliers in the
United States and in Europe. Approximately 15% of the Company's cost of sales on
a pro forma consolidated basis in 1998 was attributable to purchases of plastic
resin. To date, the Company has been able to obtain sufficient quantities of
plastic resin for its requirements. The Company has long-standing relationships
with its major suppliers.
Environmental Compliance
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, the emission,
discharge, generation, handling, storage, transportation, treatment and disposal
of hazardous and non-hazardous substances and wastes. Failure to comply with
these laws could result in substantial fines and penalties. Moreover, it is
possible that the Company could be required to remediate a site to meet
applicable legal requirements. The Company believes, although there can be no
assurance, that liabilities, if any, relating to environmental matters will not
have a material adverse effect on its future financial position or results of
operations.
Employees
At February 28, 1999, the Company had approximately 1,300 employees, of whom
approximately 1,180 were engaged in manufacturing and manufacturing support, 18
were engaged in product sales and the balance were employed in various
administrative capacities. Management considers the Company's relationships with
its employees to be satisfactory.
Backlog
The Company's backlog of orders was approximately $1.7 million as of March
30, 1999. The Company expects that all of its present backlog will be filled
within the next three months.
International Operations
See Note 13 to the Company's Consolidated Financial Statements for financial
information regarding foreign and domestic operations of the Company.
Description of Indebtedness
(a) New Credit Facility.
General. As of September 29, 1998, the Company, AFA and CSI entered into
a new credit facility (the "New Credit Facility") with First Union
National Bank ("First Union"). As amended, the New Credit Facility
replaced the revolving credit facility with NationsCredit Commercial
Corporation ("NationsCredit") ("See Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources").
Collateral. Indebtedness under the New Credit Facility is
collateralized by a first priority collateral 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
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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, plus an
Applicable Margin ranging from 1.25% to 2.25% (currently 2.25%) 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% to 1.00% (currently 1.00%).
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. The lender has the right to set reserves which can limit
the amount of borrowing base availability.
Covenants. The New Credit Facility requires the Company (on a
consolidated basis, including all domestic subsidiaries and Polytek) to
meet certain financial tests at the end of each fiscal quarter,
including a Funded Indebtedness to EBITDA Ratio and a Fixed Charge
Coverage Ratio. 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. The New Credit Facility provides for customary events
of default.
On March 24, 1999, the Company amended its New Credit Facility. The
amendment (i) waives compliance with the Funded Indebtedness to EBITDA
ratio through the end of 1999, (ii) requires the Company to maintain
EBITDA of at least $3,000,000 for each of the fiscal quarters ending on
March 31, 1999, June 30, 1999 and September 30, 1999, (iii) reduces the
Capital Expenditure Limit (as defined in the New Credit Facility) for
the period commencing on September 29, 1998 through December 31, 1999
(iv) increases the Applicable Margin on Eurodollar loans to 2.25% (from
1.75%) and on Base Rate loans to 1.00% (from 0.50%) and (v) provides
that prior to May 14, 1999, the Company and First Union will negotiate
additional financial covenants and new financial covenant levels for the
fiscal quarters ending on June 30, 1999, September 30, 1999, December
31, 1999 and March 31, 2000.
(b) Senior Subordinated Notes
On April 23, 1998, the Company issued $145,000,000 of 9.75% Senior
Subordinated Notes due April 15, 2008 (the "Old Notes") which have since
been exchanged for New Notes, as defined below. 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. Interest on the Old Notes was
payable semi-annually on April 15 and October 15, commencing October 15,
1998.
The Old Notes were 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 through the redemption
date. In addition, at any time on or before April
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15, 2001, the Company was entitled to redeem up to 35% of the initial
aggregate principal amount of the Old Notes with the net proceeds of one
or more equity offerings at a redemption price equal to 109.75% of the
principal amount thereof, plus accrued and unpaid interest, if any,
through the date of redemption; provided that at least 65 percent of the
initial aggregate principal amount of the Old Notes remained
outstanding. The terms of the Old Notes required the Company to make an
offer to purchase all outstanding Old Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest through the date of
purchase, upon a change of control of the Company.
The Old Notes were unsecured senior subordinated obligations of the
Company and were subordinated in right of payment to all existing and
future senior indebtedness of the Company, including indebtedness under
its revolving credit facility. The Old Notes were ranked pari passu with
all existing and future senior subordinated indebtedness of the Company,
were ranked senior to all other existing and future Subordinated
Indebtedness of the Company and were 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 "Subsidiary Guarantors"). The Old Notes were also effectively
subordinated to all existing and future senior indebtedness of the
Company's subsidiaries.
On August 17, 1998, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-4 with respect to its
9.75% Senior Subordinated Notes due April 15, 2008 ("New Notes") which
were 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 $145,000,000 aggregate principal amount of the
Old Notes. The New Notes are subordinated in right of payment to all
existing and future Senior Indebtedness, including indebtedness under
the New Credit Facility and, except for certain transfer restrictions
and registrations rights relating to the Old Notes, are identical in all
material respects to the Old Notes.
(c) ABN/AMRO Loan
Polytek has a credit facility with the ABN-AMRO Bank, The Netherlands
(See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources").
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ITEM 2. PROPERTIES
The Company manufactures products at plants located in Forest City, North
Carolina, St. Peters, Missouri, El Paso, Texas and Helmond, The Netherlands. The
Company has additional assembly operations in Costa Rica, and Mexico.
Consistent with the Company's previously announced plans to integrate its
three subsidiaries and consolidate its operations, in November, 1998, the
Company consolidated its UK operations into its Helmond, The Netherlands,
facility. In addition, the Company expects to close its Texas and Mexico plants
during 1999. See "Management's Discussion and Analysis of Financial Condition
and results of Operations" and Note 12 to the Company's Consolidated Financial
Statements.
The following table sets forth information with respect to the Company's
facilities:
Location Square Footage Ownership Function
--------------------------- -------------- --------- ----------------------------
Forest City, North Carolina 146,000 Owned Injection molding, automated
assembly, distribution
St. Peters, Missouri 124,000 Owned Injection molding, automated
Assembly, distribution,
St. Peters, Missouri 25,000 Leased Offices
Helmond, The Netherlands 110,000 Owned Injection molding, automated
assembly, distribution
El Paso, Texas 101,000 Building Injection molding,
owned, automated assembly,
subject to distribution
land lease
Cartago, Costa Rica 39,615 Owned Manual assembly,
distribution
Juarez, Mexico 35,000 Owned Manual assembly,
distribution
New York, New York 2,900 Leased Executive Offices
St. Louis, Missouri 9,500 Owned Mold and die construction
Management believes that the Company's facilities are in good condition and
adequate for its present operating needs.
Plastic components are produced at the Company's own manufacturing
facilities. In addition, the Company manufactures certain other components used
in its products; the remaining components are purchased from outside suppliers.
The Company's products are assembled automatically on assembly machines
built to the Company's specifications and, at its facilities in Costa Rica and
Mexico, by hand.
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ITEM 3. LEGAL PROCEEDINGS
The Company has from time to time been involved in legal proceedings related
to the ordinary course of its business, none of which has had a material adverse
effect on the Company. The Company is not currently involved in any material
legal proceedings and maintains property, general liability and product
liability insurance in amounts that it believes are consistent with industry
practices and adequate for its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of
the Company. As of March 31, 1999, there was one record holder of the common
stock of the Company.
The Company has not declared or paid cash dividends to its stockholder.
The Company anticipates that all of its earnings in the near future will be
retained for the development and expansion of its business and, therefore, does
not anticipate paying dividends on its common stock in the foreseeable future.
The Company's indenture which governs the terms of the Company's 9.75% senior
subordinated notes (the "Indenture") and the Company's New Credit Facility
contain provisions which restrict the ability of the Company to pay dividends on
its common stock. These restrictions provide that the Company may not declare or
pay any dividend to the holders of its capital stock, unless, at the time of
such payment, (i) there is no Default or Event of Default (as defined in the
Indenture), (ii) the aggregate amount of all dividends and other Restricted
Payments (as defined in the Indenture) does not exceed 50% of the Company's
Consolidated Net Income (as defined in the Indenture) plus other net cash
proceeds received by the Company from the first day of the fiscal quarter during
which the Company's notes were issued through the date of the most recent
quarterly financial statement and (iii) the Company could incur Additional
Indebtedness (as defined in the Indenture) pursuant to Section 1010 of the
Indenture.
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ITEM 6. SELECTED FINANCIAL DATA
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
The following table sets forth selected historical financial data of Indesco
International, Inc. and Subsidiaries (and its predecessors) on a consolidated
basis. The balance sheet data as of December 31, 1998 and the statement of
operations data for the twelve months ended December 31, 1998 are derived from
the financial statements of Indesco International, Inc. and Subsidiaries
included elsewhere in this Form 10-K. Such data reflects statements of
operations data for AFA and Polytek for the twelve months ended December 31,
1998 and for CSI for the eleven month period commencing on February 1, 1998, the
date of the Company's acquisition of CSI. The balance sheet data as of December
31, 1996 and 1997 and the statement of operations data for the year ended
December 31, 1996 and for the seven and five month periods ended July 31 and
December 31, 1997, respectively, are derived from the audited historical
financial statements of AFA Holdings Co. (the Company's parent) and WTI, Inc.
and Subsidiaries (the predecessor of AFA Holdings Co.). The data below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto included elsewhere in this Form 10-K.
WTI, INC. AND INDESCO
(Dollars in Thousands) SUBSIDIARIES INTERNATIONAL,
WTI, INC. AND FOR THE AFA HOLDINGS CO. INC. AND
SUBSIDIARIES FOR SEVEN MONTHS FOR THE FIVE SUBSIDIARIES FOR
THE YEAR ENDED ENDED MONTHS ENDED THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 JULY 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998(1)
----------------- ------------- ----------------- -----------------------
STATEMENT OF OPERATIONS DATA:
Net Sales $ 54,133 $ 32,988 $ 20,108 $ 107,565
Cost of Sales 39,868 23,864 16,595 79,923
--------- --------- --------- ---------
Gross Profit 14,265 9,124 3,513 27,642
Selling, General and Administrative
Expenses 7,389 4,205 2,862 21,124
--------- --------- --------- ---------
Income From Operations 6,876 4,919 651 6,518
Interest Expense 4,275 2,295 2,231 15,527
Other Income, Net (275) (803) (54) (156)
--------- --------- --------- ---------
Income (Loss) Before Extraordinary
Item and Provision (Benefit)
for Income Taxes 2,876 3,427 (1,526) (8,853)
Provision for Income Taxes (Benefit) 354 354 (152) 1
--------- --------- --------- ---------
Net Income (Loss) Before
Extraordinary Item 2,522 3,073 (1,374) (8,854)
Extraordinary Item - Loss on Early
Extinguishment of Debt - - - 7,005
--------- --------- --------- ---------
Net Income (Loss) $ 2,522 $ 3,073 $ (1,374) $ (15,859)
========= ========= ========= =========
OTHER DATA:
EBITDA(2) $ 11,621 $ 8,242 $ 4,279 $ 22,599
FINANCIAL POSITION DATA:
Current Assets $ 18,258 $ 18,155 $ 18,395 $ 29,622
Current Liabilities 17,313 15,220 12,885 19,446
Working Capital 945 2,935 5,510 10,176
Property, Plant and Equipment 16,004 15,022 28,009 65,885
Total Assets 44,801 44,365 60,887 171,406
Long-Term Obligations 25,075 25,528 44,786 164,063
Total Stockholders Equity (Deficit) 2,413 3,617 3,216 (12,103)
(1) Statement of Operations Data of the Company for the year ended December 31,
1998, includes the results of operations of the Company, AFA and Polytek
for the twelve months ended December 31, 1998 and the results of operations
of CSI for the 11-month period beginning February 1, 1998, the date of its
acquisition by the Company ("the Acquisition Date").
(2) EBITDA represents income before interest, income taxes, depreciation,
amortization, one-time charges (e.g., plant closedown costs), and
extraordinary items. Management believes that EBITDA is a measure commonly
used by analysts and investors to determine a company's ability to incur and
service its debt. EBITDA should not be considered as an alternative to, or
more meaningful than, net income, cash flows from operating activities or
other income or cash flow statement data prepared in accordance with GAAP,
or as a measure of profitability or liquidity. EBITDA does not necessarily
indicate whether cash flow will be sufficient for cash requirements. The
calculation of EBITDA does not include the commitments of the Company for
capital expenditures and payment of debt and should not be deemed to
represent funds available to the Company.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS.
The accompanying 1998 condensed consolidated statements of operations of the
Company include the results of operations of the Company, AFA and Polytek for
the twelve months ended December 31, 1998, and the results of operations of CSI
for the eleven-month period beginning February 1, 1998, the date of its
acquisition by the Company ("the Acquisition Date") ("the 1998 Twelve Month
Period"). The 1997 condensed consolidated statement of operations reflect the
financial results of WTI, Inc., the owner of AFA and Polytek prior to the
acquisition by the Company ("WTI"), for the seven months ended July 31, 1997 and
the financial results of the Parent for the five months ended, December 31,
1997, which include the results of AFA and Polytek.
The results of operations of WTI and Parent 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 and Parent for 1997, and the results
of operations of WTI and Parent in 1997 are not directly comparable to those of
WTI for 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1998.
The condensed consolidated operating results, expressed as a percentage of
sales, of (i) the Company for the 1998 Twelve Month Period, (ii) WTI for the
seven months ended July 31, 1997 and (iii) the Parent for the five months ended
December 31, 1997 are presented below. As discussed above, the 1998 and 1997
financial information presented below is not directly comparable year to year.
AFA HOLDINGS INDESCO
CO. AND INTERNATIONAL,
WTI, INC. AND SUBSIDIARIES INC. AND
SUBSIDIARIES FIVE MONTHS SUBSIDIARIES
SEVEN MONTHS ENDED TWELVE MONTHS
ENDED DECEMBER 31, ENDED
JULY 31, 1997 1997 DECEMBER 31, 1998
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 72.3% 82.5% 74.3%
----- ----- -----
Gross Profit 27.7% 17.5% 25.7%
Operating Expenses:
Selling, General & Administrative 12.7% 14.2% 11.2%
Research and Development -- -- 1.0%
Amortization of Intangibles -- -- 2.5%
Plant Closedown Costs -- -- 5.0%
----- ----- -----
12.7% 14.2% 19.7%
----- ----- -----
Income (Loss) from Operations 14.9% 3.2% 6.1%
Interest expense and other income 4.6% 9.8% 14.3%
Provision for Income Taxes 1.1% -0.8% 0.1%
----- ----- -----
Income Before Extraordinary Item 9.2% -5.8% -8.3%
Extraordinary Item -
Loss on Early Extinguishment of Debt -- -- -6.5%
----- ----- -----
Net Income (Loss) 9.2% -5.8% -14.8%
===== ===== =====
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Net sales for the 1998 Twelve Month Period were $107,565,000 and include CSI
sales of approximately $54,300,000 for the period from the Acquisition Date
through December 31, 1998. Net Sales in 1998 reflect the impact of (i) the loss
of a significant customer in the third quarter of 1998, (ii) lower selling
prices, introduced in the third quarter of 1998, for certain products in
response to competitive pricing pressures, (iii) reduced purchases by a large
custom molding customer of Polytek in the third quarter of 1998 due to decreased
demand for its products in the Russian market (the reduction in sales
represented about NLG 2,500,000 ($1,300,000) in lost sales to Polytek for the
twelve months ended December 31, 1998) and (iv) in the fourth quarter of 1998,
softening of demand for new products introduced in the second quarter of 1998,
and adjustments by customers of their inventories for year-end.
Cost of sales for the 1998 Twelve Month Period were $79,923,000 (74% of sales)
and include CSI cost of sales of $39,500,000 for the period from the Acquisition
Date through December 31, 1998. Factors adversely affecting cost of sales in
1998 include (i) reduced manufacturing efficiencies resulting from the loss of
the high volume, consistent production for the significant customer discussed
above, (ii) reduced absorption of fixed manufacturing costs on lower production
levels and (iii) a one-time step-up of $850,000 of inventory which was expensed
in 1998. Continued reductions in the cost of certain raw materials partially
offset these adverse factors in 1998.
Gross profit of $27,642,000 (26% of net sales) for the 1998 Twelve Month Period
was impacted by the factors adversely affecting cost of sales and the reduction
in selling prices, both of which are discussed above.
Selling, general and administrative (SG&A) expenses for the 1998 Twelve Month
Period, which were $12,068,000 (11% of sales). Amortization of intangibles for
the 1998 Twelve Month Period is principally related to goodwill arising from the
acquisition of CSI and AFA. The Company recorded a one-time charge of $5,344,000
for costs related to the closedown of its El Paso, Texas and Juarez, Mexico
facilities which is planned to be completed during 1999. (See Note 12 to the
Company's Consolidated Financial Statements.)
Interest expense for the 1998 Twelve Month Period was $15,527,000, which
included $9,700,000 of interest expense related to the $145,000,000 Senior
Subordinated Notes bearing interest at 9.75% incurred from April 23, 1998 (the
issuance date) through December 31, 1998. The remaining amount relates to
interest and financing fees in connection with the Company's various borrowings,
which bore interest at rates ranging from approximately 5% to 11.5%.
No U.S. tax liability has been incurred for 1998. Provision for taxes that have
been recorded in the 1998 Twelve Month Period are related to income from foreign
operations and state minimum taxes. The Company has recorded a full valuation
allowance in connection with its U.S. net operating loss.
In the 1998 Twelve Month Period, the Company recorded an Extraordinary Loss on
the Early Extinguishment of Debt in the amount of $7,005,000, comprised of
$6,054,000 of deferred financing costs and $951,000 of prepayment penalties,
resulting from early termination of various financings.
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FIVE MONTHS ENDED DECEMBER 31, 1997
The Company's net sales for the five months ended August 1, 1997 to December 31,
1997 were $20.1 million and cost of goods sold were $16.6 million, or 82.6% of
net sales. The cost of goods sold was impacted by a one-time write-up of
inventory pursuant to APB 16 of approximately $1.7 million, or 8.5% of net
sales. Selling, general and administrative expenses for the same period were
$2.9 million, or 14.4%. During the period from August 1, 1997 to December 31,
1997, net cash provided by operating activities was $1.4 million. For the same
period, the Company used approximately $0.7 million for capital expenditures.
The Company acquired AFA for approximately $46.9 million and Polytek for
approximately $0.8 million and refinancing of debt of approximately $7.9
million.
The Company believes that its operating results for the seven months ended July
31, 1997 and for the five months ended December 31, 1997 are not comparable to
its operating results for the year ended December 31, 1996 nor to operating
results expected to be achieved in the future due to, among other things, the
acquisitions made in 1997 and 1998, the finance costs and write-offs incurred in
connection with such acquisitions and the one-time write-ups pursuant to APB 16.
SEVEN MONTHS ENDED JULY 31, 1997
Net sales for the seven months ended July 31, 1997 were $33.0 million and cost
of goods sold were $23.9 million, or 72.4% of net sales. Selling, general and
administrative expenses for the same period were $4.2 million, or 12.7% of net
sales. During the seven months ended July 31, 1997, net cash from operations was
$5.8 million. For the same period, the Company used approximately $2.5 million
for capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company completed several significant transactions and, as of
December 31, 1998, the Company's outstanding debt is as follows:
1. On April 23, 1998, the Company issued $145,000,000 of 9.75% Senior
Subordinated Notes, due in 2008 (the "Old Notes"). The net proceeds were
used by the Company to refinance existing indebtedness, including borrowings
incurred in connection with the acquisition in February 1998 of
substantially all of the assets of CSI. As described in Note 6 to the
financial statements, on September 16, 1998, the Company concluded its
exchange offer and the Old Notes were exchanged for $145,000,000 of the new
notes (the "New Notes"). The New Notes are subordinated in right of payment
to the New Credit Facility and are identical in all material respects to the
Old Notes (except for certain transfer restrictions and registration rights
relating to the Old Notes).
2. As of September 29, 1998, the Company entered into a new credit facility
with First Union National Bank. As amended, the New Credit Facility,
replaced the Company's Revolving Credit Facility with NationsCredit
Commercial Corporation ("NationsCredit"), provides for up to $30,000,000 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 $2,000,000. The Company's
initial borrowing under the
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New Credit Facility, on October 1, 1998, was approximately $4,900,000. The
proceeds were used to repay all outstanding indebtedness (together with
certain fees and expenses) of the Company under its Revolving Credit
Facility with NationsCredit. The Company intends to use the New Credit
Facility to fund the majority of its working capital and capital investment
requirements in its U.S. operations. As of December 31, 1998, the Company
had total borrowing base availability under the Revolving Credit Facility of
about $28,000,000, net excess availability was about $16,000,000, and the
total balance outstanding was about $12,000,000.
As discussed in Note 6(b) to the Company's Consolidated Financial
Statements, as of December 31, 1998, the Company was not in compliance with
the Funded Indebtedness to EBITDA ratio of its New Credit Facility. The
lender has waived the failure of the Company to comply with such covenants
and further waived such compliance through the remainder of 1999. The
Company has agreed with First Union to set new covenant levels during 1999.
