1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): October 2, 1996
------------------
Quaker State Corporation
------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-2677 25-0742820
- ------------------------ --------------------- ---------------------
(State of incorporation) (Commission File No.) (IRS Employer ID No,)
225 E. John Carpenter Freeway, Irving, Texas 75062
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(972) 868-0400
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former Name or Former Address, If Changed Since Last Report)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 30, 1996, Quaker State Corporation (the "Registrant")
entered into a Stock Purchase Agreement (the "Agreement") to acquire Medo
Industries, Inc. and its affiliated companies (collectively "Medo"), privately
held corporations with their principal place of business in Tarrytown, New
York, from Mark Owens (aka Mark Reichenbaum), David Owens (aka David
Reichenbaum), Eric Owens (aka Eric Reichenbaum) and Harvey Stevens (hereafter
collectively the "Medo Shareholders"). Medo is engaged in the design,
manufacture and marketing of air freshener products primarily for use in
automobiles. The closing under the Agreement occurred on October 2, 1996. The
purchase price of $160 million was arrived at through arm's length
negotiations. The cash consideration for the transaction included the payment
of certain pre-existing indebtedness of Medo totaling approximately $17.7
million. The source of funds used was a borrowing under the Registrant's $165
million Credit Agreement, dated as of September 30, 1996, with Texas Commerce
Bank National Association. Additional consideration for the transaction was
the agreement of the Medo Shareholders to purchase on the open market
approximately 250,000 shares of the Registrant's Capital Stock from time to
time over the next six months.
No material relationship between the Registrant, its affiliates, officers and
directors and any of the Medo Shareholders existed prior to the transaction.
The assets of Medo include trademarks and trade names, manufacturing equipment,
and leased warehouse, manufacturing and distribution facilities. The
Registrant intends to use the assets for substantially the same purposes as
previously used by Medo.
The description of the transaction contained herein is qualified in its
entirety by the Agreement, which is attached hereto as Exhibit 2 and
incorporated in this item by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
(i) Audited combined balance sheets of Medo as of December 31, 1995,
1994 and 1993, and the related combined statements of income and retained
earnings and cash flows for the periods ended December 31, 1995, 1994 and 1993.
(ii) As of the date of filing of this Current Report on Form 8-K it is
impractical for the Registrant to provide the interim unaudited combined
financial statements for the acquired business which are required by this Item
7(a). In accordance with Item 7(a) of Form 8-K, such interim financial
statements will be filed by an amendment to this Form 8-K within 60 days after
October 16, 1996.
(b) Pro Forma Financial Information.
As of the date of filing this Current Report on Form 8-K, it is
impracticable for the Registrant to provide the pro forma financial information
required by this Item 7(b). In accordance with Item 7(b) of Form 8-K, such pro
forma financial information will be filed by an amendment to this Form 8-K
within 60 days after October 16, 1996.
3
(c) Exhibits.
Exhibit No. Description
----------- -----------
2(a) Stock Purchase Agreement by and among the Registrant,
and the Medo Shareholders dated as of August 30,
1996, with list of omitted schedules and exhibits,
filed herewith.
2(b) Amendment No. 1 to Stock Purchase Agreement dated as
of October 2, 1996, filed herewith
23 Consent of Independent Accountants, filed herewith
4
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 hereunto duly authorized.
