UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 1-7418
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ESSEX GROUP, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN 35-1313928
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 WALL STREET, FORT WAYNE, INDIANA 46802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (219) 461-4000
None
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(Former name, former address and former fiscal year, if
changed since last report)
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:
Number of Shares Outstanding
Common Stock As of March 31, 1994
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$.01 Par Value 100
ESSEX GROUP, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 1994
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . . . . 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1994 1993
In Thousands of Dollars, Except Per Share Data (Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 6,734 $ 10,346
Accounts receivable (net of allowance of
$2,937 and $2,811 . . . . . . . . . . . . . . . . . . 133,658 116,733
Inventories . . . . . . . . . . . . . . . . . . . . . 152,291 139,357
Other current assets . . . . . . . . . . . . . . . . . 8,940 9,738
-------- --------
Total current assets . . . . . . . . . . . . . 301,623 276,174
Property, plant and equipment, (net of accumulated
depreciation of $36,803 and $30,373) . . . . . . . . 274,129 273,084
Excess of cost over net assets acquired (net of
accumulated amortization of $6,097 and $5,081) . . . 136,148 137,164
Other intangible assets and deferred costs (net of
accumulated amortization of $3,715 and $2,986) . . . 13,691 13,921
Other assets . . . . . . . . . . . . . . . . . . . . . 2,079 6,654
-------- --------
$727,670 $706,997
======== ========
See Notes to Consolidated Financial Statements
3
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31,
1994 1993
In Thousands of Dollars, Except Per Share Data (Unaudited)
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 43,838 $ 45,535
Accrued liabilities . . . . . . . . . . . . . . . . . 48,917 42,863
Deferred income taxes . . . . . . . . . . . . . . . . 14,476 14,277
Due to Holdings . . . . . . . . . . . . . . . . . . . 24,586 18,363
-------- --------
Total current liabilities . . . . . . . . . . . 131,817 121,038
Long-term debt . . . . . . . . . . . . . . . . . . . . 202,300 200,000
Deferred income taxes . . . . . . . . . . . . . . . . 76,869 77,794
Other long-term liabilities . . . . . . . . . . . . . 5,169 4,433
Stockholder's equity:
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding; plus
additional paid in capital . . . . . . . . . . . . . 302,784 302,784
Retained earnings . . . . . . . . . . . . . . . . . . 8,731 948
-------- --------
Total stockholder's equity . . . . . . . . . . 311,515 303,732
-------- --------
$727,670 $706,997
======== ========
See Notes to Consolidated Financial Statements
4
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period
Ended March 31,
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In Thousands of Dollars 1994 1993
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REVENUES:
Net sales . . . . . . . . . . . . . . . . $231,832 $204,309
Interest income . . . . . . . . . . . . 36 35
Other income . . . . . . . . . . . . . . 129 483
-------- --------
231,997 204,827
-------- --------
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . 191,648 174,766
Selling and administrative . . . . . . . 20,231 19,700
Interest expense . . . . . . . . . . . . 6,000 6,990
Other expense . . . . . . . . . . . . . . 335 135
-------- --------
218,214 201,591
-------- --------
Income before income taxes . . . . . . . . 13,783 3,236
Provision for income taxes . . . . . . . . 6,000 1,700
-------- --------
Net income . . . . . . . . . . . . . . . . $ 7,783 $ 1,536
======== ========
See Notes to Consolidated Financial Statements
5
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Period
Ended March 31,
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In Thousands of Dollars 1994 1993
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OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . $7,783 $1,536
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 7,589 7,982
Non cash interest expense . . . . . . . . . . . . . 668 2,308
Non cash pension expense . . . . . . . . . . . . . 632 682
Provision for losses on accounts receivable . . . . 224 222
Provision for deferred income taxes . . . . . . . . (808) (1,992)
Loss on disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . 212 34
Changes in assets and liabilities:
Increase in accounts receivable . . . . . . . . . (15,616) (4,494)
Increase in inventories . . . . . . . . . . . . . (11,100) (14,088)
Increase in accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . 3,868 9,077
