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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-52657
INDESCO INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3987915
(State of Incorporation) (I.R.S. Employer Identification No.)
950 THIRD AVENUE
NEW YORK, NEW YORK 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 593-2009
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
-- --
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (November 1, 1999)
Common Stock: 200 Shares, Par Value $0.01
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INDESCO INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Balance Sheets of Indesco International,
Inc. and Subsidiaries at September 30, 1999 (Unaudited) and December 31, 1998................ 2
Condensed Consolidated Statements of Operations of Indesco
International, Inc. and Subsidiaries for the Three and Nine Months Ended
September 30, 1999 and 1998 (Unaudited)...................................................... 3
Condensed Consolidated Statements of Cash Flows of Indesco
International, Inc. and Subsidiaries for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited)...................................................... 4
Notes to Condensed Consolidated Financial Statements (Unaudited)............................. 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 18
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................................................. 22
SIGNATURE ............................................................................................. 23
1
3
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -----
ASSETS
Current Assets:
Cash and Cash Equivalents $ 106 $ 1,569
Accounts Receivable, Net 14,335 13,941
Inventories 11,502 13,447
Prepaid Expenses and Other Assets 861 665
------------- ------------
Total Current Assets 26,804 29,622
Property, Plant and Equipment, Net 67,900 65,885
Excess of Cost Over Fair Value of Net Assets Acquired, Net 59,771 60,953
Patents and Other Intangibles, Net 7,405 7,738
Deferred Financing Costs 5,640 6,165
Other Assets 1,071 1,043
------------- ------------
TOTAL ASSETS $ 168,591 $ 171,406
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Portion of Long-Term Debt and Capital Lease Obligations $ 951 $ 1,085
Credit Facilities 2,712 3,613
Accounts and Drafts Payable 7,443 7,602
Income Taxes Payable 135 36
Accrued Expenses 10,369 7,110
------------- ------------
Total Current Liabilities 21,610 19,446
Long-Term Debt and Capital Lease Obligations 164,327 163,416
Deferred Income Taxes 650 647
------------- ------------
Total Liabilities 186,587 183,509
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common-Stock, Authorized 3,000 Shares of $.01 Par Value;
200 Shares Issued and Outstanding -- --
Additional Paid-in Capital 5,062 5,062
Accumulated Deficit (23,087) (17,233)
Accumulated Other Comprehensive Income 29 68
------------- ------------
Total Stockholders' Equity (Deficit) (17,996) (12,103)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 168,591 $ 171,406
============= ============
See notes to condensed consolidated financial statements.
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INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
Net Sales $ 25,149 $ 27,572 $ 78,136 $ 84,289
Cost of Sales 19,959 20,087 59,036 59,349
------------ ------------ ----------- ----------
Gross Profit 5,190 7,485 19,100 24,940
Operating Expenses:
Selling, General and Administrative 2,753 3,049 8,945 9,426
Research and Development 328 390 1,524 792
Amortization of Intangibles 665 712 2,038 1,969
------------ ------------ ----------- ----------
Total Operating Expenses 3,746 4,151 12,507 12,187
------------ ------------ ----------- ----------
Income From Operations 1,444 3,334 6,593 12,753
Other (Income) Expense:
Interest 4,146 3,909 12,425 11,730
Other (118) (19) (85) 106
------------- ------------- ------------ ----------
Total Other Expense, Net 4,028 3,890 12,340 11,836
------------ ------------ ----------- ----------
Income (Loss) Before Extraordinary
Item and Provision for Income Taxes (2,584) (556) (5,747) 917
Provision for Income Taxes 20 225 107 464
------------ ------------ ----------- ----------
Income (Loss) Before Extraordinary Item (2,604) (781) (5,854) 453
Extraordinary Item--Loss on Early
Extinguishment of Debt -- -- -- 7,605
------------ ------------ ----------- ----------
NET LOSS $ (2,604) $ (781) $ (5,854) $ (7,152)
============= ============= ============ ===========
See notes to condensed consolidated financial statements.
