UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 1-7418
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ESSEX GROUP, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN 35-1313928
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 WALL STREET, FORT WAYNE, INDIANA 46802
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (219) 461-4000
None
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Number of Shares Outstanding
Common Stock As of March 31, 1996
-------------- ----------------------------
$.01 Par Value 100<PAGE>
ESSEX GROUP, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 1996
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . . . . 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
In Thousands of Dollars, Except Per Share Data (Unaudited)
--------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ - $ 3,157
Accounts receivable (net of allowance of
$4,064 and $3,930) . . . . . . . . . . . . . . . . . 165,909 154,584
Inventories . . . . . . . . . . . . . . . . . . . . . 187,311 166,076
Other current assets . . . . . . . . . . . . . . . . . 13,820 8,988
-------- --------
Total current assets . . . . . . . . . . . . . 367,040 332,805
Property, plant and equipment (net of accumulated
depreciation of $91,542 and $84,341) . . . . . . . . 267,483 270,546
Excess of cost over net assets acquired (net of
accumulated amortization of $14,252 and $13,221) . . 128,812 129,943
Other intangible assets and deferred costs (net of
accumulated amortization of $3,906 and $3,102) . . . 9,393 9,187
Other assets . . . . . . . . . . . . . . . . . . . . . 2,454 1,987
-------- --------
$775,182 $744,468
======== ========
See Notes to Consolidated Financial Statements
3<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31,
1996 1995
In Thousands of Dollars, Except Per Share Data (Unaudited)
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable to bank . . . . . . . . . . . . . . . . $ 14,900 $ 11,760
Current portion of long-term debt . . . . . . . . . . 11,576 24,734
Accounts payable . . . . . . . . . . . . . . . . . . . 59,470 66,797
Accrued liabilities . . . . . . . . . . . . . . . . . 48,765 45,864
Deferred income taxes . . . . . . . . . . . . . . . . 15,504 15,345
Due to Holdings . . . . . . . . . . . . . . . . . . . 5,242 384
-------- --------
Total current liabilities . . . . . . . . . . . 155,457 164,884
Long-term debt . . . . . . . . . . . . . . . . . . . . 422,122 388,016
Deferred income taxes . . . . . . . . . . . . . . . . 65,618 66,809
Other long-term liabilities . . . . . . . . . . . . . 10,888 10,081
Stockholder's equity:
Common stock, par value $.01 per share; 1,000 shares
authorized; 100 shares issued and outstanding; plus
additional paid in capital . . . . . . . . . . . . . 104,036 104,036
Retained earnings . . . . . . . . . . . . . . . . . . 17,061 10,642
-------- --------
Total stockholder's equity . . . . . . . . . . 121,097 114,678
-------- --------
$775,182 $744,468
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
--------------------------
In Thousands of Dollars 1996 1995
----------------------------------------------------------------------
REVENUES:
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . $308,410 $289,649
Interest income . . . . . . . . . . . . 39 206
Other income . . . . . . . . . . . . . . 239 859
-------- --------
308,688 290,714
-------- --------
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . 258,651 247,223
Selling and administrative . . . . . . . 28,119 21,724
Interest expense . . . . . . . . . . . . 10,167 5,756
Other expense . . . . . . . . . . . . . . 332 127
-------- --------
297,269 274,830
-------- --------
Income before income taxes . . . . . . . . 11,419 15,884
Provision for income taxes . . . . . . . . 5,000 6,700
-------- --------
Net income . . . . . . . . . . . . . . . . $ 6,419 $ 9,184
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
------------------------
In Thousands of Dollars 1996 1995
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OPERATING ACTIVITIES
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . $ 6,419 $ 9,184
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 8,431 8,168
Non cash interest expense . . . . . . . . . . . . . 751 581
Non cash pension expense . . . . . . . . . . . . . 613 642
Provision for losses on accounts receivable . . . . 330 138
Provision (benefit) for deferred income taxes . . . (1,032) 142
(Gain) loss on disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . 145 (53)
Changes in assets and liabilities:
Increase in accounts receivable . . . . . . . . . (11,599) (8,298)
Increase in inventories . . . . . . . . . . . . . (15,961) (20,233)
Decrease in accounts payable and
accrued liabilities . . . . . . . . . . . . . . (4,656) (7,092)
Net (increase) decrease in other assets
and liabilities . . . . . . . . . . . . . . . . (4,430) 9,147
