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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 September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from_________________to_________________
Commission file number 333-14913-01
ASTOR HOLDINGS II, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 25-1766332
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
8521 SIX FORKS ROAD, RALEIGH, NORTH CAROLINA 27615
(Zip code)
(Address of principal executive offices)
(919) 846-8011
(Registrant's telephone number, including area code)
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 No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of November 14, 1996: 1,000.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Astor Holdings II, Inc.
Unaudited Consolidated Condensed Statements of Income
(in thousands)
Second Quarter Ended Six Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995(1)
---- ---- ---- -------
Sales $ 44,604 $ 37,365 $ 87,827 $ 54,195
Cost of sales 34,418 29,605 67,736 44,189
-------- -------- -------- --------
Gross profit before depreciation 10,186 7,760 20,091 10,006
Selling, general and administrative
expenses 4,577 3,705 9,010 5,024
-------- -------- -------- --------
Operating profit before interest,
depreciation, amortization, taxes,
extraordinary items 5,609 4,055 11,081 4,982
Income (loss) from investment in
Rheochem 225 (65) 441 (65)
-------- -------- -------- --------
EBITDA 5,834 3,990 11,522 4,917
Depreciation and amortization 1,792 1,690 3,345 2,243
Interest expense 1,607 1,464 3,276 1,837
Reorganization expense 856
-------- -------- -------- --------
Income (loss) before taxes and
extraordinary items 2,435 836 4,901 (19)
Provision for income taxes (1,242) 566 (190) 566
-------- -------- -------- --------
Income (loss) before extraordinary items
3,677 270 5,091 (585)
Extraordinary item - gain on cancellation
of debt 44,933
-------- -------- -------- --------
Net income $ 3,677 $ 270 $ 5,091 $ 44,348
-------- -------- -------- --------
(1) Astor Holdings II's consolidated income for the six month period ended
September 30, 1995 includes the results of operations of Associated British
Industries Limited ("ABI") for the approximately three months following the
ABI acquisition on June 28, 1995.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Astor Holdings II, Inc.
Consolidated Condensed Balance Sheets
(in thousands)
(Unaudited)
September 30, March 31,
1996 1996
-------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,765 $ 1,157
Accounts receivable (net of allowance
for doubtful accounts of $725 and $726,
respectively) 23,645 23,811
Receivable from Rheochem Technologies, Inc. 635 566
Inventory 21,836 18,586
Prepaid expenses 1,862 1,755
Other current assets 2,362 1,604
--------------------------
Total current assets 52,105 47,479
Property, plant and equipment:
Land and improvements 7,633 7,442
Buildings and improvements 7,098 7,078
Machinery and equipment 42,292 40,896
--------------------------
Total cost 57,023 55,416
Less accumulated depreciation (6,059) (4,461)
--------------------------
Property, plant and equipment - net 50,964 50,955
Investment in Rheochem Technologies, Inc. 4,392 4,040
Goodwill 29,181 29,940
Other intangible assets 6,161 6,572
Deferred tax asset 4,692 3,920
--------------------------
Total assets $147,495 $142,906
--------------------------
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 16,309 $ 16,271
Accrued interest payable 522 816
Accrued expenses 8,087 5,770
Current portion of long-term debt 5,361 4,747
--------------------------
Total current liabilities 30,279 27,604
Long-term debt 62,846 66,070
Due to affiliated company 5,263 5,436
Deferred income taxes 4,856 4,782
Other long-term liabilities 2,472 2,657
Shareholder's Equity:
Common stock:
Par value $.01 per share; authorized 10,000
shares issued and outstanding, 1,000 shares
Additional paid-in capital 36,671 36,671
Reinvested earnings - net of transfer of
$23,864 accumulated deficit as a result of
the March 31, 1996 quasi-reorganization 5,091 --
Foreign currency translation adjustment 17 (314)
--------------------------
Total stockholder's equity 41,779 36,357
--------------------------
Total liabilities and stockholder's equity $147,495 $142,906
--------------------------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Astor Holdings II, INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
Six months ended September 30,
1996 1995
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OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . $5,091 $44,348
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . 3,345 2,243
Income from debt cancellation. . . . . . . . . . - (44,933)
Equity income in Rheochem Technologies, Inc. . . (441) 65
Changes in operating assets and liabilities
(net of business acquired on June 28, 1995)
Cash escrow. . . . . . . . . . . . . . . . . . . - 102