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INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1999 1998
---- ----
Cash Flows From Operating Activities:
Net Income (Loss) $ (5,854) $ (7,152)
Less: Extraordinary Item -- 7,605
------------ ----------
(5,854) 453
------------- ----------
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities:
Depreciation 5,400 4,962
Amortization 2,038 1,990
Loss on Disposal of Property, Plant and Equipment 55
Changes in Operating Assets and Liabilities:
Accounts Receivable (394) (9,128)
Inventories 1,945 (1,168)
Prepaid Expenses and Other Assets (183) 989
Accounts and Drafts Payable (159) 4,048
Income Taxes Payable 99 (45)
Accrued Expenses 3,259 4,059
------------ ----------
Total Adjustments 12,060 5,707
------------ ----------
Net Cash Provided (Used) by Operating Activities 6,206 6,160
------------ ----------
Cash Flows From Investing Activities:
Acquisition of CSI, Net of Cash Acquired -- (92,947)
Expenditures for Property, Plant and Equipment (7,415) (7,107)
Proceeds From Disposal of Property, Plant and Equipment -- 14
Other (119) (700)
------------- -----------
Net Cash Used by Investing Activities (7,534) (100,740)
------------- -----------
Cash Flows From Financing Activities:
Proceeds From Senior Subordinated Notes -- 145,000
Proceeds From Term Loans -- 135,000
Repayment of Long-Term Debt (1,851) (176,127)
Payments of Deferred Financing Costs -- (11,418)
Net Borrowings Under Revolving Credit Agreements 1,727 5,733
Return of Capital to Parent -- (2,500)
------------ -----------
Net Cash Provided (Used) by Financing Activities (124) 95,688
Effect of Exchange Rate Changes on Cash (11) 24
------------- ----------
Net Increase in Cash and Cash Equivalents (1,463) 1,132
Cash and Cash Equivalents at Beginning of Year 1,569 1,051
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 106 $ 2,183
============ ==========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Interest $8,400 $5,340
------------ ----------
Income Taxes $7 $411
------------ ----------
Non-Cash Investing and Financing Information:
During the nine-month period ended September 30, 1998, Parent debt of $3,000
was converted to equity.
See notes to consolidated financial statements.
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INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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, the stockholder of the
Parent and an affiliate of another stockholder of the Parent acquired the
outstanding capital stock of AFA Polytek B.V. ("Polytek") based in The
Netherlands. In addition, effective February 1, 1998, the Company acquired
certain assets and liabilities of Continental Sprayers International ("CSI"), a
division of Contico International, Inc. for approximately $93 million (see Note
3). Concurrent with the CSI acquisition, Polytek became a wholly-owned
subsidiary of the Company.
The accompanying unaudited condensed consolidated balance sheet of the
Company as of September 30, 1999 includes the accounts of the Company and its
subsidiaries (AFA, Polytek and CSI) as compared to the balance sheet as of
December 31, 1998.
The accompanying unaudited condensed consolidated statement of
operations of the Company for the three and nine months ended September 30, 1999
includes the results of operations of the Company and its subsidiaries (AFA,
Polytek and CSI).
The accompanying unaudited condensed consolidated statement of
operations of the Company for 1998 includes the results of operations of the
Company, AFA and Polytek, for the three and nine months ended September 30, 1998
and the results of operations of CSI from its acquisition on February 1, 1998
through September 30, 1998.
The unaudited condensed consolidated balance sheet as of September 30,
1999 and the unaudited condensed consolidated statements of operations and cash
flows for the three and nine months ended September 30, 1998 and 1999, in the
opinion of management, have been prepared on the same basis as the related
Company's audited financial statements and include all significant adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the results of the interim periods. The data disclosed in the
notes to the condensed consolidated financial statements for these periods are
also unaudited. Certain information and footnote disclosure normally included in
the Company's annual financial statements have been condensed or omitted. The
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the related annual audited financial statements and
notes thereto. Results for the three and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
entire year.
(2) SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared
using the accounting policies disclosed in the related annual audited financial
statements.
Foreign Currency Translation
Assets and liabilities of Polytek are translated at exchange rates in
effect at the balance sheets dates ($.4931 and $.5328 per guilder at September
30, 1999 and December 31, 1998, respectively). Items of revenue and expense are
translated at average exchange rates during the period ($.4899 and $.4959 per
guilder for the nine-month periods ended September 30, 1999 and 1998,
respectively). Translation adjustments resulting from translating the Polytek
financial statements into dollars are reported in the equity section of the
accompanying balance sheet under the caption "Accumulated Other Comprehensive
Income."
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INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
New Accounting Pronouncement
On September 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. During the nine months ended September 30, 1999 and 1998, total
comprehensive loss amounted to $5,893 and $6,985, respectively.
In September 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 is included in Note 13.
