SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 4, 1996
GUARDSMAN PRODUCTS, INC.
(Exact name of registrant as specified in charter)
DELAWARE 1-4704 38-0593900
(State or other jurisdic- (Commission (IRS Employer
tion of incorporation) File Number) Identification No.)
3033 ORCHARD VISTA DRIVE, S.E., SUITE 200
P.O. BOX 1521, GRAND RAPIDS, MICHIGAN 49501
(Address of principal executive offices) (Zip Code)
(616) 957-2600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name or former address, if changed since last report)
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
As publicly announced on March 4, 1996, Guardsman Products, Inc. (the
"Company") has entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Lilly Industries, Inc., an Indiana Corporation ("Parent")
and LP Acquisition Corporation, a Delaware corporation and wholly owned
subsidiary of Lilly (the "Purchaser").
As a condition to Parent's willingness to enter into the Merger
Agreement, Irwin Wayne Uran, James L. Sadler and John H. Sadler (the "Major
Stockholders"), each a stockholder of the Company, have entered into
identical letter agreements (the "Letter Agreements") with Parent regarding
their shares of Common Stock, par value $1.00 per share, of the Company
(the "Shares"). Copies of the Letter Agreements are filed as Exhibit 5 to
the Schedule 14D-9 filed by the Company on March 8, 1996 and are
incorporated as Exhibit 99(b) to this Form 8-K. These Letter Agreements
are also here incorporated by reference. The Company has been informed
that the Major Stockholders, collectively beneficially own approximately
48% of the outstanding Shares on a fully diluted basis.
In each Letter Agreement, each Major Stockholder agrees as
follows:
(i) to validly tender into the Offer to Purchase, dated
March 8, 1996, (the "Offer") and not withdraw, all Shares
beneficially owned by him;
(ii) if requested by Parent, to vote all of his Shares in
favor of the transactions contemplated by the Merger Agreement,
and against any action or arrangement that would interfere with
the successful completion of those transactions;
(iii) to not sell, transfer or grant voting rights with
respect to, or agree to sell, transfer or grant voting rights
with respect to, any of his Shares other than as part of the
transactions contemplated by the Merger Agreement, and likewise
to not purchase any additional Shares while those transactions
are pending; and
(iv) to not solicit or encourage the making of any other
proposal intended to lead to the acquisition of his Shares or any
other extraordinary transaction involving the Company.
Each Letter Agreement provides that it will remain in effect
until the transactions contemplated by the Merger Agreement, including the
Offer and the Merger, are successfully completed or the Merger Agreement is
terminated (either by Parent or the Company) in accordance with its terms.
In addition, each Major Stockholder has granted to Parent a proxy
to vote his Shares in favor of approving the Merger and against any action,
agreement or arrangement that would result in a breach of the Merger
Agreement or delay or interfere with the Offer or the merger of Purchaser
into the Company (the "Merger"). Copies of the proxies signed by each
Major Stockholder are filed as Exhibit 6 to the Schedule 14D-9 filed by the
Company on March 8, 1996 and are incorporated as Exhibit 99(c) to this Form
8-K. These proxies are also here incorporated by reference. The proxy is
irrevocable and terminates upon the first to occur of (i) consummation of
the Merger, (ii) termination of the Merger Agreement in accordance with its
terms, and (iii) termination of the Letter Agreement by Parent.
ITEM 5. OTHER EVENTS
In connection with the Agreement and Plan of Merger described in Item
1. above, Parent has filed a Tender Offer Statement pursuant to Section
14(d)(1) of the Securities Exchange Act of 1934, as amended, on Schedule
14D-1 dated March 8, 1996. In the Schedule 14D-1, Parent references
selected financial information for the Company for the year ended
December 31, 1995. This information was obtained from the Company's audited
consolidated financial statements for such year. By this report, the
Company is filing as Exhibit 99(a) its audited financial statements as of
December 31, 1995 and for the period then ended. The consent of
Guardsman's independent Public Accountants is included as Exhibit 23.
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.
GUARDSMAN PRODUCTS, INC.
Dated: March 11, 1996 By: /S/ HENRY H. GRAHAM, JR.
Henry H. Graham, Jr.
Vice President of Finance, Chief
Financial Officer and Treasurer
EXHIBIT INDEX
EXHIBIT DOCUMENT
23 Consent of independent Public Accountants
27 Financial Data Schedule.
99(a) Guardsman Products, Inc. Audited Consolidated Financial
Statements, Notes to Consolidated Financial Statements,
and report of Independent Public Accountants as of
December 31, 1995 and for the period then ended.
99(b) Letter Agreements dated March 4, 1996 between Parent
and each of Irwin Wayne Uran, James L. Sadler and John
H. Sadler. Previously filed as Exhibits 5(a), 5(b) and
5(c) to the Schedule 14D-9 filed by the Company on
March 8, 1996.
99(c) Proxies dated March 4, 1996 given to Parent by each of
Irwin Wayne Uran, James L. Sadler and John H. Sadler.
Previously filed as Exhibits 6(a), 6(b) and 6(c) to the
Schedule 14D-9 filed by the Company on March 8, 1996.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 8-K, into the Company's previously
filed Form S-8 Registration Statements, as amended, File Numbers 2-72787,
2-92445, 33-20034, 33-25483, 33-46778, 33-46780, 33-46781, 33-61689, 33-61707
and Form S-3 Registration Statements, as amended, File Numbers 33-19908 and
33-78606.
