SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
[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
Commission file number 33-10740
AMSTAR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3382652
(State of incorporation) (I.R.S. Employer Identification No.)
Long Wharf Maritime Center
555 Long Wharf Drive, Suite 12
New Haven, CT 06511
(Address of principal executive offices)
(203) 777-2274
(Registrant's telephone number)
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.
Yes X No
As of May 9, 1994 a total of 1,000 shares of common stock of the
Company was outstanding. All of the common stock is owned by
ESSTAR Incorporated.
PART 1. FINANCIAL INFORMATION
AMSTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars)
QUARTER ENDED MARCH 31,
1994 1993
Net sales $78,759 $66,846
Costs of products sold 54,335 47,752
Gross profit 24,424 19,094
Selling, general and admin-
istrative expenses 14,834 13,055
Amortization of goodwill
and other intangibles 1,033 1,033
Operating income 8,557 5,006
Interest income 12 3,536
Interest expense (5,937) (5,864)
Other expense, net (191) (102)
Income before provision for income
taxes and cumulative effects of
changes in accounting principles 2,441 2,576
Provision for income taxes:
Federal 878 977
State 664 380
1,542 1,357
Income before cumulative effects
of changes in accounting principles 899 1,219
Cumulative effects of changes in
accounting principles - (10,957)
Net income (loss) $ 899 $(9,378)
See accompanying notes
-2-
AMSTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
March 31, December 31,
1994 1993
ASSETS
Current Assets:
Cash and cash equivalents $ 63 $ 2,554
Accounts receivable 54,326 54,943
Receivable from ESSTAR Incorporated 2,717 946
Inventories 44,035 38,671
Other 1,119 861
Total current assets 102,260 97,975
Property, plant and equipment, net 65,297 64,095
Goodwill and other intangibles, net 98,635 99,787
Other assets 929 1,024
Total Assets $267,121 $262,881
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 17,803 $15,895
Accrued interest 2,777 8,331
Accrued payroll and employee
benefit costs 5,698 11,223
Accrued income taxes 636 1,179
Deferred income taxes 3,960 3,467
Other accrued expenses 8,730 9,365
Total current liabilities 39,604 49,460
Long-term debt 216,173 201,800
Deferred income taxes 8,419 9,851
Accrued postretirement benefit costs 10,620 9,638
Other noncurrent liabilities 12,279 13,005
Stockholder's Equity (Deficit):
Common stock $.01 par value,
1000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 64,814 64,814
Retained earnings 22,971 22,072
Notes and accrued interest
receivable from related party (107,759) (107,759)
Total stockholder's equity (deficit) (19,974) (20,873)
Total Liabilities and Stockholder's
Equity (Deficit) $267,121 $262,881
See accompanying notes
-3-
AMSTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
Quarter Ended March 31,
1994 1993
Cash flows from operating activities:
Net income $ 899 $ (9,738)
Adjustments to reconcile net income
to net cash used for operations:
Cumulative effects of changes
in accounting principles -- 10,957
Depreciation 1,882 1,540
Deferred income taxes (903) 159
Amortization of goodwill and
other intangibles 1,033 1,033
Accretion of non-cash interest -- (3,353)
2,911 598
Change in operating assets and liabilities,
net of accounting changes:
Receivables (1,154) (36)
Inventories (5,364) (1,621)
Other current assets (258) (80)
Other assets 214 11
Accounts payable 1,908 (5,109)
Accrued income taxes (543) (9,060)
Other current liabilities (11,221) (5,797)
Other noncurrent liabilities (273) 9,748
Net cash used for operations (13,780) (11,346)
Cash flows from investing activities:
Purchases of property, plant and
equipment, net (3,084) (898)
Net cash used for investing activities (3,084) (898)
Cash flows from financing activities:
Increase in revolving credit
agreement borrowings 14,373 5,824
Net cash provided by financing
activities 14,373 5,824
Decrease in cash and cash equivalents (2,491) (6,420)
Cash and cash equivalents, beginning
of period 2,554 6,483
Cash and cash equivalents, end of period $ 63 $ 63
See accompanying notes
-4-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein
have been prepared by Amstar Corporation ("Amstar" or the "Company"),
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. The information reported
reflects all adjustments (consisting only of normal recurring
accruals and the cumulative effects of the changes in accounting
principles discussed in Note 4) which are, in the opinion of
management, necessary to a fair statement of the results for the
periods reported. The results of operations for the quarter ended
March 31, 1994, are not necessarily indicative of the results to be
expected for the full year. These condensed financial statements
should be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form
10-K.
2. On June 30, 1989, the holders of all then outstanding shares of
common stock of Amstar exchanged (the "Amstar Exchange") such shares
for shares of common stock of ESSTAR Holdings Inc., a Delaware
corporation, now known as ESSTAR Incorporated ("Esstar").
