<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
MUEHLSTEIN HOLDING CORPORATION
(formerly HMC Acquisition Corporation)
(Exact name of Registrant as specified in its charter)
Commission file number: 33-99754
<TABLE>
<S> <S>
Delaware 06-1436941
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
800 Connecticut Avenue 06856
Norwalk, Connecticut (Zip Code)
(Address of principal executiveoffices)
</TABLE>
Registrant's telephone number including Area Code: (203) 855-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
The number of shares outstanding of Registrant's Common Stock at September 30,
1996 was 1,996,103.
<PAGE>
Muehlstein Holding Corporation
Form 10-Q
Index
Part I. Financial Information
Item 1.Financial Statements (Unaudited)--Muehlstein Holding Corporation
("Successor Company")
Consolidated Balance Sheet--September 30, 1996
Consolidated Statement of Operations--three and nine months ended September 30,
1996
Consolidated Statement of Shareholders' Equity and Redeemable Common Stock--nine
months ended September 30, 1996
Consolidated Statement of Cash Flows--for the period February 9, 1996 through
September 30, 1996
Notes to Consolidated Financial Statements
Financial Statements (Unaudited)--H. Muehlstein & Co., Inc. ("Predecessor
Company")
Combined Balance Sheet--December 31, 1995
Combined Statement of Operations--three and nine months ended September 30,
1995
Combined Statement of Cash Flows--nine months ended September 30, 1995
Notes to Combined Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
Muehlstein Holding Corporation
Consolidated Balance Sheet
Successor Company
(Unaudited)
September 30, 1996
(In thousands except per share data and number of shares)
<TABLE>
<S> <C>
Assets
Current assets:
Cash $ 1,368
Accounts receivable, net of allowance for doubtful accounts $474 32,745
Retained interest in receivables 52,946
Receivable from Master Trust 14,000
Other receivables, principally value added taxes 16,894
Inventories, net 39,129
Prepaid expenses and other assets 2,308
Deferred income taxes 1,358
--------
Total current assets 160,748
Property, plant and equipment, net of accumulated depreciation 8,877
Deferred financing costs, net of accumulated amortization 2,126
Goodwill, net of accumulated amortization 3,283
Other long term assets 452
--------
Total Assets $175,486
--------
--------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 90,305
Notes payable, including current portion of long term debt 13,951
Accrued liabilities 10,945
Income taxes payable 2,834
Other taxes payable, principally value added taxes 10,415
--------
Total current liabilities 128,450
Notes payable - long term 6,409
Other long term liabilities 4,086
Common stock, par value $.01 per share - authorized shares 2,000,000;
issued and outstanding 1,996,103 shares in 1996 20
Preferred stock, par value $.01 per share - authorized shares 1,000,000;
issued and outstanding 1,000,000 in 1996 10
Treasury Stock, par value $.01 per share - outstanding 2,920 in 1996 (29)
Additional paid - in capital 29,155
Retained earnings 7,411
Cumulative translation adjustment (26)
--------
Total liabilities and shareholders' equity $175,486
--------
--------
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
Muehlstein Holding Corporation
Consolidated Statement of Operations
Successor Company
(Unaudited)
(In thousands, except per share data and number of shares)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30,1996
------------------ -----------------
<S> <C> <C>
Sales and Commissions $192,727 $529,232
Cost of sales 167,290 454,856
------------------ -----------------
25,437 74,376
Selling, general and administrative expenses 21,483 59,098
------------------ -----------------
Income from operations 3,954 15,278
Other expense (predominantly interest expense) (1,103) (3,333)
------------------ -----------------
Income before income taxes 2,851 11,945
Provision for income taxes (729) (5,594)
------------------ -----------------
2,122 6,351
Losses applicable to pre-acquisition period - (1,527)
------------------ -----------------
Net income 2,122 7,878
Preferred stock dividend 300 767
------------------ -----------------
Net income applicable to common shareholders $ 1,822 $ 7,111
------------------ -----------------
------------------ -----------------
Net income per share applicable to common
shareholders $ .91 $ 4.21
------------------ -----------------
------------------ -----------------
Weighted average number of shares outstanding 1,996,103 1,688,202
------------------ -----------------
------------------ -----------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Muehlstein Holding Corporation
Consolidated Statement of Shareholders' Equity and Redeemable Common Stock
Successor Company
(Unaudited)
