Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 22, 1999
(Date of earliest event reported): (January 8, 1999)
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)
6300 S. Syracuse #300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303) 290-9300
(Former name or former address, if changed since last report) Not applicable
Item 7. Financial Statements and Exhibits
---------------------------------
Set forth below is the information required by Items 7(a), Financial
Statements of Acquired Businesses, and 7(b), Pro Forma Financial Statements,
of Form 8-K with respect to Katy Industries, Inc.'s ("Katy" or the "Company")
purchase of the common membership interest (the "Common Interest") in Contico
International, L.L.C. ("LLC"), the successor to the business of Contico
International, Inc. ("Contico"), as disclosed on Katy's Form 8-K, filed with
the Securities and Exchange Commission on January 15, 1999.
Financial Statements of Acquired Business and Pro Forma Financial Statements
- ----------------------------------------------------------------------------
Pro Forma Financial Statements
Unaudited Pro Forma Balance Sheet as of December 31, 1998 5
Unaudited Pro Forma Statement of Operations for the twelve
months ended December 31, 1998 7
Unaudited Notes to Pro Forma Financial Statements 8
Unaudited Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and May 31, 1998 10
Consolidated Statements of Operations for the twelve months
ended December 31, 1998 and 1997 11
Consolidated Statements of Cash Flows for the twelve months
ended December 31, 1998 and 1997 11
Notes to Consolidated Financial Statements 13
Audited Financial Statements
Report of Independent Public Accountants 15
Consolidated Balance Sheets as of May 31, 1998 and 1997 16
Consolidated Statements of Operations for the years
ended May 31, 1998, 1997 and 1996 17
Consolidated Statements of Stockholders' Equity for the
years ended May 31, 1998, 1997 and 1996 18
Consolidated Statements of Cash Flows for the years
ended May 31, 1998, 1997 and 1996 19
Notes to Consolidated Financial Statements 20
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 hereunto duly authorized.
Katy Industries, Inc.
---------------------
Registrant
By /s/ John R. Prann, Jr.
--------------------
John R. Prann, Jr.
Chief Executive Officer
Date March 22, 1999
-------------------
KATY INDUSTRIES, INC. AND CONTICO INTERNATIONAL, INC.
UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1998 AND
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998
The following unaudited pro forma balance sheet as of December 31, 1998 and
unaudited pro forma statement of operations for the twelve months ended
December 31, 1998 give effect to Katy's purchase of the Common Interest in the
LLC, as if the purchase had occurred on December 31, 1998 for purposes of the
unaudited pro forma balance sheet and January 1, 1998 for purposes of the
unaudited pro forma statement of operations. The transaction was accounted
for as a purchase in accordance with the provisions of Accounting Principles
Board Opinion No. 16.
The historical financial data included in the pro forma statements is as of
the periods presented. The historical financial data of Contico as of
December 31, 1998 and for the twelve months ended December 31, 1998 was
derived from unaudited financial statements for the twelve months ended
December 31, 1998.
The unaudited pro forma financial data is based on management's best estimate
of the effects of the Contico acquisition. Pro forma adjustments are based on
currently available information; however, the actual adjustments will be based
on more precise appraisals, evaluations and estimates of fair values. It is
possible that the actual adjustments could differ substantially from those
presented in the unaudited pro forma financial statements.
The unaudited pro forma balance sheet as of December 31, 1998 and the
statement of operations for the twelve months ended December 31, 1998 are not
necessarily indicative of the results of operations that actually would have
been achieved had the Contico acquisition been consummated as of the dates
indicated, or that may be achieved in the future. The unaudited pro forma
financial statements should be read in conjunction with the accompanying
unaudited notes to the pro forma financial statements and historical financial
statements and notes thereto.
In accordance with the rules regarding the preparation of pro forma financial
statements, income of $2,075,000, or $.25 per share, from discontinued
operations, operations to be disposed of, and certain nonrecurring items
(related to Katy historical financial statements) has not been considered in
the unaudited pro forma statement of operations for the year ended December 31,
1998. In addition, both the equity interest in a joint venture and
discontinued operations (related to Contico historical financial statements,
not included in the purchase transaction) have not been considered in the
unaudited pro forma statement of operations for the year ended December 31,
1998.
Pursuant to the purchase agreement, the purchase price of $165,000,000 was
based on a closing date balance sheet prepared on a post-closing basis as of
January 8, 1999.
