<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 4, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER 333-52657
INDESCO INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3987915
(State of Incorporation) (I.R.S. Employer Identification No.)
950 Third Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 593-2009
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 15, 1998)
Common Stock: 200 shares, par value $0.01
-1-
<PAGE> 2
INDESCO INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED OCTOBER 4, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Balance Sheets of AFA Holdings Co. at
December 31, 1997 and of Indesco International, Inc. at October
4, 1998 (Unaudited) 4
Condensed Consolidated Statements of Operations (Unaudited) of
WTI, Inc. (Predecessor) for the One Month Ended July 31, 1997,
of AFA Holdings Co. for the Two Months Ended October 5, 1997
and of Indesco International, Inc. for the Three Months Ended
October 4, 1998 5
Condensed Consolidated Statements of Operations (Unaudited) of
WTI, Inc. (Predecessor) for the Seven Months Ended July 31,
1997, of AFA Holdings Co. for the Two Months Ended October 5,
1997 and of Indesco International, Inc. for the Nine Months Ended
October 4, 1998 6
Condensed Consolidated Statements of Cash Flows (Unaudited) of
WTI, Inc. (Predecessor) for the Seven Months Ended July 31,
1997, of AFA Holdings Co. for the Two Months Ended October 5,
1997 and of Indesco International, Inc. for the Nine Months Ended
October 4, 1998 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 22
PART II. OTHER INFORMATION 28
ITEM 6. Exhibits and Reports on Form 8-K 30
SIGNATURE
-2-
<PAGE> 3
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIODS ENDED OCTOBER 5, 1997 AND OCTOBER 4, 1998
-3-
<PAGE> 4
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (See Note 1)
December 31, 1997 and October 4, 1998
(in Thousands)
<TABLE>
<CAPTION>
AFA HOLDINGS CO.
DECEMBER 31 OCTOBER 4, 1998
1997 (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 1,051 $ 2,183
Accounts Receivable 6,821 16,134
Inventories 9,918 16,520
Prepaid Expenses and Other Assets 605 439
--------- ---------
Total Current Assets 18,395 35,276
Property Plant and Equipment, Net 28,009 59,813
Excess Cost Over Fair Value of Net Assets Acquired, Net 6,365 68,260
Patents and Other Intangibles, Net 5,834 5,002
Deferred Financing Costs 1,628 5,990
Other Assets 656 1,074
--------- ---------
TOTAL ASSETS $ 60,887 $ 175,415
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 2,379 $ 704
Notes Payable 4,762 3,216
Accounts and Drafts Payable 2,410 8,877
Income Taxes Payable -- 361
Other Accrued Expenses 3,334 10,221
--------- ---------
Total Current Liabilities 12,885 23,379
Subordinated Debt 3,000 --
Long-Term Debt 41,154 154,781
Deferred Income Taxes 632 524
--------- ---------
Total Liabilities 57,671 178,684
Commitments and Contingencies
Stockholders' Equity:
Common Stock, Authorized 3,000 Shares of $.01 Par Value;
200 Shares Issued and Outstanding in 1998 242 --
Additional Paid-in Capital 4,320 5,062
Accumulated Deficit (1,374) (8,526)
Accumulated Other Comprehensive Income 28 195
--------- ---------
Total Stockholders' Equity 3,216 (3,269)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,887 $ 175,415
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE> 5
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (See Note 1)
For the One Month Ended July 31, 1997 and Two Months Ended October 5, 1997 and
the Three Months Ended October 4, 1998
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
WTI, INC. AND
SUBSIDIARIES INDESCO
(PREDECESSOR TO AFA HOLDINGS CO. INTERNATIONAL, INC.
INDESCO HOLDINGS CO.) AND SUBSIDIARIES AND SUBSIDIARIES
ONE MONTH ENDED TWO MONTHS ENDED THREE MONTHS ENDED
JULY 31, 1997 OCTOBER 5, 1997 OCTOBER 4, 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Net Sales $ 3,451 $ 8,135 $ 27,572
Cost of Sales 2,439 5,871 20,087
-------- -------- --------
Gross Profit 1,012 2,264 7,485
Operating Expenses:
Selling, General and Administrative Expenses 396 973 3,049
Research and Development 14 44 390
Amortization of Intangibles 131 266 712
-------- -------- --------
Total Operating Expenses 541 1,283 4,151
-------- -------- --------
Income From Operations 471 981 3,334
Other (Income) Expense:
Interest 335 889 3,909
Other (390) (21) (19)
-------- -------- --------
Total Other (Income) Expense, Net (55) 868 3,890
-------- -------- --------
Income (Loss) Before Provision for
Income Taxes 526 113 (556)
Provision for Income Taxes 62 24 225
-------- -------- --------
NET INCOME (LOSS) $ 464 $ 89 $ (781)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE> 6
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (See Note 1)
For the Seven Months Ended July 31, 1997, the Two Months Ended October 5, 1997
and the Nine Months Ended October 4, 1998
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
WTI, INC. AND
SUBSIDIARIES INDESCO
(PREDECESSOR TO AFA HOLDINGS CO. INTERNATIONAL, INC.
INDESCO HOLDINGS CO.) AND SUBSIDIARIES AND SUBSIDIARIES
SEVEN MONTHS ENDED TWO MONTHS ENDED NINE MONTHS ENDED
JULY 31, 1997 OCTOBER 5, 1997 OCTOBER 4, 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Net Sales $ 32,988 $ 8,135 $ 84,289
Cost of Sales 23,315 5,871 59,349
-------- -------- --------
Gross Profit 9,673 2,264 24,940
Operating Expenses:
Selling, General and Administrative Expenses 3,529 973 9,426
Research and Development 110 44 792
Amortization of Intangibles 982 266 1,969
-------- -------- --------
Total Operating Expenses 4,621 1,283 12,187
-------- -------- --------
Income From Operations 5,052 981 12,753
Other (Income) Expense:
Interest 2,295 889 11,730
Other (670) (21) 106
-------- -------- --------
Total Other Expense, Net 1,625 868 11,836
-------- -------- --------
Income Before Extraordinary Item
and Provision for Income Taxes 3,427 113 917
Provision for Income Taxes 354 24 464
-------- -------- --------
Income Before Extraordinary Item 3,073 89 453
Extraordinary Item - Loss on Early
Extinguishment of Debt 7,605
-------- -------- --------
NET INCOME (LOSS) $ 3,073 $ 89 $ (7,152)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-6-
<PAGE> 7
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (See Note 1)
For the Seven Months Ended July 31, 1997, the Two Months Ended October 5, 1997
and the Nine Months Ended October 4, 1998
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
WTI, INC. AND
SUBSIDIARIES INDESCO
(PREDECESSOR TO AFA HOLDINGS CO. INTERNATIONAL, INC.