/S/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Grand Rapids, Michigan
March 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED FINANCIAL STATEMENTS FOR 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,776
<SECURITIES> 0
<RECEIVABLES> 34,652
<ALLOWANCES> 569
<INVENTORY> 32,192
<CURRENT-ASSETS> 83,956
<PP&E> 46,646
<DEPRECIATION> 18,591
<TOTAL-ASSETS> 148,049
<CURRENT-LIABILITIES> 38,458
<BONDS> 27,757
<COMMON> 9,559
0
0
<OTHER-SE> 54,258
<TOTAL-LIABILITY-AND-EQUITY> 148,049
<SALES> 250,574
<TOTAL-REVENUES> 250,574
<CGS> 165,618
<TOTAL-COSTS> 165,618
<OTHER-EXPENSES> 79,874
<LOSS-PROVISION> 858
<INTEREST-EXPENSE> 2,131
<INCOME-PRETAX> 2,680
<INCOME-TAX> 1,248
<INCOME-CONTINUING> 1,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,432
<EPS-PRIMARY> .15
<EPS-DILUTED> .00
</TABLE>
EXHIBIT 99(a)
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
(In Thousands, Except Per
Share Amounts)
Net sales $ 250,574 $ 201,888 $ 177,806 $ 152,197 $ 140,927
Income, net of income taxes 1,432<F*> 5,903 4,671 1,978 956
Income per common share .15<F*> .70 .60 .27 .13
Cash dividends per common share .33 .32 .32 .41 .50
SUMMARY OF FINANCIAL POSITION
(In Thousands)
Total assets $ 148,049 $ 137,052 $ 96,954 $ 83,494 $ 79,777
Long-term debt, net of
current maturities 27,757 27,805 19,013 14,464 9,568
Stockholders' equity 63,817 64,426 45,362 42,200 44,002
Working capital 45,498 42,373 33,796 28,818 25,112
OTHER SUPPLEMENTAL INFORMATION
Number of employees 1,060 1,109 860 791 757
Average shares outstanding 9,515,199 8,464,639 7,849,101 7,433,416 7,370,900
INDUSTRY SEGMENT OPERATIONS
(Audited and In Thousands)
NET SALES
Coatings Group $ 194,095 $ 155,967 $ 133,216 $ 116,768 $ 107,131
Consumer Products Group 56,506 46,042 44,618 35,480 33,906
250,601 202,009 177,834 152,248 141,037
Inter-segment sales (27) (121) (28) (51) (110)
Consolidated net sales $ 250,574 $ 201,888 $ 177,806 $ 152,197 $ 140,927
OPERATING PROFIT
Coatings Group $ 1,414<F**> $ 8,738 $ 7,053 $ 3,973 $ 1,895
Consumer Products Group 6,681 5,533 5,524 4,323 4,502
8,095 14,271 12,577 8,296 6,397
Corporate expenses-net (3,871) (3,618) (4,417) (4,611) (3,931)
Interest expense (2,131) (1,188) (991) (703) (1,026)
Costs of pooling of interests (529)
Investment income 587 374 376 372 425
Income before income taxes $ 2,680 $ 9,839 $ 7,016 $ 3,354 $ 1,865
IDENTIFIABLE ASSETS
Coatings Group $ 107,834 $ 102,593 $ 66,642 $ 56,141 $ 53,980
Consumer Products Group 28,563 25,475 20,092 16,165 16,079
Corporate 11,652 8,984 10,220 11,188 9,718
Total $ 148,049 $ 137,052 $ 96,954 $ 83,494 $ 79,777
<FN>
<F*> Includes restructuring charges which decreased net income by $6,635 or $.70 per share.
<F**> Includes pretax restructuring charges of $10,458.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1995 1994
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,776 $ 5,630
Accounts receivable, less allowances of $569
in 1995 and $808 in 1994 34,083 29,517
Inventories
Finished products 16,949 16,680
Raw materials and work in process 15,243 14,644
32,192 31,324
Deferred income taxes 4,083 1,866
Other current assets 6,822 5,224
Total current assets 83,956 73,561
Property, plant and equipment
Land 2,543 2,559
Buildings 16,640 15,920
Machinery and equipment 26,869 27,469
Construction in progress 594 718
46,646 46,666
Accumulated depreciation 18,591 18,689
28,055 27,977
Goodwill, less accumulated amortization
of $3,894 in 1995 and $3,251 in 1994 19,405 20,336
Other intangibles, less accumulated amortization
of $6,141 in 1995 and $5,374 in 1994 11,893 12,587
Other assets 4,740 2,591
$148,049 $137,052
</TABLE>
-2-
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1995 1994
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 22,740 $ 19,286
Accrued compensation 4,130 4,142
Other accrued expenses 6,613 7,157
Restructuring reserves 4,257
Income taxes 665 510
Current maturities of long-term debt 53 93
Total current liabilities 38,458 31,188
Long-term debt 27,757 27,805
Deferred compensation and pension costs 8,672 7,041
Other liabilities 9,345 6,592
Stockholders' equity
Preferred stock, $1 par value, terms to be
determined when issued - authorized and
unissued - 1,000,000 shares
Common stock, $1 par value
authorized - 30,000,000 shares
outstanding - 9,558,993
shares in 1995, 9,482,199 shares
in 1994 9,559 9,482
Additional paid-in capital 47,324 46,560
Retained earnings 8,240 9,949
Cumulative translation adjustments (1,306) (1,565)
Total stockholders' equity 63,817 64,426
$148,049 $137,052
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31 (In Thousands,
EXCEPT PER SHARE AMOUNTS) 1995 1994 1993
<S> <C> <C> <C>
Net sales $ 250,574 $ 201,888 $ 177,806
Cost of sales 165,618 132,984 116,943
84,956 68,904 60,863
Selling, general and administrative
expenses 70,274 58,251 52,703
Restructuring charges 10,458
Interest expense 2,131 1,188 991
Costs of pooling of interests transaction 529
Investment income (587) (374) (376)
Income before income taxes and cumulative
effect of change in accounting principle 2,680 9,839 7,016
Income taxes 1,248 3,936 2,495
Income before cumulative effect of change
in accounting principle 1,432 5,903 4,521
Cumulative effect of change
in accounting principle 150
Net income $ 1,432 $ 5,903 $ 4,671
Income per common share:
Before cumulative effect of change in
accounting principle $ .15 $ .70 $ .58
Cumulative effect of change
in accounting principle .02
Net income $ .15 $ .70 $ .60
</TABLE>
The accompanying notes are an integral part of these financial statements
-4-
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN RETAINED TRANSLATION
(In Thousands, Except Per Share Amounts) STOCK CAPITAL EARNINGS ADJUSTMENTS
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $ 7,453 $ 31,039 $ 4,437 $ (729)
Net income for 1993 4,671
Cash dividends - $.32 per share (2,400)
Stock issued under employee
and stockholder plans 101 1,057 (223)
Stock issued for business acquired
under pooling of interests 359 (359) 409
Foreign currency translation (453)
