-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KXm5r8twHQdtY1fzs8zyCN3qcW/q72uRnSsprjQrazg2enakc5PrN1/l3KFBw3RE 9lJa5pDxabUNIx7NXRBXkg== 0000950123-98-009834.txt : 19981116 0000950123-98-009834.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950123-98-009834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARLYLE INDUSTRIES INC CENTRAL INDEX KEY: 0000011027 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 131574754 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03462 FILM NUMBER: 98745813 BUSINESS ADDRESS: STREET 1: 1 PALMER TERRACE CITY: CARLSTADT STATE: NJ ZIP: 07072 BUSINESS PHONE: 201-935-6220 MAIL ADDRESS: STREET 1: ONE PALMER TERRACE CITY: CARLSTADT STATE: NJ ZIP: 07072 FORMER COMPANY: FORMER CONFORMED NAME: BELDING HEMINWAY CO INC /DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 CARLYLE INDUSTRIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 1-3462 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO CARLYLE INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-1574754 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE PALMER TERRACE CARLSTADT, NJ 07072 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (201) 935-6220 FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT: N/A INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. AS OF OCTOBER 30, 1998, 7,382,782 SHARES OF COMMON STOCK WERE OUTSTANDING. PAGE 1 OF 16 2 CARLYLE INDUSTRIES, INC. ONE PALMER TERRACE CARLSTADT, NJ 07072 TABLE OF CONTENTS
PAGE NO. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 ...........................3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 ..........4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 ....................5 Notes to Unaudited Consolidated Financial Statements - September 30, 1998 .......................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................9 Part II -- Other Information - ---------------------------- Item 1. Legal Proceedings ...........................................Not Applicable Item 2. Changes in Securities .......................................Not Applicable Item 3. Defaults upon Senior Securities .........................................15 Item 4. Submission of Matters to a Vote of Security Holders .........Not Applicable Item 5. Other Information ...........................................Not Applicable Item 6. Exhibits and Reports on Form 8-K ........................................15 Signatures...............................................................16
PAGE 2 OF 16 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
ASSETS SEPTEMBER 30, 1998 DECEMBER 31, 1997 Current Assets: (UNAUDITED) (NOTE) -------- -------- Cash and cash equivalents $ 381 $ 12,475 Accounts receivable trade, net 5,608 3,040 Inventories 4,370 2,541 Current deferred tax asset 2,268 2,740 Other current assets 147 118 -------- -------- Total current assets 12,774 20,914 -------- -------- Property, plant and equipment, at cost 2,673 2,509 Less: Accumulated depreciation and amortization (868) (739) -------- -------- Net property, plant and equipment 1,805 1,770 -------- -------- Goodwill, net 2,366 2,152 Other assets 908 226 -------- -------- Total Assets $ 17,853 $ 25,062 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,249 $ 731 Current maturities of long-term debt 67 51 Federal and state income taxes payable 290 6,514 Other current liabilities 1,567 2,972 -------- -------- 3,173 10,268 -------- -------- Long-Term debt 10,675 78 Other Liabilities 8,385 9,033 -------- -------- Total Liabilities 22,233 19,379 -------- -------- Redeemable Preferred Stock, par value $0.01 per share Shares authorized: 21,305,055 at December 31, 1997 11,187,451 at September 30, 1998 Shares issued and outstanding: 10,687 20,805 Series A - None Series B - 20,805,060 at December 31, 1997 10,687,456 at September 30, 1998 Accumulated dividends on preferred stock 2,735 4,184 -------- -------- 13,422 24,989 -------- -------- Common Stock, par value $0.01 per share 20,000,000 shares authorized; Shares issued and outstanding: 74 74 7,382,782 at December 31, 1997 7,382,782 at September 30, 1998 Paid in Capital 19,858 19,858 Retained Earnings (37,734) (39,238) -------- -------- Total Common Stockholders' Equity (17,802) (19,306) -------- -------- $ 17,853 $ 25,062 ======== ========
