<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 MARCH 31, 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 Offices) (Zip Code)
</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 (April 30, 1999)
COMMON STOCK: 200 SHARES, PAR VALUE $0.01
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<PAGE> 2
INDESCO INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Balance Sheets of Indesco
International, Inc. at March 31, 1999 and December 31,
1998 (Unaudited).......................................... 3
Condensed Consolidated Statements of Operations of Indesco
International, Inc. for the Three Month Periods Ended
March 31, 1999 and 1998 (Unaudited)....................... 4
Condensed Consolidated Statements of Stockholders' Equity
(Deficit) of Indesco International, Inc. for the Three
Month Periods Ended March 31, 1999 and 1998 (Unaudited)...
Condensed Consolidated Statements of Cash Flows of Indesco
International, Inc. for the Three Month Periods Ended
March 31, 1999 and 1998 (Unaudited)....................... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURE .................................................................... 23
</TABLE>
2
<PAGE> 3
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH DECEMBER
1999 1998
----------- --------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents................................. $ 2,664 $ 1,569
Accounts Receivable, Net.................................. 15,491 13,941
Inventories............................................... 11,209 13,447
Prepaid Expenses and Other Assets......................... 826 665
-------- --------
Total Current Assets.............................. 30,190 29,622
Property, Plant and Equipment, Net.......................... 65,746 65,885
Excess of Cost Over Fair Value of Net Assets Acquired,
Net....................................................... 60,782 60,953
Patents and Other Intangibles, Net.......................... 7,588 7,738
Deferred Financing Costs.................................... 5,989 6,165
Other Assets................................................ 988 1,043
-------- --------
Total Assets...................................... $171,283 $171,406
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Portion of Long-Term Debt and Capital Lease
Obligations............................................ $ 998 $ 1,085
Credit Facilities......................................... 3,326 3,613
Accounts and Drafts Payable............................... 6,979 7,602
Income Taxes Payable...................................... 79 36
Other Accrued Expenses.................................... 11,235 7,110
-------- --------
Total Current Liabilities......................... 22,617 19,446
Long-Term Debt and Capital Lease Obligations................ 161,544 163,416
Deferred Income Taxes....................................... 647 647
-------- --------
Total Liabilities................................. 184,808 183,509
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....................................... (18,626) (17,233)
Accumulated Other Comprehensive Income.................... 39 68
-------- --------
Total Stockholders' Equity (Deficit).............. (13,525) (12,103)
-------- --------
Total Liabilities and Stockholders' Equity
(Deficit)....................................... $171,283 $171,406
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net Sales................................................... $27,684 $25,016
Cost of Sales............................................... 20,783 17,925
------- -------
Gross Profit.............................................. 6,901 7,091
Operating Expenses:
Selling, General and Administrative....................... 2,963 2,580
Research and Development.................................. 554 250
Amortization of Intangibles............................... 684 533
------- -------
Total Operating Expenses.......................... 4,201 3,363
------- -------
Income From Operations............................ 2,700 3,728
Other (Income) Expense:
Interest.................................................. 4,146 3,375
Other..................................................... (103) (78)
------- -------
Total Other Expense, Net.......................... 4,043 3,297
------- -------
Income (Loss) Before Extraordinary Item and
Provision for Income Taxes....................... (1,343) 431
Provision for Income Taxes.................................. 50 171
------- -------
Income (Loss) Before Extraordinary Item................... (1,393) 260
Extraordinary Item -- Loss on Early Extinguishment of
Debt...................................................... -- 2,438
------- -------
Net (Loss)........................................ $(1,393) $(2,178)
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net (Loss)................................................ $(1,393) $ (2,178)
Less: Extraordinary Item.................................. -- 2,438
------- --------
(1,393) 260
------- --------
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities:
Depreciation........................................... 1,769 1,495
Amortization........................................... 684 533
Loss on Disposal of Property, Plant and Equipment...... 55 --
Changes in Operating Assets and Liabilities:
Accounts Receivable.................................. (1,862) (10,558)
Inventories.......................................... 1,983 366
Prepaid Expenses and Other Assets.................... 22 399
Accounts and Drafts Payable.......................... (651) 539
Income Taxes Payable................................. 43 12
Other Accrued Expenses............................... 4,517 2,117
------- --------
Total Adjustments................................. 6,560 (5,097)
------- --------
Net Cash Provided (Used) by Operating
Activities....................................... 5,167 (4,837)
------- --------
Cash Flows From Investing Activities:
Acquisition of CSI, Net of Cash Acquired.................. -- (92,931)
Expenditures for Property, Plant and Equipment............ (2,663) (1,028)
Proceeds From Disposal of Property, Plant and Equipment... -- 14
Other..................................................... (7) (39)
------- --------
Net Cash Used by Investing Activities............. (2,670) (93,984)