3. Polytek has a credit facility with ABN-AMRO Bank with a maximum available
facility balance of NLG 22,000,000 ($11,700,000). The facility includes (i)
a working capital line of credit up to NLG 11,000,000 ($5,851,000) and (ii)
a loan with a maximum allowable balance of NLG 8,500,000 ($4,520,000),
collateralized by a lien on certain real property of Polytek. In connection
with the construction of a manufacturing facility in 1991, Polytek obtained
a NLG 3,500,000 ($1,865,000) loan from ABN-AMRO Bank, secured by a mortgage
on certain real property of Polytek. As of December 31, 1998, Polytek's
outstanding indebtedness under the working capital line of credit as
$3,613,000, with additional availability of approximately $2,200,000. The
Company intends to use this credit facility to fund the majority of its
working capital and capital investment requirements for its European
operations. As of December 31, 1998, Polytek's outstanding loan
indebtedness was $3,613,000.
For the 1998 Twelve Month Period, the net cash provided by operating activities
of $5,091,000 resulted from the $8,854,000 net loss before extraordinary item,
offset by (i) an aggregate $15,152,000 of non-cash items (i.e., depreciation,
amortization and plant closedown costs), and (ii) a net decrease of $1,207,000
in working capital.
For the 1998 Twelve Month Period, the net cash used in investing activities of
$107,000,000 included (i) the $94,000,000 expended to effect the CSI acquisition
and (ii) capital expenditures of $13,000,000. The Company's capital expenditures
were primarily related to equipment to be used in manufacturing its Luxor liquid
pump dispenser, conversion of certain of its high-speed assembly machines and
the purchase of injection molding machines for the Polytek facility.
For the 1998 twelve month period ended December 31, 1998, the net cash provided
from financing activities of $102,000,000 resulted primarily from the issuance
of the $145,000,000 in Senior Subordinated Notes (as described above), net of
repayment of debt, payment of deferred financing costs, and a return of capital
to Parent aggregating $43,000,000.
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Management believes that net cash generated by operations, together with amounts
available under the New Credit Facility and the credit facility with ABN-AMRO
Bank, will be adequate to fund (i) the payment of interest and principal on the
Company's outstanding indebtedness, (ii) its capital investment plans and (iii)
its working capital requirements.
Management believes that inflation did not have a significant impact on
operations.
YEAR 2000 COMPLIANCE.
As many computer systems and other equipment with embedded chips or processors
(collectively, "Business Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the Year 2000. As a result, business and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This state of affairs is commonly referred to as the "Year
2000 Compliance" ("Y2K Compliance") issue. This issue can be a factor at any
point in a business entity's supply, manufacturing, distribution or financial
chains.
The formation of the Company, as it is presently configured, was completed in
February 1998 when CSI was acquired and combined with the Company's two other
operating subsidiaries that had been acquired only several months prior, AFA and
Polytek. Substantial progress has been made in identifying Business System areas
where potential Y2K Compliance risk may exist, and in certain cases, the Company
has already established that certain of its Business Systems are in fact Y2K
Compliant. In other cases, inquiries of third party suppliers are ongoing, and
an evaluation as to the nature of modifications needed, if any, is under active
review. A discussion of certain of these areas is as follows:
1. In 1998, as part of its systems integration, the Company conducted a review
of enterprise resource planning (ERP) software packages that were suitable
for manufacturers in the injection molding industry. The objective was to
convert the applications systems being used at each of its operating sites
to a software/hardware platform that would begin to integrate the various
functions of the Company, i.e., manufacturing, distribution, supply and
finance. While selection of the software package was made from the
standpoint of optimizing its business suitability, the Company had also
obtained certification that the new software was Year 2000 Compliant prior
to finalizing the purchase. The implementation of the new software has been
successfully completed at CSI's St. Peters facility and the Company
anticipates completing the implementation of the new software at AFA and
Polytek by the third quarter of 1999.
2. Much of the Company's network server and desktop computer hardware was
recently purchased. All such equipment was certified as Y2K Compliant prior
to purchase. With respect to injection molding equipment in which a
microprocessor is used, technical management has polled its equipment
suppliers in order to establish that the equipment is Year 2000 Compliant.
In certain cases, the Company has already received affirmative responses
that certain of its equipment are Year 2000 Compliant. The Company is in the
process of evaluating this information.
The completion of the Company's program has involved (i) the review of the
Company's Business Systems for potential Y2K risk, (ii) developing required
modifications to those systems and (iii) allocating resources to effect those
modifications. Included in these efforts are communications with principal
customers and third-party providers of goods and services to establish that they
have adequately addressed Y2K Compliance within their own organizations.
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While there can be no assurance, management presently believes that the cost to
achieve Y2K compliance will not be material to the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
The information provided in this Annual Report on Form 10-K contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Such forward-looking statements are
based on the beliefs of management, as well as assumptions made by and
information currently available to the Company's management.
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 that could cause actual results to
differ materially from those reflected in the forward-looking statement. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements on page F-1.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each of the
Company's directors and executive officers. All directors hold office until the
next annual meeting of stockholders and until their successors have been elected
and qualified. All of the Company's officers are elected by the Board of
Directors and serve at the discretion of the Board of Directors.
Name Age Position
---- --- --------
Yehochai Schneider 65 Chairman of the Board of Directors
Ariel Gratch 47 President, Chief Executive Officer,
Vice Chairman
William L. Driggers 51 Chief Operating Officer
Peter Giallorenzo 41 Vice President and Chief Financial
Officer, Treasurer and Secretary
David Guinta 50 Executive Vice President - Sales and
Marketing
Mr. Schneider has been the Chairman of the Board of Directors of the Company
since February 2, 1998. He also is the Chairman of the Board of the Parent. Mr.
Schneider has over 40 years experience in manufacturing, management and
corporate transactions. Since 1981, he has been involved in the acquisition and
operation of several businesses, including AFA, various divisions of J.P.
Stevens, and Waynesboro Textiles, Inc. Mr. Schneider is a shareholder of WTI and
served as its Chairman until the Company's acquisition of AFA and Polytek. Prior
to 1981, he served as Chief Executive Officer of A & E Plastik Pak Co., a
plastic container business that he co-founded in 1956.
Mr. Gratch has been the President, Chief Executive Officer and a Director of
the Company since February 2, 1998. He also is the President and a Director of
the Company's parent corporation and the Vice Chairman of AFA. Mr. Gratch has
fifteen years of experience in structuring and financing the acquisition of
companies in the United States and Europe. Since 1980, Mr. Gratch has been a
senior member of the New York law firm, Gratch Jacobs & Brozman, P.C.,
specializing in mergers and acquisitions of mid-sized industrial companies.
Since 1992, he has acted as principal in the acquisition and management of
various manufacturing businesses and commercial real estate operations. From
1985 through 1996, Mr. Gratch served on the Board of Directors of Tyco Toys, the
third largest toy company in the United States prior to its purchase by Mattel.
Mr. Gratch has also served on the Board of Directors of several private
companies, including Glenoit Mills, Inc., a textile and consumer goods company
(from 1989 to 1995).
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William Driggers serves as Chief Operating Officer of the Company, having
been appointed to that position in November 1998. Prior thereto and from July
1995, Mr. Driggers served as President of CSI. From 1979 to July 1995, he was
employed by Tredegar Industries, serving from 1991 to 1995 as President/General
Manager of its Molded Products Division.
Peter Giallorenzo serves as Vice President & Chief Financial Officer of the
Company, having been appointed to that position in September 1998. From 1988
through August 1998, Mr. Giallorenzo was Senior Vice President and Chief
Operating Officer of Taro Pharmaceuticals U.S.A., Inc. Mr. Giallorenzo is a
Certified Public Accountant in the State of New York.
David Guinta serves as Executive Vice President -- Director of Marketing and
Sales (Global Sales Division) of the Company, having been appointed to that
position in November 1998. Prior thereto and from July 1998, Mr. Guinta served
as Executive Vice President - Director of Marketing and Sales of CSI. From
September 1991 until July 1998, he was employed by Calmar Inc., serving from
January 1997 until July 1998 as its Vice President of North American Sales.
Committees of the Board of Directors
It is expected that the Board of Directors will establish an Audit
Committee and a Compensation Committee. The membership of these committees has
not yet been determined pending the selection and election of additional
directors. The Compensation Committee will make recommendations concerning the
salaries and incentive compensation of employees of and consultants to the
Company and its subsidiaries. The Audit Committee will be responsible for
reviewing the results and scope of audits and other services provided by the
Company's independent auditors.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
None of the directors who are officers of the Company has received or will
receive any compensation for their service on the Company's Board of Directors.
The Company anticipates payment of compensation to non-officer directors for
their services, including attendance at meetings, the amount of which has not
yet been determined but is not expected to be significant.
Compensation of Executive Officers
The following table sets forth all compensation awarded to, earned by
or paid to the Chief Executive Officer and all other executive officers (the
"Named Executive Officers") for their services to the Company for the year ended
December 31, 1998.
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SUMMARY COMPENSATION TABLE
Annual compensation
- - ------------------------------------------------------------------------------------------------
Other
Annual All other
Name and Principal Compensation Compensation
position Year Salary ($)(1) Bonus ($) (2) ($) (3)
- - ------------------------------------------------------------------------------------------------
Ariel Gratch 1998 458,478.48 200,000 _____ 253
President and CEO
- - ------------------------------------------------------------------------------------------------
William L. Driggers 1998 140,763.10 75,000 _____ 1,603
Chief Operating Officer
- - ------------------------------------------------------------------------------------------------
Peter Giallorenzo 1998 72,825.63 8,333 _____ 253
Vice President and CFO
- - ------------------------------------------------------------------------------------------------
David Giunta 1998 63,192.84 40,000 _____ 253
Exex. Vice President -
Marketing and Sales
- - ------------------------------------------------------------------------------------------------
(1) Amounts represent salaries earned for (a) Messrs. Gratch and Driggers for
the period commencing on February 1, 1998 through December 31, 1998, (b) Mr.
Giallorenzo for the period commencing on August 24, 1998 through
December 31, 1998 and (c) Mr. Giunta for the period commencing on
July 27, 1998 through December 31, 1998. On an annualized basis, 1998
salaries for Messrs. Gratch, Driggers, Giallorenzo and Giunta were $500,000,
$156,000, $200,000 and $150,000, respectively. See Employment Arrangements.
(2) While certain officers received certain perquisites, such perquisites do not
exceed the lesser of $50,000 or 10% of such officers' respective salaries
and bonuses.
(3) Amounts shown include the following: (a) Company payments of term life
insurance premiums: $220 for each of Gratch, Driggers, Giallorenzo and
Giunta, (b) Company payments of Accidental Death & Disability insurance
premiums: $33 for each of Gratch Driggers, Giallorenzo and Giunta and (c)
Company contributions of $1,320 to Mr. Driggers' 401(k) plan.
Management Incentive Plan
In December 1998, the Parent adopted an equity incentive plan for management
and certain other employees of the Company and its subsidiaries (other than
Messrs. Gratch or Schneider). The plan authorizes grants of stock options and
stock appreciation rights with respect to approximately 10% of the Parent's
outstanding common stock on a fully-diluted basis. Of the aggregate options or
stock appreciation rights, approximately 90% are allocated to senior management
personnel of the Company and its subsidiaries. No options have yet been granted
pursuant to the plan.
401(k) Plan
The Company maintains a 401(k) plan (the "Plan") pursuant to which all
domestic salaried and hourly employees, after completing 6 months of service
with the Company, can elect to defer Federal Income taxation on up to 15% of
their total annual compensation, including salaries and bonuses, by having such
amount contributed by the Company to the trust established under the Plan rather
than paid to the employee. The Company will make contributions each year in an
amount equal to 25% of the employee's deferral contributions, up to a maximum of
6% of the employee's total compensation. Company matching contributions vest at
the rate of 25% for each full year of service. Company contributions for the
Named Executive Officers have been included in the Summary Compensation Table
set forth above.
Employment Arrangements
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Mr. Gratch has entered into a five-year employment agreement with the Company,
dated as of February 4, 1998, which contains customary employment terms. The
agreement provides for a base annual salary of $500,000, a minimum guaranteed
bonus of $200,000 and additional incentive compensation based on increases in
the Company's consolidated EBITDA. The agreement is automatically renewable for
two additional five-year terms unless otherwise terminated by the Company or Mr.
Gratch. Mr. Gratch participated in deliberations of the Board of Directors with
respect to the employment agreement.
Mr. Driggers is a party to an employment agreement, dated July 31, 1995 (as
amended), with CSI which contains customary employment terms and provides for an
annual base salary of $156,000, an annual bonus based on increases in CSI's
Income and participation in benefit plans. Notwithstanding the provisions in Mr.
Driggers' contract regarding the calculation of an annual bonus, the Company
awarded Mr. Driggers a bonus of $75,000 for 1998. The term of the employment
agreement expires on May 31, 1999 but renews automatically for successive
one-year periods unless CSI or Mr. Driggers provides written notice of its or
his intention not to renew. The employment agreement also contains
noncompetition and confidentiality provisions. Mr. Driggers did not participate
in the deliberations of the Board of Directors with respect to his compensation
during fiscal 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a direct wholly-owned subsidiary of Indesco Holdings Co. (the
"Parent"). The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Parent, as of December 31, 1998,
by (i) each director of the Company, (ii) each of the executive officers of the
Company, (iii) all executive officers and directors of the Company as a group
and (iv) each person who is the beneficial owner of more than 5% of the
outstanding Common Stock of the Parent. Except as indicated in the footnotes to
the table, the persons named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by them
and the address of each such person is in care of the Company's offices at 950
Third Avenue, New York, New York 10022.
Name and Address Number Percentage of Shares
of Individual or Entity Of Shares Outstanding
------------------------------------------------------ --------- --------------------
Ariel Gratch(1)(3).................................... 7,155,000 86.7%
Yehochai Schneider.................................... 1,095,000 15.0
AFA International Limited(2)(3)....................... 5,110,000 70.0
Waldock Limited(1)(4)................................. 950,000 11.5
All directors and executive officers of the
Company as a group (3 persons)........................ 8,250,000 100.0%
(1) Includes 1,095,000 shares of Common Stock held by Mr. Gratch, 5,110,000
shares of Common Stock held by AFA International Limited and 950,000 shares
of Common Stock issuable upon exercise of the warrants held by Waldock
Limited. Mr. Gratch has voting control over the shares of Common Stock held
by AFA International Limited and the 950,000 shares of Common Stock issuable
upon the exercise of the warrants held by Waldock Limited. Mr. Gratch
disclaims beneficial ownership of the shares of Common Stock held by AFA
International Limited and by Waldock Limited.
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(2) The outstanding capital stock of AFA International Limited is owned by a
trust for the benefit of members of the family of Mr. Gratch.
(3) Concurrently with consummation of the sale of the Old Notes, AFA
International Limited and Ariel Gratch advanced to the Parent an aggregate
of $2.5 million to fund the repurchase by the Parent from NationsCredit
Commercial Corporation ("NationsCredit") of outstanding warrants to purchase
875,000 shares of its Common Stock. The Parent has the option to repay the
amount so advanced by delivery to AFA International Limited and Mr. Gratch
of the repurchased warrants.
(4) Waldock Limited owns currently exercisable warrants to purchase an aggregate
of 950,000 shares of Class A Common Stock. The warrants were granted on
July 29, 1997 and, unless sooner redeemed, expire July 29, 2007. The
outstanding capital stock of Waldock Limited is owned by a trust for the
benefit of members of the family of Mr. Schneider.
The Parent also has authorized a class of Preferred Stock, having a
liquidation and redemption value of $10.00 per share, that provides for payment
of dividends, out of funds legally available therefor, at an annual rate of 7%
of the liquidation value thereof. An aggregate of 1,094,000 shares of such
Preferred Stock were issued to AFA International Limited and Warcop Investments
Ltd., the former stockholders of Polytek upon receipt of the outstanding capital
stock of Polytek. Of such shares, 820,500 were issued to AFA International
Limited and 273,500 shares were issued to Warcop Investments Ltd. Warcop
Investments Ltd. is an affiliate of Mr. Schneider.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective February 4, 1998, the Company entered into a new management
agreement with a company affiliated with Mr. Schneider that provides for annual
payments of $300,000 and expires on July 29, 2008, subject to renewal for
successive five-year periods. Pursuant to the new management agreement, Mr.
Schneider's affiliated company advises the Company on matters relating to
strategic and financial planning and provides financial and administrative
services to the Company as is necessary.
From time to time in the ordinary course of business, AFA purchases certain
metal springs for use in trigger sprayers from Spring & Wire Designs LLC
("S&W"), a company affiliated with Messrs. Gratch and Schneider. In 1998, AFA
purchased for an aggregate of $839,618 approximately 90% of its metal springs
requirements from S&W at competitive prices. The Company anticipates that S&W
will continue to supply these components at competitive prices to AFA.
From time to time in the ordinary course of business, Polytek purchases
molds and maintenance services from Brotool B.V. ("Brotool"), an affiliate of
the Company. During 1998, purchases of molds from Brotool were approximately
$429,000 and purchases of maintenance services were approximately $250,000 (see
Note 10 to the Company's Consolidated Financial Statements).
The law firm of Gratch, Jacobs & Brozman, P.C., of which Mr. Gratch is a
senior member, provides legal services on an ongoing basis to the Company and
its subsidiaries. During fiscal 1998, the Company paid fees of approximately
$1,068,000 to Gratch, Jacobs & Brozman, P.C.
24
25
In connection with the acquisition of AFA, AFA International Limited and
Waldock Limited made loans to AFA in the principal amounts of $1,000,000 and
$2,000,000, respectively. On February 4, 1998, Parent assumed AFA's obligations
in connection with said loans, and as evidence thereof, issued unsecured
subordinated notes (the "Subordinated Notes") to AFA International Limited and
Waldock Limited in the original principal amounts of $1,000,000 and $2,000,000
(plus interest on such principal amounts accrued from July 29, 1997 through
February 4, 1998), respectively. The Subordinated Notes bear interest at 11.5%
per annum, and the principal thereof is prepayable at any time at the option of
the Parent and, unless sooner prepaid, will mature on May 15, 2008.
Concurrent with the acquisition of CSI, Polytek became a direct wholly owned
subsidiary of the Company. The Parent agreed to issue to AFA International
Limited and Warcop Investments Ltd. (a company affiliated with Mr. Schneider),
820,500 shares and 273,500 shares, respectively, of a new class of Preferred
Stock of the Parent having a liquidation and redemption value of $10.00 per
share and providing for dividends at an annual rate of 7% of the liquidation
value thereof. See "Security Ownership of Certain Beneficial Owners and
Management."
In connection with a credit facility in July 1997, the Parent issued to
NationsCredit warrants to purchase, at a price of $0.01 per share, up to an
aggregate of 1,750,000 shares of Common Stock of the Parent (equivalent to 17.5%
of its outstanding Common Stock on a fully-diluted basis), at any time up to
July 29, 2007. Concurrently with the cancellation of such credit facility, the
Parent repurchased all of those warrants for a cash payment of $5.0 million as
part of a general renegotiation of various of the terms of the Company's
arrangements with NationsCredit. Funding for such repurchase was provided by (i)
distribution to the Parent by the Company of $2.5 million and (ii) the advance
to the Parent by AFA International Limited and Mr. Gratch of a like amount in
cash. The advance of those funds was evidenced by unsecured promissory notes of
the Parent bearing interest at the rate of 11.5% per annum. The principal amount
of such notes are prepayable at any time at the option of the Parent, either in
cash or by delivery of half of the warrants so repurchased from NationsCredit,
and, unless sooner prepaid, will mature on May 15, 2008.
The Parent and its U.S. subsidiaries (including Indesco) have entered into a
tax sharing agreement providing (among other things) that Parent shall pay the
federal income tax liability of the consolidated federal income tax group that
includes Indesco and such subsidiaries and that Indesco and each such
subsidiary, subject to certain limitations, will make payments to Parent on
account of income taxes, in an amount determined as if Indesco and the
subsidiaries filed a consolidated federal income tax return that did not include
the Parent.
PART IV
25
26
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The Financial Statements listed on page F-1 are filed as part of this
Form 10-K:
(a)(2) Index to Financial Statement Schedules: None
(a)(3) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Form 10-K:
26
27
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------- ----------- ------------
3.1(a) -- Certificate of Incorporation of Indesco International, Inc., as amended.*
(b) -- Certificate of Incorporation of Continental Sprayers International, Inc., as amended.*
(c) -- Certificate of Incorporation of AFA Products, Inc., as amended.*
3.2(a) -- By-laws of Indesco International, Inc.*
(b) -- By-laws of Continental Sprayers International, Inc.*
(c) -- By-laws of AFA Products, Inc.*
4.1 -- Indenture, dated as of April 23, 1998, between Indesco International, Inc., AFA
Products, Inc. and Continental Sprayers International, Inc., as subsidiary guarantors,
and Norwest Bank Minnesota, National Association, as trustee.*
4.2 -- Form of Notes.*
4.3 -- Form of Subsidiary Guarantees.*
4.4 -- Registration Rights Agreement, dated as of April 23, 1998, between Indesco International, Inc.,
AFA Products, Inc. and Continental Sprayers International, Inc., as subsidiary guarantors, and
NationsBanc Montgomery Securities LLC.*
10.1 -- Loan and Security Agreement, dated September 29, 1998, by and among Indesco International, Inc.,
AFA Products, Inc., Continental Sprayers International, Inc. and First Union National Bank.**
10.2 -- Amendment to Loan and Security Agreement and Waiver, dated March 24, 1999, by and among Indesco
International, Inc., AFA Products, Inc., Continental Sprayers International, Inc. and First
Union National Bank.
