1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1996
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-25500
ADCO TECHNOLOGIES INC.
-------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
Delaware 13-3715246
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4401 Page Avenue
P.O. Box 457
Michigan Center, MI 49254
- - ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 517-764-0334
------------
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.
CLASS OUTSTANDING AT MARCH 31, 1996
----- -----------------------------
Common Stock, par value $.01 per share 5,150,000
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED) DECEMBER 31, 1995
-------------- -----------------
Assets
Current assets:
Cash and short-term investments $ 3,434,783 $ 3,797,650
Trade accounts receivable, less allowances
($143,000 and $140,000 at March 31, 1996
and December 31, 1995, respectively) 6,275,711 4,672,127
Inventories:
Finished goods 2,830,696 2,735,782
Raw materials and packaging 3,139,897 2,332,430
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5,970,593 5,068,212
Refundable income taxes 0 176,969
Deferred income taxes 330,521 319,374
Other current assets 233,867 139,358
------------ -----------
Total current assets 16,245,475 14,173,690
Property, plant and equipment, net 8,973,841 8,895,851
Intangibles 7,964,676 8,034,994
Other assets 13,350 13,350
----------- -----------
$33,197,342 $31,117,885
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 2,531,754 $ 940,530
Accrued compensation and other expenses 1,539,565 1,992,608
Federal income and state taxes 344,694 130,982
----------- -----------
Total current liabilities 4,416,013 3,064,120
Deferred income taxes 1,028,605 1,006,570
Redeemable preferred stock of subsidiary 3,850,000 3,850,000
Stockholders' equity:
Preferred stock, par value $.01 per share--
Authorized 100,000; no shares issued and outstanding 0 0
Common stock, par value $.01 per share
Authorized 9,000,000; issued and outstanding
5,150,000 shares at March 31, 1996 and
December 31, 1995 51,500 51,500
Additional paid-in-capital - common 15,140,750 15,140,750
Less receivable from management shareholders (50,000) (150,000)
Retained earnings 8,760,474 8,154,945
----------- -----------
23,902,724 23,197,195
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$33,197,342 $31,117,885
=========== ===========
See notes to consolidated financial statements
3
ADCO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
-----------------------
Net Sales $10,958,727 $11,387,715
Cost of products sold 8,155,019 8,009,404
--------------------------
Gross profit 2,803,708 3,378,311
Operating expenses:
Selling, general and administrative 1,356,314 1,479,342
Research and development 369,526 343,046
--------------------------
Total operating expenses 1,725,840 1,822,388
--------------------------
Operating income 1,077,868 1,555,923
Interest expense 0 105,020
Dividends on preferred stock of subsidiary 70,000 70,000
Other income - net (116,005) (30,926)
--------------------------
Income before taxes 1,123,873 1,411,829
Income taxes 415,344 528,335
--------------------------
Net income 708,529 883,494
==========================
Net income per common and common equivalent share $0.14 $0.19
==========================
Weighted average shares outstanding 5,213,870 4,592,989
--------------------------
See notes to consolidated financial statements
4
ADCO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK OF
SUBSIDIARY AND STOCKHOLDERS' EQUITY
(UNAUDITED)
Redeemable Preferred Stock of Subsidiary Stockholders' Equity
------------------------------------------- -----------------------------------------------------------
Additional Additional Receivable
Series A Series B Paid-in Total Paid-in from Total
Preferred Preferred Capital Preferred Common Capital Management Retained Stockholders'
Stock Stock Preferred Stock Stock Common Shareholders Earnings Equity
------------------------------------------- -----------------------------------------------------------
Balance at December 31,
1995 $35 $350,000 $3,499,965 $3,850,000 $51,500 $15,140,750 $(150,000) $8,154,945 $23,197,195
Net income for the
three month period
ended March 31,
1996 708,529 $708,529
Repayment of management
loan 100,000 $100,000
Preferred stock dividend $0
Dividends on common stock
- - - $.02/share (103,000) $(103,000)
------------------------------------------- -----------------------------------------------------------
Balance at March 31,
1996 $35 $350,000 $3,499,965 $3,850,000 $51,500 $15,140,750 $(50,000) $8,760,474 $23,902,724
------------------------------------------- -----------------------------------------------------------
See notes to consolidated financial statements
5
ADCO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net income $ 708,529 $ 883,494
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 326,323 299,199
Deferred income taxes 10,888 14,487
Changes in current assets and liabilities:
Trade accounts receivable (1,603,584) (1,230,529)
Inventories (902,381) (1,462,627)
Other current assets 82,461 (109,166)
Other assets -- --
Trade accounts payable 1,591,224 680,018
Taxes payable 213,712 580,553
Accrued salaries, wages and other
expenses (453,043) 46,917
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Net cash used in operating activities (25,871) (297,654)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (333,996) (353,794)
Purchase of patents -- --
Other -- --
----------- -----------
Net cash used in investing activities (333,996) (353,794)
FINANCING ACTIVITIES
Repayment of management loan 100,000 --
Proceeds from notes payable -- --
Payments of debt -- (6,008,076)
Issuance of preferred stock -- --
Issuance of capital stock -- 6,908,929
Cash dividend paid on common stock (103,000) --
----------- -----------
Net cash used in financing activities (3,000) 900,853
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Decrease in cash (362,867) 249,405
Cash at beginning of period 3,797,650 336,981
----------- -----------
Cash at end of period $ 3,434,783 $ 586,386
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See notes to consolidated financial statements
6
ADCO TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Adco Technologies Inc. annual report on Form 10-K for the year ended December
31, 1995.