INDESCO HOLDINGS CO.) AND SUBSIDIARIES AND SUBSIDIARIES
SEVEN MONTHS ENDED TWO MONTHS ENDED NINE MONTHS ENDED
JULY 31, 1997 OCTOBER 5, 1997 OCTOBER 4, 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 3,073 $ 89 $ (7,152)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating
Activities:
Depreciation 1,926 644 4,962
Amortization 594 243 1,990
Deferred Income Taxes (1,939) 40
Other, Net (118)
Gain on Sale of Property, Plant and Equipment (21)
Foreign Currency Transaction Gains (545)
Write-off of Deferred Financing Costs 6,654
Changes in Operating Assets and Liabilities:
Accounts Receivable 694 1,157 (9,128)
Inventories 172 (197) (1,168)
Prepaid Expenses and Other Assets 293 215 989
Accounts and Drafts Payable 891 613 4,048
Income Taxes Payable 1,389 9 (45)
Other Accrued Expenses (581) (1,002) 5,010
--------- --------- ---------
Total Adjustments 2,755 1,722 13,312
--------- --------- ---------
Net Cash Provided (Used) by
Operating Activities 5,828 1,811 6,160
Cash Flows From Investing Activities:
Acquisition of CSI, Net of Cash Acquired (92,947)
Expenditures for Property, Plant and Equipment (2,498) (97) (7,107)
Disposal of Property, Plant and Equipment 23 14
Other (70) (700)
--------- --------- ---------
Net Cash Used by Investing Activities (2,545) (97) (100,740)
Cash Flows From Financing Activities:
Proceeds from Senior Subordinated Notes 145,000
Proceeds from Term Loans 1,321 135,000
Repayment of Long-Term Debt (1,174) (1,046) (176,127)
Payment of Deferred Financing Costs (11,418)
Net (Repayment) Borrowings Under Revolving
Credit Agreements (1,775) (235) 5,733
Return of Capital to Parent (2,500)
--------- --------- ---------
Net Cash Provided (Used) by Financing Activities (1,628) (1,281) 95,688
--------- --------- ---------
Effect of Exchange Rate Changes on Cash (102) (3) 24
--------- --------- ---------
Net Increase in Cash and Cash Equivalents 1,553 430 1,132
Cash and Cash Equivalents at Beginning of Year 838 1,001 1,051
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,391 $ 1,431 $ 2,183
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Interest $ 580 $ 760 $ 5,340
========= ========= =========
Income Taxes $ 2,817 $ -0- $ 411
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-7-
<PAGE> 8
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Indesco International, Inc. (the "Company"), is a wholly owned
subsidiary of Indesco Holdings Co., formerly AFA Holdings Co.
("Parent"). The Company manufactures and sells finger activated liquid
dispensing devices ("trigger sprayers"). The Parent was formed in July
1997 to acquire, through a wholly-owned subsidiary, certain assets and
liabilities of AFA Products, Inc. ("AFA"), located in Forest City,
North Carolina. Concurrent with this transaction, a stockholder of the
Parent and an affiliate of another stockholder of the Parent acquired
the outstanding capital stock of AFA Polytek B.V. ("Polytek") based in
The Netherlands. AFA and Polytek were formerly operating subsidiaries
of W.T.I., Inc. ("WTI" or "Predecessor"). In addition, effective
February 1, 1998, the Company acquired certain assets and liabilities
of Continental Sprayers International ("CSI"), a division of Contico
International, Inc. for approximately $93 million (see Note 3).
Concurrent with the CSI acquisition, Polytek became a wholly-owned
subsidiary of the Company.
The accompanying condensed consolidated balance sheet as of October 4,
1998 includes the accounts of the Company and its subsidiaries (AFA,
Polytek and CSI) as compared to the balance sheet as of December 31,
1997 of the Parent which includes the accounts of the Parent, AFA and
Polytek.
The accompanying condensed consolidated statement of operations of the
Company includes the results of operations of the Company, AFA and
Polytek, for the three and nine months ended October 4, 1998, and the
results of operations of CSI from its acquisition on February 1, 1998,
through October 4, 1998. The 1997 condensed consolidated statement of
operations reflect the financial results of WTI for the one month and
seven months ended July 31, 1997, and the financial results of the
Parent for the two months ended October 5, 1997, which include the
results of operations of AFA and Polytek.
The Company's balance sheet, statements of operations and cash flows
for 1998 are not directly comparable to those of its Predecessor or
the Parent for the corresponding 1997 periods due to the fact CSI's
operating results are not included therein.
The condensed consolidated balance sheet as of October 4, 1998, and the
condensed consolidated statements of operations and cash flows of WTI,
Inc. for the one month ended July 31, 1997, of the Parent for the two
months ended October 5, 1997, and of the Company for the three and nine
months ended October 4,1998, are unaudited but in the opinion of
management, have been prepared on the same basis as the related annual
audited financial statements and include all significant adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the results of the interim periods. The data disclosed
in the notes to the financial statements for these periods are also
unaudited. Certain information and footnote disclosure normally
included in the Company's annual financial statements have been
condensed or omitted. The condensed consolidated financial statements
and notes thereto should be read in conjunction with the related annual
audited financial statements and notes thereto. Results for the three
and nine months ended October 4, 1998 are not necessarily indicative of
the results that may be expected for the entire year.
-8-
<PAGE> 9
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(2) SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared
using the accounting policies disclosed in the related annual audited
financial statements.
Foreign Currency Translation
Assets and liabilities of Polytek are translated at exchange rates in
effect at the balance sheet dates. Items of revenue and expense are
translated at average exchange rates during the periods. Translation
adjustments, resulting from translating the Polytek and the CSI United
Kingdom financial statements into dollars, are reported in the equity
section of the accompanying balance sheet under the caption
"Accumulated Other Comprehensive Income."