Accounts receivable. . . . . . . . . . . . . . . 243 (2,793)
Receivable from Rheochem Technologies, Inc.. . . (69) (39)
Inventory. . . . . . . . . . . . . . . . . . . . (3,177) (2,597)
Prepaid and other current assets . . . . . . . . (866) 1,484
Deposits . . . . . . . . . . . . . . . . . . . . - 51
Restricted Cash. . . . . . . . . . . . . . . . . - 175
Accounts payable . . . . . . . . . . . . . . . . 49 (114)
Accrued reorganization costs . . . . . . . . . . - (466)
Deferred taxes - net . . . . . . . . . . . . . . (698) 128
Other long-term liabilities. . . . . . . . . . . (185) 561
Accrued interest payable . . . . . . . . . . . . (294) 178
Accrued expenses . . . . . . . . . . . . . . . . 2,317 6,516
------ ------
Net cash provided by operating activities 5,315 4,909
INVESTING ACTIVITIES
Additions to property, plant and equipment. . . . . (2,094) (1,786)
Acquisition of business . . . . . . . . . . . . . . - (66,777)
------ ------
Net cash used in investing activities . . . . . . . (2,094) 68,563
FINANCING ACTIVITIES
Capital lease payments. . . . . . . . . . . . . . . - (18)
Proceeds from long-term debt, net of fees . . . . . - 60,986
Payment of long-term debt . . . . . . . . . . . . . (2,610) (4,256)
Issuance of stock, net of fees. . . . . . . . . . . - 30,377
Payment of PCDR inventory financing . . . . . . . . - (3,600)
Payment of debtor in possession financing . . . . . - (3,500)
Payment of bridge loan payable. . . . . . . . . . . - (5,000)
Payment of pre-petition liabilities . . . . . . . . - (8,827)
Decrease in due to affiliated company . . . . . . . (172) (316)
------ ------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . . . (2,782) 65,846
------ ------
Effect of Exchange Rate Changes on Cash . . . . . . 169 (502)
Net increase in cash and cash equivalents . . . . . 608 1,690
Cash and cash equivalents at beginning of period. . 1,157 719
------ ------
Cash and cash equivalents at end of period. . . . . $1,765 $2,409
------ ------
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Astor Holdings II, Inc.
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1 - Basis of Presentation
The accompanying financial statements of Astor Holdings II, Inc.
(together with its subsidiaries, "Astor Holdings II" or the "Company") are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Article 10
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. The unaudited financial statements should be
read in conjunction with the audited financial statements and footnotes for
the year ended March 31, 1996. In the opinion of management, all adjustments
and normal recurring accruals considered necessary for a fair presentation of
the results for the interim period have been included. The interim results
reflected in the unaudited financial statements are not necessarily
indicative of expected results for the full year.
EBITDA represents earnings before interest expense, income tax expense,
depreciation and amortization expense, extraordinary items and non-recurring
items. Information concerning EBITDA is included as it is used by certain
investors as a measure of a company's ability to service its debt. EBITDA
should not be used as an alternative to, or be construed as more meaningful
than, operating income or cash flows or as an indicator of the operating
performance or liquidity of Astor Holdings II.
Note 2 - Inventory
September 30 March 31
Inventory consists of the following: 1996 1996
---- ----
Raw Materials 8,671 7,428
Work-in-progress 5,201 4,762
Finished goods 8,304 6,767
Allowance for inventory obsolescence (340) (371)
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21,836 18,586
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Note 3 -- Income Taxes
Income tax expense recorded for the six month period ended September
30, 1995 is greater than the amount computed by applying the U.S. federal
income tax rate to income before taxes and extraordinary item as a result of
taxes being provided on the income of a subsidiary of the Company which was
not part of the consolidated federal tax return for the quarter ended
September 30, 1995. Income tax expense recorded for the six month period
ended September 30, 1996 is less than the amount computed by applying the
U.S. federal income tax rate to income before taxes and extraordinary item
due primarily to the elimination of a valuation allowance related to the
Company's deferred tax assets.
Note 4 - Commitments and Contigencies
As is prevalent in the refining industry, Astor Holdings II's operating
subsidiary, Astor Corporation, has environmental issues that it is
addressing. The United States Refining Division has issues related to the
remediation of contaminated soils and ground water. Quaker State Corporation
(QSC) is responsible for the vast majority of the costs associated with the
issues. Astor Corporation's potential liability is limited to sharing fifty
percent of the first $5,500,000 of non-ground water remediation with QSC.