Nine months ended September 30, 1996
(In thousands)
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Preferred Stock Treasury Stock Paid-in Retained Translation
--------------------------------------------------
Shares Amount Shares Amount Shares Amount Capital Earnings Adjustment
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock, net of
offering costs 1,999 $20 $19,165
Issuance of Preferred Stock 1,000 $10 9,990
Purchase of stock for Treasury (3) 3 ($29)
Net income $7,878
Cash Dividends on Preferred Stock ($467)
Net change in cumulative
translation adjustment ($26)
----------------------------------------------------------------------------------------
Balance as of September 30, 1996 1,996 $20 1,000 $10 3 ($29) $29,155 $7,411 ($26)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Muehlstein Holding Corporation
Consolidated Statement of Cash Flows
Successor Company
(Unaudited)
For the period February 9, 1996 through September 30, 1996
(In thousands)
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 7,878
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation 746
Loss on sale of accounts receivable 2,186
Amortization of goodwill and deferred financing costs 2,892
Provision for deferred income taxes (465)
Changes in operating assets and liabilities:
Accounts receivable (55,712)
Other receivables 16,370
Inventories (2,392)
Prepaid expenses and other assets (376)
Accounts payable 24,802
Taxes payable (3,392)
Other liabilities 5,471
---------
Net cash used in operating activities (1,992)
Cash flows from investing activities
Payments for acquired business (98,925)
Payments for purchase of fixed assets (470)
---------
Net cash used in investing activities (99,395)
Cash flows from financing activities
Borrowing - original revolving credit facility 73,191
Repayments of original revolving credit facility (73,191)
Net borrowing-Citibank London revolving credit facility 12,871
Borrowing-term loan 8,000
Repayments of term loan borrowing (511)
Proceeds from sale of certain accounts receivables 53,000
Payments for financing costs (4,764)
Payments for purchase of treasury stock (29)
Proceeds from issuance of common stock 19,990
Initial stock offering costs (388)
Proceeds from issuance of preferred stock 10,000
Dividends paid on preferred stock (467)
-------
Net cash provided by financing activities 97,702
Effect of exchange rate change on cash (249)
---------
Net decrease in cash (3,934)
Cash at beginning of period 5,302
---------
Cash at end of period $ 1,368
---------
---------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements
Successor Company
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and 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. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the combined financial statements and footnotes thereto included in Muehlstein
Holding Corporation's (formerly HMC Acquisition Corporation) (the "Company")
Form 10-K for the year ended December 31, 1995.
In conjunction with the acquisition, the Company has adopted the Specific
Identification method using lower of cost or market valuation for all of its
inventory.
2. Business Combination
On September 21, 1995, the Company was incorporated for the purpose of acquiring
all of the outstanding capital stock of H. Muehlstein & Co., Inc.
("Muehlstein").
On October 30, 1995, the Company entered into an agreement (the "Stock Purchase
Agreement") with a wholly owned subsidiary of Mobil Oil Corporation (the
ultimate parent company of Muehlstein) to purchase 100% of the outstanding
capital stock of Muehlstein and certain related assets (the "Acquisition"). The
purchase price was based on capital employed, as defined, plus $10 million.
On November 22, 1995, the Company filed a Registration Statement ("Offering"),
which became effective on January 23, 1996, pursuant to which it offered shares
of its common stock to certain persons who were employees of Muehlstein, Mobil
Oil Corporation ("Mobil") or their respective subsidiaries who would become
employees of the Company or its subsidiaries following the Acquisition, to
certain benefit plans in which such persons were or would become participants
and to such other parties that the Company in its discretion determined. The
Company received total proceeds of $19,152,130 on February 9, 1996 based upon
the sale of 1,915,213 shares of its Common Stock ("Common Stock"), par value
$.01 per share at $10.00 per share. The proceeds of this Offering, net of
offering expenses of approximately $806,000 of which $418,000 were paid prior to
the closing, were utilized to pay a portion of the purchase price of the
Acquisition. The Company received additional proceeds of $838,100 upon the sale
of 83,810 additional shares of its common stock through June 30, 1996.