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, is effective for years beginning after December
15, 1997. This statement requires that an enterprise classify items of
other comprehensive income by their nature in the financial statements
and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. During the one month ended July
31, 1997, the two months ended October 5, 1997, and the three months
ended October 4, 1998, total comprehensive income (loss) amounted to
($131), $301 and ($615), respectively. During the nine months ended
October 4, 1998, total comprehensive loss amounted to $6,985.
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related Information, is effective for
years beginning after December 15, 1997. This statement requires that a
public business enterprise report financial and descriptive information
about its reportable business segments. Management of the Company
believes that the future adoption of this statement will not have a
significant impact on the Company's consolidated financial position,
results of operations or cash flows, but will result in additional
disclosures.
(3) ACQUISITIONS
(a) AFA and Polytek
AFA was acquired for an aggregate purchase price of $46,938 (including
expenses of $1,926), and Polytek was acquired for approximately $800
and refinancing of debt of approximately $7,900.
-9-
<PAGE> 10
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(3) ACQUISITIONS (CONTINUED)
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to
the assets purchased and liabilities assumed based upon the fair values
at the date of acquisition.
(b) Continental Sprayers International
Effective February 1, 1998, the Company acquired CSI for $92,947 in
cash, paid outstanding debt of AFA of $39,567 and paid fees of $5,439.
Such amounts were paid through the issuance of term loans of $135,000
and borrowings under a revolving credit facility.
The CSI acquisition was accounted for using the purchase method of
accounting. The Company increased the value of inventory $850 in
accordance with Accounting Principles Board Opinion No. 16 and has
recorded fixed assets and identifiable intangibles at their net
historical book value, pending completion of appraisals. Differences,
if any, between these amounts and the amounts resulting from appraisals
and valuations of these assets, which have not yet been completed, will
be reflected as adjustments to goodwill, which may increase or decrease
related depreciation and amortization charges.
Condensed proforma unaudited results of operations of the Company
before extraordinary items for the nine-month periods ended October 5,
1997 and October 4, 1998 as if the transactions had occurred on January
1, 1997 are as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
---------------------------
OCTOBER 5, OCTOBER 4,
1997 1998
----------- -----------
<S> <C> <C>
Net Sales $73,405 $89,135
======= =======
Net Income Before Extraordinary Item $ 2,497 $ 776
======= =======
</TABLE>
-10-
<PAGE> 11
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(4) INVENTORIES
The components of inventories as of December 31, 1997 and October 4,
1998 are summarized as follows:
<TABLE>
<CAPTION> DECEMBER 31, OCTOBER 4,
1997 1998
------------ -----------
<S> <C> <C>
Raw Material $ 2,172 $ 3,646
Work-in-Process 3,346 6,851
Finished Goods 4,400 6,023
------- -------
$ 9,918 $16,520
======= =======
</TABLE>
-11-
<PAGE> 12
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(5) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 4, 1998
<S> <C>
Total Working Capital Borrowings (a). $ 3,216
========
LONG-TERM DEBT
Revolving credit facility, dollar denominated
bearing interest at 7.10 percent at October 4, 1998 (b). $ 4,890
Senior subordinated notes, dollar denominated
bearing interest at 9.75 percent at October 4, 1998 (c). 145,000
ABN/AMRO loan, Dutch Guilder ("NLG") denominated, bearing
interest at 6.10 percent at October 4, 1998 (d). 4,152
Senior mortgage note, NLG denominated, payable in quarterly
principal installments (NLG 175,000 or US$ 95,000 per annum),
bearing interest at 5.50 percent at October 4, 1998 (e). 1,235
Installment notes payable, NLG denominated, bearing interest at
rates ranging from 7.10 percent to 7.75 percent at October 4, 1998. 208
--------
155,485
Less: Current Portion 704
--------
TOTAL LONG-TERM DEBT $154,781
========
</TABLE>
Working Capital Borrowings
(a) Netherlands
Borrowings under the NLG denominated line of credit have a maximum limit of NLG
11,000 ($5,970 at October 4, 1998). Interest payments on the NLG denominated
line of credit are due quarterly or, with respect to interest due on short-term
loans borrowed under the line of credit, at the end of the short-term loan
period. Borrowings under the NLG line of credit are collateralized by a lien on
certain real property of Polytek. This line of credit contains certain
covenants, the most significant of which relates to minimum net worth
requirements.
-12-
<PAGE> 13
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(5) DEBT (CONTINUED)
Long-Term Debt
(b) U.S.
Effective February 1, 1998, the Company consummated the CSI
acquisition, refinanced the AFA debt of approximately $40 million in
its entirety and acquired all of the capital stock of Polytek. Funds
used for the CSI acquisition and the refinancing of the AFA debt were
provided by a credit facility comprised of (a) term loans, which
consisted of (i) a $70.0 million principal amount Tranche A Term Loan,
bearing interest at LIBOR, plus 3.75 percent; and (ii) a $65.0 million
Tranche B Term Loan, bearing interest at LIBOR, plus 5.50 percent, and
(b) a revolving credit facility (the "Revolving Credit Facility").
Interest payments on the Revolving Credit Facility were required
monthly, beginning February 28, 1998 at a rate of LIBOR, plus 3.00
percent. Effective April 23, 1998, the Company obtained under the
Revolving Credit Facility additional availability of $5.0 million in
excess of the Borrowing Base (but in no event more than $30 million)
and a reduced interest rate of LIBOR plus 2.25 percent.
New Credit Facility.
General. As of September 29, 1998, the Company, AFA and CSI entered
into a new credit facility (the "New Credit Facility") with First
Union National Bank ("First Union"). The New Credit Facility replaces
the Revolving Credit Facility with NationsCredit Commercial Corporation
("NationsCredit"), provides for up to $30.0 million of borrowings from
time to time for a term of five years and includes a subfacility for
the issuance of letters of credit up to a maximum aggregate amount at
any one time outstanding not to exceed $2 million. The Company's
initial borrowing under the New Credit Facility, on October 1, 1998,
was approximately $4.9 million, the proceeds of which were used to
repay all outstanding indebtedness (together with certain fees and
expenses) of the Company under its Revolving Credit Facility with
NationsCredit.
Security. Indebtedness under the New Credit Facility is secured by a
first priority security interest in all accounts receivable, inventory,
machinery and equipment (including molds) of the Company and each of
its domestic subsidiaries. In addition, the Company and each of its
domestic subsidiaries has granted a negative pledge with respect to
certain other assets, including real property, general intangibles and
intellectual property (including patents).
