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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended April 4, 1998 Commission file number 333-26943
------------------------------
ANCHOR ADVANCED PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3084238
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ANCHOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1427775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Northshore Drive, Suite 600
Knoxville, TN 37919-4048
(Address of principal executive offices) (zip code)
(423) 450-5300
(Registrant's telephone number, including area code)
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- ------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Outstanding Shares
May 15, 1998 Anchor Holdings, Inc. Common Stock, 1,551,218
$.01 par value (Anchor Advanced
Products, Inc. is a wholly owned
subsidiary of Anchor Holdings, Inc.)
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<PAGE>
ANCHOR ADVANCED PRODUCTS, INC. AND ANCHOR HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at April 4, 1998
(unaudited) and December 31, 1997 3-4
Condensed Consolidated Statements of Operations for
the Thirteen Weeks Ended April 4, 1998 and March 29, 1997
(unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended April 4, 1998 and
March 29, 1997 (unaudited) 6-7
Notes to Condensed Consolidated Financial Statements 8-9
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except per share data)
<TABLE>
<CAPTION>
April 4, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................................ $ 144 $ 6,914
Accounts receivable, less allowance for doubtful accounts,
allowances, and returns of $932 in 1998 and $900 in 1997..................... 15,559 15,574
Inventories....................................................................... 26,379 23,292
Prepaid expenses and other assets................................................. 3,123 3,507
--------- ---------
Total current assets......................................................... 45,205 49,287
Property, plant, and equipment, net............................................... 51,697 53,202
Goodwill, net..................................................................... 9,363 9,569
Parent company receivable......................................................... 2,149 --
Other assets, net................................................................. 8,414 8,781
--------- ---------
$116,828 $120,839
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................................. $ 731 $ 832
Current maturities of obligations under capital leases............................ 344 382
Cash float ....................................................................... 929 --
Accounts payable.................................................................. 4,950 6,119
Other accrued expenses and current liabilities.................................... 4,328 8,059
--------- ---------
Total current liabilities.................................................... 11,282 15,392
Long-term debt, less current maturities................................................. 100,000 100,000
Accrued pension liability............................................................... 6,019 6,019
Deferred income taxes................................................................... 1,595 1,542
Other long-term liabilities............................................................. 690 725
--------- ---------
Total liabilities............................................................ 119,586 123,678
--------- ----------
See accompanying notes to
condensed consolidated financial statements (unaudited)
3
<PAGE>
Stockholders' equity:
Common stock---par value $.01 per share; authorized 2,000 shares;
shares issued ...................................................... 15 15
Retained earnings................................................................. (2,242) (2,323)
Accumulated other comprehensive income............................................ (521) (521)
Treasury stock at cost............................................................ (10) (10)
----------- ----------
Total stockholders' equity .................................................. (2,758) (2,839)
----------- ----------
$116,828 $120,839
=========== ==========
</TABLE>
See accompanying notes to
condensed consolidated financial statements (unaudited)
4
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------
April 4, March 29,
1998 1997
---- ----
<S> <C> <C>
Net Sales.................................................... $39,303 $41,546
Cost of goods sold........................................... 32,695 34,653
------- -------
Gross profit................................................. 6,608 6,893
Amortization expense......................................... 426 343
Selling, general and administrative expense.................. 3,014 2,615
------- -------
Operating income............................................. 3,168 3,935
------- -------
Other expense:
Loss on disposal of fixed assets........................ (26) (9)
Interest expense, net................................... (2,967) (1,271)
Interest expense, related party......................... -- (801)
Other, net.............................................. (16) (17)
------- -------
Total other expense, net........................... (3,009) (2,098)
------- -------
Income before income taxes .................................. 159 1,837
Provision for income taxes................................... 78 779