Balance at December 31, 1993 7,913 31,737 6,894 (1,182)
Net income for 1994 5,903
Cash dividends - $.32 per share (2,787)
Stock issued under employee
and stockholder plans 69 663 (61)
Stock issued for business acquired 1,500 14,160
Foreign currency translation (383)
Balance at December 31, 1994 9,482 46,560 9,949 (1,565)
Net income for 1995 1,432
Cash dividends - $.33 per share (3,141)
Stock issued under employee
and stockholder plans 77 764
Foreign currency translation 259
Balance at December 31, 1995 $ 9,559 $ 47,324 $ 8,240 $ (1,306)
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1995 1994 1993
<S> <C> <C> <C>
Operations
Net income $ 1,432 $ 5,903 $ 4,671
Adjustments to reconcile net income
to cash provided by operations
Depreciation and amortization 6,944 5,489 4,674
Restructuring charges 10,458
Deferred income taxes (4,026) (634) (864)
Deferred compensation and pension costs 915 804 575
Other - net 1,555 518 720
Changes in certain working capital items
Accounts receivable (3,585) (2,101) (3,630)
Inventories (2,696) (4,373) (3,282)
Other current assets (1,594) (231) 693
Accounts payable 2,363 1,171 2,880
Accrued expenses (656) 44 250
Cash provided by operations 11,110 6,590 6,687
Investing Activities
Purchase of businesses (1,376) (5,712) (3,359)
Additions to property, plant and equipment (5,317) (3,410) (3,230)
Other - net (616) 141 (803)
Cash used by investing activities (7,309) (8,981) (7,392)
Financing Activities
Cash dividends paid (3,141) (2,787) (2,400)
Proceeds from revolving lines of credit and
other long-term debt 63,649 38,586 34,437
Payments on revolving lines of credit and
other long-term debt (64,088) (32,891) (30,429)
Stock issued under employee and
stockholder plans 841 671 935
Cash (used) provided by financing activities (2,739) 3,579 2,543
Effect of foreign currency rate changes on cash 84 (30) (208)
Increase in cash and cash equivalents 1,146 1,158 1,630
Cash and cash equivalents at beginning of year 5,630 4,472 2,842
Cash and cash equivalents at end of year $ 6,776 $ 5,630 $ 4,472
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
GUARDSMAN PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FOREIGN EXCHANGE
The consolidated financial statements include the accounts of Guardsman
Products, Inc. and its wholly-owned subsidiaries (Guardsman or the
Company). All significant intercompany transactions and accounts are
eliminated.
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect at the end of the year. The unrealized
gains or losses that result from this process are shown in the cumulative
translation adjustments section of stockholders' equity. Revenues and
expenses are translated using average exchange rates that prevailed during
the year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates current market value.
INVENTORIES
Inventories are stated at the lower of cost or market, using the first-in,
first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of plant
and equipment is provided on the straight-line method based upon the
estimated useful lives of the assets as follows: buildings, 10 to 40
years; and machinery and equipment, 3 to 20 years. Depreciation expense
totaled $3,484,000 in 1995, $2,840,000 in 1994 and $2,602,000 in 1993.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the amount by which the cost of businesses purchased
exceeds the fair value of the net assets acquired. Goodwill and other
intangible assets are amortized over periods ranging from 5 to 40 years
using the straight-line method. The Company continually evaluates whether
events and circumstances have occurred that indicate the remaining
-7-
estimated useful life of goodwill and other intangible assets may warrant
revision or that the remaining balance may not be recoverable. When
factors indicate that the asset should be evaluated for possible
impairment, the Company uses an estimate of the related business segment's
undiscounted net cash flows over the remaining life of the asset in
measuring whether the asset is recoverable. Such adjustments were not
significant in 1995, 1994 and 1993. Other intangible assets in the
accompanying balance sheet include, among other things, formulas totaling
$8,386,000 and $9,928,000 at December 31, 1995 and 1994, respectively.
LONG-TERM ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" (SFAS No. 121). The Company is required to
adopt the provisions of SFAS No. 121 beginning in 1996. Based on
information currently available, the Company does not expect the impact of
adopting this statement to have a material effect on its financial
condition or results of operations.
RESEARCH AND DEVELOPMENT
Research and development expenditures, primarily in the Coatings Group, are
charged to income as incurred. Research and development expenditures
amounted to $8,389,000 in 1995, $6,860,000 in 1994 and $5,932,000 in 1993.
INCOME TAXES
Income taxes are based on income reported for financial statement purposes.
Deferred income tax balances represent the tax effect of temporary
differences between the financial reporting basis and the tax basis of
certain assets and liabilities.
INCOME PER COMMON SHARE
Income per common share is based on the weighted average number of shares
of common stock outstanding. Shares available for purchase under stock
incentive plans are not reflected in the computation of income per common
share since the effect would not be material.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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.
-8-
The Company is partially self-insured for general and product liabilities
and workers compensation. Self-insurance liabilities are estimated using
methods management believes are reasonable and appropriate. These methods
are based on historical information along with certain assumptions about
future events. Changes in assumptions for such matters as legal actions,
medical costs as well as changes in actual experience could cause these
estimates to change in the near term.