QUAKER STATE CORPORATION
(Registrant)
DATE: October 7, 1996
By: /s/ Conrad A. Conrad
-----------------------------
Conrad A. Conrad
Vice Chairman and
Chief Financial Officer
5
Audited Combined Financial Statements
Medo Industries, Inc.,
Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
December 31, 1995
6
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Audited Combined Financial Statements
December 31, 1995
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Audited Combined Financial Statements
Combined Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . 2
Combined Statements of Income and Retained Earnings . . . . . . . . . . . 3
Combined Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . 4
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . 5
7
Report of Independent Auditors
Board of Directors and Stockholders
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
We have audited the accompanying combined balance sheets of Medo Industries,
Inc., Medo Manufacturing Corp. and Medo Industries Canada, Ltd. as of
December 31, 1995 and 1994, and the related combined statements of income and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Companies' 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 Medo Industries,
Inc., Medo Manufacturing Corp. and Medo Industries Canada, Ltd. at December 31,
1995 and 1994, and the combined results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
March 22, 1996
8
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Combined Balance Sheets
DECEMBER 31
1995 1994
-------------------------------
ASSETS
Current assets:
Cash $ 32,490 $ 44,677
Accounts receivable, net of allowance for uncollectible
accounts of $181,000 in 1995 and $208,500 in 1994 13,119,234 8,343,304
Inventory 8,100,422 6,526,662
Prepaid expenses and other current assets 490,773 167,906
Due from employees 56,878 44,431
-------------------------------
Total current assets 21,799,797 15,126,980
Fixed assets 4,166,098 2,408,813
Other assets 3,066,013 870,463
Total assets $ 29,031,908 $ 18,406,256
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 922,834 $ 514,580
Accounts payable and accrued expenses 6,009,653 3,642,676
Notes payable 340,000
Current portion of long-term debt 2,944,444 2,466,667
Current portion of lease liability 143,865 53,745
-------------------------------
Total current liabilities 10,360,796 6,677,668
Long-term debt, less current portion 6,083,333 1,944,444
Lease liability, less current portion 790,673 1,054,053
Stockholders' equity:
Common stock 78,514 78,514
Retained earnings 11,718,592 8,651,577
-------------------------------
Total stockholders' equity 11,797,106 8,730,091
Commitments and contingencies
Total liabilities and stockholders' equity $ 29,031,908 $ 18,406,256
===============================
See accompanying notes.
9
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Combined Statements of Income and Retained Earnings
YEAR ENDED DECEMBER 31
1995 1994
------------------------------
REVENUES $ 60,124,582 $ 43,667,222
Cost of goods sold 31,171,348 23,390,621
------------------------------
Gross profit 28,953,234 20,276,601
EXPENSES
Selling expenses 9,206,120 7,214,421
General and administrative expenses 5,456,118 3,932,449
------------------------------
Income before other expenses and income taxes 14,290,996 9,129,731
Other expenses (income):
Interest expense 727,681 366,013
Gain on sale of fixed assets (4,124) (1,600)
Relocation expense 84,777 1,738,773
------------------------------
Income before income taxes 13,482,662 7,026,545
Income taxes 142,000 145,000
------------------------------
Net income 13,340,662 6,881,545
Retained earnings at beginning of year 8,651,577 7,182,820
Distributions to stockholders (10,273,647) (5,412,788)
------------------------------
Retained earnings at end of year $ 11,718,592 $ 8,651,577
==============================
See accompanying notes.
10
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Combined Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1994
-----------------------------
OPERATING ACTIVITIES
Net income $ 13,340,662 $ 6,881,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,267,797 1,400,439
Provision for losses on accounts receivable (27,500) 27,500
Lease liability (173,260) 1,003,480
Gain on sale of fixed assets (4,124) (1,600)
Changes in operating assets and liabilities:
Increase in accounts receivable (4,748,430) (2,518,300)
Increase in inventory (454,617) (1,198,338)
(Increase) decrease in prepaid expenses and
other current assets (322,867) 137,478
Increase in due from employees (12,447) (35,831)
Decrease (increase) in other assets 118,637 (472,788)
Increase in accounts payable and accrued
expenses and bank overdraft 2,775,231 907,977
-----------------------------
Net cash provided by operating activities 11,759,082 6,131,562
INVESTING ACTIVITIES
Net assets of acquisition (3,666,410)
Purchases of fixed assets (2,800,878) (1,055,831)
Proceeds from sale of fixed assets 13,000 1,600
-----------------------------
Net cash used in investing activities (6,454,288) (1,054,231)
FINANCING ACTIVITIES
Long-term debt borrowings 8,500,000 3,000,000
Repayments of long-term debt (3,883,334) (2,900,000)
Proceeds from note payable 18,525,000 7,910,000
Repayments of note payable (18,185,000) (8,010,000)
Distributions to stockholders (10,273,647) (5,412,788)
-----------------------------
Net cash used in financing activities (5,316,981) (5,412,788)
-----------------------------
Decrease in cash (12,187) (335,457)
Cash at beginning of year 44,677 380,134
-----------------------------
Cash at end of year $ 32,490 $ 44,677
=============================
See accompanying notes.