-13-
<PAGE> 14
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In Thousands)
(5) DEBT (CONTINUED)
Interest. Indebtedness under the New Credit Facility bears interest at
a floating rate based (at the Company's option) upon (i) LIBOR (for
either one, two, three or six months), plus an Applicable Margin
ranging from 1.25% to 2.25% (initially 1.75%) or (ii) the Base Rate
(the greater of the Prime Rate announced by First Union or the Federal
Funds Rate plus 0.50%) plus an Applicable Margin ranging from 0.00% to
1.00% (initially 0.50%).
Borrowing Base. The availability of borrowings under the New Credit
Facility is subject to a Borrowing Base equal to the sum of (i) 85% of
eligible accounts receivable, (ii) 60% of eligible inventory, (iii) 75%
of the orderly liquidation value of selected eligible machinery and
equipment, (iv) 80% of the cost of certain new machinery and equipment
and (v) 60% of the cost of the conversion of certain existing machinery
and equipment.
Covenants. The New Credit Facility requires the Company (on a
consolidated basis, including all domestic subsidiaries and Polytek)
to meet certain financial tests at the end of each fiscal quarter,
including a Funded Indebtedness to EBITDA Ratio from the closing date
through June 30, 2000 of 6.25:1.0, decreasing incrementally to 4.5:1.0
at July 1, 2002 and thereafter, and a Fixed Charge Coverage Ratio of
not less than 1.0:1.0 for any fiscal quarter. The New Credit Facility
also contains covenants that include, without limitation: (i) required
delivery of financial statements, other reports and borrowing base
certificates; (ii) limitation on liens; (iii) limitations on mergers,
consolidations and sales of assets; (iv) limitations on incurrence of
debt; (v) limitation on permitted capital expenditures; (vi)
limitations on restricted payments; (vii) limitations on investments
and acquisitions; (viii) limitations on transactions with affiliates;
and (ix) limitations on changes in the Company's line of business.
Events of Default. The New Credit Facility provides for customary
events of default.
(c) Senior Subordinated Notes
On April 23, 1998, the Company issued $145,000 of 9.75 percent Senior
Subordinated Notes due April 15, 2008 (the "Old Notes"). The net
proceeds were used by the Company to refinance U.S. indebtedness,
including borrowings incurred in connection with the acquisition in
February 1998 of substantially all of the assets of CSI, as previously
mentioned in Notes (1) and (3). Interest on the Old Notes was payable
semi-annually on April 15 and October 15, commencing October 15, 1998.
-14-
<PAGE> 15
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(5) DEBT (CONTINUED)
(c) Senior Subordinated Notes (Continued)
The Old Notes were to be redeemable at the option of the Company, in
whole or in part, on or after April 15, 2003, at certain specified
redemption prices, plus accrued and unpaid interest thereon through the
redemption date. In addition, at any time on or before April 15, 2001,
the Company could redeem up to 35 percent of the initial aggregate
principal amount of the Old Notes with the net proceeds of one or more
equity offerings at a redemption price equal to 109.75 percent of the
principal amount thereof, plus accrued and unpaid interest, if any,
through the date of redemption; provided that at least 65 percent of
the initial aggregate principal amount of the Old Notes remained
outstanding. Upon a change of control, the Company would be required to
make an offer to purchase all outstanding Old Notes at 101 percent of
the principal amount thereof, plus accrued and unpaid interest through
the date of purchase.
The Old Notes were unsecured senior subordinated obligations of the
Company and were subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including indebtedness under
its Revolving Credit Facility. The Old Notes were ranked pari passu
with all existing and future senior subordinated indebtedness of the
Company, were ranked senior to all other existing and future
Subordinated Indebtedness of the Company and were fully and
unconditionally guaranteed, jointly and severally, on an unsecured
senior subordinated basis by each of the Company's existing and future
U.S. subsidiaries (the "Subsidiary Guarantors") (see Note 9). The Old
Notes were also effectively subordinated to all existing and future
Senior Indebtedness of the Company's subsidiaries.
On August 17, 1998, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-4 with respect to its
9.75% Senior Subordinated Notes due April 15, 2008 ("New Notes") which
were fully and unconditionally guaranteed, jointly and severally, on an
unsecured senior subordinated basis, by the Subsidiary Guarantors (See
Note 9). On September 16, 1998, the Company concluded its exchange
offer and the New Notes were exchanged for $145,000 aggregate principal
amount of the Old Notes. The New Notes are subordinated in right of
payment to all existing and future Senior Indebtedness, including
indebtedness under the New Credit Facility and, except for certain
transfer restrictions and registrations rights relating to the Old
Notes, are identical in all material respects to the Old Notes.
(d) ABN/AMRO Loan
Polytek has a credit facility with the ABN-AMRO Bank, The Netherlands.
This credit facility includes a loan of up to NLG 8,500 ($4,613),
requiring quarterly payments of $115 through 2007. This Note is
collateralized by a lien on certain real property of Polytek. This Note
contains certain covenants, the most significant of which relate to
minimum net worth requirements.
-15-
<PAGE> 16
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(5) DEBT (CONTINUED)
(e) Senior Mortgage Note
In connection with the construction of a manufacturing facility,
Polytek obtained a NLG 3,500 ($1,235) mortgage from ABN-AMRO Bank, The
Netherlands. Borrowings under this Mortgage Agreement are
collateralized by a lien on certain real property of Polytek.
(6) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
In conjunction with the acquisition of CSI, the Company repaid
outstanding debt of approximately $40 million in February 1998 and
refinanced its term loan borrowing on April 23, 1998 (see Notes (1) and
(3)). As a result, the Company expensed $6,654 of deferred financing
costs and $951 of prepayment penalties as an extraordinary loss.
(7) INCOME TAXES
Pre-tax loss after the effect of the extraordinary item for the nine
months ended October 4, 1998 consists of:
<TABLE>
<CAPTION>
1998
----
<S> <C>
United States $(7,516)
Foreign 828
-------
TOTAL PRE-TAX LOSS $(6,688)
=======
</TABLE>
The condensed consolidated statement of operations includes income
taxes on foreign subsidiary income and minimum state taxes. The Company
has recorded a full valuation allowance related to the potential tax
benefit of the net operating loss carryforward.
