SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K Filed with the Securities and
Exchange Commission on March 14, 2000
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report March 14, 2000
SPARTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-5911 43-0761773
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
120 S. Central Avenue, Suite 1700, Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 721-4242
SPARTECH CORPORATION
FORM 8-K/A
AMENDMENT NO. 1
On February 28, 2000, Spartech Corporation completed the acquisition of
substantially all the assets of High Performance Plastics, Inc. ("HPP") a direct
subsidiary of Uniroyal HPP Holdings, Inc., as reported in the Company's Form 8-K
filed on March 14, 2000. Pursuant to Items 7(a)4 and 7(b)2 of Form 8-K, this
amendment is submitted to file certain financial statements of the business
acquired and pro forma financial statements related to the HPP acquisition.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The HPP audited balance sheets as of September 26, 1999 and September
27, 1998, and the related consolidated statements of operations, changes
in stockholder's deficiency and cash flows for each of the three years
in the period ended September 26, 1999, and interim unaudited balance
sheets as of January 2, 2000 and December 28, 1998, and the related
consolidated statements of operations and cash flows for the three
months ended January 2, 2000 and December 28, 1998.
(b) Pro Forma Financial Information.
Spartech Corporation's pro forma combined condensed balance sheet as of
January 29, 2000 and pro forma combined condensed statements of
operations for the fiscal year ended October 30, 1999 and three months
ended January 29, 2000.
(c) Exhibits.
23--Consent of Deloitte & Touche LLP, independent auditors
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
SPARTECH CORPORATION
Date May 15, 2000 By /s/Randy C. Martin
Randy C. Martin
Vice President-Finance and
Chief Financial Officer
Item 7(a). Financial Statements of Business Acquired
Uniroyal HPP Holdings, Inc. and Subsidiary
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
Consolidated Financial Statements
For the Years Ended September 26, 1999 and September 27,1998 and
Three Months Ended January 2, 2000 and December 28, 1998.
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
Index to Consolidated Financial Statements
Consolidated Financial Statements as of September 26, 1999 and September
27, 1998 and for the Years Ended September 26, 1999, September 27, 1998 and
September 28, 1997:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of September 26, 1999 and F-3
September 27, 1998
Consolidated Statements of Operations for the Years Ended
September 26, 1999, September 27, 1998 and September 28, F-5
1997
Consolidated Statements of Changes in Stockholder's
Deficiency for the Years Ended September 26, 1999, F-6
September 27, 1998 and September 28, 1997
Consolidated Statements of Cash Flows for the Years Ended
September 26, 1999, September 27, 1998 and September 28, F-7
1997
Notes to Consolidated Financial Statements F-9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Uniroyal HPP Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Uniroyal HPP
Holdings, Inc. and subsidiary (the "Company"), wholly owned subsidiaries of
Uniroyal Technology Corporation (the "Parent"), as of September 26, 1999 and
September 27, 1998, and the related consolidated statements of operations,
changes in stockholder's deficiency and cash flows for each of the three years
in the period ended September 26, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 26, 1999 and September 27, 1998 and the results of its operations and
its cash flows for each of the three years in the period ended September 26,
1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared from the separate
records maintained by the Parent and may not necessarily be indicative of the
conditions that would have existed if the Company had been operated as an
unaffiliated company. Portions of certain transactions represent allocations
made from the Parent for items applicable to the Parent and its subsidiaries as
a whole.
DELOITTE & TOUCHE LLP
Certified Public Accountants
December 20, 1999
(February 28, 2000 as to Note 14)
Tampa, Florida
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
September 26, September 27,
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37 $ 1,486
Trade accounts receivable (less estimated
reserve for doubtful accounts of $150 18,261 17,033
and $158, respectively) (Notes 2 and
9)
Inventories (Notes 2, 3 and 9) 30,028 27,877
Deferred income taxes (Notes 2 and 10) 2,030 1,734
Prepaid expenses and other current 1,712 210
assets
------------- -------------
Total current assets 52,068 48,340
Property, plant and equipment - net 43,349 40,189
(Notes 2, 4 and 9)
Property, plant and equipment held for 250 394
sale (Note 2)
Goodwill - net (Notes 2 and 5) 11,141 7,582
Other assets - net (Notes 7 and 9) 4,259 4,985
------------- -------------
TOTAL ASSETS $111,067 $101,490
============= =============
</TABLE>
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands)
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
September September
26, 27,
1999 1998
<S> <C> <C>
Current liabilities:
Current portion of long-term debt (Note 9) $8,805 $6,005
Trade accounts payable 13,323 6,065
Accrued expenses:
Compensation and benefits 4,336 3,181
Interest 1,290 138
Taxes, other than income 573 749
State income taxes 148 292
Due to affiliates (Noe 13) 4,518 2,608
Other 1,082 1,130
---------- ----------
Total current liabilities 34,075 20,168
Long-term debt, net of current portion 84,552 97,061
(Note 9)
Deferred income taxes (Note 10) 6,322 6,486
Other liabilities (Note 8) 516 861
---------- ----------
Total liabilities 125,465 124,576
========== ==========
Commitments and contingencies (Note 12)
Stockholder's deficiency (Notes 9 and 11):
Preferred stock:
Series A - 100 shares issued at September
26, 1999 (liquidation preference of
$53,156 per share); par value $0.01; 1,000 5,381 -
shares authorized
Common stock:
100 shares issued at September 27, 1998;
par value $0.01; 1,000 shares authorized - -
Additional paid-in capital 13,962 13,962
Retained earnings 4,948 2,010
---------- ----------
24,291 15,972
Note and accrued interest receivable from (38,689) (39,058)
parent (Note 6)
Total stockholder's deficiency - net (14,398) (23,086)
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S $111,067 $101,490
DEFICIENCY
========== ===========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Fiscal Years Ended
September 26, September 27, September 28,
1999 1998 1997
<S> <C> <C> <C>
Net sales $130,222 $ 128,580 118,847
Costs and expenses:
Costs of goods sold 93,370 90,638 86,507
Selling and administrative 15,538 15,947 16,852
Depreciation and amortization 5,652 5,479 4,941
Loss on assets to be disposed of (Note 144 407 -
2)
---------- --------- ----------
Income before interest and income 15,518 16,109 10,547
Interest income on note from parent 2,242 1,058 -
(Note 6)
Interest expense - net (8,574) (7,219) (6,151)
---------- --------- ---------
Income before income taxes 9,186 9,948 4,396
Income tax expense (Notes 2 and 10) (3,572) (3,587) (1,759)
---------- --------- ---------
Net income $5,614 $6,361 $ 2,637
========== ========= =========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIENCY
(In thousands)
Note
and Accrued
Series A Additiona Subtotal Interest Stockholder's
l
Preferred Common Paid-In Divisional Retained Stockholder's Receivable Deficiency -
Stock Stock _Capital_ Equity Earnings Equity From Parent ___Net___
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 29, $- $ - $ - 65,340 $ - $65,340 $ - $65,340
1996
Investment by parent - - - 6,307 - 6,307 - 6,307
Transfer to parent, net - - - (1,347) - (1,347) - (1,347)
Net income - - - 2,637 - 2,637 - 2,637
--------- ------- --------- ---------- ---------- ------------ ----------- -------------
Balance at September 28, - - - 72,937 - 72,937 - 72,937
1997
Transfer to parent, net - - - (6,382) - (6,382) - (6,382)
(6,382)
Net income - - - 4,351 2,010 6,361 - 6,361
Exchange of net assets for - - 108,906 - 38,000 - 38,000
stock (70,906)
Dividend to parent - - (94,944) - (94,944) - (94,944)
-
Note and accrued interest
receivable from parent - - - - -- (39,058) (39,058)
-
--------- ------- --------- ---------- ---------- ------------ ----------- -------------
Balance at September 27, - - 13,962 2,010 15,972 (39,058) (23,086)
1998 -
Net income - - - 5,614 5,614 - 5,614
-
Increase in accrued
interest receivable from - - - - - (2,242) (2,242)
parent -
Issuance of preferred stock 5,316 - - - 5,316 - 5,316
to parent
Preferred stock dividend 65 - - (65) - - -
declared -
Reduction of note and
accrued interest