NOTE 2
ACQUISITIONS OF BUSINESSES
Effective January 30, 1995, the Company purchased the business and certain
assets of Soil Shield International, Inc. (Soil Shield), a producer and
distributor of retail-applied fabric protection products. The Company's
aggregate acquisition cost for this business totaled $1,327,000. Financing
for the acquisition was provided by cash flows from operations and long-
term borrowings under the Company's revolving lines of credit. The Company
is servicing the former Soil Shield customers from its existing facilities.
The acquisition of Soil Shield did not have a material effect on the
Company's financial statements.
On August 31, 1994, the Company purchased 100% of the stock of Moline Paint
Manufacturing Co. (Moline). The consideration for the stock of Moline
included 1.5 million shares of Guardsman Common Stock valued at $10.44 per
share, approximately $6,000,000 in cash and the assumption of approximately
$3,100,000 in outstanding debt of Moline. Moline is an industrial coatings
manufacturer focusing on the agricultural/construction equipment and
general industrial markets. Management intends to continue Moline's
operations along substantially the same lines of business.
The purchase agreement provides for certain contingent payments including a
contingent adjustment for stock price. In the event that the price of
Guardsman Common Stock does not equal or exceed $18 per share during the
four year period subsequent to the acquisition date, based on the highest
trading price on any twenty days during this period, then Guardsman shall
pay the sellers the difference between the highest trading price, as
defined, and $18 per share multiplied by the 1.5 million shares issued
pursuant to the acquisition.
In addition, the sellers entered into non-competition agreements valued at
$5,014,000, which represents the present value discounted at 7.75% of
payments totaling $7,679,000 to be paid over a period of twelve years. The
Company will recognize the cost ratably over the term of the agreements.
The acquisition of Moline was accounted for as a purchase. Accordingly,
the purchase price was allocated to the net assets acquired based upon
their estimated fair market values. The excess of the purchase price over
the estimated fair value of net assets acquired amounted to approximately
-9-
$13 million, which has been accounted for as goodwill and is being
amortized over 40 years using the straight-line method.
The accompanying consolidated statements of income reflect the operating
results of Moline since the effective date of the acquisition. Pro forma
unaudited consolidated operating results of the Company and Moline for the
years ended December 31, 1994 and 1993, assuming the acquisition had been
made as of January 1, 1994 and 1993, are summarized below (in thousands,
except per share amount):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Net sales $227,346 $210,150
Net income 4,656 4,680
Earnings per share .49 .50
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional depreciation expense as
a result of a step-up in the basis of fixed assets, additional amortization
expense as a result of goodwill and other intangible assets and increased
interest expense on acquisition debt. They do not purport to be indicative
of the results of operations which actually would have resulted had the
combination been in effect on January 1, 1994 and 1993, or of future
results of operations of the consolidated entities.
In December 1993, the Company exchanged approximately 359,000 shares of its
common stock valued at $15 per share for all the outstanding shares of
Atlanta Sundries, Inc., the maker of Goof-Off latex paint remover and other
related consumer products. The acquisition was accounted for as a pooling
of interests. Since the acquisition did not have a material effect on
periods prior to 1993, they have not been restated.
NOTE 3
RESTRUCTURING CHARGES
Included in the accompanying Consolidated Statements of Income is
$10,458,000 in pretax restructuring charges, which reduced net income by
$6,635,000 or $.70 per share for the year ended December 31, 1995. This
charge primarily includes expenses associated with the closure of the
Company's Grand Rapids, Michigan coatings manufacturing plant.
Restructuring charges consisted of facilities, equipment and inventory
write-offs, termination benefits, and other costs associated with the
restructuring. Approximately 100 employees were terminated as a result of
the facility closing and job elimination process, which will be partially
offset by employee additions at other facilities as production is
relocated. The closure of the manufacturing facility and job elimination
process was largely complete in mid-January 1996.
-10-
The components of the restructuring charges and the amounts paid or charged
against these reserves during 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
COSTS PAID ENDING
PROVISION OR CHARGED BALANCE
<S> <C> <C> <C>
Facilities, equipment and inventories $ 5,736 $ 827 $ 4,909
Termination benefits 3,380 158 3,222
Other costs 1,342 451 891
$ 10,458 $ 1,436 $ 9,022
</TABLE>
NOTE 4
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." This change
resulted in a one-time additional net tax benefit of $150,000 or $.02 per
share at January 1, 1993 which is recorded under the caption "Cumulative
Effect of Change in Accounting Principle" in the accompanying Consolidated
Statements of Income.
The provision for income taxes attributable to continuing operations is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Currently payable:
Federal $ 2,436 $ 3,048 $ 1,986
State 689 481 418
Foreign 2,149 1,127 670
5,274 4,656 3,074
Deferred expense (credit):
Federal (3,350) (624) (615)
State (305) (88) (70)
Foreign (371) (8) 106
(4,026) (720) (579)
Total $ 1,248 $ 3,936 $ 2,495
</TABLE>
The components of income (loss) before income taxes are (in thousands):
-11-
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Domestic $ (1,892) $ 7,259 $ 4,732
Foreign 4,572 2,580 2,284
$ 2,680 $ 9,839 $ 7,016
</TABLE>
A reconciliation of income taxes attributable to continuing operations
calculated at the applicable federal statutory rate of 34% to the provision
for income taxes follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax at federal statutory rate $ 911 $ 3,345 $ 2,385
Adjustments to taxes at statutory rate:
State income taxes, net of
federal income tax reduction 253 259 249
Nondeductible losses of subsidiaries
and other investments 109
Benefit of tax deduction from U.S.
subsidiary (325) (417)
Nondeductible amortization of
intangible assets 507 215 200
Other (98) 117 (31)
Income taxes $ 1,248 $ 3,936 $ 2,495
Effective income tax rate 46.6% 40.0% 35.6%
</TABLE>
The following represents the components of deferred tax assets and
liabilities at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred tax assets:
Deferred compensation and pension costs $ 2,850 $ 2,626
Environmental obligations 1,803 1,775
Reserves for self-insured losses 814 656
Inventory valuation reserves 743 646
Intangible assets 730 468
Warranty reserves 815 427
Reserves for restructuring charges 3,076
Other items 744 816
Total deferred tax assets 11,575 7,414
-12-
Deferred tax liabilities:
Basis difference in acquired assets 2,836 2,975
Property, plant and equipment 2,700 2,499
Other items 147 74
Total deferred tax liabilities 5,683 5,548
Net deferred tax assets $ 5,892 $ 1,866
</TABLE>
Income and remittance taxes have not been recorded on $4.6 million of
undistributed earnings of foreign subsidiaries, either because any taxes on
dividends would be offset substantially by foreign tax credits or because
the Company considers these earnings indefinitely reinvested in the foreign
operations. For those earnings which are indefinitely reinvested, it is
not practical to determine the amount of additional tax liabilities that
would be incurred if such earnings were repatriated.
