<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 SEPTEMBER 30, 1998 COMMISSION FILE NO. 1-3462
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
CARLYLE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-1574754
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE PALMER TERRACE
CARLSTADT, NJ 07072
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (201) 935-6220
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: N/A
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.
[X] YES [ ] NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
AS OF OCTOBER 30, 1998, 7,382,782 SHARES OF COMMON STOCK WERE OUTSTANDING.
PAGE 1 OF 16
<PAGE> 2
CARLYLE INDUSTRIES, INC.
ONE PALMER TERRACE
CARLSTADT, NJ 07072
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997 ...........................3
Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1998 and 1997 ..........4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 ....................5
Notes to Unaudited Consolidated Financial Statements -
September 30, 1998 .......................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................9
Part II -- Other Information
- ----------------------------
Item 1. Legal Proceedings ...........................................Not Applicable
Item 2. Changes in Securities .......................................Not Applicable
Item 3. Defaults upon Senior Securities .........................................15
Item 4. Submission of Matters to a Vote of Security Holders .........Not Applicable
Item 5. Other Information ...........................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K ........................................15
Signatures...............................................................16
</TABLE>
PAGE 2 OF 16
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARLYLE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1998 DECEMBER 31, 1997
Current Assets: (UNAUDITED) (NOTE)
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 381 $ 12,475
Accounts receivable trade, net 5,608 3,040
Inventories 4,370 2,541
Current deferred tax asset 2,268 2,740
Other current assets 147 118
-------- --------
Total current assets 12,774 20,914
-------- --------
Property, plant and equipment, at cost 2,673 2,509
Less: Accumulated depreciation and amortization (868) (739)
-------- --------
Net property, plant and equipment 1,805 1,770
-------- --------
Goodwill, net 2,366 2,152
Other assets 908 226
-------- --------
Total Assets $ 17,853 $ 25,062
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,249 $ 731
Current maturities of long-term debt 67 51
Federal and state income taxes payable 290 6,514
Other current liabilities 1,567 2,972
-------- --------
3,173 10,268
-------- --------
Long-Term debt 10,675 78
Other Liabilities 8,385 9,033
-------- --------
Total Liabilities 22,233 19,379
-------- --------
Redeemable Preferred Stock, par value $0.01 per share
Shares authorized:
21,305,055 at December 31, 1997
11,187,451 at September 30, 1998
Shares issued and outstanding: 10,687 20,805
Series A - None
Series B - 20,805,060 at December 31, 1997
10,687,456 at September 30, 1998
Accumulated dividends on preferred stock 2,735 4,184
-------- --------
13,422 24,989
-------- --------
Common Stock, par value $0.01 per share
20,000,000 shares authorized;
Shares issued and outstanding: 74 74
7,382,782 at December 31, 1997
7,382,782 at September 30, 1998
Paid in Capital 19,858 19,858
Retained Earnings (37,734) (39,238)
-------- --------
Total Common Stockholders' Equity (17,802) (19,306)
-------- --------
$ 17,853 $ 25,062
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
PAGE 3 OF 16
<PAGE> 4
CARLYLE INDUSTRIES, INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 8,111 $ 5,050 $ 17,003 $ 14,525
Cost of Sales 4,890 2,568 9,272 6,859
-------- -------- -------- --------
3,221 2,482 7,731 7,666
Selling, general & administrative expenses 1,651 1,070 3,792 3,519
Other income -- net (3) (3) (3) (9)
-------- -------- -------- --------
Income from continuing operations before
interest and income taxes 1,573 1,415 3,942 4,156
Interest income (expense) (231) 91 (93) 164
-------- -------- -------- --------
Income from continuing operations before
provision for income taxes 1,342 1,506 3,849 4,320
Provision for income taxes 492 550 1,412 1,582
-------- -------- -------- --------
Income from continuing operations 850 956 2,437 2,738
Less dividends on preferred stock 201 367 933 1,071
-------- -------- -------- --------
Income from continuing operations
applicable to common stock 649 589 1,504 1,667
Loss from discontinued operations net of
