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) April 24, 2002
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Alltrista Corporation
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(Exact name of registrant as specified in its charter)
Delaware 0-21052 35-1828377
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
555 Theodore Fremd Avenue, Rye, New York 10580
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 967-9400
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(Former name or former address, if changed since last report.)
Item 2. Acquisition of Assets
On April 24, 2002, Alltrista Corporation ("Alltrista") acquired the
business of Tilia International, Inc., and its subsidiaries, Tilia, Inc. and
Tilia Canada, Inc. (collectively, "Tilia") pursuant to an asset purchase
agreement. The purchase price consisted of approximately (a) $135 million in
cash, with certain closing adjustments, (b) $10 million in cash to be held in
escrow, (c) $15 million in the form of subordinated seller notes, and (d) up to
$25 million contingent upon the future performance of the business and
operations of Tilia.
The asset purchase agreement provides, among other things:
o that the $135 million cash portion of the purchase price will be
reduced to reflect certain adjustments related primarily to
transaction costs;
o that of the $10 million of the purchase price to be held in
escrow, $5 million will be held until March 31, 2003 and $5
million will be held until June 30, 2005, to provide a fund for
the payment of any successful indemnification claims against Tilia
under the asset purchase agreement;
o that the $15 million of the purchase price to be paid in the form
of subordinated seller notes will consist of (1) a $10 million
subordinated seller note due and payable on March 31, 2003
(without interest) and (2) a $5 million subordinated seller note
due and payable on April 24, 2004 (together with interest at a
rate equal to the effective interest rate on our Credit Facility
(see "Other Events - New Credit Facility") compounding
semi-annually and payable at maturity into the escrow account
described above); and
o that the contingent consideration of up to $25 million will be
paid in 2005 and will be determined as follows:
o if the Average Annual Business EBITDA (as defined in the
asset purchase agreement) of Tilia is less than $40 million,
no amount is required to be paid;
o if the Average Annual Business EBITDA of Tilia is between $40
million and $46 million, an amount between $10 million and
$25 million is required to be paid; and
o if the Average Annual Business EBITDA of Tilia is greater
than $46 million, an amount of $25 million is required to be
paid.
We may, at our option, elect to pay such contingent consideration, if
any, either in cash or in shares of our common stock; provided that we may pay
such contingent consideration in stock only if (a) the average closing price per
share of our common stock on the New York Stock Exchange for the 10 consecutive
trading days ending on the second trading day prior to the date of payment is at
least $5.00 per share and (b) the product obtained by multiplying the average
trading volume for this same period by the price per share (as such number is
determined pursuant to clause (a) above) is at least $250,000. We may only pay
the contingent consideration in cash to the extent that we will be in compliance
with the Credit Facility after giving effect to
such payment and there will be at least $20 million of availability remaining
under our Credit Facility. To the extent contingent consideration is not paid in
cash pursuant to the preceding sentence, it will be paid in shares of our common
stock, without restriction for trading price or volume.
Also in April 2002, we issued $150 million of 9 3/4% Senior
Subordinated Notes to qualified institutional buyers in a private placement
pursuant to Rule 144A under the Securities Act of 1933. See "Other Events - 9
3/4% Senior Subordinated Notes." The net proceeds from this offering of
approximately $143.5 million, together with initial borrowings under our Credit
Facility (see "Other Events - New Credit Facility"), were used principally to
acquire the business of Tilia, to repay the outstanding indebtedness under our
prior credit facility, to pay related fees and expenses and for cash on hand.
Item 5. Other Events
NEW CREDIT FACILITY
On April 24, 2002, we refinanced our existing senior indebtedness with
a new $100 million senior secured credit facility (the "Credit Facility")
pursuant to the terms of a Credit Agreement (the "Credit Agreement"), with Bank
of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer,
Canadian Imperial Bank of Commerce, as Syndication Agent, National City Bank of
Indiana, as Documentation Agent, and the other Lenders party thereto, including
The Bank of New York, Fleet National Bank, Harris Trust and Savings Bank, U.S.
Bank National Association, Allfirst Bank, Transamerica Business Capital
Corporation, and Union Federal Bank of Indianapolis.
The Credit Agreement, among other things, provides for a new senior
credit facility for up to $100 million of senior secured loans, consisting of a
$50 million five-year revolving credit facility (the "Revolving Credit
Facility") and a $50 million five-year term loan facility (the "Term Loan
Facility").
The Revolving Credit Facility includes up to an aggregate of $10
million in standby and commercial letters of credit and up to an aggregate of
$10 million in swing line loans. As of April 24, 2002, Alltrista had not drawn
any of the $50 million available under the Revolving Credit Facility, although
Alltrista used some availability in connection with pre-existing letters of
credit.
The Term Loan Facility was drawn in full, in the amount of $50 million,
at the closing of the Credit Facility. Principal and interest under the Term
Loan Facility are payable quarterly, in accordance with a specified amortization
schedule, with the final payment of all amounts outstanding thereunder being due
on April 24, 2007.
The Revolving Credit Facility and the Term Loan Facility bear interest
at a rate equal to (i) the Eurodollar Rate (as determined by the Administrative
Agent) pursuant to an agreed formula or (ii) a Base Rate equal to the higher of
(a) the Bank of America prime rate and (b) the
2
federal funds rate plus .50%, plus, in each case, an applicable margin ranging
from .75% to 1.50% for Base Rate loans and from 2.00% to 2.75% for Eurodollar
Rate loans.
The Credit Agreement contains certain restrictions on the conduct of
our business, including, among other things, restrictions, generally, on:
o incurring debt;
o disposing of certain assets;
o making investments;
o exceeding certain agreed capital expenditures;
o creating or suffering liens on Alltrista's assets;
o completing certain mergers, consolidations, and with permitted
exceptions, Acquisitions;
o declaring dividends;
o redeeming or prepaying other debt; and
o transactions with affiliates.
The Credit Agreement also requires Alltrista to maintain certain
financial covenants, including a minimum fixed charge ratio, a maximum total
leverage ratio, a maximum senior leverage ratio, and a minimum consolidated net
worth.
The occurrence of certain events or conditions described in the Credit
Agreement (subject to grace periods in certain cases) constitutes an event of
default. If an event of default occurs, the Administrative Agent may, at the
request or consent of the Lenders, among other things, declare the entire
outstanding balance of principal and interest of all outstanding loans to be
immediately due and payable. The events of default include, among other things:
o our failure to pay any principal, interest, or other fees when
due;
o any material judgment or order entered against Alltrista;
o any inaccuracy in the representations and warranties;
o failure to observe certain covenants under the Credit Agreement
(including, e.g., the financial covenants);
o bankruptcy, insolvency or receivership proceedings with respect to
Alltrista; and
o a change of control of Alltrista.
The Credit Agreement provides that Alltrista shall make certain
required prepayments of the Term Loan and Revolving Loan upon the happening of
certain specified events including, among other things, the sale of Equity
Securities and proceeds received from Dispositions, each with permitted
exceptions.
In connection with entering into the Credit Agreement, all of our
direct and indirect domestic subsidiaries, including Hearthmark, Inc., Alltrista
Plastics Corporation, Alltrista Newco Corporation, Alltrista Zinc Products,
L.P., Penn Video, Inc., Lafayette Steel & Aluminum Corporation, Caspers Tin
Plate Company, Unimark Plastics, Inc., LumenX Corporation, Alltrista
3
Unimark, Inc., TriEnda Corporation, Tilia, Inc. (formerly known as Alltrista
Acquisition I, Inc.), Tilia Direct, Inc. (formerly known as Alltrista
Acquisition II, Inc.), and Tilia International, Inc. (formerly known as
Alltrista Acquisition III, Inc.), and Quoin Corporation (collectively, the
"Domestic Subsidiaries"), have agreed to guarantee the obligations of Alltrista
under the Credit Agreement.