Increase in due to Holdings . . . . . . . . . . . 4,858 740
-------- --------
NET CASH USED FOR (16,131) (6,934)
OPERATING ACTIVITIES . . . . . . . . . . . . . . -------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . (4,448) (4,205)
Proceeds from disposal of property, plant
and equipment . . . . . . . . . . . . . . . . . . . 16 881
Acquisitions and other investments . . . . . . . . . (6,682) (159)
Issuance of equity interest in a subsidiary . . . . - 1,063
-------- ---------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (11,114) (2,420)
-------- --------
See Notes to Consolidated Financial Statements
6<PAGE>
ESSEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Three Month Period
Ended March 31,
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In Thousands of Dollars 1996 1995
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FINANCING ACTIVITIES
Proceeds from long-term debt . . . . . . . . . . . . 70,200 -
Repayment of long-term debt . . . . . . . . . . . . (49,252) -
Proceeds from notes payable to banks . . . . . . . . 117,115 -
Repayment of notes payable to banks . . . . . . . . (113,975) -
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . 24,088 -
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . (3,157) (9,354)
Cash and cash equivalents at beginning of period . . 3,157 16,894
-------- --------
Cash and cash equivalents at end of period . . . . . $ - $ 7,540
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
7<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In Thousands of Dollars
-----------------------
NOTE 1 BASIS OF PRESENTATION
The unaudited interim consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of the management of Essex Group, Inc. (the "Company"), necessary
to present fairly the consolidated financial position of the Company as of
March 31, 1996, and the consolidated results of operations and cash flows
of the Company for the three month periods ended March 31, 1996 and 1995,
respectively. Results of operations for the periods presented are not
necessarily indicative of the results for the full fiscal year. These
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1995.
The Company is a wholly-owned subsidiary of BCP/Essex Holdings Inc.
("Holdings"). Holdings is a holding company with no operations and has
virtually no assets other than its ownership of all the outstanding stock
of the Company.
NOTE 2 INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Finished goods . . . . . . . . . . . . . $167,432 $146,821
Raw materials and work in process . . . . 42,678 52,366
-------- --------
210,110 199,187
LIFO reserve . . . . . . . . . . . . . . (22,799) (33,111)
-------- --------
$187,311 $166,076
======== ========
</TABLE>
The Company values a major portion of its inventories at the lower of
cost or market based on a last-in, first-out ("LIFO") method. Principal
elements of cost included in the Company's inventories are copper,
purchased materials, direct labor and manufacturing overhead. Inventories
valued using the LIFO method amounted to $176,234 and $161,449 at March
31, 1996 and December 31, 1995, respectively.
8<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
NOTE 3 DEBT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
10% Senior notes . . . . . . . . . . . $200,000 $200,000
Revolving loan . . . . . . . . . . . . 172,000 135,000
Term loan . . . . . . . . . . . . . . . 38,573 54,000
Lease obligation . . . . . . . . . . . 23,125 23,750
-------- --------
433,698 412,750
Less current portion . . . . . . . 11,576 24,734
-------- --------
$422,122 $388,016
======== ========
</TABLE>
Bank Financing
In April 1995, in connection with the redemption (the "Redemption") by
Holdings of all of its outstanding 16% Senior Discount Debentures due 2004
(the "Holdings Debentures"), the Company terminated its previous credit
agreement (the "Former Credit Agreement") and entered into three new
facilities: (i) a $260,000 revolving credit agreement, dated as of April
12, 1995, by and among the Company, Holdings, the Lenders named therein,
and Chemical Bank, as agent (the "Revolving Credit Agreement"); (ii) a
$60,000 senior unsecured note agreement, dated as of April 12, 1995, by
and among the Company, Holdings, as guarantor, the Lenders named therein,
and Chemical Bank, as administrative agent (the "Term Loan", together with
the Revolving Credit Agreement, the "Credit Facilities"); and (iii) a
$25,000 agreement and lease, dated as of April 12, 1995, by and between
the Company and Mellon Financial Services Corporation #3 (the "Sale and
Leaseback Agreement"). The Company recognized an extraordinary charge of
$2,971, net of applicable tax benefit ($1,980), in the second quarter 1995
for the write-off of unamortized deferred debt expense in connection with
the termination of its Former Credit Agreement.