income tax provision -- -- -- (316)
Loss on disposal of discontinued operations, net of
income tax provision -- -- -- (9,801)
-------- -------- -------- --------
-- -- -- (10,117)
-------- -------- -------- --------
Net income (loss) applicable to common stock $ 649 $ 589 $ 1,504 $ (8,450)
======== ======== ======== ========
Basic earnings (loss) per common share:
Continuing operations $ .09 $ .08 $ .20 $ .23
Discontinued operations -- -- -- (1.37)
-------- -------- -------- --------
Total $ .09 $ .08 $ .20 $ (1.14)
======== ======== ======== ========
Diluted earnings (loss) per common share:
Continuing operations $ .09 $ .08 $ .20 $ .23
Discontinued operations -- -- -- (1.37)
-------- -------- -------- --------
Total $ .09 $ .08 $ .20 $ (1.14)
======== ======== ======== ========
Weighted average common shares
outstanding (in thousands) $ 7,383 7,384 7,383 7,387
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
PAGE 4 OF 16
<PAGE> 5
CARLYLE INDUSTRIES, INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 2,437 $ 2,738
Reconciliation of net income from continuing
operations to net cash provided (used) by operations:
Depreciation and amortization 444 258
Deferred tax provision 472 1,065
Changes in operating assets and liabilities:
Accounts receivable, trade (1,045) 1,154
Merchandise inventories 837 (377)
Other assets (859) --
Income taxes payable (6,224) --
Other current assets -- 219
Accounts payable (287) (938)
Other current liabilities (1,705) (452)
Other liabilities (648) (620)
Cash flow from discontinued operations -- (6,403)
-------- --------
(6,578) (3,356)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operation -- 51,924
Investment in net assets of acquired business (3,593) --
Capital expenditures (36) (130)
-------- --------
(3,629) 51,794
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility and capitalized
lease obligations 17,519 20,279
Repayment of revolving credit facility
and capital lease obligations (6,906) (57,262)
Preferred stock payment (12,500) --
-------- --------
(1,887) (36,983)
-------- --------
Increase (decrease) in cash and cash equivalents (12,094) 11,455
Cash and cash equivalents beginning of period 12,475 131
-------- --------
Cash and cash equivalents end of period $ 381 $ 11,586
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 100 $ 824
======== ========
Income taxes $ 7,910 $ 143
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
PAGE 5 OF 16
<PAGE> 6
CARLYLE INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Certain reclassifications have been made to prior year amounts in
order to present them on a basis consistent with the current year. Operating
results for the three-month and nine-month periods ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operation: The Company and its subsidiaries distribute a line of
home sewing and craft products.
Consolidation: The accompanying consolidated financial statements include
the accounts of the Company and all subsidiaries after elimination of
intercompany items and transactions.
Depreciation and Amortization: Depreciation and amortization are computed
principally by the straight-line method for each class of depreciable and
amortizable assets based on their estimated useful lives. Buildings and
improvements, machinery and equipment, and furniture, fixtures and leasehold
improvements are generally depreciated over periods of 20-35, 5-25 and 5-10
years, respectively.
Revenue Recognition: Revenue is recognized upon shipment of merchandise.
Cash Equivalents: The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PAGE 6 OF 16
<PAGE> 7
NOTE 3: ACQUISITION
On June 30, 1998, the assets and business of Westwater Enterprises LP were
acquired by Westwater Industries, Inc. ("Westwater"), a newly formed
wholly-owned subsidiary of the Company. Westwater is an importer and distributor
of craft and gift products for sale to retail and specialty chain stores. The
Company paid approximately $3.1 million in cash, assumed $.5 million in bank
debt, and committed to payments totaling up to $2.0 million over three years
contingent upon achievement of specified earnings levels. The acquisition has
been recorded using the purchase method of accounting. Since June 30, 1998 the
accounts of Westwater have been consolidated with the accounts of the Company
based on a preliminary allocation of the purchase price. The allocation is
expected to be finalized after various studies and other work have been
completed. The Company's historical results of operations for the three and
nine-month periods include Westwater results for the period July 1, 1998 to
September 30, 1998.