------- -------
Net income.............................................. $ 81 $ 1,058
======= =======
Earnings per share:
Basic .................................................. $ 0.05 $ 1.04
======= ========
Weighted average common shares outstanding ............. 1,551 1,018
======= ========
Diluted ................................................ $ 0.05 $ 0.77
======= ========
Weighted average common shares and assumed
conversions outstanding ........................... 1,551 1,370
======== ========
</TABLE>
See accompanying notes to
condensed consolidated financial statements (unaudited)
5
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------
April 4, March 29,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 81 $1,058
Adjustments to reconcile net income to net cash
used by operating activities:
Deferred income taxes........................................ 54 266
Depreciation and amortization................................ 2,658 2,329
Provision for doubtful accounts.............................. 32 --
Provision for inventory obsolescence......................... 81 87
Loss from disposal of fixed assets........................... -- 9
Changes in assets and liabilities, net of effects of
purchase of business:
Accounts receivable.................................... (17) (3,757)
Inventories............................................ (3,168) (1,274)
Prepaid and other assets............................... 384 1,265
Accounts payable, accrued expense and
other liabilities...................................... (4,900) (208)
-------- -------
Net cash used by operating
activities........................................ (4,795) (225)
-------- -------
Cash flows from investing activities:
Payments made for parent company ................................. (2,149) --
Purchase of property, plant and equipment.......................... (580) (1,973)
-------- -------
Net cash used in investing activities.............. (2,729) (1,973)
-------- -------
Cash flows from financing activities:
Checks written in excess of bank balances.......................... 929 2,808
Payments on other liabilities...................................... (36) --
Principal payments on long-term debt............................... (101) (1,938)
Principal payments on capital lease obligations.................... (38) (142)
-------- -------
Net cash provided by financing activities.................... 754 728
-------- -------
See accompanying notes to
condensed consolidated financial statements (unaudited)
6
<PAGE>
Net decrease in cash.................................................... (6,770) (1,470)
Cash at beginning of period............................................. 6,914 1,578
-------- -------
Cash at end of period................................................... $ 144 $ 108
======== =======
Supplemental cash flow information:
Interest paid...................................................... $ 2,818 $1,993
</TABLE>
See accompanying notes to
condensed consolidated financial statements (unaudited)
7
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
(in thousands except for per share data)
Anchor Holdings, Inc. ("Holdings") was incorporated March 9, 1990, under
the laws of the State of Delaware. Holdings is the wholly owned subsidiary of
Anchor Acquisition Co. which is not consolidated herein. Holdings' subsidiaries
manufacture and sell: brushes used in medical and dental applications; plastic
and metal packaging for the cosmetics industry; and molded plastics products,
including assembly of plastic parts and construction of molds used in the
injection molding business. Substantially all sales are made on credit without
collateral. Holdings' subsidiaries manufacture dental products in its
Morristown, Tennessee facility and cosmetics products in three facilities:
Matamoros, Mexico; Morristown, Tennessee and Waterbury, Connecticut. The
majority of the cosmetics goods are produced in the Matamoros facility. Molded
plastics products are produced in four separate plants in Seagrove, North
Carolina as well as in a facility in Round Rock, Texas. In addition to the
manufacturing facilities, Holdings' subsidiaries operate mold technology centers
in Elk Grove, Illinois and Sanford, North Carolina.
1. Basis of Presentation
The quarterly condensed consolidated financial statements include the accounts
of Holdings and its wholly-owned subsidiaries (together the "Company" or
"Anchor"). The parent company is not consolidated and push down accounting has
not been applied since the Company had outstanding public debt at the time of
acquisition (Note 5). All significant intercompany balances and transactions
have been eliminated in consolidation. The quarterly consolidated financial
statements have been prepared, without audit, in accordance with generally
accepted accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the quarterly
consolidated financial statements include all adjustments which are necessary
for a fair presentation of the financial position and results of operations for
the interim periods presented, such adjustments being of a normal recurring
nature. Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. It is suggested that these
quarterly consolidated financial statements and notes thereto be read in
conjunction with the full consolidated financial statements and notes thereto
for the year ended December 31, 1997. Results of operations in interim periods
are not necessarily indicative of results to be expected for a full year.
