<PAGE> 1
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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 JUNE 30, 1999
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)
<TABLE>
<S> <C>
DELAWARE 13-3987915
(State of Incorporation) (I.R.S. Employer Identification
No.)
950 THIRD AVENUE
NEW YORK, NEW YORK 10022
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
(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 (August 1, 1999)
Common Stock: 200 Shares, Par Value $0.01
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<PAGE> 2
INDESCO INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Balance Sheets of Indesco
International, Inc. at June 30, 1999 (Unaudited) and
December 31, 1998........................................... 2
Condensed Consolidated Statements of Operations of Indesco
International, Inc. for the Three and Six Months Ended June
30, 1999 and 1998 (Unaudited)............................... 3
Condensed Consolidated Statements of Cash Flows of Indesco
International, Inc. for the Six Months Ended June 30, 1999
and 1998 (Unaudited)........................................ 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 23
SIGNATURE............................................................. 24
</TABLE>
1
<PAGE> 3
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 3,748 $ 1,569
Accounts Receivable, Net.................................. 12,336 13,941
Inventories............................................... 11,864 13,447
Prepaid Expenses and Other Assets......................... 935 665
-------- --------
Total Current Assets.............................. 28,883 29,622
Property, Plant and Equipment, Net.......................... 67,645 65,885
Excess of Cost Over Fair Value of Net Assets Acquired,
Net....................................................... 60,353 60,953
Patents and Other Intangibles, Net.......................... 7,483 7,738
Deferred Financing Costs.................................... 5,815 6,165
Other Assets................................................ 972 1,043
-------- --------
TOTAL ASSETS...................................... $171,151 $171,406
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Portion of Long-Term Debt and Capital Lease
Obligations............................................ $ 947 $ 1,085
Credit Facilities......................................... 3,110 3,613
Accounts and Drafts Payable............................... 7,657 7,602
Income Taxes Payable...................................... 115 36
Other Accrued Expenses.................................... 6,214 7,110
-------- --------
Total Current Liabilities......................... 18,043 19,446
Long-Term Debt and Capital Lease Obligations................ 167,851 163,416
Deferred Income Taxes....................................... 647 647
-------- --------
Total Liabilities................................. 186,541 183,509
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common-Stock, Authorized 3,000 Shares of $.01 Par Value;
200 Shares Issued and Outstanding...................... -- --
Additional Paid-in Capital................................ 5,062 5,062
Accumulated Deficit....................................... (20,483) (17,233)
Accumulated Other Comprehensive Income.................... 31 68
-------- --------
Total Stockholders' Equity (Deficit).............. (15,390) (12,103)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)....................................... $171,151 $171,406
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales........................................... $25,303 $31,701 $52,987 $56,717
Cost of Sales....................................... 18,294 21,337 39,077 39,262
------- ------- ------- -------
Gross Profit...................................... 7,009 10,364 13,910 17,455
Operating Expenses:
Selling, General and Administrative............... 3,230 3,694 6,192 6,508
Research and Development.......................... 642 382 1,196 402
Amortization of Intangibles....................... 689 724 1,373 1,257
------- ------- ------- -------
Total Operating Expenses....................... 4,561 4,800 8,761 8,167
------- ------- ------- -------
Income From Operations....................... 2,448 5,564 5,149 9,288
Other (Income) Expense:
Interest.......................................... 4,132 4,446 8,279 7,821
Other............................................. 136 76 33 (6)
------- ------- ------- -------
Total Other Expense, Net....................... 4,268 4,522 8,311 7,815
------- ------- ------- -------
Income (Loss) Before Extraordinary Item and
Provision for Income Taxes................ (1,820) 1,042 (3,163) 1,473
Provision for Income Taxes.......................... 37 68 87 239
------- ------- ------- -------
Income (Loss) Before Extraordinary Item........... (1,857) 974 (3,250) 1,234
Extraordinary Item -- Loss on Early Extinguishment
of Debt........................................... -- 5,167 -- 7,605
------- ------- ------- -------
NET LOSS.......................................... $(1,857) $(4,193) $(3,250) $(6,371)
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss)......................................... $(3,250) $ (6,371)
Less: Extraordinary Item.................................. -- 7,605
------- ---------
(3,250) 1,234
------- ---------
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities:
Depreciation........................................... 3,502 3,190
Amortization........................................... 1,373 1,273
Loss on Disposal of Property, Plant and Equipment...... 55 --
Changes in Operating Assets and Liabilities:
Accounts Receivable.................................. 1,227 (12,252)
Inventories.......................................... 1,240 249
Prepaid Expenses and Other Assets.................... 86 (62)
Accounts and Drafts Payable.......................... 53 3,345
Income Taxes Payable................................. 79 (318)
Other Accrued Expenses............................... (449) 2,639
------- ---------
Total Adjustments................................. 7,166 (1,936)
------- ---------
Net Cash Provided (Used) by Operating Activities.......... 3,916 (702)
------- ---------
Cash Flows From Investing Activities:
Acquisition of CSI, Net of Cash Acquired.................. -- (92,931)
Expenditures for Property, Plant and Equipment............ (6,572) (3,396)
Proceeds From Disposal of Property, Plant and Equipment... -- 14
Other..................................................... (60) (101)
------- ---------
Net Cash Used by Investing Activities..................... (6,632) (96,414)
------- ---------
Cash Flows From Financing Activities:
Proceeds From Senior Subordinated Notes................... -- 145,000
Proceeds From Term Loans.................................. -- 135,000
Repayment of Long-Term Debt............................... (325) (173,643)
Payments of Deferred Financing Costs...................... -- (10,954)
Net Borrowings Under Revolving Credit Agreements.......... 5,266 4,308
Return of Capital to Parent............................... -- (2,500)
------- ---------
Net Cash Provided (Used) by Financing Activities.......... 4,941 97,211
------- ---------
Effect of Exchange Rate Changes on Cash..................... (46) (6)
------- ---------
Net Increase in Cash and Cash Equivalents................. 2,179 89
Cash and Cash Equivalents at Beginning of Year.............. 1,569 1,051
------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 3,748 $ 1,140
======= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Interest............................................... $ 7,279 $ 2,782
======= =========
Income Taxes........................................... $ 7 $ 392
======= =========
</TABLE>
Non-Cash Investing and Financing Information:
During the six-month period ended June 30, 1998, Parent debt of $3,000 was
converted to equity.