Net decrease in other assets and liabilities . . . 1,295 2,598
Increase in due to Holdings . . . . . . . . . . . 6,223 7,930
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . 970 11,795
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (6,223) (5,022)
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 104 16
Investment in subsidiary and other . . . . . . . . . (367) -
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (6,486) (5,006)
-------- --------
See Notes to Consolidated Financial Statements
6
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Three Month Period
Ended March 31,
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In Thousands of Dollars 1994 1993
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FINANCING ACTIVITIES
Net increase in revolving loan . . . . . . . . . . . 2,300 2,000
Net payments of other long-term debt . . . . . . . . (396) (9,500)
Repurchase of 12 3/8% senior subordinated
debentures . . . . . . . . . . . . . . . . . . . . - (95)
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NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES . . . . . . . . . . . . . . . . . . . . 1,904 (7,595)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . (3,612) (806)
Cash and cash equivalents at beginning of period . . 10,346 9,033
-------- --------
Cash and cash equivalents at end of period . . . . . $6,734 $8,227
======== ========
See Notes to Consolidated Financial Statements
7
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In Thousands of Dollars
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NOTE 1 BASIS OF PRESENTATION
The unaudited interim consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, which are,
in the opinion of the management of Essex Group, Inc. (the "Company"),
necessary to present fairly the consolidated financial position of the
Company as of March 31, 1994, and the consolidated results of operations
and cash flows of the Company for the three month periods ended March 31,
1994 and 1993, respectively. Results of operations for the periods
presented are not necessarily indicative of the results for the full
fiscal year. These financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 1993.
NOTE 2 INVENTORIES
The components of inventories are as follows:
March 31, December 31,
1994 1993
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Finished goods . . . . . . . . . . . . . $110,784 $97,332
Raw materials and work in process . . . . 36,092 27,927
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146,876 125,259
LIFO reserve . . . . . . . . . . . . . . 5,415 14,098
-------- --------
$152,291 $139,357
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The Company values a major portion of its inventories at the lower of
cost or market based on a last-in, first-out ("LIFO") method. Principal
elements of cost included in the Company's inventories are copper,
purchased materials, direct labor and manufacturing overhead. Inventories
valued using the LIFO method amounted to $147,723 and $136,980 at March
31, 1994 and December 31, 1993, respectively.
8
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
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NOTE 3 LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1994 1993
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10% Senior notes . . . . . . . . . . . $200,000 $200,000
Revolving loan . . . . . . . . . . . . 2,300 -
-------- --------
$202,300 $200,000
======== ========
There are no maturities of long-term debt within the next five years.
Bank Financing
The Company, a wholly-owned subsidiary of BCP/Essex Holdings Inc.
("Holdings"), entered into a credit agreement dated September 25, 1992,
among BE Acquisition Corporation, Holdings, the lenders named therein and
Chemical Bank, as agent (the "Credit Agreement"). Under the Credit
Agreement, the Company borrowed $130,000 in term loans (the "Term
Credit"). In May 1993, the Company applied $111,000 of the proceeds from
the sale of its 10% Senior Notes due 2003 (the "Senior Notes") to repay
the outstanding balance under the Term Credit. See Senior Notes below.
On May 7, 1993, an amendment and restatement of the Credit Agreement (the
"Restated Credit Agreement") became effective. The Restated Credit
Agreement provides for $175,000 in revolving credit, subject to specified
percentages of eligible assets, reduced by outstanding letters of credit
($13,792 at March 31, 1994) (the "Revolving Credit"). The Revolving
Credit expires in 1998. Revolving Credit loans bear interest at floating
rates at bank prime rate plus 1.25% or a reserve adjusted Eurodollar rate
(LIBOR) plus 2.25%. The effective interest rate can be reduced by 0.25%
to 0.75% if certain specified financial conditions are achieved.
