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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-10740
AMSTAR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3382652
(State of Incorporation) (I.R.S. Employer Identification No.)
Long Wharf Maritime Center
555 Long Wharf Drive, Suite 12
New Haven, CT 06511
(Address of principal executive offices)
(203) 777-2274
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
As of November 7, 1994, a total of 1,000 shares of common stock of
the Company was outstanding. All of the common stock is owned by
ESSTAR Incorporated.
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<TABLE>
PART 1. FINANCIAL INFORMATION
AMSTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars)
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1994 1993 1994 1993
Net sales $99,783 $76,883 $264,251 $215,681
Costs of products sold 67,724 51,867 179,210 149,817
Gross profit 32,059 25,016 85,041 65,864
Selling, general and administrative
expenses 16,551 14,154 46,642 40,917
Amortization of goodwill and other
intangibles 1,033 1,033 3,099 3,099
Operating income 14,475 9,829 35,300 21,848
Interest income 48 3,681 247 11,112
Interest expense (6,010) (6,013) (18,120) (17,745)
Other expense, ne (588) (184) (893) (368)
Income before provision for income
taxes and cumulative effects of
changes in accounting principles 7,925 7,313 16,534 14,847
Provision for income taxes:
Federal 2,774 2,972 5,727 5,895
State 1,169 453 2,737 909
3,943 3,425 8,464 6,804
Income before cumulative effects
of changes in accounting principles 3,982 3,888 8,070 8,043
Cumulative effects of changes in
accounting principles -- -- -- (10,957)
Net income (loss) $ 3,982 $ 3,888 $ 8,070 $ (2,914)
See accompanying notes
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AMSTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
September 30, December 31,
1994 1993
ASSETS
Current Assets:
Cash and cash equivalents $ 93 $ 2,554
Accounts receivable 65,085 54,943
Receivable from ESSTAR Incorporated 6,025 946
Inventories 46,451 38,671
Other 499 861
Total current assets 118,153 97,975
Property, plant and equipment, net 68,337 64,095
Goodwill and other intangibles, net 96,330 99,787
Other assets 929 1,024
Total Assets $283,749 $262,881
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 19,063 $ 15,895
Accrued interest 2,777 8,331
Accrued payroll and employee
benefit costs 12,373 11,223
Accrued income taxes 5,619 1,179
Deferred income taxes 3,956 3,467
Other accrued expenses 9,204 9,365
Total current liabilities 52,992 49,460
Long-term debt 215,350 201,800
Deferred income taxes 5,797 9,851
Accrued postretirement benefit costs 10,803 9,638
Other noncurrent liabilities 11,610 13,005
Stockholder's Equity (Deficit):
Common stock $.01 par value,
1000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 64,814 64,814
Retained earnings 30,142 22,072
Notes and accrued interest
receivable from related party (107,759) (107,759)
Total stockholder's equity (deficit) (12,803) (20,873)
Total Liabilities and Stockholder's
Equity (Deficit) $283,749 $262,881
See accompanying notes
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AMSTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
Nine Months Ended
September 30,
1994 1993
Cash flows from operating activities:
Net income (loss) $8,070 $(2,914)
Adjustments to reconcile net income
(loss) to net cash used for operations:
Cumulative effects of changes
in accounting principles -- 10,957
Depreciation 5,647 4,614
Deferred income taxes (3,735) 1,622
Amortization of goodwill and
other intangibles 3,099 3,099
Accretion of non-cash interest -- (10,378)
13,081 7,000
Change in operating assets and liabilities,
net of changes in accounting principles:
Receivables (15,221) 326
Inventories (7,780) (963)
Other current assets 362 305
Other assets 453 228
Accounts payable 3,168 (4,869)
Accrued income taxes 4,440 (6,498)
Other current liabilities (4,076) (3,003)
Other noncurrent liabilities (549) 5,028
Net cash used for operations (6,122) (2,446)
Cash flows from investing activities:
Dividends paid -- (7,500)
Purchases of property, plant and
equipment, net (9,889) (5,168)
Net cash used for investing activities (9,889) (12,668)
Cash flows from financing activities:
Increase in revolving credit
agreement borrowings 13,550 8,708
Net cash provided by financing
activities 13,550 8,708
Decrease in cash and cash equivalents (2,461) (6,406)
Cash and cash equivalents, beginning
of period 2,554 6,483
Cash and cash equivalents, end of period $ 93 $ 77
See accompanying notes
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein
have been prepared by Amstar Corporation ("Amstar" or the "Company"),
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. The information reported
reflects all adjustments (consisting only of normal recurring
accruals and the cumulative effects of the changes in accounting
principles discussed in Note 4) which are, in the opinion of
management, necessary to a fair statement of the results for the
periods reported. The results of operations for the nine month
period ended September 30, 1994, are not necessarily indicative of
the results to be expected for the full year. These condensed
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
2. On June 30, 1989, the holders of all then outstanding shares of
common stock of Amstar exchanged (the "Amstar Exchange") such shares
for shares of common stock of ESSTAR Holdings Inc., a Delaware
corporation, now known as ESSTAR Incorporated ("Esstar").