(8) RELATED PARTY TRANSACTIONS
Management Fees
Effective February 4, 1998, the Company entered into a new management
agreement with an affiliate of one of the shareholders of the Parent
that provides for annual payments of $300 and expires on July 29,
2008, subject to renewal for successive five-year periods.
-16-
<PAGE> 17
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in Thousands)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
For the nine-month period ended October 4, 1998, $225 of management
fees and certain expenses was recorded. As of October 4, 1998 and
December 31, 1997, the balance of unpaid fees, which has been included
in other accrued expenses in the accompanying balance sheet were $0 and
$125, respectively.
Transactions with Affiliates
The Company has a 41 percent ownership in an affiliate, which is
accounted for using the equity method. Earnings of the affiliate are
not material to the operations of the Company. During the nine months
ended October 4, 1998 and year ended December 31, 1997, the Company
purchased molds from the affiliate for approximately $217 and $283,
respectively. During the nine-month period ended October 4, 1998, the
affiliate provided certain repairs and maintenance at a cost to the
Company of approximately $153. Included in accounts payable in the
accompanying balance sheet at October 4, 1998 and December 31, 1997 is
approximately $93 and $81, respectively, relating to these assets and
services provided by the affiliate.
Professional Services
The law firm of Gratch, Jacobs & Brozman, P.C., of which one of the
Parent's shareholders is a senior member, provides legal services on
an ongoing basis to the Company and its subsidiaries. For the
nine-month period ended October 4, 1998, the Company incurred fees of
approximately $868 to Gratch, Jacobs & Brozman, P.C.
(9) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The New Notes (described in Note 5) are fully and unconditionally
guaranteed, jointly and severally, on an unsecured senior subordinated
basis, by the Subsidiary Guarantors. Polytek and CSI's UK subsidiary
are non-guarantor subsidiaries.
The following condensed consolidating financial statements include the
accounts of the Company, the Subsidiary Guarantors, and the
non-guarantor subsidiaries.
-17-
<PAGE> 18
<PAGE> 19
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
October 4, 1998
(Unaudited)
(in Thousands)
ASSETS
<TABLE>
<CAPTION>
INDESCO GUARANTOR NON-GUARANTOR
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,076 $ 877 $ 230 $ 2,183
Accounts Receivable 9,042 11,603 5,246 (9,757) 16,134
Inventories 11,497 5,010 13 16,520
Prepaid Expenses and Other Assets 90 131 218 439
--------- --------- --------- --------- ---------
Total Current Assets 10,208 24,108 10,704 (9,744) 35,276
Property and Equipment, Net 49,318 10,495 59,813
Excess Cost Over Fair Value
of Net Assets Acquired, Net 72,890 (4,630) 68,260
Patents and Other Intangibles, Net 5,002 5,002
Deferred Financing Costs 5,862 128 5,990
Investment in Subsidiaries 131,549 672 (131,549) 672
Other Assets 402 402
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 147,619 $ 151,720 $ 17,369 (141,293) $ 175,415
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ $ $ 704 $ 704
Notes Payable 3,216 3,216
Accounts and Drafts Payable 873 5,934 2,092 (22) 8,877
Income Taxes Payable 139 222 361
Other Accrued Expenses 6,478 11,390 2,119 (9,766) 10,221
--------- --------- --------- --------- ---------
Total Current Liabilities 7,351 17,463 8,353 (9,788) 23,379
Advances from Parent 127,130 2,340 (129,470)
Long-Term Debt 149,890 4,891 154,781
Deferred Income Taxes 524 524
--------- --------- --------- --------- ---------
Total Liabilities 157,241 144,593 16,108 (139,258) 178,684
Stockholders' Equity:
Common Stock (2,500) 3,000 250 (750)
Additional Paid-in Capital 3,810 527 725 5,062
Accumulated Deficit (7,122) 317 314 (2,035) (8,526)
Accumulated Other
Comprehensive Income 170 25 195
--------- --------- --------- --------- ---------
Total Stockholders' Equity (9,622) 7,127 1,261 (2,035) (3,269)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 147,619 $ 151,720 $ 17,369 (141,293) $ 175,415
========= ========= ========= ========= =========
</TABLE>
-19-
<PAGE> 20
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended October 4, 1998
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
INDESCO GUARANTOR NON-GUARANTOR
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ $ 62,810 $ 21,622 (143) $ 84,289
Cost of Sales 42,405 17,055 (111) 59,349
-------- -------- -------- -------- --------
Gross Profit 20,405 4,567 (32) 24,940
Selling, General and Administrative
Expenses 2,084 6,769 3,334 12,187
-------- -------- -------- -------- --------
Income from Operations (2,084) 13,636 1,233 (32) 12,753
Other Expense (Income):
Interest 1,876 9,514 342 (2) 11,730
Other 43 63 106
Equity in Income of Consolidated
Subsidiaries (2,005) 2,005
-------- -------- -------- -------- --------
Total Other Expense, Net (129) 9,557 405 2,003 11,836
Income Before Extraordinary Item and
Provision for Income Taxes (1,955) 4,079 828 (2,035) 917
Provision for Income Taxes 165 299 464
-------- -------- -------- -------- --------
Income Before Extraordinary Item (1,955) 3,914 529 (2,035) 453
Extraordinary Item - Loss on Early
Extinguishment of Debt 5,167 2,438 7,605
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ (7,122) $ 1,476 $ 529 (2,035) $ (7,152)
======== ======== ======== ======== ========
</TABLE>
-20-
<PAGE> 21
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended October 4, 1998
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
INDESCO GUARANTOR NON-GUARANTOR
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities $ (10,640) $ 11,399 $ 325 5,076 $ 6,160
Cash Flows From Investing Activities:
Acquisition of CSI (92,947) (92,947)
Expenditures for Property and Equipment (6,388) (719) (7,107)
Disposal of Property and Equipment 14 14
Other (241) (459) (700)
--------- --------- --------- --------- ---------
Net Cash Used by Investing Activities (92,947) (6,615) (1,178) (100,740)
Cash Flows From Financing Activities:
Proceeds from Long-Term Debt 280,000 280,000
Repayment of Long-Term Debt (135,000) (40,542) (585) (176,127)
Payments of Deferred Financing Costs (11,297) (121) (11,418)
Net (Repayment) Borrowings Under
Revolving Credit Agreements 10,057 843 (5,167) 5,733
Return of Capital To Parent (2,500) (2,500)
Advances from Parent (36,597) 36,493 13 91
--------- --------- --------- --------- ---------
Net Cash Provided (Used) by
Financing Activities 104,663 (4,049) 150 (5,076) 95,688
--------- --------- --------- --------- ---------
Effect of Exchange Rate Changes on Cash 24 24
Net Increase (Decrease) in Cash
and Cash Equivalents 1,076 735 (679) 1,132
Cash and Cash Equivalents at
Beginning of Year 142 909 1,051
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,076 $ 877 $ 230 $ 2,183
========= ========= ========= ========= =========
</TABLE>
-21-
<PAGE> 22
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS.