Income tax payments, net of refunds, amounted to $5,127,000, $5,535,000 and
$3,050,000 in 1995, 1994 and 1993, respectively.
NOTE 5
CREDIT ARRANGEMENTS AND LONG-TERM DEBT
The Company has two short-term revolving credit agreements. The Company
may borrow up to $5 million under a domestic agreement at substantially the
same rates available under the long-term revolving lines of credit
discussed below. The Company's Canadian subsidiary has an operating credit
facility which permits borrowings up to $1,500,000 Canadian at the same
rates available under the Canadian long-term facility described below.
There were no amounts outstanding under these agreements during 1995, 1994
and 1993.
The Company has three revolving credit agreements which are classified as
long-term. During 1994, the Company increased its available long-term
borrowings under two domestic revolving lines of credit, which expire in
June and July 1997, from $25 million to $40 million. The interest rate
options generally utilized by the Company under the agreements include 5/8%
over the Federal Funds Rate and transaction rates, which are determined at
the date of borrowing on balances which mature in one to twenty-nine days.
A revolving term credit arrangement through the Canadian subsidiary, which
expires January 1, 1997, provides for borrowings up to $1,500,000 Canadian
at the prime interest rate, Base Rate Canada or 3/4% above London Interbank
Offered Rate (LIBOR).
-13-
Long-term debt consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revolving lines of credit $ 27,700 $ 27,700
Other long-term debt 110 198
27,810 27,898
Less current maturities 53 93
Long-term debt $ 27,757 $ 27,805
</TABLE>
Maturities of long-term debt are set forth below (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $ 53
1997 27,736
1998 21
</TABLE>
The debt agreements include certain restrictive covenants with which the
Company was in compliance throughout the year. At December 31, 1995, the
Company's retained earnings totaled $8,240,000, all of which was available
for the payment of cash dividends and redemption of capital stock as
provided by the debt agreements.
To manage exposure to interest rate risk, the Company utilizes an interest
rate swap agreement, which has a notional amount of $6,000,000 and an
expiration date of January 1999. The Company pays a fixed rate of 5.74%
and receives a floating rate based on LIBOR. The counterparty to this
agreement is a high credit quality financial institution.
Payments of interest due under the Company's borrowings amounted to
$2,001,000 in 1995, $1,174,000 in 1994 and $978,000 in 1993.
NOTE 6
FAIR VALUE OF FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
The carrying amount of the Company's financial instruments included in
current assets and current liabilities approximates the fair value due to
their short-term nature. The Company's long-term debt reprices frequently
at the then-prevailing market interest rates. As of December 31, 1995 and
1994, carrying value approximated the fair value of the Company's long-term
debt.
The carrying amount of the Company's interest rate swap agreement
represents interest due or accrued as reflected in the Consolidated Balance
Sheets. The estimated fair value of the interest rate swap agreement was
-14-
based upon dealer quotations for the amount which might be realized from a
transfer, sale or termination of such agreement. The fair values were
$(66,000) and $467,000 at December 31, 1995 and 1994, respectively, while
the carrying values were immaterial as of those dates.
NOTE 7
LEASES
The Company has noncancelable operating leases covering certain machinery
and equipment, automobiles and buildings which expire at various dates
through the year 2000. Certain leases contain purchase and renewal
options.
Rental expense under all operating leases was $1,740,000, $1,529,000 and
$1,349,000 in 1995, 1994 and 1993, respectively. At December 31, 1995,
future minimum rental payments under noncancelable operating leases are due
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $ 1,413
1997 1,235
1998 997
1999 844
2000 429
Thereafter 8
Total $ 4,926
</TABLE>
NOTE 8
CONTINGENCIES
Like other companies in its industry, Guardsman is subject to existing and
evolving standards related to the protection of the environment. As a
result, it is the Company's policy to establish reserves for site
restoration costs and related claims where it is probable a liability
exists and the amount can be reasonably estimated. These reserves are
adjusted as information becomes available upon which a more accurate
estimate of eventual costs can be made. Such estimates are subject to
numerous variables, the effects of which are difficult to measure,
including the stage of the investigations, the nature of potential
remedies, the joint and several liability with other potentially
responsible parties, availability of insurance and government funds and
other issues. Accordingly, the ultimate cost of these matters cannot be
determined at this time and may not be resolved for a number of years. As
such, it is reasonably possible that current estimates could change in the
near term. The reserves of $4,810,000, of which $700,000 and $4,110,000 are
-15-
included in other accrued expenses and other liabilities, respectively, at
December 31, 1995, represent the Company's best estimate of probable
exposures at this time. Based upon information currently available, it is
not anticipated that the outcome of these environmental matters will
materially affect the Company's consolidated financial position. The
ultimate effect of these matters on the Company's results of operations
cannot be predicted because any such effect depends on the amount and
timing of charges to operations resulting from new information as it
becomes available.
At December 31, 1995, approximately $600,000 included in other current
assets represents probable reimbursements from certain of the Company's
insurance carriers and from a state government agency for costs expended
and to be expended for certain site restoration activities.
The Company is also involved in legal proceedings and litigation arising in
the ordinary course of business. In the opinion of management, the outcome
of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements.