KATY INDUSTRIES, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1998
(In Thousands)
Katy Contico Pro forma
Historical Historical Adjustments Pro forma
---------- ---------- ----------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 12,898 $ 506 $ (506)[c] $ 12,898
Accounts receivable,
trade, net 53,449 33,297 - 86,746
Notes and other
receivables, net 3,246 - - 3,246
Inventories 69,394 34,621 4,150 [d] 108,165
Net current assets of
discontinued operations 10,959 - - 10,959
Net current assets of
operations to be disposed of 1,203 - - 1,203
Other current assets 16,426 5,301 (3,505)[c] 18,222
------- ------- ------- -------
Total current assets 167,575 73,725 139 241,439
------- ------- ------- -------
OTHER ASSETS:
Notes Receivable, net 953 - - 953
Cost in excess of net assets
of businesses acquired, net 33,576 - 20,053 [e] 53,629
Other Intangibles 23,621 - 15,000 [f] 38,621
Net noncurrent assets of
discontinued operations 4,279 - - 4,279
Net noncurrent assets of
operations to be disposed of 15,521 - - 15,521
Investment in joint venture - 6,350 (6,350)[c] -
Miscellaneous 2,551 564 (392)[c] 2,723
------- ------- ------- -------
Total other assets 80,501 6,914 28,311 115,726
------- ------- ------- -------
Property, plant and
equipment, net 45,099 94,498 (26,339)[c] 113,258
- - 21,841 [g] 21,841
Total assets $293,175 $175,137 $ 23,952 $492,264
======= ======= ======= =======
KATY INDUSTRIES, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1998
(In Thousands)
Katy Contico Pro forma
Historical Historical Adjustments Pro forma
---------- ---------- ----------- ---------
CURRENT LIABILTIES:
Accounts payable $ 28,017 $ 20,754 $ (4,694)[c] $ 44,077
Accrued compensation 5,354 - - 5,354
Accrued expenses 31,626 14,013 (738)[c] 44,901
Accrued interest and taxes 910 - - 910
Dividends payable 625 - - 625
Notes payable - 25,396 (24,926)[c] 470
Current maturities,
long-term debt 72 4,176 (4,176)[c] 72
------- ------- ------- -------
Total current liabilities 66,604 64,339 (34,534) 96,409
======= ======= ======= =======
Long-term debt,
less current maturities 39,908 28,377 (28,377)[c] 39,908
- - 132,100 [a] 132,100
------- ------- ------- -------
TOTAL LONG-TERM DEBT,
LESS CURRENT MATURITIES 39,908 28,377 103,723 172,008
------- ------- ------- -------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, NET 5,198 - - 5,198
------- ------- ------- -------
DEFERRED INCOME TAXES 22,839 - 4,200 [h] 27,039
------- ------- ------- -------
OTHER LIABILITIES 9,310 712 (628)[c] 9,394
------- ------- ------- -------
Total liabilities 143,859 93,428 72,761 310,048
------- ------- ------- -------
PREFERRED INTEREST OF
SUBSIDIARY - - 32,900 [b] 32,900
------- ------- ------- -------
STOCKHOLDERS' EQUITY:
Common stock 9,822 17 (17)[i] 9,822
Additional paid-in capital 51,243 1,315 (1,315)[i] 51,243
Accumulated other
comprehensive income (2,309) (333) 333 [i] (2,309)
Other adjustments (1,302) - - (1,302)
Retained earnings 112,784 80,710 (80,710)[i] 112,784
Treasury stock (20,922) - - (20,922)
------- ------- ------- -------
Total stockholders' equity 149,316 81,709 (81,709) 149,316
------- ------- ------- -------
Total liabilities and
stockholders' equity $293,175 $175,137 $ 23,952 $492,264
======= ======= ======= =======
KATY INDUSTRIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In Thousands, Except Per Share Data)
Katy Contico Pro forma
Historical Wilen [j] Historical Adjustments Pro forma
---------- ----- ---------- ----------- ---------
Net sales $342,315 $23,313 $225,675 $591,303
Cost of goods sold 243,751 16,324 154,596 (15,274)[k] 399,397
10,000 [k] 10,000
------- ------ ------- ------- -------
Gross profit 98,564 6,989 71,079 5,274 181,906
Selling, general and
administrative
expenses 83,289 5,210 50,304 (1,865)[k] 136,938
1,250 [k] 1,250
4,700 [k] 4,700
750 [k] 750
- - - 1,003 [k] 1,003
------- ------ ------- ------- -------
Income from
operations 15,275 1,779 20,775 (564) 37,265
Interest expense (1,214) (739) (5,640) 5,640 [k] (1,953)
- - - (9,900)[k] (9,900)
------- ------ ------- ------- -------
Interest income 1,093 (1,093) 200 (200)[k] 0
Other, net 1,523 52 199 (199)[k] 1,575
------- ------ ------- ------- -------
Income (loss)
before taxes 16,677 (1) 15,534 (5,223)[k] 26,987
Provision (benefit)
for income taxes 5,670 - 602 (602)[k] 5,670
3,918 [k] 3,918
------- ------ ------- ------- -------
Earnings before
distributions on
Preferred
securities 11,007 (1) 14,932 (8,539) 17,399
Distribution on
preferred
securities,
net of tax - - - (1,632)[k] (1,632)
------- ------ ------- ------- -------
Net income (loss) $ 11,007 $ (1) $ 14,932 $(10,171) $ 15,767
======= ====== ======= ======= =======
Earnings per share
of common stock -
Basic $ 1.33 $ 1.90
======= =======
Earnings per share
of common stock -
Diluted $ 1.30 $ 1.74
======= =======
Note that during the first quarter of 1999, Katy will recognize a
nonrecurring charge of approximately $1.8 million related to assigning fair
value to inventory at the date of acquisition. In accordance with pro forma
presentation guidelines, this has not been reflected in the pro forma
statement of operations as the charge is nonrecurring.