Simultaneously with the Amstar Exchange, the holders of all then
outstanding shares of common stock of EI Holdings Corp., a Delaware
corporation ("EI Holdings"), exchanged such shares for shares of
Esstar common stock (together with the Amstar Exchange, the
"Combination"). As a result of the Combination, Amstar and EI
Holdings each became direct, wholly owned subsidiaries of Esstar.
The Company holds an investment in certain securities of ESSEX
Holdings, Inc. ("Essex") formerly known as ESSEX Industries Inc., a
subsidiary of EI Holdings. (See "Long-Term Investments" on page 9.)
3. Operations include Milwaukee Electric Tool Corporation
("METCO"), which produces and sells heavy-duty portable electric
power tools and accessories.
4. Effective January 1, 1993, Amstar adopted the provisions of
Statement of Financial Accounting Standards 109, "Accounting for Income
Taxes" ("SFAS 109"), and the provisions of Statement of Financial
Accounting Standards 106, "Accounting for Postretirement Benefits Other
Than Pensions" ("SFAS 106"). The adoption of these accounting changes
resulted in a one-time cumulative charge to income aggregating $11.0
million. (See Note 6.)
-5-
SFAS 109 requires the liability method of accounting for
income taxes rather than the deferred method previously used. The
cumulative effect of adopting this accounting change as of January
1, 1993, was to reduce net income by $5.6 million.
SFAS 106 requires the accrual method of accounting for
postretirement benefits other than pensions. Prior to 1993, these
expenses were recognized on a modified cash basis. The cumulative
effect of adopting this accounting change as of January 1, 1993,
was to reduce net income by $5.4 million.
5. Inventories, which are stated at the lower of cost, under the
last-in, first-out (LIFO) method, or market, consisted of the
following (thousands of dollars):
March 31, December 31,
1994 1993
Raw materials and parts $21,387 $14,859
In-process 1,219 1,167
Finished products 21,429 22,645
$44,035 $38,671
6. As discussed in Note 4, the Company adopted FAS 109 effective
January 1, 1993. Accordingly, deferred income taxes reflect the
tax consequences on future years of differences between the tax and
financial reporting bases of assets and liabilities. Prior to
1993, provisions were made for deferred income taxes where
differences existed between the time transactions affected taxable
income and the time that these transactions entered into the
determination of income for financial statement purposes.
Under the terms of a tax sharing arrangement with Esstar, Amstar
provides for income taxes as if it files its own consolidated
return. The provision for income taxes for the quarters ended
March 31, 1994 and 1993 were as follows (thousands of dollars):
Quarter Ended March 31,
1994 1993
Current:
Federal $1,801 $ 818
State 644 380
2,445 1,198
Deferred:
Federal (923) 159
State 20 --
(903) 159
Total Provision $1,542 $1,357
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Quarter Ended March 31, 1994 and 1993
Sales
Net sales were $78.8 million during the quarter ended March
31, 1994, an increase of $11.9 million, or 17.8%, from the prior
year period. The increase is due to a 9.9% increase in unit sales
of tools and accessories and a 7.2% increase in the average tool
unit and accessory selling price.
Income from Operations
Operating income was $8.6 million during the quarter ended
March 31, 1994, compared with $5.0 million during the quarter ended
March 31, 1993. The greater operating income was the result of
higher gross profit on increased sales, partially offset by
increased selling, general, and administrative expenses during the
current quarter.
During the quarter ended March 31, 1994, gross profit
increased by $5.3 million, primarily due to higher sales volume.
Additionally, gross margin increased to 31.0% of net sales, from
28.6% during the quarter ended March 31, 1993. The improved gross
margin is due mainly to higher production levels during the current
quarter. Higher production levels resulted in the spreading of
fixed overhead costs over a larger number of units, thus reducing
the per unit cost of products sold, and increasing gross margin
during the current quarter.
Selling, general and administrative expenses, including
corporate expenses, increased $1.8 million during the quarter ended
March 31, 1994, in comparison to the prior year period. These
expenses increased primarily as a result of greater costs incurred
relating to selling and marketing programs. However, this
represents a decrease of 0.7%, as a percentage of sales.
Other Items
Interest expense, which primarily reflects interest on the
11.375% Senior Subordinated Notes (the "Notes"), increased by $0.1
million during the current period as a result of greater average
outstanding balances on the Company's revolving credit facility.
-7-
Interest income, primarily representing interest from loans
and advances to related parties, decreased by $3.5 million during
the current quarter as compared to the prior year period.