NOTE 4: PRO FORMA INFORMATION
The following pro forma condensed consolidated financial information was
prepared assuming Westwater was acquired on January 1, 1998 and 1997
respectively, (see Note 3) and that these transactions were accounted for as
purchases. These pro forma results may change as the purchase price allocations
change. Pro forma information is presented for comparative purposes only and
does not purport to be indicative of the results which would have been achieved
had these acquisitions occurred as of January 1, 1998 and 1997 respectively, nor
does it purport to be indicative of results that may be achieved in the future.
<TABLE>
<CAPTION>
Unaudited
(Dollars in thousands except per share data)
Nine Months Ended
September 30
1998 1997
---- ----
<S> <C> <C>
Net Sales $21,126 $21,665
======= =======
Income before taxes $ 3,790 $ 5,333
======= =======
Net income before preferred dividends $ 2,338 $ 3,301
======= =======
Preferred stock dividends $ 933 $ 1,071
======= =======
Net income (loss) attributable to
common stock $ 1,405 $ 2,230
======= =======
Earnings (loss) per share $ .19 $ .30
======= =======
</TABLE>
NOTE 5: EARNINGS PER SHARE
Earnings per common share for the Company have been computed on the basis of
weighted average common shares outstanding after providing for quarterly
preferred dividend requirements.
NOTE 6: INVENTORIES:
PAGE 7 OF 16
<PAGE> 8
The components of inventories, net of reserves, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $1,655 $1,976
Work in Progress 10 10
Finished goods 2,705 555
----- -----
$4,370 $2,541
====== ======
</TABLE>
NOTE 7: CREDIT FACILITY
On June 23, 1998, the Company entered into a new $14 million revolving credit
agreement (the "Credit Agreement") with Fleet Bank, N.A. ("Fleet"). The Credit
Agreement has a term of five years and amounts available under the agreement are
reduced in $1 million increments at the end of each six month period, with the
first such reduction occurring December 31, 1998. Advances bear interest equal
to, at the Company's option, (1) the rate at which deposits in U.S. dollars are
offered by the principal office of Fleet in London, England to prime banks in
the London interbank market plus 1.5% or (2) Fleet's prime rate. A performance
price grid provides that interest rates will step down upon the Company's
achievement of specified ratios of funded debt to earnings before interest,
income taxes, depreciation and amortization.
The Credit Agreement is guaranteed by all direct and indirect subsidiaries of
the Company and is secured by a first priority lien or security interest in
substantially all of the assets of the Company. The Credit Agreement contains
representations and warranties, covenants and events of default customary for
credit agreements of this nature. Such customary covenants include restrictions
on the ability to incur more debt, acquire other companies, make preferred
stock payments and use of proceeds from the sale of assets. In addition to the
semi-annual reduction in availability, additional payments may be required based
on the Company's proceeds from asset sales and "excess cash flow" as defined in
the Credit Agreement.
NOTE 8: PREFERRED STOCK
Under the terms of the Company's charter, dividends are payable upon the
Preferred Stock when, as and if declared by the Board of Directors out of
legally available funds. In addition, the Preferred Stock is required to be
redeemed by the Company in annual installments of $4.2 million beginning March
15, 1995 through March 15, 1999, subject among other things to the approval of
the Company's senior lenders, if any and the extent of legally available funds
as determined by the Board of Directors. Prior to March 27, 1997, the Company
did not make any payments on account of the Preferred Stock (either dividend or
redemption) as the Company's lenders declined to approve such payments. However,
as of that date, the Company discharged its credit facility. Consequently, the
Company was in default of its obligations to redeem the Preferred Stock to the
extent of its legally available funds.