------- --------
Cash Flows From Financing Activities:
Proceeds From Term Loans.................................. -- 135,000
Repayment of Long-Term Debt............................... (236) (40,690)
Payments of Deferred Financing Costs...................... -- (6,390)
Net Borrowings Under Revolving Credit Agreements.......... (1,141) 12,545
------- --------
Net Cash Provided (Used) by Financing
Activities....................................... (1,377) 100,465
------- --------
Effect of Exchange Rate Changes on Cash..................... (25) (20)
------- --------
Net Increase in Cash and Cash Equivalents......... 1,095 1,624
Cash and Cash Equivalents at Beginning of Year.............. 1,569 1,051
------- --------
Cash and Cash Equivalents at End of Period........ $ 2,664 $ 2,675
======= ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Interest............................................... $ 565 $ 908
======= ========
Income Taxes........................................... $ 7 $ 10
======= ========
Non-Cash Investing and Financing Information:
During the three month period ended March 31, 1998, Parent debt of $3,000 was
converted to equity.
</TABLE>
See notes to consolidated financial statements.
5
<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 condensed consolidated balance sheet as of March 31, 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 condensed consolidated statement of operations of the
Company for 1998 includes the results of operations of the Company, AFA and
Polytek, for the three months ended March 31, 1998 and the results of operations
of CSI from its acquisition on February 1, 1998 through March 31, 1998.
The accompanying condensed consolidated statement of operations for the
three months ended March 31, 1999 includes the results of operations of the
Company and its subsidiaries (AFA, Polytek and CSI).
The unaudited condensed consolidated balance sheet as of March 31, 1999 and
the unaudited condensed consolidated statements of operations and cash flows for
the three months ended March 31, 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 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
months ended March 31, 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 sheet dates ($.5328 and $.4809 per guilder at December 31,
1998 and March 31, 1999, respectively). Items of revenue and expense are
translated at average exchange rates during the period ($.5080 and $.4849 per
guilder for the three month-periods ended March 31, 1999 and 1998,
respectively). 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."
6
<PAGE> 7
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 loss 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. The comprehensive loss for the three months ended March 31,
1998 and 1999 was $2,195 and $1,422, 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 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 $5,721. 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
three months ended March 31, 1998, as if the transaction had occurred on January
1, 1998, are as follows:
<TABLE>
<S> <C>
Net Sales................................................. $29,862
=======
Net Income Before Extraordinary Item...................... $ 583
=======
</TABLE>
(4) INVENTORIES
The components of inventories as of December 31, 1998 and March 31, 1999
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1998 1999
----------- --------
<S> <C> <C>
Raw Material................................................ $ 3,418 $ 2,963
Work-in-Process............................................. 5,015 4,749
Finished Goods.............................................. 5,014 3,497
------- -------
$13,447 $11,209
======= =======
</TABLE>
7
<PAGE> 8
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 DECEMBER 31 MARCH 31
LIVES (YEARS) 1998 1999
------------- ----------- --------
<S> <C> <C> <C>
Land............................................... $ 2,499 $ 2,421
Buildings.......................................... 30-40 14,311 14,001
Machinery and Equipment............................ 5-7 42,971 42,837
Furniture and Fixtures............................. 5-7 3,056 2,953
Vehicles........................................... 5 23 23
Construction in Progress........................... -- 11,754 13,807
------- --------
74,614 74,042
Less: Accumulated Depreciation and Amortization.... (8,729) (10,296)
------- --------
Property, Plant and Equipment, Net............... $65,885 $ 65,746
======= ========
</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>
DECEMBER 31 MARCH 31
1998 1999
----------- --------
<S> <C> <C>
Working Capital line of credit, Dutch Guilder ("NLG")
denominated bearing interest at 4.75 percent(a)........... $ 3,613 $ 3,326
======== ========
Long-Term Debt and Capital Lease Obligations
Revolving credit facility, dollar denominated bearing
interest at 7.10 percent(b)............................ $ 12,058 $ 10,938
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)............................................. 3,930 3,498
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(e)............................................. 1,212 1,030
Capital lease obligations, NGL denominated, bearing
interest at rates ranging from 7.10 percent to 7.75
percent................................................ 2,301 2,076
-------- --------
164,501 162,542
Less: Current Portion..................................... 1,085 998
-------- --------
Total Long-Term Debt and Capital Lease
Obligations..................................... $163,416 $161,544
======== ========
</TABLE>
Working Capital Borrowings
(a) Netherlands
Borrowings under the guilder denominated line of credit have a maximum
limit of NLG 11,000 ($5,861 and $5,394 at December 31, 1998 and March 31, 1999,
respectively). Interest payments on the NLG
8
<PAGE> 9
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 million principal amount Tranche
A Term Loan, bearing interest at LIBOR, plus 3.75 percent; and (ii) a $65
million 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 replaced the 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 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 collateral 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.