(3) ACQUISITION OF CONTINENTAL SPRAYERS 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 million is being amortized over 30 years. Unaudited
proforma results of operations of the Company before extraordinary items for the
nine months ended September 30, 1998 as if the transaction had occurred on
January 1, 1998 are as follows:
Net Sales $ 89,135
=========
Net Income Before Extraordinary Item $ 776
=========
(4) INVENTORIES
The components of inventories as of September 30, 1999 and December 31,
1998 are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
Raw Material $ 3,074 $ 3,418
Work-in-Process 4,629 5,015
Finished Goods 3,799 5,014
---------- ----------
$ 11,502 $ 13,447
========== ==========
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INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, summarized by major classification and
estimated useful lives for depreciation purposes, is as follows:
USEFUL SEPTEMBER 30, DECEMBER 31,
LIVES (YEARS) 1999 1998
------------- ---- ----
Land $ 2,605 $ 2,499
Buildings 30-40 14,085 14,311
Machinery and Equipment 5-7 48,626 42,971
Furniture and Fixtures 5-7 3,646 3,056
Vehicles 5 23 23
Construction in Progress 12,835 11,754
------ ------
81,820 74,614
Less: Accumulated Depreciation and Amortization (13,920) (8,729)
------- ------
Property, Plant and Equipment, Net $ 67,900 $ 65,885
=========== ==========
Construction in progress primarily consists of additions and
improvements to buildings, molds and machinery. Property, plant and equipment
includes approximately $2,027 for assets recorded under capital leases.
(6) DEBT
Debt consists of the following:
SEPTEMBER 30 DECEMBER 31
1999 1998
---- ----
Working Capital line of credit, Dutch Guilder
("NLG") denominated bearing interest at 4.75 percent (a) $ 2,712 $ 3,613
============= ==========
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Revolving credit facility, dollar denominated bearing
interest at 7.50 percent (b) $ 13,785 $ 12,058
Senior subordinated notes, dollar denominated bearing interest
at 9.75 percent (c) 145,000 145,000
ABN/AMRO loan, NLG denominated, bearing interest at 6.10
percent (d) 3,353 3,930
Senior mortgage note, NLG denominated,
payable in quarterly principal installments
(NLG 175,000 or US $84,000 per annum),
bearing interest at 5.50 percent (e) 1,058 1,212
Capital lease obligations, NLG denominated,
bearing interest at rates ranging from 7.10 percent
to 7.75 percent 2,082 2,301
------------- ----------
165,278 164,501
Less: Current Portion 951 1,085
------------- ----------
TOTAL LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS $ 164,327 $ 163,416
============= ==========
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INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Working Capital Borrowings
(a) Netherlands
Borrowings under the NLG denominated line of credit have a maximum
limit of NLG 11,000 ($5,424 and $5,861 at September 30, 1999 and December 31,
1998, respectively). 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, refinanced the AFA debt of approximately $40,000 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 $70,000 principal
amount Tranche A Term Loan, bearing interest at LIBOR, plus 3.75 percent; and
(ii) a $65,000 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"). As amended, the New Credit Facility replaces the Revolving
Credit Facility with NationsCredit Commercial Corporation ("Nations Credit"),
provides for up to $30,000 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. The
Company's initial borrowing under the New Credit Facility, on October 1, 1998,
was approximately $4,900, 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.
Collateral--Indebtedness under the New Credit Facility is
collateralized by a first priority security interest in all accounts receivable,
inventory, machinery and equipment (including molds) of the Company and each of
its domestic subsidiaries. In addition, the Company and each of its domestic
subsidiaries has granted a negative pledge with respect to certain other assets,
including real property, general intangibles and intellectual property
(including patents).
Interest--Indebtedness under the New Credit Facility bears interest at
a floating rate based (at the Company's option) upon (i) LIBOR (for either one,
two, three or six months), plus an Applicable Margin ranging from 1.25 percent
to 2.25 percent (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 percent)
plus an Applicable Margin ranging from 0.00 percent to 1.00 percent (currently
1%).
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.
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INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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 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, September 30, 1999 and December 31, 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. Subsequent to May
14, 1999, the Company and the Bank have conducted discussions to establish
mutually agreeable covenants. Such discussions are ongoing.
(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") which have 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, 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 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 remained outstanding. The terms of the Old
Notes required the Company 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, 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") (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% 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
9
11
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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 restrictions and registration 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 ($4,191) requiring
quarterly payments of NLG 216 ($107) 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 ($1,726) mortgage from ABN-AMRO Bank, The
Netherlands. Borrowings under this Mortgage Note are collateralized by a lien on
certain real property of Polytek.
(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 (see Notes 1 and 3).
As a result, the Company expensed, in 1998, $6,654 of deferred financing costs
and $951 of prepayment penalties as an extraordinary loss.