KATY INDUSTRIES, INC.
UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS
(In Thousands)
[a] Record borrowings required for the acquisition of Contico. $132,100
[b] Record preferred interest pursuant to the purchase agreement. $ 32,900
The following pro forma adjustments are made to reflect (1) the allocation
of cost greater than the fair value of assets acquired resulting in the
recording of goodwill, recording of intangibles, step-up in real property,
step-up in inventory, (2) the elimination of assets not purchased pursuant
to the purchase agreement, and (3) the elimination of Contico's
stockholders' equity as of December 31, 1998.
[c] Elimination of assets and liabilities excluded from the purchase
pursuant to the purchase agreement $ 26,447
[d] Record step-up in inventory pursuant to purchase accounting $ 4,150
[e] Record goodwill pursuant to purchase accounting $ 20,053
[f] Record step-up in identifiable intangible assets pursuant to
purchase accounting $ 15,000
[g] Record step-up in real property pursuant to purchase accounting $ 21,841
[h] Record deferred income tax liability related to book and tax
difference in inventory $ (4,200)
[i] Elimination of Contico's stockholders' equity pursuant to
purchase accounting $ 81,709
RECONCILIATION OF PURCHASE PRICE:
Net current assets $44,059
Goodwill 20,053
Other intangibles 15,000
Property, plant and equipment 90,000
Deferred tax liability (4,200)
Miscellaneous assets and liabilities 88
-------
Total allocation of estimated purchase price $165,000
=======
[j] On August 11, 1998, the Company purchased substantially all of
the assets of The Wilen Companies, Incorporated. Amounts represent the
results and pro forma adjustments for the period, January 1, 1998 through
August 11, 1998, in which Wilen Companies, Incorporated was not owned by
Katy. See Form 8-K/A filed on October 5, 1998.
[k] The following pro forma adjustments are reflected in the pro
forma statement of operations for the year ended December 31, 1998:
1. Elimination of Contico's historical depreciation expense
pursuant to purchase accounting:
Cost of goods sold: 15,274
Selling, general and administrative 1,865
2. Depreciation of property, plant and equipment
pursuant to purchase accounting:
Cost of goods sold (10,000)
Selling, general and administrative (1,250)
3. Record rent expense related to facilities leased pursuant
to the purchase agreement (4,700)
4. Amortization of intangibles recorded pursuant to purchase
accounting - straight line amortization (20 years) (750)
5. Amortization of goodwill recorded pursuant to purchase
accounting - straight line amortization (20 years) (1,003)
6. Elimination of interest expense on debt which was not
assumed by Katy pursuant to the purchase agreement 5,640
7. Increase in interest expense due to additional borrowings
at applicable rates for purchase cost (9,900)
8. Decrease in interest income due to the elimination
of cash retained by Contico (200)
9. Elimination of Contico's other income resulting from
nonrecurring items (199)
10. Elimination of Contico's provision for income taxes 602
11. Net tax provision related to items 1-9 above and
Contico's historical income at the estimated effective rate (3,918)
12. Distribution of dividends on preferred securities pursuant
to the purchase agreement, net of tax (1,632)
-------
$(10,171)
=======
CONTICO INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
- ------------------------------------------------------------------------------
ASSETS
December 31, May 31,
1998 1998
------------ -------
(Unaudited)
CURRENT ASSETS:
Cash $ 506 $ 824
Advances to joint venture - 2,029
Accounts receivable, net 33,297 34,058
Inventories (Note 1) 34,621 41,182
Prepaid expenses and other current assets 5,301 2,483
------- -------
Total current assets 73,725 80,576
PROPERTY, PLANT AND EQUIPMENT - Net (Note 1) 94,498 99,654
OTHER ASSETS:
Investment in joint venture 6,350 4,104
Other 564 736
------- -------
TOTAL ASSETS $175,137 $185,070
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt 4,176 4,130
Notes payable 25,396 42,177
Accounts payable 20,754 20,558
Accrued expenses 14,013 14,728
------- -------
Total current liabilities 64,339 81,593
------- -------
OTHER LIABILITIES 712 972
LONG-TERM DEBT 16,377 17,053
SUBORDINATED DEBT 12,000 12,000
------- -------
Total liabilities 93,428 111,618
------- -------
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, authorized
2,000,000 shares, outstanding
1,700,760 shares 17 17
Paid-in surplus 1,315 1,315
Retained earnings 80,710 72,453
Cumulative translation adjustment (333) (333)
------- -------
TOTAL STOCKHOLDER'S EQUITY 81,709 73,452
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $175,137 $185,070
======= =======
The accompanying notes are an integral part of these statements.