See Notes to Unaudited Consolidated Financial Statements. PAGE 3 OF 16 4 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net Sales $ 8,111 $ 5,050 $ 17,003 $ 14,525 Cost of Sales 4,890 2,568 9,272 6,859 -------- -------- -------- -------- 3,221 2,482 7,731 7,666 Selling, general & administrative expenses 1,651 1,070 3,792 3,519 Other income -- net (3) (3) (3) (9) -------- -------- -------- -------- Income from continuing operations before interest and income taxes 1,573 1,415 3,942 4,156 Interest income (expense) (231) 91 (93) 164 -------- -------- -------- -------- Income from continuing operations before provision for income taxes 1,342 1,506 3,849 4,320 Provision for income taxes 492 550 1,412 1,582 -------- -------- -------- -------- Income from continuing operations 850 956 2,437 2,738 Less dividends on preferred stock 201 367 933 1,071 -------- -------- -------- -------- Income from continuing operations applicable to common stock 649 589 1,504 1,667 Loss from discontinued operations net of income tax provision -- -- -- (316) Loss on disposal of discontinued operations, net of income tax provision -- -- -- (9,801) -------- -------- -------- -------- -- -- -- (10,117) -------- -------- -------- -------- Net income (loss) applicable to common stock $ 649 $ 589 $ 1,504 $ (8,450) ======== ======== ======== ======== Basic earnings (loss) per common share: Continuing operations $ .09 $ .08 $ .20 $ .23 Discontinued operations -- -- -- (1.37) -------- -------- -------- -------- Total $ .09 $ .08 $ .20 $ (1.14) ======== ======== ======== ======== Diluted earnings (loss) per common share: Continuing operations $ .09 $ .08 $ .20 $ .23 Discontinued operations -- -- -- (1.37) -------- -------- -------- -------- Total $ .09 $ .08 $ .20 $ (1.14) ======== ======== ======== ======== Weighted average common shares outstanding (in thousands) $ 7,383 7,384 7,383 7,387 ======== ======== ======== ========
See Notes to Unaudited Consolidated Financial Statements. PAGE 4 OF 16 5 CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $ 2,437 $ 2,738 Reconciliation of net income from continuing operations to net cash provided (used) by operations: Depreciation and amortization 444 258 Deferred tax provision 472 1,065 Changes in operating assets and liabilities: Accounts receivable, trade (1,045) 1,154 Merchandise inventories 837 (377) Other assets (859) -- Income taxes payable (6,224) -- Other current assets -- 219 Accounts payable (287) (938) Other current liabilities (1,705) (452) Other liabilities (648) (620) Cash flow from discontinued operations -- (6,403) -------- -------- (6,578) (3,356) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of discontinued operation -- 51,924 Investment in net assets of acquired business (3,593) -- Capital expenditures (36) (130) -------- -------- (3,629) 51,794 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility and capitalized lease obligations 17,519 20,279 Repayment of revolving credit facility and capital lease obligations (6,906) (57,262) Preferred stock payment (12,500) -- -------- -------- (1,887) (36,983) -------- -------- Increase (decrease) in cash and cash equivalents (12,094) 11,455 Cash and cash equivalents beginning of period 12,475 131 -------- -------- Cash and cash equivalents end of period $ 381 $ 11,586 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 100 $ 824 ======== ======== Income taxes $ 7,910 $ 143 ======== ========
See Notes to Unaudited Consolidated Financial Statements PAGE 5 OF 16 6 CARLYLE INDUSTRIES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Certain reclassifications have been made to prior year amounts in order to present them on a basis consistent with the current year. Operating results for the three-month and nine-month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1997. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operation: The Company and its subsidiaries distribute a line of home sewing and craft products. Consolidation: The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries after elimination of intercompany items and transactions. Depreciation and Amortization: Depreciation and amortization are computed principally by the straight-line method for each class of depreciable and amortizable assets based on their estimated useful lives. Buildings and improvements, machinery and equipment, and furniture, fixtures and leasehold improvements are generally depreciated over periods of 20-35, 5-25 and 5-10 years, respectively. Revenue Recognition: Revenue is recognized upon shipment of merchandise. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PAGE 6 OF 16 7 NOTE 3: ACQUISITION On June 30, 1998, the assets and business of Westwater Enterprises LP were acquired by Westwater Industries, Inc. ("Westwater"), a newly formed wholly-owned subsidiary of the Company. Westwater is an importer and distributor of craft and gift products for sale to retail and specialty chain stores. The Company paid approximately $3.1 million in cash, assumed $.5 million in bank debt, and committed to payments totaling up to $2.0 million over three years contingent upon achievement of specified earnings levels. The acquisition has been recorded using the purchase method of accounting. Since June 30, 1998 the accounts of Westwater have been consolidated with the accounts of the Company based on a preliminary allocation of the purchase price. The allocation is expected to be finalized after