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets" effective
January 1, 1996. Based on current circumstances this adoption has no effect on
the Company's income statement.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last in, first out (LIFO) method.
Current costs, based on the first in, first out (FIFO) method would have
resulted in reported amounts approximately $109,000 higher at March 31, 1996
and approximately the same at December 31, 1995.
3. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes".
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
4. LITIGATION AND REGULATION
There are judicial and administrative claims pending or contemplated against
the Company. Management believes that the resolution of these matters should
not have a material effect upon the Company's financial condition, results of
operations and cash flows.
The Environmental Protection Agency ("EPA") has notified the Company that it is
a Potentially Responsible Party ("PRP") at, and requested that the Company
provide information with respect to, two Superfund sites. Regarding the first
site, the Company has informed the EPA that it believes that it is not
responsible for any materials at the site and that the Company believes that
the previous owners of the property upon which the Company's facility is
located may be responsible for the materials in question located at this site.
The Company has not made and has not been requested to make any expenditures
toward the clean-up of this site, and has not been contacted further by the
EPA. At the second site, the Company has been notified by the EPA that it is
the source of a de minimis quantity of waste materials. The Company spent
approximately $6,000 in clean-up costs at this site and the Company does not
expect that its clean-up costs will exceed $10,000.
7
ADCO TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LITIGATION AND REGULATION (CONTINUED).
The Michigan Department of Natural Resources ("MDNR") has identified the
property on which the Company's plant is located as a site of environmental
contamination. The Company has recorded a reserve of $148,000 at March 31,
1996, as an estimate of the amount of loss that is reasonably possible to be
incurred for this site. While management of the Company does not believe that
the Company's exposure in these matters will have a material adverse effect on
the business and financial condition of the Company, there can be no assurance
that the Company will not incur additional significant liabilities in
connection with these matters or that such liabilities will not have a material
adverse effect on the Company's business and financial condition.
Regarding each of the above-mentioned environmental matters, the Company has
notified Nalco Chemical Company ("Nalco") that Nalco may be responsible for
indemnifying ATI for expenditures made for the above matters. Pursuant to the
terms of an agreement entered into in connection with ATI's acquisition of
Adco, the Company is indemnified to a limited extent against certain
environmental liabilities by Nalco. In certain instances, the indemnification
is limited by a $100,000 deductible and a limitation on the amount of
indemnification's ranging from $341,600 to $3.5 million depending upon the type
of claim made, with an aggregate limitation of $3.5 million for all such claims
made.
5. SUBSEQUENT EVENT
In May, the Company declared it's second quarterly dividend of $.02 per share,
payable on June 5, 1996, to the holders of common stock of record on May 22,
1996. The aggregate amount of the common stock dividend will be approximately
$103,000.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE THREE MONTH PERIOD ENDED MARCH 31, 1996 VS. THE THREE MONTH PERIOD ENDED
MARCH 31, 1995
Net sales for the quarter were $11.0 million, a decrease of 3.8% compared with
$11.4 million for the first quarter of 1995. The sales decline was mainly
attributable to an anticipated drop in automotive OEM sales as Ford Motor
Company began to scale-back production of the F-series trucks. Window
manufacturing sales were down for the quarter due to normal order pattern.