Commitment fees during the revolving loan period are 0.5% of the average
daily unused portion of the available credit. The Company has purchased
interest rate cap protection through 1994 with respect to $100,000 of debt
which carries a strike rate of 6% (three month LIBOR). The indebtedness
under the Restated Credit Agreement is guaranteed by Holdings and all of
the Company's subsidiaries, and is secured by a pledge of the capital
stock of the Company and its subsidiaries and by a first lien on
substantially all assets.
9
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
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Senior Notes
On May 7, 1993, the Company issued $200,000 aggregate principal amount of
its Senior Notes which bear interest at 10% per annum, payable
semiannually and are due in May 2003. The net proceeds to the Company
from the sale of the Senior Notes, after underwriting discounts,
commissions and other offering expenses, were $193,450. The Company
applied $111,000 of such proceeds to the repayment of the Term Credit and
on June 2, 1993 applied the balance of such proceeds, together with new
borrowings under the Revolving Credit, to redeem all of its outstanding 12
3/8% Senior Subordinated Debentures due 2000 (the "Debentures").
At the option of the Company, the Senior Notes may be redeemed,
commencing in May 1998 in whole, or in part, at redemption prices ranging
from 103.75% in 1998 to 100% in 2001. Additionally, up to $67,000 may be
redeemed at 109% with the proceeds from any public equity offering prior
to June 30, 1996. Upon a Change in Control, as defined in the indenture
covering the Senior Notes, each holder of Senior Notes will have the right
to require the Company to repurchase all or any part of such holder's
Senior Notes at a repurchase price equal to 101% of the principal amount
thereof.
Debentures
The Debentures were due in 2000 and bore interest at 12 3/8% per annum
payable semiannually. However, the Restated Credit Agreement required the
Debentures, which were callable at 106% commencing May 15, 1993, to be
retired no later than June 30, 1993. Because of the mandatory retirement,
the Debentures were valued by the Company at the expected retirement cost,
discounted at 11.5%. On June 2, 1993, the Company redeemed all of the
outstanding Debentures at 106% of their principal amount.
NOTE 4 HOLDINGS SENIOR DISCOUNT DEBENTURES AND SERIES A PREFERRED STOCK
In May 1989, Holdings (then known as MS/Essex Holdings Inc.) issued
$342,000 aggregate principal amount ($135,117 aggregate proceeds amount)
of its Senior Discount Debentures due 2004 (the "Holdings Debentures").
As of March 31, 1994 Holdings had a liability of $237,128 related to the
Holdings Debentures. The Holdings Debentures are unsecured debt of
Holdings and are effectively subordinated to all outstanding indebtedness
of the Company, including the Senior Notes, and will be effectively
subordinated to other indebtedness incurred by direct and indirect
subsidiaries of Holdings if issued. No periodic cash payments of interest
are required to be made by Holdings prior to November 15, 1995 on the
Holdings Debentures and interest is payable in cash at 16% thereafter.
At March 31, 1994, Holdings had outstanding 1,514,956 shares of Series A
Cumulative Redeemable Exchangeable Preferred Stock, Liquidation Preference
$25 Per Share, (the "Series A Preferred Stock") and 5,666,738 warrants to
purchase an equivalent number of shares of common stock of Holdings at a
10
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
per share exercise price of approximately $2.86. The accreted balance of
the Series A Preferred Stock was $36,050 at March 31, 1994. Dividends on
the Series A Preferred Stock are payable quarterly at a rate of 15.0% per
annum. Under the terms of the Series A Preferred Stock, at the option of
Holdings, dividends may be paid in additional shares of Series A Preferred
Stock in lieu of cash through September 1998. The Restated Credit
Agreement permits Holdings to pay dividends in cash on the Series A
Preferred Stock subject to certain limitations. The Series A Preferred
Stock is subject to mandatory redemption on September 30, 2004. In
addition, Holdings is required to offer to repurchase the Series A
Preferred Stock upon the occurrence of certain specified events of
default. The Series A Preferred Stock may not be redeemed at the option
of Holdings until September 30, 1995. The Series A Preferred Stock is
exchangeable at Holdings' option on any dividend payment date for
debentures with terms similar to the terms of the Series A Preferred
Stock.