10.3 -- Management Agreement, dated as of February 4, 1998, between Indesco International,
Inc. and Gadraz, Inc.*
10.4 -- Employment Agreement, dated as of February 4, 1998, between Indesco International,
Inc. and Ariel Gratch.*
10.5 -- Tax Sharing Agreement, dated as of August 1, 1997, among Indesco International, Inc.,
Continental Sprayers International, Inc. and AFA Products, Inc.*
10.6 -- Supply Agreement, dated as of April 23, 1998, Spring & Wire Designs LLC and Indesco
International, Inc.*
21 -- Subsidiaries of Indesco International, Inc.*
27 Financial Data Schedule
* Previously filed as an exhibit to the Company's Registration Statement on Form
S-4 (File No. 333-52657) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended July 5, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K: None
27
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:___________________________
Ariel Gratch
Title: President and CEO
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
___________________________ President, CEO and March 31, 1999
Ariel Gratch Director (Principal
Executive Officer)
___________________________ Vice President and March 31, 1999
Peter Giallorenzo Chief Financial Officer
(Principal Financial and
Accounting Officer)
___________________________ Director March 31, 1999
Yehochai Schneider
28
29
INDEX TO FINANCIAL STATEMENTS
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet as of December 31, 1998........ F-3
Consolidated Statement of Operations for the year ended
December 31, 1998...................................... F-4
Consolidated Statement of Stockholders Equity (Deficit)
for the year ended December 31, 1998................... F-5
Consolidated Statement of Cash Flows for the year ended
December 31, 1998...................................... F-6
Notes to Consolidated Financial Statements................ F-8
AFA HOLDINGS CO. AND SUBSIDIARIES
Report of Independent Accountants......................... F-28
Combined Balance Sheet as of December 31, 1997............ F-29
Combined Statement of Operations for the five month period
ended December 31, 1997................................ F-30
Combined Statement of Stockholders' Equity for the five
month period ended December 31, 1997................... F-31
Combined Statement of Cash Flows for the five month period
ended December 31, 1997................................ F-32
Notes to Combined Financial Statements.................... F-33
WTI, INC. AND SUBSIDIARIES
Report of Independent Accountants......................... F-46
Consolidated Balance Sheets as of July 31, 1997 and
December 31, 1996...................................... F-47
Consolidated Statements of Operations for the seven month
period ended July 31, 1997 and the years ended December
31, 1996 and 1995...................................... F-48
Consolidated Statements of Stockholders' Equity for the
seven months ended July 31, 1997 and for the years
ended December 31, 1996 and 1995....................... F-49
Consolidated Statements of Cash Flows for the seven month
period ended July 31, 1997 and for the years ended
December 31, 1996 and 1995............................. F-50
Notes to Consolidated Financial Statements................ F-51
CONTINENTAL SPRAYERS AND AFFILIATES
Report of Independent Accountants......................... F-69
Combined Balance Sheets as of May 31, 1997 and 1996....... F-70
Combined Statements of Operations for the years ended May
31, 1997, 1996 and 1995................................ F-71
Combined Statements of Divisional Equity for the years
ended May 31, 1997, 1996 and 1995...................... F-72
Combined Statements of Cash Flows for the years ended May
31, 1997, 1996 and 1995................................ F-73
Notes to Combined Financial Statements.................... F-74
CONTINENTAL SPRAYERS AND AFFILIATES
Report of Independent Accountants......................... F-78
Combined Balance Sheet as of January 31, 1998............. F-79
Combined Statements of Operations for the eight months
ended January 31, 1998................................. F-80
Statements of Cash Flows for the eight months ended
January 31, 1998....................................... F-81
Notes to Combined Financial Statements.................... F-82
F-1
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Indesco International, Inc.
In our opinion, the consolidated balance sheet and related consolidated
statements of operations, stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the consolidated financial position of Indesco
International, Inc. and Subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
March 29, 1999
F-2
31
Indesco International, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1998
(Dollars in Thousands)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 1,569
Accounts Receivable, Net of Allowance of $45 13,941
Inventories 13,447
Prepaid Expenses and Other Assets 665
---------
Total Current Assets 29,622
Property, Plant and Equipment, Net 65,885
Excess of Cost Over Fair Value of Net Assets Acquired, Net 60,953
Patents and Other Intangibles, Net 7,738
Deferred Financing Costs 6,165
Other Assets 1,043
---------
TOTAL ASSETS $ 171,406
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current Portion of Long-Term Debt and Capital Lease Obligations $ 1,085
Credit Facility 3,613
Accounts and Drafts Payable 7,602
Accrued Interest Payable 2,945
Other Accrued Expenses 4,201
---------
Total Current Liabilities 19,446
Long-Term Debt and Capital Lease Obligations 163,416
Deferred Income Taxes 647
---------
Total Liabilities 183,509
---------
Commitments and Contingencies
Stockholders' Deficit:
Common Stock, Authorized 3,000 Shares of $.01 Par Value; 200 Shares
Issued and Outstanding --
Additional Paid-in Capital 5,062
Accumulated Deficit (17,233)
Accumulated Other Comprehensive Income 68
---------
Total Stockholders' Deficit (12,103)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 171,406
=========
See notes to consolidated financial statements.
F-3
32
Indesco International, Inc. and Subsidiaries
Consolidated Statement of Operations
Year Ended December 31, 1998
(Dollars in Thousands)
Net Sales $ 107,565
Cost of Sales 79,923
---------
Gross Profit 27,642
Operating Expenses:
Selling, General and Administrative 12,068
Research and Development 1,068
Amortization of Intangibles 2,644
Plant Closedown Costs 5,344
---------
Total Operating Expenses 21,124
---------
Income From Operations 6,518
Other (Income) Expense:
Interest 15,527
Other (156)
---------
Total Other Expense, Net 15,371
---------
Loss Before Extraordinary Item and Provision for Income Taxes 8,853
Provision for Income Taxes 1
---------
Loss Before Extraordinary Item 8,854
Extraordinary Item - Loss on Early Extinguishment of Debt 7,005
---------
NET LOSS $ 15,859
=========
See notes to consolidated financial statements.
F-4
33
Indesco International, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Year Ended December 31, 1998
(Dollars in Thousands)
COMMON STOCK
-----------------------------
INDESCO ADDITIONAL
COMPREHENSIVE INTERNATIONAL PAID-IN
LOSS POLYTEK INC. CAPITAL
------------- ----------- ------------- --------
Balance at January 1, 1998 $ -- $ 242 $ -- $ 4,320
Net Loss (15,859) -- -- --
Contribution of Subsidiary Equity- -- (242) -- 242
Parent Debt Converted to Equity -- -- -- 3,000
Return of Capital to Parent -- -- -- (2,500)
Translation Adjustment 40 -- -- --
-------- -------- -------- --------
Total Comprehensive Loss ($15,819)
========
BALANCE AT DECEMBER 31, 1998 $ -- $ -- $ 5,062
======== ======== ========
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
DEFICIT INCOME EQUITY (DEFICIT)
----------- -------------- -------------
Balance at January 1, 1998 ($ 1,374) $ 28 $ 3,216
Net Loss (15,859) -- (15,859)
Contribution of Subsidiary Equity -- --
Parent Debt Converted to Equity -- --
3,000
Return of Capital to Parent -- -- (2,500)
Translation Adjustment -- 40 40
-------- -------- --------
Total Comprehensive Loss
BALANCE AT DECEMBER 31, 1998 ($17,233) $ 68 ($12,103)
======== ======== ========
See notes to consolidated financial statements.
F-5
34
Indesco International, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year Ended December 31, 1998
(Dollars in Thousands)
Cash Flows From Operating Activities:
Net Loss $ 15,859
Less: Extraordinary Item (7,005)
---------
8,854
---------
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:
Depreciation 7,087
Amortization 2,645
Plant Closedown Costs 5,344
Deferred Income Taxes 115
Equity in Earnings of Affiliate (39)
Changes in Operating Assets and Liabilities:
Accounts Receivable (7,652)
Inventories 1,776
Prepaid Expenses and Other Assets 914
Accounts and Drafts Payable 2,777
Income Taxes Payable (357)
Other Accrued Expenses 1,335
---------
Total Adjustments 13,945
---------
Net Cash Provided by Operating Activities 5,091
---------
Cash Flows From Investing Activities:
Acquisition of CSI, Net of Cash Acquired (93,568)
Expenditures for Property, Plant and Equipment (12,924)
Proceeds From Disposal of Property, Plant and Equipment 87
Other (563)
---------
Net Cash Used by Investing Activities (106,968)
---------
Cash Flows From Financing Activities:
Proceeds From Senior Subordinated Notes 145,000
Proceeds From Term Loans 135,000
Repayment of Long-Term Debt (173,643)
Payments of Deferred Financing Costs (12,116)
Net Borrowings Under Revolving Credit Agreements 10,629
Return of Capital to Parent (2,500)
---------
Net Cash Provided by Financing Activities 102,370
---------
Effect of Exchange Rate Changes on Cash 25
---------
Net Increase in Cash and Cash Equivalents 518
Cash and Cash Equivalents at Beginning of Year 1,051
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,569
=========
F-6
35
Indesco International, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
Year Ended December 31, 1998
(Dollars in Thousands)
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Interest $8,790
======
Income Taxes $ 314
======
Non-Cash Investing and Financing Information:
During fiscal 1998, the Company entered into capital leases for
machinery and equipment aggregating $2,269.
During fiscal 1998, Parent debt of $3,000 was converted to equity.
See notes to consolidated financial statements.
F-7
36
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars 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") primarily in the United States
and the Netherlands. 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 $94 million (see Note 3). Concurrent with the CSI
acquisition, Polytek became a wholly-owned subsidiary of the Company.
The accompanying consolidated balance sheet as of December 31, 1998
includes the accounts of the Company and its subsidiaries (AFA, Polytek
and CSI).
The accompanying consolidated statement of operations of the Company
includes the results of operations of the Company, AFA and Polytek, for
the year ended December 31, 1998 and the results of operations of CSI
from its acquisition on February 1, 1998 through December 31, 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. The investment in affiliate is carried at
cost plus equity in undistributed earnings since acquisition. All
significant intercompany account and transactions have been eliminated
in consolidation.
Revenue Recognition
The Company recognizes revenue upon shipment of its products to
customers.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant
F-8
37
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimates in the financial statements relate to the allowance for
uncollectible accounts receivable, the allowance for slow-moving and
obsolete inventories, the recoverability of long-lived assets, the
allowance for sales returns and the valuation allowance for deferred
tax assets.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined at the first-in, first-out (FIFO) basis. Cost includes
material, labor and applicable manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of
the assets. Maintenance and repairs are charged to income as incurred
and betterments that extend the useful life are capitalized. Upon
retirement or sale, the cost and accumulated depreciation are
eliminated from the respective accounts, and the gain or loss, if any,
is included in income.
If events, or changes in circumstances indicate that the carrying
amount of a long-lived assets may not be recoverable, the Company
estimates the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) is less than the
carrying amount of the long-lived asset, an impairment loss is
recognized.
Research and Development
Company sponsored research and development expenses related to present
and future products are expensed as incurred.
Excess of Cost Over Fair Value of Net Assets Acquired
Net excess of cost over fair value of net assets acquired (goodwill) is
being amortized on a straight-line basis over a period of thirty years.
Amortization charged to operation for the year amounted to $1,958.
Accumulated amortization amounted to $2,035 at December 31, 1998.
F-9
38
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through forecasted future operations.
Impairment is evaluated by comparing future cash flows (undiscounted
and without interest charges) expected to result from the use or sale
of the asset and its eventual disposition, to the carrying amount of
the asset.
Patents and Other Intangible Assets
The cost of patents acquired and other intangible assets, consisting
primarily of an exclusive sales agreement and royalty agreements, are
being amortized using the straight-line method over the estimated
useful lives ranging from twelve to fifteen years. Amortization expense
and related accumulated amortization amounted to $652 and $818,
respectively for the year ended.
Deferred Tooling
From time to time, the Company purchases certain molds and equipment
(tooling) to meet specific customer product requirements. These tooling
costs are capitalized by the Company and are amortized into operations
over the estimated life of the sales contract period. Amortization
charged to operations for the year was $35.
Deferred Financing Fee
Costs incurred to obtain financing are amortized using the
straight-line method (which approximates the interest method) over the
term of the related debt.
Income Taxes
The Company uses the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the
financial statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future. Such deferred
income tax assets and liability computations are based on enacted tax
laws and rates applicable to periods in which the differences are
expected to affect taxable income. A valuation allowance is established
when necessary to reduce deferred tax assets to the amount expected to
be realized.
Foreign Currency Translation
Assets and liabilities of Polytek are translated at exchange rates in
effect at the balance sheet date ($.5328 per guilder at December 31,
1998). Items of revenue and expense are translated at average exchange
rates during the period ($.5041 per guilder for the year ended).
F-10
39
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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."
Advertising Costs
All costs relating to marketing and advertising the Company's products
are expensed in the period incurred. Total advertising expenses were
approximately $36.
Financial Instruments
Financial instruments which potentially subject the Company to credit
risk consist primarily of cash and cash equivalents and trade
receivables.
Although cash balances are held at various financial institutions, such
balances may, at times, exceed insurable amounts. The Company believes
it mitigates its risks by investing in or through major financial
institutions. Recovery is dependent upon performance of the
institution.
Credit risk with respect to trade accounts receivable is generally
diversified due to the large number of entities comprising the
Company's customer base. The Company performs ongoing credit
evaluations of its customers' financial condition. During 1998, the
Company had sales to three customers, which represented approximately
19 percent of the Company's revenues. No one customer represents more
than 10 percent of revenues.
The carrying amount of accounts receivable, accounts payable and
accrued liabilities approximates fair value because of the short
maturity of these financial instruments. The fair value of long-term
debt approximates the carrying amount as the related interest rates
represent current market rates.
New Accounting Pronouncements
On June 1, 1997, the FASB issued SFAS No. 130, "Reporting of
Comprehensive Income," which establishes standards for the reporting
and display of comprehensive income, its components (revenue, expenses,
gains and losses) and accumulated balances in a full set of general
purpose financial statements. Comprehensive income for the Company
includes net income (loss) and the effects of translation which are
charged or credited to the cumulative translation adjustments account
within stockholders' equity. SFAS No. 130 was adopted on January 1,
1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which changes the way public
companies report information about segments. This statement is
effective for 1998 and related disclosure is included in footnote 13.
F-11
40
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(3) ACQUISITIONS OF CONTINENTAL SPRAYER INTERNATIONAL
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 $5,721.
Such amounts were paid through the issuance of term loans of $135,000
and borrowings under a revolving credit facility.
The CSI acquisition was accounted for using the purchase method of
accounting. The Company increased the value of the inventory $850 in
accordance with Accounting Principles Board Opinion No. 16 and has
recorded fixed assets and identifiable intangibles at their appraised
fair market value. The excess of the aggregate purchase price over the
fair market value of net assets acquired of approximately $55,000
is being amortized over 30 years. Unaudited proforma results of
operations of the Company before extraordinary items for the year ended
December 31, 1998 as if the transaction had occurred on January 1, 1998
are as follows:
Net Sales $112,411
========
Net Loss Before Extraordinary Item $ 9,177
========
(4) INVENTORIES
The components of inventories are summarized as follows:
Raw Material $ 3,418
Work-in-Process 5,015
Finished Goods 5,014
---------
$ 13,447
========
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, summarized by major classification and
estimated useful lives for depreciation purposes, is as follows:
USEFUL DECEMBER 31,
LIVES (YEARS) 1998
------------- ------------
Land $ 2,499
Buildings 30 - 40 14,311
Machinery and Equipment 5 - 10 42,971
Furniture and Fixtures 5 - 7 3,056
F-12
41
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(5 ) PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
USEFUL DECEMBER 31,
LIVES (YEARS) 1998
------------ -----------
Vehicles 5 23
Construction in Progress -- 11,754
--------
74,614
Less: Accumulated Depreciation and Amortization (8,729)
--------
Property, Plant and Equipment, Net $ 65,885
========
Construction in progress primarily consists of additions and
improvements to buildings, molds and machinery. Property, plant and
equipment includes approximately $2,269 for assets recorded under
capital leases.
(6) DEBT
Debt consists of the following:
Working Capital line of credit, Dutch Guilder
("NLG") denominated, bearing interest at 4.75 percent (A) $ 3,613
========
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Revolving credit facility, dollar denominated bearing
interest at 7.10 percent (B) $ 12,058
Senior subordinated notes, dollar denominated
bearing interest at 9.75 percent (C) 145,000
ABN/AMRO loan, NLG denominated, bearing
interest at 6.10 percent (D) 3,962
Senior mortgage note, NLG denominated, payable
in quarterly principal installments (NLG 175 or
US $95 per annum), bearing interest at 5.50 percent (E) 1,212
Capital lease obligations, NLG denominated, bearing interest at
rates ranging from 7.10 percent to 7.75
percent 2,269
--------
164,501
Less: Current Portion 1,085
--------
TOTAL LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS $163,416
========
F-13
42
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(6) DEBT (CONTINUED)
Working Capital Borrowings
(a) Netherlands
Borrowings under the guilder denominated line of credit have a
maximum limit of NLG 11,000 ($5,861 at December 31, 1998).
Interest payments on the NLG denominated line of credit are due
quarterly, or with respect to interest due on short-term loans
borrowed under the line of credit, at the end of the short-term
loan period. Borrowings under the NLG line of credit are
collateralized by a lien on certain real property of Polytek. This
line of credit contains certain covenants, the most significant of
which relates to minimum net worth requirements.
Long-Term Debt
(b) U.S.
Effective February 1, 1998, the Company consummated the CSI
acquisition, refinancing 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 credit facility comprised of (a) term
loans, which consisted of (i) a $70 million principal amount
Tranche A Term Loan, bearing interest at LIBOR, plus 3.75 percent;
and (ii) a $65 million Tranche B Term Loan, bearing interest at
LIBOR, plus 5.50 percent, and (b) a revolving credit facility (the
"Revolving Credit Facility").
New Credit Facility
General - As of September 29, 1998, the Company, AFA and CSI
entered into a new credit facility (the "New Credit Facility")
with First Union National Bank ("First Union"). The New Credit
Facility replaced the Revolving Credit Facility with NationsCredit
Commercial Corporation ("NationsCredit"), provides for up to $30
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 exceeds $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.
F-14
43
\ Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(6) DEBT (CONTINUED)
Collateral - Indebtedness under the New Credit Facility is
collateralized by a first priority collateral 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 percent to 2.25 percent
(initially 1.75 percent) or (ii) the Base Rate (the greater of the
Prime Rate announced by First Union or the Federal Funds Rate plus
0.50 percent) plus an Applicable Margin ranging from 0.00 percent
to 1.00 percent (initially 0.50 percent).
Borrowing Base - The availability of borrowings under the New
Credit Facility is subject to a Borrowing Base equal to the sum of
(i) 85 percent of eligible accounts receivable, (ii) 60 percent of
eligible inventory, (iii) 75 percent of the orderly liquidation
value of selected eligible machinery and equipment, (iv) 80
percent of the cost of certain new machinery and equipment and (v)
60 percent of the cost of the conversion of certain existing
machinery and equipment. The lender has the right to set reserves
which can limit the amount of borrowing base availability.
Covenants - The New Credit Facility requires the Company (on a
consolidated basis, including all domestic subsidiaries and
Polytek) 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 quarter. The New Credit Facility also contains covenants
that include, without limitation: (i) required delivery of
financial statements, other reports and borrowings base
certificates; (ii) limitations on liens; (iii) limitations on
mergers, consolidations and sales of assets; (iv) limitations on
incurrence of debt; (v) limitations 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.
On March 24, 1999, the Company amended its New Credit Facility.
The amendment (i) waives compliance with the Funded Indebtedness
to EBITDA ratio through the end of 1999, (ii) requires the Company
to maintain EBITDA of at least $3,000 for each of the fiscal
quarters ending on March 31, 1999, June 30, 1999 and September 30,
1999, (iii) reduces the Capital Expenditure Limit (as defined in
the New Credit Facility) for the period commencing on September
29, 1998 through December 31, 1999 (iv) increases the Applicable
Margin on Eurodollar loans to 2.25% (from 1.75%) and on Base Rate
loans to 1.00% (from 0.50%) and (v) provides that prior to May 14,
1999, the Company and First Union will negotiate additional
financial covenants and new financial covenant levels for the
fiscal quarters ending on June 30, 1999, September 30, 1999,
December 31, 1999 and March 31, 2000.
F-15
44
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(6) DEBT (CONTINUED)
(c) Senior Subordinated Notes
On April 23, 1998, the Company issued $145,000 of 9.75 percent
Senior Subordinated Notes due April 15, 2008 (the "Old 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 Notes (1) and (3). Interest on the
Old Notes was payable semi-annually on April 15 and October 15,
commencing October 15, 1998.
The Old Notes were to 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 could redeem up to 35 percent
of the initial aggregate principal amount of the Old 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 Old Notes remains outstanding.
Upon a change of control, the Company would be required to make an
offer to purchase all outstanding Old Notes at 101 percent of the
principal amount thereof, plus accrued and unpaid interest to the
date of purchase.
The Old Notes were unsecured senior subordinated obligations of
the Company and were subordinated in right of payment to all
existing and future Senior Indebtedness of the Company, including
indebtedness under its Revolving Credit Facility. The Old Notes
were ranked pari passu with all existing and future senior
subordinated indebtedness of the Company, were ranked senior to
all other existing and future Subordinated Indebtedness of the
Company and were 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
"Subsidiary Guarantors"), (see Note 13). The Old Notes were also
effectively subordinated to all existing and future Senior
Indebtedness of the Company's subsidiaries.
On August 17, 1998, the Company filed with the Securities and
Exchange Commission a registration statement on Form S-4 with
respect to its 9.75 percent Senior Subordinated Notes due April
15, 2008 ("New Notes") which are fully and unconditionally
guaranteed, jointly and severally, on an unsecured senior
subordinated basis, by the Subsidiary Guarantors, (see Note 13).