See notes to consolidated financial statements.
4
<PAGE> 6
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS 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") primarily in the United States and the Netherlands. The Parent was
formed in July 1997 to acquire, through a wholly-owned subsidiary, the assets
and liabilities of AFA Products, Inc. ("AFA"), located in Forest City, North
Carolina. Concurrent with this transaction, the stockholder of the Parent and
affiliate of another stockholder of the Parent acquired the outstanding capital
stock of AFA Polytek B.V. ("Polytek") based in The Netherlands. 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 unaudited condensed consolidated balance sheet of the
Company as of June 30, 1999 includes the accounts of the Company and its
subsidiaries (AFA, Polytek and CSI) as compared to the balance sheet as of
December 31, 1998.
The accompanying unaudited condensed consolidated statement of operations
of the Company for the three and six months ended June 30, 1999 includes the
results of operations of the Company and its subsidiaries (AFA, Polytek and
CSI).
The accompanying unaudited condensed consolidated statement of operations
of the Company for 1998 includes the results of operations of the Company, AFA
and Polytek, for the three and six months ended June 30, 1998 and the results of
operations of CSI from its acquisition on February 1, 1998 through June 30,
1998.
The unaudited condensed consolidated balance sheet as of June 30, 1999 and
the unaudited condensed consolidated statements of operations and cash flows for
the three and six months ended June 30, 1998 and 1999, in the opinion of
management, have been prepared on the same basis as the related Company's
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 condensed
consolidated 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 unaudited 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 six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year.
(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 sheets dates ($.5328 and $.4785 per guilder at December
31, 1998 and June 30, 1999, respectively). Items of revenue and expense are
translated at average exchange rates during the period ($.4902 per guilder for
the six-month periods ended June 30, 1998 and 1999). Translation adjustments
resulting from translating the Polytek financial statements into dollars, are
reported in the equity section of the accompanying balance sheet under the
caption "Accumulated Other Comprehensive Income."
5
<PAGE> 7
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
New Accounting Pronouncement
On June 1, 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income, its components (revenue, expenses, gains and losses) and
accumulated balances in a full set of general purpose financial statements.
Comprehensive income for the Company includes net income (loss) and the effects
of translation which are charged or credited to the cumulative translation
adjustments account within stockholders' equity. SFAS No. 130 was adopted on
January 1, 1998. During the six months ended June 30, 1998 and 1999, total
comprehensive loss amounted to $6,370 and $3,454, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments. This statement is effective for 1998 and is
included in Note 13.
(3) ACQUISITIONS OF CONTINENTAL SPRAYER 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 $5,721. 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 the inventory $850 in accordance
with Accounting Principles Board Opinion No. 16 and has recorded fixed assets
and identifiable intangibles at their appraised fair market value. The excess of
the aggregate purchase price over the fair market value of net assets acquired
of approximately $55 million is being amortized over 30 years. Unaudited
proforma results of operations of the Company before extraordinary items for the
six months ended June 30, 1998 as if the transaction had occurred on January 1,
1998 are as follows:
<TABLE>
<S> <C>
Net Sales................................................... $61,563
=======
Net Income Before Extraordinary Item........................ $ 1,557
=======
</TABLE>
(4) INVENTORIES
The components of inventories as of June 30, 1999 and December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
------- -----------
<S> <C> <C>
Raw Material................................................ $ 3,195 $ 3,418
Work-in-Process............................................. 4,491 5,015
Finished Goods.............................................. 4,178 5,014
------- -------
$11,864 $13,447
======= =======
</TABLE>
6
<PAGE> 8
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, summarized by major classification and
estimated useful lives for depreciation purposes, is as follows:
<TABLE>
<CAPTION>
USEFUL JUNE 30 DECEMBER 31
LIVES (YEARS) 1999 1998
------------- -------- -----------
<S> <C> <C> <C>
Land............................................ $ 2,578 $ 2,499
Buildings....................................... 30-40 13,906 14,311
Machinery and Equipment......................... 5-7 42,587 42,971
Furniture and Fixtures.......................... 5-7 3,014 3,056
Vehicles........................................ 5 23 23
Construction in Progress........................ 17,512 11,754
-------- -------
79,620 74,614
Less: Accumulated Depreciation and
Amortization.................................. (11,975) (8,729)
-------- -------
Property, Plant and Equipment, Net............ $ 67,645 $65,885
======== =======
</TABLE>
Construction in progress primarily consists of additions and improvements
to buildings, molds and machinery. Property, plant and equipment includes
approximately $2,269 for assets recorded under capital leases.
(6) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
-------- -----------
<S> <C> <C>
Working Capital line of credit, Dutch Guilder ("NLG")
denominated bearing interest at 4.75 percent (a).......... $ 3,110 $ 3,613
======== ========
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
-------- --------
Revolving credit facility, dollar denominated bearing
interest at 7.10 percent (b).............................. $ 17,344 $ 12,058
Senior subordinated notes, dollar denominated bearing
interest at 9.75 percent (c).............................. 145,000 145,000
ABN/AMRO loan, NLG denominated, bearing interest at 6.10
percent (d)............................................... 3,362 3,930
Senior mortgage note, NLG denominated, payable in quarterly
principal installments (NLG 175,000 or US $84,000 per
annum), bearing interest at 5.50 percent (e).............. 1,041 1,212
Capital lease obligations, NLG denominated, bearing interest
at rates ranging from 7.10 percent to 7.75 percent........ 2,051 2,301
-------- --------
168,798 164,501
Less: Current Portion....................................... 947 1,085
-------- --------
TOTAL LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS........ $167,851 $163,416
======== ========
</TABLE>
7
<PAGE> 9
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Working Capital Borrowings
(a) Netherlands
Borrowings under the NLG denominated line of credit have a maximum limit of
NLG 11,000 ($5,861 and $5,264 at December 31, 1998 and June 30, 1999,
respectively). 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.