various studies and other work have been completed. The Company's historical results of operations for the three and nine-month periods include Westwater results for the period July 1, 1998 to September 30, 1998. NOTE 4: PRO FORMA INFORMATION The following pro forma condensed consolidated financial information was prepared assuming Westwater was acquired on January 1, 1998 and 1997 respectively, (see Note 3) and that these transactions were accounted for as purchases. These pro forma results may change as the purchase price allocations change. Pro forma information is presented for comparative purposes only and does not purport to be indicative of the results which would have been achieved had these acquisitions occurred as of January 1, 1998 and 1997 respectively, nor does it purport to be indicative of results that may be achieved in the future.
Unaudited (Dollars in thousands except per share data) Nine Months Ended September 30 1998 1997 ---- ---- Net Sales $21,126 $21,665 ======= ======= Income before taxes $ 3,790 $ 5,333 ======= ======= Net income before preferred dividends $ 2,338 $ 3,301 ======= ======= Preferred stock dividends $ 933 $ 1,071 ======= ======= Net income (loss) attributable to common stock $ 1,405 $ 2,230 ======= ======= Earnings (loss) per share $ .19 $ .30 ======= =======
NOTE 5: EARNINGS PER SHARE Earnings per common share for the Company have been computed on the basis of weighted average common shares outstanding after providing for quarterly preferred dividend requirements. NOTE 6: INVENTORIES: PAGE 7 OF 16 8 The components of inventories, net of reserves, are as follows (dollars in thousands):
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- Raw materials $1,655 $1,976 Work in Progress 10 10 Finished goods 2,705 555 ----- ----- $4,370 $2,541 ====== ======
NOTE 7: CREDIT FACILITY On June 23, 1998, the Company entered into a new $14 million revolving credit agreement (the "Credit Agreement") with Fleet Bank, N.A. ("Fleet"). The Credit Agreement has a term of five years and amounts available under the agreement are reduced in $1 million increments at the end of each six month period, with the first such reduction occurring December 31, 1998. Advances bear interest equal to, at the Company's option, (1) the rate at which deposits in U.S. dollars are offered by the principal office of Fleet in London, England to prime banks in the London interbank market plus 1.5% or (2) Fleet's prime rate. A performance price grid provides that interest rates will step down upon the Company's achievement of specified ratios of funded debt to earnings before interest, income taxes, depreciation and amortization. The Credit Agreement is guaranteed by all direct and indirect subsidiaries of the Company and is secured by a first priority lien or security interest in substantially all of the assets of the Company. The Credit Agreement contains representations and warranties, covenants and events of default customary for credit agreements of this nature. Such customary covenants include restrictions on the ability to incur more debt, acquire other companies, make preferred stock payments and use of proceeds from the sale of assets. In addition to the semi-annual reduction in availability, additional payments may be required based on the Company's proceeds from asset sales and "excess cash flow" as defined in the Credit Agreement. NOTE 8: PREFERRED STOCK Under the terms of the Company's charter, dividends are payable upon the Preferred Stock when, as and if declared by the Board of Directors out of legally available funds. In addition, the Preferred Stock is required to be redeemed by the Company in annual installments of $4.2 million beginning March 15, 1995 through March 15, 1999, subject among other things to the approval of the Company's senior lenders, if any and the extent of legally available funds as determined by the Board of Directors. Prior to March 27, 1997, the Company did not make any payments on account of the Preferred Stock (either dividend or redemption) as the Company's lenders declined to approve such payments. However, as of that date, the Company discharged its credit facility. Consequently, the Company was in default of its obligations to redeem the Preferred Stock to the extent of its legally available funds. On June 23, 1998 the Company paid $12.5 million to holders of its Series B Preferred stock of record as of June 22, 1998. $10.1 million of this amount represented the original redemption amount and $2.4 million represented the increase in the required redemption payment resulting from accumulated and unpaid PAGE 8 OF 16 9 dividends. The payment was previously authorized by the Company's Board of Directors at its annual meeting on May 14, 1998, which authorization was contingent upon obtaining the necessary bank financing and receipt of an opinion by its investment