Pursuant to the Securities Pledge Agreement, all obligations under the
Credit Agreement are secured by a security interest in all of the capital stock
or other equity interests of each of our existing or future direct or indirect
domestic subsidiaries, and 65% of the voting capital stock or other equity
interests and 100% of the nonvoting stock or other equity interests of each of
our (or any of our direct or indirect domestic subsidiaries') existing or future
direct foreign subsidiaries. Pursuant to the terms of a Security Agreement and
an Intellectual Property Security Agreement, the obligations under the Credit
Agreement are also secured by a security interest in substantially all of the
assets and properties of Alltrista and the Domestic Subsidiaries.
The foregoing is a summary of the material provisions of the Credit
Agreement and certain of the documents entered into by Alltrista and the
Domestic Subsidiaries in connection therewith. Attached hereto as exhibits are
copies of the Credit Agreement and certain documents entered into by Alltrista
which contain the actual terms of such documents, and which are incorporated
herein by reference.
9 3/4% SENIOR SUBORDINATED NOTES
On April 24, 2002, we issued 9 3/4 % senior subordinated notes (the
"Notes") to qualified institutional buyers in the aggregate principal amount of
$150 million under an Indenture among Alltrista, the Domestic Subsidiaries, and
The Bank of New York, as trustee, in a private transaction that is not subject
to the registration requirements of the Securities Act of 1933, as amended. The
net proceeds from this offering were approximately $143.5 million.
We may issue additional Notes under the Indenture from time to time.
All Notes issued under the Indenture are treated as a single class for all
purposes under the Indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. We issued the Notes in
denominations of $1,000 and integral multiples of $1,000. The Notes will mature
on May 1, 2012.
Interest on the Notes accrues at the rate of 9 3/4 % per annum and is
payable semi-annually in arrears on May 1 and November 1, commencing on November
1, 2002. We will make each interest payment to the holders of record on the
immediately preceding April 15 and October 15.
The Notes are unconditionally guaranteed on a senior subordinated basis
by the Domestic Subsidiaries. The Notes and the guarantees will be unsecured
senior subordinated obligations. Accordingly, they will rank:
o junior to all of Alltrista and the Domestic Subsidiaries' existing
and future senior
4
debt, including the Credit Facility;
o equally with all of Alltrista and the Domestic Subsidiaries'
existing and future unsecured senior subordinated obligations that
do not expressly provide that they are subordinated to the Notes;
and
o senior to any of Alltrista and the Domestic Subsidiaries' future
debt that expressly provides that it is subordinated to the Notes.
The obligations under the Notes and the related guarantees are
subordinated to the obligations under the Credit Facility.
On or after May 1, 2007, we may redeem all or part of the Notes at any
time at a redemption price ranging from 100% to 104.875% of the principal
amount, plus accrued and unpaid interest and liquidated damages, if any. Prior
to May 1, 2005, we may redeem up to 35% of the aggregate principal amount of the
Notes with the net cash proceeds from certain public equity offerings at a
redemption price of 109.750% of the principal amount, plus accrued and unpaid
interest and liquidated damages, if any. If a change of control of Alltrista
occurs, we must offer to repurchase the Notes at a price of 101% of the
principal amount, plus accrued and unpaid interest and liquidated damages, if
any.
The Indenture governing the Notes will, among other things, limit the
ability of Alltrista and certain of its subsidiaries to:
o incur additional indebtedness;
o pay dividends or distributions on, or redeem or repurchase,
capital stock;
o make investments;
o engage in transactions with affiliates;
o incur liens;
o transfer or sell assets; and
o consolidate, merge or transfer all or substantially all of our
assets.
The occurrence of certain events or conditions (subject to grace
periods in certain cases) constitutes an event of default under the Notes. If an
event of default occurs, the trustee or holders of at least 25% of the aggregate
principal amount of the then outstanding Notes may, among other things, declare
the entire outstanding balance of principal and interest of all outstanding
loans to be immediately due and payable. The events of default include, among
other things:
o our failure to pay any principal, interest, or other fees when due
under the Notes;
o failure to pay certain judgments entered against Alltrista or
certain of its subsidiaries;
o failure to observe certain covenants under the Notes;
o certain bankruptcy events with respect to Alltrista or certain of
its subsidiaries; and
o a default under certain other indebtedness.
5
Under a Registration Rights Agreement, Alltrista and the Domestic
Subsidiaries agreed to:
o file a registration statement within 60 days after the issue date
of the Notes enabling the holders of the Notes to exchange the
Notes for publicly registered Notes with identical terms;
o use their best efforts to cause the registration statement to
become effective within 180 days after the issue date of the
Notes;
o consummate the exchange offer within 30 business days after the
effective date of the registration statement for the Notes;
o file a shelf registration statement for the resale of the Notes if
Alltrista cannot effect an exchange offer and in certain other
circumstances;
o use its best efforts to cause the shelf registration statement to
be declared effective; and
o keep the shelf registration statement effective for a period of at
least two years subject to certain provisions of the Registration
Rights Agreement.
If we do not comply with certain of our obligations under the
registration rights agreement, we have agreed to pay liquidated damages.
The Notes are eligible for trading in The PORTAL(SM) Market. Alltrista
does not intend to list the Notes on any securities exchange.
The foregoing is a summary of the material provisions of the Indenture, the
Notes, and the Registration Rights Agreement. Attached hereto as exhibits are
copies of the Indenture, the form of Notes, and the Registration Rights
Agreement which contain the actual terms of such documents, and which are
incorporated herein by reference.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
Audited consolidated balance sheets of Tilia as of December 31, 2000
and 2001 and related consolidated statements of operations, shareholders' equity
and cash flows for each of the years ended December 31, 1999, 2000 and 2001. See
"Index to Financial Statements."
(b) Pro Forma Financial Information.
Unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 2001 of Alltrista which gives effect to the
acquisition of Tilia as if it had occurred on January 1, 2001. See "Index to
Financial Statements."
(c) Exhibits. The following Exhibits are filed herewith as part of this
report:
6
Exhibit Description
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4.1 Indenture, dated as of April 24, 2002, among Alltrista, the Domestic
Subsidiaries, and The Bank of New York, as trustee, and form of Note
attached as Exhibit A thereto
10.1 Credit Agreement, dated as of April 24, 2002, among Alltrista, Bank of
America, N.A., as Administrative Agent, Swing Line Lender, and L/C
Issuer, Canadian Imperial Bank of Commerce, as Syndication Agent,
National City Bank of Indiana, as Documentation Agent, and the other
Lenders party thereto, including The Bank of New York, Fleet National
Bank, Harris Trust and Savings Bank, U.S. Bank National Association,
Allfirst Bank, Transamerica Business Capital Corporation, and Union
Federal Bank of Indianapolis
10.2 Guaranty Agreement, dated as of April 24, 2002, by the Domestic
Subsidiaries to Bank of America, NA., as administrative agent
10.3 Security Agreement, dated as of April 24, 2002, among Alltrista, the
Domestic Subsidiaries, and Bank of America, N.A., as administrative
agent
10.4 Intellectual Property Security Agreement, dated as of April 24, 2002,
among Alltrista, the Domestic Subsidiaries and Bank of America, N.A.,
as administrative agent
10.5 Securities Pledge Agreement, dated as of April 24, 2002, among
Alltrista, Quoin Corporation, Alltrista Newco Corporation, Caspers Tin
Plate Company, and Bank of America, NA., as administrative agent
10.6 Asset Purchase Agreement, dated as of March 27, 2002, among Alltrista,
Tilia International, Inc., Tilia, Inc., Tilia Canada, Inc., and Andrew
Schilling
10.7 Amendment No. 1 to the Asset Purchase Agreement, dated as of April 24,
2002, among Alltrista, Tilia International, Inc., Tilia, Inc., Tilia
Canada, Inc., and Andrew Schilling
10.8 Unsecured Subordinated Note, dated as of April 24, 2002, by Alltrista
in favor of Tilia International, Inc. in the principal amount of
$5,000,000
10.9 Unsecured Subordinated Note, dated as of April 24, 2002, by Alltrista
in favor of Tilia International, Inc. in the principal amount of
$10,000,000
10.10 Escrow Agreement, dated as of April 24, 2002, among Alltrista, Tilia
International, Inc., Tilia, Inc., Tilia Canada, Inc., Andrew Schilling,
and J. P. Morgan Trust Company, National Association, as escrow agent
7
Exhibit Description
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10.11 Long Term Escrow Agreement, dated as of April 24, 2002, among
Alltrista, Tilia International, Inc., Andrew Schilling, and J. P.