Astor Corporation will pay for its share of the above costs by issuing
subordinated 9% notes payable to QSC, which will be due December 31, 2008.
As of September 30, 1996, Astor Corporation has issued environmental notes to
Quaker State in the amount of $160,079 for shared costs. The future cost to
Astor Corporation for non-ground water remediation, if any, is not known at
this time.
The United States Blending Division has environmental issues related to
contamination at its Titusville, Pa. facility. Under the terms of the
L1,450,988 of 8% subordinated debt issued to ABI's former shareholders by
Astor Holdings II's parent corporation, Astor Holdings, Inc. (the "Parent"),
the Parent is entitled to set-off costs in excess of $350,000 relating to
this site against the principal and interest otherwise payable, so long as
the Parent notifies the shareholders by June 28, 1999 of the existence of a
condition that could give rise to a set-off claim. Astor Holdings II
believes it has provided for probable losses with respect to these issues and
does not anticipate a material impact on future operating results.
Note 5 - Subsequent Event
On October 8, 1996 the Company completed the acquisition of Adco
Technologies, Inc. ("ADCO"), a Michigan based manufacturer and marketer of
specialty adhesives and sealants for $54.4 million. The acquisition was
financed through the private placement of $110 million of 10.5% Senior
Subordinated Notes maturing October 15, 2006 (the "Notes"). The remaining
net proceeds from the Notes were used to repay outstanding indebtedness under
the Union Bank of Switzerland ("UBS") Credit Facility and expenses. The
Company also entered into a Senior Credit Agreement with The Chase Manhattan
Bank providing for a six-year term loan denominated in sterling in an amount
equivalent to $20.0 million and a six-year revolving credit facility of $30.0
million.
On October 25, 1996 the Company filed with the Securities and Exchange
Commission a registration statement relating to $110 million of 10.5% Series
B Senior Subordinated Notes Due 2006 of Astor Corporation which are to be
exchanged for the like amount of privately placed 10.5% Senior Subordinated
Notes Due 2006 of Astor Corporation issued on October 8, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
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COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 30, 1996 WITH THE SIX MONTHS ENDED
SEPTEMBER 30, 1995
SALES. Sales of Astor Holdings II, Inc. (together with its subsidiaries,
"Astor Holdings II" or the "Company") increased by $33.6 million from $54.2
million for the six months ended September 30, 1995 to $87.8 million for the
six months ended September 1996. Of this sales increase, $26.1 million is
related to the acquisition of ABI on June 28, 1995. Excluding the impact of
ABI, sales increased $7.5 million or 23% as a result of: (i) higher volume
sales due to the capacity improvements achieved from the capital spending
program completed in January 1996; (ii) higher specialty wax prices realized
in the U.S.; (iii) a more focused marketing effort provided by the addition
of ABI's sales force; and (iv) a shift in sales from lower priced applications
to higher value applications.
GROSS PROFIT. Gross profit increased by $10.1 million from $10.0 million
for the six months ended September 1995 to $20.1 million for the six months
ended September 30, 1996, with $8.0 million of the increase attributable to
the acquisition of ABI. Gross profit as a percentage of sales increased from
18.5% for the six months ended September 30, 1995 to 22.9% for the six months
ended September 30, 1996 as a result of the acquisition and improved margins
in the Company's business. Excluding the effect of the acquisition of ABI,
gross profit as a percentage of sales improved from 13.1% for the six months
ended September 30, 1995 to 16.0% for the six months ended September 30, 1996
principally as a result of the reasons discussed above.
SELLING, GENERAL AND ADMINISTATIVE EXPENSES. Selling, general and
administrative expenses increased by $4.0 million from $5.0 million for the six
months ended September 1995 to $9.0 million for the six months ended September
1996. Selling, general and administrative expenses as a percentage of sales
increased from 9.3% to 10.3%. The increase was primarily associated with the
expansion of the business as a result of the acquisition of ABI. The $4.0
million increase is comprised of (i) $1.3 million of additional selling related
costs associated with ABI product sales, (ii) $1.8 million of administrative
costs associated with the acquired ABI businesses and (iii) $0.9 million
associated with planned staff increases to support the new larger company and
the Company's growth strategy.