On September 16, 1998, the Company concluded its exchange offer
and the New Notes were exchanged for $145,000 aggregate principal
amount of the Old Notes. The New Notes are subordinated in right
of payment to all existing and future Senior Indebtedness,
including indebtedness under the New Credit Facility and, except
for certain transfer
F-16
45
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(6) DEBT (CONTINUED)
restrictions and registrations rights relating to the Old Notes,
are identical in all material respects to the Old Notes.
(d) ABN/AMRO Loan
Polytek has a credit facility with the ABN-AMRO Bank, The
Netherlands. This credit facility includes a loan of up to NLG
8,500 ($4,528), requiring quarterly payments of $115 through 2007.
This Note is collateralized by a lien on certain real property of
Polytek. This Note contains certain covenants, 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 NLG 3,500 ($1,865) mortgage from ABN-AMRO Bank,
The Netherlands. Borrowings under this Mortgage Agreement are
collateralized by a lien on certain real property of Polytek.
Aggregate Annual Maturities
Aggregate annual maturities of debt (including capital lease
obligations) after December 31, 1998 are as follows:
1999 $ 1,085
2000 1,017
2001 984
2002 984
2003 12,996
Thereafter 147,435
---------
$164,501
========
(7) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
In conjunction with the acquisition of CSI, the Company repaid
outstanding debt of approximately $40,000 in February 1998, refinanced
its term loan borrowing on April 23, 1998 and refinanced its credit
facility on September 29, 1998, (see Notes 1 and 3). As a result, the
Company expensed $6,054 of deferred financing costs and $951 of
prepayment penalties as an extraordinary loss.
F-17
46
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(8) INCOME TAXES
The loss before provision for income taxes consisted of:
United States $ 15,656
Foreign 203
--------
$ 15,859
========
The provision (benefit) for income taxes consisted of:
Current Tax Provision (Benefit):
U.S. Federal $ --
State and Local 133
Foreign (247)
--------
Total Current Tax Provision (Benefit) (114)
--------
Deferred Tax Provision consisted of:
U.S. Federal --
State and Local --
Foreign 115
--------
Total Deferred Tax Provision 115
--------
Provision for Income Taxes $ 1
========
U.S. income tax benefit at the statutory tax rate is reconciled below
to the overall U.S. and foreign income tax expense:
Tax at U.S. Federal Income Tax Rate $(5,391)
State Taxes, Net of Federal Income Tax Effect 124
Impact of Foreign Tax Rates and Credits (132)
Loss Not Currently Deductible 5,577
Other Items, Net (177)
-------
Income Tax Expense $ 1
=======
Deferred tax assets and liabilities consisted of the following:
Deferred Tax Assets:
Operating Losses $ 5,577
Plant Closedown Costs 1,263
Asset Basis Differences 886
Accruals Not Currently Deductible 608
Other 456
-------
Deferred Tax Assets 8,790
-------
F-18
47
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(8) INCOME TAXES (CONTINUED)
Deferred Tax Liabilities:
Depreciation and Amortization 2,448
Other 99
------
Deferred Tax Liability 2,547
------
Valuation Allowance 6,890
------
Net Deferred Tax Liability $ 647
======
The income taxes paid during 1998 were $314. The Company has U.S. net
operating loss carryforwards of approximately $14 million, expiring in
years 2012 through 2013. The net deferred tax liability of $647 relates
to foreign taxes.
The Company has established valuation allowances in accordance with the
provision of FASB Statement No. 109, "Accounting for Income Taxes." The
Company will review the adequacy of the valuation allowance in the
future years and recognize only those benefits as the reassessment
indicates that it is more likely than not that the benefits will be
realized.
(9 ) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under various noncancellable operating leases
which expire at various dates through 2003.
Future minimum annual rental payments in excess of one year at December
31, 1998 are as follows:
YEAR-ENDING DECEMBER 31
1999 $ 496
2000 340
2001 219
2002 180
2003 73
-----------
$ 1,308
=========
Total rent expense charged to operations was approximately $155 for the
year ended December 31, 1998.
F-19
48
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment
The Company has an employment agreement with one of its officers. The
agreement which expires in 2003 and is automatically renewable for two
additional five-year terms provides for a minimum salary level, minimum
guaranteed bonus and additional incentive compensation based on
performance criteria.
The commitment for salaries as of December 31, 1998 was approximately
$500 per year.
Litigation
There are pending claims and litigations against the Company arising in
the ordinary course of business. Management believes, on the basis of
its understanding and advise of counsel, that these actions will not
result in payment of amounts, if any, which would have a material
adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
(10) RELATED PARTY TRANSACTIONS
Management Fees
Effective February 4, 1998, the Company entered into a new management
agreement with an affiliate of one of the shareholders of the Parent
that provides for annual payments of $300 and expires on July 29, 2008,
subject to renewal for successive five-year periods.
During 1998, $308 of management fees and certain expenses were
recorded. As of December 31, 1998, all fees and expenses had been paid.
Transactions with Parent
On February 4, 1998, the Parent assumed $3,000 of notes payable due to
certain shareholders of the Parent by AFA, which amount has been
recorded as a contribution of capital. In April 1998, the Company
returned capital to the Parent in the amount of $2,500 from the
proceeds of its debt offering.
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 year, the
Company purchased molds from the affiliate for approximately $429.
During the year, the affiliate provided certain repairs and maintenance
at a cost to the Company
F-20
49
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
of approximately $250. Included in accounts payable in the accompanying
balance sheet at December 31, 1998 is approximately $55, 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
Parent's shareholders is a senior member, provides legal services on an
ongoing basis to the Company and its subsidiaries. For the year ended
December 31, 1998, the Company incurred fees of approximately $1,068 to
Gratch, Jacobs & Brozman, P.C.
(11) EMPLOYEE BENEFIT PLANS
401(k) Plans
The Company offers an employee savings plan (the "Plan") under Section
401(k) of the Internal Revenue Code. The Plan covers substantially all
U.S. full-time employees and the Company matches 25 percent of each
employee's contribution up to 6 percent of annual compensation.
The Company's matching contributions under the Plan was approximately
$100,000 for the year ended December 31, 1998.
Retirement Plan
Polytek has various pension plans covering substantially all employees.
Polytek funds all costs through insurance contracts which provide for
retiree benefits under the terms of the plan; there were no unfunded or
overfunded benefit obligations. Pension expense for the year ended
December 31, 1998 was approximately $455.
Parent Company Stock Option Agreement
In December 1998, the Parent adopted an equity incentive plan for
management and certain other employees of the Company and its
subsidiaries. The plan authorizes grants of stock options and stock
appreciation rights with respect to approximately 10% of the Parent's
outstanding common stock on a fully-diluted basis. Of the aggregate
options or stock appreciation rights, approximately 90% are allocated
to senior management personnel of the Company and its subsidiaries. No
options have yet been granted pursuant to the plan.
F-21
50
Indesco International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(12) PLANT CLOSEDOWN COST
During 1998, the Company continued its rationalization of certain
manufacturing operations to more efficiently utilize its production
capacity. In the fourth quarter of 1998, the Company finalized and
approved a plan to closedown its El Paso, Texas and Juarez, Mexico
manufacturing facilities.
The estimated cost of this plan is approximately $5,344 which has been
reflected in operating expenses. The charge consisted of employee
separation costs of $1,100, asset impairments of $3,978 and other exit
costs of $266.
(13) SEGMENT DATA AND SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS
The Company evaluates the performance of its operation by evaluating
the profitability of its three major operating subsidiaries, AFA, CSI
and Polytek. AFA is a U.S. supplier of trigger sprayers to independent
distributors, who typically purchase in small volume but at higher
margins than larger multi-national consumer product companies. CSI is a
supplier of trigger sprayers to large national and multi-national
consumer product manufacturers. U.S. and foreign multi-national
consumer product manufacturers are provided products manufactured in
the Company's Polytek facility located in Holland, Netherlands. In
1998, sales outside the United States approximated $31,780. Information
relating to these operations is presented in the supplemental
consolidating financial statements below.
The New Notes (described in Note 6) are fully and unconditionally
guaranteed, jointly and severally, on an unsecured senior subordinated
basis, by the Subsidiary Guarantors. Polytek is a non-guarantor
subsidiary.
The following consolidating financial statements include the accounts
of the Company, the Subsidiary Guarantors, and the non-guarantor
subsidiaries.
F-22
51
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
GUARANTOR SUBSIDIARIES NON-GUARANTOR
INDESCO AFA CSI POLYTEK &
INTERNATIONAL, INC. PRODUCTS U.S. CSI EUROPE
------------------- -------- ---- ----------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 68 $ 1,000 $ 365 $ 136
Accounts Receivable, Net 8,802 10,409 14,829 3,731
Inventories -- 5,799 4,104 3,549
Prepaid Expenses and Other Assets 67 1 38 559
-------- ------- -------- -------
Total Current Assets 8,937 17,209 19,336 7,975
Property, Plant and Equipment, Net -- 17,552 35,946 12,387
Excess Cost Over Fair Value of Net Assets
Acquired, Net -- 12,009 53,431 (4,487)
Patents and Other Intangibles, Net -- 4,221 3,517 --
Deferred Financing Costs 6,165 -- -- --
Investment in Subsidiaries 19,778 -- (63) 680
Other Assets 129,928 879 8,110 --
-------- ------- -------- -------
TOTAL ASSETS $164,808 $51,870 $ 120,277 $16,555
======== ======= ========= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current Portion of L.T. Debt and Cap. Lease
Obligations $ -- $ -- $ -- $1,085
Credit Facilities -- -- -- 3,613
Accounts and Drafts Payable 48 1,937 4,180 1,582
Income Taxes Payable 1 35 -- --
Other Accrued Expenses 26,077 953 10,269 2,774
------- ------- -------- -------
Total Current Liabilities 26,126 2,925 14,449 9,054
ELIMINATIONS CONSOLIDATED
------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ -- $ 1,569
Accounts Receivable, Net (23,830) 13,941
Inventories (5) 13,447
Prepaid Expenses and Other Assets -- 665
--------- -------
Total Current Assets (23,835) 29,622
Property, Plant and Equipment, Net -- 65,885
Excess Cost Over Fair Value of Net Assets
Acquired, Net -- 60,953
Patents and Other Intangibles, Net -- 7,738
Deferred Financing Costs -- 6,165
Investment in Subsidiaries (19,715) 680
Other Assets (138,554) 363
--------- --------
TOTAL ASSETS $(182,104) $171,406
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current Portion of L.T. Debt and Cap. Lease
Obligations $ -- $ 1,085
Credit Facilities -- 3,613
Accounts and Drafts Payable (145) 7,602
Income Taxes Payable -- 36
Other Accrued Expenses (32,963) 7,110
--------- -------
Total Current Liabilities (33,108) 19,446
F-23
52
Advances from Parent -- 40,423 89,505 (63)
Long-Term Debt & Capitalized Lease Obligations 157,058 -- -- 6,358
Deferred Income Taxes -- 811 7,815 647
------- ------- -------- -------
Total Liabilities 183,184 44,159 111,769 15,996
Stockholders' Deficit:
Common Stock (2,500) 3,000 -- 242
Additional Paid-In Capital -- 5,521 15,795 510
Accumulated Deficit (15,876) (810) (7,287) (261)
Accumulated Other Comprehensive Income -- -- -- 68
------- ------- -------- -------
Total Stockholders' Deficit (18,376) 7,711 8,508 559
------- ------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $164,808 $51,870 $120,277 $16,555
======= ====== ======= ======
Advances from Parent (129,865) --
Long-Term Debt & Capitalized Lease Obligations -- 163,416
Deferred Income Taxes (8,626) 647
--------- -------
Total Liabilities (171,599) 183,509
Stockholders' Deficit:
Common Stock (742) --
Additional Paid-In Capital (16,764) 5,062
Accumulated Deficit 7,001 (17,233)
Accumulated Other Comprehensive Income -- 68
--------- -------
Total Stockholders' Deficit (10,505) (12,103)
--------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $(182,104) $171,406
======== =======
F-24
53
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
NON- GUARANTOR
GUARANTOR SUBSIDARIES SUBSIDARIES
INDESCO AFA CSI POLYTEK &
INTERNATIONAL, PRODUCTS U.S. CSI EUROPE
INC.
Net Sales $ -- $30,410 $49,133 $28,238
Cost of Sales -- 21,646 35,008 23,480
------- ------ ------- -------
Gross Profit 8,764 14,125 4,758
Operating Expenses 1,905 2,375 12,451 4,393
------- ------ ------- -------
Income from Operations (1,905) 6,389 1,674 365
Other (Income) Expense
Interest 2,406 3,743 8,835 543
Other 13 (205) 33 64
Equity in Income of Consolidated
Subsidiaries 6,984 -- -- (39)
------- ------ ------- -------
Total Other Expense, Net 9,403 3,538 8,868 568
Income (Loss) Before Extraordinary Item
and Provision for Income Taxes (11,308) 2,851 (7,194) (203)
Provision for Income Taxes 1 64 93 (157)
------- ------ ------- -------
Income (Loss) Before Extraordinary Item (11,309) 2,787 (7,287) (46)
Extraordinary Item - Loss on Early
Extinguishment of Debt 4,567 2,438 -- --
------- ------ ------- -------
Net Income (Loss) $(15,876) $ 349 $(7,287) $ (46)
========= ====== ======== =======
ELIMINATIONS CONSOLIDATED
Net Sales $ (216) $ 107,565
Cost of Sales (211) 79,923
------ --------
Gross Profit (5) 27,642
Operating Expenses 21,124
------ --------
Income from Operations (5) 6,518
Other (Income) Expense
Interest 15,527
Other (22) (117)
Equity in Income of Consolidated
Subsidiaries (6,984) (39)
------ --------
Total Other Expense, Net (7,006) 15,371
Income (Loss) Before Extraordinary Item
and Provision for Income Taxes 7,001 (8,853)
Provision for Income Taxes -- 1
------ --------
Income (Loss) Before Extraordinary Item 7,001 (8,854)
Extraordinary Item - Loss on Early
Extinguishment of Debt -- 7,005
------ --------
Net Income (Loss) $7,001 $(15,859)
====== =========
F-25
54
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
GUARANTOR SUBSIDIARIES
INDESCO AFA CSI
INTERNATIONAL PRODUCTS U.S.
INC.
Cash Flows From Operating Activities:
Net Income (Loss) $(15,876) $ 349 $(7,287)
Less: Extraordinary Item 5,518 1,487 --
-------- -------- --------
(10,358) 1,836 (7,287)
Adjustments to Reconcile Net Income (Loss)
Provided (Used) by
Operating Activities:
Depreciation -- 2,409 3,154
Amortization -- 767 2,023
Plant Closedown Costs -- -- 5,344
Deferred Income Taxes -- -- --
Equity in (Earnings) Loss of Subsidiaries and
Affiliate 6,984 -- --
Changes in Operating Assets and Liabilities:
Accounts Receivable (8,802) (6,476) (14,829)
Inventories -- 924 116
Prepaid Expenses and Other Assets 366 112 345
Accounts and Drafts Payable 48 803 1,965
Income Taxes Payable 1 35 --
Other Accrued Expenses (19,787) (478) 6,830
-------- -------- --------
Net Cash Provided (Used) by Operating
Activities (31,548) (68) (2,339)
Cash Flows From Investing Activities:
Acquisition of CSI (93,568) -- --
Expenditures for Property, Plant and Equipment -- (691) (11,410)
Proceeds from Disposal of Property, Plant and
Equipment -- 25 14
Other -- -- (563)
-------- -------- --------
Net Cash Used by Investing Activities (93,568) (666) (11,959)
NON-GUARANTOR
SUBSIDIARIES
POLYTEK &
CSI EUROPE ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net Income (Loss ) $ (46) $ 7,001 $(15,859)
Less: Extraordinary Item -- -- 7,005
------- --------- ---------
(46) 7,001 (8,854)
Adjustments to Reconcile Net Income (Loss)
Provided (Used) by
Operating Activities:
Depreciation 1,524 -- 7,087
Amortization (145) -- 2,645
Plant Closedown Costs -- -- 5,344
Deferred Income Taxes 115 -- 115
Equity in (Earnings) Loss of Subsidiaries and
Affiliate (39) (6,984) (39)
Changes in Operating Assets and Liabilities:
Accounts Receivable (1,256) 23,711 (7,652)
Inventories 731 5 1,776
Prepaid Expenses and Other Assets 91 -- 914
Accounts and Drafts Payable 106 (145) 2,777
Income Taxes Payable (393) (357)
Other Accrued Expenses 2,727 12,043 1,335
------- --------- ---------
Net Cash Provided (Used) by Operating
Activities 3,415 35,631 5,091
Cash Flows From Investing Activities:
Acquisition of CSI -- -- (93,568)
Expenditures for Property, Plant and Equipment (2,326) 1,503 (12,924)
Proceeds from Disposal of Property, Plant and
Equipment 73 (25) 87
Other -- (563)
------- --------- ---------
Net Cash Used by Investing Activities (2,253) 1,478 (106,968)
F-26
55
Cash Flows From Financing Activities:
Proceeds from Senior Subordinated Notes and Term
Loans 280,000 -- --
Repayment of Long-Term Debt (135,000) (38,000) --
Payments of Deferred Financing Costs (12,116) -- --
Net (Repayment) Borrowings Under Revolving Credit
Agreements 12,058 (2,542) --
Return of Capital to Parent (2,500) -- --
Advances from Parent (17,258) 42,134 14,663
-------- -------- --------
Net Cash Provided (Used) by Financing
Activities 125,184 1,592 14,663
-------- -------- --------
Effect of Exchange Rate Change on Cash -- -- --
Net Increase (Decrease) in Cash and Cash Equivalents 68 858 365
Cash and Cash Equivalents at Beginning of Year -- 142 --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68 $ 1,000 $ 365
======== ======== ========
Cash Flows From Financing Activities:
Proceeds from Senior Subordinated Notes and Term
Loans (0) -- 80,000
Repayment of Long-Term Debt (643) -- (173,643)
Payments of Deferred Financing Costs -- -- (12,116)
Net (Repayment) Borrowings Under Revolving Credit
Agreements 1,113 -- 10,629
Return of Capital to Parent -- -- (2,500)
Advances from Parent (2,430) (37,109) 0
------- --------- ---------
Net Cash Provided (Used) by Financing
Activities (1,960) (37,109) 102,370
------- --------- ---------
Effect of Exchange Rate Change on Cash 25 -- 25
Net Increase (Decrease) in Cash and Cash Equivalents (773) -- 518
Cash and Cash Equivalents at Beginning of Year 909 -- 1,051
------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 136 $ -- $ 1,569
======= ========= =========
F-27
56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
AFA Holdings Co. and Subsidiaries:
We have audited the accompanying combined balance sheet of AFA Holdings Co.
and Subsidiaries (the "Company," see Note 1) as of December 31, 1997, and the
related combined statements of operations, stockholders' equity, and cash flows
for the five month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of AFA Holdings Co. and
Subsidiaries as of December 31, 1997 and the combined results of their
operations and their cash flows for the five month period then ended, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Charlotte, North Carolina
March 5, 1998, except as to the first paragraph of Note 12 for which the date is
April 23, 1998.
F-28
57
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 1,051
Accounts receivable, net of allowances of $28............. 6,821
Inventories............................................... 9,918
Prepaid expenses and other................................ 605
-------
Total current assets.............................. 18,395
Property, plant and equipment............................... 28,009
Excess of cost over fair value of net assets acquired,
net....................................................... 6,365
Patents and other intangibles, net.......................... 5,834
Deferred financing costs.................................... 1,628
Other assets................................................ 656
-------
Total assets...................................... $60,887
=======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 2,379
Notes payable............................................. 4,762
Accounts and drafts payable............................... 2,410
Other accrued expenses.................................... 3,334
-------
Total current liabilities......................... 12,885
Subordinated debt........................................... 3,000
Long-term debt.............................................. 41,154
Deferred income taxes....................................... 632
-------
Total liabilities................................. 57,671
-------
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 242
Additional paid-in capital................................ 4,320
Accumulated deficit....................................... (1,374)
Accumulated other comprehensive income.................... 28
-------
Total stockholders' equity........................ 3,216
-------
Total liabilities and stockholders' equity........ $60,887
=======
The accompanying notes are an integral part of the financial statements.
F-29
58
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED STATEMENT OF OPERATIONS
FOR THE FIVE MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Net sales................................................... $20,108
Cost of sales............................................... 16,595
-------
Gross profit...................................... 3,513
Selling, general and administrative expenses................ 2,862
-------
Income from operations............................ 651
Other expense (income):
Interest.................................................. 2,231
Other..................................................... (54)
-------
Total other expense............................... 2,177
-------
Loss before income tax benefit.............................. (1,526)
Income tax benefit.......................................... (152)
-------
Net loss.......................................... $(1,374)
=======
The accompanying notes are an integral part of the financial statements.
F-30
59
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FIVE MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
COMMON STOCK ACCUMULATED
------------------ ADDITIONAL OTHER TOTAL
AFA PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
POLYTEK HOLDINGS CAPITAL DEFICIT INCOME EQUITY
------- -------- ---------- ----------- ------------- -------------
Balance, August 1, 1997.......... $242 $ $4,320 $ 4,562
-------
Net loss......................... $(1,374) (1,374)
Translation adjustment........... $28 28
-------
Comprehensive income............. (1,346)
---- -- ------ ------- --- -------
Balance, December 31, 1997....... $242 $ $4,320 $(1,374) $28 $ 3,216
==== == ====== ======= === =======
The accompanying notes are an integral part of the financial statements.