receivable from parent - - - (2,611) (2,611) 2,611 -
through dividend -
--------- ------- --------- ---------- ---------- ------------ ----------- -------------
Balance at September 26, $5,381 $ - $13,962 $ $4,948 $24,291 $(38,689) $(14,398)
1999 -
======= ======= ======== ========== ========== ============ =========== ==============
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended
September 26, September 27, September 28,
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $5,614 $6,361 $2,637
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 5,652 5,479 4,941
Provision for doubtful accounts 73 87 -
Deferred tax benefit (459) (372) (114)
Amortization of debt issuance costs 567 278 -
Loss on assets held for sale 144 407 -
Interest income on note from parent
(2,242) (1,058) -
Other 47 (43) 56
Changes in assets and liabilities:
(Increase) decrease in trade
accounts receivable (481) 1,431 (1,918)
Increase in inventories (1,690) (3,119) (1,198)
Increase in prepaid expenses and
other assets (1,407) (100) (184)
Increase in trade accounts payable 6,990 632 245
Increase in accrued expenses and
other liabilities 1,178 454 59
Increase in due to affiliates 1,664 2,608 -
-------- -------- --------
Net cash provided by operating 15,650 13,045 4,524
activities
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and (7,441) (5,399) (2,951)
equipment
Proceeds from investment by - - 5,107
parent
Business acquisitions - net of 177 (1,768) (6,607)
cash acquired
-------- -------- --------
Net cash used in investing (7,264) (7,167)
activities (4,451)
-------- -------- --------
FINANCING ACTIVITIES:
Repayment of term loans (6,047) (2,167) (226)
(Decrease) Increase in (3,788) 11,338 -
revolving credit agreement
Proceeds from refinancing - 90,000 -
Refinancing costs - (3,545) -
Proceeds from term loan - - 1,500
Dividend to parent - (94,944) -
Transfers to parent - net - (5,087) (1,347)
-------- -------- --------
Net cash used in financing (9,835) (4,405) (73)
activities
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents (1,449) 1,473 -
Cash and cash equivalents at 1,486 13 13
beginning of year
-------- -------- --------
Cash and cash equivalents at end $ 37 $1,486 $ 13
of year
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Supplemental Disclosures:
Payments for state income taxes and interest expense were as follows (in
thousands):
Fiscal Years Ended
September 26, September 27, September 28,
1999 1998 1997
State income tax payments $ 432 $ 39 $ 27
Interest payments (net of 6,854 3,833 60
capitalized interest)
Non-cash investing activities were as follows (in thousands):
Fiscal Years Ended
September 26, September 27, September 28,
1999 1998 1997
Business acquisition
purchased with note $ - $1,000 $ 1,000
payable
The purchases of property, plant and equipment and the net cash used in
financing activities for the fiscal year ended September 26, 1999, do not
include approximately $125,000 related to property acquired through capitalized
leases. The Company did not enter into any capital lease agreements during the
years ended September 27, 1998 and September 28, 1997.
Net cash used in financing activities does not include $2,611,000 related to the
reduction of accrued interest receivable by $1,634,000 and the reduction of note
receivable from parent by $977,000 as a result of a common stock dividend
declared to parent during the fiscal year ended September 26, 1999. No common
stock dividends were declared during the fiscal years ended September 27, 1998
and September 28, 1997. Net cash used in financing activities does not include
$38,000,000 relating to the note issued by Uniroyal Technology Corporation to
High Performance Plastics, Inc. (Note 6) in connection with the Transfer (Note
1) during the fiscal year ended September 27, 1998.
Net cash used in investing activities and net cash provided by financing
activities does not include approximately $5,139,000 and $5,316,000,
respectively, of Series A Preferred Stock issued to Uniroyal Technology
Corporation in consideration of amounts paid by Uniroyal Technology Corporation
on behalf of the Company towards the purchase of Happel Marine, Inc. during the
fiscal year ended September 26, 1999. Net cash used in financing activities for
the fiscal year ended September 26, 1999 does not include approximately $65,000
of dividends declared on the Series A Preferred Stock since they were paid with
the issuance of 1.23 shares of Series A Preferred Stock in October of 1999. No
dividends are applicable to the fiscal years ended September 27, 1998 or
September 28, 1997. No Series A Preferred Stock was outstanding during the
fiscal years ended September 27, 1998 or September 28, 1997.
The transfers to parent, net, for the fiscal year ended September 27, 1998, does
not include the transfer of $1,295,000 (net) in property to Uniroyal Technology
Corporation prior to the Fleet Financing of High Performance Plastics, Inc.
(Notes 1 and 9).
See notes to consolidated financial statements.
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended September 26, 1999, September 27, 1998
and September 28, 1997
1. THE COMPANY
On April 14, 1998, Uniroyal Technology Corporation ("UTC") transferred all
of the net assets of its High Performance Plastics Segment to a newly
created wholly-owned subsidiary, Uniroyal HPP Holdings, Inc., who
transferred the net assets to its newly created wholly-owned subsidiary,
High Performance Plastics, Inc. ("HPPI") (the "Transfer"). Uniroyal HPP
Holdings, Inc. and High Performance Plastics, Inc. were both incorporated
under the laws of the State of Delaware on February 19, 1998.
The accompanying consolidated financial statements include the accounts of
Uniroyal HPP Holdings, Inc. and its wholly-owned subsidiary, HPPI
(collectively the "Company"). HPPI, through its operating divisions,
Royalite Thermoplastics ("Royalite"), Polycast Technology ("Polycast"),
ViPlex/Happel and Townsend/Glasflex, is engaged in the manufacture,
fabrication and sale of high performance plastics products.
Basis of Presentation
The Company's consolidated financial statements reflect the results of
operations, financial position changes in stockholder's deficiency and cash
flows of the Company as if the Company were a separate stand alone entity
for all periods presented. The consolidated financial statements of the
Company have been derived from the consolidated financial statements of UTC
using historical results of operations and historical carrying values of
the assets and liabilities of the High Performance Plastics Segment. The
transfer was accounted for as a transfer of interests between entities
under common control in a manner similar to a pooling of interests.
Prior to the Transfer, the divisional equity represented the original
investment by UTC in the High Performance Plastics Segment, the net income
of the High Performance Plastics Segment including cost allocations from
UTC, net cash transfers to UTC, as well as investments by UTC for
businesses acquired. As of April 14, 1998, divisional equity was replaced
by additional paid-in-capital as UTC exchanged net assets of the High
Performance Plastics Segment for 100% of the common stock outstanding of
the Company. The Company began accumulating its own retained earnings as of
April 14, 1998.
General corporate overhead related to UTC's corporate headquarters and
common support functions is allocated to the High Performance Plastics
Segment (through April 13, 1998) and the Company (beginning April 14, 1998)
during the fiscal years ended September 26, 1999 and September 27, 1998
based upon a percentage of sales. During the fiscal year ended September
28, 1997, the allocation for these costs was based upon the ratio of High
Performance Plastics Segment sales to total UTC sales applied against total
corporate costs. Management believes these allocations are reasonable;
however, the costs of these services charged to the Company and the High
Performance Plastics Segment are not necessarily indicative of the costs
that would have been incurred had the Company performed these functions as
a stand-alone entity (Note 13).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Uniroyal HPP
Holdings, Inc. and its subsidiary. All significant intercompany
transactions and balances have been eliminated.
Fiscal Year End
The Company's fiscal year ends on the Sunday following the last Friday in
September. The dates on which the fiscal year ended for the past three
fiscal years were September 26, 1999 ("Fiscal 1999"), September 27, 1998
("Fiscal 1998") and September 28, 1997 ("Fiscal 1997").
Use of Estimates
The preparation of consolidated 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes all highly liquid investments purchased
with an original maturity of three months or less.