banker that the payment could be made from legally available funds. On June 23, 1998 both such conditions were met and the payment was made. As of September 30, 1998, the Preferred Stock payment arrearages aggregated $6.9 million including accrued but unpaid preferred dividends of $2.7 million. Accrued but unpaid dividends are added to the redemption value of the Preferred Stock and they continue to accrue at a compound rate of 6% per annum. The Company is engaged in discussions with Noel Group, Inc. ("Noel"), with a view to satisfying the balance of its obligations to the holders of the Preferred Stock in accordance with the terms of its charter and to the extent consistent with the Company's resources. Discussions have dealt with the amount and timing of payments and possible modifications of the Preferred Stock terms and conditions. Any such modifications would require the agreement of the Company and the holders of the Preferred Stock. The Company intends to fulfill its obligation to the holders of the Preferred Stock as required by the Company's charter to the extent the Company has cash resources in excess of those required to operate its business. As the Company believes that it does not currently have such excess resources, its ability to make payments on account of the Preferred Stock in the future will depend on the Company's future cash flow, the timing of the settlement of the liabilities recorded in the consolidated financial statements of the Company, the outcome of the negotiations with Noel described above, the ability of the Company to obtain additional financing and compliance with the Company's new Credit Facility which presently permits only specified payment amounts including 25% of "excess cash flow", as defined in the agreement. In addition, as the Company has agreed to notify the Pension Benefit Guaranty Corporation ("PBGC") prior to making any redemption payment, the Company's decision to make any such payments will depend on the successful resolution of any issues which may arise with the PBGC relating to the Company's unfunded liability, if any, to its defined benefit plan. The Company is also exploring strategic alternatives to redemption of the Preferred Stock. PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THIRD QUARTER Sales during the third quarter of 1998 totaled $8.1 million as compared to $5.1 million in the third quarter of 1997 for an increase of $3.0 million. Sales contributed by Westwater totaled $3.1 million during the quarter, accounting for all of the increase over 1997. Gross margin during the third quarter of 1998 totaled $3.2 million as compared with $2.5 million in the third quarter of 1997. The increase in gross margin dollars in 1998 as compared to 1997 was primarily the result of Westwater, which contributed $1.1 million of gross profit during the quarter. During the quarter, PAGE 9 OF 16 10 the Company incurred approximately $218M of incremental cost of goods sold in connection with merchandise distributions related to new store openings by customers. The gross margin percent during the third quarter of 1998 was 39.7% as compared to 49.1% during the third quarter of 1997. The decrease in gross margin percent during the quarter was a result of the Westwater business which generally operates at a lower gross profit percent and incremental costs associated with merchandise distributions related to new store openings by customers. Selling, general and administrative expenses totaled $1.6 million as compared to $1.1 million in the third quarter of 1997. The increase in selling, general and administrative expense in 1998 as compared to 1997 was primarily the result of the Westwater acquisition which added $658M of incremental selling, general and administrative expense. Interest expense during the third quarter of 1998 totaled $231 thousand as compared to interest income of $91 thousand during the third quarter of 1997. The increase in interest expense was the result of new bank debt outstanding since June 1998 which was borrowed in connection with the Preferred stock payment and the Westwater acquisition. The provision for income taxes totaled $.5 million as compared to $.6 million during the same period last year. The combined effective income tax rate totaled 36.5% in both 1998 and 1997. The combined effective income tax rates are higher than combined statutory rates because of nondeductible goodwill. Preferred dividends accrued totaled $200 thousand as compared to $367 thousand during the same period in 1997. Preferred dividends are accrued and compound at a rate of 6% per annum. The reduction in preferred dividends accrued as compared to 1997 was due to the partial redemption of Preferred Stock on June 23, 1998. A portion of the dividend arrearage was also satisfied in connection with the partial redemption. See Note 8 to the unaudited consolidated