Subsequent to December 31, 1993, Essex informed the Company that as
of December 31, 1993, Essex wrote off the remaining balance of its
goodwill of $82.3 million. (See "Goodwill Write-off" on page 20.)
Based on this information, the Company determined that, as of
December 31, 1993, the ultimate realization of a portion of the
Senior Subordinated Discount Notes (the "Discount Notes") may be in
doubt. Accordingly, the Company has classified the Discount Notes
as an offset to stockholder's equity in the consolidated balance
sheet as of December 31, 1993, and has reserved in full against the
accretion of interest on the Discount Notes subsequent to December
31, 1993. The accretion on the Discount Notes during the current
quarter was $3.9 million. (See "Long-Term Investments" on page 9.)
-8-
Financial Condition
Working Capital
The working capital of the Company was $62.7 million on March
31, 1994, compared with $48.5 million on December 31, 1993. All
working capital changes are normal period-to-period variations.
Long-Term Investments
On June 30, 1989, in connection with the Combination, the
Company made the Intercompany Loan to Essex (the "Intercompany
Loan"). The Intercompany Loan was evidenced by $152.7 million
aggregate principal amount of Senior Subordinated Discount Notes
due 1997 (the "Discount Notes") and $100.0 million aggregate
principal amount of 14% Subordinated Debentures due 1997 (the
"Debentures"). Interest on the Debentures was payable
semi-annually, on August 1 and February 1 of each year. Essex paid
the Company $1.2 million, due on August 1, 1989, and $7.0 million
due on each of February 1, 1990, August 1, 1990, February 1, 1991
and August 1, 1991, of interest in cash on the Debentures, as
required under the terms thereof. On December 31, 1991, the
Discount Note Indenture was amended to provide that, among other
things, at the option of Essex, the date from and after which cash
interest must be paid on the Discount Notes may be extended to the
maturity of the Discount Notes, February 1, 1997. Pursuant to a
Debt Exchange Agreement dated as of December 31, 1991, between
Amstar and Essex, Amstar exchanged $100.0 million aggregate
principal amount of the Debentures, plus the right to accrued
interest thereon, and $25.0 million accreted value of the Discount
Notes, for $86.6 million of the Notes (the "Debt Swap"). As of
December 31, 1993, the Company held approximately $107.8 million
accreted value of Discount Notes. As of the same date, Essex
informed the Company that Essex was in compliance with the terms
and conditions of the Discount Note indenture. Subsequent to
December 31, 1993, Essex informed the Company that as of December
31, 1993, Essex wrote off the remaining balance if its goodwill of
$82.3 million. (See "Goodwill Write-off" on page 20.) Based on
this information, the Company determined that, as of December 31,
1993, the ultimate realization of a portion of the Discount Notes
may be in doubt. Accordingly, the Company has classified the
Discount Notes as an offset to stockholder's equity in the
consolidated balance sheet as of December 31, 1993, and has
reserved in full against the accretion of interest on the Discount
Notes subsequent to December 31, 1993. The accretion of the
Discount Notes during the current quarter was $3.9 million.
-9-
Effective at the close of business on December 31, 1989, the
Company sold substantially all of the assets of Aiken Advanced
Systems, Inc., a wholly-owned subsidiary in the Amstar Electronics
Group, for a purchase price of approximately $7.2 million, which
approximated the book value of those assets, and the assumption of
specified liabilities. Of the $7.2 million, $.25 million was in
cash with the remainder payable under a promissory note bearing
interest at 16.0% per annum and payable in four semi-annual
installments beginning July 2, 1990. Approximately $2.6 million in
cash was received by the Company during the year ended December 31,
1990, in partial payment of the principal of the promissory note.
As of December 31, 1990, the obligor was not in compliance with
certain terms and conditions of the promissory note. As a result
of discussions the Company had with the purchaser to resolve a
dispute regarding the original purchase price, the promissory note
was amended to reduce the remaining principal balance of the
indebtedness to $1.6 million, as of January 1, 1991, to provide
that it would mature on December 31, 1992, and that it would bear
interest at 12% per annum in 1991 and at 16% per annum in 1992. As
of May 9, 1994, the obligor was not in compliance with certain
terms and conditions of the promissory note and it had not paid the
quarterly interest installments due on June 30, September 30, and
December 31, 1992. The Company fully reserved for the value of
this note during the year ended December 31, 1990.
Leverage, Credit Availability and Liquidity
Subsequent to December 31, 1993, Essex informed the Company
that Essex wrote off the remaining balance of its goodwill (See
"Goodwill Write-off" on page 20.) Accordingly, as of December 31,
1993, the Company classified the Discount Notes as an offset to
stockholder's equity in the consolidated financial statements,
resulting in a reduction in net equity of $107.8 million as of
December 31, 1993. Exclusive of this reduction, the total debt to
equity ratio was 2.5 to 1.0 on March 31, 1994, as compared to 2.3
to 1.0 on December 31, 1993.