Morgan Trust Company, National Association, as escrow agent
10.12 Purchase Agreement, dated as of April 10, 2002, Alltrista, the Domestic
Subsidiaries, and Banc of America Securities LLC, CIBC World Markets
Corp., and NatCity Investments, Inc., a representatives of the several
initial purchasers
10.13 Registration Rights Agreement, dated as of April 24, 2002, among
Alltrista, the Domestic Subsidiaries, and Banc of America Securities
LLC, CIBC World Markets Corp., and NatCity Investments, Inc., a
representatives of the several initial purchasers
23.1 Consent of Arthur Andersen LLP
99.1 Press Release of Alltrista, dated April 24, 2002
8
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 hereunto duly authorized.
Dated: May 8, 2002
ALLTRISTA CORPORATION
By: /s/ Ian G.H. Ashken
-------------------------------------
Name: Ian G.H. Ashken
Title: Vice Chairman, Chief Financial
Officer, and Secretary
9
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Public Accountants.................................... F-2
Consolidated Statements of Operations
for the Years Ended December 31, 1999, 2000 and 2001........................ F-3
Consolidated Balance Sheets as of December 31, 2000 and 2001................ F-4
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 2000 and 2001........................ F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1999, 2000 and 2001........................ F-6
Notes to Consolidated Financial Statements.................................. F-7
Unaudited Pro Forma Condensed Financial Statements
Pro Forma Condensed Consolidated Statements of Operations
for the Year Ended December 31, 2001........................................F-18
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Tilia International, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Tilia
International, Inc. (a Cook Islands Corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December
31, 2001, 2000 and 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial position of Tilia International, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
San Francisco, California
January 30, 2002
F-2
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- --------------
Net sales ..................................... $183,825,138 $132,079,478 $ 79,996,637
Cost of goods sold ............................ 89,668,207 59,896,104 32,655,501
------------ ------------ ------------
Gross profit .................................. 94,156,931 72,183,374 47,341,136
------------ ------------ ------------
Operating expenses
Sales and marketing .......................... 43,567,390 34,111,543 20,763,454
Product development and engineering .......... 2,267,751 1,860,911 994,116
General and administrative ................... 15,196,506 10,217,678 6,137,069
Depreciation and amortization ................ 1,361,526 872,760 744,304
Bad debts (reserve reversal) expense ......... (427,041) 771,380 254,127
Noncash stock compensation expense ........... 198,501 157,342 --
------------ ------------ ------------
Total operating expenses ................... 62,164,633 47,991,614 28,893,070
------------ ------------ ------------
Income from operations ........................ 31,992,298 24,191,760 18,448,066
Other (expense) income ........................ (700,767) 226,653 428,869
------------ ------------ ------------
Net income before income tax .................. 31,291,531 24,418,413 18,876,935
Provision for income tax ...................... 8,512,529 7,385,799 4,998,982
------------ ------------ ------------
Net income .................................... $ 22,779,002 $ 17,032,614 $ 13,877,953
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2001 2000
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents ................................ $ 18,914,934 $ 374,989
Accounts receivable, net ................................. 22,981,731 20,193,828
Inventory, net ........................................... 22,088,654 22,733,265
Prepaid inventory ........................................ 2,363,965 1,663,197
Prepaid income taxes ..................................... -- 726,438
Prepaid media and other expenses ......................... 1,675,540 1,178,216
Deferred tax asset ....................................... 5,632,150 4,654,389
Deposits and other current assets ........................ 212,387 106,273
------------ -----------
Total current assets ................................... 73,869,361 51,630,595
------------ -----------
Property and equipment, net ............................... 3,266,982 2,606,797
Long-term note receivable, net ............................ 546,000 --
Long-term deferred tax asset .............................. 122,084 --
Intellectual property, net ................................ 600,000 800,000
------------ -----------
Total assets ............................................. $ 78,404,427 $55,037,392
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ......................................... $ 3,535,528 $ 6,170,601
Accrued liabilities ...................................... 13,761,415 10,086,977
Income taxes payable ..................................... 3,543,120 --
Bank loan payable ........................................ -- 4,335,000
------------ -----------
Total current liabilities .............................. 20,840,063 20,592,578
------------ -----------
Shareholders' Equity
Series A preferred stock, no par value, 2,860,000 shares
authorized, issued and outstanding ..................... 4,468,058 4,468,058
Common stock, no par value, 30,000,000 shares authorized,
6,041,734 and 5,845,355 shares issued and outstanding in
2001 and 2000, respectively ............................ 3,305,902 2,911,022
Stock subscriptions receivable ........................... (237,000) (182,668)
Retained earnings ........................................ 50,027,404 27,248,402
------------ -----------
Total shareholders' equity ................................ 57,564,364 34,444,814
------------ -----------
Total liabilities and shareholders' equity ............. $ 78,404,427 $55,037,392
============ ===========
All shares and amounts, except for Series A preferred stock, have been restated
to retroactively reflect the five for one stock split in October 2000.
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- --------------
OPERATING ACTIVITIES:
Net income .............................................. $ 22,779,002 $ 17,032,614 $ 13,877,953
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 1,611,900 872,760 744,304
Gain on sale of property and equipment ............... (4,241) (673) (376)
Bad debts (reserve reversal) expense ................. (427,041) 771,380 254,127
Noncash stock compensation expense ................... 198,501 157,342 --
Deferred income taxes ................................ (1,099,845) (2,155,009) (2,499,380)
Utilization of prior years' net operating losses ..... -- -- 1,226,425
Changes in current assets and liabilities:
Accounts receivable .................................... (2,360,862) (11,673,037) (6,351,239)
Inventory .............................................. 644,611 (13,384,628) (7,159,527)
Prepaid inventory ...................................... (700,768) 105,025 (1,581,861)
Prepaid income taxes ................................... 726,438 (726,438) --
Prepaid media and other expenses ....................... (497,324) (160,177) (485,725)
Deposits and other current assets ...................... (106,114) 1,022,160 (1,077,815)
Accounts payable and accrued liabilities ............... 1,039,365 8,592,276 5,750,799
Income taxes payable ................................... 3,543,120 (1,596,685) 1,253,701
------------ ------------- ------------
Net cash provided by (used in) operating activities ..... 25,346,742 (1,143,090) 3,951,386
------------ ------------- ------------
INVESTING ACTIVITIES:
Net payments for purchase of
property and equipment ............................... (1,983,980) (2,535,966) (622,932)
Issuance of long-term note receivable .................. (629,864) -- --
------------ ------------- ------------
Net cash used in investing activities ................... (2,613,844) (2,535,966) (622,932)
------------ ------------- ------------
FINANCING ACTIVITIES:
Dividend payment ....................................... -- (1,436,775) (1,993,940)
Net (payment of) proceeds from bank loan ............... (4,335,000) 4,335,000 (459,536)
Purchase of treasury stock ............................. -- (200,000) --
Net proceeds from issuance of common stock ............. 96,379 100 64,487
Proceeds from payment of subscriptions receivable....... 45,668 -- --
------------ ------------- ------------
Net cash (used in) provided by financing activities ..... (4,192,953) 2,698,325 (2,388,989)
------------ ------------- ------------
Net change in cash ...................................... 18,539,945 (980,731) 939,465
Cash and cash equivalents at beginning of year .......... 374,989 1,355,720 416,255
------------ ------------- ------------
Cash and cash equivalents at end of year ................ $ 18,914,934 $ 374,989 $ 1,355,720
============ ============= ============
Supplemental cash flow information
Cash paid during the year for
Interest ............................................. $ 370,327 $ 105,980 $ 15,727
Income taxes, net of refund .......................... $ 5,342,816 $ 11,863,931 $ 5,018,235
Non-cash
Dividends declared, not paid ......................... $ -- $ -- $ 908,398
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NUMBER OF SHARES
----------------------------------------
SERIES A SERIES B SERIES A
PREFERRED PREFERRED COMMON PREFERRED
STOCK STOCK STOCK STOCK
----------- --------------- ------------ --------------
Balance at
January 1, 1999 ...... 2,860,000 3,700,000 -- $ 4,468,058
Net income ............