On May 12, 1995, the Company borrowed the full amount available under the
Term Loan and the Sale and Leaseback Agreement. These funds, together
with available cash and borrowings under the Revolving Credit Agreement,
were paid to Holdings in the form of a cash dividend ($238,748) and
repayment of a portion of an intercompany liability ($34,102) totaling
$272,850. Holdings applied such funds to redeem all of its outstanding
9<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
Holdings Debentures at 100% of their principal amount of $272,850 on May
15, 1995.
The Revolving Credit Agreement provides for up to $260,000 in revolving
loans, subject to specified percentages of eligible assets and also
provides a $25,000 letter of credit subfacility. The Company's ability to
borrow under the Revolving Credit Agreement is restricted by the financial
covenants contained therein as well as those contained in the Term Loan
and to certain debt limitation covenants contained in the indenture under
which the 10% Senior Notes due 2003 (the "Senior Notes") were issued (the
"Senior Note Indenture"). The Revolving Credit Agreement terminates five
years from its effective date of April 12, 1995. Revolving Credit
Agreement loans bear floating rates of interest, at the Company's option,
at bank prime plus 1.25% or a reserve adjusted Eurodollar rate (LIBOR)
plus 2.25%. The effective interest rate can be reduced by 0.25% to 1.25%
if certain specified financial conditions are achieved. Commitment fees
during the revolving loan period are .375% or .5% of the average daily
unused portion of the available credit based upon certain specified
financial conditions. Indebtedness under the Revolving Credit Agreement
is guaranteed by Holdings and all of the Company's subsidiaries, and is
secured by a pledge of the capital stock of the Company and its
subsidiaries and by a first lien on substantially all assets.
The Term Loan provides for an aggregate of $60,000 in term loans, the
last payment of which is due in May 2000. Borrowings under the Term Loan
bear floating rates of interest at bank prime plus 2.75% or LIBOR plus
3.75%. Principal payments on the term loans will be made in 20 equal
quarterly installments, subject to the loan's excess cash provision,
commencing August 15, 1995. The Term Loan requires 50% of excess cash, as
defined, to be applied against the outstanding term loan balance. The
excess cash calculation for the year ended December 31, 1995 required the
Company to repay $12,427 of the term loan. This payment was made in March
1996. After the 1996 excess cash repayment, principal payments will be
made in 17 equal quarterly installments of $2,269. Amounts repaid with
respect to the excess cash provision may not be reborrowed.
The Sale and Leaseback Agreement provides $25,000 for the sale and
leaseback of certain of the Company's fixed assets. The Sale and
Leaseback Agreement has a seven-year term expiring in May 2002. The
principal component of the rental is to be paid quarterly, with the amount
of each of the first 27 payments to be equal to 2.5% of lessor's cost of
the equipment, and the balance due at the final payment. The interest
component is to be paid on the unpaid principal balance and is to be
calculated by lessor at LIBOR plus 2.5%. The effective interest rate can
be reduced by 0.25% to 1.125% if certain specified financial conditions
are achieved.
The Company has purchased interest rate cap protection through May 15,
1997 with respect to $150,000 of debt with a strike rate of 10.0% (three
month LIBOR).
10<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars, Except Per Share Data
----------------------------------------------
In addition, the Company also has uncommitted bank lines of credit which
provide for unsecured borrowings for working capital of up to $25,000, of
which $14,900 and $11,760 were outstanding at March 31, 1996 and December
31, 1995, respectively. Amounts outstanding under these lines of credit
are denoted as notes payable to banks in the Consolidated Balance Sheets
and bear interest at rates subject to agreement between the Company and
the lending banks. At March 31, 1996 and December 31, 1995, such rates of
interest averaged 6.3% and 6.7%, respectively.
Senior Notes
In May 1993, the Company issued $200,000 aggregate principal amount of
its Senior Notes which bear interest at 10% per annum, payable
semiannually and are due in May 2003. The Senior Notes rank pari passu in
right of payment with all other senior indebtedness of the Company. To
the extent that any other senior indebtedness of the Company is secured by
liens on the assets of the Company, the holders of such secured senior
indebtedness will have a claim prior to any claim of the holders of the
Senior Notes as to those assets.