As of March 31, 1994, the Company's debt included $195.3
million principal amount of the Notes (excluding $3.5 million
principal amount of Notes beneficially owned by the Company that
are held pursuant to an escrow agreement to secure certain
obligations of the Company).
On December 31, 1991, METCO entered into a credit agreement
(the "Credit Agreement") with Heller Financial, Inc., which
replaced the revolving credit agreement with The Bank of New York.
The Credit Agreement provides for a primary revolving loan facility
of $45.0 million (up to $15.0 million of which may be used for
letters of credit); and, a secondary revolving loan facility of
$10.0 million effective January 15, 1993, which was amended and
increased to $15.0 million effective October 26, 1993 (collectively
the "Credit Facility"). In addition, the Credit Agreement provides
for a primary letter of credit facility of $15.0 million.
-10-
Borrowings under the primary revolving facility are limited to 90%
of eligible accounts receivable of METCO, as defined, 65% of
eligible inventory, as defined, and the primary letter of credit
borrowing base of $15.0 million, as defined. Borrowings under the
Credit Facility bear interest at either the London Interbank
Offered Rate (LIBOR), plus 3.0% to 3.75%, or the prime rate plus
1.75% to 2.5%, with borrowings under the secondary revolving loan
facility bearing the higher interest rates. There is a 2.0% per
annum fee on all outstanding letters of credit and a 0.5% per annum
fee on the unused portion of the Credit Facility. In addition, if
METCO's operating cash flow, as defined, does not meet certain
minimum ratios for a specified period of time, these interest rates
will increase by 1.0% on the Credit Facility borrowings and by 0.5%
on the outstanding letters of credit. As of April 30, 1994,
METCO's operating cash flow met those ratios. The loans made and
letters of credit issued pursuant to the Credit Agreement are
secured by substantially all the real and personal property of
METCO, the capital stock of METCO and 65% of the capital stock of
METCO's sole subsidiary. Additionally, the Company has guaranteed
the indebtedness of METCO under the Credit Agreement. On March 31,
1994, there was $30.4 million outstanding under the primary
revolving facility, including $9.5 million of letters of credit,
and there was $15.0 million of letters of credit outstanding under
the primary letter of credit facility. As of the same date, there
was $29.6 million of available credit remaining under the terms of
the Credit Agreement.
As of May 9, 1994, there was $27.8 million outstanding under
the primary revolving facility, including $9.6 million of letters
of credit, and there was $15.0 million of letters of credit
outstanding under the primary letter of credit facility. There was
$32.2 million of availability remaining under the terms of the
primary revolving facility as of the same date.
The indenture for the Notes and the Credit Agreement contain
various covenants that restrict the business activities of the
Company. As of April 30, 1994, Amstar was in compliance with the
covenants in those agreements. The Company anticipates that the
Company and its subsidiaries will remain in compliance with all
such covenants during the next twelve months.
Management believes that funds generated by the operations of
the Company combined with its credit availability are adequate to
meet its working capital, capital expenditure, and other funding
requirements.
Debt and preferred stock agreements of Esstar require that the
Company apply the proceeds of certain asset sales to reduce the
Company's indebtedness. These agreements may require Amstar to
repurchase a portion of the outstanding Notes as well as repaying
other borrowings which may be outstanding.
-11-
The Company is in the process of reviewing various
alternatives to its present capital structure, including the
potential refinancing of indebtedness outstanding under the Notes.
The Company has received, and is reviewing a preliminary proposal
from Merrill Lynch & Co. in connection with such a potential
refinancing. Such a refinancing, if pursued, would be subject to
a number of factors, including market conditions, economic
conditions and the Company's operating performance. While the
Company has experienced positive trends in its fiscal 1993
operating results and in its first quarter 1994 operating results,
there can be no assurance as to the Company's operating performance
during the remainder of 1994 or as to the other conditions
necessary to consummate a refinancing. Therefore, there can be no
assurance that a refinancing or other transaction, if pursued,
would occur. Esstar has advised the Company that it is reviewing
potential alternatives with respect to its consolidated financial
and corporate structure.
Dividends
As of May 9, 1994, Amstar had not declared a current year
dividend on its issued and outstanding shares of capital stock, all
of which are owned by Esstar.