Long-Term Debt
(b) U.S.
Effective February 1, 1998, the Company consummated the CSI acquisition,
refinanced the AFA debt of approximately $40,000 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 $70,000 principal amount Tranche A Term
Loan, bearing interest at LIBOR, plus 3.75 percent; and (ii) a $65,000 Tranche B
Term Loan, bearing interest at LIBOR, plus 5.50 percent, and (b) a revolving
credit facility (the "Revolving Credit Facility").
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"). As amended, the New Credit Facility replaces the Revolving
Credit Facility with NationsCredit Commercial Corporation ("NationsCredit"),
provides for up to $30,000 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 $2,000. The
Company's initial borrowing under the New Credit Facility, on October 1, 1998,
was approximately $4,900, 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.
Collateral -- Indebtedness under the New Credit Facility is collateralized
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).
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 percent
to 2.25 percent (currently 2.25%) or (ii) the Base Rate (the greater of the
Prime Rate announced by First Union or the Federal Funds Rate plus 0.50 percent)
plus an Applicable Margin ranging from 0.00 percent to 1.00 percent (currently
1%).
Borrowing Base -- The availability of borrowings under the New Credit
Facility is subject to a borrowing base equal to the sum of (i) 85 percent of
eligible accounts receivable, (ii) 60 percent of eligible inventory, (iii) 75
percent of the orderly liquidation value of selected eligible machinery and
equipment, (iv) 80 percent of the cost of certain new machinery and equipment
and (v) 60 percent of the cost of the conversion of certain existing machinery
and equipment. The lender has the right to set reserves which can limit the
amount of borrowing base availability.
8
<PAGE> 10
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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 and a Fixed Charge Coverage Ratio. The New Credit
Facility also contains covenants that include, without limitation: (i) required
delivery of financial statements, other reports and borrowings base
certificates; (ii) limitations on liens; (iii) limitations on mergers,
consolidations and sales of assets; (iv) limitations on incurrence of debt; (v)
limitations 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.
On March 24, 1999, the Company amended its New Credit Facility. The
amendment (i) waives compliance with the Funded Indebtedness to EBITDA ratio
through the end of 1999, (ii) requires the Company to maintain EBITDA of at
least $3,000 for each of the fiscal quarters ending on March 31, 1999, June 30,
1999, September 30, 1999 and December 31, 1999, (iii) reduces the Capital
Expenditure Limit (as defined in the New Credit Facility) for the period
commencing on September 29, 1998 through December 31, 1999, (iv) increases the
Applicable Margin on Eurodollar loans to 2.25% (from 1.75%) and on Base Rate
loans to 1.00% (from 0.50%) and (v) provides that prior to May 14, 1999, the
Company and First Union will negotiate additional financial covenants and new
financial covenant levels for the fiscal quarters ending on June 30, 1999,
September 30, 1999, December 31, 1999 and March 31, 2000. With respect to (v),
the Company and the Bank are currently in discussions.
(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") which have been
exchanged for New Notes, as defined below. 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.
The Old Notes were 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 to 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, to the
date of redemption; provided that at least 65 percent of the initial aggregate
principal amount of the Old Notes remained outstanding. The terms of the Old
Notes required the Company to make an offer to purchase all outstanding Old
Notes at 101 percent of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase, upon a change of control of the Company.
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 13). The Old Notes were
also effectively subordinated to all existing and future Senior Indebtedness of
the Company's subsidiaries.
9
<PAGE> 11
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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 are fully and
unconditionally guaranteed, jointly and severally, on an unsecured senior
subordinated basis, by the Subsidiary Guarantors, (see Note 13). 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 ($4,067), requiring quarterly
payments of NLG 216 ($103) 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.
(e) Senior Mortgage Note
In connection with the construction of a manufacturing facility, Polytek
obtained a NLG 3,500 ($1,675) mortgage from ABN-AMRO Bank, The Netherlands.
Borrowings under this Mortgage Note are collateralized by a lien on certain real
property of Polytek.
(7) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
In conjunction with the acquisition of CSI, the Company repaid outstanding
debt of approximately $40,000 in February 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.
(8) INCOME TAXES
The loss before provision for income taxes consisted of:
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1999 1998
------- -------
<S> <C> <C>
United States............................................... ($2,691) $(6,532)
Foreign..................................................... (472) 400
------- -------
Total Pre-Tax Loss........................................ $(3,163) $(6,132)
======= =======
</TABLE>
The condensed consolidated statements 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 and other deferred tax assets.
The Company paid income taxes of $7 and $392 for the periods ended June 30,
1999 and 1998, respectively. The Company has U.S. net operating loss
carryforwards of approximately $14,000, expiring in years 2012 through 2013. The
net deferred tax liability of $647 relates to foreign taxes.
The Company has established valuation allowances in accordance with the
provision of FASB Statement No. 109, "Accounting for Income Taxes." The Company
will review the adequacy of the valuation allowance
10
<PAGE> 12
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
in the future years and recognize only those benefits as the reassessment
indicates that it is more likely than not that the benefits will be realized.
(9) CONTINGENCIES
Litigation
There are pending claims and litigation against the Company arising in the
ordinary course of business. Management believes, on the basis of its
understanding and advice of counsel, that these actions will not result in
payment of amounts, if any, which would have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
(10) 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.
For the six months ended June 30, 1998 and 1999, the Company incurred
approximately $150 and $150, respectively, of management fees and certain
expenses. As of December 31, 1998 and June 30, 1999, all fees and expenses had
been paid.
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 periods ended June 30, 1998 and 1999, the
Company purchased molds from the affiliate for approximately $121 and $239,
respectively. During the periods ended June 30, 1998 and 1999, the affiliate
provided certain repairs and maintenance at a cost to the Company of
approximately $115 and $136, respectively.
Included in accounts payable in the accompanying balance sheets at December
31, 1998 and June 30, 1999, are approximately $156 and $100, 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 six months ended June 30,
1998 and 1999, the Company incurred fees of approximately $807 and $312,
respectively, to Gratch, Jacobs & Brozman, P.C.