NOTE 4 HOLDINGS PREFERRED STOCK AND WARRANTS
At March 31, 1996, Holdings had outstanding 2,110,049 shares of 15%
Series B Cumulative Redeemable Exchangeable Preferred Stock, Liquidation
Preference $25 Per Share, (the "Series B Preferred Stock") and 5,666,738
warrants to purchase an equivalent number of shares of common stock of
Holdings at a per share exercise price of approximately $2.86. The
accreted balance of the Series B Preferred Stock was $50,906 at March 31,
1996. The Series B Preferred Stock is subject to mandatory redemption on
September 30, 2004. At the option of Holdings, the Series B Preferred
Stock may be redeemed at a percentage of liquidation preference declining
from 107.5% beginning September 30, 1995 to 100% beginning September 30,
1998, plus accumulated and unpaid dividends. The Revolving Credit
Agreement permits the optional redemption of the Series B Preferred Stock
only out of proceeds of a Holdings primary offering (public or private) of
common stock, or in exchange for debentures with terms similar to those of
the Series B Preferred Stock or in exchange for other preferred stock on
terms no more onerous than those presently existing. In order to redeem
the Series B Preferred Stock under the terms of the Senior Note Indenture,
Holdings would be required, among other things, to seek the consent of the
holders of the Senior Notes, refinance the Senior Notes after they become
redeemable in May 1998, or obtain funds through the sale of equity
securities.
Dividends on the Series B Preferred Stock are payable quarterly at a rate
of 15.0% per annum. Dividends accruing on or before September 30, 1998
may, at the option of Holdings, be paid in cash, paid in additional shares
of Series B Preferred Stock or in any combination thereof. Dividends on
the Series B Preferred Stock accruing after September 30, 1998 must be
paid in cash. Holdings does not expect to pay cash dividends on or prior
11<PAGE>
ESSEX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
In Thousands of Dollars
-----------------------
to September 30, 1998. Each of the Credit Facilities and the Senior Note
Indenture restricts the payment of cash to Holdings. In order to make
cash dividend payments on the Series B Preferred Stock under the terms of
the Senior Note Indenture, Holdings would be required, among other things,
to seek the consent of the holders of the Senior Notes, refinance the
Senior Notes after they become redeemable in May 1998, or obtain funds
through the sale of equity securities.
NOTE 5 CONTINGENT LIABILITIES
There are various environmental claims and legal proceedings pending
against the Company which have arisen out of the ordinary course of its
business. Pursuant to the February 29, 1988 acquisition of the Company by
Holdings from United Technologies Corporation ("UTC"), UTC agreed to
indemnify the Company against all losses (as defined) resulting from or in
connection with damage or pollution to the environment and arising from
events, operations, or activities of the Company prior to February 29,
1988 or from conditions or circumstances existing at February 29, 1988.
Except for certain matters relating to permit compliance, the Company is
fully indemnified with respect to conditions, events or circumstances
known to UTC prior to February 29, 1988. The sites covered by this
indemnity are handled directly by UTC and all payments required to be made
are paid directly by UTC. The amounts related to this environmental
contingency are not material to the Company's consolidated financial
statements. UTC also provided a second environmental indemnity which
deals with losses related to environmental events, conditions or
circumstances existing at or prior to February 29, 1988, which only became
known in the five year period commencing February 29, 1988. As to any
such losses, the Company is responsible for the first $4,000 incurred.
Management and its legal counsel periodically review the probable outcome
of pending proceedings and the costs reasonably expected to be incurred.
The Company accrues for these costs when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated.
After consultation with counsel during the current quarter, in the opinion
of management, the ultimate cost to the Company, exceeding amounts
provided, will not materially affect the consolidated financial position
or results of operations.
12<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Introduction
Essex Group, Inc. (the "Company"), founded in Detroit, Michigan in 1930,
is engaged in one principal line of business, the development, production
and marketing of electrical wire and cable and electrical insulation
products. Among the Company's products are building wire for residential
and commercial applications; magnet wire for electromechanical devices
such as motors, transformers and electrical controls; voice and data
communication wire; automotive wire and specialty wiring assemblies for
automobiles and trucks; industrial wire for applications in appliances,
construction and recreational vehicles and insulation products including
mica paper and mica-based composites.
In October 1992, MS/Essex Holdings Inc. ("Holdings") was acquired (the
"Acquisition") by merger (the "Merger") of B E Acquisition Corporation
("BE") with and into Holdings with Holdings surviving under the name
BCP/Essex Holdings Inc. ("Holdings"). BE was a newly organized Delaware
corporation formed for the purpose of effecting the Acquisition.