Financial Instruments
Interest rate swap agreements are used to manage interest rate exposures.
The interest rate differentials to be paid or received under such swaps are
recognized over the life of the agreements as adjustments to interest
expense.
The estimated fair value of amounts reported in the consolidated financial
statements have been determined using available market information and
valuation methodologies, as applicable. The carrying value of all current
assets and liabilities approximates the fair value because of their short-
term nature. The fair values of non-current assets and liabilities
approximate their carrying value.
Trade Accounts Receivable
The Company grants credit to its customers generally in the form of short-
term trade accounts receivable. The creditworthiness of customers is
evaluated prior to the sale of inventory. There are no significant
concentrations of credit risk to the Company.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using a monthly average basis or standard costs (which approximates actual
average costs) for raw materials and supplies and the first-in, first-out
("FIFO") basis of accounting or standard costs (which approximates actual
FIFO costs) for work in process and finished goods.
Property. Plant and Equipment
Property, plant and equipment are stated at cost. The cost of property,
plant and equipment held under capital leases is equal to the lower of the
net present value of the minimum lease payments or the fair value of the
leased assets at the inception of the lease. Depreciation is computed under
the straight-line method based on the cost and estimated useful lives of
the related assets including assets held under capital leases. Interest
costs applicable to the construction of major plant and expansion projects
have been capitalized to the cost of the related assets. Interest
capitalized during Fiscal 1999 and Fiscal 1998 approximated $204,000 and
$64,000, respectively.
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 requires that long-
lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not be
recoverable. The Company evaluates at each balance sheet date whether
events and circumstances have occurred that indicate possible impairment.
In accordance with SFAS No. 121, the Company uses an estimate of the future
undiscounted net cash flows of the related assets over the remaining life
in measuring whether the assets are recoverable.
Property. Plant and Equipment Held for Sale
The Company has classified certain equipment related to its Stirling, New
Jersey ("Stirling") facility as held for sale. The Stirling facility is
leased from UTC.
During Fiscal 1998, in conjunction with plant consolidations at the
Polycast division and in order to address concerns of the Federal Trade
Commission ("FTC") (Note 12), the Company decided to sell certain assets
and abandon certain other assets used in the manufacture of acrylic rods
and tubes. In accordance with SFAS No. 121, the Company recorded a write-
down of the related assets totaling approximately $144,000 and $407,000 in
Fiscal 1999 and Fiscal 1998, respectively, related to this decision. The
Company expects the disposition of the assets to be completed in Fiscal
2000. The Company is carrying the related assets at fair value less cost to
sell based upon a current sales offer. The fair value less cost to sell
approximates $250,000 at September 26, 1999.
Amortization
Debt issuance costs are amortized using the interest method over the life
of the related debt. Trademarks are amortized using the straight-line
method over periods ranging from 7 to 20 years. Goodwill is amortized on a
straight-line basis over 25 years. Goodwill is reported net of accumulated
amortization of approximately $639,000 at September 26, 1999 and $285,000
at September 27, 1998, respectively.
Research and Development Expenses
Research and development expenditures are expensed as incurred. Research
and development expenditures were $1,128,000, $1,205,000 and $1,335,000 for
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
Income Taxes
The Company is included in the consolidated federal income tax return of
UTC and in certain consolidated state income tax returns of UTC. Federal
and state income taxes have been charged by UTC to HPPI from April 14, 1998
forward pursuant to a written tax sharing agreement between UTC and HPPI.
Federal and state income taxes have also been charged by UTC to the Company
for financial statement periods presented prior to April 14, 1998 as if the
Company had been a stand-alone entity for those periods. Non-consolidated
state and local income taxes have been provided based on stand-alone
computations. HPPI is limited in the amount of federal income taxes it can
pay to UTC in accordance with the terms of the tax sharing agreement. For
each taxable year UTC computes a Separate Return Tax Liability (as defined
in the agreement) equal to the tax liability, refund or credit that HPPI
would have incurred or would have been entitled to had it always filed a
separate federal income tax return. The liability is computed at
approximately 40% of HPPI's taxable income.
New Accounting Pronouncements
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends upon the intended use of
the derivative and resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not evaluated the effect, if any, that the adoption of SFAS 133 will
have on the Company's consolidated financial statements.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
3. INVENTORIES
Inventories consisted of the following (in thousands):
September September
26, 27,
1999 1998
Raw materials, work in process and $20,049 $17,336
supplies
Finished goods 9,979 10,541
Total $30,028 $27,877
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
Estimated September 26, September 27,
Useful 1999 1998
Lives
Land and improvements - $4,880 $4,871
Buildings and 5-40 years 14,068 13,486
improvements
Machinery, equipment and
office furnishings 3-20 years 44,845 42,241
Construction in progress 7,176 2,284
70,969 62,882
Accumulated depreciation (27,620) (22,693)
Total $43,349 $40,189
5. BUSINESS ACQUISITIONS
On June 14, 1999, UTC and the Company acquired 100% of the common stock of
Happel Marine, Inc., a fabricator for the marine industry, for $5,193,500.
The purchase price was adjusted for changes in working capital between
April 30, 1999 and June 13, 1999. This resulted in an increase of the
purchase price of $122,137. The purchase price was paid by UTC in exchange
for 100 shares of preferred stock (liquidation value $5,315,637) issued by
the Company (Note 11). Effective September 1, 1999, Happel Marine, Inc. was
merged into the Company and the Company contributed the related net assets
to HPPI.
On May 22, 1998, HPPI acquired 100% of the common stock of ViPlex, an
acrylic sheet fabricator for the marine industry, for $2,700,000 consisting
of $1,700,000 in cash and unsecured promissory notes aggregating $1,000,000
(Note 9). The purchase price was adjusted for changes in working capital
between September 30, 1997 and May 22, 1998. This resulted in an increase
in the purchase price of $114,000, which was paid in cash. ViPlex
Corporation was merged into HPPI on December 31, 1998.
The above business combinations were accounted for by the purchase method
in accordance with APB Opinion No. 16. The results of operations of the
above named businesses are included in the consolidated financial
statements from their respective purchase dates in Fiscal 1999 and Fiscal
1998.
In Fiscal 1999 and Fiscal 1998, the following assets and liabilities were
acquired (net of cash received of $46,000 in Fiscal 1998) in the above
transactions (in thousands):
September 26, September 27,
1999 1998
Accounts receivable $ 820 $ 457
Inventory 461 501
Prepaids and other 24 32
assets
Property, plant and 870 188
equipment
Goodwill 3,894 1,841
Note payable (246) (1,000)
Other liabilities (684) (251)
Net value of purchased 5,139 1,768
assets
Value of preferred stock
issued to parent (5,316) -
Cash (received) paid for $(177) $ 1,768
acquisitions
The acquired goodwill is being amortized over its estimated useful life of
25 years.
The pro forma effect of these acquisitions on the Company's net sales and
net income had the acquisitions occurred on September 28, 1998 and
September 29, 1997, respectively, is not considered material.
6. NOTE AND ACCRUED INTEREST RECEIVABLE FROM PARENT
In connection with the Transfer of net assets from UTC ultimately to HPPI,
and the dividend payment from HPPI ultimately to UTC on April 14, 1998
(Note 9), an unsecured demand note in the principal amount of $38,000,000
was given by UTC to HPPI. The note receivable bears an interest rate of
6.0%. At September 26, 1999 and September 27, 1998 accrued interest
receivable was $1,666,000 and $1,058,000, respectively. There is no set
maturity on the note and payments of principal and interest may be made at
the option of UTC in cash or in equity of UTC. The stated interest rate on
this related party note is below market (prime on April 14, 1998 was 8.5%),
and as well, below HPPI's incremental borrowing rate of approximately 8.0%.
The fair value of the note is not readily determinable based on its related
party nature.
On December 7, 1999, the Board of Directors approved the distribution of
the note receivable and related accrued interest to UTC.