11
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements
December 31, 1995
1. ORGANIZATION
Medo Industries, Inc. ("Industries"), a New York corporation and Medo
Industries Canada, Ltd. ("Canada") a Canadian corporation, are engaged in the
wholesale distribution of auto accessories. Medo Manufacturing Corp.
("Manufacturing") is a Maryland corporation engaged in the manufacture of auto
accessories, all of which are sold to Industries and Canada. Industries, Canada
and Manufacturing ("the Company") have common ownership sufficient to provide a
basis for presenting combined financial position, results of operations and
cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company conform to generally accepted accounting
principles (GAAP). The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts and disclosures reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. A summary of
significant accounting policies follows:
COMBINATION
Significant intercompany accounts and transactions have been eliminated.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out method) or
market.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization are computed
using straight-line and accelerated methods over the estimated useful lives of
the respective assets.
OTHER ASSETS
Other assets include goodwill, trademark license and non-compete agreements
which are being amortized on the straight- line basis over their estimated
useful lives of three to five years.
RECLASSIFICATIONS
Certain 1994 amounts have been reclassified to conform to the 1995
presentation.
12
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized upon shipment to the customer. Sales are made primarily
to automotive retailers and mass merchandisers principally in North America.
The Company records an allowance for losses based upon the expected
collectibility of its receivables. Sales to a major customer accounted for
approximately 24% and 21% of total sales in 1995 and 1994, respectively. No
other single customer accounted for sales in excess of 10%.
CASH EQUIVALENTS
The Company considers all liquid investments with maturities of three months or
less, at the time of purchase, to be cash equivalents.
3. ACQUISITIONS
On August 24, 1995, the Company acquired the Ozium Air Sanitizer product line
from Blue Coral Inc. for $3,666,410. The acquisition included substantially all
of the assets of the Ozium Product line (principally inventory of $1,119,143)
and resulted in the Company recording goodwill in the amount of $2,547,267. In
addition, the Company entered into a non- compete agreement with Blue Coral,
Inc. The acquisition was accounted for by the purchase method and was financed
through a $3.5 million term loan bearing interest at 6.54% per annum (See Note
7).
4. INVENTORY
Inventory consists of the following:
DECEMBER 31
1995 1994
---------------------------
Raw materials $3,909,302 $2,581,604
Work in process 1,224,851 767,361
Finished goods 2,966,269 3,177,697
---------------------------
$8,100,422 $6,526,662
===========================
13
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
5. FIXED ASSETS
Fixed assets consist of the following:
DECEMBER 31
1995 1994
---------------------------
Leasehold improvements $ 739,505 $ 392,852
Furniture and fixtures 677,591 649,583
Machinery and equipment 6,269,094 4,318,374
Tools and dies 589,118 473,451
Automobiles and trucks 39,976 39,976
---------------------------
8,315,284 5,874,236
Less accumulated depreciation and amortization 4,149,186 3,465,423
---------------------------
$4,166,098 $ 2,408,813
===========================
6. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31
1995 1994
---------------------------
Intangibles:
Goodwill $2,565,657 $ 18,390
Trademark license agreements 710,000
Non-competition agreements 150,000 150,000
---------------------------
2,715,657 878,390
Less accumulated amortization 300,323 777,243
---------------------------
2,415,334 101,147
Deposits and advances 650,679 769,316
---------------------------
$3,066,013 $ 870,463
===========================
14
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
7. NOTES PAYABLE AND LONG-TERM DEBT
The Company has a $5.5 million line of credit which expires on May 31, 1996. As
of December 31, 1995, the Company has $340,000 of borrowings outstanding under
this line of credit. Interest under the line of credit is payable monthly at
the bank's prime rate (8.5% per annum at DecemberE31, 1995) and borrowings are
secured by all of the assets of the Company.