Simultaneously with the Amstar Exchange, the holders of all then
outstanding shares of common stock of EI Holdings Corp., a Delaware
corporation ("EI Holdings"), exchanged such shares for shares of
Esstar common stock (together with the Amstar Exchange, the
"Combination"). As a result of the Combination, Amstar and EI
Holdings each became direct, wholly owned subsidiaries of Esstar.
The Company holds an investment in certain securities of ESSEX
Holdings, Inc. ("Essex") formerly known as ESSEX Industries Inc., a
subsidiary of EI Holdings. (See "Long-Term Investments" on page 11.)
3. Operations include Milwaukee Electric Tool Corporation
("METCO"), which produces and sells heavy-duty portable electric
power tools and accessories.
4. Effective January 1, 1993, Amstar adopted the provisions of
Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes" ("SFAS 109"), and the provisions of Statement of
Financial Accounting Standards 106, "Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"). The adoption of these
accounting changes resulted in a one-time cumulative charge to income
aggregating $11.0 million. (See Note 6.)
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SFAS 109 requires the liability method of accounting for
income taxes rather than the deferred method previously used. The
cumulative effect of adopting this accounting change as of January
1, 1993, was to reduce net income by $5.6 million.
SFAS 106 requires the accrual method of accounting for
postretirement benefits other than pensions. Prior to 1993, these
expenses were recognized on a modified cash basis. The cumulative
effect of adopting this accounting change as of January 1, 1993,
was to reduce net income by $5.4 million.
5. Inventories, which are stated at the lower of cost, under the
last-in, first-out (LIFO) method, or market, consisted of the
following (thousands of dollars):
September 30, December 31,
1994 1993
Raw materials and parts $23,069 $21,660
In-process 1,299 1,167
Finished products 22,083 15,844
$46,451 $38,671
6. As discussed in Note 4, the Company adopted FAS 109 effective
January 1, 1993. Accordingly, deferred income taxes reflect the
tax consequences in future years of differences between the tax and
financial reporting bases of assets and liabilities. Prior to
1993, provisions were made for deferred income taxes where
differences existed between the time transactions affected taxable
income and the time that these transactions entered into the
determination of income for financial statement purposes.
Under the terms of a tax sharing arrangement with Esstar, Amstar
provides for income taxes as if it files its own consolidated
return. The provision for income taxes for the quarters and nine
month periods ended September 30, 1994 and 1993 were as follows
(thousands of dollars):
Quarter Ended Nine Month Period Ended
September 30, September 30,
1994 1993 1994 1993
Current:
Federal $4,194 $2,239 $ 9,431 $4,546
State 1,220 390 2,768 636
5,414 2,629 12,199 5,182
Deferred:
Federal (1,420) 733 (3,704) 1,349
State (51) 63 (31) 273
(1,471) 796 (3,735) 1,622
Total
Provision $3,943 $3,425 $ 8,464 $6,804
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Quarter Ended September 30, 1994 and 1993
Sales
Net sales were $99.8 million during the quarter ended
September 30, 1994, an increase of $22.9 million, or 29.8%, from
the comparable prior year period. The increase is due to a 22.8%
increase in unit sales of tools and accessories and a 5.7% increase
in the average tool unit and accessory selling price.
Income from Operations
Operating income was $14.5 million during the quarter ended
September 30, 1994, compared with $9.8 million during the quarter
ended September 30, 1993. The greater operating income was the
result of higher gross profit, partially offset by increased
selling, general, and administrative expenses and other expense,
net, during the current quarter.