7. OTHER ASSETS
Other assets consisted of the following (in thousands):
September 26, September 27,
1999 1998
Debt issuance costs $2,716 $3,267
Trademarks 1,150 1,239
Other 393 479
Total $4,259 $4,985
During Fiscal 1998, the Company capitalized approximately $3,545,000 of
debt issuance costs incurred in connection with the Fleet Financing (Note
9). Debt issuance costs are shown net of accumulated amortization of
$845,000 and $278,000 at September 26, 1999 and September 27, 1998,
respectively.
Trademarks are reported net of accumulated amortization of $619,000 and
$531,000 at September 26, 1999 and September 27, 1998, respectively.
Included in other assets at September 26, 1999, is a loan to the President
of HPPI for approximately $170,000. The loan was granted in connection with
a relocation. Subsequent to September 26, 1999, the loan was repaid in
full.
8. OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
September September
26, 27,
1999 1998
Taxes, other than income $ 109 $ 350
Other 407 511
Total $ 516 $ 861
9. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
September September
26, 27,
1999 1998
Term A Advance $25,500 $30,000
Term B Advance 59,550 60,000
Revolving credit agreement 7,550 11,338
Unsecured promissory notes 650 1,667
Other obligations 107 61
93,357 103,066
Less current portion (8,805) (6,005)
Long-term debt, net of current $84,552 $97,061
portion
Interest expense was $8,585,000, $7,222,000 and $6,152,000 during Fiscal
1999, Fiscal 1998 and Fiscal 1997, respectively.
Debt amounts become due during subsequent fiscal years ending in September
as follows (in thousands):
2000 $ 8,805
2001 6,797
2002 4,955
2003 6,600
2004 6,650
Subsequent years 59,550
Total debt $93,357
On April 14, 1998, in connection with the Transfer, HPPI, as borrower,
entered into a credit agreement with the Company, UTC, the banks, financial
institutions and other institutional lenders named therein, Fleet National
Bank (as Initial Issuing Bank, Swing Line Bank and Administrative Agent)
("Fleet") and DLJ Capital Funding, Inc. as Documentation Agent (the "Credit
Agreement"), providing among other things, for the borrowing by HPPI of an
aggregate principal amount of up to $110,000,000 (the "Fleet Financing").
The $110,000,000 line under the Credit Agreement is comprised of a
$30,000,000 Term A Advance, a $60,000,000 Term B Advance and a $20,000,000
Revolving Credit Advance.
The Term A Advance is payable in equal quarterly installments of $1,500,000
beginning on December 31, 1998 and ending on September 30, 2003. Interest
on the Term A Advance is initially payable monthly at the Prime Rate (as
defined in the Credit Agreement) plus 1.25% for Prime Rate advances or not
later than the end of each three-month period at the Eurodollar Rate (as
defined in the Credit Agreement) plus 2.25% for Eurodollar Rate advances
during the first six months of the Credit Agreement. After the first six
months, the applicable margin for each Prime Rate advance and each
Eurodollar Rate advance will be determined quarterly by reference to HPPI's
ratio of Consolidated Debt to EBITDA (as defined in the Credit Agreement).
The applicable margins on the Term A Advance range from 0.50% - 1.25% for
the Prime Rate advances and 1.50% - 2.25% for Eurodollar Rate advances and
were 1.25% and 2.25%, respectively, at September 26, 1999. The weighted
average interest rate for the Term A Advance during Fiscal 1999 and Fiscal
1998 was approximately 7.36% and 7.84%, respectively.
The Term B Advance is payable in quarterly installments of $150,000
beginning on December 31, 1998 through September 30, 2003, semiannual
installments of $5,000,000 on March 31, 2004 and September 30, 2004 and a
final payment of $47,000,000 on March 31, 2005. Interest on the Term B
Advance is initially payable monthly at Prime Rate plus 1.50% for Prime
Rate advances or not later than the end of each three-month period at the
Eurodollar Rate plus 2.50% for Eurodollar Rate advances during the first
six months of the Credit Agreement. After the first six months, the
applicable margin for each Prime Rate advance and Eurodollar Rate advance
will be determined quarterly by reference to HPPI's ratio of Consolidated
Debt to EBITDA (as defined in the Credit Agreement). The applicable margins
on Term B Advances range from 1.00% - 1.50% for Prime Rate advances and
2.00% - 2.50% for Eurodollar Rate advances and were 1.50% and 2.50%,
respectively, at September 26, 1999. The weighted average interest rate for
the Term B Advance during Fiscal 1999 and Fiscal 1998 was approximately
7.57% and 8.09%, respectively.
Under the Revolving Credit Advance, HPPI may borrow the lesser of
$20,000,000 or the sum of 85% of Eligible Receivables plus 50% of the value
of Eligible Inventory as defined in the Credit Agreement. Interest is
payable under the same terms as the Term A Advance. The Revolving Credit
Advance matures on September 30, 2003. The weighted average interest rate
on the Revolving Credit Advance during Fiscal 1999 and Fiscal 1998 was
8.31% and 8.20%, respectively.
The advances under the Credit Agreement are collateralized by a lien on
substantially all of the non-cash assets of HPPI excluding the note and
accrued interest receivable from parent. Such note and accrued interest
receivable are not subject to the terms of the Credit Agreement. The Credit
Agreement contains certain covenants which limit, among other things,
HPPI's ability to incur additional debt, sell its assets, pay cash
dividends, make certain other payments and redeem its capital stock. The
Credit Agreement also contains covenants which require the maintenance of
certain ratios. HPPI was in compliance with these covenants at September
26, 1999. The Credit Agreement also contains annual mandatory pre-payments
of principal equal to 50% of HPPI's annual Excess Cash Flow (as defined in
the Credit Agreement) beginning September 26, 1999. No such prepayment was
due on September 26, 1999.
Under the terms of the Credit Agreement, HPPI is required to obtain and
keep in effect one or more interest rate Bank Hedge Agreements (as defined
in the Credit Agreement) covering at least 50% of the Term A and Term B
Advances, for an aggregate period of not less than three years. On May 14,
1998, HPPI entered into three interest rate swap agreements with two banks.
The first agreement is a fixed rate swap on $30,000,000 notional amount
that expires on May 14, 2003. HPPI's fixed LIBOR rate of interest on this
swap is 5.985%. HPPI pays or receives interest based upon the differential
between HPPI's fixed LIBOR rate and the bank's floating LIBOR rate. The
bank's floating LIBOR rate is adjusted monthly. The second agreement is a
cancelable interest rate swap on $30,000,000 notional amount that expires
on May 14, 2003. HPPI's fixed LIBOR rate of interest on this swap is
5.7375%. HPPI pays or receives interest based upon the differential between
HPPI's fixed LIBOR rate and the bank's floating LIBOR rate. The bank's
floating LIBOR rate is adjusted quarterly. The bank has the option to
cancel this swap on May 14, 2001. The third agreement is a cancelable
interest rate swap on $20,000,000 notional amount that expires on May 14,
2000. HPPI's fixed LIBOR rate of interest on this swap is 5.6725%. HPPI
pays or receives interest based upon the rate differential between HPPI's
fixed LIBOR rate and the bank's floating LIBOR rate. The bank's floating
LIBOR rate is adjusted quarterly. The bank had an option to cancel this
swap on May 14, 1999 which it did not exercise. The differential on
interest rate swaps is accrued as interest rates change and is recognized
as an adjustment to interest expense over the life of the agreements. The
fair value of these interest rate swap agreements represents the estimated
receipts or payments that would be made to terminate the agreements. At
September 26, 1999, the Company would have received approximately $195,000
to terminate the agreements.
On April 14, 1998, HPPI paid $94,944,000 to UTC, which in turn used such
amount to defease its outstanding debt. The $94,944,000 was exchanged for
the net assets of UTC's High Performance Plastics Segment and an unsecured
note receivable from UTC for $38,000,000 (Note 6).