(8) INCOME TAXES
The loss before provision for income taxes consisted of: NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
United States $ (5,557) $ (7,516)
Foreign (297) 828
---------- ----------
Total Pre-Tax Loss $ (5,854) $ (6,688)
========== ==========
The condensed consolidated statements of operations includes income
taxes on foreign subsidiary income and minimum state taxes. The Company has
recorded a full valuation allowance related to the potential tax benefit of the
net operating loss carryforward and other deferred tax assets.
The Company paid income taxes of $7 and $411 for the periods ended
September 30, 1999 and 1998, respectively. The Company has U.S. net operating
loss carryforwards of approximately $14,000, expiring in years 2012 through
2013. The net deferred tax liability of $650 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.
10
12
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(9) CONTINGENCIES
Litigation
There are pending claims and litigation against the Company arising in
the ordinary course of business. Management believes, on the basis of its
understanding and advice 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.
For the nine months ended September 30, 1999 and 1998, the Company
incurred approximately $225 and $225, respectively, of management fees and
certain expenses. As of December 31, 1998 and September 30, 1999, all fees and
expenses had been paid.
Transactions with Affiliates
The Company, through Polytek, 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 periods
ended September 30, 1999 and 1998, the Company purchased molds from the
affiliate for approximately $360 and $217, respectively. During the periods
ended September 30, 1999 and 1998, the affiliate provided certain repairs and
maintenance at a cost to the Company of approximately $195 and $153,
respectively.
Included in accounts payable in the accompanying balance sheets at
September 30, 1999 and December 31, 1998, are approximately $145 and $156,
respectively, relating to these assets and services provided by the affiliate.
In October 1999, the Company, through Polytek, completed a transaction
in which it sold back to the affiliate all its shares of the affiliate for a
total amount of NLG 1,238 (US $542). The loss on sale of the shares was not
material.
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 nine months ended September
30, 1999 and 1998, the Company incurred fees of approximately $510 and $868,
respectively, to Gratch, Jacobs & Brozman, P.C.
11
13
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(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 full-time
U.S. employees of the Company and its domestic subsidiaries, and the Company
matches 25 percent of each employee's contribution up to a maximum of 6 percent
of the employee's annual compensation.
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.
(12) PLANT CLOSEDOWN COST
In the fourth quarter of 1998, the Company finalized and approved a
plan to closedown its El Paso, Texas and Juarez, Mexico manufacturing
facilities. These facilities were closed in June 1999.
The estimated cost of this plan was approximately $5,344 which was
reflected in operating expenses during the year ending December 31, 1998. The
estimated costs consisted of employee separation costs of $1,100, asset
impairments of $3,978, and other exit costs of $266.
(13) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
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 condensed consolidating financial statements include the
accounts of the Company, the Subsidiary Guarantors, and the non-guarantor
subsidiaries.
12
14
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARY
INDESCO ---------------------- ----------------
INTERNATIONAL, AFA
INC. PRODUCTS CSI POLYTEK ELIMINATIONS CONSOLIDATED
--- -------- --- ------- ------------ ------------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ -- -- -- 106 -- $ 106
Accounts Receivable, Net 9,974 12,473 13,570 4,330 (26,012) 14,335
Inventories -- 6,013 3,085 2,412 (8) 11,502
Prepaid Expenses & Other 430 -- 703 78 (350) 861
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,404 18,486 17,358 6,926 (26,370) 26,804
Property, Plant & Equipment, Net 321 22,146 34,301 11,132 -- 67,900
Excess Purchase Price Over Fair Value
of Net Assets Acquired, Net -- 11,694 52,051 (3,974) -- 59,771
Patents & Other Intangibles, Net -- 3,986 3,419 -- -- 7,405
Deferred Financing Costs, Net 5,640 -- -- -- -- 5,640
Deferred Tax Asset -- 811 8,099 -- (8,626) 284
Investments in Subsidaries 18,757 -- -- 630 (18,757) 630
Other 129,870 146 11 -- (129,870) 157
--------------------------------------------------------------------------------