2. Inventories
The components of inventory for the quarter ended April 4, 1998 are as follows:
Raw materials.................................................... $10,240
Work in process.................................................. 7,241
Finished goods................................................... 10,572
-------
28,053
Less valuation allowances........................................ 1,674
-------
$26,379
=======
8
<PAGE>
3. Income Taxes
The income tax expense for the quarters ended April 4, 1998 and March 29, 1997
varies from the amount of expense computed by applying the federal corporate
income tax rate of 34% to net income before taxes due primarily to state and
foreign taxes similar to those reflected in the years ended December 31, 1996
and 1997 footnote.
4. Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which changes the
calculations used for earnings per share (EPS) and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. Basic earnings per share is computed by dividing net
income available for common shareholders by the weighted average number of
shares of common stock outstanding. The standard also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted income per share is computed by dividing
adjusted net income by the weighted average number of shares of common stock and
assumed conversions of dilutive securities outstanding for the respective
periods. Dilutive securities include stock options and warrants. The Company
uses the treasury stock method for calculating the dilutive effect of options
and warrants.
The following table sets forth for the periods indicated the calculation of
earnings per share included in the Company's Condensed Consolidated Statements
of Income:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
April 4, March 29,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Numerator:
Net income available for common shareholders $81 $1,058
====== ======
Denominator:
Weighted average shares 1,551 1,018
Effect of dilutive securities:
Employee stock options -- 251
Warrants -- 101
Adjusted weighted-average
shares and assumed conversions 1,551 1,370
====== ======
Basic earnings per share $ 0.05 $ 1.04
====== ======
Diluted earnings per share $ 0.05 $ 0.77
====== ======
</TABLE>
5. Changes in Control of Registrant.
On March 19, 1998 Anchor Acquisition Co., a Delaware corporation ("Purchaser"),
entered into a Stock Purchase Agreement (the "Purchase Agreement") with ML-Lee
Acquisition Fund II, L.P., ML-Lee Acquisition Fund (Retirement Accounts) II,
L.P. and Thomas H. Lee Equity Partners, L.P. The closing of the transactions
contemplated by the Purchase Agreement occurred concurrent with the signing of
the Purchase Agreement (the "Closing"). Pursuant to the terms and conditions of
the Purchase Agreement, at the Closing the Purchaser acquired all of the issued
and outstanding shares of capital stock of Anchor Holdings, Inc., whose wholly
owned subsidiary is Anchor Advanced Products, Inc.
The purchase price was $4.00 per share, of which 1,551,217.66 shares of common
stock, $.01 par value per share, were issued and outstanding, for a total
purchase price of $6,204,870.64.
Upon the Closing, the officers and directors of Anchor Holdings, Inc. and Anchor
Advanced Products, Inc. resigned and the Purchaser caused new officers and a new
director of each of those entities to be elected.
6. Anchor Advanced Products, Inc. Separate Company Financial Statements.
On April 2, 1997, Anchor Advanced Products, Inc. issued $100,000,000 of 11-3/4%
Senior Notes due 2004. These notes have been guaranteed fully and
unconditionally by the parent company, Anchor Holdings, Inc. The separate
financial statements of Anchor Advanced Products, Inc. are not included herein
because management has determined that they are not materially different from
those of Anchor Holdings, Inc. Summarized financial information of Anchor
Advanced Products, Inc. for the year ended December 31, 1997 and the thirteen
weeks ended April 4, 1998 and March 29, 1997, are as follows:
Thirteen Weeks Ended
December 31, March 29, April 4,
1997 1997 1998
------------ --------- --------
Current assets $ 49,087 N/A $ 44,865
Noncurrent assets 71,544 N/A 71,617
Current liabilities 15,368 N/A 11,258
Noncurrent liabilities 108,286 N/A 108,305
Net sales N/A $41,546 39,303
Gross Profit N/A 6,893 6,608
Income from operations N/A
before extraordinary N/A
item 1,006 5
Net income 1,006 5
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report may contain forward-looking statements concerning the Company's
operations, economic performance and financial condition. All such statements
are based upon a number of assumptions and estimates that are inherently subject
to significant uncertainties and contingencies, many of which are beyond the
control of the Company, and reflect future business decisions that are subject
to change. Some of these assumptions inevitably will not materialize, and
unanticipated events will occur that will affect the Company's results.