In connection with the Fleet Financing, the Company incurred approximately
$3,545,000 in debt issuance costs. The costs were capitalized in the third
quarter of Fiscal 1998 and are amortized using the interest method over the
lives of the agreements. Included in the above debt issuance costs is
$650,000 paid to an investment banking firm that employs relatives of one
of the Company's directors. The fee was paid under an agreement between the
investment banking firm and UTC for financial advisory services. Also
included in the debt issuance costs are legal fees of approximately
$231,000 paid to a law firm of which one of UTC's directors is a senior
partner.
The Company has entered into or assumed various unsecured promissory notes
in connection with prior year business acquisitions at stated rates ranging
from 6.0% - 8.0% per annum. To the extent the stated rates were below
current market rates, the Company imputed interest at the market rate in
effect on the date of the respective transaction.
The Company leases certain machinery and equipment under non-cancelable
capital leases which extend for varying periods up to 5 years. Other
obligations represent the remaining capitalized lease obligations at
September 26, 1999 and September 27, 1998 (Note 12).
10. INCOME TAXES
The effective tax rate differs from the statutory federal income tax rate
for the following reasons (in thousands):
Fiscal Years Ended
September September September
26, 1999 27, 1998 28, 1997
Income tax calculated
at the statutory rate
applied to income $3,122 $3,071 $ 1,491
before income tax
Increase (decrease)
resulting from:
State income tax 341 609 225
Other 109 (93) 43
Income tax expense $3,572 $3,587 $ 1,759
Income tax expense consisted of the following components (in thousands):
Fiscal Years Ended
September September September
26, 1999 27, 1998 28, 1997
Current tax expense:
Federal $3,630 $3,350 $ 1,633
State 401 609 240
Total $4,031 $3,959 $ 1,873
Net deferred tax
(benefit):
Federal $(400) $(372) $ (99)
State (59) - (15)
Total $(459) $(372) $ (114)
Total:
Federal $3,230 $2,978 $ 1,534
State 342 609 225
Total $3,572 $3,587 $ 1,759
The components of the deferred tax assets and liabilities consisted of the
following (in thousands):
September 26, 1999
Assets Liabiliti Total
es
Current
Accrued expenses
deductible in future $2,030 $ - $2,030
periods
Non-Current
Book basis in excess of
tax basis of assets $ - $(6,467) $(6,467)
Long-term accrual of
expenses deductible in 145 - 145
future periods
Total $ 145 $(6,467) $(6,322)
September 27, 1998
Assets Liabiliti Total
es
Current
Accrued expenses
deductible in future $1,734 $ - $1,734
periods
Non-Current
Book basis in excess of
tax basis of assets $ - $(6,631) $(6,631)
Long-term accrual of
expenses deductible in 145 - 145
future periods
Total $ 145 $(6,631) $(6,486)
In connection with the formation of HPPI, HPPI and UTC entered into a tax-
sharing agreement relative to federal and certain state income tax returns
filed on a consolidated basis by UTC.
The obligation of HPPI for federal income taxes for each taxable year,
beginning April 14, 1998, is limited by the tax-sharing agreement to its
Separate Tax Return Liability (as defined in the agreement). The Separate
Tax Return Liability is computed based upon approximately 40% of HPPI's
taxable income for the tax year. HPPI is entitled to the benefit of its own
loss or credit carryforward or carryback generated on a stand-alone basis
beginning April 14, 1998. The principles of the tax-sharing agreement also
apply to any state or local consolidated income tax return filed by UTC. At
September 26, 1999 and September 27, 1998, respectively, $1,147,000 and
$1,909,000 is owed to UTC under the tax-sharing agreement and is included
in due to parent.
Payments to UTC under the tax-sharing agreement are subject to compliance
by HPPI with the financial covenants set forth in the Credit Agreement. In
the event that an Event of Default (as defined in the Credit Agreement)
shall have occurred and be continuing, payments under the tax-sharing
agreement shall be limited to UTC's actual tax liability after giving
effect to net operating losses possessed by UTC. The difference between
UTC's actual tax liability and the Separate Tax Return Liability for HPPI
will be in the form of a promissory note bearing interest at the then prime
rate announced by Fleet National Bank or another bank which shall be
mutually agreed upon. The note shall provide that the principal thereof and
all accrued interest thereon shall be subordinated to the obligations of
HPPI under the Credit Agreement until such time that the default is cured.
11. STOCKHOLDER'S DEFICIENCY
On July 26, 1999, the Certificate of Incorporation of the Company was amended to
increase the number of shares of all classes of stock which the Corporation
shall have authority to issue to 2,000 shares. The 2,000 shares consist of
1,000 shares of preferred stock, par value of $0.01 per share and 1,000
shares of common stock, par value of $0.01 per share.
On August 2, 1999, the Company designated a series of the Company's preferred
stock as Series A Preferred Stock ("Preferred Stock") and issued 100 shares
of the Preferred Stock to UTC. The Preferred Stock has a liquidation value
of $53,156 per share. The holder of the Preferred Stock is entitled to
receive an annual dividend of 8%, payable in quarterly installments of 2%
of the liquidation preference. Dividends are payable only in shares of the
Preferred Stock. On September 26, 1999, the Company declared a dividend on
the Preferred Stock of approximately $65,000. In October, 1999, the
dividend was paid through the issuance of 1.23 shares of Preferred Stock.
At September 26, 1999 and September 27, 1998 all 100 shares of common stock were
issued to UTC.
12. COMMITMENTS AND CONTINGENCIES
Townsend Acquisition
By letter dated January 30, 1998, the Denver Regional Office of the FTC notified
UTC that it was conducting a non-public investigation into UTC's
acquisition of the Townsend Plastics Division of Townsend Industries, Inc.
in September 1997, which was part of the transfer on April 14, 1998. The
purpose of the investigation was to determine whether the transaction
violated Section 7 of the Clayton Act, 15 USC Section 18, Section 5 of the
Federal Trade Commission Act, 15 USC section 45, or any other law enforced
by the FTC. UTC has been cooperating with the FTC in its investigation. UTC
has been in discussions with the staff of the FTC seeking to meet the
concerns of both UTC and the FTC. Management of the Company does not expect
the cost of compliance with the FTC requests to have a material adverse
effect upon the Company's results of operations, cash flows or financial
position. UTC is currently seeking to sell certain assets to another entity
that could compete with Townsend/Glasflex in order to increase competition
in the markets served by Townsend/Glasflex.
Litigation
The Company is engaged in litigation arising from the ordinary course of
business. Management believes the ultimate outcome of such litigation will
not have a material adverse effect upon the Company's results of
operations, cash flows or financial position.
Environmental Factors
The Company is subject to a wide range of federal, state and local laws and
regulations designed to protect the environment and worker health and
safety. The Company's management emphasizes compliance with these laws and
regulations. The Company has instituted programs to provide guidance and
training and to audit compliance with environmental laws and regulations at
Company owned or leased facilities. The Company's policy is to accrue
environmental and cleanup-related costs of a non-capital nature when it is
probable both that a liability has been incurred and that the amount can be
reasonably estimated.
The acquisition of assets of Townsend Plastics in September 1997 included
the building in which the business operates in Pleasant Hill, Iowa. The
seller retained the underlying real property, which is leased to the
Company for a term of ten years. The Company also has an option to acquire
such real property until September 30, 2007. The real property is subject
to a RCRA Facility Investigation/Corrective Measures Study with Interim
Measures ordered by the EPA pursuant to RCRA. Two former lessees of the
property are performing corrective measures on the real property to
remediate soil and ground water contamination. The Company does not
anticipate that such corrective measures will interfere with the Company's
use of the property. The Company does not anticipate any liability to the
Company in connection with such contamination or corrective measures as
long as the Company remains a lessee of the property.
Based on information available as of September 26, 1999, the Company
believes that the costs of known environmental matters either have been
adequately provided for or are unlikely to have a material adverse effect
on the Company's operations, cash flows or financial position.