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements (continued)
Successor Company
(Unaudited)
2. Business Combination (continued)
Pursuant to the Stock Purchase Agreement, Mobil purchased from the Company on
February 9, 1996, 1,000,000 shares of Series "A" Preferred Stock, $.01 par
value per share, at a purchase price of $10.00 per share. The Series "A"
Preferred Stock pays an annual dividend of $1.20 per share (equal to 12
percent per annum of the stated value of $10.00 per share). Except for
certain matters connected with the Series "A" Preferred Stock and other
matters required by applicable law, holders of Series "A" Preferred Stock
will have no voting rights. Series "A" Preferred Stock will have no
preemptive rights and may be redeemed, in whole or in part, at the option of
the Company, at any time. If the Company redeems the Series "A" Preferred
Stock, the redemption price for the shares will equal the stated value per
share ($10.00) plus all accrued and unpaid dividends. In the event of any
voluntary or involuntary dissolution, liquidation or winding up of the
Company, the holders of Series "A" Preferred Stock will have preferential
rights, superior to other shareholders, to distributions out of the assets of
the Company.
Effective February 9, 1996, Muehlstein entered into a credit agreement with
Citicorp USA, Inc. and Citicorp Canada ("Credit agreement"), which was
guaranteed by the Company. Pursuant to this Credit agreement a $125,000,000
revolving credit facility was provided, the expiration date of which is February
9, 2000. The revolving credit facility will bear interest at either (1) 100
basis points per annum over the U.S. or certain other foreign currency Base
Rates or (2) 250 basis points per annum over the U.S. or certain other foreign
currency LIBOR rates. On the same date, the Company borrowed approximately
$73,191,000 under this facility. On September 25, 1996 as part of the agreement
to sell a defined pool of the Company's account receivables, an amendment was
added to the credit agreement whereby the $125,000,000 revolving credit facility
was reduced to $45,000,000, (as part of the reduction in the credit facility,
$2,070,000 of the financing costs incurred in obtaining the original credit
facility were amortized in the quarter), the balance of the agreement remained
the same. As of September 30, 1996, the revolving credit balance was zero.
Effective February 9, 1996, Muehlstein entered into a loan agreement with Finova
Capital Corporation ("Loan agreement"), which was guaranteed by the Company.
Pursuant to this Loan agreement total proceeds of $8,000,000 from two term
loans, Note A and Note B, both maturing March 1, 2000, were received. The
principal amount of the two term loans are $2,560,000 (Note A) and $5,440,000
(Note B), respectively. These notes bear interest at a fixed annual rate of
interest of 8.20% per annum (Note A) and 9.70% per annum (Note B).
The indebtedness under the Credit and Loan agreements is secured by liens on
substantially all the assets of Muehlstein. The Credit and Loan agreements
contain various covenants which include, among other things: (a) the maintenance
of certain financial ratios and compliance with certain financial tests and
limitations; (b) limitations on investments and capital expenditures; and (c)
limitations on leases and the sale of assets.
The proceeds from the sale of the Company's common and preferred stock
aggregating approximately $30,000,000 and borrowing of $81,191,000 under the
aforementioned facilities were used to finalize the Acquisition and provide
working capital.
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements (continued)
Successor Company
(Unaudited)
2. Business Combination (continued)
The Acquisition was finalized on February 9, 1996 for a total purchase price of
approximately $98,925,000 ("Purchase Price"), with fees of approximately
$1,004,000 being included. Upon effectiveness of the Acquisition, Muehlstein
became a wholly-owned subsidiary of the Company, and the Company thereupon
changed its name to "Muehlstein Holding Company". The results for the
nine-months ended September 30, 1996 reflect losses of $1,527,000, being the
results of Muehlstein applicable to the period January 1, 1996 through February
8, 1996.
The Company's financial statements reflect the application of purchase
accounting to the acquired operations of Muehlstein. The application of purchase
accounting resulted in the allocation of the purchase price and related
acquisition costs based on the fair value of the assets acquired and liabilities
assumed. As a result, the enclosed predecessor combined financial statements are
not comparable to the successor company consolidated financial statements. The
classification of certain assets and liabilities have been adjusted to reflect
the additional information that has become available. Such changes did not have
any effect on the actual purchase price.