financial statements. Third quarter results may not be indicative of future quarterly results due to seasonality of the craft business and because of future programs with major customers which may vary as to timing and amount from quarter to quarter. In addition, consolidation within the Company's customer base may continue to put further pressure on the Company's revenue and operating results in subsequent quarters. The Company is currently pursuing a number of strategies to improve its revenue base. YEAR TO DATE Sales during the nine months ended September 30, 1998 totaled $17.0 million as compared to $14.5 million during the year to date period in 1997 for an increase of $2.5 million. Westwater provided $3.1 million of incremental sales. Somewhat offsetting the favorable incremental Westwater sales were the effects on sales from customer consolidation and related store closings. Gross margin during the nine months ended September 30, 1998 totaled $7.7 million or 45.5% as compared to $7.7 million or 52.7% during the comparable period in 1997. Westwater contributed $1.1 million of gross profit during the year to date period in 1998. Offsetting the incremental Westwater margin dollars was the effect on gross margin of lower sales volume in the core business, caused by customer consolidation occurring primarily during the second half of 1997. Also, higher incremental variable cost of good sold were incurred during the year to date period in 1998 associated with merchandise distributions related to new store openings by customers. PAGE 10 OF 16 11 Selling, general and administrative expense during the nine months ended September 30, 1998 totaled $3.8 million as compared to $3.5 million during the first nine months of 1997. Incremental Westwater selling, general and administrative expense totaled $658 thousand. Offsetting this increase was a reduction in selling, general and administrative expense in 1998 as compared to 1997 due to lower corporate administrative headcount and expense. Net interest expense during the first nine months of 1998 totaled $93 thousand as compared to net interest income of $164 thousand during the year to date period in 1997. The increase in interest expense during 1998 as compared to 1997 was the result of bank debt outstanding beginning June 23, 1998 in connection with the Preferred stock payment and the Westwater acquisition. Interest expense incurred prior to March 27, 1997 related to outstanding debt under former credit facilities has been classified as discontinued operations in 1997. The provision for income taxes during the first nine months of 1998 totaled $1.4 million compared to $1.6 million during the comparable period in 1997. The effective income tax rate was 36.7% during each of the first nine month periods of 1998 and 1997. Preferred dividends accrued during the first nine months of 1998 totaled $933 thousand as compared to $1.071 million during the first nine months of 1997. The reduction in accrued preferred dividends in the year to date period 1998 as compared to 1997 was the result of the $12.5 million Preferred stock payment in June 1998. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company's principal sources of liquidity included cash and cash equivalents of $.4 million and trade accounts receivable of $5.6 million. In addition, the Company had $3.4 million available under its revolving credit facility as of September 30, 1998. Cash used by operations during the nine months ended September 30, 1998 totaled $6.6 million which included income tax payments totaling $7.2 million made during the first quarter of 1998 attributable to the tax gain from the sale of the Thread division in 1997. On June 23, 1998, the Company entered into a new $14 million revolving credit agreement (the "Credit Agreement") with Fleet Bank, N.A. ("Fleet"). The Credit Agreement has a term of five years and amounts available under the agreement are reduced in $1 million increments at the end of each six month period, with the first such reduction occurring December 31, 1998. Advances bear interest equal to, at the Company's option, (1) the rate at which deposits in U.S. dollars are offered by the principal office of Fleet in London, England to prime banks in the London interbank market plus 1.5% or (2) Fleet's prime rate. A performance price grid provides that interest rates will step down upon the Company's achievement of specified ratios of funded debt to earnings before interest, income taxes, depreciation and amortization. The Credit Agreement is guaranteed by all direct and indirect subsidiaries of the Company and is secured by a first priority lien or security interest in substantially of the assets of the Company. The Credit Agreement contains representations and warranties, covenants and events of default customary for credit agreements of this nature. Such customary