Shareholders of BE included Bessemer Holdings, L.P. (an affiliate and
successor in interest to Bessemer Capital Partners, L.P. ["BCP"])
("BHLP"), affiliates of Goldman, Sachs & Co. ("Goldman Sachs"), affiliates
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Chemical
Equity Associates, A California Limited Partnership ("CEA") and members of
management and other employees of the Company. As a result of the Merger,
the stockholders of BE became stockholders of Holdings. Holdings acquired
the Company from United Technologies Corporation ("UTC") in February 1988.
Results of Operations
Three Month Period Ended March 31, 1996
Net sales for the first quarter 1996 were $308.4 million or 6.5% higher
than the comparable period in 1995, resulting primarily from improved
sales volume, partially offset by lower copper prices, the Company's
principal raw material. During the first quarter 1996, the average price
of copper on the New York Commodity Exchange, Inc. ("COMEX") was 14.5%
lower than the comparable period in 1995. Copper costs are generally
passed onto customers through product pricing. First quarter 1996 sales
volumes were at record levels with respect to historical first quarter
operating performance and exceeded the first quarter 1995 by 4.5%. Sales
volume improvements resulted primarily from increased distribution sales
attributable to the distribution operations acquired in September 1995 and
increased demand for the Company's building and communication wire
products. Building wire sales for the first quarter 1996, despite an
increase in sales volume, declined as compared to the first quarter 1995
due primarily to a decrease in copper prices and other pricing conditions.
Building wire market prices have experienced very competitive market
conditions caused primarily by excess industry capacity. Sales of magnet
wire during the first quarter 1996 declined from the comparable 1995
period due to declining copper prices and a change in product mix,
partially offset by improved sales volumes. Sales volume improvements
were attributable to increased demand for magnet wire in the electric
motor market as well as increased sales to distributors. Voice and data
communication wire sales for the first quarter 1996 increased over the
comparable period in 1995 due to increased domestic sales volume and
13<PAGE>
improved product pricing. Automotive wire sales in the first quarter 1996
were below the comparable 1995 period due to a decrease in copper prices
and reduced sales volumes.
Cost of goods sold for the first quarter 1996 was 4.6% higher than the
same period in 1995 due primarily to higher sales volumes partially offset
by lower copper prices. The Company's cost of goods sold as a percentage
of net sales was 83.9% and 85.4% in the first quarter 1996 and 1995,
respectively. The cost of goods sold percentage decrease resulted
primarily from the impact of lower copper and other material costs as well
as lower manufacturing costs attributable to continued capital investments
and higher manufacturing volumes. These lower costs were partially offset
by competitive pricing conditions within the building wire market.
Selling and administrative expenses for the first quarter 1996 were 29.4%
above the comparable 1995 period, due primarily to increased overhead
expenses attributable to the distribution operations acquired in September
1995.
Interest expense in the first quarter 1996 was 76.6% higher than the same
period in 1995 due primarily to additional borrowings under the Company's
new credit facilities to effect the redemption (the "Redemption") of all
of Holdings' outstanding Senior Discount Debentures due 2004 (the
"Debentures"). See "Liquidity, Capital Resources and Financial Condition"
under this caption. The Redemption resulted in a reduction of Holdings'
first quarter 1996 interest expense of 33.7% compared to the first quarter
1995.
Income tax expense was 43.8% of pretax income in the first quarter 1996
compared with 42.2% for the same period in 1995. The effective income tax
rate of the Company is higher than the approximate statutory rate of 40%
due to the effect of the amortization of excess of cost over net assets
acquired which is not deductible for income tax purposes.
Liquidity, Capital Resources and Financial Condition
The Company's financial position at March 31, 1996 was highly leveraged.
The Company's aggregate notes payable to banks plus long-term debt was
$448.6 million and its stockholder's equity was $121.1 million. The
resulting ratio of debt to stockholder's equity of approximately 3.7 to 1
was comparable to the ratio at December 31, 1995.
In general, the Company requires liquidity for working capital, capital
expenditures, debt repayments, interest and taxes. Of particular
significance to the Company is its working capital requirements which
increase whenever it experiences strong incremental demand in its business
and/or a significant rise in copper prices. Historically, the Company has
satisfied its liquidity requirements through a combination of funds
generated from operating activities together with funds available under
its credit facilities. Based upon historical experience and the
availability of funds under its credit facilities, the Company expects
that its usual sources of liquidity will be sufficient to enable it to
meet its cash requirements for working capital, capital expenditures, debt
repayments, interest and taxes for 1996. As of March 31, 1996, the
Company was in compliance with all covenants under the agreements
governing its outstanding indebtedness.