F-31
60
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE FIVE MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $(1,374)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 1,605
Amortization........................................... 256
Deferred income taxes.................................. (180)
Changes in assets and liabilities:
Accounts receivable.................................. (248)
Inventories.......................................... 1,434
Prepaid expenses and other........................... 31
Accounts and drafts payable.......................... (600)
Other accrued expenses............................... 524
-------
Net cash provided by operating activities......... 1,448
-------
Cash flows from investing activities:
Expenditures for property, plant and equipment............ (661)
-------
Net cash used in investing activities............. (661)
-------
Cash flows from financing activities:
Repayment of debt......................................... (770)
-------
Net cash used in financing activities............. (770)
-------
Effect of exchange rate changes on cash..................... 34
-------
Net increase in cash and cash equivalents................... 51
Cash and cash equivalents at beginning of period............ 1,000
-------
Cash and cash equivalents at end of period........ $ 1,051
=======
Cash paid during the period for:
Interest.................................................. $ 1,378
Income taxes.............................................. 0
The accompanying notes are an integral part of the financial statements.
F-32
61
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. ORGANIZATION:
AFA HOLDINGS CO.
AFA Holdings Co. ("AFA") manufactures and sells finger activated liquid
dispensing devices ("trigger sprayers"). AFA was formed in July 1997 to acquire,
through a wholly-owned subsidiary, the assets and liabilities of AFA Products,
Inc. ("Products"), located in Forest City, North Carolina. Concurrent with this
transaction, Dejanu B.V., acquired the outstanding capital stock of AFA Polytek
B.V. ("Polytek") based in The Netherlands. AFA and Polytek are collectively
referred to herein as the "Company." Products and Polytek were formerly
operating subsidiaries of W.T.I., Inc. ("WTI"). AFA and Dejanu B.V. are under
common control and have been presented on a combined basis.
The acquisition of Products 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
changes in financial position:
ASSETS: LIABILITIES AND EQUITY:
Cash and receivables........... $7,526 Current liabilities............ $5,620
Inventories.................... 11,223 Bank debt...................... 48,771
Fixed assets................... 28,646 Subordinated debt.............. 3,000
Patents........................ 6,000 Other liabilities.............. 942
Other assets................... 2,885 Equity......................... 4,562
Goodwill....................... 6,615
------- -------
$62,895 $62,895
======= =======
The WTI businesses were acquired through U.S. dollar bank debt of $38,000,
subordinated debt from shareholders of $3,000, an equity investment of $3,752,
issuance of warrants with a value of $810 to various lenders and borrowings
under lines of credit.
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.
ACQUISITION OF CONTINENTAL SPRAYERS AND AFFILIATES
Effective February 1, 1998, AFA acquired certain assets and liabilities of
Continental Sprayers and Affiliates ("CSI"), a division of Contico
International, Inc. CSI also manufactures and sells trigger sprayers. AFA
acquired CSI for $92,947 in cash, paid outstanding debt of Products of $39,567
and paid fees of $4,980. 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 based on the December
31, 1997 value thereof are as follows:
Cash and receivables....................................... $ 767
Inventory.................................................. 5,309
Fixed assets............................................... 27,789
Other assets............................................... 1,135
Goodwill................................................... 60,639
Payables................................................... (2,692)
-------
Purchase price................................... $92,947
=======
F-33
62
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
The acquisitions have been accounted for using the purchase method of
accounting. The Company has increased the value of inventory by $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.
Concurrent with the acquisition of CSI, Polytek became an indirect
wholly-owned subsidiary of AFA. AFA agreed to issue to AFA International Limited
and Warcop Investments Ltd. (a company affiliated with a shareholder), 820,500
shares and 273,500 shares, respectively, of a new class of Preferred Stock
having a liquidation and redemption value of $10 per share and providing for
dividends at an annual rate of 7% of the liquidation value thereof. As a result
of the common control of AFA and Polytek this transaction has been recorded at
its historical cost basis.
Condensed pro forma unaudited combined results of operations of AFA, CSI
and Polytek for the years ended December 31, 1997 and 1996 as if the
transactions had occurred on January 1, 1996 are as follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
Net sales............................................ $114,531 $113,139
======== ========
Net income........................................... $ 1,424 $ 493
======== ========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of AFA and Polytek
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
assets. Maintenance and repairs are charged to income as incurred and
betterments that extend the useful life are capitalized. Upon retirement or
sale, the cost and accumulated depreciation are eliminated from the respective
accounts, and the gain or loss, if any, is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
RESEARCH AND DEVELOPMENT
The cost of research and development expenditures is expensed as incurred.
F-34
63
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates in the financial statements relate to the allowance for uncollectible
accounts receivable, the allowance for slow-moving and obsolete inventories, the
allowance for sales returns and the valuation allowance for deferred tax assets.
INCOME TAXES
The Company uses the asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Polytek are translated at exchange rates in
effect at the balance sheet date ($.4935 per guilder at December 31, 1997).
Items of revenue and expense are translated at average exchange rates during the
period ($.4990 per guilder for the five months of 1997 presented). Translation
adjustments, resulting from translating Polytek's financial statements into
dollars, are reported in the equity section of the accompanying balance sheet
under the caption "cumulative translation adjustment."
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Net excess of cost over fair value of net assets acquired is being
amortized on a straight-line basis over a period of thirty years. Accumulated
amortization was $90 as of December 31, 1997. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
forecasted future operations. Impairment is evaluated by comparing future cash
flows (undiscounted and without interest charges) expected to result from the
use or sale of the asset and its eventual disposition, to the carrying amount of
the asset. To date, no impairment losses have been recognized.
PATENTS AND OTHER INTANGIBLE ASSETS
The cost of patents acquired and other intangible assets, consisting
primarily of an exclusive sales agreement and royalty agreements, are being
amortized using the straight-line method over the estimated useful lives of
fifteen years. Accumulated amortization was $166 at December 31, 1997.
DEFERRED FINANCING FEE
Costs incurred to obtain financing are amortized using the straight-line
method (which approximates the interest method) over the term of the related
debt.
F-35
64
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
DEFERRED TOOLING
From time to time, the Company purchases certain molds and equipment
(tooling) to meet specific customer product requirements. These tooling costs
are capitalized by the Company and are amortized into operations over the
estimated life of the sales contract period.
CASH EQUIVALENTS
The Company considers demand deposits and time deposits with original
maturities of three months or less as equivalent to cash.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. 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.
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
combined financial position, results of operations or cash flows, but will
result in additional disclosure.
3. INVENTORIES:
The components of inventories as of December 31, 1997 are summarized below:
Raw material................................................ $2,172
Work-in-process............................................. 3,346
Finished goods.............................................. 4,400
------
$9,918
======
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, summarized by major classification and
estimated useful lives for depreciation purposes, is as follows:
USEFUL DECEMBER 31,
LIVES (YEARS) 1997
------------- ------------
Land.................................................... $ 1,293
Buildings............................................... 30 - 40 7,940
Machinery and equipment................................. 5 - 7 10,095
Molds................................................... 7 8,469
Furniture and fixtures.................................. 5 - 7 1,582
Vehicles................................................ 5 3
Construction in progress................................ -- 225
-------
29,607
Less accumulated depreciation........................... (1,598)
-------
Property, plant and equipment, net...................... $28,009
=======
F-36
65
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
Construction in progress primarily consists of additions and improvements
to buildings, molds and machinery.
5. DEBT:
Debt consists of the following as of December 31, 1997:
WORKING CAPITAL BORROWINGS(A):
Working capital line of credit -- dollar denominated,
bearing interest at 9.22% at December 31, 1997......... $ 2,541
Working capital line of credit -- guilder denominated,
bearing interest at 4.75% at December 31, 1997......... 2,221
-------
Total working capital borrowings.................. $ 4,762
=======
LONG-TERM DEBT:
Senior mortgage note -- dollar denominated, bearing
interest at 9.72% at December 31, 1997(b).............. 28,000
Senior mortgage note -- dollar denominated, bearing
interest at 10.97% at December 31, 1997(c)............. 6,000
Senior mortgage note -- dollar denominated, bearing
interest at 11.86% at December 31, 1997(d)............. 4,000
Subordinated note payable -- dollar denominated, bearing
interest at 11.5% at December 31, 1997(e).............. 2,000
Subordinated note payable -- dollar denominated, bearing
interest at 11.5% at December 31, 1997(f).............. 1,000
ABN/AMRO loan -- guilder denominated, bearing interest at
6.1% at December 31, 1997(g)........................... 4,090
Senior mortgage note -- guilder denominated, payable in
quarterly principal installments of $86,363 (175,000
guilders), bearing interest at 5.5% at December 31,
1997(h)................................................ 1,209
Installment notes payable -- guilder denominated, bearing
interest at rates ranging from 7.1% to 7.75%........... 234
-------
46,533
Less current portion........................................ 2,379
-------
Total long-term debt.............................. $44,154
=======
(a) WORKING CAPITAL BORROWINGS:
At December 31, 1997, the Company had loan and security agreements (the
"Agreements" or "Term Loans") with a U.S. lender and Dutch bank that provided
for working capital lines of credit, denominated in both dollars and guilders.
Borrowings under the dollar denominated working capital line of credit,
which had a maximum amount of $7,000 were limited to 85% of eligible accounts
receivable (as defined), and 60% of eligible inventories (as defined).
Borrowings under the guilder denominated line of credit had a maximum amount of
11,000 guilders ($5,429 at December 31, 1997.)
Interest payments on the dollar denominated working capital line of credit
are due monthly, beginning September 1, 1997 at a rate of LIBOR plus 3.25%. The
due date of the dollar denominated working capital line of credit is July 29,
2004. The dollar denominated working capital line of credit agreement contained
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.
F-37
66
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
Interest payments on the guilder denominated line of credit are due
quarterly. Borrowings under this line of credit are collateralized by a lien on
the facility. This line of credit contains certain prohibitions, the most
significant of which relate to minimum net worth requirements.
LONG-TERM DEBT
(b) TERM LOAN -- TRANCHE A -- DOLLAR DENOMINATED
At December 31, 1997, the Company had a Term Loan payable of $28,000 to a
bank. Quarterly installments of varying amounts are due beginning April 1998
through July 2004. Interest payments are due monthly, beginning September 1,
1997 at a rate of LIBOR plus 3.75%. The Term Loan agreement contained 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) TERM LOAN -- TRANCHE B -- DOLLAR DENOMINATED
At December 31, 1997, the Company had a Term Loan of $6,000 to a bank.
Quarterly installments of $1,500 are due beginning July 2003 through July 2004.
The Term Loan agreement contains a clause requiring quarterly payments to begin
upon repayment in full of the Term Loan described in (b) above. Interest
payments are due monthly, beginning September 1, 1997 at a rate of LIBOR plus
5.00%. The Term Loan agreement 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.
(d) TERM LOAN -- TRANCHE C -- DOLLAR DENOMINATED
At December 31, 1997, the Company had a Term Loan payable of $4,000 to a
bank. Quarterly installments of $1,000 are due beginning July 2004 through July
2005. The Term Loan agreement contains a clause requiring quarterly payments to
begin upon repayment in full of the Term Loan described in (b) and (c) above.
Interest payments are due monthly, beginning September 1, 1997 at a rate of
LIBOR plus 5.90%. The Term Loan agreement 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.
Warrants, with a value of $525, were issued in conjunction with execution
of this Term Loan and are recorded as deferred financing costs. Under the terms
of these warrants, the bank was granted the option to purchase 175 shares of
Class B Common Stock at an exercise price of $.01 per share. These warrants
expire on July 29, 2007. No options have been exercised under these warrants as
of December 31, 1997.
(e) SUBORDINATED NOTE PAYABLE -- DOLLAR DENOMINATED
On July 29, 1997, the Company borrowed $2,000, with interest at 11.5%, from
Waldock Limited, an entity affiliated with a shareholder of AFA. The principal
amount of the loan is due the earlier of July 30, 2005 or the date on which the
Term Loan has been paid in full. In accordance with certain covenants contained
in the Term Loan agreements, interest payments have been deferred. Accrued
interest payable on this obligation amounted to $98.
Warrants, with a value of $285, were issued in conjunction with execution
of this note and are recorded as deferred financing costs. Under the terms of
these warrants, Waldock Limited was granted the option to purchase 95 shares of
Class A Common Stock at an exercise price of $.01 per share. These warrants
expire on July 29, 2007. No options have been exercised under these warrants as
of December 31, 1997.
F-38
67
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(f) SUBORDINATED NOTE PAYABLE -- DOLLAR DENOMINATED
On July 29, 1997, the Company borrowed $1,000, with interest at 11.5%, from
AFA International Limited, an entity affiliated with a shareholder of AFA. The
principal amount of the loan is due the earlier of July 30, 2005 or the date on
which the Term Loans have been paid in full. In accordance with certain
covenants contained in the Term Loan agreements, interest payments have been
deferred. Accrued interest payable on this obligation amounted to $49.
(g) ABN/AMRO LOAN
Polytek has a credit facility with the ABN AMRO Bank, The Netherlands. This
credit facility includes a loan of $4,195 (8,500 guilders) requiring quarterly
payments of $105 (213 guilders) through 2007. This note is collateralized by a
lien on the facility. This note contains certain prohibitions, the most
significant of which relate to minimum net worth requirements.
(h) SENIOR MORTGAGE NOTE
In connection with the construction of a manufacturing facility in 1991,
Polytek obtained a 3,500 guilder mortgage from ABN Bank, The Netherlands.
Borrowings under this mortgage agreement are collateralized by a lien on the
facility.
In connection with the acquisition of CSI, the Company refinanced its
dollar denominated bank debt ((a), (b), (c) and (d) above) with a new credit
facility which provides for up to $135,000 of term loans and a $30,000 revolving
credit facility, that have various interest rates based upon type and level of
borrowings. The facility contains certain covenants, the most restrictive of
which limits capital expenditures, sets forth maximum leverage ratios, debt
coverage and income ratios.
COLLATERAL AND DEBT COVENANTS UNDER LOAN AGREEMENTS OUTSTANDING AT DECEMBER 31,
1997
Under the terms of the various financing arrangements described above at
December 31, 1997, substantially all of the Company's assets are pledged as
collateral, including, but not limited to, the stock of the various
subsidiaries. In addition, the various agreements contained restrictive
covenants, as defined therein, including limits on capital expenditures and
transactions with related parties, maintenance of certain minimum levels of cash
flow earnings and leverage ratios, among others.
AGGREGATE ANNUAL MATURITIES
Aggregate annual maturities of debt after December 31, 1997 are as follows:
1998....................................................... $ 2,379
1999....................................................... 3,616
2000....................................................... 3,756
2001....................................................... 4,756
2002....................................................... 5,756
Thereafter................................................. 26,270
-------
$46,533
=======
F-39
68
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
6. INCOME TAXES:
Pre-tax loss, for the five months ended December 31, 1997, consists of:
United States.............................................. $(1,159)
Foreign.................................................... (367)
-------
Total pre-tax loss............................... (1,526)
=======
Current expense............................................ $ 28
Deferred benefit........................................... (180)
-------
$ (152)
=======
The income tax provision differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to the pre-tax loss. The computed
amount, for the five months ended December 31, 1997, is reconciled to the income
tax benefit as follows:
Tax at federal statutory rate............................... $(519)
Increase in valuation allowance............................. 417
Other....................................................... (50)
-----
Income tax benefit................................ $(152)
=====
The approximate tax effect of temporary differences that gave rise to the
Company's deferred income tax assets and liabilities at December 31, 1997 is as
follows:
ASSETS LIABILITIES TOTAL
------ ----------- -------
Property, plant and equipment.......................... $(1,008) $(1,008)
Intangible assets...................................... (91) (91)
Net operating loss credit carryforward................. $ 775 775
Accrued management fees................................ 49 49
Accrued incentive...................................... 53 53
Other.................................................. 7 7
----- ------- -------
Total before valuation allowance....................... 884 (1,099) (215)
----- ------- -------
Valuation allowance.................................... (417) (417)
----- ------- -------
Total deferred taxes......................... $ 467 $(1,099) $ (632)
===== ======= =======
The deferred tax assets and liabilities are broken down between current and
noncurrent amounts in the accompanying balance sheets according to the
classification of the related asset and liability or in the case of tax loss
carryforwards, based on their expected utilization date.
7. EQUITY:
AFA HOLDINGS
Class A -- Class A common stock has 100% of the voting rights and is
convertible (at the option of the stockholder) into Class B stock on a share per
share basis. As of December 31, 1997, there were 730 shares of Class A common
stock outstanding and 5,000 shares authorized, with a par value of $.01.
Class B -- Class B common stock is non-voting and is convertible (at the
option of the stockholder) into Class A stock on a share per share basis. There
are no Class B shares outstanding and 3,000 shares authorized, with a par value
of $.01 per share.
F-40
69
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
POLYTEK
Common stock -- As of December 31, 1997, there were 980 shares of common
stock outstanding and 2,000 shares authorized with a par value of $247 per
share.
8. OPERATING LEASES:
The Company is obligated under noncancelable operating leases for certain
machinery and equipment and telephone equipment. Minimum annual rental payments
are as follows:
1998........................................................ $298
1999........................................................ 269
2000........................................................ 181
2001........................................................ 80
2002........................................................ 53
----
$881
====
Rent expense was approximately $180 for the five month period ended
December 31, 1997.
9. RELATED PARTY TRANSACTIONS:
INTEREST ON SUBORDINATED DEBT
Included in interest expense for the five month period ended December 31,
1997 is approximately $147 relating to debt owed to shareholders. As of December
31, 1997, accrued interest of $147 on this obligation has been classified as a
noncurrent liability in the accompanying balance sheet.
MANAGEMENT FEES
Included in operating expenses for the five month period ended December
1997 are approximately $291 for management fees and certain expenses paid or
payable to entities affiliated with the shareholders. As of December 31, 1997,
the balance of unpaid fees, which has been included in other accrued expenses in
the accompanying balance sheet, approximated $125.
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 $300,000 and expires on July 29, 2008, subject to renewal for
successive five-year periods.
TRANSACTIONS WITH AFFILIATE
The Company has a 41% 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 1997 period presented, the Company
purchased molds from the affiliate for approximately $283. During the five month
period ended December 31, 1997 the affiliate provided certain repairs and
maintenance at a cost to the Company of approximately $70. Included in accounts
payable in the accompanying balance sheet at December 31, 1997 is approximately
$81 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. During fiscal 1997, the Company paid fees of
approximately $364,000 to Gratch, Jacobs & Brozman, P.C.
F-41
70
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
10. EMPLOYEE BENEFITS PLANS:
401(k) PLAN
Effective July 1, 1996, AFA Products adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time employees and the Company matches five percent of each employee's
contributions up to six percent of annual compensation. During the five month
period ended December 31, 1997, the Company expensed $10 in matching
contributions.
RETIREMENT PLAN
Polytek has various pension plans covering substantially all employees.
Polytek funds all costs through insurance contracts which provide for retiree
benefits. Under the terms of the plans, there are no unfunded or overfunded
benefit obligations. Pension expense for the period ended December 31, 1997 was
approximately $309.
11. FOREIGN OPERATIONS:
Information regarding the Company's operations in The Netherlands for the
five months ended December 31, 1997 is as follows:
Sales...................................................... $ 8,198
Net income................................................. (215)
Total assets............................................... 12,074
12. SUPPLEMENTAL CONDENSED COMBINING FINANCIAL STATEMENTS
On April 21, 1998, AFA issued $145,000 aggregate principal amount of 9 3/4%
Senior Subordinated Notes (the "Notes") due 2008, the proceeds of which were
used to pay down debt incurred in various acquisitions (see Note 1). The Notes
are fully and unconditionally guaranteed, jointly and severally, on an
unsecured, senior subordinated basis by Products. Polytek is a nonguarantor
subsidiary.
The following condensed, combining financial statements include the
accounts of AFA and its wholly owned subsidiaries Products and Polytek. Given
the size of Polytek relative to AFA on a combined basis, separate financial
statements of the guarantor are not presented because management has determined
that such information is not material.