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements (continued)
Successor Company
(Unaudited)
The condensed consolidated balance sheet on a fair value basis as of February 9,
1996 was as follows:
<TABLE>
<CAPTION>
IN
THOUSANDS
<S> <C>
Assets
Current assets:
Cash $ 5,302
Accounts receivable, net 118,093
Other receivables 22,224
Inventories 36,713
Prepaid expenses and other current assets 3,085
--------
Total current assets 185,417
Property, plant and equipment 9,153
Other assets 7,030
--------
Total assets $201,600
--------
--------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 65,477
Notes payable to bank 74,147
Accrued and other current liabilities 23,678
--------
163,302
Long-term debt 7,044
Other long-term liabilities 2,521
Common and preferred stock 28,733
--------
$201,600
--------
--------
</TABLE>
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements (continued)
Successor Company
(Unaudited)
3. Sale of Receivables
Effective September 25, 1996, the Company entered into an agreement to sell, on
a revolving basis, their interests in a defined pool of accounts receivable
through February 9, 2000. At September 30, 1996 the defined pool of outstanding
accounts receivable amounted to $119,946,000. During the period from September
25, 1996 to September 30, 1996, the Company had net cash receipts of $67,000,000
from the sale of certain eligible receivables, as defined, to Muehlstein Trade
Receivables Master Trust or Master Trust. The remaining $52,946,000 of accounts
receivables represents all ineligible receivables along with certain eligible
receivables which at the Company's discretion were not advanced against.
In return for $53,000,000 the Master Trust issued Series
1996-I certificates which bear interest at a commercial paper rate. At
September 30, 1996 the rate was 5.34%. In return for $14,000,000 the Master
Trust issued Series 1996-II certificates (See next paragraph for further
discussion). If the amount of uncollected receivables is more or less than the
September 30, 1996 allowance for such uncollectability, the Company will incur a
loss or gain. The loss on the sale amounted to $2,186,000 for the period
from September 25, 1996 to September 30, 1996 and is included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations. Pursuant to the agreement, the Company services, on behalf of
the Master Trust, the accounts receivable that were sold. In return the
Company is paid a servicing fee by the Master Trust which is equal to 1/12 of
1/2% the average Series 1996-I invested amounts on each day immediately
preceding a collection period. The servicing fees were not significant for
the period from September 25, 1996 through September 30, 1996.
Included in the cash receipts from the Master Trust is $14,000,000 from Polymers
International Financial Corporation, a subsidiary of the Company. In return for
this payment, Polymers International Financial Corporation received Series
1996-II certificates ("Certificates") from the Master Trust which will bear
interest at 100 basis points over the U.S. or certain other foreign currency
LIBOR rates. Subsequently, Polymers International Financial Corporation pledged
the Certificates to Citibank N.A. As collateral for a $20,000,000 revolving
credit facility to Pegasus Polymers International Inc. (PEGASUS), a subsidiary
of the Company. Such facility expiers February 9, 2000 and bears interest at
a rate of LIBOR plus 40 basis points. At September 30, 1996 the outstanding
balance of Pegasus' revolving credit facility was $12,871,000. The Series
1996-II certificate is included on the consolidated balance sheet as
"Receivable from Master Trust".
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements (continued)
Successor Company
(Unaudited)
4. Common Stock
The Company's common stock is held by certain of the Company's employees, the
Company's Employee Share Ownership Plan (ESOP) and Citicorp North America, Inc.
("Citicorp"). Shareholders' excluding Citicorp, have a right to put these shares
to the Company, following termination of their employment, subject to the
limitations imposed under the terms of the Credit, Loan and preferred stock
agreements. Such provisions exists to create a market for the employees' shares.
Citicorp has the right to put their shares to the Company at any time after the
earliest to occur of: (a) three years after the Acquisition closing date or (b)
certain mergers, consolidations, sale of assets or change of control with
respect to the Company or its material subsidiaries. Except for certain matters
connected with its shares, the shares held by Citicorp will be nonvoting shares.
The redemption price for any shares will be equal to the most recent appraised
fair market value of the common stock. If a put is exercised, the Company will
have the option to pay for the repurchased shares either in cash or pursuant to
a promissory note. Under the terms of the Credit, Loan and preferred stock
agreements and given management's view of its present employee base, significant
activity under the put provisions is not anticipated presently. However, in
accordance with the requirements for accounting for common stock with a put
provision, the common stock has been classified between liabilities and
preferred stock.
5. Pro Forma Financial Data
The following pro forma unaudited consolidated condensed statements of
operations for the three-month and nine-month periods ended September 30, 1996
and 1995 have been prepared to reflect the consummation of the offerings of the
Company's debt and equity securities, the Acquisition and related transactions.
The pro forma unaudited effects of such transactions have been presented
assuming that they occurred as of the beginning of the periods presented in the
pro forma unaudited combined statement of operations.