NOTE 9
PENSION PLANS
The Company has four noncontributory primary defined benefit pension plans
covering substantially all of its employees. A plan covering non-union
employees provides pension benefits based upon a retiree's earnings of the
five consecutive calendar years during employment in which the retiree
received the highest level of compensation. Plans covering union employees
provide pension benefits at stated amounts for each year of service. The
Company's policy is to fund the minimum actuarially computed annual
contribution required under ERISA.
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets for the Company's primary defined benefit
pension plans at December 31, (in thousands):
-16-
<TABLE>
<CAPTION>
1995 1994
PLANS WHOSE PLAN WHOSE PLANS WHOSE PLAN WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
<S> <C> <C> <C> <C>
Pension assets at fair value $ 23,377 $ 3,702 $ 20,076 $ 3,287
Actuarial present value of
accumulated plan benefits:
Vested 16,902 4,040 14,931 3,740
Non-vested 488 715 97
17,390 4,040 15,646 3,837
Effect of estimated future
increases in compensation 5,607 5,506
Projected benefit obligation of
service rendered to date 22,997 4,040 21,152 3,837
Plan assets in excess of (less
than) projected benefit
obligation 380 (338) (1,076) (550)
Accrued pension costs
recognized
in the balance sheet 5,550 912 5,199 208
Adjustment to recognize
minimum liability 342
Unrecognized net pension assets $ 5,930 $ 574 $ 4,123 $ 0
Components of unrecognized
net pension assets:
Net experience gains $ 6,463 $ 659 $ 4,644 $ 438
Transition assets (liabilities) 311 (21) 333 (187)
Prior service costs (844) (64) (854) (593)
Adjustment to recognize
minimum liability 342
$ 5,930 $ 574 $ 4,123 $ 0
</TABLE>
During 1995, the Company changed its method of recognizing the market-
related value of plan assets from the fair value to a calculated value that
recognizes changes in fair value in a systematic and rational manner over
not more than five years. This change did not have a material affect on
the Company's financial statements.
-17-
At December 31, 1995, plan assets of the four primary defined benefit plans
were invested in listed common stocks (46%), fixed income securities (36%),
Guardsman common stock (9%) with a market value of $2,430,000, life
insurance contracts (3%) and short-term investments (6%).
In addition to the four primary defined benefit pension plans, the Company
also has a supplemental executive retirement plan (the SERP), a pension
restoration plan and a directors' retirement plan, all of which are
unfunded defined benefit plans. The actuarial present value of accumulated
plan benefits related to the Company's SERP, pension restoration plan and
directors' retirement plan totaled $1,595,000 and $1,493,000 at December
31, 1995 and 1994, respectively. Accrued pension costs of $1,924,000 and
$1,878,000 related to these three plans were recorded at December 31, 1995
and 1994, respectively.
The assumptions used in accounting for defined benefit plans for the three
years presented are set forth below:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Weighted-average assumed discount rates 7.75% 8.25% 7.75%
Rates of compensation increase 4.50% 5.00% 5.00%
Weighted-average expected long-term rate
of return on plan assets 8.50% 8.50% 8.50%
</TABLE>
Guardsman also maintains defined contribution plans covering the employees
of its Canadian and United Kingdom subsidiaries and a 401(k) plan for all
of its non-bargaining domestic employees.
The following is a summary of pension expense recognized by the Company (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Defined benefit plans:
Service cost - benefits earned
during the period $ 1,287 $ 1,090 $ 945
Interest cost on projected benefit
obligations 2,252 1,950 1,805
Actual loss (return) on plan assets (4,733) 1,013 (2,698)
Net amortization (deferral) 2,376 (3,244) 598
Curtailment cost 615
Net pension cost of defined benefit
plans 1,797 809 650
Defined contribution plans 225 198 146
Total pension expense $ 2,022 $ 1,007 $ 796
</TABLE>
-18-
In connection with the closing of the Grand Rapids, Michigan facility, as
further discussed in Note 3 to the Consolidated Financial Statements, the
Company recognized curtailment expenses in 1995 associated with the union
pension plan and the postretirement medical plan. These curtailments were
classified as restructuring charges in the accompanying Consolidated
Statements of Income.
NOTE 10
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Substantially all domestic employees of the Company, other than employees
of Moline, are eligible upon retirement for certain healthcare and life
insurance benefits. The postretirement healthcare plans are unfunded
contributory plans and contain other cost-sharing features such as
deductibles, life-time benefit limits and coinsurance.
The following table sets forth amounts recognized in the Consolidated
Balance Sheets at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Actuarial present value of
accumulated postretirement benefit obligation:
Retirees $ 1,113 $ 1,277
Fully eligible active participants 459 572
Other active participants 116 154
Unfunded status 1,688 2,003
Unrecognized net transition obligation (1,081) (1,286)
Unrecognized net loss (436)
Accrued postretirement benefit cost $ 607 $ 281
</TABLE>
The following is a summary of postretirement benefit cost recognized by the
Company (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Service cost $ 16 $ 19 $ 16
Interest cost 139 130 119
Net amortization 71 77 71
Curtailment cost 91
Net periodic postretirement benefit cost $ 317 $ 226 $ 206
</TABLE>
The transitional liability upon implementation of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" in 1993 of $1,430,000 is being accrued
ratably over a 20 year period. The discount rate assumed in determining
-19-
the actuarial value of the plans' postretirement benefit obligation was
7.75% and 8.25% at December 31, 1995 and 1994, respectively. The annual
assumed rate of increase in the per capita cost of covered benefits, or
healthcare cost trend rate, will be 10.675% in 1996, uniformly decreasing
to 5.25% in 2003 and thereafter. A 1% increase in the assumed healthcare
cost trend rate would not have a material effect on the postretirement
benefit obligation or the periodic cost of the plans.