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;
9
<PAGE> 10
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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 since 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 through the redemption date. In addition, at
any time on or before April 15, 2001, the Company was entitled to 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. 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.
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 percent
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 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 registration rights relating to the Old
Notes, are identical in all material respects to the Old Notes.
10
<PAGE> 11
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 ($4,168), 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.
(e) Senior Mortgage Note
In connection with the construction of a manufacturing facility, Polytek
obtained a NLG 3,500 ($1,716) mortgage from ABN-AMRO Bank, The Netherlands.
Borrowings under this Mortgage Agreement 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 $1,487 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>
MARCH 31 MARCH 31
1998 1999
-------- --------
<S> <C> <C>
United States............................................... $(2,415) $ (480)
Foreign..................................................... 408 (863)
------- -------
Total Pre-Tax Loss................................ $(2,007) $(1,343)
======= =======
</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 $10 and $7 for the periods ended March 31,
1998 and 1999, respectively. The Company has U.S. net operating loss
carryforwards of approximately $14 million, 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 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 litigations against the Company arising in the
ordinary course of business. Management believes, on the basis of its
understanding and advise 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.
11
<PAGE> 12
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) RELATED PARTY TRANSACTIONS
Management Fees
Effective February 4, 1998, the Company entered into a 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 three months ended March 31, 1998 and 1999, the Company incurred
approximately $75 of management fees and certain expenses. As of December 31,
1998, all fees and expenses had been paid. At March 31, 1999, the balance of
unpaid fees, which has been included in accounts payable in the accompanying
balance sheet were approximately $50.
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 March 31, 1998 and 1999, the
Company purchased molds from the affiliate for approximately $283 and $239,
respectively. During the periods ended March 31, 1998 and 1999, the affiliate
provided certain repairs and maintenance at a cost to the Company of
approximately $30 and $40, respectively.
Included in accounts payable in the accompanying balance sheets at December
31, 1998 and March 31, 1999, are approximately $55 and $60, 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 three months ended March 31,
1998 and 1999, the Company incurred fees of approximately $340 and $130,
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 U.S.
full-time employees and the Company matches 25 percent of each employee's
contribution up to a maxium of 6 percent of the employees's annual compensation.
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 more efficiently utilize 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. The
estimated cost of this plan is approximately $5,344 which was reflected in
operating expenses during the year ended December 31, 1998. The estimated cost
consisted of employee separation costs of $1,100, asset impairments of $3,978
and
12
<PAGE> 13
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other exit costs of $266. As of March 31, 1999, approximately $814 of the
accrued employee separation and other exit costs is included in other accrued
expenses on the accompanying balance sheet.
(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.