On June 23, 1998 the Company paid $12.5 million to holders of its Series B
Preferred stock of record as of June 22, 1998. $10.1 million of this amount
represented the original redemption amount and $2.4 million represented the
increase in the required redemption payment resulting from accumulated and
unpaid
PAGE 8 OF 16
<PAGE> 9
dividends. The payment was previously authorized by the Company's Board of
Directors at its annual meeting on May 14, 1998, which authorization was
contingent upon obtaining the necessary bank financing and receipt of an opinion
by its investment banker that the payment could be made from legally available
funds. On June 23, 1998 both such conditions were met and the payment was made.
As of September 30, 1998, the Preferred Stock payment arrearages aggregated $6.9
million including accrued but unpaid preferred dividends of $2.7 million.
Accrued but unpaid dividends are added to the redemption value of the Preferred
Stock and they continue to accrue at a compound rate of 6% per annum.
The Company is engaged in discussions with Noel Group, Inc. ("Noel"), with a
view to satisfying the balance of its obligations to the holders of the
Preferred Stock in accordance with the terms of its charter and to the extent
consistent with the Company's resources. Discussions have dealt with the amount
and timing of payments and possible modifications of the Preferred Stock terms
and conditions. Any such modifications would require the agreement of the
Company and the holders of the Preferred Stock.
The Company intends to fulfill its obligation to the holders of the Preferred
Stock as required by the Company's charter to the extent the Company has cash
resources in excess of those required to operate its business. As the Company
believes that it does not currently have such excess resources, its ability to
make payments on account of the Preferred Stock in the future will depend on the
Company's future cash flow, the timing of the settlement of the liabilities
recorded in the consolidated financial statements of the Company, the outcome of
the negotiations with Noel described above, the ability of the Company to obtain
additional financing and compliance with the Company's new Credit Facility which
presently permits only specified payment amounts including 25% of "excess cash
flow", as defined in the agreement. In addition, as the Company has agreed to
notify the Pension Benefit Guaranty Corporation ("PBGC") prior to making any
redemption payment, the Company's decision to make any such payments will depend
on the successful resolution of any issues which may arise with the PBGC
relating to the Company's unfunded liability, if any, to its defined benefit
plan. The Company is also exploring strategic alternatives to redemption of the
Preferred Stock.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER
Sales during the third quarter of 1998 totaled $8.1 million as compared to $5.1
million in the third quarter of 1997 for an increase of $3.0 million. Sales
contributed by Westwater totaled $3.1 million during the quarter, accounting for
all of the increase over 1997.
Gross margin during the third quarter of 1998 totaled $3.2 million as compared
with $2.5 million in the third quarter of 1997. The increase in gross margin
dollars in 1998 as compared to 1997 was primarily the result of Westwater, which
contributed $1.1 million of gross profit during the quarter. During the quarter,
PAGE 9 OF 16
<PAGE> 10
the Company incurred approximately $218M of incremental cost of goods sold in
connection with merchandise distributions related to new store openings by
customers. The gross margin percent during the third quarter of 1998 was 39.7%
as compared to 49.1% during the third quarter of 1997. The decrease in gross
margin percent during the quarter was a result of the Westwater business which
generally operates at a lower gross profit percent and incremental costs
associated with merchandise distributions related to new store openings by
customers.
Selling, general and administrative expenses totaled $1.6 million as compared to
$1.1 million in the third quarter of 1997. The increase in selling, general and
administrative expense in 1998 as compared to 1997 was primarily the result of
the Westwater acquisition which added $658M of incremental selling, general and
administrative expense.
Interest expense during the third quarter of 1998 totaled $231 thousand as
compared to interest income of $91 thousand during the third quarter of 1997.
The increase in interest expense was the result of new bank debt outstanding
since June 1998 which was borrowed in connection with the Preferred stock
payment and the Westwater acquisition.
The provision for income taxes totaled $.5 million as compared to $.6 million
during the same period last year. The combined effective income tax rate totaled
36.5% in both 1998 and 1997. The combined effective income tax rates are higher
than combined statutory rates because of nondeductible goodwill.