Long-term debt consists of the following:
DECEMBER 31
1995 1994
---------------------------
Term loans $9,027,777 $4,411,111
Less current portion 2,944,444 2,466,667
---------------------------
$6,083,333 $1,944,444
===========================
The long-term debt above consists of three term loans bearing interest at rates
ranging from 5.82% to 8.875% per annum. These rates are subject to
renegotiation or determination by formula. The loans are due in equal monthly
installments and collateralized by all the assets of the Company.
The term loans require the Company to meet certain financial covenants relating
to, among others, current ratio, liabilities to tangible net worth, capital
expenditures, fixed charge coverage and tangible net worth.
The aggregate maturities of long-term debt at December 31, 1995 are as follows:
1996 $2,944,444
1997 1,833,337
1998 1,700,004
1999 1,700,004
2000 849,988
----------
$9,027,777
==========
During the years ended December 31, 1995 and 1994, the Company made interest
payments of approximately $695,000 and $371,000, respectively.
15
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
8. INCOME TAXES
Industries and Manufacturing have elected to have their taxable net income
reported by its individual stockholders under Subchapter S of the Internal
Revenue Code. Accordingly, the accompanying financial statements do not contain
any provision for current or deferred federal or Maryland state income taxes.
Included within the provision for income taxes are Canadian and certain state
taxes.
During 1995 and 1994, the Company made income tax payments of approximately
$140,000 and $90,000, respectively.
9. PROFIT SHARING PLAN
The Company has a profit sharing plan in which all employees who meet certain
minimum eligibility requirements participate. During 1995 and 1994, the Company
recorded voluntary contributions of approximately $182,000 and $143,000,
respectively. Contributions are allocated to participants based on a percentage
of their compensation, subject to certain limitations, and participants can
make voluntary contributions of up to 15% of their compensation.
10. STOCK ARRANGEMENTS
At December 31, 1995 and 1994, the Companies has the following shares
authorized, issued and outstanding:
Issued and
Common Stock Authorized Outstanding
- --------------------------------------------------------------------------------
Industries and Manufacturing:
Class A, voting 180 80
Class B, non-voting 20 20
Canada:
Voting 100 100
16
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space as well as manufacturing and warehouse
facilities. The future minimum payments for operating leases having initial or
remaining noncancelable lease terms in excess of one year at December 31, 1995
are as follows:
1996 $ 1,200,000
1997 1,200,000
1998 1,301,000
1999 1,267,000
2000 1,363,000
Thereafter 9,911,000
-----------
16,242,000
Less sublease 1,659,000
-----------
$14,583,000
===========
The leases contain provisions for the Company to pay its proportionate share of
operating costs, escalation provisions and renewals. Rent expense under all
operating leases aggregated approximately $1,144,000 ($605,000 paid to related
parties, see below)and $759,000 in 1995 and 1994, respectively.
During 1994, Manufacturing entered into a 15 year lease commitment with a
company, three officers of which are employees of Manufacturing, for a new
manufacturing and warehouse facility to replace its existing space. The new
lease commenced in 1995 and is guaranteed by Industries. As a result of this
new lease, Manufacturing, in 1994, incurred approximately $739,000 in costs
associated with early termination of existing leases and the write-off of
leasehold improvements. In addition, Manufacturing is committed under another
long-term lease which it vacated during 1995 and began sub-leasing in January
1996 for the remaining term of the lease. At December 31, 1994, the Company
recorded an anticipated loss over the term of that lease of $1 million
representing the present value of the lease payments and occupancy costs less
estimated sublease income. During 1995, the Company recorded expenses of
approximately $249,000 in connection with the lease and, based on the executed
sublease included in the above table, reduced the anticipated loss from $1
million to $836,000.