F-42
71
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
AFA AFA
AFA PRODUCTS, INC. POLYTEK
HOLDINGS CO. (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS COMBINED
ASSETS ------------ -------------- --------------- ------------ --------
Current assets:
Cash and cash equivalents........ $ $ 142 $ 909 $ 1,051
Accounts receivable.............. 4,089 2,796 (64) 6,821
Inventories...................... 6,723 3,195 9,918
Prepaid expenses and other....... 130 475 605
------ ------- ------- ------- -------
Total current assets..... 11,084 7,375 (64) 18,395
Property, plant and equipment,
net.............................. 19,295 8,714 28,009
Intangibles, net................... 16,805 (4,607) 12,199
Investment in subsidiary........... 2,651 (2,651)
Other assets....................... 1,692 592 2,284
------ ------- ------- ------- -------
Total assets:...................... $2,651 $48,877 $12,074 ($2,715) $60,887
====== ======= ======= ======= =======
Liabilities and Stockholders'
equity
Current liabilities:............... $
Current portion of long-term
debt.......................... $ $ 1,750 $ 629 $ 2,379
Revolving credit facility........ 2,542 2,220 4,762
Accounts payable................. 1,134 1,275 1 2,410
Other Accrued expenses........... 1,550 1,849 (65) 3,334
------ ------- ------- ------- -------
Total current
liabilities............ 6,976 5,973 (64) 12,885
Revolving credit facilities........ 36,250 4,904 41,154
Subordinated debt.................. 3,000 3,000
Deferred income taxes.............. 632 632
------ ------- ------- ------- -------
Total liabilities........ 48,226 11,509 (64) 57,671
------ ------- ------- ------- -------
STOCKHOLDERS' EQUITY
Common stock..................... 242 242
Additional paid-in capital....... 3,810 3,810 510 (3,810) 4,320
Retained earnings (deficit)...... (1,159) (1,159) (215) 1,159 (1,374)
Cumulative translation
adjustment.................... 28 28
Total stockholders'
equity................. 2,651 2,651 565 (2,651) 3,216
------ ------- ------- ------- -------
Total liabilities and stockholders'
equity........................... $2,651 $48,877 $12,074 ($2,715) $60,887
====== ======= ======= ======= =======
F-43
72
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
FIVE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
AFA
AFA POLYTEK
AFA CO. PRODUCTS, INC. (NON-
HOLDINGS (GUARANTOR) GUARANTOR) ELIMINATIONS COMBINED
-------- -------------- ---------- ------------ --------
Net sales...................... $ $ 12,011 $ 8,198 $ (101) $ 20,108
Cost of sales.................. 9,897 6,799 (101) 16,595
------------- ------------- ------------- ------------- -------------
Gross profit.............. 2,114 1,399 3,513
Selling and administrative
expenses..................... 1,712 1,150 2,862
Income from operations.... 402 249 651
Other expense (income):
Interest.................. 2,020 211 2,231
Other..................... (459) 405 (54)
------------- ------------- ------------- ------------- -------------
Total other
expense............ 1,561 616 2,177
Loss before income tax
provision.................... (1,159) (367) (1,526)
Tax benefit.................... (152) (152)
------------- ------------- ------------- ------------- -------------
Loss before equity in loss of
consolidated subsidiary...... (1,159) (215) (1,374)
Equity in loss of consolidated
subsidiary................... (1,159) 1,159
------------- ------------- ------------- ------------- -------------
Net income..................... $ (1,159) $ (1,159) $ (215) $ 1,159 $ (1,374)
============= ============= ============= ============= =============
F-44
73
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
FIVE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
AFA AFA
AFA PRODUCTS, INC. POLYTEK
HOLDINGS CO. (GUARANTOR) (NON-GUARANTOR) COMBINED
------------ -------------- --------------- --------
Cash flows from operating
activities...................... $ $ 456 $ 992 $ 1,448
Cash flows from investing
activities:
Capital expenditures......... (258) (403) (661)
----------- ----------- ----------- -----------
Net cash used in investing
activities................. (258) (403) (661)
Cash flows from financing
activities:
Change in line of credit..... (85) (85)
Repayment of long term
debt....................... (685) (685)
----------- ----------- ----------- -----------
Net cash from financing
activities................. (85) (685) (770)
Effect of exchange rate changes on
cash............................ 34 34
----------- ----------- ----------- -----------
Change in cash and cash
equivalents..................... 113 (62) 51
Cash and cash equivalents,
beginning of period............. 29 971 1,000
----------- ----------- ----------- -----------
Cash and cash equivalents, end of
period.......................... $ 142 $ 909 $ 1,051
=========== =========== =========== ===========
F-45
74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
WTI, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of WTI, Inc.
and Subsidiaries (the "Company") as of July 31, 1997 and December 31, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the seven month period ended July 31, 1997 and for the years
ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WTI, Inc. and
Subsidiaries as of July 31, 1997 and December 31, 1996, and the consolidated
results of their operations and their cash flows for the seven month period
ended July 31, 1997 and for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Charlotte, North Carolina
March 5, 1998.
F-46
75
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS)
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 2,391 $ 837
Accounts receivable, net of allowances of $43 and $29,
respectively........................................... 5,909 6,499
Inventories............................................... 9,496 10,314
Prepaid expenses and other................................ 359 608
------- -------
Total current assets.............................. 18,155 18,258
Property, plant and equipment............................... 15,022 16,004
Excess of cost over fair value of net assets acquired, net
of accumulated amortization............................... 1,321 1,761
Patents, net of accumulated amortization.................... 4,236 4,734
Deferred income taxes....................................... 3,224 1,285
Other assets................................................ 2,407 2,759
------- -------
Total assets...................................... $44,365 $44,801
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 4,944 $ 8,066
Accounts and drafts payable............................... 2,811 2,201
Income taxes payable...................................... 1,975 988
Other accrued expenses.................................... 5,490 6,058
------- -------
Total current liabilities......................... 15,220 17,313
Long-term debt.............................................. 15,176 16,045
Accrued interest to stockholder............................. 10,352 9,030
------- -------
Total liabilities................................. 40,748 42,388
------- -------
Commitments and contingencies
Stockholders' equity:
Class A common stock, $1 par value; 123,000 shares, issued
and outstanding........................................ 123 123
Class B common stock, convertible, $1,000 par value, no
shares issued..........................................
Additional paid-in capital................................ 9,047 9,047
Accumulated deficit....................................... (2,771) (5,844)
Cumulative translation adjustment......................... (2,782) (913)
------- -------
Total stockholders' equity........................ 3,617 2,413
------- -------
Total liabilities and stockholders' equity........ $44,365 $44,801
======= =======
The accompanying notes are an integral part of the financial statements.
F-47
76
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SEVEN MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
JULY 31, ------------------
1997 1996 1995
------------ ------- -------
Net sales................................................... $32,988 $54,133 $55,238
Cost of sales............................................... 23,864 39,868 41,971
------- ------- -------
Gross profit...................................... 9,124 14,265 13,267
Selling, general and administrative expense................. 4,205 7,389 7,877
------- ------- -------
Income from operations............................ 4,919 6,876 5,390
Other expense (income):
Interest expense.......................................... 2,295 4,275 4,489
Foreign currency (gain) loss.............................. (545) (230) 170
Royalty income............................................ (133) (178) (165)
Other..................................................... (125) 133 (256)
------- ------- -------
Total............................................. 1,492 4,000 4,238
------- ------- -------
Income before provision for income taxes.................... 3,427 2,876 1,152
Provision for income taxes.................................. 354 354 880
------- ------- -------
Net income........................................ $ 3,073 $ 2,522 $ 272
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-48
77
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
CLASS A ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
------- ---------- ----------- ----------- --------------
Balance, January 1, 1995.................. $123 $9,047 $(8,638) $ (42) $ 490
Net income................................ 272 272
---- ------ ------- ------- -------
Balance, December 31, 1995................ 123 9,047 (8,366) (42) 762
Net income................................ 2,522 2,522
Translation adjustment.................... (871) (871)
---- ------ ------- ------- -------
Balance, December 31, 1996................ 123 9,047 (5,844) (913) 2,413
Net income................................ 3,073 3,073
Translation adjustment.................... (1,869) (1,869)
---- ------ ------- ------- -------
Balance, July 31, 1997.................... $123 $9,047 $(2,771) $(2,782) $ 3,617
==== ====== ======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-49
78
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SEVEN MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
JULY 31, -----------------
1997 1996 1995
------------ ------- -------
Cash flows from operating activities:
Net income................................................ $ 3,073 $ 2,522 $ 272
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 1,926 3,153 3,103
Amortization........................................... 594 1,317 1,333
Deferred income taxes.................................. (1,939) (1,441) (5)
Other, net............................................. (118) (54) (47)
Loss (gain) on sale of property, plant and equipment... (21) 3 (39)
Foreign currency transaction (gain) loss............... (545) (230) 170
Changes in assets and liabilities:
Accounts receivable.................................. 694 (83) 677
Inventories.......................................... 172 53 (270)
Prepaid expenses and other........................... 293 706 208
Accounts and drafts payable.......................... 891 (1,402) (694)
Other accrued expenses............................... (581) 1,202 2,676
Other, net........................................... 36
Income taxes payable or refundable................... 1,389 391 (679)
------- ------- -------
Net cash provided by operating activities......... 5,828 6,173 6,705
------- ------- -------
Cash flows from investing activities:
Expenditures for property, plant and equipment............ (2,498) (2,218) (3,604)
Proceeds from disposal of property, plant and equipment... 23 2 49
Investment in affiliate................................... 2
Expenditures for tooling.................................. (69) (84) (1,010)
------- ------- -------
Net cash used in investing activities............. (2,544) (2,300) (4,563)
------- ------- -------
Cash flows from financing activities:
Net (repayment) borrowings under revolving lines of
credit................................................. (1,775) (2,864) 1,162
Proceeds from long-term debt borrowing.................... 1,321 2,978 600
Repayment of debt......................................... (1,174) (4,110) (3,968)
Payment of bank financing fees............................ (162) (35)
------- ------- -------
Net cash used in financing activities............. (1,628) (4,158) (2,241)
------- ------- -------
Effect of exchange rate changes on cash..................... (102) (62) 89
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 1,554 (347) (10)
Cash and cash equivalents at beginning of period............ 837 1,184 1,194
------- ------- -------
Cash and cash equivalents at end of period........ $ 2,391 $ 837 $ 1,184
======= ======= =======
Cash paid during the period for:
Interest.................................................. $ 580 $ 1,513 $ 1,961
Income taxes.............................................. 2,817 1,040 1,564
The accompanying notes are an integral part of the financial statements.
F-50
79
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. DESCRIPTION OF THE COMPANY AND CURRENT BUSINESS OPERATIONS:
WTI, Inc. (the "Company") was formed in 1988 by Waynesboro Textiles, Inc.
("Waynesboro"), Berkshire Partners and affiliates ("Berkshire") and AIG
Insurance Company and affiliates ("AIG").
WTI, Inc. has a wholly-owned subsidiary, AFA Products, Inc., based in
Forest City, North Carolina, which in turn has a wholly-owned subsidiary, WTI
Holding B.V. ("WTI Holding"), based in Helmond, The Netherlands. WTI Holding
also has a subsidiary, AFA Polytek B.V. ("Polytek"), which is also based in
Helmond, The Netherlands.
The Company's primary business is the manufacture and sale of activated
liquid dispensing devices ("trigger sprayers"). Manufacturing is primarily
conducted in facilities located in Forest City, North Carolina, and Helmond, The
Netherlands.
SALE OF ASSETS
On July 31, 1997, the Company sold substantially all of its assets and
operations to AFA Holdings Co. Proceeds from the sale were used to retire
liabilities not assumed by the purchaser with the remainder distributed to
shareholders of the Company. These consolidated financial statements were
prepared immediately prior to the sale using the historical basis of accounting
followed by the Company and do not reflect the sale transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
assets. Maintenance and repairs are charged to income as incurred and
betterments that extend the useful life are capitalized. Upon retirement or
sale, the cost and accumulated depreciation are eliminated from the respective
accounts, and the gain or loss, if any, is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
RESEARCH AND DEVELOPMENT
The cost of research and development expenditures is expensed as incurred.
F-51
80
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates in the financial statements relate to the allowance for uncollectible
accounts receivable, the allowance for slow-moving and obsolete inventories, the
allowance for sales returns and the valuation allowance for deferred tax assets.
INCOME TAXES
The Company uses the asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of WTI Holding are translated at exchange rates in
effect at the balance sheet dates ($.4767 and $.5744 per guilder at July 31,
1997 and December 31, 1996, respectively). Items of revenue and expense are
translated at average exchange rates during the periods ($.5211, $.5919 and
$.6236 per guilder for the 1997, 1996 and 1995 periods presented, respectively).
Translation adjustments, resulting from translating WTI Holding's financial
statements into dollars, are reported in the equity section of the accompanying
balance sheets under the caption "cumulative translation adjustment."
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over fair value of net assets acquired is being amortized on
a straight-line basis over a period of fifteen years. Accumulated amortization
was $2,283 and $2,581 as of July 31, 1997 and December 31, 1996, respectively.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through forecasted future operations. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. To date, no impairment losses have been
recognized.
PATENTS
The cost of patents acquired is being amortized using the straight-line
method over the estimated useful lives of the patents, which range from
approximately fourteen to seventeen years. The cost of patents developed are
expensed as incurred because the economic lives are indeterminable.
Accumulated amortization was $8,096 and $7,599 at July 31, 1997 and
December 31, 1996, respectively.
DEFERRED FINANCING FEES
Costs incurred to obtain financing are amortized using the straight-line
method (which approximates the interest method) over the term of the related
debt.
F-52
81
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
DEFERRED TOOLING
From time to time, the Company purchases certain molds and equipment
(tooling) to meet specific customer product requirements. These tooling costs
are capitalized by the Company and are amortized into operations over the
estimated life of the sales contract period.
OTHER INTANGIBLE ASSETS
Other intangible assets, consisting primarily of an exclusive sales
agreement and royalty agreements, are being amortized using the straight-line
method over the related lives of the agreements, which range from five to
fifteen years.
CASH EQUIVALENTS
The Company considers demand deposits and time deposits with original
maturities of three months or less as equivalent to cash.
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 sheets.
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 these
statements will not have a significant impact on the Company's combined
financial position, results of operations or cash flows, but will result in
additional disclosure.
3. INVENTORIES:
The components of inventories are summarized below:
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
Raw material........................................... $2,089 $ 2,429
Work-in-process........................................ 3,102 3,084
Finished goods......................................... 4,305 4,801
------ -------
$9,496 $10,314
====== =======
F-53
82
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, summarized by major classification and
estimated useful lives for depreciation purposes, is as follows:
USEFUL JULY 31, DECEMBER 31,
LIVES (YEARS) 1997 1996
------------- -------- ------------
Land............................................ $ 825 $ 947
Buildings....................................... 20 - 25 8,439 9,546
Machinery and equipment......................... 4 - 7 19,700 22,133
Molds........................................... 5 15,628 13,728
Furniture and fixtures.......................... 3 - 5 1,156 1,271
Vehicles........................................ 3 43 43
Construction in progress........................ -- 825 891
-------- --------
46,616 48,559
Less accumulated depreciation................... (31,594) (32,555)
-------- --------
Property, plant and equipment, net.............. $ 15,022 $ 16,004
======== ========
Construction in progress primarily consists of additions and improvements
to buildings, molds and machinery.
5. OTHER NONCURRENT ASSETS:
Other noncurrent assets consists of the following:
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
Deferred financing fees................................ $ 122 $ 241
Royalty agreement...................................... 917 1014
Investment in affiliate................................ 568 554
Lease deposit.......................................... 75 75
Deferred tooling....................................... 725 875
------ ------
$2,407 $2,759
====== ======
F-54
83
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
WORKING CAPITAL BORROWINGS(A):
Working capital line of credit -- dollar
denominated, bearing interest at 10% at December
31, 1996......................................... -- $ 1,411
Working capital line of credit -- guilder
denominated, bearing interest at 9.8% and 7.39%,
at July 31, 1997 and December 31, 1997
respectively..................................... $ 1,223 1,875
------- -------
Total working capital borrowings............ 1,223 3,286
------- -------
OTHER LONG-TERM DEBT:
Senior note -- dollar denominated................... 500 1,500
Senior mortgage note -- guilder denominated, payable
in quarterly principal installments of $25,204,
bearing interest at rates varying with the Dutch
prime rate (5.95% at July 31, 1997 and December
31, 1996(b)...................................... 1,188 1,508
Junior subordinated debt -- dollar denominated,
stockholder, bearing interest at 14% (Note
10)(c)........................................... 3,500 3,500
Subordinated note payable -- dollar denominated,
bearing interest at 13.5%(d)..................... 1,907 2,298
Senior subordinated debt -- dollar denominated,
stockholder, bearing interest at 13.5%(e)........ 10,000 10,000
Installment notes payable -- guilder denominated,
bearing interest at rates ranging from 7.1% to
7.75%............................................ 282 499
Promissory note payable -- dollar denominated,
affiliate, bearing interest at 14% (Note
10)(f)........................................... 320 320
Promissory note payable -- dollar denominated,
affiliate, bearing interest at 10.25% (Note
10)(f)........................................... 1,200 1,200
------- -------
Total other long-term debt.................. 18,897 20,825
------- -------
Total....................................... 20,120 24,111
Less current portion.................................. (4,944) (8,066)
------- -------
Total long-term debt........................ $15,176 $16,045
======= =======
(a) WORKING CAPITAL BORROWINGS:
At July 31, 1997 and December 31, 1996, the Company had loan and security
agreements (the "Agreements") with the Bank of Boston that provided for two
working capital lines of credit, denominated in both dollars and guilders.
Borrowings under the dollar denominated working capital line of credit,
which had a maximum amount of $4,700, were limited to 80% of eligible accounts
receivable (as defined), and 50% of eligible raw material and finished goods
inventories (as defined). Borrowings under the guilder denominated line of
credit had a maximum amount of 4,754 guilders ($2,266 at July 31, 1997) and were
limited to 70% of eligible accounts receivable (as defined) and 25% of eligible
raw materials and finished goods inventories (as defined).
On December 2, 1996, AFA Products, Inc. entered into the third amendment of
its dollar denominated working capital line of credit with the Bank of Boston.
The amendment extended the due date of the working
F-55
84
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
capital line of credit until November 30, 1997. The third amendment also
provided a new $1,500 term loan to be used to make an installment payment on the
$5,000 junior subordinated note payable to stockholder (AIG). Interest on the
extended line of credit and the new 1996 term loan is payable quarterly in
arrears beginning January 1, 1997. The 1996 term loan was due to be repaid in
1997. The amendment modifies certain financial covenants contained in the
original agreement and waives all violations of all loan covenants contained in
the original agreement through the effective date of the amendment. At December
31, 1996, the Company was in violation of the covenant limiting capital
expenditures. A waiver for this covenant violation was obtained from the bank.
Also on December 2, 1996, AFA Polytek B.V. entered into the third amendment
of its guilder denominated working capital line of credit with the Bank of
Boston. The amendment extended the due date of the working capital line of
credit until November 30, 1997. Interest on the extended line of credit is
payable quarterly in arrears beginning January 1, 1997. The amendment modifies
certain financial covenants contained in the original agreement and waives all
violations of all loan covenants contained in the original agreement through the
effective date of the amendment.
Substantially all of these bank borrowings were paid simultaneously with
the sale of substantially all of the Company's assets.
OTHER LONG-TERM DEBT
(b) Senior Mortgage Note -- Guilder Denominated
In connection with the construction of a manufacturing facility in 1991,
Polytek obtained a 3,500 guilder mortgage from ABN Bank, Netherlands. Borrowings
under this mortgage agreement are collateralized by a lien on the facility. The
mortgage agreement contains certain prohibitions, the most significant of which
prohibit payments of dividends which would result in the net worth of Polytek
falling below 10,000 guilders ($4,767 and $5,774 at July 31, 1997 and December
31, 1996).
(c) JUNIOR SUBORDINATED DEBT
The junior subordinated debt is payable to AIG and has principal payments
of $1,500 due December 31, 1997 and a $2,000 principal payment due December 31,
1998.
(d) SUBORDINATED NOTE PAYABLE
On December 30, 1991, WTI borrowed 4,000 guilders from Parkhill Holdings
Limited, an unaffiliated entity. The loan is collateralized by a secondary
pledge of the shares of Polytek. Effective February 5, 1993, this guilder
denominated debt was converted to a dollar denominated obligation, and interest
rates were adjusted to a U.S. prime rate (8.5% at July 31, 1997 and December 31,
1996) plus 5%. In November 1996, the original maturity on the debt was extended
to December 31, 1998.
(e) SENIOR SUBORDINATED DEBT
The senior subordinated debt is payable to Waynesboro or its stockholders.
In November 1996, the maturity schedule for principal repayment was amended,
resulting in principal payments of $4,000 due December 31, 1998 and $6,000 due
December 31, 1999. In accordance with certain covenants contained in senior loan
agreements, interest payments on this obligation were deferred. Accrued interest
payable on this obligation amounted to $10,352 and $9,030 at July 31, 1997 and
December 31, 1996, respectively.
F-56
85
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(f) PROMISSORY NOTES PAYABLE
The promissory notes payable represent borrowings from a partnership
controlled by certain shareholders of the Company. The obligations are
unsecured.
COLLATERAL AND DEBT COVENANTS UNDER LOAN AGREEMENTS OUTSTANDING AT JULY 31, 1997
Under the terms of the various financing arrangements described above at
July 31, 1997, substantially all of the Company's assets are pledged as
collateral, including, but not limited to, the stock of the various
subsidiaries. In addition, the various agreements contained restrictive
covenants, as defined, including limits on capital expenditures and transactions
with related parties, maintenance of certain minimum levels of cash flow
earnings and leverage ratios, among others.