Holdings is a holding company with no operations and has virtually no
assets other than its ownership of the outstanding common stock of the
Company. All of such stock is pledged, however, to the lenders under the
Restated Credit Agreement. Accordingly, Holdings' ability to meet its
obligations when due under the terms of its indebtedness will be dependent
on the Company's ability to pay dividends, to loan, or otherwise advance
or transfer funds, to Holdings in amounts sufficient to service Holdings'
debt obligations.
11
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Introduction
Essex Group, Inc. (the "Company") is engaged in one principal line of
business, the production of electrical wire and cable. It classifies its
operations into four major divisions based on the markets served: Wire and
Cable Division, Magnet Wire and Insulation Division, Telecommunication
Products Division and Engineered Products Division.
On October 9, 1992, MS/Essex Holdings Inc. ("Holdings") was acquired (the
"Acquisition") by merger (the "Merger") of B E Acquisition Corporation
("BE") with and into Holdings with Holdings surviving under the name
BCP/Essex Holdings Inc. BE was a newly organized Delaware corporation
formed for the purpose of effecting the Acquisition. The shareholders of
BE included Bessemer Capital Partners, L.P. ("BCP"), affiliates of
Goldman, Sachs & Co. ("Goldman Sachs"), affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Chemical Equity Associates, A
California Limited Partnership ("CEA"), and members of management and
other employees of the Company. As a result of the Merger, the
stockholders of BE became stockholders of Holdings. During 1993, BCP
transferred its ownership in Holdings to Bessemer Holdings, L.P. ("BHLP"),
an affiliate of BCP. Prior to the Acquisition, the outstanding common
stock of Holdings was beneficially owned by The Morgan Stanley Leveraged
Equity Fund II, L.P., certain directors and members of management of
Holdings and the Company, and others. Holdings acquired the Company from
United Technologies Corporation ("UTC") in February 1988.
Results of Operations
Three Month Period Ended March 31, 1994 Compared With The Three Month
Period Ended March 31, 1993
Net sales for the first quarter 1994 were 13.5% greater than the
comparable period of 1993 as a result of improved sales volume and product
pricing, partially offset by lower copper prices, the Company's principal
raw material. Copper costs are generally passed on to customers through
product pricing. During the first quarter 1994 the average price of
copper on the New York Commodity Exchange, Inc. was 11.6% below the
comparable period of 1993. First quarter 1994 sales volumes were at
record levels in respect of historical first quarter operating performance
and exceeded the first quarter 1993 by 19.5%. Sales volume improvements
resulted from increased demand for wire products within the Company's
served markets, particularly automotive production and residential and
non-residential construction. The Magnet Wire and Insulation Division
reported significant volume increases in its automotive, transformer and
motor markets while the Engineered Products Division also reported volume
increases in its automotive market, as well as in appliance wire, welding
cable, and recreational vehicle products. The Wire and Cable Division
experienced marked volume improvements in addition to improved product
pricing attributable to strengthening product demand. The
Telecommunication Products Division reported a sharp reduction in sales
due primarily to reduced regional Bell operating company sales partially
offset by increased sales in the independent telephone company and
customer premise equipment markets.
12
Cost of goods sold for the first quarter 1994 was 9.7% greater than the
comparable period of 1993 due primarily to higher sales volumes partially
offset by lower copper prices. The Company's cost of goods sold as a
percentage of net sales was 82.7% and 85.5% in the first quarter 1994 and
1993, respectively. The cost of goods sold percentage in the first
quarter 1994 was lower due primarily to improved margins resulting from
favorable product pricing and improved manufacturing efficiencies
attributable to increased sales volumes.
Selling and administrative expenses for the first quarter 1994 were 2.7%
higher than the first quarter 1993 due primarily to increases in general
administrative expenses and sales commissions resulting from higher sales
levels, partially offset by lower amortization charges in 1994 resulting
from the expiration of a non-compete agreement with UTC. Such agreement
expired in February 1993 resulting in amortization charges of $1.1 million
in the first quarter 1993.