Utilization of prior
years' net
operating losses
and realization of
deferred tax
assets ...............
Exercise of stock
options .............. 1,612,185
Dividends declared.....
Balance at
December 31,
1999 ................. 2,860,000 3,700,000 1,612,185 $ 4,468,058
Net income ............
Exercise of stock
options .............. 2,500
Additional shares
issued ............... 730,670
Noncash stock
compensation
expense ..............
Conversion to
common ............... (3,700,000) 3,700,000
Purchase of
treasury stock ....... (200,000)
Dividends declared.....
Balance at
December 31,
2000 ................. 2,860,000 -- 5,845,355 $ 4,468,058
Net income ............
Exercise of stock
options .............. 196,379
Noncash stock
compensation
expense ..............
Payment of
subscriptions
receivable ...........
Balance at
December 31,
2001 ................. 2,860,000 -- 6,041,734 $ 4,468,058
========= ========== ========= ===========
SERIES B STOCK
PREFERRED COMMON SUBSCRIPTIONS RETAINED TOTAL
STOCK STOCK RECEIVABLE EARNINGS EQUITY
-------------- -------------- --------------- ---------------- ----------------
Balance at
January 1, 1999 ...... $ 1,480,000 $ -- $ -- $ (459,617) $ 5,488,441
Net income ............ 13,877,953 13,877,953
Utilization of prior
years' net
operating losses
and realization of
deferred tax
assets ............... 1,226,425 1,226,425
Exercise of stock
options .............. 64,487 64,487
Dividends declared..... (2,674,171) (2,674,171)
------------ ------------
Balance at
December 31,
1999 ................. $ 1,480,000 $ 1,290,912 $ -- $ 10,744,165 $ 17,983,135
Net income ............ 17,032,614 17,032,614
Exercise of stock
options .............. 100 100
Additional shares
issued ............... 182,668 (182,668) --
Noncash stock
compensation
expense .............. 157,342 157,342
Conversion to
common ............... (1,480,000) 1,480,000 --
Purchase of
treasury stock ....... (200,000) (200,000)
Dividends declared..... (528,377) (528,377)
------------ ------------
Balance at
December 31,
2000 ................. $ -- $ 2,911,022 $ (182,668) $ 27,248,402 $ 34,444,814
Net income ............ 22,779,002 22,779,002
Exercise of stock
options .............. 196,379 (100,000) 96,379
Noncash stock
compensation
expense .............. 198,501 198,501
Payment of
subscriptions
receivable ........... 45,668 45,668
----------- ------------
Balance at
December 31,
2001 ................. $ -- $ 3,305,902 $ (237,000) $ 50,027,404 $ 57,564,364
============ =========== =========== ============ ============
All shares and amounts, except for Series A preferred stock, have been
restated to retroactively reflect the five for one stock split in October 2000.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BUSINESS AND BASIS OF PRESENTATION:
Tilia International, Inc., a Cook Islands Corporation, develops and markets
patented vacuum packaging systems for home use, primarily for food storage. The
accompanying consolidated financial statements include the accounts of Tilia
International, Inc. and its wholly owned subsidiaries, Tilia Cyprus, Tilia
Hungary, Tilia Canada, Inc. and Tilia, Inc. (collectively, the "Company"). All
intercompany transactions have been eliminated in consolidation.
A Tilia vacuum packaging system employs a patented vacuum-sealing appliance
combined with a patented, technologically advanced plastic bag or with an array
of accessories such as canisters, lids and bottle stoppers. The appliance
removes air from the bag or other container before creating an airtight seal,
resulting in protection unlike other household food storage bags and containers
on the market. The Company's patented bags are also sold as separate,
replaceable supplies, resulting in a recurring stream of revenue. The systems
are sold under the FoodSaver trademark.
Tilia, Inc., the U.S. subsidiary, manages operations and sales worldwide.
Product manufacturing is concentrated in the Far East using third party
manufacturers. Sales are concentrated in the United States, representing 96% of
2001 revenue.
Tilia's products are sold through independent sales representatives to
national and regional retail chains. The Company also sells directly to the
consumer through television infomercials, the Internet and other direct to
consumer promotions. In addition to generating direct sales, the infomercial
serves as an advertising tool creating awareness and demand at retail for the
product line.
Sales fall into two distinct categories. These are the retail business and
the direct-to-consumer business. In 2001, retail revenue was $138.1 million, up
from $86.9 million in 2000 and $39.8 million in 1999. Bag revenue (excluding
bags in kits) was 25%, 24% and 27% of retail revenue in 2001, 2000 and 1999,
respectively. Retail sales accounted for 75%, 66% and 50% of the Company's
revenues in 2001, 2000 and 1999, respectively.
In the direct-to-consumer category, the Company sells a significant volume
through television infomercials. In 2001, infomercial revenue was $40.9 million,
compared to $43.3 million and $38.3 million in 2000 and 1999, respectively,
accounting for 22%, 33% and 48% of the Company's revenues in 2001, 2000 and
1999, respectively. Bag revenue was 10%, 12% and 12% of infomercial revenue in
2001, 2000 and 1999, respectively. For the infomercial business, the Company
receives the revenue for the full consumer price (including shipping and
handling charges), ships directly to the end-user and pays variable fees for
third party services and airtime. In addition, the Company recognized $4.8
million in other direct-to-consumer (phone and internet orders) revenue or 3% of
total 2001 revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company is subject to risks associated with dependence on a single type
of product, dependence on key individuals, dependence on a select few third
party manufacturers, competition from other companies and products, the reliance
on a few key customers, the high number of bankruptcies in the retail market,
the requirement for continued successful development and marketing of its
products and the availability of supplies. Currently, each appliance has either
one or two manufacturing sources and all are manufactured in the Far East. The
Company has two bag suppliers, one in Korea and one in the United States. Third
parties in the Far East and the United States manufacture accessories such as
canisters, universal lids and bottle stoppers. The Company has various patents
due to expire in the years 2005 to 2018, making the Company subject to risks
associated with competition from other companies and products.
F-7
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CASH AND CASH EQUIVALENTS
The Company invests excess cash in investments with original maturities of
less than three months. The investments consist of time deposits and money
market funds and are stated at cost, which approximates market value. The
Company considers such investments to be cash equivalents for purposes of the
financial statements.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of reserves for doubtful accounts and
returns and discounts of $2.9 million and $2.7 million as of December 31, 2001
and 2000, respectively. Amounts due from four customers accounted for 66% of the
Company's receivables as of December 31, 2001.
INVENTORIES
Inventories are stated at the lower of average cost (which approximates
first-in first-out cost) or market. Inventories consist of the following:
In thousands 2001 2000
- ------------ ------- -------
Appliance and system kits .......... $11,144 $12,380
Supplies and accessories ........... 11,344 11,026
------- -------
Subtotal ........................... 22,488 23,406
Inventory reserve .................. (399) (673)
------- -------
Net inventory ...................... $22,089 $22,733
======= =======
PREPAID INVENTORY
The Company has agreements with certain suppliers to pay deposits in advance
of shipment for purchase orders. These deposits range from 20 to 100 percent of
purchases that are expected to be received within a timeframe that ranges from a
week to a month. As of December 31, 2001, the Company has prepaid for $2.4
million of inventory.
PREPAID MEDIA AND OTHER EXPENSES
Direct advertising costs (primarily media expenses) related to infomercial
sales are recorded as prepaid assets when paid in advance. The expense is
recognized at the time that the corresponding infomercial revenues are booked,
which is normally within a week after the costs are incurred. The amount of
prepaid media was $0.6 million and $0.8 million as of December 31, 2001 and
2000, respectively. Total media expenses incurred amounted to $20.9 million,
$18.2 million and $11.9 million for the years ended December 31, 2001, 2000 and
1999, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets ranging
from two to five years. Molds and tooling owned by the Company and used by third
party manufacturers are amortized on a straight-line basis over a three-year
period. Leasehold improvements are amortized over the lesser of five years or
the life of the lease. Computer equipment is depreciated over two years.