Cuban Claim
The Company holds a claim for compensation for operations of
a predecessor corporation seized by Cuba in 1960. The amount of
the claim, certified at approximately $81.0 million in 1969 by the
Foreign Claims Settlement Commission of the United States, plus
interest accrued in accordance with the terms of the certification,
currently is up to approximately $587.0 million. There is no
assurance that the Company will ever receive compensation in
settlement of the claim, and no value is recorded on the Company's
financial statements for this claim. The receipt of consideration
in satisfaction of such claim will depend on a number of
uncertainties, including economic and political conditions in Cuba
and the policies of the United States government.
-12-
ESSEX HOLDINGS, INC.
General
In connection with the Combination, the Company made the
Intercompany Loan to Essex which was evidenced by $252.7 million
aggregate principal amount of securities, which consisted of the
Discount Notes and the Debentures. As a result of the Debt Swap at
December 31, 1991, the Debentures, together with accrued interest
thereon as of that date, and $25.0 million accreted value of the
Discount Notes, have been redeemed and are no longer outstanding as
indebtedness of Essex due to Amstar. (See "Long-Term Investments"
on page 9.)
Essex, through its wholly owned subsidiaries, is engaged in
the manufacture and distribution of architectural hardware and
related products primarily for the non-residential building market.
The subsidiaries and their businesses include the manufacture and
distribution of locks, locksets, door closers and exit devices by
Sargent Manufacturing Company and Sargent of Canada, Ltd., a
Canadian corporation; metal doors and frames by Curries Company
("Curries"); wood doors by Graham Manufacturing Company; and hinges
and stainless steel washroom accessories by McKinney Products
Company ("McKinney"). On November 7, 1991, Essex formed a new
subsidiary which, on January 23, 1992, changed its name from ESSEX
Holdings, Inc. to ESSEX Industries, Inc. (and, on January 23, 1992,
Essex changed its name from ESSEX Industries, Inc. to ESSEX
Holdings, Inc.). This subsidiary conducts sales and marketing
activities for the domestic operating subsidiaries of Essex.
On May 22, 1990, a federal grand jury in St. Louis indicted
McKinney, and three unrelated corporations, for allegedly violating
the antitrust laws. McKinney entered a plea of nolo contendere and
the court accepted the plea. Five present or former executives of
three of the indicted corporations, including Robert A. Haversat,
President and Chief Executive Officer of the Company and of Essex,
and formerly President of McKinney, and David B. Gibson, President
of McKinney, also were indicted. Messrs. Haversat and Gibson
entered pleas of nolo contendere and the court accepted such pleas.
On March 31, 1993, in the United States District Court in St.
Louis, Missouri, McKinney was fined $2.0 million, payable over a
five year period. Essex recorded the impact of this fine during
the quarter ended March 31, 1993. On March 31, 1993, and April 1,
1993, respectively, Mr. Gibson and Mr. Haversat were also fined in
the United States District Court in St. Louis, each in the amount
of $250,000. The United States Department of Justice filed notices
of appeal with respect to the fines imposed on McKinney and Messrs.
Gibson and Haversat. McKinney and the individual defendants filed
responsive notices of appeal to preserve its and their rights
should the government proceed with an appeal.
-13-
Subsequently, the United States and McKinney entered into a
stipulation to terminate the appeals, thereby bringing to a
conclusion the criminal action against McKinney. With respect to
Messrs. Haversat and Gibson, the United States Court of Appeals has
found that the District Court judge failed to properly apply the
sentencing guidelines and has remanded both of their cases to the
District Court for resentencing.
Six civil class actions on behalf of direct purchasers of
architectural hinges were initiated against McKinney and the other
indicted corporations. McKinney and two of the other corporate
defendants entered into a settlement agreement of $4.0 million with
respect to those actions. This settlement agreement was approved
by the court, and payment was made in 1990. Three class actions on
behalf of California indirect purchasers and a class action on
behalf of Alabama indirect purchasers of architectural hinges were
initiated against McKinney and the three other corporate
defendants. McKinney and other corporate defendants entered into
a settlement agreement with respect to two of the three California
actions and with respect to the Alabama action. Those settlement
agreements received court approval and payment was made as of
December 31, 1992. It is presently expected that a satisfactory
resolution of the third California class action will be obtained.
The ESSEX Holdings, Inc. Condensed Consolidated Statements of
Operations, Balance Sheets, Statements of Cash Flows and the
Management's Discussion and Analysis of Results of Operations and
Financial Condition set forth herein as of and for the quarter
ended March 31, 1994, have been furnished to the Company by the
management of Essex and are included herein to provide investors
in the Company with information about Essex. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the management
of Essex believes that the disclosures are adequate to make the
information presented not misleading. The information reported
reflects all adjustments (consisting only of normal recurring
accruals and the cumulative effect of the changes in accounting
principals discussed in the Notes to Condensed Consolidated
Financial Statements) which are, in the opinion of Essex
management, necessary to a fair statement of the results for the
periods presented. The results of operations for the quarter
ended March 31, 1994, are not necessarily indicative of the
results to be expected for the full year. These condensed
financial statements should be read in conjunction with the
financial statements and the notes thereto included in Amstar's
latest annual report on Form 10-K.