TOTAL ASSETS 164,992 57,269 115,239 14,714 (183,623) 168,591
================================================================================
LIABILITIES & STOCKHOLDERS EQUITY:
CURRENT LIABILITIES
Current Portion of Long Term Debt and
Capital Lease Obligations $ -- -- -- 951 -- $ 951
Credit Facility -- -- -- 2,712 -- 2,712
Accounts Payable - Trade 450 3,722 3,553 2,862 (3,144) 7,443
Income Taxes Payable -- 18 117 -- -- 135
Accrued Expenses 29,772 1,164 10,087 1,837 (32,491) 10,369
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 30,222 4,904 13,757 8,362 (35,635) 21,610
Long Term Debt 158,785 40,365 89,505 5,542 (129,870) 164,327
Deferred Income Taxes -- 811 7,815 650 (8,626) 650
--------------------------------------------------------------------------------
TOTAL LIABILITIES 189,007 46,080 111,077 14,554 (174,131) 186,587
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock (2,500) 3,000 -- 242 (742) --
Additional Paid - In Capital -- 5,521 15,795 510 (16,764) 5,062
Accumulated Deficit (21,515) 2,668 (11,633) (621) 8,014 (23,087)
Accumulated Other Comprehensive Income -- -- -- 29 -- 29
--------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (24,015) 11,189 4,162 160 (9,492) (17,996)
--------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 164,992 57,269 115,239 14,714 (183,623) $ 168,591
================================================================================
13
15
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARY
---------------------- ----------
INDESCO
INTERNATIONAL, AFA
INC. PRODUCTS CSI POLYTEK ELIMINATIONS CONSOLIDATED
---- -------- ---- ------- ------------ ------------
Net Sales $ -- 28,562 30,225 19,598 (249) $ 78,136
Cost of Sales (158) 20,879 22,415 16,367 (467) 59,036
-------- -------- -------- -------- ------- --------
Gross Profit 158 7,683 7,810 3,231 218 19,100
Operating Expenses 2,788 2,282 5,130 2,307 12,507
-------- -------- -------- -------- ------- --------
Income from Operations (2,630) 5,401 2,680 924 218 6,593
Other (Income) Expense
Interest 12,074 2,922 7,154 351 (10,076) 12,425
Equity in Loss of Subsidiaries 1,021 -- -- -- (1,021) --
Other (10,088) (1,030) (139) 871 10,301 (85)
---------- ---------- ----------- ----------- --------- --------
Total Other Expense, Net 3,007 1,892 7,015 1,221 (795) 12,340
Income (Loss) Before
Provision for Income Taxes (5,637) 3,509 (4,335) (297) 1,013 (5,747)
Provision for Income Taxes 1 32 74 -- -- 107
-------- -------- -------- -------- ------- --------
Net Income (Loss) $ (5,638) 3,477 (4,409) (297) 1,013 $(5,854)
======== ======== ======== ======== ======= =========
14
16
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARY
------------------------------------- ----------
INDESCO
INTERNATIONAL, AFA
INC. PRODUCTS CSI POLYTEK ELIMINATIONS CONSOLIDATED
---- -------- ---- ------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ (5,638) 3,477 (4,409) (297) 1,013 $ (5,854)
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Depreciation - 2,029 2,116 1,255 5,400
Amortization of:
Intangibles - 315 1,380 (109) (404) 1,182
Patents - 235 217 - 452
Loss (gain) on diposal of P.P. & E.. - 55 - - 55
Deferred Financing Fees 525 - - - 525
Equity in Income of Affiliate 1,021 - - - (1,021) -
(INCREASE)/DECREASE IN OPERATING ASSETS: -
Accounts Receivable (11) (1,951) 1,677 (953) 844 (394)
Intercompany Receivable (1,161) (106) (1,016) 102 2,181 --
Other Accounts Receivable - - - - -
Inventory (214) 1,019 867 273 1,945
Prepaid Expenses and Other Assets (363) (85) (67) 467 (256) (304)
INCREASE/(DECREASE) IN OPERATING LIABILITIES
Accounts Payable 402 501 (1,222) 132 28 (159)
Accrued Expenses 3,610 319 (945) 137 138 3,259
Income Taxes Payable (1) (17) 117 - 99
Intercompany Payable 84 1,178 1,358 325 (2,945) -
-----------------------------------------------------------------------------------
Total Adjustments 4,106 2,259 4,634 2,224 (1,162) 12,060
-----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (1,532) 5,736 225 1,926 (149) 6,206
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of Property Plant and Equipment (321) (3,758) (3,391) (925) 980 (7,415)
Disposal of Property Plant and Equipment - - - - -
Increase in other Assets - - (119) - (119)
Transfer of Assets (2,920) 2,920 -
-----------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (321) (6,678) (590) (925) 980 (7,534)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(Decrease) in Line of Credit 1,727 - - - 1,727
Repayment of Long Term Debt/
Capital Lease Obligation - - - (1,020) (831) (1,851)
Advances (to)/from Parent Company 58 (58) - - - -
-----------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 1,785 (58) - (1,020) (831) (124)
Effect of exchange rate change on cash - - - (11) (11)