Interest expense in the first quarter 1994 was 14.2% lower than the
comparable period of 1993 due primarily to a decrease in the weighted
average debt outstanding, a decrease in deferred debt amortization
charges, partially offset by an increase in the Company's average interest
rate incurred from 8.5% to 10.4%. The decrease in weighted average debt
outstanding resulted from reduced usage of the Company's revolving credit
facility in the first quarter 1994 compared to the same period of 1993.
Deferred debt amortization charges decreased from 1993 due primarily to
the repayment in May 1993 of the term loans under the credit agreement
entered into in September 1992 (the "Term Credit") and the redemption in
June 1993 of the 12 3/8% Senior Subordinated Debentures due 2000 (the
"Debentures") partially offset by the May 1993 issuance of the 10% Senior
Notes due 2003 (the "Senior Notes"). The increase in the average interest
rate reflected the higher rate of interest payable on the Senior Notes
compared with the rate of interest on the Term Credit, which was repaid
from the sale of the Senior Notes, partially offset by the redemption of
the Debentures.
Income tax expense was 43.5% of pretax income in the first quarter 1994
compared with 52.5% in the same period of 1993. The effective income tax
rate of the Company is higher than the approximate statutory rate of 40%
due to the effect of the amortization of excess of cost over net assets
acquired which is not deductible for income tax purposes and for which no
deferred income taxes have been provided.
Liquidity, Capital Resources and Financial Condition
The Company had a ratio of debt to stockholder's equity of approximately
0.7 to 1 at March 31, 1994 and December 31, 1993.
The Company entered into a credit agreement in September 1992, among BE,
the Company, Holdings, the lenders named therein and Chemical Bank, as
agent (the "Credit Agreement"). The Credit Agreement provided for $155.0
million in revolving credit, expiring April 9, 1998, and Term Credit in
the amount of $130.0 million.
In May 1993, the Company issued $200.0 million aggregate principal amount
of its Senior Notes. The net proceeds to the Company from the sale of the
Senior Notes, after underwriting discounts, commissions and other offering
expenses, were approximately $193.5 million. The Company applied
approximately $111.0 million of such proceeds to the repayment of the
13
outstanding balance under the Term Credit and, in June 1993, applied the
balance of such proceeds, together with new borrowings under the revolving
credit facility of the amended and restated credit agreement, (see
immediately following paragraph), to redeem all of its outstanding
Debentures.
Upon application of the net proceeds received from the Senior Notes to
repay the Term Credit, as discussed above, an amendment and restatement of
the Credit Agreement became effective (the "Restated Credit Agreement").
The Restated Credit Agreement provides for $175.0 million in revolving
credit, subject to specified percentages of eligible assets, reduced by
outstanding letters of credit (the "Revolving Credit"). The Revolving
Credit expires in 1998. Revolving Credit loans bear interest at floating
rates at bank prime rate plus 1.25% or a reserve adjusted Eurodollar rate
(LIBOR) plus 2.25%. The effective interest rate can be reduced by 0.25%
to 0.75% if certain specified financial conditions are achieved. The
Company has purchased interest rate cap protection through 1994 covering
up to $100.0 million of Revolving Credit borrowings. No term facility is
available under the Restated Credit Agreement. Through March 31, 1994,
the Company fully complied with all of the financial ratios and covenants
contained in the Restated Credit Agreement and the indenture under which
the Senior Notes were issued (the "Indenture").
The Restated Credit Agreement and the Indenture contain provisions which
may restrict the liquidity of the Company. These include restrictions on
the incurrence of additional indebtedness and, in the case of the Restated
Credit Agreement, mandatory principal repayment requirements for all
indebtedness that exceeds the Borrowing Base as defined in the Restated
Credit Agreement.
Net cash provided by operating activities through the first three months
of 1994 was $1.0 million, compared to $11.8 million in the same period of
1993. The reduction was due primarily to increased cash requirements to
fund higher accounts receivable and inventory balances at March 31, 1994,
which resulted from increased sales volume in the first quarter 1994.