Extremely cold weather in January impacted construction and roofing related
sales, tempering sales growth somewhat. For the quarter, roofing sales were up
moderately over first quarter 1995 sales, while construction sales had a
double-digit increase over the year earlier period. Windshield replacement
product sales were up slightly compared to first quarter 1995. Urethane sales
increased significantly in March as the packaging problem experienced in the
fourth quarter of 1995 was resolved.
Gross profit for the quarter was $2.8 million, down $575,000, or 17%, from $3.4
million for the same period last year. Gross profit as a percentage of sales
declined to 25.6% for the first quarter of 1996 from 29.7% in the year earlier
period. The decline in gross profit was due to lower sales, credits issued
against first quarter 1996 sales for the residual effects of the urethane
packaging problem from 1995, and increases in raw material costs.
Selling, general and administrative expenses were $1.4 million, down 8.3% from
the first quarter of 1995. Lower travel and advertising expenses for the
quarter, as well as reduced commission expense due to lower sales, helped
soften the impact of the decline in gross profit.
Research and development expenditures for the quarter were $370,000, an
increase of 7.7% compared to $343,000 in the year earlier period. The increase
was mainly the result of hiring additional research personnel.
Operating income decreased $478,000, or 30.7%, to $1.1 million for the first
quarter of 1996. Operating income as a percentage of sales declined to 9.8% in
the first quarter of 1996 from 13.7% in the first quarter of 1995.
There was no interest expense in the first quarter of 1996, a decrease of
$105,000 from the first quarter of 1995. The decrease was attributable to the
repayment of all of the Company's outstanding bank debt from the proceeds of
the initial public offering of the Company's common stock in February, 1995.
Income taxes decreased $113,000, or 21.4%, to $415,000 in the first quarter of
1996 from $528,000 in the first quarter of 1995. This was the result of the
decrease in taxable income. The effective tax rate decreased to 37.0% in the
first quarter of 1996 from 37.4% in the year earlier period.
Net income decreased $175,000, or 19.8%, to $709,000 in the first quarter of
1996 from $883,000 in the same period last year. Net income as a percentage of
sales decreased to 6.5% in the first quarter of 1996 from 7.8% in the first
quarter of 1995.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (CONTINUED)
THE THREE MONTH PERIOD ENDED MARCH 31, 1995 VS. THE THREE MONTH PERIOD ENDED
MARCH 31, 1994
Net sales increased $3.7 million, or 48.1%, to $11.4 million in the first three
months of 1995 from $7.7 million in the first three months of 1994. The gain
in sales was mainly attributable to significant increases in roofing,
automotive OEM and window manufacturing markets. Roofing sales accounted for
$2.0 million, or 54% of the increase, as the Company increased sales of roofing
tape products. Automotive OEM sales accounted for $.8 million, or 22% of the
increase, mainly from further penetration of hot melt products to existing
customers. Window manufacturing sales accounted for $.4 million, or 11% of the
increase, due to increased sales of our butyl products for insulated windows.
Gross profit increased $1.3 million, or 63.0%, to $3.4 million in the first
three months of 1995 from $2.1 million in the first three months of 1994.
Gross profit as a percentage of sales increased to 29.7% for the first three
months of 1995 from 26.9% in the year earlier period. Increases in certain
raw material costs were offset by an increase in sales of our higher margin
roofing products, increased capacity utilization and selected price increases.
Selling, general and administrative expenses increased $.3 million, or 23.7%,
to $1.5 million in the first three months of 1995 from $1.2 million in the
first three months of 1994. The increase was primarily attributable to the
hiring of additional salespersons, increased advertising expenditures,
increased commissions to outside representatives and increased legal and
accounting costs associated with filings and reports required as a public
corporation.
Research and development costs increased $33,000, or 10.6%, to $343,000 in the
first three months of 1995 from $310,000 in the year earlier period. The
increase was mainly the result of the hiring of research personnel and
independent outside testing of new products.
Operating income increased $1.0 million, or 174.9%, to $1.6 million in the
first three months of 1995 from $.6 million in the year earlier period.
Operating income as a percentage of sales improved to 13.7% in the first three
months of 1995 from 7.4% in the first three months of 1994.