Preferred dividends accrued totaled $200 thousand as compared to $367 thousand
during the same period in 1997. Preferred dividends are accrued and compound at
a rate of 6% per annum. The reduction in preferred dividends accrued as compared
to 1997 was due to the partial redemption of Preferred Stock on June 23, 1998. A
portion of the dividend arrearage was also satisfied in connection with the
partial redemption. See Note 8 to the unaudited consolidated financial
statements.
Third quarter results may not be indicative of future quarterly results due to
seasonality of the craft business and because of future programs with major
customers which may vary as to timing and amount from quarter to quarter. In
addition, consolidation within the Company's customer base may continue to put
further pressure on the Company's revenue and operating results in subsequent
quarters. The Company is currently pursuing a number of strategies to improve
its revenue base.
YEAR TO DATE
Sales during the nine months ended September 30, 1998 totaled $17.0 million as
compared to $14.5 million during the year to date period in 1997 for an increase
of $2.5 million. Westwater provided $3.1 million of incremental sales. Somewhat
offsetting the favorable incremental Westwater sales were the effects on sales
from customer consolidation and related store closings.
Gross margin during the nine months ended September 30, 1998 totaled $7.7
million or 45.5% as compared to $7.7 million or 52.7% during the comparable
period in 1997. Westwater contributed $1.1 million of gross profit during the
year to date period in 1998. Offsetting the incremental Westwater margin dollars
was the effect on gross margin of lower sales volume in the core business,
caused by customer consolidation occurring primarily during the second half of
1997. Also, higher incremental variable cost of good sold were incurred during
the year to date period in 1998 associated with merchandise distributions
related to new store openings by customers.
PAGE 10 OF 16
<PAGE> 11
Selling, general and administrative expense during the nine months ended
September 30, 1998 totaled $3.8 million as compared to $3.5 million during the
first nine months of 1997. Incremental Westwater selling, general and
administrative expense totaled $658 thousand. Offsetting this increase was a
reduction in selling, general and administrative expense in 1998 as compared to
1997 due to lower corporate administrative headcount and expense.
Net interest expense during the first nine months of 1998 totaled $93 thousand
as compared to net interest income of $164 thousand during the year to date
period in 1997. The increase in interest expense during 1998 as compared to 1997
was the result of bank debt outstanding beginning June 23, 1998 in connection
with the Preferred stock payment and the Westwater acquisition. Interest expense
incurred prior to March 27, 1997 related to outstanding debt under former credit
facilities has been classified as discontinued operations in 1997.
The provision for income taxes during the first nine months of 1998 totaled $1.4
million compared to $1.6 million during the comparable period in 1997. The
effective income tax rate was 36.7% during each of the first nine month periods
of 1998 and 1997.
Preferred dividends accrued during the first nine months of 1998 totaled $933
thousand as compared to $1.071 million during the first nine months of 1997. The
reduction in accrued preferred dividends in the year to date period 1998 as
compared to 1997 was the result of the $12.5 million Preferred stock payment in
June 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $.4 million and trade accounts receivable of $5.6
million. In addition, the Company had $3.4 million available under its revolving
credit facility as of September 30, 1998.
Cash used by operations during the nine months ended September 30, 1998 totaled
$6.6 million which included income tax payments totaling $7.2 million made
during the first quarter of 1998 attributable to the tax gain from the sale of
the Thread division in 1997.
On June 23, 1998, the Company entered into a new $14 million revolving credit
agreement (the "Credit Agreement") with Fleet Bank, N.A. ("Fleet"). The Credit
Agreement has a term of five years and amounts available under the agreement are
reduced in $1 million increments at the end of each six month period, with the
first such reduction occurring December 31, 1998. Advances bear interest equal
to, at the Company's option, (1) the rate at which deposits in U.S. dollars are
offered by the principal office of Fleet in London, England to prime banks in
the London interbank market plus 1.5% or (2) Fleet's prime rate. A performance
price grid provides that interest rates will step down upon the Company's
achievement of specified ratios of funded debt to earnings before interest,
income taxes, depreciation and amortization.