Increase (decrease) in Cash and Cash
Equivalents (68) (1,000) (365) (30) - (1,463)
Cash and Cash Equiv.at Beginning of Year 68 1,000 365 136 1,569
-----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - - - 106 - $ 106
===================================================================================
15
17
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
INDESCO NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- ------------ ------------ ------------ -----------
Net Sales $ $62,810 $21,622 $ (143) $84,289
Cost of Sales 42,405 17,055 (111) 59,349
------- ------- ------- -------
Gross Profit 20,405 4,567 (32) 24,940
Operating Expenses 2,084 6,769 3,334 12,187
------- ------- ------- ------- -------
Income from Operations (2,084) 13,636 1,233 (32) 12,753
Other Expense (Income):
Interest 1,876 9,514 342 (2) 11,730
Other 43 63 106
Equity in Income of
Consolidated Subsidiaries (2,005) 2,005 --
------- ------- ------- ------- -------
Total Other Expense, Net (129) 9,557 405 2,003 11,836
Income Before Extraordinary Item and
Provision for Income Taxes (1,955) 4,079 828 (2,035) 917
Provision for Income Taxes 165 299 464
------- ------- ------- ------- -------
Income Before Extraordinary Item (1,955) 3,914 529 (2,035) 453
Extraordinary Item - Loss on Early
Extinguishment of Debt 5,167 2,438 7,605
------- ------- ------- ------- -------
NET INCOME (LOSS) $(7,122) $ 1,476 $ 529 $(2,035) $(7,152)
------- ------- ------- ------- -------
16
18
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
INDESCO NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- ------------ ------------ ------------ ------------
Cash Flows From Operating Activities $ (10,640) $ 11,399 $ 325 5,076 $ 6,160
Cash Flows From Investing Activities:
Acquisition of CSI (92,947) (92,947)
Expenditures for Property and
Equipment (6,388) (719) (7,107)
Disposal of Property and Equipment 14 14
Other (241) (459) (700)
---------------- ----------- --------- -------------- -------------
Net Cash Used by Investing
Activities (92,947) (6,615) (1,178) (100,740)
Cash Flows From Financing
Activities:
Proceeds from Long-Term Debt 280,000 280,000
Repayment of Long-Term Debt (135,000) (40,542) (585) (176,127)
Payments of Deferred Financing Costs (11,297) (121) (11,418)
Net (Repayment) Borrowings Under
Revolving Credit Agreements 10,057 843 (5,167) 5,733
Return of Capital To Parent (2,500) (2,500)
Advances from Parent (36,597) 36,493 13 91
--------- ---------- ------------ ----------------------------
Net Cash Provided (Used) by
Financing Activities 104,663 (4,049) 150 (5,076) 95,688
--------- ----------- ----------- ---------- -----------
Effect of Exchange Rate Changes
on Cash 24 24
Net Increase (Decrease) in
Cash and Cash Equivalents 1,076 735 (679) 1,132
Cash and Cash Equivalents at
Beginning of Year 142 909 1,051
---------------- ----------- ----------- --------------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,076 $ 877 $ 230 $ 2,183
=========== ========== ========== =============== ============
17
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The accompanying unaudited condensed consolidated statements of
operations of the Company include (i) the results of operations of the Company,
AFA, Polytek and CSI for the three months ended September 30, 1999 and 1998, and
(ii) the results of operations of the Company, AFA, Polytek and CSI for the nine
months ended September 30, 1999. The results of operations for the nine months
ended September 30, 1998 include the results of operations of the Company, AFA
and Polytek for the entire nine month period and of CSI for the eight-month
period beginning February 1, 1998, the date of its acquisition by the Company.
See Note 2 to the Company's condensed consolidated financial statements for
description of exchange rates used in the translation of Polytek's operating
results. All dollar amounts are presented in thousands.
Third Quarter Ended September 30, 1999
The condensed consolidated operating results of the Company for the
quarters ended September 30, 1999 and 1998 are presented below and are expressed
as a percentage of sales for analytical purposes.
QUARTER ENDED
SEPTEMBER 30,
--------------------
1999 1998
---- ----
Net Sales 100.0% 100.0%
Cost of Sales 79.4 72.9
------ ------
Gross Profit 20.6 27.1
Operating expenses:
Selling, General and Administrative Expenses 10.9 11.0
Research and Development Expenses 1.3 1.4
Amortization of Intangibles 2.6 2.6
------ ------
Total Operating Expenses 14.8 15.0
------ ------
Income from Operations 5.8% 12.1%
====== ======
Net sales for the Third Quarter 1999 were $25,149, a decrease of
$2,423, or 9%, as compared to net sales of $27,572 in the Third Quarter 1998.