F-8
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Property and equipment consists of the following:
In thousands 2001 2000
- ------------ ---- ----
Computer equipment ...................... $ 1,711 $ 1,415
Equipment and furniture ................. 1,724 897
Leasehold improvements .................. 211 129
Molds and tooling ....................... 3,022 2,351
-------- --------
Total ................................... 6,668 4,792
Less: accumulated depreciation .......... (3,401) (2,185)
-------- --------
Net property and equipment .............. $ 3,267 $ 2,607
======== ========
INTELLECTUAL PROPERTY
Intellectual property was recorded when the Company was reorganized in 1994
and relates to the business of developing, manufacturing, producing,
distributing and selling vacuum products and consists of patents, plans,
prototypes, and trademarks. Amortization is computed using the straight-line
method over the estimated useful life of the asset (ten years). Intellectual
property consists of the following:
In thousands 2001 2000
- ------------ ---- ----
Intellectual property ............. $ 2,000 $ 2,000
Accumulated amortization .......... (1,400) (1,200)
-------- --------
Net ............................... $ 600 $ 800
======== ========
The realization of these assets is dependent upon continued successful
operations of the Company. The Company periodically reviews the realizability of
its intangible assets.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) No. 25,
"Accounting for Stock Issued to Employees", and related interpretations to
account for employee stock options and restricted stock. Under APB 25, when the
market price of the underlying stock on the date of grant is greater than the
exercise price of employee stock options, stock compensation expense is recorded
as the difference between the market price of the underlying stock and the
exercise price. The Company has adopted the disclosure only provision of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation".
CUSTOMER WARRANTIES
The Company has warranties associated with its appliances. The standard
warranty period is one year. The Company has recorded a reserve for these
warranties.
ACCRUED RETAIL ALLOWANCES
The Company has agreements with customers to reimburse them for advertising
costs. The Company also provides volume incentive rebates to certain customers.
Included in accrued liabilities are reserves for expected advertising costs and
volume incentive rebates totaling $1.4 million and $0.9 million as of December
31, 2001 and 2000, respectively.
F-9
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
REVENUE RECOGNITION
Revenues from sales are recognized upon shipment. Revenues for sales made on
consignment are recognized when the products are sold by the third party
distributor to an end-user. Approximately $176.8 million, $126.6 million, and
$77.3 million, or 96% for each year of the Company's revenues were recognized
from sales in the United States for the years 2001, 2000 and 1999, respectively.
Direct infomercial sales amounted to 22%, 33% and 48% of total sales in 2001,
2000 and 1999, respectively. Sales to the three largest retail customers
accounted for 39%, 36% and 26% of consolidated revenues in 2001, 2000 and 1999,
respectively. Reserves are established for anticipated returns and discounts
based on past experience.
SHIPPING AND HANDLING FEES AND COSTS
Amounts billed to a customer for shipping and handling are classified as
revenue. Costs incurred by the Company for shipping and handling are classified
in cost of goods sold.
VOLUME INCENTIVE REBATE COSTS
Costs related to volume incentive rebates are recorded as a reduction of
revenue at the time the sale is recorded.
FREE PRODUCT COSTS
Costs associated with free products (gifts with purchase) shipped to certain
customers are included in sales and marketing expenses. The Company does not
record revenue related to these items.
INCOME TAXES
The Company follows SFAS No. 109 "Accounting for Income Taxes". SFAS No. 109
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between carrying amounts and
the tax bases of assets and liabilities. A valuation allowance is provided
against deferred tax assets that are not likely to be realizable.
OTHER (EXPENSE) INCOME
Other (expense) income consists of the following:
In thousands 2001 2000 1999
- ------------ ---- ---- ----
(Payments for) proceeds from legal settlement .......... ($ 266) $ 140 $ 300
Foreign exchange loss .................................. (129) (50) 11
Interest income ........................................ 26 193 60
Interest expense ....................................... (370) (106) (17)
Rental income .......................................... -- 7 68
Miscellaneous .......................................... 39 43 7
----- ------ -----
Net (expense) income ................................... ($ 700) $ 227 $ 429
===== ====== =====
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the
F-10
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain 2000 and 1999 balances have been reclassified to conform to the 2001
financial statement presentation.
3. INCOME TAXES:
The Company files tax returns in Hong Kong, Canada, Cyprus and Hungary based
on the earnings of Tilia International, Tilia Canada, Inc., Tilia Cyprus, and
Tilia Hungary, respectively, and in the United States for federal and state
purposes. Taxable income in Hungary is the result of an intercompany royalty of
$11.0 million, $7.9 million and $4.8 million paid to Tilia Hungary during the
years 2001, 2000 and 1999, respectively, for licensing of marketing and
manufacturing intangibles. This revenue is offset by the amortization of
intangible assets held by Tilia Hungary, which for tax purposes have a basis of
$34.5 million and are being amortized over eight years. Additionally, there is
no tax liability in either Hong Kong or Cyprus due to tax losses in these
jurisdictions.
The provision for income taxes consists of the following:
In thousands 2001 2000 1999
- ------------ ---- ---- ----
Federal:
Current ........................... $7,098 $ 7,445 $4,697
Deferred .......................... (872) (1,626) (900)
------ -------- ------
Subtotal .......................... 6,226 5,819 3,797
------ -------- ------
State:
Current ........................... 2,005 2,135 1,575
Deferred .......................... (228) (568) (373)
------ -------- ------
Subtotal .......................... 1,777 1,567 1,202
------ -------- ------
International ...................... 510 -- --
------ -------- ------
Provision for income taxes ......... $8,513 $ 7,386 $4,999
====== ======== ======
The federal statutory rate is reconciled to the effective rate as follows:
2001 2000 1999
---------- ---------- ----------
Income tax provision at federal statutory rate .......... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit ................................................ 3.7 4.1 4.2
Utilization of net operating losses generated
subsequent to reorganization ........................... -- -- (3.5)
Foreign taxes at rates other than U.S. .................. (10.8) (10.4) (7.3)
Reversal of valuation allowance on deferred tax
assets created subsequent to reorganization ............ -- -- (1.4)
Other ................................................... (0.7) 1.6 (0.5)
----- ----- ----
Provision for income taxes .............................. 27.2% 30.3% 26.5%
===== ===== ====
F-11
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The components of the net deferred tax asset of the Company as of December
31, 2001 and 2000 were as follows:
In thousands 2001 2000
- ------------ ---- ----
Depreciation and amortization .......... $ 122 $ 7
Inventory reserve ...................... 163 275
Bad debt reserve ....................... 242 562
Warranty reserve ....................... 98 103
Sales returns reserve .................. 921 547
Accrued retail allowance ............... 557 364
Unicap ................................. 902 1,373
Accrued vacation ....................... 85 54
Other accrued liabilities .............. 1,845 1,108
Other .................................. 819 261
------ ------
Deferred tax asset ..................... $5,754 $4,654
====== ======
4. RELATED PARTY TRANSACTIONS:
As of December 31, 2001 and 2000, subscriptions receivable of $237,000 and
$182,668, respectively (included in Shareholders' Equity) are due from officers
of the Company (See Note 10).
5. LONG-TERM NOTE RECEIVABLE:
In May 2001, the Company entered into a loan agreement with one of its bag
suppliers. The Company loaned amounts totaling $0.63 million, the proceeds of
which were used by the supplier to purchase certain machines and equipment to
improve the processing of the products. In accordance with the agreement, the
supplier is to repay the loan in increments, based on the volume of orders
received from the Company, and therefore, not specifying an exact date. The
loan is secured by the equipment.
As of December 31, 2001, the Company is carrying the Note Receivable as a
long-term asset on its balance sheet for a net amount of $0.55 million. This
amount represents the original loan amount of $0.63 million net of amortization
of $0.08 million. The Company is reserving the loan receivable on a
straight-line basis over a five-year period (the useful life of the equipment
purchased) due to the uncertainty of the timeframe of the repayment of the loan.
The amortization cost is classified as Cost of Goods Sold in the consolidated
statement of operations.