The accompanying condensed consolidated statements of operations of the Company
include the results of operations of the Company, AFA and Polytek, for the three
months and nine months ended October 4, 1998, and the results of operations of
CSI from its acquisition on February 1, 1998 through October 4, 1998. The 1997
condensed consolidated statement of operations reflect the financial results of
WTI for the one month and seven months ended July 31, 1997 and the financial
results of the Parent for the two months ended, October 5, 1997, and Parent
which include the results of AFA and Polytek. The results of operations of WTI
and Parent in 1997 do not include any results of operations for CSI.
Accordingly, the Company's results of operations for 1998 are not directly
comparable to those of WTI and the Parent for 1997.
Third Quarter Ended October 4, 1998.
The condensed consolidated operating results of the Company for each of the
three months ended July 5, 1998 and October 4, 1998, and the operating results
of WTI for the one month ended July 31, 1997 and the Parent for the two months
ended October 5,1997 are presented below. The operating results are expressed as
a percentage of sales for review purposes. The Company's 1998 results of
operations are not directly comparable to those of WTI and the Parent for 1997
because they do not include the results of operations for CSI. Therefore, a
comparison of the Company's results of operations for the three months ended
October 4, 1998 ("Third Quarter") to the results for the three months ended July
5, 1998 ("Second Quarter") is presented herewith.
<TABLE>
<CAPTION>
WTI, INC. AND AFA HOLDINGS INDESCO INDESCO
SUBSIDIARIES CO. AND INTERNATIONAL, INTERNATIONAL,
(PREDECESSOR TO SUBSIDIARIES INC. AND INC. AND
INDESCO SUBSIDIARIES SUBSIDIARIES
HOLDINGS CO.) Two Months
One Month Ended Ended Quarter Ended Quarter Ended
July 31, 1997 October 5, 1997 July 5, 1998 October 4, 1998
------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 70.7% 72.2% 67.3% 72.9%
----- ----- ----- -----
GROSS PROFIT 29.3% 27.8% 32.6% 27.1%
OPERATING EXPENSES:
Selling, General & Administrative 11.5% 12.0% 11.7% 11.0%
Research and Development 0.4% 0.5% 1.2% 1.4%
Amortization of Intangibles 3.8% 3.3% 2.3% 2.6%
----- ----- ----- -----
15.7% 15.8% 15.2% 15.0%
----- ----- ----- -----
INCOME FROM OPERATIONS 13.6% 12.1% 17.4% 12.1%
OTHER INCOME/(EXPENSE):
Interest 9.7% 10.9% -14.0% -14.2%
Other -11.3% -0.3% -0.2% 0.1%
----- ----- ----- -----
TOTAL OTHER EXPENSE, NET -1.6% 10.7% -14.2% -14.1%
----- ----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM
AND PROVISION FOR INCOME TAXES 15.2% 1.4% 3.3% -2.0%
Provision for Income Taxes 1.8% 0.3% 0.2% 0.8%
----- ----- ----- -----
</TABLE>
-22-
<PAGE> 23
<TABLE>
<CAPTION>
WTI, INC. AND AFA HOLDINGS INDESCO INDESCO
SUBSIDIARIES CO. AND INTERNATIONAL, INTERNATIONAL,
(PREDECESSOR TO SUBSIDIARIES INC. AND INC. AND
INDESCO SUBSIDIARIES SUBSIDIARIES
HOLDINGS CO.) Two Months
One Month Ended Ended Quarter Ended Quarter Ended
July 31, 1997 October 5, 1997 July 5, 1998 October 4, 1998
------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
INCOME BEFORE EXTRAORDINARY ITEM 13.4% 1.1% 3.1% -2.8%
Extraordinary Item - Loss on Early
Extinguishment of Debt 0.0% 0.0% 16.3% 0.0%
----- ----- ----- -----
NET INCOME (LOSS) 13.4% 1.1% -13.2% -2.8%
===== ===== ===== =====
</TABLE>
Net sales for the Third Quarter were $27.6 million, a decrease of $4.1 million
or 13%, compared to the Second Quarter. The decrease in net sales was
principally due to the effect of the loss of a significant trigger sprayer
customer, which occurred earlier in the year. (Sales to this customer
actually ended early in the Third Quarter). Second Quarter sales were
positively impacted by the successful launch of new trigger sprayer products for
two of the Company's other customers. Sales of these new products in the Third
Quarter were somewhat lower. In addition, for certain trigger sprayer products,
the Company has lowered its selling prices in response to competitive pricing
pressures. This also served to reduce net sales in the Third Quarter. Third
Quarter decreases in net sales were partially offset by higher volume sales to
several of the Company's multi-national customers.
As a percentage of net sales, cost of sales was 72.9% in the Third Quarter as
compared to 67.3% for the Second Quarter. Production efficiencies in the Third
Quarter were adversely affected by the loss of the significant trigger sprayer
customer described above. Products for that customer were high volume and
consistently produced. Production efficiencies were also impacted by an overall
decrease in output, which led to unabsorbed manufacturing overhead and thus,
higher cost of sales. These factors were partially offset by the continued
downward trend of resin costs which has served to reduce overall cost of sales.
Selling, general and administrative expenses were $3.0 million, or 11.0% of net
sales for the Third Quarter, a decrease from $3.7 million, or 11.7% of net sales
for the Second Quarter. The $0.7 million decrease was primarily due to higher
legal and other professional fees incurred as a period cost in the Second
Quarter, which were related to the completion of the CSI acquisition and other
corporate transactions.
Research and development costs and amortization of intangibles did not
materially change from the Second Quarter to the Third Quarter.