The Credit Agreement is guaranteed by all direct and indirect subsidiaries of
the Company and is secured by a first priority lien or security interest in
substantially of the assets of the Company. The Credit Agreement contains
representations and warranties, covenants and events of default customary for
credit agreements of this nature. Such customary covenants include restrictions
on the ability to incur more
PAGE 11 OF 16
<PAGE> 12
debt, acquire other companies, make preferred stock payments and use of proceeds
from the sale of assets. In addition to the semi-annual reduction in
availability, additional payments may be required based on the Company's
proceeds from asset sales and "excess cash flow" as defined in the Credit
Agreement.
Under the terms of the Company's charter, dividends are payable upon the
Preferred Stock when, as and if declared by the Board of Directors out of
legally available funds. In addition, the Preferred Stock is required to be
redeemed by the Company in annual installments of $4.2 million beginning March
15, 1995 through March 15, 1999, subject among other things to the approval of
the Company's senior lenders, if any and the extent of legally available funds
as determined by the Board of Directors. Prior to March 27, 1997, the Company
did not make any payments on account of the Preferred Stock (either dividend or
redemption) as the Company's lenders declined to approve such payments. However,
as of that date, the Company discharged its credit facility. Consequently, the
Company was in default of its obligations to redeem the Preferred Stock to the
extent of its legally available funds.
On June 23, 1998 the Company paid $12.5 million to holders of its Series B
Preferred stock of record as of June 22, 1998. $10.1 million of this amount
represented the original redemption amount and $2.4 million represented
accumulated and unpaid dividends. The payment was previously authorized by the
Company's board of directors at its annual meeting on May 14, 1998, which
authorization was contingent upon obtaining the necessary bank financing and
receipt of an opinion by its investment banker that the payment could be made
from legally available funds. On June 23, 1998 both such conditions were met and
the payment was made.
As of September 30, 1998, the Preferred Stock payment arrearages aggregated $6.9
million including accrued but unpaid preferred dividends of $2.7 million.
Accrued but unpaid dividends are added to the redemption value of the Preferred
Stock and the total continues to accrue interest at a compound rate of 6% per
annum.
The Company is engaged in discussions with Noel Group, Inc. ("Noel"), with a
view to satisfying the balance of its obligations to the holders of the
Preferred Stock in accordance with the terms of its charter and to the extent
consistent with the Company's resources. Discussions have dealt with the amount
and timing of payments and possible modifications of the Preferred Stock terms
and conditions. Any such modifications would require the agreement of the
Company and the holders of the Preferred Stock.
The Company intends to fulfill its obligation to the holders of the Preferred
Stock as required by the Company's charter to the extent the Company has cash
resources in excess of those required to operate its business. As the Company
believes that it does not currently have such excess resources, its ability to
make payments on account of the Preferred Stock in the future will depend on the
Company's future cash flow, the timing of the settlement of the liabilities
recorded in the financial statements of the Company, the outcome of the
negotiations with Noel described above, the ability of the Company to obtain
additional financing and compliance with the Company's new Credit Facility which
presently permits only specified payment amounts including 25% of "excess cash
flow", as defined in the agreement. In addition, as the Company has agreed to
notify the Pension Benefit Guaranty Corporation ("PBGC") prior to making any
redemption payment, the Company's decision to make any such payments will depend
on the successful resolution of any issues which may arise with the PBGC
relating to the Company's unfunded liability, if any, to its defined benefit
plan. The Company is also exploring strategic alternatives to redemption of the
preferred stock.
PAGE 12 OF 16
<PAGE> 13
On June 30, 1998 the Company acquired the business and net assets of Westwater
Enterprises, LP for $3.1 million in cash plus the assumption of $.5 million of
bank debt. In connection with this transaction, additional payments of up to
$2.0 million may become payable contingent upon the attainment of specified
earnings levels over the next three years.