(11) EMPLOYEE BENEFIT PLANS
401(k) Plans
The Company offers an employee savings plan (the "Plan") under Section
401(k) of the Internal Revenue Code. The Plan covers substantially all full-time
U.S. employees of the Company and its domestic subsidiaries, and the Company
matches 25 percent of each employee's contribution up to a maximum of 6 percent
of the employee's annual compensation.
11
<PAGE> 13
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Retirement Plan
Polytek has various pension plans covering substantially all employees.
Polytek funds all costs through insurance contracts which provide for retiree
benefits under the terms of the plan; there were no unfunded or overfunded
benefit obligations.
(12) PLANT CLOSEDOWN COST
During 1998, the Company continued its rationalization of certain
manufacturing operations to utilize more efficiently its production capacity. In
the fourth quarter of 1998, the Company finalized and approved a plan to
closedown its El Paso, Texas and Juarez, Mexico manufacturing facilities. These
facilities were closed in June 1999.
The estimated cost of this plan was approximately $5,344 which was
reflected in operating expenses during the year ending December 31, 1998. The
estimated costs consisted of employee separation costs of $1,100, asset
impairments of $3,978, and other exit costs of $266.
(13) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The New Notes (described in Note 6) are fully and unconditionally
guaranteed, jointly and severally, on an unsecured senior subordinated basis, by
the Subsidiary Guarantors. Polytek is a non-guarantor subsidiary.
The following condensed consolidating financial statements include the
accounts of the Company, the Subsidiary Guarantors, and the non-guarantor
subsidiaries.
12
<PAGE> 14
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARY
------------------ -------------
INDESCO AFA
INTERNATIONAL, INC. PRODUCTS CSI POLYTEK ELIMINATION CONSOLIDATED
------------------- -------- ------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents... 378 742 2,335 293 3,748
Accounts Receivable, Net.... 13,122 11,979 12,505 3,555 (28,825) 12,336
Inventories................. -- 5,998 3,230 2,648 (12) 11,864
Prepaid Expenses and Other
Assets.................... 323 -- 315 297 935
------- ------ ------- ------ -------- -------
Total Current
Assets............. 13,823 18,719 18,385 6,793 (28,837) 28,883
Property, Plant and Equipment,
Net......................... 165 19,058 37,656 10,766 67,645
Excess Cost Over Fair Value of
Net Assets Acquired, Net.... -- 11,800 52,512 (3,959) 60,353
Patents and Other Intangibles,
Net......................... -- 4,064 3,419 -- 7,483
Deferred Financing Costs...... 5,815 -- -- -- 5,815
Investment in Subsidiaries.... 19,681 -- -- 611 (19,681) 611
Other Assets.................. 127,670 877 8,110 -- (136,296) 361
------- ------ ------- ------ -------- -------
Total Assets......... 167,154 54,518 120,082 14,211 (184,814) 171,151
======= ====== ======= ====== ======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current Portion of L.T. Debt
and Cap. Lease
Obligations............... -- -- -- 947 947
Credit Facilities........... -- -- -- 3,110 3,110
Accounts and Drafts
Payable................... 367 4,373 3,102 2,882 (3,067) 7,657
Income Taxes Payable........ -- 18 97 -- 115
Other Accrued Expenses...... 26,225 890 12,999 1,131 (35,031) 6,214
------- ------ ------- ------ -------- -------
Total Current
Liabilities........ 26,592 5,281 16,198 8,070 (38,098) 18,043
------- ------ ------- ------ -------- -------
Advances from Parent.......... -- 38,165 89,505 -- (127,670) --
Long-Term Debt & Capitalized
Lease Obligations........... 162,344 -- -- 5,507 167,851
Deferred Income Taxes......... -- 811 7,815 647 (8,626) 647
------- ------ ------- ------ -------- -------
Total Liabilities.... 188,936 44,257 113,518 14,224 (174,394) 186,541
Stockholders' Deficit:
Common Stock................ (2,500) 3,000 -- 242 (742) --
Additional Paid-In
Capital................... -- 5,521 15,795 510 (16,764) 5,062
Accumulated Deficit......... (19,282) 1,740 (9,231) (796) 7,086 (20,483)
Accumulated Other
Comprehensive Income...... -- -- -- 31 31
------- ------ ------- ------ -------- -------
Total Stockholders'
Deficit............ (21,782) 10,261 6,564 (13) (10,420) (15,390)
------- ------ ------- ------ -------- -------
Total Liabilities and
Stockholders'
Deficit............ 167,154 54,518 120,082 14,211 (184,814) 171,151
======= ====== ======= ====== ======== =======
</TABLE>
13
<PAGE> 15
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS NON-GUARANTOR
----------------- SUBSIDIARY
INDESCO AFA CSI -------------
INTERNATIONAL, INC. PRODUCTS U.S. POLYTEK ELIMINATIONS CONSOLIDATED
------------------- -------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales.................... -- 18,066 22,422 12,636 (137) 52,987
Cost of Sales................ (102) 12,643 16,430 10,567 (461) 39,077
------ ------ ------ ------ ------ ------
Gross Profit............... 102 5,423 5,992 2,069 324 13,910
Operating Expenses........... 1,950 1,476 3,622 1,713 8,761
------ ------ ------ ------ ------ ------
Income from Operations..... (1,848) 3,947 2,370 356 324 5,149
Other (Income) Expense
Interest................... 8,023 1,985 4,572 256 (6,557) 8,279
Other...................... (6,564) (619) (249) 571 6,893 33
Equity in Loss of
Consolidated
Subsidiaries............ 97 -- -- -- (97) --
------ ------ ------ ------ ------ ------
Total Other Expense,
Net................... 1,556 1,366 4,323 827 239 8,311
Income (Loss) Before
Provision for Income
Taxes................. (3,404) 2,581 (1,953) (472) 85 (3,163)
Provision for Income Taxes... 1 32 54 -- -- 87
------ ------ ------ ------ ------ ------
Net Income (Loss)....... (3,405) 2,549 (2,007) (472) 85 (3,250)
====== ====== ====== ====== ====== ======
</TABLE>
14
<PAGE> 16
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS NON-GUARANTOR
----------------- SUBSIDIARY
INDESCO AFA CSI -------------
INTERNATIONAL, INC. PRODUCTS U.S. POLYTEK ELIMINATIONS CONSOLIDATED