Cash flow provided by operating activities in the first three months of
1994, together with borrowings under the Revolving Credit were sufficient
to meet the Company's cash interest requirements, working capital and
capital expenditure needs.
Capital expenditures of $6.2 million for the first three months of 1994
were $1.2 million greater than the comparable period in 1993. The first
three months of 1993 included expenditures of $1.4 million in connection
with a magnet wire manufacturing facility in Franklin, Indiana. This
facility, which is occupied by both the Company and the Femco Magnet Wire
Corporation, was completed in the second quarter 1993. The Company
expects to make capital expenditures in 1994 approximating 1993
expenditure levels to expand capacity, complete modernization projects,
reduce costs and ensure continued compliance with regulatory provisions.
At March 31, 1994, approximately $9.0 million was committed to outside
vendors for capital expenditures. The Restated Credit Agreement imposes
annual limits on the Company's capital expenditures and business
acquisitions.
The Company anticipates that its working capital, capital expenditure and
cash interest requirements for 1994 will be satisfied through a
combination of funds generated from operating activities together with
funds available under the Revolving Credit. Management bases such belief
14
on historical experience and the substantial availability of funds under
the Revolving Credit. Increased working capital needs occur whenever the
Company experiences strong incremental demand in its business and/or a
significant rise in copper prices. At March 31, 1994, the borrowing
amount available under the Revolving Credit was $172.7 million, subject to
specified percentages of eligible assets (less $13.8 million in
outstanding letters of credit). During the first quarter 1994, average
borrowings under the Company's revolving credit facilities were $1.5
million compared to $9.1 million during the same period of 1993.
The Company expects that it may make certain cash payments to Holdings or
other affiliates during the remainder of 1994 to the extent cash is
available and to the extent it is permitted to do so under the terms of
the Restated Credit Agreement and the Indenture. Such payments may
include (i) an amount necessary under the tax sharing agreement between
the Company and Holdings to enable Holdings to pay the Company's taxes as
if computed on an unconsolidated basis; (ii) an annual management fee to
an affiliate of BHLP of up to $1.0 million; (iii) amounts to repurchase
outstanding Senior Discount Debentures due 2004 of Holdings (the "Holdings
Debentures") to the extent they may become available for repurchase in the
open market at prices which Holdings and the Company find attractive and
to the extent such repurchases are permitted under the terms of the
instruments governing Holdings and the Company's indebtedness; and (iv)
other amounts to meet ongoing expenses of Holdings (such amounts are
considered to be immaterial both individually and in the aggregate). To
the extent the Company makes any such payments during the remainder of
1994, it will do so out of operating cash flow or borrowings under the
Restated Credit Agreement and only to the extent such payments are
permitted under the terms of the Restated Credit Agreement and the
Indenture. Each of the foregoing payments is either completely
discretionary on the part of the Company or may be waived by an affiliate
of the Company.
Notwithstanding any of the foregoing payments which the Company may make
to Holdings, Holdings' actual liquidity requirements are expected to be
insubstantial in 1994 on an unconsolidated basis because Holdings has no
operations (other than those conducted through the Company) or employees
and is not expected to have any tax liability on an unconsolidated basis.
Holdings' Series A Cumulative Redeemable Exchangeable Preferred Stock,
Liquidation Preference $25 Per Share (the "Series A Preferred Stock"),
which was issued in connection with the Acquisition and Merger, provides
that dividends may be paid in kind at the option of Holdings until 1998
and is not subject to mandatory redemption until 2004 (except upon the
occurrence of certain specified events). The redemption price is $25 per
share plus accrued and unpaid dividends to the date of redemption. A
dividend of $1.4 million on the Series A Preferred Stock was recorded
during the first quarter 1994 to be paid in kind by the issuance of 56,811
additional shares of Series A Preferred Stock in the second quarter 1994.