14<PAGE>
In April 1995, in connection with the Redemption of all of Holdings'
outstanding Debentures at their principal amount of $272.9 million, the
Company terminated its previous credit agreement (the "Former Credit
Agreement") and entered into three new facilities: (i) a $260.0 million
revolving credit agreement, dated as of April 12, 1995 by and among the
Company, Holdings, the lenders named therein and Chemical Bank, as agent
(the "Revolving Credit Agreement"); (ii) a $60.0 million senior unsecured
note agreement, dated as of April 12, 1995 by and among the Company,
Holdings, as guarantor, the lenders named therein and Chemical Bank, as
administrative agent (the "Term Loan", together with the Revolving Credit
Agreement, the "Credit Facilities"); and (iii) a $25.0 million agreement
and lease dated as of April 12, 1995 by and between the Company and Mellon
Financial Services Corporation #3 (the "Sale and Leaseback Agreement" and
together with the Credit Facilities the "New Company Facilities"). The
Company recognized an extraordinary charge of approximately $3.0 million,
net of applicable tax benefit, in the second quarter 1995 for the write-
off of unamortized deferred debt expense in connection with the
termination of the Former Credit Agreement. Holdings is a party to each
of the Credit Facilities and has guaranteed the Company's obligations
under the Revolving Credit Agreement. Holdings has secured its
obligations pursuant to the guarantee of the Revolving Credit Agreement by
a pledge of all of the outstanding stock of the Company to the lending
banks.
On May 12, 1995 the Company borrowed the full amounts available under the
Term Loan and Sale and Leaseback Agreement. These funds, together with
available cash and borrowings under the Revolving Credit Agreement, were
paid to Holdings in the form of a cash dividend ($238.8 million) and
repayment of a portion of an intercompany liability ($34.1 million)
totaling $272.9 million. Holdings applied such funds to effect the
redemption of its Debentures, at 100% of their principal amount of $272.9
million, on May 15, 1995.
The Revolving Credit Agreement provides for up to $260.0 million in
revolving loans, subject to specified percentages of eligible assets and
also provides a $25.0 million letter of credit subfacility. The Company's
ability to borrow under the Revolving Credit Agreement is restricted by
the financial covenants contained therein as well as those contained in
the Term Loan and certain debt limitation covenants contained in the
indenture under which the 10% Senior Notes due 2003 (the "Senior Notes")
were issued (the "Senior Note Indenture"). The Revolving Credit Agreement
terminates five years from its effective date of April 12, 1995. The
Revolving Credit Agreement loans bear floating rates of interest, at the
Company's option, at bank prime plus 1.25% or a reserve adjusted
Eurodollar rate (LIBOR) plus 2.25%. The effective interest rate can be
reduced by 0.25% to 1.25% if certain specified financial conditions are
achieved. Commitment fees during the revolving loan period are .375% or
0.5% of the average daily unused portion of the available credit based
upon certain specified financial conditions.
The Term Loan provides an aggregate $60.0 million in term loans, and is
to be repaid in 20 equal quarterly installments, subject to the loan's
excess cash provision, beginning August 15, 1995 and ending May 15, 2000.
The Term Loan bears floating rates of interest at bank prime plus 2.75% or
LIBOR plus 3.75%. The Term Loan requires 50% of excess cash, as defined,
to be applied against the outstanding term loan balance. The excess cash
calculation for the year ended December 31, 1995 required the Company to
repay $12.4 million of the term loan on or before April 15, 1996. After
15<PAGE>
the 1996 excess cash repayment, the remaining principal payments will be
made in 17 equal quarterly installments of $2.3 million. Amounts repaid
with respect to the excess cash provision may not be reborrowed.
The Sale and Leaseback Agreement provides $25.0 million for the sale and
leaseback of certain of the Company's fixed assets. The lease obligation
has a seven-year term expiring in May 2002. The principal component of
the rental is paid quarterly, with the amount of each of the first 27
payments equal to 2.5% of Lessor's cost of the equipment, and the balance
due at the final payment. The interest component is paid on the unpaid
principal balance and is calculated by Lessor at LIBOR plus 2.5%. The
effective interest rate can be reduced by 0.25% to 1.125% if certain
specified financial conditions are achieved.