INCOME FROM RHEOCHEM. The Company's share of equity earnings form
Rheochem was $0.4 million for the six months period ended September 1996
compared to a $0.1 million loss from Rheochem for the six months ended
September 30, 1995. The Company acquired its interest in Rheochem on
June 28, 1995 with the acquistion of ABI.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1.1 million from $2.2 million for the six months ended September
30, 1995 to $3.3 million for the six months ended September 30, 1996 primarily
due to the acquisition of ABI.
INTEREST EXPENSE, NET. Interest expense, net, increased by $1.5 million
from $1.8 million for the six months ended September 30, 1995 to $3.3 million
for the six months ended September 30, 1996. This increase was primarily due to
the increased debt incurred in connection with the acquisition of ABI.
NONRECURRING EXPENSES. The $0.9 million of reorganization expenses for
the six months ended September 1995 were attributable to professional fees
associated with the emergence from bankruptcy of the Company's operating
subsidiary, Astor Corporation. No costs related to the acquisition of ABI or
Astor Corporation's emergence from bankruptcy occurred in the 1996 period or
are expected in the future.
EXTRAORDINARY ITEM - GAIN ON CANCELLATION OF DEBT. An extraordinary item
resulting from the gain on cancellation of debt of $44.9 million was recorded in
the six months ended September 1995 reflecting the discharge of pre-bankruptcy
petition indebtedness of Astor Corporation.
3
NET INCOME BEFORE EXTRAORDINARY ITEMS. As a result of the factors
discussed above, the acquisition of ABI and improved performance of the
Company's business, net income before extraordinary items for the six months
ended Spetember 30, 1996 was $5.1 million while the six months period ended
September 30, 1995 showed a $0.6 million net loss before extraordinary items.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended
September 30, 1996 was $5.3 million compared to $4.9 million for the six
months ended September 30, 1995. The $5.3 million of net cash provided in the
six months ended September 30, 1996 was primarily due to cash flow from
operating profits of $7.3 million offsetting a $2.0 million use of cash from
working capital, resulting from an increase in inventories due to higher
sales. The $4.9 million source of cash provided for the six months ended
September 30, 1995 was primarily due to $1.7 million of cash flow from
operating profits and a $3.2 million source of cash from working capital,
resulting from an increase in accrued expenses which offset increased
inventories and accounts receivable due to higher sales.
Cash used in investing activities for the six months ended September 30,
1996 and 1995 was $2.1 million and $68.6 million, respectively. The use of
cash for the six months ended September 1996 was primarily due to capital
expenditures. The use of cash for the six months ended September 30, 1995 was
due to the ABI acquisition costs of $66.8 million and capital expenditures of
$1.8 million. The Company expects that capital expenditure requirements will
be approximately $3.4 million for fiscal year 1997 and approximately $0.6
million for the ADCO operations following the ADCO acquisition, resulting in
total capital expenditures of $4.0 million for fiscal 1997. Astor expects to
fund future capital expenditures primarily from cash generated from operating
activities, except that Astor purchased ADCO with proceeds from the Notes
Offering and the Senior Bank Facility (as described below).
Cash used for financing activities for the six months ended September
1996 was $2.8 million due to debt repayments of an outstanding term loan of
$2.0 million and a $0.6 million reduction in the Company's revolving Loan
borrowings. Cash provided by financing activities of $65.8 million for the
six months ended September 30, 1995 was due to (i) proceeds from the
long-term debt issuance of $60.9 million, net of fees, (ii) $30.4 million
from the issuance of stock and warrants, net of fees, and (iii) the repayment
of $25.4 million of existing debt and settlement of bankruptcy claims.
On October 8, 1996 the Company completed the acquisition of Adco
Technologies, Inc. ("ADCO"), a Michigan based manufacturer and marketer of
specialty adhesives and sealants for $54.4 million. The acquisition was
financed through the private placement of $110 million of 10.5% Senior
Subordinated Notes maturing October 15, 2006 (the "Notes"). The remaining net
proceeds from the Notes were used to repay outstanding indebtedness under the
Union Bank of Switzerland ("UBS") Credit Facility and expenses. The Company
also entered into a Senior Credit Agreement with The Chase Manhattan Bank
providing for a six-year term loan denominated in sterling in an amount
equivalent to $20.0 million and a six-year revolving credit facility of $30.0
million.