Leases
The Company is a party to non-cancelable lease agreements involving
equipment. The leases extend for varying periods up to 5 years and
generally provide for the payment of taxes, insurance and maintenance by
the lessee. Generally these leases have options to purchase at varying
dates.
The Company's property held under capitalized leases, included in property,
plant and equipment (Note 4), consisted of the following (in thousands):
September
26, 1999 September
27,
1998
Machinery, equipment and office $ 282 $ 225
furnishings (168) (161)
Less accumulated amortization
$ 114 $ 64
The approximate minimum future lease obligations on long-term non-cancelable
capital lease obligations included in long-term debt (Note 9) during
subsequent fiscal years ending in September are as follows (in thousands):
Fiscal Year
2000 $ 66
2001 40
2002 4
110
Less imputed (3)
interest
Total $107
Interest is imputed using the rate that would equate the present value of the
minimum lease payments to the fair value of the leased equipment.
The Company leases equipment, vehicles and warehouse and office space under
various lease agreements, certain of which are subject to escalations based
upon increases in specified operating expenses or increases in the Consumer
Price Index (Note 13). The approximate future minimum rentals under non-
cancelable operating leases during subsequent fiscal years ending in
September are as follows (in thousands):
Fiscal Year
2000 $1,897
2001 1,463
2002 1,294
2003 1,291
2004 1,274
Subsequent years 1,037
Total $8,256
Rent expense was approximately $1,510,000, $1,043,000 and $576,000 for
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
13. RELATED PARTY TRANSACTIONS
On April 14, 1998, HPPI entered into a management agreement with UTC
whereby UTC will provide management and certain administrative support
services to HPPI. For management services, HPPI pays a monthly fee to UTC
equal to 2.0% of HPPI's monthly net sales. For administrative support
services, HPPI pays a monthly fee to UTC equal to 1.5% of HPPI's monthly
net sales. The payment for management services shall not be paid in the
Event of a Default as defined in the Credit Agreement (Note 9) with Fleet,
until such time that the default is cured. The term of the agreement is
through September 30, 2001 and shall automatically be extended on each
October 1 beginning October 1, 2001 unless terminated by either party. Fees
under this agreement approximated $4,628,000 and $2,167,000 for Fiscal
1999 and Fiscal 1998, respectively.
For the period September 29, 1997 through April 13, 1998 (prior to the
formation of HPPI), and during the fiscal years ended September 28, 1997,
UTC allocated general corporate overhead expenses, interest expense, and
certain retiree medical costs to HPPI as follows (in thousands):
For the period
September 29, Fiscal Year
1997 Ended
To April 13, Septemb
1998 er 28, 1997
General corporate $ 2,088 $
overhead 6,544
Retiree medical 1,138
expense 1,801
Interest expense 2,991
6,069
Total $ 6,217 $
14,414
Prior to April 14, 1998, UTC allocations were based upon various factors
including ratios of net sales and asset base.
On April 14, 1998, HPPI entered into two lease agreements with UTC. The
first lease agreement is for the rental of the Glasflex facility located in
Stirling, New Jersey. The lease term is through December 31, 1999 and
requires a fixed monthly rental of $4,000. In Fiscal 1999, the lease for
the Stirling facility was assigned from UTC to UnitechNJ, Inc., a wholly-
owned subsidiary of UTC, in connection with the transfer of the Stirling
real property to UnitechNJ, Inc. The second lease agreement is for office
space in South Bend, Indiana. The lease term is through September 30, 2001
with automatic one-year renewals through March 31, 2037 unless terminated
by either party. Monthly rental payments are $11,150 and will be increased
on October 1 of each year by the percentage increase of the Consumer Price
Index for all Urban Consumers published by the Bureau of Labor Statistics
of the U.S. Department of Labor (the "CPI") on September 30 of each such
year from the CPI as of September 30 of the previous year. In Fiscal 1999,
the lease for the South Bend facility was assigned from UTC to Uniroyal
Engineered Products, Inc., a wholly-owned subsidiary of UTC. Total rent
expense under the above two agreements was approximately $184,000 and
$83,000 for Fiscal 1999 and Fiscal 1998, respectively.
HPPI employees participate in health and welfare benefit plans administered
by UTC. Costs for these plans are charged to HPPI based upon various
methods including actual cost per employee, headcount allocations and
ratios of compensation expense. Expenses included in the statement of
operations during Fiscal 1999, Fiscal 1998 and Fiscal 1997 were
approximately $1,650,000, $2,156,000 and $1,648,000, respectively.
UTC administers all of the insurance programs for HPPI. Costs of these programs
are allocated to HPPI based upon various factors including historical loss
experience, percent of assets, sales and employee base. Included in the
statement of operations for Fiscal 1999, Fiscal 1998 and Fiscal 1997 were
allocations of approximately $1,001,000, $962,000 and $1,146,000,
respectively.
UTC provides two savings plans under Section 401(k) of the Internal Revenue
Code. The first savings plan covers all eligible salaried and non-union
wage employees of the Company and the second savings plan covers certain
Polycast union wage employees. The savings plans allow all eligible
employees to defer up to 15% of their income on a pre-tax basis through
contributions to the savings plans. For every dollar an employee
contributes, UTC may contribute an amount equal to 25% of each
participant's before-tax obligation up to 6% of the participant's
compensation. Such employer contribution may be made in cash or in UTC
common stock with respect to the plan for eligible salaried and non-union
wage employees and cash only with respect to the plan for certain Polycast
union wage personnel. The expenses charged to the Company by UTC pertaining
to these savings plans were approximately $157,000, $80,000 and $75,000 for
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
In addition, UTC provides retirement benefits to certain of the Royalite wage
employees through a defined contribution savings plan. The plan provides
for employee contributions and employer matching contributions to employee
savings. Employer contributions are generally at rates per hour ranging
from $0.19 to $0.50 based upon years of service. The expenses charged to
the Company by UTC pertaining to this plan amounted to approximately
$150,000, $180,000 and $163,000 for Fiscal 1999, Fiscal 1998 and Fiscal
1997, respectively.
Included in due to parent as of September 26, 1999, is approximately $1,147,000
due UTC under the tax sharing agreement (Note 10) and approximately
$3,371,000 representing the net remaining amounts due UTC for management
and administrative support services, health and welfare benefit plan
charges and insurance costs. Included in due to parent as of September 27,
1998, is approximately $1,909,000 due UTC under the tax sharing agreement
(Note 10) and approximately $699,000 representing the remaining amounts due
UTC for management and administrative support services, health and welfare
benefit plan charges and insurance costs.
On June 25, 1999, the Company entered into an operating lease agreement with UTC
whereby UTC purchased from the Company approximately $3,777,000 of new
machinery and equipment for its original cost (which approximated carrying
value on the date of the transaction) and then leased the equipment back to
the Company. The original lease term was 60 months and monthly rental
payments were $69,078. Expenses related to this lease included in the
statement of operations were approximately $207,000 for Fiscal 1999. On
September 24, 1999, the Company exercised its early purchase option under
the lease agreement and repurchased the machinery and equipment from UTC
for approximately $3,777,000. The Company then sold a majority of these
assets to a third party leasing company who in turn leased these assets to
the Company under an operating lease. No gain or loss resulted from this
sale.
On September 24, 1999, the Company entered into another operating lease
agreement with UTC whereby UTC purchased from the Company approximately
$623,000 of new machinery and equipment for its original cost (which
approximated carrying value on the date of the transaction) and then leased
the equipment back to the Company. The lease term is 60 months and the
monthly rental payment is $11,569. There is no rent expense related to this
agreement in Fiscal 1999. Future minimum lease payments are included in
Note 12.
During Fiscal 1999, Fiscal 1998 and Fiscal 1997, the Company purchased
approximately $500,000, $346,000 and $403,000, respectively, of materials
from a wholly-owned subsidiary of UTC for use in production. Purchases were
made under similar terms offered by UTC's subsidiary to its other
customers.
14. SUBSEQUENT EVENT
Pursuant to an asset purchase agreement dated December 24, 1999, HPPI sold
substantially all of its net assets to Spartech Corporation. The purchase
price was approximately $216,000,000. The transaction closed on February
28, 2000.