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has operating lease commitments for facilities and certain
equipment. At December 31, 2001, future minimum annual rental payments under
operating leases are as follows:
F-12
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
In thousands
- ------------
2002 ................................................................ $1,789
2003 ................................................................ 1,748
2004 ................................................................ 1,682
2005 ................................................................ 1,620
2006 ................................................................ 1,487
2007 ................................................................ 114
------
Totals .............................................................. $8,440
======
During 2001, 2000 and 1999, rent expense was $2.4 million, $0.88 million,
and $0.46 million respectively. The Company has committed to vacate certain
buildings in February 2002 and has signed a lease agreement for new office space
prior to the expiration of the lease. The 2001 rent expense includes $0.31
million of rent due on office buildings in 2002 after the space is vacated.
EMPLOYMENT CONTRACTS
The President and Chief Executive Officer of Tilia, Inc., who is also a
Director and shareholder of the Company, is employed under a contract with
Tilia, Inc. Severance payments for termination without cause are equal to nine
months of compensation. Under continued employment, the President and CEO is
also entitled to specific mandatory annual bonuses from 2001 through 2004 up to
a total of $110,231.
The Vice President of International Sales and Marketing and the Senior Vice
President of Finance and Administration are also employed under contracts with
Tilia, Inc. Severance payments for termination without cause for each are equal
to six months of compensation. Under continued employment, the Senior Vice
President of Finance and Administration is entitled to specific mandatory annual
bonuses from 2001 through 2004 up to a total of $101,815.
PURCHASE COMMITMENTS
As of December 31, 2001, the Company has committed to purchase $15 million
of inventory from various vendors in the year 2002.
LETTERS OF CREDIT
As of December 31, 2001, the Company had $1.57 million of outstanding
letters of credit issued. Of this amount, $0.57 million represents outstanding
standby letters of credit issued to three vendors to guarantee payment of its
obligations. The Company also had an outstanding commercial letter of credit
issued to two suppliers totaling $1.0 million for inventory purchases. These
amounts outstanding reduced the credit line availability as of December 31,
2001.
LEGAL ACTIONS
From time to time and in the normal course of business, the Company is
involved in legal actions relating to its operations. In management's opinion,
the liabilities, if any, that may ultimately result from such legal actions are
not expected to have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
7. CAPITAL STOCK:
STOCK SPLIT
In October 2000, the Company approved a five-for-one split of the
outstanding common stock. All shares, except for Series A preferred stock, have
been retroactively restated in the financial statements to reflect the stock
split.
F-13
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMON STOCK
In 1999, the Company had authorized 20 million shares of Common Stock, of
which 18 million shares were reserved for conversion of Series A and B Preferred
Stock. As discussed below, all Series B Preferred Stock converted to 3.7 million
shares of Common Stock in 2000. The remaining 2 million shares of Common Stock
were held for issuance in accordance with the employee and management stock
option and incentive programs (See Note 10). Of these available shares, 1.6
million option shares had been exercised and converted to Common Stock as of
December 31, 2001 and 2000.
In 2000 the Company increased the authorized shares of common stock to 30
million shares, of which 2.5 million shares of Common Stock were held for
additional issuance of stock options pursuant to the terms of the 2000 Stock
Incentive Plan (See Note 10).
SERIES A PREFERRED STOCK
The Company has 2.86 million shares of Series A Preferred Stock authorized
and outstanding. All shares of Series A Preferred Stock are convertible into
Common Stock on a one to one basis, adjusted for any stock splits including the
stock split in October 2000 mentioned above, and shall be entitled to vote on a
fully converted basis. Series A Preferred Stock has a liquidation preference on
all of the Company's assets other than the intellectual property.
SERIES B PREFERRED STOCK
At the end of 1999, the Company had 3.7 million shares of Series B Preferred
Stock authorized and outstanding. On a quarterly basis, holders of Series B
Preferred Stock were entitled to receive cumulative dividends, calculated as
3.5% of the Company's consolidated quarterly net revenue. The aggregate of all
dividends to be paid to Series B Preferred Stockholders was not to exceed $4.95
million (Dividend Limit), which was reached during the first quarter of 2000.
All Series B Preferred Stock (recorded at $1.48 million) converted to common
stock upon full payment of the Dividend Limit in 2000.
Dividends paid during 2000, which were declared in 1999, amounted to $1.4
million. Cumulative dividends paid through the end of 2000 amounted to $4.95
million. No dividends were paid in 2001.
8. RETIREMENT PLAN:
Tilia, Inc. has established a defined contribution retirement plan qualified
under the Internal Revenue Code 401(k) for all full time employees. Under the
401(k) plan, Tilia, Inc. makes matching contributions equal to 50% of the
contributions of the employee, not exceeding 3% of the employee's earnings.
Contributions to the 401(k) plan by Tilia, Inc. were $191,239, $79,446 and
$24,042 for 2001, 2000 and 1999, respectively. Additionally, Tilia, Inc. made a
payment under the profit sharing provisions of the 401(k) plan, contributing a
minimum of 3% of every qualifying employee's income. This contribution was
$157,403, $84,785 and $0 in 2001, 2000 and 1999, respectively.
9. LINE OF CREDIT:
In 2000, the Company had a loan agreement with United California Bank
(formerly Sanwa Bank) that provided a revolving credit facility not to exceed
$7.0 million. As of December 31, 2000, the outstanding loan amount was $4.3
million. In January 2001, the credit facility was increased from $7.0 million to
$10.0 million. The minimum effective tangible net worth requirement was
increased from $13.75 million to $26.8 million. All other terms and conditions
of the original credit agreement remain unchanged.
F-14
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
In March 2001, the credit facility was further increased to $12 million. The
loan expired in June 2001 but was extended to November 2001.
After the United California Bank loan agreement expired, the Company
obtained an $18 million credit facility with Union Bank of California. The new
loan expiration date is September 30, 2003.
The loan is secured by virtually all of the Company's assets and includes
covenants and restrictions under which the Company is required to comply with
certain financial ratios and submit periodic financial statements and reports.
These include maintaining a minimum effective tangible net worth of $36 million;
a minimum quick ratio of 1.00:1.00; and an annual minimum net positive profit
before tax at each quarter and fiscal year end. As of December 31, 2001, the
Company was in compliance with all covenants.
Interest on this line of credit is calculated at a variable rate per annum
of 0.625% below Reference rate, or London InterBank Offering Rate (LIBOR) plus
1.7% per annum. A commitment fee of 0.125% per year is charged quarterly on the
unused portion of the revolving loan. The fee will be waived if average usage
for the quarter exceeds 34% of the line of credit.
The loan agreement includes a Letter of Credit Sub-Facility wherein the bank
agrees to issue commercial and/or standby letters of credit on behalf of the
Company of up to $5 million. At no time, however, shall the total principal
amount of the advances outstanding under the line of credit, together with the
total face amount of all letters of credit outstanding, less any partial draws
paid by the bank, exceed the line of credit. As of December 31, 2001, no loan
amount was outstanding while the outstanding commercial and standby letters of
credit totaled $1.57 million (see Note 6 above).
10. RESTRICTED STOCK AND STOCK OPTION PLANS:
Effective March 2000, the Company issued 0.73 million shares of common stock
to two officers. The shares vest ratably over a four-year period. This agreement
granted the Company the right, exercisable at any time during the ninety day
period following the date that the shareholder fails to be employed by the
Company, for any reason or no reason at all, to repurchase all or any portion of
the shares that are not vested at their fair market value but not less than
$0.25 per share (the purchase price of the shares). In connection with the
issuance of these restricted shares, the Company issued four-year full recourse
promissory notes to the officers for a total of $0.18 million (the purchase
price of the restricted shares). The notes bear interest at 6.21%. Each holder
is required to make principal and interest payments annually on the anniversary
date of the stock issuance.
In January 2001, an officer exercised 0.1 million of stock options in
exchange for a secured promissory note for $0.1 million. The note bears interest
at 5.9%.