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements (continued)
Successor Company
(Unaudited)
5. Pro Forma Financial Data (continued)
<TABLE>
<CAPTION>
Three months ended
September 30
1996 1995
Actual Pro forma
-------------------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
-------------------------
<S> <C> <C>
Revenues $192,727 $180,434
Total operational costs 188,773 179,335
-----------------------
Income from operations 3,954 1,099
Other income 457 607
Interest expense (1,560) (1,879)
-----------------------
Income (loss) before income tax (provision) benefit 2,851 (173)
(Provision) benefit for income taxes (729) 168
------------ ----------
Net income (loss) 2,122 (5)
Preferred dividend (300) (300)
------------ ----------
Net income (loss) applicable to common shareholders $ 1,822 $ (305)
------------ ----------
------------ ----------
Net income (loss) per share applicable to common
shareholders $ .91 $ (.15)
------------ ----------
------------ ----------
Assumed number of common shares outstanding 1,996 1,996
------------ ----------
------------ ----------
</TABLE>
<PAGE>
Muehlstein Holding Corporation
Notes to Consolidated Financial Statements (continued)
Successor Company
(Unaudited)
5. Pro Forma Financial Data (continued)
<TABLE>
<CAPTION>
Nine months ended
September 30
1996 1995
Pro forma
----------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues $529,232 $644,510
Total operational costs 514,143 628,606
-------- ---------
Income from operations 15,089 15,904
Other income 564 585
Interest expense (4,700) (5,638)
Provision for income taxes (4,380) (4,633)
-------- ---------
Net income 6,573 6,218
Preferred dividend (900) (900)
-------- ---------
Net income applicable to common shareholders $ 5,673 $ 5,318
-------- ---------
-------- ---------
Net income per share applicable to common shareholders $ 2.84 $ 2.66
-------- ---------
-------- ---------
Assumed number of common shares outstanding 1,996 1,996
-------- ---------
-------- ---------
</TABLE>
6. Income Taxes
The tax provision for the three and nine-month periods ended September 30,
1996 were determined based upon an estimate of the effective tax rates for
the year ending December 31, 1996. The effective tax rate of 26% for the
three-month period ended September 30, 1996 and 47% for the nine-month period
ended September 30, 1996 reflect higher taxes for dividend distributions from
foreign subsidiaries and changes in the valuation of certain foreign deferred
tax assets for the period prior to the Acquisition and foreign losses for
which the Company did not receive tax benefit. The quarter ended September
30, 1996 reflects a year to date adjustment caused by a change in tax law,
related to the amortization of deferred financing costs which had previously
been treated as a non-deductible expense in the first half of 1996.
<PAGE>
H. Muehlstein & Co., Inc.
Predecessor Combined Balance Sheet
December 31, 1995
(In thousands)
<TABLE>
<S> <C>
Assets
Current assets:
Cash $ 6,326
Accounts receivable, net of allowance for
doubtful accounts of $2,775 134,132
Other receivables, principally value added taxes 21,341
Inventories, net 29,516
Due from affiliates 139
Prepaid expenses and other assets 2,120
Deferred income taxes 4,151
---------
Total current assets 197,725
Property, plant and equipment, net of accumulated depreciation 7,307
Deferred income taxes 549
---------
Total assets $205,581
---------
---------
Liabilities and Parent Company Investment
Current liabilities:
Accounts payable $ 57,412
Accrued liabilities 10,672
Other taxes payable, principally value added taxes 15,345
Due to affiliates 11,681
---------
Total current liabilities 95,110
Other long term liabilities 1,832
Parent company investment 108,639
---------
Total liabilities and parent company investment $205,581
---------
---------
</TABLE>
See notes to combined financial statements.
<PAGE>
H. Muehlstein & Co., Inc.
Predecessor Combined Statement of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
1995 1995
------------- -------------
<S> <C> <C>
Revenues:
Sales and Commissions $177,057 $631,402
Sales to affiliates 3,377 13,108
-------- --------
Total revenues 180,434 644,510
Cost of sales 152,333 559,808
-------- --------
28,101 84,702
Selling, general and administrative expenses 25,085 67,680
-------- --------
Income from operations 3,016 17,022
Other income (608) (585)
-------- --------
Income before income taxes 3,624 17,607
Provision for income taxes 1,339 7,296
-------- --------
Net income $ 2,285 $ 10,311
-------- --------
-------- --------
</TABLE>
See notes to combined financial statements.