------------------- -------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net Income (Loss).............. (3,405) 2,549 (2,007) (472) 85 (3,250)
Adjustments to Reconcile Net
Income (Loss) Provided (Used)
by Operating Activities:
Depreciation................. -- 1,252 1,422 828 3,502
Amortization................. -- 369 1,077 (73) 1,373
Loss on disposal of property
plant and equipment........ -- 55 -- -- 55
Equity in (Earnings) Loss of
Subsidiaries and
Affiliate.................. 97 -- -- -- (97) --
Changes in Operating Assets and
Liabilities:
Accounts Receivable............ (4,320) (1,562) 2,324 (209) 4,994 1,227
Inventories.................... -- (199) 874 553 12 1,240
Prepaid Expenses and Other
Assets....................... 94 (8) (277) 277 86
Accounts and Drafts Payable.... 403 2,330 2,686 455 (5,821) 53
Income Taxes Payable........... (1) (17) 97 -- 79
Other Accrued Expenses......... 63 45 (1,034) (350) 827 (449)
------ ------ ------ ----- ------ ------
Net Cash Provided (Used) by
Operating Activities....... (7,069) 4,814 5,162 1,009 (85) 3,916
Cash Flows From Investing
Activities:
Expenditures for Property,
Plant and Equipment.......... (165) (2,814) (3,132) (461) -- (6,572)
Proceeds from Disposal of
Property, Plant and
Equipment.................... -- -- -- -- -- --
Other.......................... -- -- (60) -- (60)
------ ------ ------ ----- ------ ------
Net Cash Used by Investing
Activities................. (165) (2,814) (3,192) (461) -- (6,632)
Cash Flows From Financing
Activities:
Repayment of Long-Term Debt.... -- -- -- (325) (325)
Net (Repayment) Borrowings
Under Revolving Credit
Agreements................... 5,286 -- -- (20) 5,266
Advances to/from Parent........ 2,258 (2,258) -- -- -- --
------ ------ ------ ----- ------ ------
Net Cash Provided (Used) by
Financing Activities....... 7,544 (2,258) -- (345) -- 4,941
------ ------ ------ ----- ------ ------
Effect of Exchange Rate Change on
Cash........................... -- (46) (46)
Net Increase (Decrease) in
Cash and Cash
Equivalents................ 310 (258) 1,970 157 -- 2,179
Cash and Cash Equivalents at
Beginning of Year.............. 68 1,000 365 136 -- 1,569
------ ------ ------ ----- ------ ------
Cash and Cash Equivalents at
End of Period................ 378 742 2,335 293 -- 3,748
====== ====== ====== ===== ====== ======
</TABLE>
15
<PAGE> 17
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARY
------------------ -------------
INDESCO AFA CSI
INTERNATIONAL, INC. PRODUCTS U.S. POLYTEK ELIMINATIONS CONSOLIDATED
------------------- -------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales.................... -- 17,307 27,505 11,950 (44) 56,717
Cost of Sales................ -- 11,623 18,429 9,247 (36) 39,262
------ ------ ------ ------ ------ ------
Gross Profit............... -- 5,684 9,076 2,703 (8) 17,455
Operating Expenses........... 1,700 1,755 3,345 1,367 8,167
------ ------ ------ ------ ------ ------
Income from Operations..... (1,700) 3,929 5,731 1,336 (8) 9,288
Other (Income) Expense
Interest................... 7,125 2,055 4,196 226 (5,781) 7,821
Other...................... (5,781) (710) (7) 730 5,781 13
Equity in Income of
Consolidated
Subsidiaries............. (1,848) -- -- (19) 1,848 (19)
------ ------ ------ ------ ------ ------
Total Other Expense,
Net.................... (504) 1,345 4,189 937 1,848 7,815
Income (Loss) Before
Extraordinary Item and
Provision for Income
Taxes.................. (1,196) 2,584 1,542 399 (1,856) 1,473
Provision for Income Taxes... -- -- 124 115 -- 239
------ ------ ------ ------ ------ ------
Income (Loss Before
Extraordinary Item..... (1,196) 2,584 1,418 284 (1,856) 1,234
------ ------ ------ ------ ------ ------
Extraordinary Item -- Loss on
Early Extinguishment of
Debt....................... (5,167) (2,438) -- -- -- (7,605)
------ ------ ------ ------ ------ ------
Net Income (Loss)........ (6,363) 146 1,418 284 (1,856) (6,371)
====== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE> 18
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS NON-GUARANTOR
------------------ SUBSIDIARY
INDESCO AFA CSI -------------
INT'L., INC. PRODUCTS U.S. POLYTEK ELIMIN. CONSOLIDATED
------------ -------- ------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss )...................... (6,363) 146 1,418 284 (1,856) (6,371)
Less: Extraordinary Item.............. 5,167 2,438 -- -- -- 7,605
-------- ------- ------- ---- ------ --------
(1,196) 2,584 1,418 284 (1,856) 1,234
Adjustments to Reconcile Net Income
(Loss) Provided (Used) by Operating
Activities:
Depreciation.......................... -- 1,189 1,265 736 3,190
Amortization.......................... -- 383 960 (70) 1,273
Deferred Income Taxes................. -- -- -- -- --
Loss/(Gain) on disposal of property
plant and equip..................... -- -- -- -- --
Equity in (Earnings) Loss of
Subsidiaries and Affiliate.......... (1,848) -- -- -- 1,848 --
Changes in Operating Assets and
Liabilities:
Accounts Receivable..................... (5,781) (546) (11,099) (734) 5,908 (12,252)
Inventories............................. -- 587 (277) (53) (8) 249
Prepaid Expenses and Other Assets....... 128 (810) 173 454 (7) (62)
Accounts and Drafts Payable............. 1,062 95 2,014 291 (117) 3,345
Income Taxes Payable.................... -- 109 (427) (318)
Other Accrued Expenses.................. 3,566 949 4,380 (476) (5,780) 2,639
-------- ------- ------- ---- ------ --------
Net Cash Provided (Used) by Operating
Activities.......................... (4,069) 4,431 (1,057) 5 (12) (702)
Cash Flows From Investing Activities:
Acquisition of CSI...................... (92,947) -- 16 -- (92,931)
Expenditures for Property, Plant and
Equipment............................. -- (399) (2,587) (410) -- (3,396)
Proceeds from Disposal of Property,
Plant and Equip....................... -- -- 14 -- -- 14
Other................................... -- -- (82) (19) (101)
-------- ------- ------- ---- ------ --------
Net Cash Used by Investing
Activities.......................... (92,947) (399) (2,639) (429) -- (96,414)
Cash Flows From Financing Activities:
Proceeds from Senior Subordinated