The Company had originally reserved 2 million shares of Common Stock for
issuance to employees under an employee stock option plan. In August 1996, the
Company implemented the 1996 Executive Stock Option Plan and the 1996 Employee
Stock Option Plan and awarded 1.87 million Common Stock options under these
plans. In October 2000, the Company reserved an additional 2.5 million shares of
common stock for issuance to employees under a second employee stock option
plan, and implemented the 2000 Stock Option plan, under which an additional 1.5
million common stock options were awarded. The Company does not intend to grant
any additional options under the 1996 plans.
Under the terms of the Option Plans, options granted may be either
nonqualified or incentive stock options and the exercise price is determined by
the Board of Directors of the Company. Options may be exercised in installments,
however no options may be exercised within one year from the vesting
commencement or later than ten years from the date of grant. The options fully
vest in 48 months from the vesting commencement date. Vesting commencement on
options granted in
F-15
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
August 1996 was retroactive to the hire date of the employee while those
granted in October 2000 was retroactive to August 1, 1999 for employees hired
before that date and on actual hire dates for employees hired thereafter. The
options granted under the October 2000 plan are subject to repurchase by the
Company at the Company's option, exercisable at any time during the ninety day
period following the date that the shareholder fails to be employed by the
Company for any reason or no reason at all, at the fair market value.
In October 2000, the Company repurchased 0.2 million common shares from an
employee who had exercised his options in 1999 and left the Company in 2000, at
a price of $1 per share or $0.2 million.
Activity under the plan is summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------------- ---------
IN THOUSANDS
Outstanding at January 1, 2000 ........... 29 $ 0.04
Exercised ................................ (3) 0.04
Expired .................................. (10) 0.04
Granted .................................. 1,252 1.00
------ -------
Outstanding December 31, 2000 ............ 1,268 $ 0.99
Exercised ................................ (196) 1.00
Expired .................................. (81) 1.09
Granted .................................. 235 1.64
------ -------
Outstanding at December 31, 2001 ......... 1,226 $ 1.10
Exercisable at December 31, 2001 ......... 576 $ 1.10
====== =======
The following summarizes information about stock options outstanding at
December 31, 2001:
OPTIONS WEIGHTED AVERAGE
EXERCISE OUTSTANDING AT REMAINING
PRICE DECEMBER 31, 2001 CONTRACTUAL LIFE
----- ----------------- ----------------
IN THOUSANDS
$.04 13 4.8
1.00 996 8.2
1.56 110 8.9
1.70 68 8.9
1.79 39 9.0
----- ----- ---
$1.10 1,226 8.0
===== ===== ===
The Company accounts for these plans in accordance with APB Opinion No. 25
under which compensation cost is recorded as the difference between the fair
value and the exercise price of the shares at the date of grant and is recorded
on a straight-line basis over the vesting period of four years for both the
options and the restricted stock. The Board of Directors estimated the fair
value of the shares at the date of grant and compensation expense of $198,501,
$157,342 and $0 was recognized during 2001, 2000 and 1999, respectively, related
to the issuance of stock options and restricted stock issued below this price.
F-16
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Had compensation cost for the stock options and restricted stock granted
been based on the estimated fair value at the award dates, as prescribed by
SFAS No. 123, the Company's proforma net income would have been as follows:
In thousands 2001 2000 1999
- ------------ ---- ---- ----
As reported .......... $22,779 $17,033 $13,878
Pro-forma ............ 22,702 16,951 13,878
======= ======= =======
The fair value determination under SFAS 123 was calculated using the
Black-Scholes option pricing model to value all restricted stock and stock
options granted in 2000 and 2001, using the following range of assumptions, and
assuming no dividends:
RISK FREE EXPECTED EXPECTED
INTEREST RATE VOLATILITY LIFE OF OPTIONS
------------- ---------- ---------------
5.75% -- 6.55% 0% 5 years
============= = =======
F-17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial information as of and for
the year ended December 31, 2001 has been derived from our audited consolidated
financial statements as of such date and for such period and gives pro forma
effect to (1) as if they had been consummated as of January 1, 2001, (a) the
November 2001 sale of the assets of Alltrista's Triangle, TriEnda and Synergy
World divisions (the "TPD Assets"), including the receipt in January 2002 of a
$15.7 million federal income tax refund relating to the sale of the TPD Assets,
and the receipt in March 2002 of a $22.2 million federal income tax refund and
the anticipated receipt of an additional $0.6 million federal income tax refund
resulting from the enactment, in March 2002, of the Job Creation and Workers'
Assistance Act of 2002, and the use of such funds to reduce debt (collectively,
the "Tax Refunds"), (b) the November 2001 sale of our majority interest in
Microlin, LLC (c) the offering of the Notes, (d) the Credit Facility ,and (e)
the use of the proceeds from the offering of the Notes, together with initial
borrowings under the Credit Facility and cash on hand, to acquire the business
of Tilia, to repay the outstanding indebtedness under our previous credit
facility and to pay related fees and expenses; and (2) the Tax Refunds and the
Transactions as if they had been consummated as of December 31, 2001, in the
case of balance sheet data.
The unaudited pro forma financial information is not necessarily
indicative of Alltrista's results of operations or financial position had the
events reflected herein actually been consummated at the assumed dates, nor is
it necessarily indicative of Alltrista's results of operations or financial
position for any future period. The unaudited pro forma condensed consolidated
statements of operations should be read in conjunction with our consolidated
financial statements and the related notes thereto filed with our Form 10-K for
the year ended December 31, 2001, and the consolidated financial statements of
Tilia included herein.
The pro forma adjustments related to the purchase price allocation and
financing of the acquisition of Tilia are preliminary and based on information
obtained to date and are subject to revision as additional information becomes
available. Revisions to the preliminary purchase price allocation and financing
of the acquisition may have a significant impact on the unaudited pro forma
information.
F-18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
DISPOSITIONS-
RELATED
ALLTRISTA PRO FORMA
AS REPORTED ADJUSTMENTS
------------- ---------------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents ................. $ 6,376
Accounts receivable, net .................. 13,986
Income taxes receivable ................... 16,252 $ (15,700) (a)
Inventories, net .......................... 26,994
Deferred taxes on income .................. 4,832 (4,832)(a)
Other current assets ...................... 3,134
--------- -----------
Total current assets ..................... 71,574 (20,532)
--------- -----------
Property, plant and equipment, net ......... 43,543
Goodwill, net .............................. 15,487
Deferred taxes on income ................... 25,417 (17,968)(a)
Other assets ............................... 5,282
--------- -----------
Total assets ............................... $ 161,303 $ (38,500)
========= ===========
LIABILITIES AND EQUITY
Current liabilities
Short-term and current portion of
long-term debt ........................... $ 28,500 $ (23,500)(a)
Accounts payable .......................... 14,197
Other current liabilities ................. 20,842
--------- -----------
Total current liabilities ................ 63,539 (23,500)
--------- -----------
Noncurrent liabilities
Long-term debt ............................ 56,375 (15,000)(a)
Other noncurrent liabilities .............. 6,260
--------- -----------
Total noncurrent liabilities ............. 62,635 (15,000)
Equity ..................................... 35,129
--------- -----------
Total liabilities and equity ............... $ 161,303 $ (38,500)
========= ===========
ACQUISITION-
RELATED
ALLTRISTA TILIA PRO FORMA PRO FORMA
PRO FORMA AS REPORTED ADJUSTMENTS COMBINED
----------- ------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents ................. $ 6,376 $ 18,915 $ (4,221)(b) $ 21,070
Accounts receivable, net .................. 13,986 22,982 36,968
Income taxes receivable ................... 552 -- 552
Inventories, net .......................... 26,994 24,453 51,447
Deferred taxes on income .................. -- 5,632 5,632
Other current assets ...................... 3,134 1,888 5,022
--------- ---------- ---------- ---------
Total current assets ..................... 51,042 73,870 (4,221) 120,691
--------- ---------- ---------- ---------