NOTE 11
EMPLOYEE INCENTIVE PLANS
The Company's 1992 Employee Stock Purchase Plan provides eligible employees
the option to purchase the Company's common stock at a price equal to 85%
of the market price at the date of purchase.
The Company has set aside 519,923 shares of common stock under its 1984
Incentive Stock Option Plan for the grant of options to directors and key
management employees. In addition, the Company has reserved 330,000 and
360,000 shares of common stock for granting of stock options to directors
and key management employees under its 1988 and 1991 Stock Option Plans,
respectively. In addition, 470,000 shares of common stock were reserved
for the granting of stock options and other incentives to directors and key
management employees under the 1995 Long-Term Incentive Plan. Certain of
these options qualify as nontaxable under the Internal Revenue Code.
Stock option activity under the various plans is presented below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Shares under Employee Stock Purchase Plan:
Outstanding at beginning of year 7 5 23
Granted 18 19 20
Exercised (18) (17) (17)
Canceled (21)
Outstanding and exercisable at end of year 7 7 5
Available for grant at end of year 49 66 85
Purchase price per share of options
exercised <FA> $10.36 to $7.86 to $10.31 to
$11.42 $10.68 $13.81
Market price per share of options
exercised <FA> $12.19 to $9.25 to $12.13 to
$13.44 $12.56 $16.25
</TABLE>
-20-
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Shares under Performance Award,
Stock Option and Long-Term Incentive Plans:
Outstanding at beginning of year 461 428 478
Granted 234 205 125
Exercised (44) (44) (100)
Terminated (72) (128) (75)
Outstanding at end of year 579 461 428
Exercisable at end of year 482 386 401
Available for grant at end of year 551 243 385
Purchase price per share of options:
Outstanding <FB> $9.13 to $9.13 to $7.82 to
$14.75 $14.75 $14.75
Exercised <FA> $9.13 to $7.82 to $8.28 to
$12.50 $14.75 $14.75
Market price per share of options
exercised <FA> $11.00 to $11.50 to $10.75 to
<FN> $15.00 $16.50 $16.38
<FA> At date of exercise.
<FB> Market value at date of grant.
</FN>
</TABLE>
In addition, 50,000 shares of common stock have been reserved for issuance
under a one-time grant in November 1994 of stock options to the Chairman of
the Board of the Company. These shares, which were granted at the fair
market value of the stock at the date of grant, are fully exercisable as of
December 31, 1995.
The Company has a performance award plan under which performance award
units may be granted to key management employees. Performance award units
include a performance allotment expressed in dollars and options to
purchase common stock. Performance allotments aggregating $495,000,
$353,000 and $222,000 were granted under the plan in 1995, 1994 and 1993,
respectively. Such allotments are payable in 1998, 1997 and 1996,
respectively, if specified performance levels, measured in terms of income
before income taxes, are achieved by the Company during the three year
period subsequent to the grant.
Distributions, payable in cash, to key employees under various bonus plans
are based primarily upon sales and income before income taxes. Expense
incurred under the plans was $3,744,000, $2,523,000 and $1,928,000 for
1995, 1994 and 1993, respectively.
-21-
NOTE 12
STOCK RIGHTS PLAN
On December 31, 1995, the Company had outstanding 9,558,993 Series A
Preferred Stock Purchase Rights (Rights). The Rights were originally
issued in August 1986 as a dividend to holders of the Company's common
stock at the rate of one Right for each share of common stock outstanding.
Each Right entitles the holder thereof, until August 27, 1996, to buy one
one-hundredth (1/100) of a share of Series A Preferred Stock at an exercise
price of $60.00. The exercise price and the number of shares of Series A
Preferred Stock issuable upon the exercise of the Rights are subject to
adjustment in certain cases to prevent dilution. The Rights are evidenced
by common stock certificates and are not exercisable or transferable apart
from the common stock until ten days after a person (exclusive of persons
holding 20% or more of the Company's common stock on August 8, 1986)
acquires 20% or more or makes a tender or exchange offer for 30% or more of
the common stock. If, after a person acquires 20% or more of the common
stock, the Company is acquired in a merger or other business combination
transaction (including one in which the Company is the surviving
corporation), or if certain other conditions are met, each Right will
entitle its holder to purchase, at the then current exercise price of the
Right, that number of shares of common stock of either the acquiring
company or Guardsman, as the case may be, which at the time of such
transaction would have a market value of two times the exercise price of
the Right. The Rights do not have any voting rights and are redeemable, at
the option of the Company, at a price of $0.05 per Right prior to any
person acquiring beneficial ownership of at least 20% of the common stock.
The Rights expire on August 27, 1996. So long as the Rights are not
separately transferable, the Company will issue one Right with each new
share of common stock issued.
NOTE 13
BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company operates in two industries, Coatings and Consumer Products.
Coatings involves the production and distribution of industrial paints,
varnishes, enamels and lacquers primarily for sale to manufacturers of wood
and metal products. Additionally, the Group manufactures resins for
internal use and external sale. Consumer Products includes the distribution
of furniture polishes, wood treatments, dust cloths, cleaning fluids, paint
sundries and other household products to retailers. Consumer Products also
manufactures and distributes a variety of proprietary after-market
automotive maintenance products and industrial lubricants.
As summarized in the segment information below, identifiable assets are
those assets that are used by each of the Company's industry segments and
foreign operations presented. Capital expenditures exclude the cost of
-22-
capital assets acquired in business combinations. Corporate assets are
principally cash, marketable securities, prepaid expenses, deferred income
tax assets and corporate fixed assets. Operating profit does not include
general corporate expenses, interest expense, investment income, costs of
pooling of interests transactions, and income taxes. Sales between
segments are at cost plus a small percentage markup.