Overview
Anchor is a leading designer, manufacturer and packager of precision molded
plastic products for a wide range of dental, cosmetic, medical, computer and
consumer applications. The Company is one of the world's largest manufacturers
of toothbrushes and is a leading U.S. manufacturer of cosmetics packaging.
Approximately 5.62% of the Company's 1997 net sales were made under supply
contracts with three of its largest customers, Colgate-Palmolive, Procter &
Gamble and L'Oreal. The remaining terms of each of such contracts are up to 3
years, excluding options to renew. Typically, contracts are renewed or replaced
by new contracts prior to expiration. The terms of the contracts vary, including
any minimum purchasing requirements and the customers' ability to cancel, but in
each case the Company passes through to its customers raw material price
increases and decreases. Anchor's principal materials are plastic resins, nylon
and packaging materials. During periods of limited supply, Anchor has typically
been able to procure sufficient quantities of plastic resins, nylon and
packaging materials to satisfy all of its customers' needs. Anchor's gross
profit is substantially unaffected by fluctuations in plastic resin and nylon
prices because the Company historically has been successful in passing through
increases in those prices to its customers by means of corresponding changes in
product pricing. Anchor began operations in 1941 as a manufacturer of cosmetic
brushes for Maybelline and, in 1958, began producing Pepsodent toothbrushes for
Lever Brothers Company, Inc. The Company was acquired in 1990 by affiliates of
the Thomas H. Lee Company and management. Since the 1990 acquisition, the
Company has pursued a growth strategy designed to increase sales while
diversifying its revenue base.
On March 19, 1998 Anchor Acquisition Co., a Delaware corporation
("Purchaser"), entered into a Stock Purchase Agreement (the "Purchase
Agreement") with ML-Lee Acquisition Fund II, L.P., ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P. and Thomas H. Lee Equity Partners, L.P. Pursuant
to the terms and conditions of the Purchase Agreement, the Purchaser acquired
all of the issued and outstanding shares of capital stock of Holdings.
Certain of the Company's operating data for the thirteen weeks ended April
4, 1998 and March 29, 1997 are set forth below as percentages of net sales:
Anchor Advanced Products, Inc.
Percentage of Net Sales
13 Weeks Ended
Mar 29 Apr 04
1997 1998
---- ----
Net Sales 100.0% 100.0%
Gross Profit 16.8% 16.6%
Selling, G&A 7.7% 6.3%
Amortization 1.0% 0.8%
Operating Income 8.1% 9.5%
Other (Income)/Expense 0.1% 0.1%
Net Interest (Income)/Expense 7.6% 5.0%
Income Taxes 0.2% 1.9%
Extraordinary Item 0.0% 0.0%
Net Income 0.2% 2.5%
Results of Operations
13 Weeks Ended April 4, 1998 ("Interim 1998")
Compared to 13 Weeks Ended March 29, 1997 ("Interim 1997")
Net Sales. Net sales decreased by $2.2 million, or 5.3%, to $39.3 million
for Interim 98 from $41.5 million for Interim 97. The sales decrease resulted
primarily from lower toothbrush sales to Colgate, as had been forecasted. This
decrease was partially offset by strong performance on the part of the Company's
Cosmetics division.
Gross Profit. Gross Profit decreased by $.3 million, or 4.3%, to $6.6
million for Interim 98 from $6.9 million for Interim 97. The loss of margin
associated with the lower sales mentioned above was offset by efficiency
improvements in the Mid-State division, and increased margins associated with
strong Cosmetics sales.
Selling, General and Administrative. SG&A expenses increased by $.4
million, or 15.4%, to $3.0 million for Interim 98 from $2.6 million for
Interim 97 due to selling expense associated with higher Cosmetics sales, and to
salary and benefit increases for 1998.
Amortization. Amortization expense increased by $.1 million, or 33.3%, to
$.4 million for Interim 98 from $.3 million for Interim 97 due to the write-off
of additional capitalized fees associated with the Bond issue in April, 1997.
Operating Income. Operating income decreased by $.7, or 17.9%, to $3.2
million for Interim 98 from $3.9 million for Interim 97 for the reasons listed
above.