<PAGE>
H. Muehlstein & Co., Inc.
Predecessor Combined Statement of Cash Flows
(Unaudited)
Nine months ended September 30, 1995
(In thousands)
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $10,311
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation 669
Provision for deferred income taxes 363
Changes in operating assets and liabilities:
Accounts receivable (9,914)
Inventories 7,569
Due from affiliates (6)
Prepaid expenses and other assets 136
Other receivables (5,865)
Accounts payable 3,365
Accrued liabilities (1,985)
Taxes payable 2,060
Due to affiliates 5,367
-------
Net cash provided by operating activities 12,070
Cash flows from investing activities
Payments for purchase of fixed assets (308)
-------
Net cash (used in) investing activities (308)
Cash flows from financing activities
Net change in parent company advances (14,320)
-------
Net cash (used in) financing activities (14,320)
Effect of exchange rate changes on cash (1,002)
-------
Net (decrease) in cash (3,560)
Cash at beginning of period 4,763
-------
Cash at end of period $ 1,203
-------
-------
</TABLE>
See notes to combined financial statements.
<PAGE>
H. Muehlstein & Co., Inc.
Notes to Predecessor Combined Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited combined financial statements present the combined
assets, liabilities, revenues and expenses related to the marketing operations
of H. Muehlstein & Co., Inc. ("Muehlstein") and affiliated entities, exclusive
of certain assets and liabilities retained by Mobil Oil Corporation ("Mobil"),
the ultimate parent company in conjunction with the Acquisition (See Note 2 of
the Notes to Consolidated Financial Statements--Successor Company). These
statements are presented on a historical cost basis. All transactions between
subsidiaries of Muehlstein and other units of Mobil which are included in
Muehlstein's operations have been eliminated. Parent company investment
reflects Mobil's investment in Muehlstein, the accumulated earnings of such
entity, as well as intercompany balances with Mobil and other entities therewith
which are not settled on a current basis. In addition, the parent company
investment includes intercompany accounts resulting from the exclusion of
various assets or liabilities that were not acquired under the Acquisition.
The unaudited combined financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and 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.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the combined financial statements and footnotes
thereto included in Muehlstein Holding Corporation's Form 10-K for the year
ended December 31, 1995.
<PAGE>
Muehlstein Holding Corporation
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
As discussed in the notes to the financial statements, Muehlstein Holding
Corporation (formerly HMC Acquisition Corporation) (the "Company") was
incorporated for the purpose of acquiring all of the outstanding capital stock
of H. Muehlstein & Co., Inc. ("Muehlstein") and certain related assets. The
acquisition was finalized on February 9, 1996 for a total purchase price of
approximately $98,925,000. Accordingly, the quarters ended March 31, 1996, June
30, 1996, and September 30, 1996 are the only periods of successor company
operations and are compared to pro forma results of operations for the three and
nine-month periods ended September 30, 1995 for purposes of the comparative
discussion presented below. The financial information of the successor company
reflects the application of purchase accounting to the operations of Muehlstein
subsequent to the Offering by the Company. The application of purchase
accounting results in the allocation of the purchase price and related
acquisition costs based on the fair value of the underlying assets and
liabilities of the predecessor company's operations. As a result of the
application of purchase accounting, the predecessor combined financial
information is not comparable to the financial information of the successor
company. The unaudited proforma results of operations have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations that would have resulted had the Offering and Acquisition been
effective January 1, 1995, or that may result in the future.
Results of Operations
Total revenues increased 6.8% in the third quarter of 1996 to $192,727,000
compared to $180,434,000 for the third quarter of 1995. For the first nine
months of 1996 revenues of $529,232,000 were 17.9% lower than the first nine
months of 1995. Income from operations increased 259.8% to $3,954,000 for the
third quarter of 1996 from $1,099,000 for the third quarter of 1995. For the
nine months ended September 30, 1996 income from operations decreased 5.1% to
$15,089,000 from $15,904,000 for the nine months ended September 30, 1995.
The average sales price for plastic resin and rubber, combined, increased 8.1%
in the third quarter of 1996 versus the same period in 1995, while the average
sales price for the first nine months of 1996 was 12.4% lower than the first
nine months of 1995. Worldwide sales volume decreased 1.2% and 4.3% for the
third quarter of 1996 versus the third quarter of 1995 and for the first nine
months of 1996 versus the first nine months of 1995, respectfully.
Income from operations was favorably impacted by higher selling prices during
the third quarter of 1996 versus the comparative period in 1995. Due to changes
in market conditions, the average margin on product sales increased to $0.0558
per pound in the third quarter of 1996 from $0.0551 per pound in the third
quarter of 1995. Adding to the higher margins was a 11.7% decrease in selling
and administrative expenses to $21,483,000 for the third quarter of 1996 from
$24,322,000 for the same period in 1995. The decrease was mainly due to lower
bad debt expense in the U.S. and Latin America along with lower freight costs.