Interest expense and finance fees were $3.7 million and $0.2 million (total $3.9
million) for the Third Quarter as compared to $4.1 million and $0.3 million
(total $4.4 million) for the Second Quarter. The $0.4 decrease in interest was
principally due to: (i) a lower average balance outstanding under the Revolving
Credit Facility (approximately $10 million in the Second Quarter as compared to
$5 million in the Third Quarter), and (ii) a lower overall interest rate in the
Third Quarter resulting from the April 23, 1998 refinancing of the then-existing
term loans. The additional $0.1 million of finance fees in the Second Quarter
were related to the then-existing term loans that were retired in the Second
Quarter. (Finance fees of $0.2 million related to the Revolving Credit Facility
and the issuance of the Senior Subordinated Notes were also incurred in each
quarter.)
No U.S. tax liability is currently anticipated for 1998. Provisions for taxes
that have been recorded in the 1998 financial statements are related to taxes on
income from foreign operations and state minimum taxes.
Nine Months Ended October 4, 1998.
The condensed consolidated operating results of the Company for the nine months
ended October 4, 1998, and the operating results of WTI for the seven months
ended July 31, 1997 and the Parent for the two months ended October 5, 1997 are
presented below. The operating results are expressed as a percentage of sales
for review purposes. The Company's 1998 results of operations are not directly
comparable to those of WTI and the Parent for 1997.
-23-
<PAGE> 24
<TABLE>
<CAPTION>
WTI, INC. AND AFA HOLDINGS INDESCO
SUBSIDIARIES CO. AND INTERNATIONAL,
(PREDECESSOR SUBSIDIARIES INC. AND
TO INDESCO SUBSIDIARIES
HOLDINGS CO.)
Seven Months Two Months Nine Months
Ended Ended Ended
July 31, 1997 October 5, October 4, 1998
1997
------------- ---------- ---------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 70.7% 72.2% 70.4%
----- ----- -----
Gross Profit 29.3% 27.8% 29.6%
Operating Expenses:
Selling, General & Administrative 10.7% 12.0% 11.2%
Research and Development 0.3% 0.5% 0.9%
Amortization of Intangibles 3.0% 3.3% 2.3%
----- ----- -----
14.0% 15.8% 14.4%
----- ----- -----
Income from Operations 15.3% 12.0% 15.2%
Other Income/(Expense):
Interest 7.0% 10.9% 13.9%
Other -2.0% -0.3% 0.1%
----- ----- -----
Total Other Expense, Net 5.0% 10.6% 14.0%
----- ----- -----
Income Before Extraordinary Item
And Provision for Income Taxes 10.3% 1.4% 1.2%
Provision for Income Taxes 1.0% 0.3% 0.6%
----- ----- -----
Income Before Extraordinary Item 9.3% 1.1% 0.6%
Extraordinary Item - Loss on Early
Extinguishment of Debt 0.0% 0.0% 9.1%
----- ----- -----
Net Income (Loss) 9.3% 1.1% -8.5%
===== ===== =====
</TABLE>
Net sales for the nine months ended October 4, 1998 ("the 1998 Nine Month
Period") were $84.3 million and include CSI sales of approximately $42.5 million
for the period from February 1, 1998, the acquisition date, through October 4,
1998. For certain of its trigger sprayer products, the Company lowered its
selling prices in response to competitive pricing pressures experienced during
the 1998 Nine Month Period. Lower prices served to reduce overall 1998 sales.
The 1998 net sales related to AFA and Polytek did not significantly change on a
year-to-year basis.
Cost of sales for the 1998 Nine Month Period were $59.3 million, or 70.4% of
sales. CSI's cost of sales as a percentage of net sales for the period February
1, 1998 through October 4, 1998 was approximately 69% and was adversely affected
by a one-time step-up of $850,000 of inventory which was expensed during the
1998 Nine Month Period. Overall cost of sales was positively impacted by the
continued downward trend of resin costs.
Gross profit for the 1998 Nine Month Period was $24.9 million, or 29.6% of
net sales. Gross profit has been negatively
-24-
<PAGE> 25
impacted by a reduction in selling prices, consistent with competitive selling
pressures, for certain of the Company's larger volume trigger sprayer products
during the 1998 Nine Month Period.
Selling, general and administrative expenses for the 1998 Nine Month Period,
which were $9.1 million, or 11.2% of sales, include (i) CSI expenses from
February 1, 1998 through October 4, 1998, (ii) legal and other professional fees
related to the completion of the CSI acquisition and other corporate
transactions, and (iii) expenses related to establishing the Company's corporate
office. Research and Development expense includes CSI expenses. Amortization of
Intangibles for the 1998 Nine Month Period includes approximately $1.4 million
amortization of goodwill related to the acquisition of CSI on February 1, 1998.
Interest expense for the 1998 Nine Month Period was $11.7 million, or 13.9% of
sales. Approximately $6.7 million of interest expense, related to the $145
million Senior Subordinated Notes bearing interest at 9.75%, was incurred
from April 23, 1998 (the issuance date) through October 4, 1998. The remaining
amount relates to interest and financing fees in connection with the Company's
various credit facilities, which bore interest at rates ranging from
approximately 5% to 11.5%.
No U.S. tax liability is currently anticipated for 1998. Provision for taxes
that have been recorded in the 1998 Nine Month Period are related to income
from foreign operations and state minimum taxes.
In the 1998 Nine Month Period, the Company recorded an Extraordinary Loss on the
Early Extinguishment of Debt, comprised of $6.65 million of deferred financing
costs and $0.95 million of prepayment penalties.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company completed several significant transactions and, as of
October 4, 1998, the Company's outstanding debt is as follows:
1. On April 23, 1998, the Company issued $145 million of 9.75% Senior
Subordinated Notes, due in 2008. The net proceeds were used by the
Company to refinance the indebtedness, including borrowings incurred in
connection with the acquisition in February 1998 of substantially all
of the assets of CSI. As described in Note 5 to the financial
statements, on September 16, 1998, the Company concluded its exchange
offer and the New Notes were exchanged for $145 million of the Old
Notes. The New Notes are subordinated in right of payment to the New
Credit Facility (see 2 below) and are identical in all material
respects to the Old Notes (except for certain transfer restrictions and
registration rights relating to the Old Notes).