Notes................................. 145,000 -- -- -- 145,000
Proceeds from Term Loans................ 135,000 -- -- -- 135,000
Repayment of Long-Term Debt............. (132,739) (40,542) -- (362) (173,643)
Payments of Deferred Financing Costs.... (10,954) -- -- -- (10,954)
Return of Capital to Parent............. (2,500) -- -- -- (2,500)
Net Borrowings Under Revolving Credit
Agreement............................. 4,239 -- -- 69 4,308
Advances from Parent.................... (40,572) 36,845 3,714 -- 13 --
-------- ------- ------- ---- ------ --------
Net Cash Provided (Used) by Financing
Activities............................ 97,474 (3,697) 3,714 (293) 13 97,211
-------- ------- ------- ---- ------ --------
Effect of Exchange Rate Change on Cash.... -- (6) (6)
Net Increase (Decrease) in Cash and
Cash Equivalents.................... 458 335 18 (723) -- 89
Cash and Cash Equivalents at Beginning of
Year.................................... -- 142 -- 909 -- 1,051
-------- ------- ------- ---- ------ --------
Cash and Cash Equivalents at End of
Period.............................. 458 477 18 186 -- 1,140
======== ======= ======= ==== ====== ========
</TABLE>
17
<PAGE> 19
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 (i) the results of operations of the Company, AFA, Polytek and
CSI for the three months ended June 30, 1999 and 1998, and (ii) the results of
operations of the Company, AFA, Polytek and CSI for the six months ended June
30, 1999. The results of operations for the six months ended June 30, 1998
include the results of operations of the Company, AFA and Polytek for the entire
six month period and of CSI for the five-month period beginning February 1,
1998, the date of its acquisition by the Company. See Note 2 to the Company's
condensed consolidated financial statements for description of exchange rates
used in the translation of Polytek's operating results. All dollar amounts are
presented in thousands.
Second Quarter Ended June 30, 1999
The condensed consolidated operating results of the Company for the
quarters ended June 30, 1999 and 1998 are presented below and are expressed as a
percentage of sales for analytical purposes.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Net Sales................................................... 100.0% 100.0%
Cost of Sales............................................... 72.3 67.3
----- -----
Gross Profit.............................................. 27.7 32.7
Selling, General and Administrative Expenses................ 12.8 11.7
Research and Development Expenses........................... 2.5 1.2
Amortization of Intangibles................................. 2.7 2.3
----- -----
Income from Operations.................................... 9.7 17.5
Other Expense (Income)...................................... .5 .2
Interest Expense............................................ 16.3 14.0
----- -----
Income Before Extraordinary Item and Provision for Income
Taxes.................................................. (7.2) 3.3
Provision for Income Taxes.................................. (.1) .2
----- -----
Income Before Extraordinary Item.......................... (7.3) 3.1
Extraordinary Loss on Early Extinguishment of Debt.......... 0.0 (16.3)
----- -----
Net Income (Loss)......................................... (7.3) (13.2)
----- -----
</TABLE>
Net sales for the Second Quarter 1999 were $25,303, a decrease of $6,398,
or 20%, as compared to net sales of $31,701 in the Second Quarter 1998. This
decrease in sales was principally due to three factors. First, as previously
reported, the Second Quarter 1998 included sales to a significant CSI customer
that were subsequently lost. Secondly, in the Second Quarter 1999, the Company
experienced temporary manufacturing constraints in the production of certain
products during the process of closing its El Paso and Juarez facilities
(completed in June 1999) and transferring the molding and assembly operations
for those products to its Forest City facility. As a result, sales of these
products during Second Quarter 1999 were lower than during Second Quarter 1998.
Thirdly, the Second Quarter 1998 included sales related to inventory ramp-up by
customers of the Company for new product introductions. Such sales subsequently
leveled off.
Cost of sales for the Second Quarter 1999 were $18,294 (72% of sales) as
compared to $21,337, (67% of sales) in the Second Quarter 1998. Higher cost of
sales, as a percentage of sales, resulted from (i) reduced manufacturing
efficiencies related to the loss of the high volume, consistent production for
the significant customer discussed above and (ii), in the process of
transferring assembly and molding operations from the El Paso and Juarez
facilities to the Forest City facility and assembly operations from the UK
facility to the Polytek facility, the Company experienced temporary
manufacturing inefficiencies from the incurrence of outside molding costs,
delays in the approval of new molds by customers, increased freight costs on the
18
<PAGE> 20
movement of molded parts between plants, unabsorbed lease costs for idle molding
equipment, and interrupted production caused by the movement of equipment
between sites. These factors resulted in additional unabsorbed overhead, which
increased cost of sales as a percentage of sales for the Second Quarter 1999.
Operating expenses for the Second Quarter 1999 were $4,561, a net decrease
of $239 from $4,800 of operating expenses in Second Quarter 1998. Selling,
general and administrative ("SG&A") expenses were $3,230 in the Second Quarter
as compared to $3,694 in the Second Quarter 1998. As discussed below in "Six
Months Ended June 30, 1999". SG&A expenses in the Second Quarter 1999 reflect
specific charges related to the ongoing process of consolidating the Company's
operations. Such charges were in excess of $1,000 for the six months ended June
30, 1999, a majority of which were incurred in the Second Quarter 1999. The
decrease in SG&A expense was partially offset by higher R&D expenses in the
Second Quarter 1999, which is attributable to accelerated development of new
product initiatives.