<PAGE>
For the nine months ended September 30, 1996 average margin on product sales
decreased to $0.0537 from $0.0585 for the nine months ended September 30,
1995. Offsetting the lower margins was a 13.6% decrease in selling and
administrative expenses to $59,287,000 for the nine months ended September
30, 1996 versus $68,618,000 for the same period in 1995. The change was
mainly due to lower bad debt expense in the U.S. and Latin America along with
lower freight costs and employee costs.
Other expenses (predominantly interest expense) decreased $169,000 in the
third quarter of 1996 versus the third quarter of 1995. Non-operating
expenses for the first nine months of 1996 were $917,000 lower than the first
nine months of 1995. The decrease was predominantly due to the lower interest
expense.
Net income increased to $2,122,000 in the third quarter of 1996 from a net
loss of $5,000 in the comparative period of the prior year after tax
charges/(benefits) of $729,000 and ($168,000), respectively. The effective
tax rate (benefit) was 26% in the third quarter of 1996 and (97%) in the same
period in 1995, which is reflective of the Company's ability to obtain tax
benefits from foreign losses. For the nine months ended September 30, 1996
net income increased 5.7% to $6,573,000 from $6,218,000 in the comparative
period of the prior year after tax charges of $4,380,000 and $4,633,000,
respectively. The effective tax rate was 40% for the nine months ended
September 30, 1996 and 43% for the nine months ended September 30, 1995.
Liquidity and Sources of Capital
Historically, Muehlstein had been an indirect, wholly owned subsidiary of Mobil.
As such, cash generated by Muehlstein and its financing requirements had been
subject to Mobil's cash management procedures and policies.
In connection with the Acquisition, Muehlstein entered into a $125,000,000
revolving credit facility with Citibank N.A. ("Citibank"). The revolving credit
facility expires February 9, 2000. The revolving credit facility will bear
interest at either (1) 100 basis points per annum over the U.S. or certain other
foreign currency Base Rates or (2) 250 basis points per annum over the U.S. or
certain other foreign currency LIBOR rates. On the day of the Acquisition, the
Company borrowed approximately $73,191,000 under this facility. On September 25,
1996, as part of the agreement to sell a defined pool of the Company's accounts
receivables (See Note 3 of the Notes to Consolidated financial statements -
Successor Company) the first amendment was added to the credit agreement whereby
the $125,000,000 revolving credit facility was reduced to $45,000,000, the
balance of the agreement remained the same. Based on the value of the
Company's assets used as collateral for the credit facility, the calculated
availability of the $45,000,000 credit facility was 43,320,000 at September
30, 1996.
At the date of the Acquisition, Muehlstein entered into a loan agreement with
Finova Capital Corporation ("Finova"). Pursuant to this agreement total proceeds
of $8,000,000 from two term loans, Note A and Note B, both maturing March 1,
2000, were received. The principal amount of the two term loans is $2,560,000
(Note A) and $5,440,000 (Note B), respectively. These notes bear interest at a
fixed annual rate of interest of 8.20% per annum (Note A) and 9.70% per annum
(Note B).
Pursuant to the Stock Purchase Agreement, Mobil purchased from the Company on
February 9, 1996, 1,000,000 shares of Series "A" Preferred Stock, $.01 par value
per share, at a purchase price of $10.00 per share. The Series "A" Preferred
Stock pays an annual dividend of $1.20 per share (equal to 12 percent per annum
of the stated value of $10.00 per share).
<PAGE>
The Company issued a total of 1,999,023 shares of common stock between January
23, 1996 and September 30, 1996, of which 2,920 have subsequently been
repurchased and held in Treasury Stock. The Company's common stock is held by
certain of the Company's employees, the Company's Employee Share Ownership Plan
(ESOP) and Citicorp North America, Inc. ("Citicorp"). Shareholders', excluding
Citicorp, have a right to put these shares to the Company, following termination
of their employment, subject to the limitations imposed under the terms of the
Credit, Loan and preferred stock agreements. Such provision exists to create a
market for the employees' shares. Citicorp has the right to put their shares to
the Company at any time after the earliest to occur of: (a) three years after
the Acquisition closing date or (b) certain mergers, consolidations, sale of
assets or change of control with respect to the Company or its material
subsidiaries. The redemption price for any shares will be equal to the most
recent appraised fair market value of the common stock. If a put is exercised,
the Company will have the option to pay for the repurchased shares either in
cash or pursuant to a promissory note. Under the terms of the Credit, Loan and
preferred stock agreements and given management's view of its present employee
base, significant activity under the put provisions is not anticipated
presently. However, in accordance with the requirements for accounting for
common stock with a put provision, the common stock has been classified between
liabilities and preferred stock.