-14-
ESSEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars)
QUARTER ENDED MARCH 31,
1994 1993
Net sales $54,161 $46,802
Costs of products sold 40,245 44,180
Gross profit 13,916 2,622
Selling, general and admin-
istrative expenses 9,551 7,605
Other expense, net 920 3,336
Income (loss) from operations 3,445 (8,319)
Interest expense 5,941 5,878
Loss before benefit from income
taxes and cumulative effects of
changes in accounting principles (2,496) (14,197)
Benefit from income taxes (1,653) (797)
Loss before cumulative effects of
changes in accounting principles (843) (13,400)
Cumulative effects of changes in
accounting principles -- 4,104
Net loss $ (843) $(9,296)
Depreciation and amortization
included above:
Cost of products sold $ 811 $ 9,325
Other expense, net $ 537 $ 1,314
See accompanying notes
-15-
ESSEX HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
MARCH 31, DECEMBER 31,
1994 1993
ASSETS
Current Assets:
Cash and cash equivalents $ 1,820 $ 1,419
Accounts receivable 30,626 26,058
Inventories 36,529 36,116
Other 1,602 2,002
Total current assets 70,577 65,595
Property, plant and equipment, net 57,338 56,240
Other intangibles, net 6,273 6,555
Other assets 2,580 3,442
Total Assets $136,768 $131,832
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term
debt $ 16,294 $ 21,295
Accounts payable 19,834 15,781
Payable to ESSTAR Incorporated 5,423 4,163
Accrued payroll and employee
benefit costs 4,143 4,166
Other current liabilities 7,347 7,750
Total current liabilities 53,041 53,155
Long-term debt, less current
maturities 97,300 97,849
Notes and accrued interest payable
to related party 111,614 107,759
Accrued employee benefit costs 29,611 29,524
Stockholder's Equity (Deficit):
Common stock $.01 par value, 1,000
shares authorized, issued and
outstanding -- --
Additional paid-in capital 163,278 160,778
Retained earnings (deficit) (313,748) (312,905)
Excess of pension liability over
unrecognized prior service cost (4,328) (4,328)
Total stockholder's equity(deficit) (154,798) (156,455)
Total Liabilities and Stockholder's
Equity (Deficit) $136,768 $131,832
See accompanying notes
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ESSEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
QUARTER ENDED MARCH 31,
1994 1993
Cash flows from operating activities:
Net loss $(843) $(9,296)
Adjustments to reconcile net loss
to net cash provided by operations:
Cumulative effects of changes in
accounting principles -- (4,104)
Depreciation 811 1,906
Amortization of goodwill and
other intangibles 537 8,733
Accretion of non-cash interest 3,855 3,353
4,360 592
Change in operating assets and liabilities,
net of accounting change:
Accounts receivable (4,568) (413)
Inventories (413) (282)
Other current assets 400 (1,580)
Other assets 607 (13)
Accounts payable and accrued
expenses 4,887 1,654
Other noncurrent liabilities 87 2,911
Net cash provided by operations 5,360 2,869
Cash flows from investing activities:
Purchases of property, plant and
equipment, net (1,909) (650)
Net cash used for investing
activities (1,909) (650)
Cash flows from financing activities:
Contribution of capital 2,500 --
Net decrease in long-term debt (5,550) (2,306)
Net cash used for financing
activities (3,050) (2,306)
Increase (decrease) in cash and
cash equivalents 401 (87)
Cash and cash equivalents, beginning
of period 1,419 1,504
Cash and cash equivalents, end
of period $1,820 $1,417
See accompanying notes
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Effective January 1, 1993, Essex adopted Statement of
Financial Accounting Standards 109, "Accounting for Income Taxes"
("SFAS 109") and Statement of Financial Accounting Standards 106,
"Accounting for Postretirement Benefits Other Than Pensions"
("SFAS 106"). The adoption of these accounting changes resulted
in a one-time cumulative credit to income aggregating $4.1
million. (See Note 2.)
SFAS 109 requires an asset and liability approach of
accounting for income taxes rather than the deferred method
previously used. The cumulative effect of adopting this
accounting change as of January 1, 1993, was to increase net
income by $5.7 million. The effect of this change on the Balance
Sheet was to increase the carrying value of accounts receivable;
property, plant and equipment; and goodwill and other intangibles,
net, by $0.5 million, $2.9 million, and $4.1 million,
respectively.