Business segment financial information follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net Sales
Coatings Group $ 194,095 $ 155,967 $ 133,216
Consumer Products Group 56,506 46,042 44,618
250,601 202,009 177,834
Inter-segment sales (27) (121) (28)
Consolidated $ 250,574 $ 201,888 $ 177,806
Operating Profit
Coatings Group $ 1,414<F*> $ 8,738 $ 7,053
Consumer Products Group 6,681 5,533 5,524
8,095 14,271 12,577
Corporate expenses-net (3,871) (3,618) (4,417)
Interest expense (2,131) (1,188) (991)
Costs of pooling of interests (529)
Investment income 587 374 376
Income before income taxes $ 2,680 $ 9,839 $ 7,016
Identifiable Assets
Coatings Group $ 107,834 $ 102,593 $ 66,642
Consumer Products Group 28,563 25,475 20,092
Corporate 11,652 8,984 10,220
Total $ 148,049 $ 137,052 $ 96,954
Capital Expenditures
Coatings $ 4,375 $ 2,686 $ 2,582
Consumer Products 851 627 622
Corporate 91 97 26
Total $ 5,317 $ 3,410 $ 3,230
</TABLE>
-23-
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Depreciation and Amortization
Coatings $ 5,741 $ 4,350 $ 3,428
Consumer Products 1,093 982 1,068
Corporate 110 157 178
Total $ 6,944 $ 5,489 $ 4,674
</TABLE>
Financial information by geographic area is set forth below (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net sales
United States $ 216,410 $ 175,665 $ 156,662
Canada 26,827 19,424 15,687
Europe 7,337 6,799 5,457
Consolidated $ 250,574 $ 201,888 $ 177,806
Operating profit
United States $ 3,183<F*> $ 11,050 $ 9,894
Canada 2,751 1,395 1,177
Europe 2,161 1,826 1,506
8,095 14,271 12,577
Corporate expenses - net (3,871) (3,618) (4,417)
Interest expense (2,131) (1,188) (991)
Costs of pooling of interests (529)
Investment income 587 374 376
Income before income taxes $ 2,680 $ 9,839 $ 7,016
Identifiable assets
United States $ 114,472 $ 107,298 $ 68,098
Canada 17,976 14,102 12,866
Europe 3,949 4,964 3,351
Corporate 11,652 10,688 12,639
Total $ 148,049 $ 137,052 $ 96,954
<FN>
<F*> Includes pretax restructuring charges of $10,458.
</FN>
</TABLE>
-24-
NOTE 14
SUMMARIZED QUARTERLY OPERATING RESULTS (UNAUDITED)
Selected quarterly financial data is summarized as follows (in thousands,
except share and per share data):
<TABLE>
<CAPTION>
1995 QUARTERS
FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 64,340 $ 63,317 $ 61,481 $ 61,436 $ 250,574
Gross profit 21,280 21,593 19,999 22,084 84,956
Net income 1,672 2,377 1,354 (3,971) 1,432
Net income per common
share $ .18 $ .25 $ .14 $ (.42) $ .15
Weighted average shares
outstanding 9,484,154 9,495,754 9,529,767 9,550,234 9,515,199
</TABLE>
<TABLE>
<CAPTION>
1994 QUARTERS
FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 44,950 $ 48,946 $ 51,102 $ 56,890 $ 201,888
Gross profit 15,719 17,220 17,441 18,524 68,904
Net income 1,165 1,831 1,682 1,225 5,903
Net income per common
share $ .15 $ .23 $ .20 $ .13 $ .70
Weighted average shares
outstanding 7,940,876 7,956,326 8,470,159 9,474,283 8,464,639
</TABLE>
Included in the third and fourth quarters of 1995 were pretax restructuring
charges totaling approximately $470,000, or $.03 per share after taxes, and
$9,988,000, or $.67 per share after taxes, respectively. See Note 3 to the
Consolidated Financial Statements.
-25-
NOTE 15 - SUBSEQUENT EVENT
On March 4, 1996, the Company entered into a definitive agreement pursuant
to which Lilly Industries, Inc. (Lilly) will acquire all of the outstanding
common stock of Guardsman. Under the terms of the agreement, Lilly,
through a wholly-owned subsidiary, will make a cash tender offer for all
Guardsman shares, including the associated rights, at a price of $23.00 per
share in cash, and upon successful completion of the tender offer, the
stock not tendered will be cashed out at $23.00 per share in a statutory
merger. Guardsman's three largest stockholders, collectively representing
approximately 50% of Guardsman's outstanding shares, have entered into
separate agreements with Lilly supporting the transaction. The transaction
remains subject to regulatory approval and certain other conditions.
-26-
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
Management is responsible for the integrity of the financial data reported
by Guardsman and its subsidiaries. This responsibility requires preparing
financial statements in accordance with generally accepted accounting
principles and reporting data which, using management's best judgment,
fairly reflects Guardsman's financial position and results of operations.
To gather and control financial data, the Company establishes and maintains
accounting systems adequately supported by internal controls. Management
believes that a high level of internal control is maintained by the
selection and training of qualified personnel, by the establishment and
communication of accounting and business policies and by internal audits.
Arthur Andersen LLP, independent public accountants, are engaged to audit
and to render an opinion as to whether management's financial statements,
considered in their entirety, present fairly Guardsman's consolidated
financial position and operating results. Their audit was conducted in
accordance with generally accepted auditing standards, and their report is
included herein.
The Audit Committee of the Board of Directors, composed of five outside
directors, meets regularly with management, the internal auditor and the
independent public accountants to review the activities of each.
/S/ CHARLES E. BENNETT /S/ HENRY H. GRAHAM, JR.
Charles E. Bennett Henry H. Graham, Jr.
President and Vice President of Finance and
Chief Executive Officer Chief Financial Officer
January 25, 1996
-27-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Guardsman Products, Inc.
We have audited the accompanying consolidated balance sheets of Guardsman
Products, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Guardsman Products,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As explained in note 4 to the consolidated financial statements, in 1993,
the Company changed its method of accounting for income taxes to adopt the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
/S/ ARTHUR ANDERSEN LLP
Grand Rapids, Michigan
January 25, 1996 (except with respect to the matter discussed
in Note 15, as to which the date is March 4, 1996)