Property, plant and equipment, net ......... 43,543 3,267 46,810
Goodwill, net .............................. 15,487 -- 100,935(c) 116,422
Deferred taxes on income ................... 7,449 122 7,571
Other assets ............................... 5,282 1,146 12,000(d) 18,214
(214)(e)
--------- ---------- ---------- ---------
Total assets ............................... $ 122,803 $ 78,405 $ 108,500 $ 309,708
========= ========== ========== =========
LIABILITIES AND EQUITY
Current liabilities
Short-term and current portion of
long-term debt ........................... $ 5,000 $ -- $ (5,000)(f) $ --
Accounts payable .......................... 14,197 3,535 17,732
Other current liabilities ................. 20,842 17,305 38,147
--------- ---------- ---------- ---------
Total current liabilities ................ 40,039 20,840 (5,000) 55,879
--------- ---------- ---------- ---------
Noncurrent liabilities
Long-term debt ............................ 41,375 -- (41,375)(f) 212,654
50,000(g)
15,000(h)
147,654(i)
Other noncurrent liabilities .............. 6,260 -- 6,260
--------- ---------- ---------- ---------
Total noncurrent liabilities ............. 47,635 -- 171,279 218,914
Equity ..................................... 35,129 57,565 (57,565)(j) 34,915
(214)(e)
--------- ---------- ---------- ---------
Total liabilities and equity ............... $ 122,803 $ 78,405 $ 108,500 $ 309,708
========= ========== =========== =========
F-19
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND OTHER OPERATING DATA
YEAR ENDED DECEMBER 31, 2001
DISPOSITIONS-
RELATED
ALLTRISTA PRO FORMA
AS REPORTED ADJUSTMENTS
------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net sales ........................................ $ 304,978 $ (62,588)(k)
(711)(l)
Costs and expenses
Cost of sales ................................... 233,676 (60,901)(k)
Selling, general and administrative expenses..... 52,212 (9,061)(k)
(1,670)(l)
Goodwill amortization ........................... 5,153 (4,044)(k)
Special charges (credits) and reorganization
expenses ....................................... 4,978 345(k)
Loss on divestitures of assets .................. 122,887 (122,426)(m)
---------- -------------
Income (loss) before interest, taxes and
minority interest ............................... (113,928) 134,458
Interest expense, net ............................ 11,791 (3,602)(n)
---------- -------------
Income (loss) before taxes and minority
interest ........................................ (125,719) 138,060
Income tax provision (benefit) ................... (40,443) 44,352(o)
Minority interest in loss of consolidated
subsidiary ...................................... 153 (153)(p)
---------- -------------
Net income (loss) ................................ $ (85,429) $ 93,861
========== =============
Basic earnings (loss) per share .................. $ (13.43)
Diluted earnings (loss) per share ................ (13.43)
Weighted average shares outstanding:
Basic ........................................... 6,363
Diluted ......................................... 6,363
Other Data:
EBITDA(u) ....................................... $ 32,734 $ 3,564
Depreciation and amortization ................... 18,797 8,813
Capital expenditures ............................ 9,707 3,000
ACQUISITION-
RELATED
ALLTRISTA TILIA PRO FORMA PRO FORMA
PRO FORMA AS REPORTED ADJUSTMENTS COMBINED
-------------- ------------- ------------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ........................................ $ 241,679 $ 183,825 $ 425,504
Costs and expenses
Cost of sales ................................... 172,775 89,668 262,443
Selling, general and administrative expenses..... 41,481 61,718 $ 1,000(q) 104,199
Goodwill amortization ........................... 1,109 -- 1,109
Special charges (credits) and reorganization
expenses ....................................... 5,323 803 6,126
Loss on divestitures of assets .................. 461 -- 461
---------- --------- ------------ ----------
Income (loss) before interest, taxes and
minority interest ............................... 20,530 31,636 (1,000) 51,166
Interest expense, net ............................ 8,189 344 (8,189)(r) 19,994
18,750(s)
900(t)
---------- --------- ------------ ----------
Income (loss) before taxes and minority
interest ........................................ 12,341 31,292 (12,461) 31,172
Income tax provision (benefit) ................... 3,909 8,513 (1,512) (o) 10,910
Minority interest in loss of consolidated
subsidiary ...................................... -- -- --
---------- --------- ------------ ----------
Net income (loss) ................................ $ 8,432 $ 22,779 $ (10,949) $ 20,262
========== ========= ============ ==========
Basic earnings (loss) per share .................. $ 1.33 $ 3.18
Diluted earnings (loss) per share ................ 1.32 3.18
Weighted average shares outstanding:
Basic ........................................... 6,363 6,363
Diluted ......................................... 6,377 6,377
Other Data:
EBITDA(u) ....................................... $ 36,298 $ 34,051 $ -- $ 70,349
Depreciation and amortization ................... 9,984 1,612 1,000 12,596
Capital expenditures ............................ 6,707 1,984 -- 8,691
F-20
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2001
Balance sheet adjustments:
(a) Adjustment to reflect the use of the Tax Refunds to repay existing debt,
thereby reducing income taxes receivable and deferred tax assets.
(b) Adjustment to reflect the use of cash on hand to fund a portion of the
purchase price of Tilia.
(c) Adjustment to reflect estimated goodwill to be recorded with the
Acquisition calculated as the purchase price plus related expenses ($163.5
million) related to the Acquisition less the net equity of Tilia and
amounts allocated to specifically identifiable intangible assets ($5.0
million).
(d) Adjustment to reflect the following:
(i) estimated fair value of Tilia's identifiable intangible assets
(primarily patents) of $5.0 million to be amortized over an average
five-year life;
(ii) estimated expenses of this offering of $5.0 million to be amortized
over the ten-year term of the Senior Subordinated Notes due 2012;
and
(iii) estimated expenses of the new senior credit facility of $2.0 million
to be amortized over the five-year term.
(e) Adjustment to reflect the write-off of remaining debt issue costs relating
to Alltrista's existing senior credit facility.
(f) Adjustment to reflect the repayment of Alltrista's existing credit facility
in conjunction with the Transactions.
(g) Adjustment to reflect the initial borrowing under the new senior credit
facility in conjunction with the Transactions.
(h) Adjustment to reflect the subordinated seller notes to be issued in
conjunction with the Transactions:
(i) $10.0 million non-interest bearing note due March 31, 2003, and
(ii) $5.0 million note due in 2004.
(i) Adjustment to reflect the issuance of the Senior Subordinated Notes due
2012 at 98.436% of par value.
(j) Adjustment to reflect the elimination of the existing stockholders' equity
of Tilia.
Statement of operations adjustments:
(k) Adjustment to reflect the elimination of the operating results of the TPD
Assets.
(l) Adjustment to reflect the elimination of the operating results of Microlin,
LLC.
(m) Adjustment to reflect the elimination of the loss on the Dispositions.
(n) Adjustment to reflect the elimination of interest expense related to the
debt repayment resulting from the Tax Refunds.
(o) Adjustment to reflect an effective tax rate of 35.0%.
(p) Adjustment to reflect the elimination of the minority interest's share in
the loss of Microlin, LLC.
(q) Adjustment to reflect the amortization of estimated identifiable intangible
assets. See note (d)(i) above.
(r) Adjustment to reflect the elimination of historical Alltrista interest
expense in conjunction with the Transactions.
(s) Adjustment to reflect pro forma interest expense relating to:
(i) the new senior credit facility based upon Alltrista's 2001 effective
borrowing rate;
(ii) the interest bearing subordinated seller note described in note
(g)(ii) above based upon Alltrista's 2001 effective borrowing rate;
and
(iii) the 9 3/4% Senior Subordinated Notes due 2012.
(t) Adjustment to reflect amortization of debt issue costs for both the new
senior credit facility and the Senior Subordinated Notes due 2012. See note
(d) above.
(u) "EBITDA" is calculated as income (loss) before interest, taxes and minority
interest plus (i) depreciation and amortization, (ii) special charges
(credits) and reorganization expenses and (iii) loss (gain) on divestiture
of assets and product lines. EBITDA is not intended to represent cash flow
from operations as defined by accounting principles generally accepted in
the United States and should not be used as an alternative to net income as
an indicator of operating performance or to cash flow as a measure of
liquidity. EBITDA is included in this offering memorandum because it is a
basis upon which our management assesses financial performance. While
EBITDA is frequently used as a measure of operations and the ability to
meet debt service requirements, it is not necessarily comparable to other
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
F-21