During the quarter ended September 30, 1994, gross profit was
$7.0 million greater than the comparable prior year quarter as a
result of greater sales volume. Gross margin during the current
quarter decreased to 32.1% of net sales from 32.5% during the prior
year quarter. The decrease is the result of a $1.0 million
adjustment to the LIFO inventory reserve, resulting in an increase
in cost of sales. Exclusive of this adjustment, gross margin during
the current quarter was 33.1%.
Selling, general and administrative expenses, including
corporate expenses, increased $2.4 million during the quarter ended
September 30, 1994, in comparison with the prior year period.
These expenses increased primarily as a result of greater costs
incurred related to selling and marketing programs. However,
selling, general and administrative expenses have decreased 1.8%,
as a percentage of sales, because of greater sales volume.
Other Items
Interest expense, which primarily reflects $5.6 million of
interest on the 11.375% Senior Subordinated Notes (the "Notes"),
remained relatively unchanged from the prior year quarter.
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Interest income, which primarily represents interest from
loans and advances to related parties, decreased by $3.6 million
during the current quarter as compared to the prior year period.
Subsequent to December 31, 1993, Essex informed the Company that as
of December 31, 1993, Essex wrote off the remaining balance of its
goodwill of $82.3 million. (See "Goodwill Write-off" on page 23.)
Based on this information, the Company determined that, as of
December 31, 1993, the ultimate realization of a portion of the
Senior Subordinated Discount Notes (the "Discount Notes") may be in
doubt. Accordingly, the Company has classified the Discount Notes
as an offset to stockholder's equity in the consolidated balance
sheet as of December 31, 1993, and has reserved in full against the
accretion of interest on the Discount Notes subsequent to December
31, 1993. The accretion on the Discount Notes during the current
quarter was $4.1 million. (See "Long-Term Investments" on page 11.)
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Nine Month Period Ended September 30, 1994 and 1993
Sales
Net sales were $264.2 million during the nine month period
ended September 30, 1994, an increase of $48.6 million, or 22.5%,
from the comparable prior year period. The increase is due to a
15.9% increase in unit sales of tools and accessories and a 5.7%
increase in the average tool unit and accessory selling price.
Income from Operations
Operating income was $35.3 million during the nine month
period ended September 30, 1994, in comparison with $21.8 million
during the comparable prior year period. The greater operating
income was the result of higher gross profit, partially offset by
increased selling, general, and administrative expenses during the
current period.
During the nine month period ended September 30, 1994, gross
profit was $19.2 million greater than the comparable prior year
period as a result of higher sales volume and gross margin. The
greater sales volume resulted in $14.8 million of additional gross
profit. An increase in gross margin to 32.2% of net sales from
30.5% during the prior year period resulted in $4.4 million of
additional gross profit. The improved gross margin is due mainly
to higher production levels during the current period. Higher
production levels resulted in the spreading of fixed overhead costs
over a larger number of units, thus reducing the per unit cost of
products sold, and increasing gross margin during the current
period.
Selling, general and administrative expenses, including
corporate expenses, increased $5.7 million during the nine months
ended September 30, 1994, in comparison with the prior year period.
These expenses increased primarily as a result of greater costs
incurred related to selling and marketing programs. However,
selling, general and administrative expenses have decreased 1.3%,
as a percentage of sales, because of greater sales volume.
Other Items
Interest expense, which primarily reflects $16.7 million of
interest on the Notes, increased by $0.4 million during the current
period as a result of greater average outstanding balances on the
Company's revolving credit facility and higher interest rates
during the current period.
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Interest income, which primarily represents interest from
loans and advances to related parties, decreased by $10.9 million
during the current nine month period ended September 30, 1994, as
compared to the prior year period. Subsequent to December 31,
1993, Essex informed the Company that as of December 31, 1993,
Essex wrote off the remaining balance of its goodwill of $82.3
million. (See "Goodwill Write-off" on page 23.) Based on this
information, the Company determined that, as of December 31, 1993,
the ultimate realization of a portion of the Discount Notes may be
in doubt. Accordingly, the Company has classified the Discount
Notes as an offset to stockholder's equity in the consolidated
balance sheet as of December 31, 1993, and has reserved in full
against the accretion of interest on the Discount Notes subsequent
to December 31, 1993. The accretion on the Discount Notes during
the current nine month period was $11.9 million. (See "Long-Term
Investments" on page 11.)