The Restated Credit Agreement permits Holdings to pay dividends in cash on
the Series A Preferred Stock subject to certain limitations. Although
dividends on the Series A Preferred Stock have historically been paid in
additional shares of Series A Preferred Stock, Holdings can make no
assurances that future dividends will not be paid in cash. The Holdings
Debentures are not expected to have an impact on the Company's liquidity
prior to November 15, 1995 (unless they are repurchased or refinanced
prior to that date) when cash interest at 16.0% first becomes payable
semiannually. As of March 31, 1994, Holdings had a carrying value, net of
repurchases, of $237.1 million in respect of the Holdings Debentures
15
($277.9 million aggregate principal amount). Through March 31, 1994,
Holdings had repurchased $64.2 million aggregate principal amount of its
Holdings Debentures in the open market using cash dividends, management
fees and income taxes paid to Holdings by the Company together with
available cash. Such payments were made pursuant to the Company's prior
credit agreement which was terminated in October 1992. There have been no
repurchases of Holdings Debentures since 1991 and further repurchases, if
any, may be made at the discretion of Holdings and will depend upon market
conditions, and, in particular, the prices at which the Holdings
Debentures are trading as well as Holdings' available cash. The Holdings
Debentures are unsecured debt of Holdings and are effectively subordinated
to all outstanding indebtedness of the Company, including the Senior
Notes, and will be effectively subordinated to other indebtedness incurred
by direct and indirect subsidiaries of Holdings, if issued.
Because Holdings is a holding company with no operations and has
virtually no assets other than the outstanding capital stock of the
Company (all of which is pledged to the lenders under the Restated Credit
Agreement), Holdings' ability to meet its cash obligations will be
dependent upon the Company's ability to pay dividends, loan or to
otherwise advance or transfer funds to Holdings in sufficient amounts.
The Company believes that the Restated Credit Agreement and the Indenture
permit the Company to dividend or otherwise provide funds to Holdings to
enable Holdings to meet its known cash obligations provided that the
Company meets certain conditions. Among such conditions, however, are
that the Company meet various financial maintenance tests. There can be
no assurance that such tests will be met at any given time when Holdings
may require cash, in which case the Company would not be able to pay
dividends to Holdings without the consent of the percentage of the lenders
specified in the Restated Credit Agreement and/or the holders of the
percentage of the Senior Notes specified in the Indenture. There can be
no assurance that the Company would be able to obtain such consents, or
meet the terms on which such consents might be granted if they were
obtainable. Moreover, a violation of the Restated Credit Agreement and/or
the Indenture could lead to an event of default and acceleration of
outstanding indebtedness under the Restated Credit Agreement and to
acceleration of the indebtedness represented by the Senior Notes and the
Holdings Debentures. Because the capital stock of the Company and its
subsidiaries, as well as virtually all of the assets of the Company and
its subsidiaries, are pledged to the lenders under the Restated Credit
Agreement, such lenders would have a claim over such assets prior to
holders of the Senior Notes and the Holdings Debentures. In the event
Holdings were unable to meet its cash obligations, a sequence of events
similar to that described above could ultimately occur.
General Economic Conditions and Inflation
The Company faces various economic risks ranging from an economic
downturn adversely impacting the Company's primary markets to marked
fluctuations in copper prices. In the short-term, pronounced changes in
the price of copper tend to affect the Wire and Cable Division's gross
profits because such changes affect raw material costs more quickly than
those changes can be reflected in the pricing of the Wire and Cable
Division's products. In the long-term, however, copper price changes have
not had a material adverse effect on gross profits because cost changes
generally have been passed through to customers over time. In addition,
the Company believes that its sensitivity to downturns in its primary
markets is less significant than it might otherwise be due to its diverse
16
customer base and its strategy of attempting to match its copper purchases
with its needs. The Company cannot predict either the continuation of
current economic conditions or future results of its operations in light
thereof.
The Company believes that it is not particularly affected by inflation
except to the extent that the economy in general is thereby affected.
Should inflationary pressures drive costs higher, the Company believes
that general industry competitive price increases would sustain operating
results, although there can be no assurance that this will be the case.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the
Company during the quarter ended March 31,
1994.
17
SIGNATURE
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.
ESSEX GROUP, INC.
(Registrant)
May 10, 1994 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
18