The Company's primary capital requirements consist of debt service and
capital expenditures. The required debt amortization payments under the New
Senior Bank Facility for the next five fiscal years are: (i) no amortization
payments in fiscal year 1997, (ii) $1.4 million in fiscal year 1998, (iii)
$1.8 million in fiscal year 1999, (iv) $3.0 million in fiscal year 2000 and
(v) $4.5 million in fiscal year 2001. The Bank Term Loan and Revolving Credit
Facility borrowings under the Senior Bank Facility bear interest at the
election of the Company at an interest rate determined either by Chase
Manhattan Bank's prime lending rate plus an initial margin of 1.25% or the
eurodollar rate specified in the Senior Bank Facility plus an initial margin
of 2.5%. The Senior Bank Facility and the Notes impose various restrictions
and covenants on the Company, including, among other things, financial
covenants relating to the maintenance of minimum fixed charge coverage ratios
and interest coverage ratios as well as restrictions on indebtedness,
guarantees, acquisitions, capital expenditures, investments, loans, liens,
dividends and other
restricted payments and asset sales. The Company estimates that approximately
$3.5 million is required annually for maintenance and improvements of its
facilities. The Company's principal source of cash to fund these capital
requirements is cash generated from operating activities.
SEASONALITY. Based on the historical performances of Astor Corporation
and ADCO, management expects the Company's future performance to display
seasonal fluctuations, with the first fiscal quarter being the strongest
quarter and the third fiscal quarter being the weakest.
FOREIGN EXCHANGE EXPOSURE. The functional currency for the majority of
the Company's foreign operations is the applicable local currency. The bulk
of the Company's foreign sales, raw materials, expenses, assets, and liabilities
(including bank debt) are denominated in the local currency, providing for a
natural hedge for currency exposure. For a small portion of foreign sales
transactions, the Company uses forward foreign exchange contracts to mitigate
exposure. The translation from the applicable foreign currency to U.S.
dollars is performed for balance sheet accounts using current exchange rates
in effect at the balance sheet date and for revenue and expense accounts
using a weighted average exchange rate during the period. Translation
adjustments resulting from such translation were $0.3 million at March 31,
1996.
FORWARD LOOKING STATEMENTS.
The foregoing "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations or beliefs concerning future events,
including, but not limited to, the following: statements regarding future
capital expenditures and the source of funding for future capital
expenditures; statements regarding the Company's primary capital
requirements; statements regarding the Company's required debt amortization
payments under the Senior Bank Facility; statements regarding the amounts
required annually for maintenance and improvements of the Company's
facilities and the source of cash to fund such capital requirements; and
statements regarding seasonal fluctuations in the Company's future
performance. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including without
limitation, the following: growth in the business, as a result of
acquisitions or internal growth, affecting future capital expenditures;
technological change in equipment used in developing and manufacturing the
Company's products; damage, destruction or other casualty loss with respect
to the Company's fixed plant or equipment; insufficient cash flow from
operations to fund anticipated capital expenditures and scheduled debt
payments; changes in the Company's debt and capital structure, including
amendments to the Senior Bank Facility; and shifts in product mix changing
the effect of seasonality on the Company's future performance. Results actually
achieved thus may differ materially from expected results included in these and
other forward looking statements.
4
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has been named as a defendant, along with 92 other companies,
in a class action lawsuit in Texas. The suit alleges personal injury, death
and other damages arising out of the plaintiffs' exposure to a variety of
building materials and other products while working at the Corpus Christi
Army Depot. The plaintiffs, who are seeking approximately $500 million in
damages, appear to have named as defendants the manufacturers of every
substance known to have been used over an extended period at the Army Depot.
The Company product involved appears to be a sealant used in the installation
and repair of commercial roofing. The Company's insurance carrier is
currently defending this action on behalf of the Company. While the case is
still in the early stages of discovery, according to the insurer, no evidence
has been produced to date linking the Company sealants to any of the
plaintiffs' claims.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the three months
ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: November 14, 1996 ASTOR HOLDINGS II, INC.
By: /s/ Boyd D. Wainscott
------------------------------
Boyd D. Wainscott
Chief Executive Officer
Dated: November 14, 1996 By: /s/ John F. Gottshall
------------------------------
John F. Gottshall
Chief Financial Officer