AGGREGATE ANNUAL MATURITIES
Aggregate annual maturities of long-term debt after July 31, 1997 are as
follows:
1998....................................................... $ 4,944
1999....................................................... 8,091
2000....................................................... 6,147
2001....................................................... 83
2002....................................................... 83
Thereafter................................................. 772
-------
$20,120
=======
7. INCOME TAXES:
Pre-tax income (loss) consists of:
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, ------------------
1997 1996 1995
------------ ------- -------
United States.............................. $ 2,451 $ 2,145 $(1,044)
Foreign.................................... 976 731 2,196
------- ------- -------
Total pre-tax income............. $ 3,427 $ 2,876 $ 1,152
======= ======= =======
Current expense............................ 2,293 1,795 885
Deferred benefit........................... (1,939) (1,441) (5)
------- ------- -------
$ 354 $ 354 $ 880
======= ======= =======
F-57
86
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
The income tax provision differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to the pre-tax income. The
computed amount is reconciled to the total provision for income taxes as
follows:
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, -------------
1997 1996 1995
------------ ----- ----
Tax at federal statutory rate.................. $ 1,165 $ 978 $392
Tax effect of nondeductible expenses........... 55 118 126
Foreign taxes at rates other than U.S.
statutory rate............................... 17 10 16
State taxes (net of federal benefit)........... 186 119
Increase (reduction) in valuation allowance.... (1,098) (848) 355
Other.......................................... 29 (23) (9)
------- ----- ----
Income tax provision................. $ 354 $ 354 $880
======= ===== ====
The approximate tax effect of temporary differences that gave rise to the
Company's deferred income tax assets and liabilities at July 31, 1997 and
December 31, 1996 is as follows:
JULY 31, 1997
-------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- ------
Property, plant and equipment................... $ $ (983) $ (983)
Intangible assets............................... (463) (463)
Patents......................................... 434 434
Accrued interest................................ 3,374 3,374
Accrued rent.................................... 264 264
AMT credit carryforward......................... 447 447
Other........................................... 151 151
------ ------- ------
Total deferred taxes.................. $4,670 $(1,446) $3,224
====== ======= ======
DECEMBER 31, 1996
---------------------------------
ASSETS LIABILITIES TOTAL
------- ----------- -------
Property, plant and equipment................. $ $(1,140) $(1,140)
Intangible assets............................. (525) (525)
Patents....................................... 440 440
Accrued interest.............................. 2,823 2,823
Accrued rent.................................. 229 229
AMT credit carryforward....................... 447 447
Other......................................... 109 109
------- ------- -------
Total before valuation allowance.... 4,048 (1,665) 2,383
------- ------- -------
Valuation allowance........................... (1,098) (1,098)
------- ------- -------
Total deferred taxes................ $ 2,950 $(1,665) $ 1,285
======= ======= =======
The deferred tax assets and liabilities are broken down between current and
noncurrent amounts in the accompanying balance sheets according to the
classification of the related asset and liability or in the case of tax loss or
AMT credit carryforwards, based on their expected utilization date.
F-58
87
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
During 1996, the Company reduced its valuation allowance by $848 and during
the period ended July 31, 1997, the allowance was reduced by $1,098.
8. COMMON STOCK:
CLASS A -- Class A common stock has 100% of the voting rights with the
exception of rights to certain matters as described below. As of July 31, 1997
and December 31, 1996, there were 123,000 shares of Class A common stock
outstanding and 150,000 shares authorized, with a par value of $1.
CLASS B -- Class B common stock limits voting rights to certain specified
matters. Class B stock is convertible (at the option of the stockholder) into
Class A stock on a share per share basis. There are no Class B shares
outstanding and 150,000 shares authorized, with a par value of $1,000 per share.
VOTING RIGHTS ON CERTAIN MATTERS -- In accordance with the articles of
incorporation, the affirmative vote of at least two-thirds of the aggregate
outstanding Class A and Class B common stock is required for certain specified
transactions, including, but not limited to, the merger of the Company with or
into another entity; the sale, lease or other disposition of a substantial
portion of the Company's assets; an initial public offering of equity
securities; and incurrence of additional indebtedness (as defined therein).
9. OPERATING LEASES:
The Company is obligated under noncancelable operating leases for certain
machinery and equipment and telephone equipment. Minimum annual rental payments
are as follows:
PAYABLE TO
RELATED PAYABLE TO
PARTIES OTHERS TOTAL
---------- ---------- ------
1998.......................................... $121 $ 353 $ 474
1999.......................................... 340 340
2000.......................................... 261 261
2001.......................................... 87 87
2002.......................................... 22 22
---- ------ ------
$121 $1,063 $1,184
==== ====== ======
Rent expense approximated $381, $713 and $438 for the seven months ended
July 31, 1997 and the years ended December 31, 1996 and 1995, respectively,
including approximately $145 in 1997 and $249 for both 1996 and 1995 for rent
paid to an entity controlled by the stockholders of Waynesboro.
10. RELATED PARTY TRANSACTIONS:
INTEREST ON SENIOR SUBORDINATED DEBT
Included in interest expense for the seven month period ended July 31, 1997
and the years ended December 31, 1996 and 1995 is approximately $1,322, $2,156
and $1,969, respectively, relating to debt owed to Waynesboro or its
stockholders. As of July 31, 1997 and December 31, 1996, accrued interest of
$10,352 and $9,030, respectively, on this obligation has been classified as a
noncurrent liability in the accompanying balance sheet.
F-59
88
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
INTEREST ON JUNIOR SUBORDINATED DEBT
Included in interest expense for the 1997 period presented is $278 and for
both 1996 and 1995 is $700 relating to debt owed to AIG. As of July 31, 1997 and
December 31, 1996, accrued interest of $80 and $63 on this obligation has been
included in other accrued expenses in the accompanying balance sheets.
MANAGEMENT FEES
Included in operating expenses for the periods ended July 31, 1997 and
December 1996 and 1995 are approximately $295, $556 and $533, respectively, for
management fees and certain expenses paid or payable to entities affiliated with
Waynesboro or Berkshire. As of July 31, 1997 and December 31, 1996, the balance
of unpaid fees, which has been included in other accrued expenses in the
accompanying balance sheets, approximated $482 and $445, respectively.
TRANSACTIONS WITH AFFILIATE
The Company has a 41% 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 1997, 1996 and 1995 periods presented, the
Company purchased molds from the affiliate for approximately $160, $43 and $487,
respectively. During 1997, 1996 and 1995, the affiliate provided certain repairs
and maintenance at a cost to the Company of approximately $117, $203 and $135,
respectively. Included in accounts payable in the accompanying balance sheets at
July 31, 1997 and December 31, 1996, respectively, are approximately $22 and $40
relating to these assets and services provided by the affiliate.
ACCRUED RENT EXPENSE
As of July 31, 1997 and December 31, 1996, other accrued expenses includes
rent expense of $583 and $586, respectively, payable to a related party relating
to an operating lease for certain molding machines.
INTEREST ON PROMISSORY NOTE PAYABLE
Included in interest expense for the seven month period ended July 31, 1997
and the years ended December 31, 1996 and 1995 is approximately $100, $168 and
$66, respectively, relating to interest on funds advanced to the Company from an
affiliate. Accrued interest, which is computed at the rates of 10.25% and 14%
from the date of the advances, approximated $381 and $290 at July 31, 1997 and
December 31, 1996, respectively, and is included in accrued expenses on the
accompanying balance sheets.
11. OTHER INCOME (EXPENSE):
Other income consisted primarily of royalty income. In prior years, the
Company became involved in litigation with one or more of its competitors
regarding alleged patent infringements and ultimately reached out-of-court
settlements with those competitors. Royalty payments under two different
settlement agreements of $50 were received by the Company in 1996 and 1995, and
are recorded in other income in the accompanying consolidated statements of
operations.
12. EMPLOYEE BENEFITS PLANS:
RETIREMENT PLANS
Polytek has various pension plans covering substantially all employees.
Polytek funds all costs through insurance contracts which provide for retiree
benefits. Under the terms of the plans, there are no unfunded or
F-60
89
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
overfunded benefit obligations. Pension expense for July 31, 1997 and the years
ended December 31, 1996 and 1995 was approximately $241, $441 and $461,
respectively.
401(k) PLAN
Effective July 1, 1996, AFA Products adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time employees and the Company matches five percent of each employee's
contributions up to six percent of annual compensation. During 1997 and 1996,
the Company expensed $20 and $9 in matching contributions.
13. CONTINGENCIES:
The Company is a defendant and plaintiff in several disputes and legal
actions in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse impact on the
financial condition or the future results of operations of the Company.
14. FOREIGN OPERATIONS:
Information regarding the Company's operations in The Netherlands is as
follows:
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, ------------------
1997 1996 1995
------------ ------- -------
Sales...................................... $13,401 $23,698 $30,675
Net income................................. 1,172 1,328 2,483
Total assets............................... 15,734 19,172 21,866
15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA:
The following summarizes the Company's consolidating balance sheet as of
December 31, 1996 and consolidating results of operations and cash flows for the
years ended December 31, 1995 and 1996 and the seven month period ended July 31,
1997.
F-61
90
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SEVEN MONTHS ENDED JULY 31, 1997
(DOLLARS IN THOUSANDS)
AFA
WTI, INC. AFA POLYTEK
(PREDECESSOR PRODUCTS, INC. (NON-
TO AFA) (GUARANTOR) GUARANTOR) ELIMINATIONS CONSOLIDATED
------------ -------------- ---------- ------------ ------------
Net sales...................... $ $ 19,626 $ 13,401 $ (39) $ 32,988
Cost of sales.................. 13,708 10,195 (39) 23,864
------------- ------------- ------------- ------------- -------------
Gross profit.............. 5,918 3,206 9,124
Selling, general and
administrative expenses...... 134 2,643 1,428 4,205
------------- ------------- ------------- ------------- -------------
Income from operations.... (134) 3,275 1,778 4,919
------------- ------------- ------------- ------------- -------------
Other expense (income):
Interest.................. (24) 2,089 230 2,295
Other..................... (1,374) 571 (803)
------------- ------------- ------------- ------------- -------------
Total other
expense............ (24) 715 801 1,492
------------- ------------- ------------- ------------- -------------
Income before income tax
provision.................... (110) 2,560 977 3,427
Tax provision.................. 354 354
------------- ------------- ------------- ------------- -------------
Income before equity in income
of consolidated subsidiary... (110) 2,560 623 3,073
Equity in income of
consolidated subsidiary...... 3,183 623 (3,806)
------------- ------------- ------------- ------------- -------------
Net income..................... $ 3,073 $ 3,183 $ 623 $ (3,806) $ 3,073
============= ============= ============= ============= =============
F-62
91
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED JULY 31, 1997
(DOLLARS IN THOUSANDS)
AFA AFA
WTI, INC. PRODUCTS, INC. POLYTEK
(PREDECESSOR TO AFA) (GUARANTOR) (NON-GUARANTOR) CONSOLIDATED
-------------------- -------------- --------------- ------------
Cash flows from operating
activities.......................... $ $ 4,237 $1,591 $ 5,828
Cash flows from investing activities:
Capital expenditures................ (1,649) (849) (2,498)
Other............................... (46) (46)
Net cash used in investing
activities....................... (1,695) (849) (2,544)
Cash flows from financing activities:
Change in line of credit............ (1,410) (365) (1,775)
Proceeds from long term debt........ 1,321 1,321
Repayment of long term debt......... (1,000) (174) (1,174)
------- ------- ------ -------
Net cash from financing
activities....................... (1,089) (539) (1,628)
Effect of exchange rate changes on
cash................................ (102) (102)
------- ------- ------ -------
Change in cash and cash equivalents... 1,453 101 1,554
Cash and cash equivalents, beginning
of period........................... 337 500 837
------- ------- ------ -------
Cash and cash equivalents, end of
period.............................. $ 1,790 $ 601 $ 2,391
======= ======= ====== =======
F-63
92
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS CONSOLIDATED
--------------- -------------- --------------- ------------ ------------
Assets
Current Assets:
Cash and cash
equivalents......... $ 337 $ 500 $ 837
Accounts receivable... $ 1,870 4,236 3,374 ($ 2,981) 6,499
Inventories........... 6,394 3,920 10,314
Prepaid expenses and
other current
assets.............. 64 544 608
------------- ------------- ------------- ------------- -------------
Total current
assets......... 1,870 11,031 8,338 (2,981) 18,258
Property, plant and
equipment, net...... 7,360 8,644 16,004
Intangibles, net...... 4,734 1,761 6,495
Investment in
subsidiary.......... 2,307 10,679 (12,986)
Deferred income
taxes............... 1,285 1,285
Other assets.......... 2,287 2,187 3,243 (4,958) 2,759
------------- ------------- ------------- ------------- -------------
Total assets..... $ 6,464 $ 37,276 $ 21,986 ($ 20,925) $ 44,801
============= ============= ============= ============= =============
Liabilities and
Stockholders' Equity
Current Liabilities:
Current portion of
long-term debt...... $ 1,500 $ 5,931 $ 2,135 ($ 1,500) $ 8,066
Accounts payable...... 14 1,359 857 (29) 2,201
Income taxes
payable............. 988 988
Other accrued
expenses............ 537 2,855 4,118 (1,452) 6,058
------------- ------------- ------------- ------------- -------------
Total current
liabilities.... 2,051 11,133 7,110 (2,981) 17,313
Long-term debt:
Credit facilities.....
Subordinated debt..... 2,000 14,957 4,046 (4,958) 16,045
Accrued interest of
stockholders........ 8,879 151 9,030
------------- ------------- ------------- ------------- -------------
Total
liabilities.... 4,051 34,969 11,307 (7,939) 42,388
------------- ------------- ------------- ------------- -------------
Stockholders' Equity
Common stock.......... 123 8,878 9,462 (18,340) 123
Additional
paid-in-capital..... 9,047 179 (179) 9,047
Retained earnings
(deficit)........... (6,757) (6,571) 1,951 5,533 (5,844)
Cumulative translation
adjustment.......... (913) (913)
Total
stockholders'
equity......... 2,413 2,307 10,679 (12,986) 2,413
------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity..... $ 6,464 $ 37,276 $ 21,986 ($ 20,925) $ 44,801
============= ============= ============= ============= =============
F-64
93
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS
--------------- -------------- --------------- ------------
Net sales.......................... $ $ 30,673 $ 23,698 $ (238)
Cost of sales...................... 21,715 18,140 13
------------- ------------- ------------- ---------------
Gross profit.................. 8,958 5,558 (251)
Selling, general and
administrative expense...... 200 3,239 2,879 1,071
Income from operations........ (200) 5,719 2,679 (1,322)
Other expense (income):
Interest...................... (35) 3,717 574 19
Other......................... 4 (312) 1,374 (1,341)
------------- ------------- ------------- ---------------
Total other expense...... (31) 3,405 1,948 (1,322)
Income (loss) before provision
(benefit) for income taxes....... (169) 2,314 731
------------- ------------- ------------- ---------------
Tax provision (benefit)............ 354
------------- ------------- ------------- ---------------
Income (loss) before equity in
income of consolidated
subsidiary....................... (169) 2,314 377
Equity in income of consolidated
subsidiaries..................... 2,691 377 (3,068)
------------- ------------- ------------- ---------------
Net income......................... $ 2,522 $ 2,691 $ 377 $ (3,068)
============= ============= ============= ===============
CONSOLIDATED
------------
Net sales.......................... $ 54,133
Cost of sales...................... 39,868
-------------
Gross profit.................. 14,265
Selling, general and
administrative expense...... 7,389
Income from operations........ 6,876
Other expense (income):
Interest...................... 4,275
Other......................... (275)
-------------
Total other expense...... 4,000
Income (loss) before provision
(benefit) for income taxes....... 2,876
-------------
Tax provision (benefit)............ 354
-------------
Income (loss) before equity in
income of consolidated
subsidiary....................... 2,522
Equity in income of consolidated
subsidiaries.....................
-------------
Net income......................... $ 2,522
=============
F-65
94
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) CONSOLIDATED
--------------- -------------- --------------- ------------
Cash flows from operating activities.... $ $ 3,691 $ 2,482 $ 6,173
Cash flows from investing activities:
Capital expenditures............... (406) (1,812) (2,218)
Other.............................. (84) 2 (82)
------------- ------------- ------------- -------------
Net cash used in investing
activities....................... (490) (1,810) (2,300)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Change in line of credit........... (2,657) (207) (2,864)
Repayment of long term debt........ (1,500) (1,633) (977) (4,110)
Intercompany advances.............. 1,500 (1,399) (101)
Proceeds from long term debt....... 2,594 222 2,816
------------- ------------- ------------- -------------
Net cash from financing
activities....................... (3,095) (1,063) (4,158)
------------- ------------- ------------- -------------
Effect of exchange rate changes on
cash.................................. (62) (62)
------------- ------------- ------------- -------------
Change in cash and cash equivalents..... 106 (453) (347)
Cash and cash equivalents, beginning of
period................................ 232 952 1,184
------------- ------------- ------------- -------------
Cash and cash equivalents, end of
period................................ $ 338 $ 499 $ 837
============= ============= ============= =============
F-66
95
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS CONSOLIDATED
--------------- -------------- --------------- ------------ ------------
Net sales.................. $ $ 24,734 $ 30,675 $ (171) $ 55,238
Cost of sales.............. 19,327 22,738 (94) 41,971
------------- ------------- ------------- ------------- -------------
Gross profit.......... 5,407 7,937 (77) 13,267
Selling, general and
administrative expense... 179 2,783 3,581 1,334 7,877
------------- ------------- ------------- ------------- -------------
Income from
operations.......... (179) 2,624 4,356 (1,411) 5,390
Other expense (income):
Interest.............. (35) 3,832 664 28 4,489
Other................. 5 (313) 1,496 (1,439) (251)
------------- ------------- ------------- ------------- -------------
Total other
expense........ (30) 3,519 2,160 (1,411) 4,238
Income (loss) before
provision (benefit) for
income taxes............. (149) (895) 2,196 1,152
Tax provision.............. 880 880
------------- ------------- ------------- ------------- -------------
Income (loss) before equity
in income of
consolidating
subsidiary............... (149) (895) 1,316 272
Equity in income of
consolidated
subsidiaries............. 421 1,316 (1,737)
------------- ------------- ------------- ------------- -------------
Net income (loss).......... $ 272 $ 421 $ 1,316 $ (1,737) $ 272
============= ============= ============= ============= =============
F-67
96
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) CONSOLIDATED
--------------- -------------- --------------- ------------
Cash flows from operating activities.... $ $ 4,098 $ 2,607 $ 6,705
------------- ------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures............... (2,140) (1,464) (3,604)
Other.............................. (982) 23 (959)
------------- ------------- ------------- -------------
Net cash used in investing
activities....................... (3,122) (1,441) (4,563)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Change in line of credit........... 913 249 1,162
Repayment of long term debt........ (2,828) (1,140) (3,968)
Intercompany advances.............. 519 (519)
Proceeds from long term debt....... 565 565
------------- ------------- ------------- -------------
Net cash from financing
activities....................... (831) (1,410) (2,241)
------------- ------------- ------------- -------------
Effect of exchange rate changes on
cash.................................. 89 89
------------- ------------- ------------- -------------
Change in cash and cash equivalents..... 145 (155) (10)
Cash and cash equivalents, beginning of
period................................ 88 1,106 1,194
------------- ------------- ------------- -------------
Cash and cash equivalents, end of
period................................ $ $ 233 $ 951 $ 1,184
============= ============= ============= =============
F-68
97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Contico International, Inc.:
We have audited the accompanying combined balance sheets of Continental
Sprayers and Affiliates (the "Company") as of May 31, 1997 and 1996, and the
related combined statements of operations, divisional equity and cash flows for
each of the three years in the period ended May 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Continental
Sprayers and Affiliates as of May 31, 1997 and 1996, and the combined results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
St. Louis, Missouri
March 12, 1998
F-69
98
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED BALANCE SHEETS
MAY 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
------- -------
ASSETS
Current assets:
Cash...................................................... $ 21 $ 39
Trade receivables from Contico............................ 585 279
Trade receivables, less allowance for doubtful accounts of
$63 and $67............................................ 8,194 8,029
Inventories............................................... 5,768 6,847
Other current assets...................................... 287 589
------- -------
Total current assets.............................. 14,855 15,783
Property, plant and equipment............................... 30,588 32,464
Other assets................................................ 485 384
------- -------
Total assets...................................... $45,928 $48,631
======= =======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,441 $ 4,257
Accrued expenses.......................................... 1,958 2,286
Uncleared checks.......................................... 1,519 1,216
------- -------
Total current liabilities......................... 5,918 7,759
Advances from Contico....................................... 5,712 8,813
Minority interest in affiliate.............................. 120 119
------- -------
Total liabilities................................. 11,750 16,691
------- -------
Divisional equity........................................... 34,178 31,940
------- -------
Total liabilities and divisional equity........... $45,928 $48,631
======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-70
99
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
------- ------- -------
Net sales to third parties.................................. $58,600 $54,086 $54,658
Net sales to Contico........................................ 3,649 3,018 3,662
------- ------- -------
62,249 57,104 58,320
Cost of sales............................................... 48,901 44,614 42,491
------- ------- -------
Gross profit...................................... 13,348 12,490 15,829
Selling, general and administrative expenses................ 6,286 6,335 6,214
------- ------- -------
Income from operations............................ 7,062 6,155 9,615
------- ------- -------
Other expense (income):
Interest expense from Contico............................. 616 983 1,355
Other, net................................................ 28 142 (181)
------- ------- -------
644 1,125 1,174
------- ------- -------
Income before provision for income taxes.......... 6,418 5,030 8,441
Provision for income taxes.................................. 361 258 260
------- ------- -------
Net income........................................ $ 6,057 $ 4,772 $ 8,181
======= ======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-71
100
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF DIVISIONAL EQUITY
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS)
Balance, June 1, 1994....................................... $27,068
Net income.................................................. 8,181
Dividends................................................... (5,065)
Foreign currency translation adjustment..................... 19
-------
Balance, May 31, 1995....................................... 30,203
Net income.................................................. 4,772
Dividends................................................... (3,018)
Foreign currency translation adjustment..................... (17)
-------
Balance, May 31, 1996....................................... 31,940
Net income.................................................. 6,057
Dividends................................................... (3,851)
Foreign currency translation adjustment..................... 32
-------
Balance, May 31, 1997....................................... $34,178
=======
The accompanying notes are an integral part of the combined financial
statements.