2. As of September 29, 1998, the Company entered into a new credit
facility (the "New Credit Facility") with First Union National Bank
("First Union"). The New Credit Facility, which replaces the Company's
Revolving Credit Facility with NationsCredit Commercial Corporation
("NationsCredit"), provides for up to $30 million of borrowings from
time to time for a term of five years and includes a subfacility for
the issuance of letters of credit up to a maximum aggregate amount at
any one time outstanding not to exceed $2 million. The Company's
initial borrowing under the New Credit Facility, on October 1, 1998,
was approximately $4.9 million. The proceeds were used to repay all
outstanding indebtedness (together with certain fees and expenses) of
the Company under its Revolving Credit Facility with NationsCredit. The
Company intends to use the New Credit Facility to fund the majority of
its working capital and capital investment requirements in its U.S.
operations (see Note 5(b) to the financial statements for further
description of the terms of the New Credit Facility).
3. Polytek has a credit facility with ABN-AMRO Bank that includes a loan
of NLG 8.5 million ($4.6 million), collateralized by a lien on certain
real property of Polytek. This facility also includes a working capital
line of credit up to NLG 11 million ($6.0 million). As of October 4,
1998, Polytek's outstanding indebtedness under the working capital line
of credit was $3.2 million, with additional availability of $2.8
million. The Company intends to use this credit facility to fund the
majority of its working capital and capital investment requirements for
its European operations.
4. In connection with the construction of a manufacturing facility in
1991, Polytek obtained a NLG 3.5 million ($1.9 million) loan from
ABN-AMRO Bank, secured by a mortgage on certain real property of
Polytek.
-25-
<PAGE> 26
For the 1998 Nine Month Period, the net cash provided by operating activities
of $6.2 million resulted from the $7.2 million net loss, offset by (i) an
aggregate $13.6 million of non-cash items (i.e., depreciation, amortization, the
write-off of deferred financing costs), and (ii) $0.2 million net increase in
current assets.
For the 1998 Nine Month Period, the net cash used in investing activities
included the $92.9 million expended to effect the CSI acquisition and capital
expenditures of $7.1 million.
For the 1998 Nine Month Period, the net cash provided from financing activities
aggregated $95.7 million resulting primarily from the issuance of $145 million
in Senior Subordinated Notes (as described above).
Management believes that net cash generated by operations, together with amounts
available under the New Credit Facility and the credit facility with ABN-AMRO
Bank, will be adequate to fund the payment of interest and principal on the
Company's outstanding indebtedness as well as its capital expenditure plans and
working capital requirements.
Management believes that inflation did not have a significant impact on
operations.
Year 2000 Compliance.
As many computer systems and other equipment with embedded chips or processors
(collectively, "Business Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the Year 2000. As a result, business and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This state of affairs is commonly referred to as the "Year
2000 Compliance" ("Y2K") issue. This issue can be a factor at any point in a
business entity's supply, manufacturing, distribution or financial chains.
The formation of the Company, as it is presently configured, was completed in
February 1998 when CSI was acquired and combined with the Company's two other
operating subsidiaries that had been acquired only several months prior, AFA and
Polytek. However, while the Indesco combination was therefore only completed
earlier this year, management of the subsidiaries had already begun to address
Year 2000 Compliance issues at the subsidiary level. Substantive progress has
been made throughout the Company in identifying Business System areas where
potential risk may exist, and in certain cases, the Company has already
established that certain of its Business Systems are in fact Y2K Compliant. In
other cases, inquiries of third party suppliers have been initiated, and an
evaluation as to the nature of modifications needed, if any, is under active
review. A discussion of certain of these areas is as follows:
1. Earlier this year, as part of its systems integration, the Company
conducted a review of enterprise resource planning (ERP) software
packages that were suitable for manufacturers in the injection molding
industry. The objective was to convert the applications systems being
used at each of its operating sites to a software/hardware platform
that would integrate the various functions of the Company, i.e.,
manufacturing, distribution, supply and finance. While selection of the
software package was made from the standpoint of optimizing its
business suitability, the Company had also obtained certification that
the new software was Year 2000 Compliant prior to finalizing the
purchase. The implementation of the new software is being performed at
each of the Company's operating sites so as to standardize and
integrate the Company's communications, reporting and data management
functions.
2. Much of the Company's network server and desktop computer hardware was
recently purchased. All such equipment was certified as Y2K Compliant
prior to purchase.
3. With respect to injection molding equipment in which a microprocessor
is used, technical management has polled its equipment suppliers in
order to establish that the equipment is Year 2000 Compliant. In
certain cases, the Company has already received affirmative responses
that certain of its equipment are Year 2000 Compliant. The Company is
in the process of evaluating this information.
-26-
<PAGE> 27
The completion of the Company's program involves (i) reviewing the Company's
Business Systems for potential Y2K risk, (ii) developing required modifications
to those systems and (iii) allocating resources to effect those modifications.
Included in these efforts will be communications with principal customers and
third-party providers of goods and services to establish that they have
adequately addressed Y2K Compliance within their own organizations.
While there can be no assurance, management presently believes that the cost to
achieve Y2K compliance will not be material to the Company.
Other.
The information provided contains certain forward-looking statements and
information that are based on the beliefs of management, as well as assumptions
made by and information currently available to the Company's management.
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
-27-
<PAGE> 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 (the Financial Data Schedule) is included with this
report.
(b) No reports on Form 8-K were filed for the quarter ended October 4,
1998.
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Indesco International, Inc.
By: \s\ Peter Giallorenzo
-------------------------
Peter Giallorenzo
Vice President and Chief
Financial Officer
Date: November 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements included in the Indesco International, Inc. Form 10-Q for the Nine
Months Ended October 4, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-04-1998
<CASH> 2,183
<SECURITIES> 0
<RECEIVABLES> 15,134
<ALLOWANCES> 0
<INVENTORY> 16,520
<CURRENT-ASSETS> 35,276
<PP&E> 66,542
<DEPRECIATION> 6,729
<TOTAL-ASSETS> 175,415
<CURRENT-LIABILITIES> 23,379
<BONDS> 154,781
0
0
<COMMON> 5,062
<OTHER-SE> (8,311)
<TOTAL-LIABILITY-AND-EQUITY> 175,415
<SALES> 84,289
<TOTAL-REVENUES> 84,289
<CGS> 59,349
<TOTAL-COSTS> 59,349
<OTHER-EXPENSES> 12,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,730
<INCOME-PRETAX> 917
<INCOME-TAX> 464
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 7,605
<CHANGES> 0
<NET-INCOME> (7,152)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