SFAS 106 requires the accrual method of accounting for
postretirement benefits other than pensions. In prior years, the
expense was recognized on a modified cash basis. The cumulative
effect of adopting this accounting change as of January 1, 1993,
was to reduce net income by $1.6 million.
2. As discussed in Note 1, Essex adopted SFAS 109 effective
January 1, 1993. Accordingly, the March 31, 1994 and 1993 deferred
income taxes reflect the tax consequences on future years of
differences between the tax and financial reporting bases of assets
and liabilities. Since Essex has recorded a valuation allowance
against its net deferred tax assets, Essex has no deferred tax
assets or liabilities on its Consolidated Balance Sheet. Prior to
1993, provisions were made for deferred income taxes where
differences existed between the time that transactions affected
taxable income and the time that these transactions entered into the
determination of income for financial statement purposes.
Under the terms of the tax sharing agreement with Esstar, Essex
accounts for income taxes as if it filed its own consolidated return.
Should Essex incur a loss, Esstar may contribute to Essex the tax
benefit of the loss. The benefit from income taxes for the quarters
ended March 31, 1994 and 1993 were as follows (thousands of dollars):
Quarter Ended March 31,
1994 1993
Current:
Federal $(1,653) $(797)
State -- -
$(1,653) $(797)
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MANAGEMENT'S DISCUSSION AND AN ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Quarter Ended March 31, 1994 and 1993
Sales
Consolidated Essex net sales for the quarter ended March 31,
1994 were $54.2 million, an increase of $7.4 million, or 15.7%,
from the prior year period. The increase during the 1994 period
resulted from increased unit sales and, to a lesser extent, higher
average selling prices of certain Essex products during the
quarter ended March 31, 1994.
Income from Operations
Essex had income from operations of $3.4 million during the
quarter ended March 31, 1994, as compared to a loss from
operations of $8.3 million during the 1993 period. The
improvement in operations during the current period is the result
of several factors. An increase during the current quarter in
gross profit of $11.3 million and a reduction in other expense,
net, of $2.4 million were partially offset by an increase in
selling, general and administrative expenses of $1.9 million
during the current quarter.
During 1993, certain intangible assets became fully
amortized. As a result, depreciation and amortization included in
cost of sales declined by $8.5 million, resulting in an increase
in the gross profit. Additionally, gross margin, excluding
depreciation and amortization expense, improved to 27.2% during
the quarter ended March 31, 1994, as compared with 25.5% a year
earlier. The improved gross margin is due mainly to higher
production levels during the current quarter. Higher production
levels resulted in the spreading of fixed overhead costs over a
larger number of units, thus reducing the per unit cost of
products sold, and increasing gross margin during the current
quarter.
As a percentage of sales, selling, general and admin-
istrative expenses increased by 1.4% to 17.6% during the quarter
ended March 31, 1994, as compared to the prior year period. The
increase is due primarily to the introduction and continuing
expansion of sales and marketing programs.
Other expense, net, decreased by $2.4 million during the
current quarter in comparison with the prior year period. During
the 1993 period, Essex recorded a $2.0 million charge related to
the antitrust suit. (See "ESSEX Holdings, Inc. - General" on page
13.) Additionally, Essex wrote off the remaining balance of its
goodwill as of December 31, 1993. This resulted in a reduction in
amortization of $0.5 million during the current quarter as
compared to the prior year quarter. (See "Goodwill Write-off" on
page 20.)
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Goodwill Write-off
Since the Combination in 1989, Essex has not achieved its
sales or earnings projections established at that time due
primarily to the general economic recession and its impact on
certain markets served by Essex related to the nonresidential
segment of the construction industry, combined with significantly
increased competitive pressures. During December 1993, when Essex
prepared its operating plans for 1994, it determined that it most
likely would not be in compliance with certain financial ratio
covenants during 1994 under the Essex Credit Agreement.
Additionally, during this period, there was consolidation of
certain Essex competitors, which led Essex to believe that there
might be additional pressure on profit margins in the future.
These events caused Essex to reevaluate its longer term operating
projections and its ability to recover the remaining balance of
goodwill recorded on the Essex balance sheet. The methodology
used by Essex to assess the recoverability of its goodwill
involved the projection of its net income over the remaining 35
year amortization period of the goodwill. This projection
indicated that Essex would incur a net loss of approximately $8.0
million during the remaining 35 year amortization period,
including a net loss of over $100.0 million during the first 15
years, without regard to goodwill amortization. Accordingly,
Essex wrote off the remaining balance of its goodwill of $82.3
million, as of December 31, 1993.
Other Items
Interest expense during the quarter ended March 31, 1994, of
$5.9 million included $3.9 million of interest representing an
increase of that amount in the accreted value of Discount Notes.