CONTICO INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands) - UNAUDITED
- ------------------------------------------------------------------------------
1998 1997
---- ----
NET SALES $225,675 $216,558
COST OF GOODS SOLD 154,596 157,002
------- -------
Gross profit 71,079 59,556
OPERATING EXPENSES:
Selling and distribution 39,552 39,502
Administrative 10,752 11,310
------- -------
Income from operations 20,775 8,744
OTHER EXPENSE (INCOME):
Interest expense 5,640 8,952
Other income, net (399) 418
------- -------
Income (loss) before provision
for income taxes 15,534 (626)
PROVISION FOR INCOME TAXES 602 58
------- -------
Income (loss) from continuing operations 14,932 (684)
INCOME FROM DISCONTINUED OPERATIONS 2,580 10,565
GAIN ON SALE OF DISCONTINUED OPERTATIONS 54,300 -
------- -------
NET INCOME $ 71,812 $ 9,881
======= =======
The accompanying notes are an integral part of these statements.
CONTICO INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands) - UNAUDITED
- ------------------------------------------------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 71,812 $ 9,881
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,166 17,537
Net loss on disposal of assets 1,866 565
Gain on sale of discontinued operations (54,300) -
Changes in assets and liabilities:
Increase in accounts receivable 473 1,664
Increase in inventories 159 5,915
Increase (Decrease) in accounts payable 4,322 (5,311)
Increase (Decrease) in accrued expenses (1,601) 2,646
Other, net (6,726) 3,118
------- -------
Net cash provided by operating activities 33,171 36,015
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (16,404) (23,235)
Proceeds from disposal of assets 4,017 173
Proceeds from sale of discontinued operations 91,713 -
------- -------
Net cash provided by (used in)
investing activities 79,326 (23,062)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt agreements - 20,600
Principal payments on long-term debt (65,099) (1,159)
Net borrowings under notes payable agreements 23,177 (28,852)
Payment of dividends (71,000) (3,100)
Payment of deferred financing fees (53) (80)
------- -------
Net cash used in financing activities (112,975) (12,591)
------- -------
NET INCREASE (DECREASE) IN CASH (478) 362
CASH AT BEGINNING OF PERIOD 984 622
------- -------
CASH AT END OF PERIOD $ 506 $ 984
======= =======
The accompanying notes are an integral part of these statements.
CONTICO INTERNATIONAL, INC.
Notes to Consolidated Financial Statements - Unaudited
December 31, 1998
The accompanying unaudited consolidated financial statements have been
prepared by the Company and include the accounts of its subsidiary and
divisions. These statements reflect all adjustments, consisting of only
normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of financial results for the 12 month
periods ended December 31, 1998 and 1997, in accordance with generally
accepted accounting principles for interim financial reporting. Certain
information and footnote disclosures normally included in audited financial
statements have been omitted pursuant to such rules and regulations. These
interim consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and the notes thereto
for the three years ended May 31, 1998.
1. DESCRIPTION OF BUSINESS:
- ---------------------------
Contico International, Inc. and its subsidiary (Contico) is engaged
principally in the design, manufacturing and marketing of a broad range of
molded plastic products for consumer and industrial use. Contico markets are
predominately located in North America and the United Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------
Principles of Consolidation and Revenue Recognition
- ---------------------------------------------------
The accounts of its foreign subsidiary (Subsidiary) and domestic and foreign
divisions are included in the consolidated financial statements of Contico.
Contico's investment in Joint Venture is accounted for under the equity
method of accounting. The Subsidiary is 75% owned by the Contico. Minority
interest in the Subsidiary represents the minority stockholder's
proportionate (25%) share of the Subsidiary's equity and retained earnings.
The minority interest in the Subsidiary at December 31, 1998, is held by
Contico's Chairman of the Board. All significant intercompany accounts and
transactions have been eliminated. Sales are recognized as products are
shipped.
Use of Estimates
- ----------------
The preparation of these consolidated financial statements required the use
of certain estimates by management in determining Contico's assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
Inventories
- -----------
Inventories are stated at the lower of cost (using the last-in, first-out
method) or market. If Contico had used the first-in, first-out method of
computing inventory costs, inventories would have been $2,350, $6,500 and
$5,400 higher than reported at December 31, 1998, 1997 and 1996,
respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment is stated at cost and depreciated over
estimated useful lives ranging from 5 to 39 years, using the straight-line
method for financial statement purposes. Additions, betterments and
replacements are capitalized, while expenditures for repairs and maintenance
are charged against income.
Income Taxes
- ------------
Contico has elected to be taxed as an S corporation for federal and Missouri
income tax purposes. Accordingly, Contico is not taxed on its income except
for certain state taxes and taxes on its foreign subsidiary and divisions.
The stockholders of Contico are otherwise responsible for the payment of
income taxes on their share of the Contico's income.
Translation of Foreign Currencies
- ---------------------------------
Assets and liabilities of the foreign division and subsidiary are translated
into U.S. dollars at current exchange rates, and profit and loss accounts are
translated at average annual exchange rates. Resulting translation gains and
losses are included as a separate component in Stockholders' Equity. Foreign
exchange transaction gains and losses are included in the results of
operations. Such amounts for the years presented were insignificant.