13
<PAGE> 14
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-GUARANTOR
GUARANTOR SUBSIDIARIES SUBSIDIARY
----------------------- -------------
INDESCO AFA
INTERNATIONAL, INC. PRODUCTS CSI POLYTEK ELIMINATION CONSOLIDATED
------------------- ---------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents... $ 461 $ 450 $ 1,147 $ 606 $ 2,664
Accounts Receivable, Net.... 10,816 12,427 13,721 4,031 $ (25,503) 15,491
Inventories................. -- 4,907 3,648 2,654 11,209
Prepaid Expenses and Other
Assets................... 231 -- 25 570 826
-------- ------- -------- ------- --------- --------
Total Current
Assets............ 11,507 17,784 18,541 7,861 (25,503) 30,190
Property, Plant and Equipment,
Net......................... 74 17,418 37,031 11,223 65,746
Excess Cost Over Fair Value of
Net Assets Acquired, Net.... -- 11,905 52,972 (4,095) 60,782
Patents and Other Intangibles,
Net......................... -- 4,142 3,446 -- 7,588
Deferred Financing Costs...... 5,989 -- -- -- 5,989
Investment in Subsidiaries.... 19,906 -- -- 626 (19,906) 626
Other Assets.................. 129,035 878 8,110 -- (137,661) 362
-------- ------- -------- ------- --------- --------
Total Assets........ $166,511 $52,127 $120,100 $15,615 $(183,070) $171,283
======== ======= ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current Portion of L.T. Debt
and Cap. Lease
Obligations.............. $ -- $ -- $ -- $ 998 $ 998
Credit Facilities........... -- -- -- 3,326 3,326
Accounts and Drafts
Payable.................. 571 1,833 2,582 3,320 $ (1,327) 6,979
Income Taxes Payable........ -- 2 77 -- 79
Other Accrued Expenses...... 29,772 911 12,391 1,610 (33,449) 11,235
-------- ------- -------- ------- --------- --------
Total Current
Liabilities....... 30,343 2,746 15,050 9,254 (34,776) 22,617
Advances from Parent.......... -- 39,530 89,505 -- (129,035) --
Long-Term Debt & Capitalized
Lease Obligations........... 155,938 -- -- 5,606 161,544
Deferred Income Taxes......... -- 811 7,815 647 (8,626) 647
-------- ------- -------- ------- --------- --------
Total Liabilities... 186,281 43,087 112,370 15,507 (172,437) 184,808
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......... (17,270) 519 (8,065) (683) 6,873 (18,626)
Accumulated Other
Comprehensive Income..... -- -- -- 39 39
-------- ------- -------- ------- --------- --------
Total Stockholders'
Deficit........... (19,770) 9,040 7,730 (108) (10,633) (13,525)
-------- ------- -------- ------- --------- --------
Total Liabilities
and Stockholders'
Deficit........... $166,511 $52,127 $120,100 $15,615 $(183,070) $171,283
======== ======= ======== ======= ========= ========
</TABLE>
14
<PAGE> 15
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY
------------------ ----------
INDESCO AFA CSI
INTERNATIONAL, INC. PRODUCTS U.S. POLYTEK ELIMINATIONS CONSOLIDATED
------------------- -------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales...................... $ -- $8,920 $12,522 $6,288 $ (46) $27,684
Cost of Sales.................. (25) 6,188 9,273 5,393 (46) 20,783
------- ------ ------- ------ ------- -------
Gross Profit................. 25 2,732 3,249 895 -- 6,901
Operating Expenses............. 810 484 1,819 1,088 4,201
------- ------ ------- ------ ------- -------
Income from Operations....... (785) 2,248 1,430 (193) -- 2,700
Other (Income) Expense
Interest..................... 3,981 1,007 2,238 166 (3,245) 4,146
Other........................ (3,246) (103) -- 1 3,245 (103)
Equity in Income of
Consolidated
Subsidiaries.............. (128) -- -- -- 128 --
------- ------ ------- ------ ------- -------
Total Other Expense,
Net................ 607 904 2,238 (359) 128 4,043
Income (Loss) Before
Provision for Income
Taxes..................... (1,392) 1,344 (808) (863) (128) (1,343)
Provision for Income Taxes..... 1 16 33 -- -- 50
------- ------ ------- ------ ------- -------
Net Income (Loss).... $(1,393) $1,328 $ (841) $ (359) $ (128) $(1,393)
======= ====== ======= ====== ======= =======
</TABLE>
15
<PAGE> 16
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR
GUARANTOR SUBSIDIARIES 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).................... $(1,393) $ 1,328 $ (841) $ (359) $ (128) $(1,393)
Adjustments to Reconcile Net Income
(Loss) Provided (Used) by Operating
Activities:
Depreciation....................... -- 610 734 425 1,769
Amortization....................... -- 184 538 (38) 684
Loss on disposal of property plant