The Revolving Credit Agreement restricts incurrence of indebtedness,
liens, guarantees, mergers, sales of assets, lease obligations, payment of
dividends, capital expenditure and investments and, with certain
exceptions, limits prepayment of indebtedness, including the Senior Notes.
The Revolving Credit Agreement only permits the optional redemption of the
Series B Preferred Stock out of proceeds of a Holdings primary offering
(public or private) of common stock, or in exchange for debentures with
terms similar to those of the Series B Preferred Stock or in exchange for
other preferred stock on terms no more onerous than those presently
existing. Transactions with affiliates are also restricted subject to
certain exceptions. The Term Loan and the Senior Note Indenture prohibit,
with certain exceptions, the incurrence by the Company of any secured
indebtedness unless such indebtedness is equally and ratably secured. The
failure by Holdings or the Company to comply with any of the foregoing
covenants, if such failure is not timely cured or waived, could lead to
acceleration of the indebtedness covered by the applicable agreement and
to cross-defaults and cross-acceleration of other indebtedness of the
Company.
The Company also has uncommitted bank lines of credit which provide
unsecured borrowings for working capital of up to $25.0 million of which
$14.9 million was outstanding at March 31, 1996 and denoted as notes
payable to banks in the Consolidated Balance Sheets. These lines of
credit bear interest at rates subject to agreement between the Company and
the lending banks. At March 31, 1996, such rates of interest averaged
6.3%.
The Company has purchased interest rate cap protection through May 15,
1997 with respect to $150.0 million of debt with a strike rate of 10.0%
(three month LIBOR).
Net cash used for operating activities through the first three months of
1996 was $16.1 million, compared to $6.9 million during the same period in
1995. The increase in cash requirements was needed primarily to fund
higher accounts receivable balances. Further, in 1995 other assets
declined due to the collection of a 1994 miscellaneous receivable.
Capital expenditures of $4.4 million in the first quarter of 1996 were
$0.2 million more than in the comparable period in 1995. The major
projects in 1996 entail improving product quality, increasing
manufacturing productivity and expanding capacity. Capital expenditures
in 1996 are expected to be approximately 20% to 25% below 1995 and will be
used to complete modernization projects, expand capacity, enhance
efficiency and ensure continued compliance with regulatory requirements.
16<PAGE>
At March 31, 1996, approximately $4.7 million was committed to outside
vendors for capital expenditures. The Company's Credit Facilities impose
limitations on capital expenditures, business acquisitions and
investments. On March 25, 1996, the Company acquired the Canadian
building wire operations of BICC Phillips, Inc. The acquisition consisted
primarily of inventory and equipment and was financed from proceeds
received under the Company's Revolving Credit Agreement. Future cash
requirements of this operation are expected to be satisfied through the
Company's traditional sources of liquidity as previously discussed.
Regarding long-term liquidity issues, future capital expenditures are
anticipated to be at or below historical levels while the Senior Notes
mature in 2003 and are expected to be replaced by similar financing at
that time. The terms of the Sale and Leaseback Agreement include a
balloon payment of $8.1 million in 2002. The Company expects that its
traditional sources of liquidity will enable it to meet its long-term cash
requirements for working capital, capital expenditures, interest and
taxes, as well as its debt repayment obligations under both the Term Loan
and the Sale and Leaseback Agreement.
The Company's operations involve the use, disposal and clean-up of
certain substances regulated under environmental protection laws. The
Company has accrued $0.7 million for environmental remediation and
restoration costs. The accruals were based upon management's best
estimate of the Company's exposure in light of relevant available
information including the allocations and remedies set forth in applicable
consent decrees, third party estimates of remediation costs, the estimated
ability of other potentially responsible parties to pay their
proportionate share of remediation costs, the nature of each site and the
number of participating parties. Subject to the difficulty in estimating
future environmental costs, the Company expects that any sum it may have
to pay in connection with environmental matters in excess of the amounts
recorded or disclosed will not have a material adverse effect on its
financial position, results of operations or cash flows.
Considerations Relating To Holdings' Cash Obligations
Holdings is a holding company with no operations and has virtually no
assets other than its ownership of the outstanding common stock of the
Company. All of such stock is pledged, however, to the lenders under the
Revolving Credit Agreement. Accordingly, Holdings' ability to meet its
cash obligations is dependent on the Company's ability to pay dividends,
to loan, or otherwise advance or transfer funds to Holdings in amounts
sufficient to service Holdings' obligations.