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
January 2, December 28,
2000 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13 $ 239
Trade accounts receivable (less estimated
reserve for doubtful accounts of $113 and 16,345 16,384
$182, respectively)
Inventories 30,169 28,804
Deferred income taxes 1,672 1,831
Prepaid expenses and other current assets 2,284 2,031
---------- -----------
Total current assets 50,483 49,289
Property, plant and equipment - net 46,715 41,350
Goodwill - net 11,033 7,514
Other assets - net 3,737 4,828
---------- ----------
TOTAL ASSETS $111,968 $ 102,981
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands)
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
January 2, December 28,
2000 1998
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $7,141 $7,651
Trade accounts payable 11,983 6,504
Accrued expenses:
Compensation and benefits 2,934 3,025
Interest 302 1,364
Taxes, other than income 579 803
State income taxes 42 226
Due to affiliates 5,756 2,705
Other 710 1,091
--------- ---------
Total current liabilities 29,447 23,369
Long-term debt, net of current portion 88,082 93,910
Deferred income taxes 6,452 6,797
Other liabilities 32 331
--------- ---------
Total liabilities 124,013 124,407
========= ==========
Stockholder's deficiency:
Preferred stock 5,381 -
Common stock - -
Additional paid-in capital (24,165) 17,525
Retained earnings 6,739 (951)
--------- ---------
(12,045) 16,574
Note and accrued interest receivable from - (38,000)
parent
Total stockholder's deficiency - net (12,045) (21,426)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S $111,968 $102,981
DEFICIENCY
========== ===========
</TABLE>
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended
January 2, December 28,
2000 1998
<S> <C> <C>
Net sales $33,743 $30,963
Costs and expenses:
Costs of goods sold 26,111 24,238
Selling and administrative 2,779 3,911
Amortization 118 79
-------- --------
Income before interest and
income tax 4,735 2,735
Interest expense - net (1,728) (1,617)
-------- --------
Income before income taxes 3,007 1,118
Income tax expense (1,216) (517)
-------- --------
Net income $1,791 $ 601
======== ========
</TABLE>
<TABLE>
<CAPTION>
UNIROYAL HPP HOLDINGS, INC. AND SUBSIDIARY
(Wholly-owned Subsidiaries of Uniroyal Technology Corporation)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
January 2, December 28,
2000 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $1,791 $ 601
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 1,476 1,407
Provision for doubtful accounts (39) 24
Deferred tax (benefit) provision 114 (154)
Amortization of debt issuance costs 138 144
Loss on assets held for sale 4 5
Interest income on note from parent
(444) (546)
Other 997 (11)
Changes in assets and liabilities:
Decrease in trade accounts 1,955 625
receivable
Increase in inventories (141) (927)
(Increase) decrease in prepaid
expenses and other assets 34 (226)
Increase (decrease) in trade (1,340) 439
accounts payable
Increase (decrease) in accrued
expenses and other liabilities (3,216) 859
--------- --------
Net cash provided by operating 1,329 2,240
activities
--------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and (4,457) (2,078)
equipment
--------- --------
Net cash used in investing (4,457) (2,078)
activities
--------- --------
FINANCING ACTIVITIES:
(Decrease) Increase in 1,866 (1,505)
revolving credit agreement
Transfers to parent - net 1,238 96
--------- --------
Net cash provided by (used) in 3,104 (1,409)
financing activities
--------- --------
Net decrease in cash and cash
equivalents (24) (1,247)
Cash and cash equivalents at 37 1,486
beginning of year
--------- --------
Cash and cash equivalents at end $ 13 $ 239
of the quarter
======== ========
</TABLE>
Item 7(b). Pro Forma Financial Information
SPARTECH CORPORATION
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On February 28, 2000, Spartech Corporation completed its acquisition of
substantially all the assets of High Performance Plastics, Inc. ("HPP"), as
reported in the Company's Form 8-K filed on March 14, 2000. The net purchase
price was approximately $216 million, including estimated costs of the
transaction, subject to adjustments provided in the Asset Purchase Agreement
dated December 24, 1999 regarding the determination of Net Working Capital and
the Final Purchase Price. The acquisition was financed through the Company's
new $250 million bank credit facility provided by a group of banks led by Bank
of America, N.A.
The accompanying unaudited pro forma combined condensed balance sheet as of
January 29, 2000 gives effect to the acquisition of HPP and the related
financing as if the transactions occurred on January 29, 2000.
The accompanying unaudited pro forma combined condensed statements of
operations present the condensed historical financial statements of the Company
and of HPP, pro forma adjustments, and the pro forma combined results under the
purchase method of accounting. The historical columns of financial information
for the Company were prepared from audited and unaudited financial statements
previously filed with the Commission.
The historical financial information for HPP included in the unaudited pro
forma combined condensed statement of operations for the year ended October 30,
1999 was derived from the audited financial statements included in this filing
and represents the twelve-month period from September 28, 1998 through September
26, 1999. The pro forma combined condensed statement of operations for the
fiscal year ended October 30, 1999 also gives effect to the acquisition of
Lustro Plastics Company on January 7, 1999, the Plastic Packaging Division of
Alltrista Corporation on May 24, 1999, and the acquisitions of Accura Molding
Company Ltd., OS Plastics, and GeoPlast Profile Extrusion in October 1999, as if
they occurred at the beginning of the period presented.
The historical financial information for HPP included in the unaudited pro
forma combined condensed financial statements for the three months ended January
29, 2000 was prepared from unaudited information from the books and records of
HPP, and represents the three-month period from September 27, 1999 through
December 31, 1999.
The pro forma financial information should be read in conjunction with the
historical financial statements of the Company included in the Annual Report on
Form 10-K for the year ended October 30, 1999 and the audited financial
statements of Uniroyal HPP Holdings, Inc. and Subsidiary included elsewhere
herein. The pro forma information is not necessarily indicative of future
earnings or earnings that would have been reported for the periods presented had
the transactions been completed at the beginning of the earliest period
presented. Further, the pro forma combined condensed statement of operations
for the three months ended January 29, 2000 should not necessarily be taken as
an indication of earnings for a full year.
<TABLE>
<CAPTION>
SPARTECH CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JANUARY 29, 2000
(Unaudited and dollars in thousands, except share amounts)
High
Spartech Performance
Corporation Plastics Pro Forma Pro Forma
(Historical)(Historical)Adjustments(a)Combined
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash $ 6,020 $ 13 $ - $ 6,033
Receivables, net 116,335 16,345 - 132,680
Inventories 82,814 30,169 (5,596) (b) 107,387
Prepayments and other 8,199 3,956 (3,849) (c) 8,306
------- -------- ------- -------
Total current assets 213,368 50,483 (9,445) 254,406
------- -------- ------- -------
Property, plant & equipment 329,082 76,110 (12,110) (a)393,082
Accumulated depreciation (81,367) (29,395) 29,395 (a) (81,367)
------- -------- ------- -------
Property, plant
& equipment, net 247,715 46,715 17,285 311,715
------- -------- ------- -------
Goodwill 167,325 11,033 122,967 (a) 301,325
Other assets 6,703 3,737 (1,609) (d) 8,831
------- -------- ------- -------
$635,111 $111,968 $129,198 $ 876,277
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities
of long-term debt $12,471 $ 7,141 $(7,141) (e)$12,471
Accounts payable 68,535 11,983 - 80,518
Accrued liabilities 35,238 10,323 2,435 (f) 47,996
------- -------- ------- -------
Total current liabilities 116,244 29,447 (4,706) 140,985
------- -------- ------- -------
Long-term debt, less current
maturities 232,857 88,082 128,343 (e) 449,282
Other liabilities 39,598 6,484 (6,484) (f) 39,598
------- -------- ------- -------
Total long-term
liabilities 272,455 94,566 121,859 488,880
------- -------- ------- -------
Company-obligated manditorily
redeemable convertible preferred
securities 50,000 - - 50,000
Shareholders' Equity
Common stock, 28,007,023
shares issued 20,994 - 20,994
Contributed capital 99,256 - - 99,256
Retained earnings 94,472 - - 94,472
Intercompany with Parent _ (12,045) 12,045 -
Treasury stock, at cost,
679,796 shares (15,268) - - (15,268)
Other equity (3,042) - - (3,042)
------- -------- ------- -------
Total shareholders'
equity 196,412 (12,045) 12,045 196,412
------- -------- ------- -------
$ 635,111$ 111,968 $ 129,198 $876,277
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma combined condensed
financial statements.