and equipment................... -- 55 -- -- 55
Equity in (Earnings) Loss of
Subsidiaries and Affiliate...... (128) -- -- -- 128 --
Changes in Operating Assets and
Liabilities:
Accounts Receivable.................. (2,013) (2,017) 1,108 (618) 1,678 (1,862)
Inventories.......................... -- 892 456 635 1,983
Prepaid Expenses and Other Assets.... 12 1 13 (4) 22
Accounts and Drafts Payable.......... 586 (210) 633 849 (2,509) (651)
Income Taxes Payable................. (1) (33) 77 -- 43
Other Accrued Expenses............... 3,631 64 (109) 100 831 4,517
------- ------- ------- ------ ------- -------
Net Cash Provided by Operating
Activities.................. 694 874 2,609 990 -- 5,167
Cash Flows From Investing Activities:
Expenditures for Property, Plant and
Equipment.......................... (74) (531) (1,819) (239) (2,663)
Proceeds from Disposal of Property,
Plant and Equipment................ -- -- -- -- --
Other................................ -- -- (7) -- (7)
------- ------- ------- ------ ------- -------
Net Cash Used by Investing
Activities.................. (74) (531) (1,827) (239) (2,670)
Cash Flows From Financing Activities:
Repayment of Long-Term Debt.......... -- -- -- (236) (236)
Net (Repayment) Borrowings Under
Revolving Credit Agreements........ (1,120) -- -- (21) (1,141)
Advances from Parent................. 893 (893) -- -- --
------- ------- ------- ------ ------- -------
Net Cash Used by Financing
Activities.................. (227) (893) -- (257) (1,377)
------- ------- ------- ------ ------- -------
Effect of Exchange Rate Change on
Cash................................. -- -- -- (25) (25)
Net Increase (Decrease) in
Cash and Cash Equivalents... 393 (550) 783 469 1,095
Cash and Cash Equivalents at Beginning
of Year.............................. 68 1,000 365 136 1,569
------- ------- ------- ------ ------- -------
Cash and Cash Equivalents at
End of Period............... $ 461 $ 450 $ 1,148 $ 605 $ $ 2,664
======= ======= ======= ====== ======= =======
</TABLE>
16
<PAGE> 17
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY
------------------ -------------
INDESCO Afa CSI
INTERNATIONAL, INC. PRODUCTS U.S. POLYTEK ELIMINATIONS CONSOLIDATED
------------------- -------- ------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales..................... $ -- $ 8,583 $10,427 $6,034 $ (28) $25,016
Cost of Sales................. -- 5,839 7,518 4,590 (22) 17,925
------- ------- ------- ------ ------- -------
Gross Profit................ -- 2,744 2,909 1,444 (6) 7,091
Operating Expenses............ 470 564 1,344 985 3,363
------- ------- ------- ------ ------- -------
Income from Operations...... (470) 2,180 1,565 459 (6) 3,728
Other (Income) Expense
Interest.................... 2,790 1,094 1,573 116 (2,198) 3,375
Other....................... (2,198) (127) 5 44 2,198 (78)
Equity in Income of
Consolidated
Subsidiaries............. 873 -- -- -- (873) --
------- ------- ------- ------ ------- -------
Total Other Expense,
Net............... 1,465 967 1,578 160 (873) 3,297
Income (Loss) Before
Extraordinary Item and
Provision for Income
Taxes.................... (1,935) 1,213 (13) 299 867 431
Provision for Income Taxes.... -- -- 58 113 -- 171
------- ------- ------- ------ ------- -------
Income (Loss) Before
Extraordinary Item....... (1,935) 1,213 (71) 186 867 260
------- ------- ------- ------ ------- -------
Extraordinary Item -- Loss on
Early Extinguishment of
Debt........................ -- (2,438) -- -- -- (2,438)
------- ------- ------- ------ ------- -------
Net Income (Loss)... $(1,935) $(1,225) $ (71) $ 186 $ 867 $(2,178)
======= ======= ======= ====== ======= =======
</TABLE>
17
<PAGE> 18
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
GUARANTOR
GUARANTOR SUBSIDIARIES 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)................... $ (1,935) $ (1,225) $ (71) $ 186 $ 867 $ (2,178)
Less: Extraordinary Item.......... -- 2,438 -- -- 2,438
-------- -------- ------- ------ ------- --------
(1,935) 1,213 (71) 186 867 260
Adjustments to Reconcile Net Income
(Loss) Provided (Used) by
Operating Activities:
Depreciation...................... -- 592 541 362 1,495
Amortization...................... -- 187 384 (38) 533
Equity in (Earnings) Loss of
Subsidiaries and Affiliate..... 873 -- -- -- (873) --
Changes in Operating Assets and
Liabilities:
Accounts Receivable................. (2,198) (24) (8,270) (2,295) 2,229 (10,558)
Inventories......................... -- 263 (6) 152 (43) 366