As of December 31, 1995, the Company has entered commitments to acquire
approximately $700,000 in fixed assets.
17
Audited Combined Financial Statements
Medo Industries, Inc.,
Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
December 31, 1994
18
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Audited Combined Financial Statements
December 31, 1994
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . 1
Audited Combined Financial Statements
Combined Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Combined Statements of Income and Retained Earnings . . . . . . . . . . . . . 3
Combined Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . 4
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . 5
19
Report of Independent Auditors
Board of Directors and Stockholders
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
We have audited the accompanying combined balance sheets of Medo Industries,
Inc., Medo Manufacturing Corp. and Medo Industries Canada, Ltd. as of December
31, 1994 and 1993, and the related combined statements of income and retained
earnings and cash flows for the years then ended. These financial statements
are the responsibility of the Companies' 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 Medo Industries,
Inc., Medo Manufacturing Corp. and Medo Industries Canada, Ltd. at December 31,
1994 and 1993, and the combined results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
March 24, 1995
20
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Combined Balance Sheets
DECEMBER 31
1994 1993
ASSETS
Current assets:
Cash $ 44,677 $ 380,134
Accounts receivable, net of allowance for uncollectible
accounts of $208,500 in 1994 and $181,000 in 1993 8,343,304 5,852,504
Inventory 6,526,662 5,328,324
Prepaid expenses and other current assets 167,906 305,384
Due from employees 44,431 8,600
----------------------------
Total current assets 15,126,980 11,874,946
Fixed assets, net of accumulated depreciation and
amortization of $3,465,423 in 1994 and $2,672,352 in 1993 2,408,813 2,413,075
Other assets, net of accumulated amortization
of $777,243 in 1994 and $1,036,897 in 1993 870,463 738,021
----------------------------
Total assets $18,406,256 $15,026,042
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 514,580 $ 253,427
Accounts payable and accrued expenses 3,696,421 3,005,260
Notes payable 100,000
Current portion of long-term debt 2,466,667 1,466,667
----------------------------
Total current liabilities 6,677,668 4,825,354
Long-term debt, less current portion 1,944,444 2,844,444
Lease liability 1,054,053 94,910
Stockholders' equity:
Common stock 78,514 78,514
Retained earnings 8,651,577 7,182,820
----------------------------
Total stockholders' equity 8,730,091 7,261,334
----------------------------
Commitments and contingencies
----------------------------
Total liabilities and stockholders' equity $18,406,256 $15,026,042
============================
See accompanying notes.
21
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Combined Statements of Income and Retained Earnings
YEAR ENDED DECEMBER 31
1994 1993
------------------------------
REVENUES $43,667,222 $33,869,729
Cost of goods sold 23,390,621 18,979,391
------------------------------
Gross profit 20,276,601 14,890,338
EXPENSES
Selling expenses 7,214,421 5,797,004
General and administrative expenses 3,932,449 4,304,915
------------------------------
Income before other expenses and income taxes 9,129,731 4,788,419
Other expenses (income):
Interest expense 366,013 277,284
Share of income of partnership (134,315)
Gain on sale of fixed assets (1,600) (4,749)
Relocation expense 1,738,773
------------------------------
Income before income taxes 7,026,545 4,650,199
Income taxes 145,000 73,000
------------------------------
Net income 6,881,545 4,577,199
Retained earnings at beginning of year 7,182,820 7,687,526
Distributions to stockholders (5,412,788) (5,081,905)
------------------------------
Retained earnings at end of year $ 8,651,577 $ 7,182,820
==============================
See accompanying notes.