3. DISCONTINUED OPERATIONS:
- ---------------------------
In January 1998, Contico sold certain net assets of its liquid dispensing
business segment for approximately $92 million, resulting in a gain on
disposal of $54.3 million. Contico used the proceeds to reduce
long-term debt and to fund dividends to its shareholders. An additional $2
million has been escrowed and may be received by Contico contingent upon the
purchaser of the liquid dispensing business segment attaining specified unit
sales levels. This contingent gain has not been reflected in these financial
statements and will be recognized as received.
4. JOINT VENTURE:
- -----------------
Contico is a joint venture partner along with a French corporation in
Allibert-Contico, L.L.C. ("Allibert-Contico"), a limited liability company
engaged in manufacturing of plastic material handling products. Contico's
50% equity interest in Allibert-Contico's results is included in other
income, and was income of $2,130 and $425 for the years ended December 31,
1998 and 1997, respectively.
Contico announced that it will sell its interest in Allibert-Contico for
approximately $28 million with the closing date scheduled during January
1999.
5. SUBSEQUENT EVENT:
- --------------------
On January 8, 1999, Katy purchased all of the Common Interest in the LLC,
the successor to the janitorial, consumer products and industrial packaging
businesses (collectively, the "Business") of Contico. Contico had
previously contributed substantially all of the assets and certain of the
liabilities of the Business to the LLC and entered into leases with the LLC
for certain real property used in the Business and retained by Contico. The
full interest in Contico's foreign subsidiary was contributed to the LLC,
eliminating the minority interest previously held by Contico's Chairman of
the Board. The purchase price for the Common Interest was $132,100,000.
The payment of the purchase price on the closing date was financed under
Katy's credit agreement, agented by Bank of America. Contico has retained a
preferred membership interest in the LLC (the "Preferred Interest"), having
a stated value of $32,900,000, which yields an 8% annual return on its
stated value while outstanding. Pursuant to a Members Agreement between
Katy and Contico (now known as Newcastle Industries, Inc.), at certain times
beginning on January 8, 2001, or upon the occurrence of certain events, all
or a portion of the Preferred Interest is exchangeable for shares of Katy
common stock at a price of $21 per share (for an aggregate of 1,567,000
shares).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Contico International, Inc.:
We have audited the accompanying consolidated balance sheets of Contico
International, Inc. (a Missouri corporation) and subsidiaries as of May 31,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended May 31, 1998. 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 Contico International, Inc.
and subsidiaries as of May 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended May 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
July 24, 1998
CONTICO INTERNATIONAL, INC.
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS - MAY 31, 1998 AND 1997
---------------------------------------------------
(In Thousands, Except Per Share Data)
1998 1997
---- ----
ASSETS
------
CURRENT ASSETS:
Cash $ 824 $ 698
Advances to joint venture 2,029 74
Trade receivables, less reserves
of $417 and $371 34,058 32,396
Inventories 41,182 41,522
Other current assets 2,483 6,409
Net current assets of discontinued operations - 2,417
------- -------
Total current assets 80,576 83,516
PROPERTY, PLANT AND EQUIPMENT 99,654 103,819
INVESTMENT IN JOINT VENTURE 4,104 2,622
OTHER ASSETS 736 1,449
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS - 30,919
------- -------
Total assets $185,070 $222,325
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
and subordinated debt $ 4,130 $ 1,204
Notes payable 42,177 18,080
Accounts payable 20,558 17,276
Accrued expenses 14,728 12,944
------- -------
Total current liabilities 81,593 49,504
OTHER LIABILITIES 972 1,152
LONG-TERM DEBT 17,053 82,184
SUBORDINATED DEBT 12,000 15,000
------- -------
Total liabilities 111,618 147,840
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized
2,000,000 shares, outstanding
1,700,760 shares 17 17
Paid-in surplus 1,315 1,315
Retained earnings 72,453 73,534
Cumulative translation adjustment (333) (381)
------- -------
Total stockholders' equity 73,452 74,485
------- -------
Total liabilities and stockholders' equity $185,070 $222,325
======= =======
The accompanying notes are an integral part of these balance sheets.
CONTICO INTERNATIONAL, INC.
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED MAY 31, 1998, 1997 AND 1996
-----------------------------------------------
(In Thousands)
1998 1997 1996
---- ---- ----
NET SALES $221,045 $222,066 $201,827
COST OF SALES 154,052 160,155 130,603
------- ------- -------
Gross profit 66,993 61,911 71,224
------- ------- -------
OPERATING EXPENSES:
Selling and distribution 38,480 38,517 36,447
Administrative 11,058 10,844 10,083
------- ------- -------
Total operating expenses 49,538 49,361 46,530
------- ------- -------
Income from operations 17,455 12,550 24,694
------- ------- -------
OTHER EXPENSE (INCOME):
Interest expense 7,687 8,373 8,349
Other, net (1,380) (796) 106
------- ------- -------
6,307 7,577 8,455
------- ------- -------
Income before provision for income taxes 11,148 4,973 16,239
PROVISION FOR INCOME TAXES 150 53 196
------- ------- -------
Income from continuing operations 10,998 4,920 16,043
INCOME FROM DISCONTINUED OPERATIONS 5,621 5,924 4,617
GAIN ON SALE OF DISCONTINUED OPERATIONS 54,300 - -
------- ------- -------
Net income $ 70,919 $ 10,844 $ 20,660
======= ======= =======
The accompanying notes are an integral part of these statements.