Interest expense for the Second Quarter 1999 was $4,132 as compared to
$4,446 for the Second Quarter 1998. The Second Quarter 1998 included interest
charges on retired debt previously incurred in conjunction with the refinancing
of certain long term debt and the financing of the CSI acquisition and the
issuance of the Old Notes.
In the Second Quarter 1998, the Company recorded an Extraordinary Loss on
the Early Extinguishment of Debt in the amount of $5,167, comprised of deferred
financing costs and prepayment penalties resulting from early termination of
various loans.
Six Months Ended June 30, 1999
The condensed consolidated operating results of the Company for the six
months ended June 30, 1999 and 1998 are presented below and are expressed as a
percentage of sales for analytical purposes.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Net Sales*.................................................. 100.0% 100.0%
Cost of Sales............................................... 73.8 69.2
----- -----
Gross Profit.............................................. 26.2 30.8
Selling, General and Administrative Expenses................ 11.7 11.5
Research and Development Expenses........................... 2.2 .7
Amortization of Intangibles................................. 2.6 2.2
----- -----
Income from Operations.................................... 9.7 16.4
Other Expense (Income)...................................... .1 --
Interest Expense............................................ 15.6 13.8
----- -----
Income Before Extraordinary Item and Provision for Income
Taxes.................................................. (6.0) 2.6
Provision for Income Taxes.................................. (.1) .4
----- -----
Income Before Extraordinary Item.......................... (6.1) 2.2
Extraordinary Loss on Early Extinguishment of Debt.......... 0.0 (13.4)
----- -----
Net (Loss)................................................ (6.1) (11.2)
----- -----
</TABLE>
- ---------------
* -- All percentages for the Six Months Ended June 30, 1998 reflect results of
operations for six months for the Company, AFA and Polytek, and five months
for CSI.
Net sales for the six months ended June 30, 1999 were $52,987, a decrease
of $3,730, or 7%, as compared to net sales of $56,717 for the six months ended
June 30, 1998 (i.e., sales of AFA and Polytek for six months and CSI for five
months). On a proforma basis (i.e., assuming that the acquisition of CSI had
been completed as of January 1, 1998), net sales would have decreased
approximately $8,576 in the first six months of 1999 as
19
<PAGE> 21
compared to the first six months of 1998. The decrease in proforma net sales is
a result of the factors discussed above. In addition, and to a lesser extent,
the decrease in net sales from 1998 to 1999 reflects the impact of lower selling
prices, introduced in the third quarter of 1998, for certain products in
response to competitive pricing pressures.
Cost of sales for the six months ended June 30, 1999 were $39,077 (74% of
sales) as compared to $39,262 (69% of sales) for the six months ended June 30,
1998. Higher cost of sales, as a percentage of sales, resulted from lower sales
and the factors discussed above.
Operating expenses for the six months ended June 30, 1999 were $8,761, an
increase of $594 over operating expenses of $8,167 for the six months ended June
30, 1998. As the Company proceeds to consolidate the AFA, Polytek and CSI
operations, it continues to be burdened by specific consolidation-related
charges, such as professional fees, and higher than normal freight costs and
administrative expenses. In addition, during the first six months of 1999, the
Company incurred substantial costs relating to a suit brought by the Company
against a competitor to enjoin that competitor's infringement of the Company's
patent. The consolidation charges and the patent infringement litigation costs
aggregated approximately $1,000 (the majority of which was incurred in the
Second Quarter 1999) and has been included in SG&A expense for the Six Months
Ended June 30, 1999. In addition, operating expenses for the first six months of
1999 include R&D expenses of $1,196, an increase of $794 over the first six
months of 1998 which is attributable to accelerated development of new product
initiatives.
Interest expense for the six months ended June 30, 1999 was $8,279, an
increase of $458 over interest expense of $7,821 for the six months ended June
30, 1998. The increase results from higher long term debt balances outstanding
on average in 1999.
No U.S. tax liability has been incurred for the six months ended June 30,
1999. Provision for taxes that have been recorded in the Second Quarter 1999
relates to state minimum taxes. The Company has recorded a full valuation
allowance in connection with its consolidated net operating loss.
In the six months ended June 30, 1998, the Company recorded an
Extraordinary Loss on the Early Extinguishment of Debt in the amount of $7,605,
as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, the Company's operating activities
generated net cash of $3,916 (the combination of the $3,250 net loss, $4,930 of
non-cash items added back, and a $2,236 net increase in working capital). In
that period, the Company had capital expenditures of $6,572 which was
principally related to (i) the purchase of molding equipment in connection with
the transfer of manufacturing operations from the Company's El Paso and Juarez
facilities to its Forest City facility, (ii) completion of the conversion of
certain of the Company's assembly equipment which had begun in 1998, and (iii)
purchase of assembly equipment in preparation of launching the Company's new
Luxor lotion pump towards the end of 1999. In 1999, the Company has not
initiated any new capital projects and is focused on completing those projects
that had been started prior to 1999. In the first six months of 1999, the
Company has increased its borrowings under revolving credit agreements by a net
amount of $3,697.
At June 30, 1999, the Company had available excess borrowing capacity of
approximately $16,000 and $4,000 (NLG 8,400), respectively, under its credit
facilities with First Union and ABN-AMRO Bank. (See Note 6 to the Company's
condensed consolidated financial statements for description of existing
indebtedness.)
The Company uses EBITDA (defined as income before interest, income taxes,
depreciation, amortization, one-time charges and extraordinary items) to measure
its operating performance and ability to incur and service its debt. EBITDA
should not be considered as an alternative to, or more meaningful than, net
income
20
<PAGE> 22
or cash flow statement data prepared in accordance with GAAP, or as a measure of
profitability or liquidity. EBITDA does not include commitments by the Company
for capital expenditures and payment of debt and, therefore, should not be
deemed to represent funds available to the Company. EBITDA for the Second
Quarter 1999 was $4,734 as compared to $7,923 for the Second Quarter 1998.