This decrease in sales was principally caused by continuing manufacturing
constraints in the production of certain products during the process to
integrate molding and assembly operations from its El Paso and Juarez facilities
(which were both closed in June 1999) into its Forest City facility. In
addition, the Third Quarter 1998 included sales related to inventory ramp-up by
customers of the Company for new product introductions. Such sales subsequently
leveled off.
Cost of sales for the Third Quarter 1999 were $19,959 (79% of sales),
as compared to $20,087 (73% of sales) in the Third Quarter 1998. Higher cost of
sales, as a percentage of sales, was primarily due to manufacturing
inefficiencies resulting from the integration of molding and assembly equipment
described above. Such inefficiencies temporarily resulted in increased costs in
the Third Quarter 1999 due to the incurrence of outside molding costs, the
hiring of additional production personnel and interrupted production caused by
the movement of equipment between sites.
Selling, general and administrative ("SG&A") expenses were $2,753 in
the Third Quarter 1999 as compared to $3,049 in the Third Quarter 1998. The
decrease reflects the Company's ongoing efforts to reduce administrative costs
such as outside professional fees and employee overhead. As discussed below in
"Nine Months Ended September 30, 1999", SG&A expenses in the Third Quarter 1999
include approximately $300 of specific legal and administrative charges related
to the ongoing process of consolidating the Company's operations.
18
20
Interest expense for the Third Quarter 1999 was $4,146 as compared to
$3,909 for the Third Quarter 1998. Average balances of interest-bearing debt
outstanding in the Third Quarter 1999 were higher than such balances outstanding
in the Third Quarter 1998.
Nine Months Ended September 30, 1999
The condensed consolidated operating results of the Company for the
nine months ended September 30, 1999 and 1998 are presented below and are
expressed as a percentage of sales for analytical purposes.
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1999 1998*
---- ----
Net Sales 100.0% 100.0%
Cost of Sales 75.6 70.4
------ ------
Gross Profit 24.4 29.6
Operating expenses:
Selling, General and Administrative Expenses 11.4 11.2
Research and Development Expenses 2.0 0.1
Amortization of Intangibles 2.6 2.3
------ ------
Total Operating Expenses: 16.0 13.6
Income from Operations 8.4% 16.0%
====== ======
* All percentages for the Nine Months Ended September 30, 1998 reflect results
of operations for nine months for the Company, AFA and Polytek, and eight months
for CSI.
Net sales for the nine months ended September 30, 1999 were $78,136, a
decrease of $6,153, or 7%, as compared to net sales of $84,289 for the nine
months ended September 30, 1998 (i.e., sales of AFA and Polytek for nine months
and CSI for eight months). On a proforma basis (i.e., assuming that the
acquisition of CSI had been completed as of January 1, 1998), net sales would
have decreased approximately $11,312 in the first nine months of 1999 as
compared to the first nine months of 1998. The decrease in proforma net sales
principally resulted from (i) the manufacturing inefficiencies described above,
(ii) the loss of a significant CSI customer in Third Quarter 1998, as previously
reported, and (iii) sales related to inventory ramp-up by customers of the
Company for new product introductions in the first nine months of 1998, which
subsequently leveled off. In addition, and to a lesser extent, the decrease in
net sales from 1998 to 1999 reflects the impact of lower selling prices,
introduced in the third quarter of 1998, for certain products in response to
competitive pricing pressures.
Cost of sales for the nine months ended September 30, 1999 were $59,036
(76% of sales) as compared to $59,349 (70% of sales) for the nine months ended
September 30, 1998. Higher cost of sales as a percentage of sales, resulted from
lower sales and the factors discussed above.
Operating expenses for the nine months ended September 30, 1999 were
$12,507, an increase of $320 over operating expenses of $12,187 for the nine
months ended September 30, 1998. As the Company proceeds to consolidate the AFA,
Polytek and CSI operations, it continues to be burdened by specific
consolidation-related charges, such as professional fees, and higher than normal
freight costs and administrative expenses. Also, during the first nine months of
1999, the Company incurred substantial costs relating to a suit brought by the
Company against a competitor to enjoin that competitor's infringement of the
Company's patent. The consolidation charges and the patent infringement
litigation costs aggregated approximately $1,300 and have been included in SG&A
expense for the Nine Months Ended September 30, 1999. In addition, operating
expenses for the first nine months of 1999 include R&D expenses of $1,524, an
increase of $732 over the first nine months of 1998, which is attributable to
accelerated development of new product initiatives.