CONTICO INTERNATIONAL, INC.
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MAY 31, 1998, 1997 AND 1996
-----------------------------------------------
(In Thousands)
Cumulative
Common Paid-In Retained Translation
Stock Surplus Earnings Adjustment Total
----- ------- -------- ---------- -----
BALANCE MAY 31, 1995 $ 17 $1,315 $ 57,103 $(395) $58,040
Net income - - 20,660 - 20,660
Dividends - - (1,000) - (1,000)
Translation adjustment - - - (2) (2)
---- ----- ------- ---- ------
BALANCE MAY 31, 1996 17 1,315 76,763 (397) 77,698
Net income - - 10,844 - 10,844
Dividends - - (14,073) - (14,073)
Translation adjustment - - - 16 16
---- ----- ------- ---- ------
BALANCE MAY 31, 1997 17 1,315 73,534 (381) 74,485
Net income - - 70,919 - 70,919
Dividends - - (72,000) - (72,000)
Translation adjustment - - - 48 48
---- ----- ------- ---- ------
BALANCE MAY 31, 1998 $ 17 $1,315 $ 72,453 $(333) $ 73,452
==== ===== ======= ==== ======
The accompanying notes are an integral part of these statements.
CONTICO INTERNATIONAL, INC.
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MAY 31, 1998, 1997 AND 1996
-----------------------------------------------
(In Thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 70,919 $ 10,844 $ 20,660
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation 17,576 22,426 19,580
Net loss on disposal of assets 1,354 479 394
Gain on sale of discontinued operations (54,300) - -
(Increase) decrease in-
Trade receivables, less reserves (1,662) (1,478) (5,908)
Inventories 340 (3,016) 5,109
Increase (decrease) in-
Accounts payable 3,282 (4,081) 1,813
Accrued expenses 1,784 230 (322)
Other, net (2,816) 2,664 8,790
------- ------- -------
Net cash provided by
operating activities 36,477 28,068 50,116
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (14,691) (36,803) (19,110)
Investment in joint venture - (1,000) -
Proceeds from disposal of assets 127 276 835
Proceeds from sale of discontinued operations 91,713 - -
------- ------- -------
Net cash provided by
(used in) investing activities 77,149 (37,527) (18,275)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt agreements - 20,600 -
Principal payments on long-term debt (65,205) (1,295) (27,840)
Net borrowings (repayments) under
notes payable agreements 23,758 3,680 (2,093)
Payment of dividends (72,000) (14,073) (1,000)
Payment of deferred financing fees (53) (80) (66)
------- ------- -------
Net cash (used in) provided by
financing activities (113,500) 8,832 (30,999)
------- ------- -------
Increase (decrease) in cash 126 (627) 842
CASH AT BEGINNING OF YEAR 698 1,325 483
CASH AT END OF YEAR $ 824 $ 698 $ 1,325
======= ======= =======
CASH INTEREST PAID $ 7,804 $ 8,609 $ 9,043
======= ======= =======
CASH TAXES PAID $ 181 $ 24 $ 156
======= ======= =======
The accompanying notes are an integral part of these statements.
CONTICO INTERNATIONAL, INC.
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Thousands of Dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------
Business
- --------
Contico International, Inc. and subsidiaries (the Company) is engaged
principally in the design, manufacturing and marketing of a broad range of
molded plastic products for consumer and industrial use. The Company's
markets are predominately located in North America and the United Kingdom.
Principles of Consolidation and Revenue Recognition
- ---------------------------------------------------
The accounts of all foreign subsidiaries (Subsidiaries) and domestic and
foreign divisions are included in the consolidated financial statements of
the Company. The Company's investment in Joint Venture is accounted for
under the equity method of accounting. All Subsidiaries are 75% owned by the
Company. Minority interest in Subsidiaries represents the minority
stockholder's proportionate (25%) share of the Subsidiaries' equity and
retained earnings. The minority interest in Subsidiaries at May 31, 1998 and
1997, is held by the Company's Chairman of the Board. All significant
intercompany accounts and transactions have been eliminated. Sales are
recognized as products are shipped.
Use of Estimates
- ----------------
The preparation of these consolidated financial statements required the use
of certain estimates by management in determining the Company's assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
Inventories
- -----------
Inventories are stated at the lower of cost (using the last-in, first-out
method) or market. If the Company had used the first-in, first-out method of
computing inventory costs, inventories would have been $4,600, $6,500, $5,400
and $17,700 higher than reported at May 31, 1998, 1997, 1996 and 1995,
respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment is stated at cost and depreciated over
estimated useful lives ranging from 5 to 39 years, using the straight-line
method for financial statement purposes. Additions, betterments and
replacements are capitalized, while expenditures for repairs and maintenance
are charged against income.
Income Taxes
- ------------
The Company has elected to be taxed as an S corporation for federal and
Missouri income tax purposes. Accordingly, the Company is not taxed on its
income except for certain state taxes and taxes on foreign subsidiaries and
divisions. The stockholders of the Company are otherwise responsible for the
payment of income taxes on their share of the Company's income.