Interest expense decreased $46,000, or 30.7%, to $105,000 in the first three
months of 1995 from $151,000 in the year earlier period. The decrease was
attributable to the repayment of all of the Company's outstanding bank debt
from the proceeds of the initial public offering of the Company's common stock
in February, 1995.
Income taxes increased $359,000, or 212.4%, to $528,000 in the first three
months of 1995 from $169,000 in the first three months of 1994. This was the
result of the increase in taxable income. The effective tax rate decreased to
35.7% in the first three months of 1995 from 40.2% in the year earlier period.
This was primarily attributable to non-deductible expenses becoming a smaller
proportion of income.
Net income increased $703,000, or 280.0%, to $953,000 in the first three months
of 1995 from $251,000 in the year earlier period. Net income as a percentage
of sales increased to 8.4% in the first three months of 1995 from 3.3% in the
first three months of 1994.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had working capital of $11.8 million,
compared to $11.1 million at December 31, 1995. During the three month period,
trade accounts receivable increased $1.6 million and inventories increased
$900,000. Subsequently, the majority of these trade accounts receivable have
been collected. Trade accounts payable were $2.5 million at March 31, 1996, an
increase of $1.6 million from December 31, 1995.
For the three month period ended March 31, 1996 capital expenditures were
$333,996. This compares to $354,000 in the year earlier period. The majority
of the expenditures were for efficiency and capacity improvements on current
equipment, production equipment for new products and construction in the plant
and offices.
In February, 1996, the Company paid a quarterly common stock dividend of $.02
per share, or $103,000.
CONTINGENT MATTERS
There are judicial and administrative claims pending or contemplated against
the Company. Management believes that the resolution of these matters should
not have a material effect upon the Company's business and financial condition,
results of operations or cash flows.
The EPA has notified the Company that it is a PRP at, and requested that the
Company provide information with respect to, two Superfund sites. Regarding the
first site, the Company has informed the EPA that it believes that it is not
responsible for any materials at the site and that the Company believes that
the previous owners of the property upon which the Company's facility is
located may be responsible for the materials in question located at this site.
The Company has not made and has not been requested to make any expenditures
toward the clean-up of this site, and has not been contacted further by the
EPA. At the second site, the Company has been notified by the EPA that it is
the source of a de minimis quantity of waste materials. The Company spent
approximately $6,000 in clean-up costs at this site and the Company does not
expect that its clean-up costs will exceed $10,000.
The Michigan Department of Natural Resources has identified the property on
which the Company's plant is located as a site of environmental contamination.
The Company has recorded a reserve of $148,000 at March 31, 1996, as an
estimate of the amount of loss that is reasonably possible to be incurred for
this site. While management of the Company does not believe that the Company's
exposure in these matters will have a material adverse effect on the business
and financial condition of the Company, there can be no assurance that the
Company will not incur additional significant liabilities in connection with
these matters or that such liabilities will not have a material adverse effect
on the Company's business and financial condition.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (CONTINUED)
CONTINGENT MATTERS (CONTINUED)
Regarding each of the above-mentioned environmental matters, the Company has
notified Nalco Chemical Company ("Nalco") that Nalco may be responsible for
indemnifying ATI for expenditures made for the above matters. Pursuant to the
terms of an agreement entered into in connection with ATI's acquisition of
Adco, the Company is indemnified to a limited extent against certain
environmental liabilities by Nalco. In certain instances, the indemnification
is limited by a $100,000 deductible and a limitation on the amount of
indemnification's, ranging from $341,600 to $3.5 million depending upon the
type of claim made, with an aggregate limitation of $3.5 million for all such
claims made.
NEW PRONOUNCEMENT
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets" effective
January 1, 1996. Based on current circumstances this adoption has no effect on
the Company's income statement.
ADDITIONAL INFORMATION
In May, the Company retained the services of the investment banking firm of
Schroder Wertheim & Co. Incorporated to evaluate strategic options including a
sale of the Company.
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings per Share
(b) Reports on Form 8-K - none
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADCO TECHNOLOGIES INC.
(Registrant)
Date May 13, 1996 /s/ Charles E. Sax
- - ------------------- ------------------------------------------
Charles E. Sax
President and Chief Executive Officer
Date May 13, 1996 /s/ David J. Fuchs
- - ------------------- ------------------------------------------
David J. Fuchs
Vice President and Chief Financial Officer
14
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NO.
- - ------- --------------------------------- --------
11 Computation of Earnings per Share 15
27 Financial Data Schedule 16