19
21
Interest expense for the nine months ended September 30, 1999 was
$12,425, an increase of $695 over interest expense of $11,730 for the nine
months ended September 30, 1998. The increase results from higher average
balances of interest-bearing debt outstanding in 1999.
No U.S. tax liability has been incurred for the nine months ended
September 30, 1999. Provision for taxes that have been recorded in 1999 relates
to state minimum taxes. The Company has recorded a full valuation allowance in
connection with its consolidated net operating loss.
In the nine months ended September 30, 1998, the Company recorded an
Extraordinary Loss on the Early Extinguishment of Debt in the amount of $7,605,
comprised of deferred financing costs and prepayment penalties resulting from
early termination of various loans.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, the Company's operating
activities generated net cash of $6,206 (the combination of the $5,854 net loss,
$7,493 of non-cash items added back, and a $4,567 net increase in working
capital). In that period, the Company had capital expenditures of $7,415 which
was principally related to (i) the purchase of molding equipment in connection
with the transfer of manufacturing operations from the Company's El Paso and
Juarez facilities to its Forest City facility, (ii) completion of the conversion
of certain of the Company's assembly equipment which had begun in 1998, and
(iii) purchase of assembly equipment in preparation of launching the Company's
new Luxor lotion pump. For the nine months ended September 30, 1999, the Company
has reduced its net borrowings under bank credit agreements and capital lease
arrangements by $124.
At September 30, 1999, the Company had available excess borrowing
capacity of approximately $16,000 and $3,500 (NLG 7,100), respectively, under
its credit facilities with First Union and ABN-AMRO Bank. (See Note 6 to the
Company's condensed consolidated financial statements for description of
existing indebtedness.)
The Company uses EBITDA (defined as income before interest, income
taxes, depreciation, amortization, one-time charges and extraordinary items) to
measure its operating performance and ability to incur and service its debt.
EBITDA should not be considered as an alternative to, or more meaningful than,
net income or cash flow statement data prepared in accordance with GAAP, or as a
measure of profitability or liquidity. EBITDA does not include commitments by
the Company for capital expenditures and payment of debt and, therefore, should
not be deemed to represent funds available to the Company. EBITDA for the Third
Quarter 1999 was $4,125 as compared to $5,837 for the Third Quarter 1998. EBITDA
for the nine months ended September 30, 1999 was $14,116 as compared to $20,428
for the nine months ended September 30, 1998 (i.e., the results of operations of
the Company, AFA and Polytek for nine months and CSI for eight months). The
$6,312 decrease in EBITDA for the nine months ended September 30, 1999 is the
result of lower sales, increased cost of sales as a percentage of sales, and
higher R&D expenses in 1999.
As previously reported, on March 24, 1999, the Company amended its
credit facility with First Union National Bank. 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, September 30, 1999 and
December 31, 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 June 30, 1999, September 30, 1999, December 31, 1999
and March 31, 2000. Subsequent to May 14, 1999, the Company and the Bank have
conducted discussions to establish mutually agreeable covenants. Such
discussions are ongoing.
Management believes that net cash generated by operations, together
with amounts available under the credit facilities with First Union and ABN-AMRO
Bank, will be adequate to fund the payment of interest and principal on the
Company's outstanding indebtedness as well as its capital expenditure plans and
working capital requirements.
20
22
Management believes that inflation did not have a significant impact on
operations.
YEAR 2000 COMPLIANCE
With respect to core information systems at its operating sites ("core
information systems" refers to business processes in the areas of manufacturing,
materials management, distribution, sales and accounting), the Company has
completed the process of upgrading to new software and modifying existing
software to achieve Year 2000 ("Y2K") Compliance. The Company, with its
suppliers, have certified that the new software and the modified existing
software are Y2K Compliant. With respect to its assembly machines and injection
molding equipment in which a microprocessor is used, the Company has completed
its communications with suppliers, and no potential Y2K concerns have been
identified. Thus, the Company has completed its review without significant
issues, and the overall cost to achieve Y2K compliance has not been material to
the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENT
The information provided in this Quarterly Report on Form 10-Q 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.
----------------------------------
21
23
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Form 10-Q:
(b) Reports on Form 8-K: None
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
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, between 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.
*** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Indesco International, Inc.
By: /s/ PETER GIALLORENZO
-----------------------------
Peter Giallorenzo
Title: Vice President and Chief Financial Officer
Date: November 15, 1999
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