Prepaid Expenses and Other Assets... (122) 116 130 335 (60) 399
Accounts and Drafts Payable......... 196 714 1,513 392 (2,276) 539
Income Taxes Payable................ -- -- 52 (40) 12
Other Accrued Expenses.............. 503 (201) 1,741 (82) 156 2,117
-------- -------- ------- ------ ------- --------
Net Cash Provided (Used) by
Operating Activities....... (2,683) 2,860 (3,986) (1,028) -- (4,837)
Cash Flows From Investing Activities:
Acquisition of CSI.................. (92,931) -- -- -- (92,931)
Expenditures for Property, Plant and
Equipment......................... -- (72) (918) (38) (1,028)
Proceeds from Disposal of Property,
Plant and Equip................... -- -- 14 -- 14
Other............................... -- -- (39) -- (39)
-------- -------- ------- ------ ------- --------
Net Cash Used by Investing
Activities................. (92,931) (72) (943) (38) (93,984)
Cash Flows From Financing Activities:
Proceeds from Term Loans............ 135,000 -- -- -- 135,000
Repayment of Long-Term Debt......... -- (40,542) -- (148) (40,690)
Payments of Deferred Financing
Costs............................. (5,439) (951) -- -- (6,390)
Net Borrowings Under Revolving
Credit Agreement.................. 11,818 -- -- 727 12,545
Advances from Parent................ (45,372) 39,371 6,001 -- --
-------- -------- ------- ------ ------- --------
Net Cash Provided (Used) by
Financing Activities....... 96,007 (2,122) 6,001 579 100,465
-------- -------- ------- ------ ------- --------
Effect of Exchange Rate Change on
Cash................................ -- -- -- (20) (20)
Net Increase (Decrease) in
Cash and Cash
Equivalents................ 393 666 1,072 (507) 1,624
Cash and Cash Equivalents at Beginning
of Year............................. -- 142 -- 909 -- 1,051
-------- -------- ------- ------ ------- --------
Cash and Cash Equivalents at
End of Period.............. $ 393 $ 808 $ 1,072 $ 402 $ -- $ 2,675
======== ======== ======= ====== ======= ========
</TABLE>
18
<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 March 31, 1999 (the "First Quarter 1999") and
(ii) the results of operations of the Company, AFA and Polytek for the three
months ended March 31, 1998, and of CSI for the two-month period beginning
February 1, 1998, the date of its acquisition by the Company (the "First Quarter
1998"). 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.
FIRST QUARTER ENDED MARCH 31, 1999
The condensed consolidated operating results of the Company for the First
Quarter 1999 and the First Quarter 1998 are presented below and are expressed as
a percentage of sales for review purposes.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
(UNAUDITED) (UNAUDITED)
% %
<S> <C> <C>
Net Sales................................................ 100.0 100.0
Cost of Sales............................................ 75.1 71.7
----- -----
Gross Profit........................................... 24.9 28.3
Operating Expenses....................................... 15.2 12.9
----- -----
Operating Income....................................... 9.7 15.4
Interest and Other Expense, Net.......................... 14.6 13.7
----- -----
Income (Loss) Before Extraordinary Item And Provision for
Income Taxes........................................... (4.9) 1.8
Provision for Income Taxes............................... 0.2 0.1
----- -----
Income (Loss) Before Extraordinary Item.................. (5.1) 1.7
Extraordinary Item -- Loss on Early Extinguishment of
Debt................................................... -- (9.7)
----- -----
Net (Loss)..................................... (5.1) (8.7)
===== =====
</TABLE>
Net Sales for the First Quarter 1999 were $27,684, an increase of $2,668,
or 11%, over net sales of $25,016 in the First Quarter 1998. The increase is due
to the inclusion of three months of CSI net sales in First Quarter 1999 as
compared to two months in First Quarter 1998. 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 $2,200, or 7%, from First Quarter
1998 to First Quarter 1999. The decrease in proforma net sales is attributable
primarily to (i) lower trigger sprayer sales in Europe, (ii) the impact of the
loss in the second quarter of 1998 of a significant CSI customer, sales to whom
are included in First Quarter 1998 but were not replaced in their entirety in
First Quarter 1999, and (iii) reduced purchases by a large custom molding
customer of Polytek due to decreased demand for its products in the Russian
market.