Effective September 25, 1996, the Company entered into an agreement to sell,
on a revolving basis, to the Muehlstein Trade Receivables Master Trust, their
interests in a defined pool of accounts receivable through February 9, 2000
(See note 3 of the Notes to Consolidated financial statements - Successor
Company). The Company had net cash receipts of $67,000,000 from the initial
sale of eligible receivables. The Company used $48,775,000 of the proceeds to
repay the outstanding balance of the original revolving credit facility at
September 25, 1996. Pursuant to the agreement, the Company services, on
behalf of the Master Trust, the accounts receivable that were sold. In return
the Company is paid a servicing fee by the Master Trust which is equal to 1/12
of 1/2 % the average Series 1996 I invested and on each day immediately
preceeding a collection period.
In return for $53,000,000 of cash receipts, the Master Trust issued Series
1996-I certificates which will bear interest at a commercial paper rate. In
return for $14,000,000 the Master Trust issued Series 1996-II certificates to
Polymers International Financial Corporation, a subsidiary of the Company. The
series 1996-II certificates ("Certificates") from the Master Trust will bear
interest at 100 basis points over the U.S. or certain other foreign currency
LIBOR rates. Subsequently, Polymers International Financial Corporation pledged
the Certificates to Citibank N.A.. In return Citibank N.A. gave approval to
Citibank London to issue a $20,000,000 revolving credit facility to Pegasus
Polymers International Inc., a subsidiary of the Company, at a rate of LIBOR
plus 40 basis points.
Operating activities have historically been a major source or use of cash for
working capital needs and capital expenditures. Net cash used in operations
was $1,992,000 for the nine months ended September 30, 1996 as compared to a
$12,070,000 source of cash in the first nine months of 1995. Working capital
on a comparative basis decreased $70,317,000 from December 31, 1995 to
September 30, 1996. Current assets decreased by 18.7% to $160,748,000 at
September 30, 1996 from $197,725,000 at December 31, 1995. Current
liabilities increased $33,340,000 mainly due to the addition of $13,951,000
in short term borrowing from Citibank and the current portion of the Finova
loan. In addition, accounts payable increased $32,893,000 mainly due to the
addition of Mobil as a non-affiliated supplier. The Company expects that
available cash and existing credit facilities will be sufficient to meet its
normal operating requirements, including capital expenditures, over the near
term.
<PAGE>
Foreign Exchange
The Company's foreign exchange exposure is limited to its operations in Europe,
Far East and Canada. All sales and purchases in the United States and Latin
America, representing approximately 75 percent of the companies volume, are
denominated in U.S. dollars. Exposure to foreign exchange fluctuations in Europe
are managed through a balancing of the local assets (primarily accounts
receivable) and liabilities (accounts payable). Fluctuations in foreign currency
exchange rates have not had a material financial impact on the results of the
Predecessor Company or Successor Company.
Impact of Inflation and Changing Prices
Market conditions which are influenced by economic and political considerations,
as well as production capacities and utilization dictate pricing and costs. The
Company has entered into certain supply agreements with Mobil for an initial
term of three years. Such agreements provide for minimum and maximum limits on
the amounts of product supplied at current market prices. The Company does not
have any other long-term purchase or sales commitments with its suppliers or
customers. The Company views this as a marketing advantage that enables it to
respond quickly to market changes, matching supply with demand. The Company
capitalizes on opportunities and imbalances in the market place.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
\42066\011\10PRTSBM.001
<PAGE>
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.
MUEHLSTEIN HOLDING CORPORATION
Date: November 14, 1996 By:/S/ J. Kevin Donohue
J. Kevin Donohue
Chairman of the Board and
Chief Executive Officer
Date: November 14, 1996 By:/S/ Ronald J. Restivo
Ronald J. Restivo
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)
\42066\011\10SIGSBM.004
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET (SEPTEMBER 30, 1996) CONSOLIDATED STATEMENT OF OPERATIONS
(SEPTEMBER 30, 1996) CONSOLIDATED STATEMENT OF CASH FLOWS (FEBRUARY 9 THROUGH
SEPTEMBER 30, 1996) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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