YEAR 2000 ISSUES
The Company has implemented a plan to address year 2000 issues. The Company's
plan includes the identification and testing of its information technology
components and imbedded technology. In connection with this plan a detailed list
of hardware, software and other micro-processing technology has been compiled.
The Company's plan includes an evaluation of each identified item as compliant
or not compliant and the testing of each component. Certain noncompliant systems
have been upgraded or replaced and others are scheduled to be replaced. In
addition, the Company's plan includes confirmation with its significant
customers and suppliers regarding their state of readiness with respect to year
2000 issues.
The Company's primary risks related to year 2000 issues are associated with the
failure of its management information systems, which include billing, production
scheduling, raw material ordering and financial reporting. In addition, the
Company may be at risk if any of its significant customers or vendors experience
failures related to year 2000 issues.
Based on information currently available, management does not anticipate that
the Company will incur significant operating expenses or be required to invest
heavily in computer system improvements to be year 2000 compliant, however, the
Company is still analyzing its systems and requirements. To the extent the
Company's systems are not fully year 2000 compliant, there can be no assurance
that potential systems interruptions or the cost necessary to update software
would not have a material adverse effect on the Company's business, financial
condition, results of operations and business prospects. The Company does not
currently have complete information concerning the year 2000 compliance status
of its major customers and vendors. In the event that any of the Company's
significant customers or vendors do not successfully and timely achieve year
2000 compliance, the Company's business or operations could be adversely
affected.
STOCK EXCHANGE LISTING
As of December 31, 1997 and June 30, 1998, the Company failed to meet certain of
the New York Stock Exchange (the "Exchange") continued listing requirements. On
September 2, 1998 the New York Stock Exchange notified the Company that it would
be delisted for failing to meet listing criteria related to aggregate market
value, net income and net tangible assets. On September 4, 1998 the Company
commenced trading on the over-the-counter bulletin board market under the symbol
CRLH.
This Quarterly Report on Form 10-Q (the "Quarterly Report") contains statements
which constitute forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as
PAGE 13 OF 16
<PAGE> 14
amended (the "Exchange Act"). Those statements appear in a number of places in
this Quarterly Report and include statements regarding the intent, belief or
current expectations of the Company, its Directors or its Officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; (iv) customer concentration and the
increasing consolidation of the Company's customer base (v) the declaration and
payment of dividends; (vi) impact of year 2000 issues. Shareholders are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors.
IMPACT OF INFLATION
The Company's results are affected by the impact of inflation on operating
costs. Historically, the Company has used selling price adjustments, cost
containment programs and improved operating efficiencies to offset the otherwise
negative impact of inflation on its operations.
PAGE 14 OF 16
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
a) None
b) REDEEMABLE SERIES B PREFERRED STOCK
Dividends totaling $1,316,018 in 1995, $1,361,230 in 1996
$1,440,957 in 1997 and $935,720 in 1998 were scheduled to
be paid. No such payments were made until June 23, 1998 at
which time a payment of $2,383,396 was made by redemption
of 10.1 million shares of Preferred Stock. The balance of
unpaid dividends continue to accrue at a compounded rate of
6% per annum. Additionally, the Company has not given
effect to certain previously scheduled redemption payments.
See Note 8 to the unaudited consolidated financial
statements for a detailed discussion of the Preferred
Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
None
(b) REPORTS ON FORM 8-K.
On July 15, 1998, the Company filed a Current Report on
Form 8-K to reflect the acquisition of Westwater
Enterprises, LLP. On September 11, 1998, the Company filed
a Current Report on Form 8-KA to reflect the pro forma
financial information related to the Westwater acquisition.
PAGE 15 OF 16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARLYLE INDUSTRIES, INC.
(Registrant)
/S/ Robert A. Levinson
- -------------------------------------------------------------------
Robert A. Levinson, Chairman, President and Chief Executive Officer
/S/ Edward F. Cooke
- ----------------------------------------------------------------------
Edward F. Cooke, Vice President, Secretary and Chief Financial Officer
Date: November 13, 1998
PAGE 16 OF 16
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