Other Expense. Other expense increased by $.01 million, or 33.3%, to $.04
million expense for Interim 98 from $.03 million for Interim 97.
Net Interest Expense. Net interest expense increased by $.9 million, or
42.9%, to $3.0 million for Interim 98 from $2.1 million for Interim 97 due to
the retirement of bank debt and the issue of $100 million Senior Notes in the
second quarter of 1997.
Income Taxes. Income Taxes decreased $.7 million, or 87.5%, to $.1 million
for Interim 98 from $.8 million for Interim 97 as a result of decreased
operating income for the quarter.
Net Income. Net income decreased $1.0 million, or 90.9%, to $.1 million for
Interim 98 from $1.1 million for Interim 97 as a result of the above factors.
Liquidity and Capital Resources
The Company's liquidity requirements consist primarily of working capital
needs and capital expenditures, required payments of principal and interest on
any borrowings under the NationsBank Credit Facility and required payments of
interest on the Senior Notes and principal at maturity. The NationsBank Credit
Facility provides for revolving loans to, and the issuance of letters of credit
on behalf of the Company in an aggregate amount not to exceed $15.0 million,
$13.8 million of which was available under the revolving loans and $1.2 million
of which was reserved under the letters of credit at April 4, 1998.
For the thirteen weeks ended April 4, 1998, the Company generated cash from
operating activities of $4.8 million. The Company's capital expenditures for
that period were $.6 million, principally for additions to the Company's
manufacturing capacity.
Inflation and Changing Prices
Anchor's sales and costs are subject to inflation and price fluctuations.
However, because changes in the cost of plastic resins and nylon, Anchor's
principal raw materials, are generally passed through to customers, such changes
historically have not, and in the future are not expected to have a material
effect on Anchor's gross profit.
10
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
On April 2, 1998, Anchor filed a Form 8-K (Item 1) reporting that on March
19, 1998 Anchor Acquisition Co., a Delaware corporation ("Purchaser") had
entered into a Stock Purchase Agreement (the "Purchase Agreement") with ML-Lee
Acquisition Fund II, L.P., ML-Lee Acquisition Fund (Retirement Accounts) II,
L.P. and Thomas H. Lee Equity Partners, L.P. Pursuant to the terms and
conditions of the Purchase Agreement, the Purchaser acquired all of the issued
and outstanding shares of capital stock of Holdings.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, and this report has also been signed by
the following person in the capacities indicated, on the 19th day of May, 1998.
ANCHOR ADVANCED PRODUCTS, INC.
By: /c/ Phyllis C. Best
---------------------------------------------
Phyllis C. Best
Chief Financial Officer
(Principal Financial and Accounting Officer)
ANCHOR HOLDINGS, INC.
By: /c/ Phyllis C. Best
---------------------------------------------
Phyllis C. Best
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001030451
<NAME> Anchor Holdings, Inc.
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-1-1997 JAN-1-1998
<PERIOD-END> MAR-29-1997 APR-4-1998
<EXCHANGE-RATE> 1 1
<CASH> 108 144
<SECURITIES> 0 0
<RECEIVABLES> 26,015 16,491
<ALLOWANCES> (858) (932)
<INVENTORY> 21,598 26,379
<CURRENT-ASSETS> 49,341 45,205
<PP&E> 95,916 102,064
<DEPRECIATION> (42,715) (50,367)
<TOTAL-ASSETS> 118,241 116,828
<CURRENT-LIABILITIES> 22,282 11,282
<BONDS> 0 100,000
0 0
0 0
<COMMON> 10 15
<OTHER-SE> 21,865 (2,768)
<TOTAL-LIABILITY-AND-EQUITY> 118,241 116,828
<SALES> 41,546 39,303
<TOTAL-REVENUES> 0 0
<CGS> 34,653 32,695
<TOTAL-COSTS> 2,958 3,440
<OTHER-EXPENSES> 26 42
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,072 2,967
<INCOME-PRETAX> 1,837 159
<INCOME-TAX> 779 78
<INCOME-CONTINUING> 1,058 81
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,058 81
<EPS-PRIMARY> 1.04 0.05
<EPS-DILUTED> 0.77 0.05
</TABLE>