The Company expects that it may make certain cash payments to Holdings
from time to time to the extent cash is available and to the extent it is
permitted under the terms of the Credit Facilities and the Senior Note
Indenture. Such payments may include (i) an amount necessary under the
tax sharing agreement between the Company and Holdings to enable Holdings
to pay the Company's taxes as if computed on an unconsolidated basis; (ii)
an annual management fee to an affiliate of BHLP of up to $1.0 million;
(iii) amounts necessary to repurchase management stockholders' shares of
Holdings' common stock under certain specified conditions; and (iv) other
amounts to meet ongoing expenses of Holdings (such amounts are considered
to be immaterial both individually and in the aggregate, however, because
Holdings has no operations, other than those conducted through the
Company, or employees). To the extent the Company makes any such
17<PAGE>
payments, it will do so out of operating cash flow, borrowings under the
Revolving Credit Agreement or other sources of funds it may obtain in the
future and only to the extent such payments are permitted under the terms
of the Credit Facilities and the Senior Note Indenture.
At March 31, 1996, Holdings had outstanding 2,110,049 shares of 15%
Series B Cumulative Redeemable Exchangeable Preferred Stock, Liquidation
Preference $25 Per Share, (the "Series B Preferred Stock"). The aggregate
liquidation preference of the Series B Preferred Stock was $52.8 million
at March 31, 1996. The Series B Preferred Stock is subject to mandatory
redemption on September 30, 2004. At the option of Holdings, the Series B
Preferred Stock may be redeemed at a percentage of liquidation preference
declining from 107.5% beginning September 30, 1995 to 100% beginning
September 30, 1998, plus accumulated and unpaid dividends. The Revolving
Credit Agreement permits the optional redemption of the Series B Preferred
Stock only out of proceeds of a Holdings primary offering (public or
private) of common stock, or in exchange for debentures with terms similar
to those of the Series B Preferred Stock or in exchange for other
preferred stock on terms no more onerous than those presently existing.
In order to redeem the Series B Preferred Stock under the terms of the
Senior Note Indenture, Holdings would be required, among other things, to
seek the consent of the holders of the Senior Notes, refinance the Senior
Notes after they become redeemable in May 1998, or obtain funds through
the sale of equity securities.
Dividends on the Series B Preferred Stock are payable quarterly at a rate
of 15.0% per annum. Dividends accruing on or before September 30, 1998
may, at the option of Holdings, be paid in cash, paid in additional shares
of Series B Preferred Stock or in any combination thereof. Dividends on
the Series B Preferred Stock accruing after September 30, 1998 must be
paid in cash. Holdings does not expect to pay cash dividends on or prior
to September 30, 1998. Each of the Credit Facilities and the Senior Note
Indenture restricts the payment of cash to Holdings. In order to make
cash dividend payments on the Series B Preferred Stock under the terms of
the Senior Note indenture, Holdings would be required, among other things,
to seek the consent of the holders of the Senior Notes, refinance the
Senior Notes after they become redeemable in May, 1998, or obtain funds
through the sale of equity securities.
General Economic Conditions and Inflation
The Company faces various economic risks ranging from an economic
downturn adversely impacting the Company's primary markets to marked
fluctuations in copper prices. In the short-term, pronounced changes in
the price of copper tend to affect gross profits within the building wire
product line because such changes affect raw material costs more quickly
than those changes can be reflected in the pricing of building wire
products. In the long-term, however, copper price changes have not had a
material adverse effect on gross profits because cost changes generally
have been passed through to customers over time. In addition, the Company
believes that its sensitivity to downturns in its primary markets is less
significant than it might otherwise be due to its diverse customer base
and its strategy of attempting to match its copper purchases with its
needs. The Company cannot predict either the continuation of current
economic conditions or future results of its operations in light thereof.
18<PAGE>
The Company believes that it is not particularly affected by inflation
except to the extent that the economy in general is thereby affected.
Should inflationary pressures drive costs higher, the Company believes
that general industry competitive price increases would sustain operating
results, although there can be no assurance that this will be the case.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during
the quarter ended March 31, 1996.
19<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX GROUP, INC.
(Registrant)
May 14, 1996 /s/ David A. Owen
---------------------------------
David A. Owen
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
20<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS
OF MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000033565
<NAME> ESSEX GROUP, INC.
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