22
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Combined Statements of Cash Flows
YEAR ENDED DECEMBER 31
1994 1993
-----------------------------
OPERATING ACTIVITIES
Net income $ 6,881,545 $ 4,577,199
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,400,439 1,198,823
Provision for losses on accounts receivable 27,500 (29,500)
Share of income of partnership (134,315)
Lease liability 1,003,480 (8,142)
(Gain) loss on sale of fixed assets (1,600) 3,554
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,518,300) (467,119)
(Increase) decrease in inventory (1,198,338) 832,102
Decrease in prepaid expenses and
other current assets 137,478 3,358
(Increase) decrease in due from employees (35,831) 5,225
(Increase) in other assets (472,788) (21,154)
Increase in accounts payable and accrued
expenses and bank overdraft 907,977 761,345
-----------------------------
Net cash provided by operating activities 6,131,562 6,721,376
INVESTING ACTIVITIES
Purchases of fixed assets (1,055,831) (1,233,322)
Proceeds from sale of fixed assets 1,600 41,815
-----------------------------
Net cash used in investing activities (1,054,231) (1,191,507)
FINANCING ACTIVITIES
Long-term debt borrowings 3,000,000 2,000,000
Repayments of long-term debt (2,900,000) (1,022,222)
Revolving line of credit borrowings 7,910,000 2,360,000
Repayments of note payable (8,010,000) (3,560,000)
Distributions to stockholders (5,412,788) (5,081,905)
-----------------------------
Net cash used in financing activities (5,412,788) (5,304,127)
-----------------------------
(Decrease) increase in cash (335,457) 225,742
Cash at beginning of year 380,134 154,392
-----------------------------
Cash at end of year $ 44,677 $ 380,134
=============================
See accompanying notes.
23
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements
December 31, 1994
1. ORGANIZATION
Medo Industries, Inc. ("Industries"), a New York corporation and Medo
Industries Canada, Ltd. ("Canada") a Canadian corporation, are engaged in the
wholesale distribution of auto accessories. Medo Manufacturing Corp.
("Manufacturing") is a Maryland corporation engaged in the manufacture of auto
accessories, all of which are sold to Industries and Canada. Industries, Canada
and Manufacturing ("the Company") have common ownership, sufficient to provide
a basis for presenting combined financial position, results of operations and
cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMBINATION
Significant intercompany accounts and transactions have been eliminated.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out method) or
market.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization are computed
using straight-line and accelerated methods over the estimated useful lives of
the respective assets.
OTHER ASSETS
Other assets include non-competition (1994 -- $150,000; 1993 -- $750,000) and
trademark license agreements ($710,000) which are being amortized on the
straight-line basis over the lives of the agreements (1-5 years).
REVENUE RECOGNITION
Revenue is recognized upon shipment to the customer. Accounts receivable are
due primarily from automotive retailers and mass merchandisers whose operations
are located throughout North America and other parts of the world. The Company
records an allowance for losses based upon the expected collectibility of such
receivables.
24
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all liquid investments with maturities of three months or
less, at the time of purchase, to be cash equivalents.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31
1994 1993
---------------------------
Raw materials $2,581,604 $1,913,574
Work in process 767,361 559,740
Finished goods 3,177,697 2,855,010
---------------------------
$6,526,662 $5,328,324
===========================
4. FIXED ASSETS
Fixed assets consist of the following:
DECEMBER 31
1994 1993
---------------------------
Leasehold improvements $ 392,852 $ 613,222
Furniture and fixtures 649,583 593,692
Machinery and equipment 4,318,374 3,441,221
Tools and dies 473,451 407,459
Automobiles and trucks 39,976 29,833
---------------------------
5,874,236 5,085,427
Less: accumulated depreciation and amortization 3,465,423 2,672,352
---------------------------
$2,408,813 $2,413,075
===========================
25
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company has a $4.5 million line of credit which expires on May 31, 1995. As
of December 31, 1993, the Company has $100,000 of borrowings outstanding under
this line of credit. Interest under the line of credit is payable monthly at
the bank's prime rate (8.5% at December 31, 1994) and borrowings are secured by
all of the assets of the Company.