Cost of sales for the First Quarter 1999 were $20,783 (75% of sales) as
compared to $17,925 (72% of sales) for the First Quarter 1998. During late 1998
and First Quarter 1999, the Company consolidated CSI's UK assembly facility into
the Company's Polytek manufacturing facility to begin the manufacture and
assembly of trigger sprayers in the Netherlands for CSI's European customer
base. As a part of this program, new molding machines were acquired, training
programs for personnel were implemented and additional manufacturing personnel
were hired. Sales to CSI's European customer base during First Quarter 1999 were
not as anticipated, due in part to unanticipated delays in customer
qualification of new molds, resulting in higher unabsorbed manufacturing
overhead as compared to First Quarter 1998. Higher costs of sales, on a
percentage basis, also resulted from reduced manufacturing efficiencies related
to the loss of the high volume, consistent production for the significant
customer discussed above. Lastly, depreciation expense was higher in
19
<PAGE> 20
the First Quarter 1999 as compared to First Quarter 1998 due to a higher level
of depreciable manufacturing equipment in place during First Quarter 1999 as
compared to First Quarter 1998.
Operating expenses for the First Quarter 1999 were $4,201, an increase of
$838, or 25%, over operating expenses of $3,363 for the First Quarter 1998. The
increase was principally related to the inclusion in First Quarter 1999 of three
months of CSI Selling, General and Administrative expenses and Research and
Development expenses, and higher amortization of intangibles in First Quarter
1999 as well.
Interest expense for the First Quarter 1999 was $4,146, an increase of $771
over interest expense of $3,375 for the First Quarter 1998. The increase was due
to the higher level of long term debt outstanding in First Quarter 1999.
No U.S. tax liability has been incurred for First Quarter 1999. Provision
for taxes that have been recorded in the First 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 First Quarter 1998, the Company recorded an Extraordinary Loss on
the Early Extinguishment of Debt in the amount of $2,438, comprised of deferred
financing costs and prepayment penalties resulting from early termination of
various loans.
LIQUIDITY AND CAPITAL RESOURCES
For the First Quarter 1999, net cash provided by operating activities of
$5,167 resulted from the $1,393 net loss, offset by $2,508 of non-cash items
added back to net loss (i.e., depreciation and amortization), and $4,052 net
increase in working capital. Net cash used in investing activities included
capital expenditures of $2,663, which was principally for molding and assembly
equipment. Net cash used in financing activities included the repayment of
$1,141 in loans from banks in the First Quarter 1999. At March 31, 1999, the
Company had available excess borrowing capacity of approximately $19,000 and
$3,600 (NLG 7,500), 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 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 First
Quarter 1999 was $5,256 as compared to $6,684 for the First Quarter 1998 (i.e.,
the results of operations of the Company, AFA and Polytek for three months and
CSI for two months). The decrease in EBITDA is due to the factors resulting in
higher costs of sales and operating expenses discussed above.
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 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.
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.
20
<PAGE> 21
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Exhibit Index are filed as part
of this Form 10-Q.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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, 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.
22
<PAGE> 23
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: May 5, 1999
23
<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 three
Months Ended March 31, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,664
<SECURITIES> 0
<RECEIVABLES> 15,491
<ALLOWANCES> 0
<INVENTORY> 11,209
<CURRENT-ASSETS> 30,190
<PP&E> 74,042
<DEPRECIATION> 10,296
<TOTAL-ASSETS> 171,283
<CURRENT-LIABILITIES> 22,617
<BONDS> 161,544
0
0
<COMMON> 5,062
<OTHER-SE> (18,587)
<TOTAL-LIABILITY-AND-EQUITY> 171,283
<SALES> 27,684
<TOTAL-REVENUES> 27,684
<CGS> 20,783
<TOTAL-COSTS> 20,783
<OTHER-EXPENSES> 4,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,146
<INCOME-PRETAX> (1,343)
<INCOME-TAX> 50
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,393)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