Translation of Foreign Currencies
- ---------------------------------
Assets and liabilities of foreign divisions and subsidiaries are translated
into U.S. dollars at current exchange rates, and profit and loss accounts are
translated at average annual exchange rates. Resulting translation gains and
losses are included as a separate component in Stockholders' Equity. Foreign
exchange transaction gains and losses are included in the results of
operations. Such amounts for the years presented were insignificant.
2. DISCONTINUED OPERATIONS:
- ---------------------------
In January 1998, the Company sold certain net assets of its liquid dispensing
business segment for approximately $92 million, resulting in a gain on
disposal of $54.3 million. The Company used the proceeds to reduce
long-term debt and to fund dividends to its shareholders. An additional $2
million has been escrowed and may be received by the Company contingent upon
the purchaser of the liquid dispensing business segment attaining specified
unit sales levels. This contingent gain has not been reflected in these
financial statements and will be recognized as received.
The Company has restated its prior financial statements to present the
operating results of its liquid dispensing business segment as a discontinued
operation. The assets and liabilities of the discontinued operations at
May 31, 1997, have been reflected as net current assets and net noncurrent
assets based on their original classifications.
Operating results from discontinued operations are as follows:
Eight Twelve Twelve
Months Months Months
Ended Ended Ended
January 31, May 31, May 31,
1998 1997 1996
------ ------ ------
Net sales $ 39,768 $ 59,901 $ 55,271
Cost of sales 30,360 47,620 43,622
Selling, general and
administrative expenses 3,426 5,739 5,845
------- ------- -------
5,982 6,542 5,804
Interest/other expense 190 617 1,072
Provision for income taxes 171 1 115
Income from discontinued operations $ 5,621 $ 5,924 $ 4,617
======= ======= =======
3. INVENTORIES:
- ---------------
Inventories consist of the following:
May 31
----------------
1998 1997
---- ----
Raw material and parts $15,030 $16,729
Work-in-process 1,040 1,197
Finished goods 29,712 30,096
------ ------
45,782 48,022
Less - LIFO reserve 4,600 6,500
------ ------
$41,182 $41,522
====== ======
4. PROPERTY, PLANT AND EQUIPMENT:
- ---------------------------------
Property, plant and equipment consists of the following:
May 31
----------------
1998 1997
---- ----
Land, buildings and improvements $ 42,893 $ 42,284
Machinery and equipment 88,017 85,153
Molds, dies and tooling 67,909 61,655
Office equipment 6,930 6,565
Construction in progress 2,313 1,636
------- -------
208,062 197,293
Less- Accumulated depreciation 108,408 93,474
------- -------
$ 99,654 $103,819
======= =======
5. ACCRUED EXPENSES:
- --------------------
Accrued expenses consist of the following:
May 31
----------------
1998 1997
---- ----
Accrued compensation $ 3,395 $ 3,142
Accrued workers' compensation and insurance 1,935 1,963
Accrued advertising and rebates 4,754 3,793
Accrued property and other taxes 1,653 1,281
Accrued interest 637 739
Other 2,354 2,026
------ ------
$14,728 $12,944
====== ======
6. LEASES:
- ----------
The Company conducts a portion of its operations from facilities leased under
operating leases. Future minimum rent payments under existing noncancelable
operating leases at May 31, 1998, are as follows:
Fiscal year:
1999 $ 2,433
2000 2,163
2001 1,711
2002 1,502
2003 1,502
Later years 9,483
-------
$ 18,794
=======
Operating lease rental expense for the years ended May 31, 1998, 1997 and
1996, amounted to $2,708, $2,610 and $2,526, respectively.
7. NOTES PAYABLE:
- -----------------
The Company has an agreement expiring in December 1998 with a group of banks
providing for an unsecured line of credit of $70 million ($20 million of
which is available for borrowings denominated in Pounds Sterling) at May 31,
1998, at variable interest rates (weighted average rate of 6.5% at May 31,
1998). Loans of $42,177, of which $12,877 were denominated in Pounds
Sterling, were outstanding under this agreement at May 31, 1998. The
carrying amounts of the notes payable approximate their fair values.
Borrowings under the $70 million agreement are available to the Company at
the banks' U.S. prime interest rate or at the sum of Eurodollar or Europound
rates plus a margin that varies between .2% and .5%, based on a debt coverage
ratio determined quarterly. The maximum credit available to the Company is
reduced by the amount of outstanding letters of credit issued under this
agreement ($3,048 at May 31, 1998).
Among other restrictions under this agreement, the Company is required to
maintain specified interest coverage ratios, debt coverage ratios and minimum
stockholders' equity, and is restricted from payments of capital expenditures
above certain levels prescribed by the agreement.
The Company had an agreement with a foreign bank providing for a line of
credit payable in Pounds Sterling for a U.S. dollar equivalent of $19,200 at
May 31, 1997, secured by a standby letter of credit drawn under the $140
million secured credit agreement (see Note 8), at .6% over sterling LIBOR
rates (average rate of 6.9% at May 31, 1997). Loans of $18,080 were
outstanding under this agreement at May 31, 1997.