<TABLE>
<CAPTION>
SPARTECH CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 30, 1999
(Unaudited and in thousands, except per share amounts)
High
Spartech Spartech Performance
Corporation Previous Corp. Plastics Pro Forma Pro Forma
(Historical) Acquis (As Adj.) (Historical) Adj. Combined
<S> <C> <C> <C> <C> <C> <C>
Net Sales $767,873 $43,055 $810,928 $130,222 $5,885(g) $947,035
Costs and Expenses
Cost of sales 630,911 33,577 664,488 98,812 4,235 (g) 766,889
(646)(h)
Selling and
administrative 45,067 3,787 48,854 15,538 581 (g) 61,053
(3,920)(i)
Amortization
of intangibles 4,188 365 4,553 354 2,996 (j) 7,903
-------- ---- ------- ----- ----- ------
Operating earnings 87,707 5,326 93,033 15,518 2,639 111,190
Interest Expense
(Income) 14,063 2,928 16,991 6,332 8,845 (k)32,168
Distributions on Preferred
Securities 2,135 - 2,135 - - 2,135
-------- ---- ------- ----- ----- ------
Earnings before
income taxes 71,509 2,398 73,907 9,186 (6,206) 76,887
Income taxes 28,438 958 29,396 3,572 (2,387)(l)30,581
-------- ---- ------- ----- ----- ------
Net earnings $ 43,071 $1,440 $ 44,511 $ 5,614 $ (3,819)$46,306
======= ======= ======= ======== ======= ======
Earnings Per Share Calculation:
Basic earnings $ 43,071 $ 44,511 $46,307
Distributions on
Preferred Securities,
net of tax 1,280 1,280 1,280
-------- ---- ------- ----- ----- ------
Diluted earnings $ 44,351 $ 45,791 $47,587
======= ======= ======= ======== ======= ======
Weighted average shares
outstanding
Basic 27,038 27,038 27,038
-------- ---- ------- ----- ----- ------
Diluted 29,982 29,982 29,982
======= ======= ======= ======== ======= ======
Net earnings per common share:
Basic $ 1.59 $ 1.65 $ 1.71
======= ======= ======= ======== ======= ======
Diluted $ 1.48 $ 1.53 $ 1.59
======= ======= ======= ======== ======= ======
</TABLE>
The accompanying notes are an integral part of the pro forma combined condensed
financial statements.
<TABLE>
<CAPTION>
SPARTECH CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 29, 2000
(Unaudited and in thousands, except per share amounts)
High
Spartech Performance
Corporation Plastics Pro Forma Pro Forma
(Historical)(Historical)(i)Adjustments Combined
<S> <C> <C> <C> <C>
Net Sales $198,455 $ 33,743 $ - $232,198
Costs and Expenses
Cost of sales 162,335 26,111 (162) (h) 188,284
Selling and
administrative 11,991 2,672 - 14,663
Amortization
of intangibles 1,139 120 720 (j) 1,979
------- -------- ------ -----
Operating earnings 22,990 4,840 (558) 27,272
Interest Expense
(Income) 3,714 1,833 2,104 (k) 7,651
Distributions on
Preferred Securities 813 - - 813
------- -------- ------ -----
- -
Earnings before
income taxes 18,463 3,007 (2,662) 18,808
Income taxes 7,296 1,216 (1,080) (l) 7,432
------- -------- ------ -------
Net earnings $11,167 $ 1,791 $(1,582) $11,376
======= ======== ======== =======
Earnings Per Share Calculation:
Basic earnings $ 11,167 $ 11,376
Distributions on Preferred
Securities, net of tax 488 488
------- -------- ------ ---------
Diluted earnings $11,655 $11,864
======= ======== ======== =======
Weighted average shares
outstanding:
Basic 27,299 27,299
======= ======== ======== =======
Diluted 30,034 30,034
======= ======== ======== =======
Net earnings per common share:
Basic $ .41 $ .42
======= ======== ======== =======
Diluted $ .39 $ .40
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the pro forma combined condensed
financial statements.
SPARTECH CORPORATION
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands)
(a) Represents adjustments to record the acquired assets of HPP at their
preliminary assigned values reflecting their estimated fair market values
or net realizable values and the allocation of the excess purchase price
over the fair market values as goodwill in accordance with the purchase
method of accounting. The estimated values and allocations are subject to
revision upon determination of the final purchase price adjustments with
Uniroyal. The purchase price for the net assets acquired from HPP was
approxi-mately $216,425 in cash, including costs of the transaction. The
fair value of assets acquired (including $134,000 of goodwill) and
liabilities assumed (including accounts payable and accrued liabilities)
was $241,166 and $24,741, respectively.
(b) To reflect the inventory acquired at its net realizable value for its
intended use by Spartech and to record consistent with Spartech's valuation
methodology for similar types of inventory.
(c) To eliminate deferred income tax assets and prepaid assets not acquired.
(d) To eliminate HPP's loan issuance costs net of recording $1,000 in debt
issuance costs related to the new bank credit facility to be amortized over
five years.
(e) Represents the elimination of HPP's outstanding debt and recording of the
borrowing of $216,425 to finance the purchase price and related costs of
the acquisition under a new $250,000 bank credit facility.
(f) Represents the elimination of deferred income tax liabilities or other
liabilities not assumed by Spartech and liabilities recorded for costs to
exit certain activities acquired and terminate individuals of the acquired
company.
(g) Represents the results for Happel Marine, Inc. prior to its acquisition by
HPP on June 14, 1999, to reflect Happel in HPP's Statement of Operations as
of the beginning of the period presented.
(h) Represents the reduction of rental expense net of annual depreciation for a
manufacturing line previously under an operating lease that was paid off by
Uniroyal and acquired in this purchase transaction.
(i) Represents the elimination of the corporate service charge allocation
($4,628) based on 3.5% of net sales and reflects the charge to replace
these services under an Information Technology and Services Agreement
entered into on February 28, 2000 between Uniroyal and Spartech at $59
per month ($708 on an annual basis).
(j) Reflects the additional amortization expense resulting from the goodwill
associated with the HPP acquisition amortized over a 40 year period.
(k) Represents the interest expense related to the financing of the acquisition
under our bank credit facility with an incremental borrowing rate on the
acquisition date of 6.92% plus debt issuance cost amortized over a five
year period.
(l) Adjusts the tax rate for HPP to the combined rate of 39.8% for fiscal year
1999 and 39.5% for the three months ended January 29, 2000.
Note: The above adjustments do not include the effects of removing the costs of
20 managers that were not acquired from Uniroyal and other synergies that
are anticipated when HPP's nine operating facilities are fully integrated
with Spartech, including the production efficiencies of the soon to be
completed modernization program at Polycast's Stamford, Connecticut
facility that is not reflected in the pro formas.
Uniroyal HPP Holdings, Inc. and Subsidiary
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 33-20437, 33-
61322, 333-60381 and 333-30878) and Form S-3 (Nos. 333-24527
and 333-90745) of Spartech Corporation of our report dated
December 20, 1999 (February 28, 2000 as to Note 14) relating
to the consolidated financial statements of Uniroyal HPP
Holdings, Inc. and subsidiary included in this Current
Report on Form 8-K/A of Spartech Corporation dated May 15,
2000.
Deloitte & Touche LLP
Tampa, Florida
May 15, 2000