covenants include restrictions on the ability to incur more PAGE 11 OF 16 12 debt, acquire other companies, make preferred stock payments and use of proceeds from the sale of assets. In addition to the semi-annual reduction in availability, additional payments may be required based on the Company's proceeds from asset sales and "excess cash flow" as defined in the Credit Agreement. Under the terms of the Company's charter, dividends are payable upon the Preferred Stock when, as and if declared by the Board of Directors out of legally available funds. In addition, the Preferred Stock is required to be redeemed by the Company in annual installments of $4.2 million beginning March 15, 1995 through March 15, 1999, subject among other things to the approval of the Company's senior lenders, if any and the extent of legally available funds as determined by the Board of Directors. Prior to March 27, 1997, the Company did not make any payments on account of the Preferred Stock (either dividend or redemption) as the Company's lenders declined to approve such payments. However, as of that date, the Company discharged its credit facility. Consequently, the Company was in default of its obligations to redeem the Preferred Stock to the extent of its legally available funds. On June 23, 1998 the Company paid $12.5 million to holders of its Series B Preferred stock of record as of June 22, 1998. $10.1 million of this amount represented the original redemption amount and $2.4 million represented accumulated and unpaid dividends. The payment was previously authorized by the Company's board of directors at its annual meeting on May 14, 1998, which authorization was contingent upon obtaining the necessary bank financing and receipt of an opinion by its investment banker that the payment could be made from legally available funds. On June 23, 1998 both such conditions were met and the payment was made. As of September 30, 1998, the Preferred Stock payment arrearages aggregated $6.9 million including accrued but unpaid preferred dividends of $2.7 million. Accrued but unpaid dividends are added to the redemption value of the Preferred Stock and the total continues to accrue interest at a compound rate of 6% per annum. The Company is engaged in discussions with Noel Group, Inc. ("Noel"), with a view to satisfying the balance of its obligations to the holders of the Preferred Stock in accordance with the terms of its charter and to the extent consistent with the Company's resources. Discussions have dealt with the amount and timing of payments and possible modifications of the Preferred Stock terms and conditions. Any such modifications would require the agreement of the Company and the holders of the Preferred Stock. The Company intends to fulfill its obligation to the holders of the Preferred Stock as required by the Company's charter to the extent the Company has cash resources in excess of those required to operate its business. As the Company believes that it does not currently have such excess resources, its ability to make payments on account of the Preferred Stock in the future will depend on the Company's future cash flow, the timing of the settlement of the liabilities recorded in the financial statements of the Company, the outcome of the negotiations with Noel described above, the ability of the Company to obtain additional financing and compliance with the Company's new Credit Facility which presently permits only specified payment amounts including 25% of "excess cash flow", as defined in the agreement. In addition, as the Company has agreed to notify the Pension Benefit Guaranty Corporation ("PBGC") prior to making any redemption payment, the Company's decision to make any such payments will depend on the successful resolution of any issues which may arise with the PBGC relating to the Company's unfunded liability, if any, to its defined benefit plan. The Company is also exploring strategic alternatives to redemption of the preferred stock. PAGE 12 OF 16 13 On June 30, 1998 the Company acquired the business and net assets of Westwater Enterprises, LP for $3.1 million in cash plus the assumption of $.5 million of bank debt. In connection with this transaction, additional payments of up to $2.0 million may become payable contingent upon the attainment of specified earnings levels over the next three years. YEAR 2000 ISSUES The Company has implemented a plan to address year 2000 issues. The Company's plan includes the identification and testing of its information technology components and imbedded technology. In connection with this plan a detailed list of hardware, software and other micro-processing technology has been compiled. The Company's plan includes an evaluation of each identified item as compliant or not compliant and the testing of each component. Certain noncompliant systems have been upgraded or