The Company has an agreement with a foreign bank providing for an unsecured
line of credit payable in Pounds Sterling for a U.S. dollar equivalent of
$815 at May 31, 1998, at 1.5% over the bank's Base Rate (8.8% and 7.8% at
May 31, 1998 and 1997, respectively). No loans were outstanding under this
agreement at May 31, 1998 and 1997.
8. LONG-TERM DEBT:
- ------------------
Long-term debt consists of the following:
May 31
----------------
1998 1997
---- ----
Secured credit agreement with banks, $140 million
maximum, secured by all assets not specifically
pledged for other loans, retired in 1998,
interest at variable rates (weighted average rate
of 7.4%). $ - $64,000
Promissory notes to insurance company, secured by
Deeds of Trust and Security Agreements, payable
monthly to 2008, interest at various fixed rates
(weighted average rate of 8.5% and 8.5%). 15,498 16,326
Note payable to The Industrial Development
Authority of the City of Bridgeton, Missouri,
secured by a letter of credit of $2.7 million and
plant and equipment, payable semiannually to
2010, interest at variable rates (5.9% and 6.2%). 2,685 2,915
Promissory note to Springfield Business and
Industrial Development Corporation, secured by a
Deed of Trust, retired in 1998, with no interest. - 147
------ ------
18,183 83,388
Less- Current maturities 1,130 1,204
------ ------
$17,053 $82,184
====== ======
Scheduled maturities of long-term debt at May 31, 1998, are as follows:
Fiscal Year:
1999 $ 1,130
2000 1,210
2001 1,297
2002 1,391
2003 1,494
Later years 11,661
-------
$ 18,183
=======
The fair values of the long-term debt approximate their carrying amounts.
Among other restrictions under the debt agreements, the Company is required
to maintain specified interest and capital expenditure coverage ratios, debt
coverage ratios and net worth ratios, and is restricted from payments of
dividends and capital expenditures above certain levels prescribed by the
agreements.
9. SUBORDINATED DEBT:
- ---------------------
At May 31, 1998 and 1997, the Company had outstanding $15 million, 12%
subordinated debt that matures in equal installments of $3 million starting
in 1999 through 2003. Among other restrictions under the subordinated debt
agreement, the Company is required to maintain certain cash flow ratios and
consolidated net worth levels, and is restricted from incurring additional
funded debt and from payment of dividends above certain levels prescribed by
the agreement. In the event of a change in control of the Company, as
defined in the agreement, the subordinated debt may become due at the option
of the holders of the notes. The fair value of the subordinated debt
approximates its carrying amount.
10. JOINT VENTURE:
- ------------------
The Company is a joint venture partner along with a French corporation in
Allibert-Contico, L.L.C. ("Allibert-Contico"), a limited liability company
engaged in manufacturing of plastic material handling products. The
Company's 50% equity interest in Allibert-Contico's results is included in
other income, and was income (loss) of $784, $52 and $(522) for the periods
ended May 31, 1998, 1997 and 1996, respectively.
The Company contracts with Allibert-Contico to produce certain products. The
sales price to the Company for these molded products is the standard cost of
production to Allibert-Contico plus a gross margin of approximately 10%.
Total purchases from Allibert-Contico were $711, $4,150 and $7,302 for the
years ended May 31, 1998, 1997 and 1996, respectively.
The Company and its joint venture partner announced that they will seek
qualified buyers for Allibert-Contico. In the event that a transaction is
completed, the Company expects to use the proceeds to reduce its bank debt
and to fund dividends to the stockholders of the Company.
11. RELATED-PARTY TRANSACTIONS:
- -------------------------------
The Company leases certain facilities from its Chairman of the Board under
leases expiring in 2008 and 2012. Lease payments for the years ended May 31,
1998, 1997 and 1996, were $1,502, $1,462 and $1,434, respectively. In
addition, the Company has an agreement with its Chairman which provides for
payments over a defined period in the event of his retirement or death.
12. RETIREMENT BENEFITS:
- ------------------------
Certain of the Company's employees are covered by a union sponsored,
multiemployer defined contribution pension plan pursuant to a collective
bargaining agreement. The Company incurred expenses of $249, $353 and $345
for the years ended May 31, 1998, 1997 and 1996, respectively, for
contributions to the plan. The Company also offers a 401(k) plan to
substantially all domestic nonunion employees. The Company's contributions
under this plan for the years ended May 31, 1998, 1997 and 1996, were $200,
$206 and $203, respectively.
13. MAJOR CUSTOMERS:
- --------------------
One customer accounted for approximately 19%, 20% and 18% of total net sales
for the years ended May 31, 1998, 1997 and 1996, respectively. Another
customer accounted for approximately 12% of total net sales for the year
ended May 31, 1998.
14. CONTINGENCIES:
- ------------------
The Company is involved in various litigation arising in the ordinary course
of business. In the opinion of management, settlement of these matters will
not have a material effect on the Company's financial position or results of
operations.