EBITDA for the six months ended June 30, 1999 was $9,991 as compared to $14,607
for the six months ended June 30, 1998 (i.e., the results of operations of the
Company, AFA and Polytek for the six months and CSI for five months). The $4,616
decrease in EBITDA for the six months ended June 30, 1999 is the result of lower
sales, increased cost of sales as a percentage of sales, and higher R&D expenses
in 1999.
As previously reported, on March 24, 1999, the Company amended its credit
facility with First Union National Bank. The amendment (i) waives compliance
with the Funded Indebtedness to EBITDA ratio through the end of 1999, (ii)
requires the Company to maintain EBITDA of at least $3,000 for each of the
fiscal quarters ending on March 31, 1999, June 30, 1999, September 30, 1999 and
December 31, 1999, (iii) reduces the Capital Expenditure Limit (as defines in
the New Credit Facility) for the period commencing on September 29, 1998,
through December 31, 1999 (iv) increases the Applicable Margin on Eurodollar
loans to 2.25 % (from 1.75%) and on Base Rate loans to 1.00% (from 0.50%) and
(v) provides that prior to May 14, 1999, the Company and First Union will
negotiate additional financial covenants and new financial covenant levels for
the fiscal quarters ending June 30, 1999, September 30, 1999, December 31, 1999
and March 31, 2000. With respect to (v), the Company and the Bank are currently
in discussions.
Management believes that net cash generated by operations, together with
amounts available under the credit facilities with First Union and 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 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 potentially 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. Generally speaking, this issue can be a factor at any
point in a business entity's supply, manufacturing or financial chains.
The Company has advanced the implementation, commenced in 1998, of new
software for its core systems at each of the Company's operating sites. ("Core
Systems" refers to business processes in the areas of manufacturing, materials
management, distribution, sales and accounting.) The system conversion will
strengthen the Company's ability to standardize and integrate its
communications, reporting and data management functions. The new software was
certified as being Year 2000 Compliant prior to being purchased in early 1998.
The Company is on track with its plans to implement the new software in each of
its operating sites. Where practical, certain portions of the Company's existing
software will be used to supplement the new software, and in such cases, the
Company is currently completing the necessary upgrades of the existing software
to ensure Y2K Compliance. The implementation should be substantially completed
by the end of the Third Quarter 1999. With respect to PLC units for its assembly
machines and injection molding equipment in which a microprocessor is used, the
Company has substantially completed its communications with suppliers, and no
potential Y2K concerns have been identified.
The Company has therefore substantially completed its Y2K Compliance review
without any significant issues identified or expenses incurred. Management
presently believes that the overall cost to achieve Y2K compliance will not be
material to the Company.
21
<PAGE> 23
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENT
The information provided in this Quarterly Report on Form 10-Q contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such forward-looking
statements 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 that could cause actual results to
differ materially from those reflected in the forward-looking statement. 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.
22
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Form 10-Q:
(b) Reports on Form 8-K: None
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
3.1 (a) -- Certificate of Incorporation of Indesco International, Inc.,
as amended.*
(b) -- Certificate of Incorporation of Continental Sprayers
International, Inc., as amended.*
(c) -- Certificate of Incorporation of AFA Products, Inc., as
amended.*
3.2 (a) -- By-laws of Indesco International, Inc.*
(b) -- By-laws of Continental Sprayers International, Inc.*
(c) -- By-laws of AFA Products, Inc.*
4.1 -- Indenture, dated as of April 23, 1998, between Indesco
International, Inc., AFA Products, Inc. and Continental
Sprayers International, Inc., as subsidiary guarantors, and
Norwest Bank Minnesota, National Association, as trustee.*
4.2 -- Form of Notes.*
4.3 -- Form of Subsidiary Guarantees.*
4.4 -- Registration Rights Agreement, dated as of April 23, 1998,
between Indesco International, Inc., AFA Products, Inc. and
Continental Sprayers International, Inc., as subsidiary
guarantors, and NationsBanc Montgomery Securities LLC.*
10.1 -- Loan and Security Agreement, dated September 29, 1998, by
and among Indesco International, Inc., AFA Products, Inc.,
Continental Sprayers International, Inc. and First Union
National Bank.**
10.2 -- Amendment to Loan and Security Agreement and Waiver, dated
March 24, 1999, by and among Indesco International, Inc.,
AFA Products, Inc., Continental Sprayers International, Inc.
and First Union National Bank.***
10.3 -- Management Agreement, dated as of February 4, 1998, between
Indesco International, Inc. and Gadraz, Inc.*
10.4 -- Employment Agreement, dated as of February 4, 1998, between
Indesco International, Inc. and Ariel Gratch.*
10.5 -- Tax Sharing Agreement, dated as of August 1, 1997, among
Indesco International, Inc., Continental Sprayers
International, Inc. and AFA Products, Inc.*
10.6 -- Supply Agreement, dated as of April 23, 1998, between Spring
& Wire Designs LLC and Indesco International, Inc.*
21 -- Subsidiaries of Indesco International, Inc.*
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-52657) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended July 5, 1998 and incorporated herein by reference.
*** Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by reference.
23
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Indesco International, Inc.
By: /s/ PETER GIALLORENZO
------------------------------------
Peter Giallorenzo
Title: Vice President and Chief
Financial Officer
Date: August 16, 1999
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE INDESCO INTERNATIONAL, INC. FORM 10-Q FOR THE SIX MONTHS ENDED
JUNE 30, 1999 ANS IS QUALIFIED IN ITS ENTIRETY BY REFENENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,748
<SECURITIES> 0
<RECEIVABLES> 12,336
<ALLOWANCES> 0
<INVENTORY> 11,864
<CURRENT-ASSETS> 28,883
<PP&E> 79,620
<DEPRECIATION> 11,975
<TOTAL-ASSETS> 171,151
<CURRENT-LIABILITIES> 18,043
<BONDS> 167,851
0
0
<COMMON> 5,062
<OTHER-SE> (20,452)
<TOTAL-LIABILITY-AND-EQUITY> 171,151
<SALES> 52,987
<TOTAL-REVENUES> 52,987
<CGS> 39,077
<TOTAL-COSTS> 39,077
<OTHER-EXPENSES> 8,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,279
<INCOME-PRETAX> (3,163)
<INCOME-TAX> 87
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,250)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