replaced and others are scheduled to be replaced. In addition, the Company's plan includes confirmation with its significant customers and suppliers regarding their state of readiness with respect to year 2000 issues. The Company's primary risks related to year 2000 issues are associated with the failure of its management information systems, which include billing, production scheduling, raw material ordering and financial reporting. In addition, the Company may be at risk if any of its significant customers or vendors experience failures related to year 2000 issues. Based on information currently available, management does not anticipate that the Company will incur significant operating expenses or be required to invest heavily in computer system improvements to be year 2000 compliant, however, the Company is still analyzing its systems and requirements. To the extent the Company's systems are not fully year 2000 compliant, there can be no assurance that potential systems interruptions or the cost necessary to update software would not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. The Company does not currently have complete information concerning the year 2000 compliance status of its major customers and vendors. In the event that any of the Company's significant customers or vendors do not successfully and timely achieve year 2000 compliance, the Company's business or operations could be adversely affected. STOCK EXCHANGE LISTING As of December 31, 1997 and June 30, 1998, the Company failed to meet certain of the New York Stock Exchange (the "Exchange") continued listing requirements. On September 2, 1998 the New York Stock Exchange notified the Company that it would be delisted for failing to meet listing criteria related to aggregate market value, net income and net tangible assets. On September 4, 1998 the Company commenced trading on the over-the-counter bulletin board market under the symbol CRLH. This Quarterly Report on Form 10-Q (the "Quarterly Report") contains statements which constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as PAGE 13 OF 16 14 amended (the "Exchange Act"). Those statements appear in a number of places in this Quarterly Report and include statements regarding the intent, belief or current expectations of the Company, its Directors or its Officers with respect to, among other things: (i) the Company's financing plans; (ii) trends affecting the Company's financial condition or results of operations; (iii) the Company's growth strategy and operating strategy; (iv) customer concentration and the increasing consolidation of the Company's customer base (v) the declaration and payment of dividends; (vi) impact of year 2000 issues. Shareholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. IMPACT OF INFLATION The Company's results are affected by the impact of inflation on operating costs. Historically, the Company has used selling price adjustments, cost containment programs and improved operating efficiencies to offset the otherwise negative impact of inflation on its operations. PAGE 14 OF 16 15 PART II - OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES a) None b) REDEEMABLE SERIES B PREFERRED STOCK Dividends totaling $1,316,018 in 1995, $1,361,230 in 1996 $1,440,957 in 1997 and $935,720 in 1998 were scheduled to be paid. No such payments were made until June 23, 1998 at which time a payment of $2,383,396 was made by redemption of 10.1 million shares of Preferred Stock. The balance of unpaid dividends continue to accrue at a compounded rate of 6% per annum. Additionally, the Company has not given effect to certain previously scheduled redemption payments. See Note 8 to the unaudited consolidated financial statements for a detailed discussion of the Preferred Stock. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS None (b) REPORTS ON FORM 8-K. On July 15, 1998, the Company filed a Current Report on Form 8-K to reflect the acquisition of Westwater Enterprises, LLP. On September 11, 1998, the Company filed a Current Report on Form 8-KA to reflect the pro forma financial information related to the Westwater acquisition. PAGE 15 OF 16 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARLYLE INDUSTRIES, INC. (Registrant) /S/ Robert A. Levinson - ------------------------------------------------------------------- Robert A. Levinson, Chairman, President and Chief Executive Officer /S/ Edward F. Cooke - ---------------------------------------------------------------------- Edward F. Cooke, Vice President, Secretary and Chief Financial Officer Date: November 13, 1998 PAGE 16 OF 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 SEP-30-1998 381 0 5,608 0 4,370 12,774 2,673 868 17,853 3,173 0 0 13,422 (17,802) 0 17,853 17,003 17,003 9,272 9,272 3,944 0 93 3,851 (1,412) 2,439 0 0 0 1,507 0.20 0.20
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