Essex will continue to record interest expense under the terms of
the Discount Notes through maturity. (See "Long-Term Investments"
on page 9.)
Leverage, Credit Availability and Liquidity
At March 31, 1994, Essex had $225.2 million of debt
outstanding, of which $16.3 million was current. The debt
consisted of $105.6 million of senior borrowings under the Essex
Credit Agreement with Bankers Trust Company (the "Essex Credit
Agreement"), $111.6 million accreted value of the Discount Notes
held by Amstar, and $8.0 million of the other nonacquisition
related debt.
The Essex Credit Agreement contains various covenants that
restrict the business activities of Essex. On March 31 and June
30, 1991, Essex was not in compliance with certain of the
covenants under the Essex Credit Agreement, which compliance was
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waived pursuant to the Essex Credit Agreement. In July 1991, the
Essex Credit Agreement was amended to modify covenants related to
quarterly measurements of minimum cash flows and leverage and
interest coverage ratios through and including the quarter ended
September 30, 1991. On December 31, 1991, the Essex Credit
Agreement was again amended to, among other things, modify certain
covenants related to quarterly and annual measurements of minimum
cash flows and leverage and interest coverage ratios through the
maturity of the Essex Credit Agreement. In addition, the December
31, 1991, amendment modified the principal amortization required
under the Essex Credit Agreement to be $7.5 million in 1991; $10.0
million in 1992; $20.0 million in 1993; $21.0 million in 1994;
$57.7 million upon the expiration of the term loan and long-term
loan portions of the Essex Credit Agreement in 1995 and repayment
of all borrowings outstanding upon the expiration of the revolving
loan portion of the Essex Credit Agreement in 1996. On December
29, 1992, the Essex Credit Agreement was again amended to, among
other things, modify certain covenants related to quarterly and
annual measurements of minimum cash flows, and ratios related to
working capital, leverage and interest coverage, through December
31, 1993. On March 28, 1994, the Essex Credit Agreement was again
amended to, among other things, modify certain covenants related
to quarterly and annual measurements of minimum cash flows and
interest coverage, through December 31, 1994. As of March 31,
1994, Essex was in compliance with the material covenants under
the Essex Credit Agreement. Essex anticipates that Essex and its
subsidiaries will remain in compliance with all such amended
covenants through December 31, 1994; however, amendment of certain
covenants under the Essex Credit Agreement may be necessary
subsequent to December 31, 1994. In addition, the March 28, 1994,
amendment modified the principal amortization required under the
Essex Credit Agreement, requiring $3.0 million of the $10.5
million due on June 30, 1994, and $2.0 million of the $10.5
million due on December 31, 1994, to be paid as of the effective
date of the amendment. The aggregate principal amortization for
1994 of $21.0 million remains unchanged.
Borrowings under the Essex Credit Agreement bear interest as
follows, as of March 31, 1994: $101.9 million at the three month
Adjusted Eurodollar Rate, plus 3.5% (approximately 6.87%); and
$3.7 million at the prime rate of Bankers Trust Company, plus 1.5%
(7.5%).
As of May 9, 1994, Essex had available but unused borrowing
capacity of $3.1 million under the Essex Credit Agreement.
On April 29, 1993, Curries entered into a Development
Agreement with the City of Mason City, Iowa, (the "City")
providing for the construction of a manufacturing facility for
Curries. The construction has been financed through the issuance,
by the City, of General Obligation Urban Renewal Bonds (the
"Bonds"). Upon completion of the construction of the facility in
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March, 1994, Curries took occupancy of the facility under the
terms of a 15 year lease agreement between Curries and the City.
The Development Agreement and the related lease agreement have
been accounted for as a capitalized lease obligation in the
accompanying financial statements. The capitalized lease
obligation has an implicit interest rate of 6.7257% per annum.
All changes in working capital are normal period-to-period
variations.
During the first quarter of 1994, Essex received a $2.5
million capital contribution from Esstar. Also during the first
quarter of 1994, Essex received, in cash, $2.1 million of tax
benefit payments from Esstar.
Essex's management believes that funds generated by the
operations of Essex, including benefits it may receive under the
tax sharing agreement with Esstar, combined with its credit
availability and capital contributions it may receive from Esstar,
are adequate to meet its working capital, capital expenditure and
other funding requirements.
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Part II. OTHER INFORMATION
None
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.
AMSTAR CORPORATION
(Registrant)
Dated: May 13, 1994 By/s/ Jeffrey A. Mereschuk Principal
Jeffrey A. Mereschuk Financial
Vice President, Officer
Treasurer and Chief
Financial Officer
Dated: May 13, 1994 By/s/ John D. Speridakos Principal
John D. Speridakos Accounting
Controller Officer
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