F-72
101
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net income................................................ $ 6,057 $ 4,772 $ 8,181
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 6,526 6,173 5,562
Net gain on disposal of assets......................... (89) (6) 15
Decrease (increase) in receivable from Contico, net.... (355) 482 (19)
Decrease (increase) in trade receivable, less
reserves............................................. (117) (2,316) 922
Decrease (increase) in inventories..................... 1,119 1,589 (81)
Decrease (increase) in other current assets............ 311 (387) (141)
Increase (decrease) in accounts payable................ (1,822) 2,685 (606)
Increase (decrease) in accrued expenses................ (331) (286) 14
------- ------- -------
Net cash provided by operating activities......... 11,299 12,706 13,847
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (4,477) (3,337) (5,301)
Proceeds from disposal of assets.......................... 106 10 18
Purchases of other long-term assets....................... (238) (232) (131)
------- ------- -------
Net cash used in investing activities............. (4,609) (3,559) (5,414)
------- ------- -------
Cash flows from financing activities:
Payment of dividends to Contico........................... (3,851) (3,018) (5,065)
Net decrease in advances from Contico..................... (3,151) (6,490) (3,199)
Increase (decrease) in uncleared checks................... 303 363 (220)
------- ------- -------
Net cash used in financing activities............. (6,699) (9,145) (8,484)
------- ------- -------
Effect of exchange rate changes on cash........... (9) 4 (13)
------- ------- -------
Increase (decrease) in cash....................... (18) 6 (64)
Cash, beginning of period................................... 39 33 97
------- ------- -------
Cash, end of period......................................... $ 21 $ 39 $ 33
======= ======= =======
Cash paid during the period for:
Interest.................................................. $ 616 $ 983 $ 1,355
======= ======= =======
Taxes..................................................... $ 396 $ 178 $ 333
======= ======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-73
102
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. COMBINED ENTITIES AND BASIS OF PRESENTATION: The combined financial
statements of Continental Sprayers and affiliates (the "Company") include the
accounts of Continental Sprayers and Contour Cutting, divisions of Contico
International, Inc. ("Contico"), a Missouri corporation, of Continental Sprayers
de Mexico S.A. de C.V. (a majority owned Mexican subsidiary of Contico) and of
Continental Sprayers & Equipment (a United Kingdom division of Contico).
The purpose of the combined financial statements is to present the
financial position, results of operations and cash flows of Contico's liquid
dispenser business activities. The combined financial statements have been
prepared as if the Company had operated as a stand-alone entity for all periods
presented, and include those assets, liabilities, revenues, expenses and cash
flows directly attributable to the operations of the Company. The combined
financial statements have been presented using consolidation principles.
Minority interest in affiliate represents the minority stockholder's
proportionate share of net equity. As a result of the matters discussed above,
no separate components of equity are presented in the combined financial
statements. All significant intercompany accounts and transactions have been
eliminated.
Contico provides certain services to, and incurs certain costs on behalf
of, its subsidiaries and divisions. These costs, which include general overhead
and treasury services are billed to Contico's subsidiaries, including the
Company, based upon an analysis of the allocated resources required to perform
such services. Such costs are presented in the accompanying combined statements
of operations as administrative expenses (see Note 5).
Contico's management believes the method used to allocate expenses to the
Company is reasonable and appropriate. However, allocated expenses are not
necessarily indicative of the expenses which would have resulted had the Company
operated as a separate entity. The Company has relied upon Contico to fund
working capital needs and provide equity. The financial information included
herein is based on the operation of the Company as a division of Contico and
should not necessarily be considered indicative of future operating results of
the Company on a stand-alone basis.
B. 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 statement of position.
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 these
statements will not have a significant impact on the Company's combined
financial position, results of operations or cash flows, but will result in
additional disclosure.
C. INVENTORIES: Inventories are stated at the lower of cost or market.
Cost is determined on the first-in, first-out (FIFO) basis.
D. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated
at cost. Depreciation is provided primarily on a straight-line basis over the
estimated useful lives of the assets. The estimated lives utilized in
calculating depreciation are as follows: building -- 39 years; building
improvements -- 10 to 39 years; machinery and equipment -- 3 to 10 years; molds,
dies and tooling -- 5 years; and furniture and fixtures -- 5 to 10 years.
Leasehold improvements are amortized over the shorter of the life of the lease
or of the improvement. Maintenance and repairs are charged to income as incurred
and betterments that extend the
F-74
103
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
useful life are capitalized. Upon retirement or sale, the cost and accumulated
depreciation are eliminated from the respective accounts, and the gain or loss,
if any, is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
E. FOREIGN CURRENCY TRANSLATION: The functional currency of Continental
Sprayers de Mexico S.A. de C.V. is the U.S. dollar. The functional currency of
Continental Sprayers & Equipment is British pounds sterling. Assets and
liabilities of Continental Sprayers & Equipment are translated into U.S. dollars
at current exchange rates, and profit and loss accounts are translated at
average annual exchange rates. Resulting translation gains and losses are
included as a separate component in divisional equity. As of May 31, 1997 and
1996, the cumulative translation adjustment included in divisional equity was
$33 and $1, respectively. Foreign exchange transaction gains and losses are
included in the results of operations. Such amounts for the years presented were
insignificant.
F. REVENUE RECOGNITION: Sales and related costs of goods sold are
included in income when goods are shipped and title has passed to customers.
G. RESEARCH AND DEVELOPMENT: The cost of research and development is
expensed as incurred. Research and development costs for the periods were not
significant.
H. INCOME TAXES: Contico is a Subchapter S corporation for federal and
Missouri state tax purposes. Under this election, the United States taxable
income of the Company is included in the personal taxable income of the
stockholders of Contico. The provision for income taxes includes certain state
taxes and taxes provided for foreign affiliates and divisions.
I. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. INVENTORIES:
Inventories are comprised of the following:
1997 1996
------ ------
Raw materials.............................................. $1,293 $1,562
Work in process............................................ 2,303 3,355
Finished goods............................................. 2,172 1,930
------ ------
$5,768 $6,847
====== ======
F-75
104
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
1997 1996
-------- --------
Land, buildings and improvements....................... $ 7,897 $ 7,852
Machinery and equipment................................ 40,160 39,320
Molds, dies and tooling................................ 21,936 19,694
Furniture and fixtures................................. 1,216 989
Construction in progress............................... 669 608
-------- --------
71,878 68,463
Less accumulated depreciation..................... (41,290) (35,999)
-------- --------
$ 30,588 $ 32,464
======== ========
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
1997 1996
------ ------
Accrued compensation....................................... $1,156 $1,248
Accrued workers' compensation.............................. 400 673
Other accrued expenses..................................... 402 365
------ ------
$1,958 $2,286
====== ======
5. INTERENTITY TRANSACTIONS:
Net sales to Contico result from a wholesale distribution agreement whereby
the Company provides Contico's entire domestic requirements of liquid
dispensers. The agreement is renewable annually as mutually agreed by the
parties.
The Company has an agreement to purchase certain operating, administrative
and corporate services from Contico. The agreement, which is subject to certain
conditions, is renewable annually as mutually agreed by the parties. The Company
paid $285, $285 and $270 for services rendered during the years ended May 31,
1997, 1996 and 1995, respectively (see Note 1).
Contico advances funds to the Company as needed to meet the Company's
operating requirements. The Company is charged interest on these advances at
7.5% and 8.3% at May 31, 1997 and 1996, respectively. Interest expense on these
advances was $616, $983 and $1,355 for the years ended May 31, 1997, 1996 and
1995, respectively. The Company's domestic, as well as Contico's, assets are
pledged as collateral under Contico's bank financing agreements.
The Company paid dividends to Contico of $3,851, $3,018 and $5,065
representing 60% of the Company's income before provision for income taxes for
the years ended May 31, 1997, 1996 and 1995, respectively.
6. RETIREMENT BENEFITS:
The Company offers a 401(k) plan to substantially all domestic nonunion
employees. The Company's contributions under this plan were $83, $91 and $110
for the years ended May 31, 1997, 1996 and 1995, respectively.
F-76
105
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. MAJOR CUSTOMERS:
Two customers accounted for approximately 30%, 34% and 24% of total net
sales for the years ended May 31, 1997, 1996 and 1995, respectively.
In January 1998, following the sale of certain of its product lines to S.C.
Johnson, Dow Brands, CSI's largest customer, notified CSI that it would be
terminating its contract with CSI effective April 23, 1998. Dow Brands purchases
from CSI for each of the three years in the period ended May 31, 1997 was 18.2%,
22.2% and 15.1%, respectively. The loss of the Dow Brands business could
adversely impact the Company's future results of operations. Following its
acquisition of the Dow Brands product lines, S.C. Johnson resold certain of the
acquired product lines to a third party. Management believes that the Company
will continue through the end of 1998 to supply trigger sprayers for those
product lines, which accounted for approximately one-half of CSI's unit sales to
Dow Brands, as well as for certain of the product lines retained by S.C.
Johnson. However, there can be no assurance of the extent to which the Company
will continue to supply trigger sprayers for any of these product lines or the
length of time it will continue to supply them.
8. GEOGRAPHIC SEGMENT INFORMATION:
The Company operates in one business segment -- the manufacture and sale of
liquid dispensers. The Company's operations can be grouped into two geographical
segments. Total revenue by segment includes both sales to customers and
intersegment sales, which are accounted for at prices charged to customers and
eliminated in consolidation. Pertinent financial data by major geographic
segment is as follows:
YEAR ENDED MAY 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
North America:
Net sales...................................... $60,582 $56,856 $59,844
Operating income............................... 6,026 5,537 8,992
Identifiable assets............................ 41,672 47,259
Europe:
Net sales...................................... $ 7,643 $ 4,110 $ 4,117
Operating income............................... 1,284 546 656
Identifiable assets............................ 5,566 4,009
Eliminations:
Net sales...................................... $(5,976) $(3,862) $(5,641)
Operating (loss) income........................ (248) 72 (33)
Identifiable assets............................ (1,310) (2,637)
Total:
Net sales...................................... $62,249 $57,104 $58,320
Operating income............................... 7,062 6,155 9,615
Identifiable assets............................ 45,928 48,631
9. SUBSEQUENT EVENT -- SALE OF OPERATIONS:
Effective February 1, 1998, Contico sold certain of the assets, liabilities
and operations of the Company to Continental Acquisition Corp., for a net cash
sale price of approximately $91 million plus approximately $2 million,
contingently payable in the future based on the Company achieving certain
agreed-upon sales levels through 2005. No adjustments have been recorded in the
accompanying historical combined financial statements of the Company as a result
of this transaction.
F-77
106
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Contico International, Inc.:
In our opinion, the accompanying combined balance sheet and the related combined
statement of operations and of divisional equity and of cash flows present
fairly, in all material respects, the combined financial position of Continental
Sprayers and Affiliates (the "Company") at January 30, 1998, and the combined
results of their operations and their cash flows for the eight-month period
ended January 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers, LLP
St. Louis, Missouri
March 12, 1998
F-78
107
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED BALANCE SHEET
January 30, 1998
(In thousands)
ASSETS
Current assets:
Cash $ 16
Trade receivables from Contico 503
Trade receivables, less allowance for doubtful accounts
of $129 7,379
Inventories 4,818
Other current assets 196
-------
Total current assets 12,912
Property, plant and equipment 28,149
Other assets 599
-------
Total assets $41,660
=======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable $ 1,861
Accrued expenses 2,751
Uncleared checks 598
-------
Total current liabilities 5,210
Advances from Contico 1,058
Minority interest in affiliate 116
-------
Total liabilities 6,384
-------
Divisional equity 35,276
-------
Total liabilities and divisional equity $41,660
=======
The accompanying notes are an integral part of the combined financial
statements.
F-79
108
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
for the eight months ended January 30, 1998
(In thousands)
Net sales to third parties $38,366
Net sales to Contico 2,606
-------
40,972
Cost of sales 31,294
-------
Gross profit 9,678
Operating expenses:
Selling and distribution 2,116
Administrative 1,801
-------
Income from operations 5,761
-------
Other expense (income):
Interest expense from Contico 147
Other, net 57
-------
204
-------
Income before provision for income taxes 5,557
Provision for income taxes 253
-------
Net income $ 5,304
=======
The accompanying notes are an integral part of the combined financial
statements.
F-80
109
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENT OF DIVISIONAL EQUITY
for the eight months ended January 30, 1998
(In thousands)
Balance, May 31, 1997 $ 34,178
Net income 5,304
Dividends (4,241)
Foreign currency translation adjustment 35
--------
Balance, January 30, 1998 $ 35,276
========
The accompanying notes are an integral part of the combined financial
statements.
F-81
110
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
for the eight months ended January 30, 1998
(In thousands)
Cash flows from operating activities:
Net income $ 5,304
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 4,382
Net gain on disposal of assets (8)
Decrease in receivable from Contico, net 247
Decrease in trade receivable, less reserves 842
Decrease in inventories 978
Decrease in other current assets 92
Decrease in accounts payable (583)
Decrease in accrued expenses 790
--------
Net cash provided by operating activities 12,044
--------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,816)
Proceeds from disposal of assets 17
Purchases of other long-term assets (217)
--------
Net cash used in investing activities (2,016)
--------
Cash flows from financing activities:
Payment of dividends to Contico (4,241)
Net decrease in advances from Contico (4,856)
(921)
Decrease in uncleared checks
--------
Net cash used in financing activities (10,018)
--------
Effect of exchange rate changes on cash (15)
--------
Increase (decrease) in cash (5)
Cash, beginning of period 21
--------
Cash, end of period $ 16
========
Cash paid during the period for:
Interest $ 208
========
Taxes $ 266
========
The accompanying notes are an integral part of the combined
financial statements.
F-82
111
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. COMBINED ENTITIES AND BASIS OF PRESENTATION: The combined financial
statements of Continental Sprayers and affiliates (the "Company")
include the accounts of Continental Sprayers and Contour Cutting,
divisions of Contico International, Inc. ("Contico"), a Missouri
corporation, of Continental Sprayers de Mexico S.A. de C.V. (a majority
owned Mexican subsidiary of Contico) and of Continental Sprayers &
Equipment (a United Kingdom division of Contico).
The purpose of the combined financial statements is to present the
financial position, results of operations and cash flows of Contico's
liquid dispenser business activities. The combined financial statements
have been prepared as if the Company had operated as a stand-alone
entity for all periods presented, and include those assets, liabilities,
revenues, expenses and cash flows directly attributable to the
operations of the Company. The combined financial statements have been
presented using consolidation principles. Minority interest in affiliate
represents the minority stockholder's proportionate share of net equity.
As a result of the matters discussed above, no separate components of
equity are presented in the combined financial statements. All
significant intercompany accounts and transactions have been eliminated.
Contico provides certain services to, and incurs certain costs on behalf
of its subsidiaries and divisions. These costs, which include general
overhead and treasury services are billed to Contico's subsidiaries and
divisions, including the Company, based upon an analysis of the
allocated resources required to perform such services. Such costs are
presented in the accompanying combined statements of operations as
administrative expenses (see Note 5).
Contico's management believes the method used to allocate expenses to
the Company is reasonable and appropriate. However, allocated expenses
are not necessarily indicative of the expenses which would have resulted
had the Company operated as a separate entity. The Company has relied
upon Contico to fund working capital needs and provide equity. The
financial information included herein is based on the operation of the
Company as a Division of Contico and should not necessarily be
considered indicative of future operating results of the Company on a
stand-alone basis.
F-90
112
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
B. 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 statement of position.
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 these
statements will not have a significant impact on the Company's combined
financial position, results of operations or cash flows, but will result
in additional disclosure.
C. INVENTORIES: Inventories are stated at the lower of cost or market. Cost
is determined on the first-in, first-out (FIFO) basis.
D. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated
at cost. Depreciation is provided primarily on a straight-line basis
over the estimated useful lives of the assets. The estimated lives
utilized in calculating depreciation are as follows: building - 39
years; building improvements - 10 to 39 years; machinery and equipment -
3 to 10 years; molds, dies and tooling - 5 years; and furniture and
fixtures - 5 to 10 years. Leasehold improvements are amortized over the
shorter of the life of the lease or of the improvement. Maintenance and
repairs are charged to income as incurred and betterments that extend
the useful life are capitalized. Upon retirement or sale, the cost and
accumulated depreciation are eliminated from the respective accounts,
and the gain or loss, if any, is included in income.
If events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the long-lived asset, an impairment loss is recognized. To
date, no impairment losses have been recognized.
F-91
113
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
E. FOREIGN CURRENCY TRANSLATION: The functional currency of Continental
Sprayers de Mexico S.A. de C.V. is the U.S. dollar. The functional
currency of Continental Sprayers and Equipment is British pounds
sterling. Assets and liabilities of Continental Sprayers & Equipment are
translated into U.S. dollars at current exchange rates, and profit and
loss accounts are translated at average annual exchange rates. Resulting
translation gains and losses are included as a separate component in
equity. As of January 30, 1998, the cumulative translation adjustment
included in divisional equity was $35. Foreign exchange transaction
gains and losses are included in the results of operations. Such amounts
for the period presented were insignificant.
F. REVENUE RECOGNITION: Sales and related costs of goods sold are included
in income when goods are shipped and title has passed to customers.
G. RESEARCH AND DEVELOPMENT: The cost of research and development is
expensed as incurred. Research and development costs for the periods
presented were not significant.
H. INCOME TAXES: Contico is a Subchapter S corporation for federal and
Missouri state tax purposes. Under this election, the United States
taxable income of the Company is included in the personal taxable income
of the stockholders of Contico. The provision for income taxes includes
certain state taxes and taxes provided for foreign affiliates and
divisions.
I. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. INVENTORIES:
Inventories at January 30, 1998 are comprised of the following:
Raw materials $1,450
Work in process 1,912
Finished goods 1,456
------
$4,818
======
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114
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Amounts in thousands)
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at January 30, 1998 consists of the following:
Land, buildings and improvements $ 7,878
Machinery and equipment 40,711
Molds, dies and tooling 22,352
Furniture and fixtures 1,264
Construction in progress 1,482
--------
73,687
Less accumulated depreciation (45,538)
--------
$ 28,149
========
4. ACCRUED EXPENSES:
Accrued expenses at January 30, 1998 consist of the following:
Accrued compensation $ 820
Accrued workers' compensation 342
Customer allowances 1,210
Other accrued expenses 379
------
$2,751
======
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115
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Amounts in thousands)
5. INTERENTITY TRANSACTIONS:
Net sales to Contico result from a wholesale distribution agreement whereby
the Company provides Contico's entire domestic requirements of liquid
dispensers. The agreement is renewable annually as mutually agreed by the
parties.
The Company has an agreement to purchase certain operating, administrative
and corporate services from Contico. The agreement, which is subject to
certain conditions, is renewable annually as mutually agreed by the parties.
The Company paid $196 for services rendered during the period ended January
30, 1998 (see Note 1).
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116
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Amounts in thousands)
5. INTERENTITY TRANSACTIONS:
Contico advances funds to the Company as needed to meet the Company's
operating requirements. The Company is charged interest on these advances at
7.7% at January 30, 1998. Interest expense on these advances was $208 for
the period ended January 30, 1998. The Company's domestic as well as
Contico's assets are pledged as collateral under Contico's bank financing
agreements.
The Company paid dividends to Contico of $4,241 representing 62% of the
Company's income before provision for income taxes for the period ended
January 30, 1998.
6. RETIREMENT BENEFITS:
The Company offers a 401(k) plan to substantially all domestic nonunion
employees. The Company's contributions under this plan were $157 for the
period ended January 30, 1998.
7. MAJOR CUSTOMERS:
Two customers accounted for approximately 26% of total net sales for the
eight months ended January 30, 1998.
8. GEOGRAPHIC SEGMENT INFORMATION:
The Company operates in one business segment - the manufacture and sale of
liquid dispensers. The Company's operations can be grouped into two
geographical segments. Total revenue by segment includes both sales to
customers and intersegment sales, which are accounted for at prices charged
to customers and eliminated in consolidation. Pertinent financial data by
major geographic segment is as follows:
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117
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Amounts in thousands)
8. GEOGRAPHIC SEGMENT INFORMATION, CONTINUED:
EIGHT MONTHS
ENDED
JANUARY 30,
1998
------------
North America:
Net sales $ 37,918
Operating income 4,929
Identifiable assets 37,541
Europe:
Net sales $ 6,301
Operating income 859
Identifiable assets 6,878
Eliminations:
Net sales $ (3,247)
Operating income (27)
Identifiable assets (2,759)
Total:
Net sales $ 40,972
Operating income 5,761
Identifiable assets 41,660
9. SUBSEQUENT EVENT - SALE OF OPERATIONS:
Effective February 1, 1998, Contico sold certain of the assets, liabilities
and operations of the Company to Continental Acquisition Corp., for cash of
approximately $91 million plus approximately $2 million, contingently
payable in the future based on the Company achieving certain agreed-upon
sales levels through 2005. No adjustments have been recorded in the
accompanying historical combined financial statements of the Company as a
result of this transaction.
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118
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Amounts in thousands)
9. SUBSEQUENT EVENT - SALE OF OPERATIONS, CONTINUED:
In September 1997, at the request of a customer, the Company implemented
certain design changes to a trigger sprayer, which changes were approved by
the customer. In October 1997, without informing the Company, the customer
made changes to the formulation of is product that were incompatible with
the revised design of the Company's trigger sprayer, resulting in
malfunction of the trigger sprayer when used with that product. Management
believes that the trigger sprayer functions in accordance with the
customer's design specifications. However, the Company will provide certain
allowance to the customer. The Company has estimated and recorded total
allowances of $1,210, which are included in accrued liabilities at January
30, 1998.
F-97