Long-term debt consists of the following:
DECEMBER 31
1994 1993
---------------------------
Term loans $4,411,111 $4,311,111
Less current portion 2,466,667 1,466,667
---------------------------
$1,944,444 $2,844,444
===========================
The long-term debt above consists of three term loans bearing interest ranging
from 5.82% to 9.07% subject to renegotiation or determination by formula. The
loans are due in equal monthly installments and collateralized by all the
assets of the Companies.
The term loans require the Company to meet certain financial covenants relating
to, among others, current ratio, liabilities to net worth, capital
expenditures, fixed charge coverage and net worth.
The aggregate maturities of long-term debt at December 31, 1994 are as follows:
1995 $2,466,667
1996 1,811,111
1997 133,333
----------
$4,411,111
==========
During the years ended December 31, 1994 and 1993, the Company made interest
payments of approximately $371,000 and $285,000, respectively.
26
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
6. INCOME TAXES
Industries and Manufacturing have elected to have their taxable net income
reported by its individual stockholders under Subchapter S of the Internal
Revenue Code. Accordingly, the accompanying financial statements do not contain
any provision for current or deferred federal or Maryland state income taxes.
Included within the provision for income taxes are Canadian and certain state
taxes.
During 1994 and 1993, the Company made income tax payments of approximately
$90,000 and $96,000, respectively.
7. INVESTMENT IN PARTNERSHIP
The Company had an investment in a partnership, under which it guaranteed its
share of the debt of the partnership which was terminated and liquidated during
1993. In 1993, the Company recorded its share of partnership profits of
$134,315.
8. PROFIT SHARING PLAN
The Company has a profit sharing plan in which all employees who meet certain
minimum eligibility requirements participate. During 1994 and 1993, the Company
made voluntary contributions of approximately $143,000 and $132,000,
respectively. Contributions are allocated to participants based on a percentage
of their compensation, subject to certain limitations, and participants can
make voluntary contributions of up to 15% of their compensation.
9. STOCK ARRANGEMENTS
At December 31, 1994 and 1993, the Companies has the following shares
authorized, issued and outstanding:
Issued and
Common Stock Authorized Outstanding
- ----------------------------------------------------------------------------
Industries and Manufacturing:
Class A, voting 180 80
Class B, non-voting 20 20
Canada:
Voting 100 100
27
Medo Industries, Inc., Medo Manufacturing Corp.
and Medo Industries Canada, Ltd.
Notes to Combined Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space as well as manufacturing and warehouse
facilities. The future minimum payments for operating leases having initial or
remaining noncancelable lease terms in excess of one year at December 31, 1994
are as follows:
1995 $ 1,217,000
1996 1,200,000
1997 1,200,000
1998 1,301,000
1999 1,267,000
Thereafter 11,274,000
-----------
$17,459,000
===========
The leases contain provisions for the Company to pay its proportionate share of
operating costs, escalation provisions and renewals. Rent expense under all
operating leases aggregated approximately $759,000 in 1994 and $817,000 in
1993.
During 1994, Manufacturing entered into a 15 year lease commitment with a
company, three officers of which are employees of Manufacturing, for a new
manufacturing and warehouse facility to replace its existing space. The new
lease will commence in 1995 and is guaranteed by Industries. As a result of
this new lease, Manufacturing incurred approximately $739,000 in costs
associated with early termination of existing leases and the write-off of
leasehold improvements. In addition, Manufacturing is committed under another
long-term lease which it plans to vacate and sublease during 1995. In 1994, the
Company, based on a recent appraisal, has recorded an anticipated loss over the
term of that lease of $1 million representing the present value of the lease
payments and occupancy costs less estimated sublease income.
The above table includes the Company's commitment under all its leases, but
excludes any potential sublease income.
As of December 31, 1994, the Company has entered commitments to acquire
approximately $1 million in fixed assets.
28
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2(a) Stock Purchase Agreement by and among the Registrant,
and the Medo Shareholders dated as of August 30, 1996, with list of omitted schedules and exhibits,
filed herewith.
2(b) Amendment No. 1 to Stock Purchase Agreement dated as of
October 2, 1996, filed herewith
23 Consent of Independent Auditors, filed herewith.