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Financial Condition
Working Capital
The working capital of the Company was $65.2 million on
September 30, 1994, compared with $48.5 million on December 31,
1993. All working capital changes are normal period-to-period
variations. The increase in working capital during the current
period is primarily the result of increased sales during the
current period.
Long-Term Investments
On June 30, 1989, in connection with the Combination, the
Company made the Intercompany Loan to Essex (the "Intercompany
Loan"). The Intercompany Loan was evidenced by $152.7 million
aggregate principal amount of Senior Subordinated Discount Notes
due 1997 (the "Discount Notes") and $100.0 million aggregate
principal amount of 14% Subordinated Debentures due 1997 (the
"Debentures"). Interest on the Debentures was payable semi-
annually, on August 1 and February 1 of each year. Essex paid the
Company $1.2 million, due on August 1, 1989, and $7.0 million due
on each of February 1, 1990, August 1, 1990, February 1, 1991 and
August 1, 1991, of interest in cash on the Debentures, as required
under the terms thereof. On December 31, 1991, the Discount Note
Indenture was amended to provide that, among other things, at the
option of Essex, the date from and after which cash interest must
be paid on the Discount Notes may be extended to the maturity of
the Discount Notes, February 1, 1997. Pursuant to a Debt Exchange
Agreement dated as of December 31, 1991, between Amstar and Essex,
Amstar exchanged $100.0 million aggregate principal amount of the
Debentures, plus the right to accrued interest thereon, and $25.0
million accreted value of the Discount Notes, for $86.6 million of
the Notes (the "Debt Swap"). As of December 31, 1993, the Company
held approximately $107.8 million accreted value of Discount Notes.
As of the same date, Essex informed the Company that Essex was in
compliance with the terms and conditions of the Discount Note
indenture. Subsequent to December 31, 1993, Essex informed the
Company that as of December 31, 1993, Essex wrote off the remaining
balance of its goodwill of $82.3 million. (See "Goodwill Write-
off" on page 23.) Based on this information, the Company
determined that, as of December 31, 1993, the ultimate realization
of a portion of the Discount Notes may be in doubt. Accordingly,
the Company has classified the Discount Notes as an offset to
stockholder's equity in the consolidated balance sheet as of
December 31, 1993, and has reserved in full against the accretion
of interest on the Discount Notes subsequent to December 31, 1993.
The accretion of the Discount Notes during the nine month period
ended September 30, 1994, was $11.9 million.
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Leverage, Credit Availability and Liquidity
Subsequent to December 31, 1993, Essex informed the Company
that Essex wrote off the remaining balance of its goodwill (See
"Goodwill Write-off" on page 23.) Accordingly, as of December 31,
1993, the Company classified the Discount Notes as an offset to
stockholder's equity in the consolidated financial statements,
resulting in a reduction in net equity of $107.8 million as of
December 31, 1993. Exclusive of this reduction, the total debt to
equity ratio was 2.3 to 1.0 on September 30, 1994, and on December
31, 1993.
As of September 30, 1994, the Company's debt included $195.3
million principal amount of the Notes (excluding $3.5 million
principal amount of Notes beneficially owned by the Company that
are held pursuant to an escrow agreement to secure certain
obligations of the Company).
On December 31, 1991, METCO entered into a credit agreement
(the "Credit Agreement") with Heller Financial, Inc. The Credit
Agreement provides for a primary revolving loan facility of $45.0
million (up to $15.0 million of which may be used for letters of
credit) and, effective January 15, 1993, a secondary revolving loan
facility of $10.0 million, which was amended and increased to $15.0
million effective October 26, 1993 (collectively the "Credit
Facility"). In addition, the Credit Agreement provides for a
primary letter of credit facility of $15.0 million.
Borrowings under the primary revolving facility are limited to
90% of eligible accounts receivable of METCO, as defined, 65% of
eligible inventory, as defined, and the primary letter of credit
borrowing base of $15.0 million, as defined. Borrowings under the
Credit Facility bear interest at either the London Interbank
Offered Rate (LIBOR), plus 3.0% to 3.75%, or the prime rate plus
1.75% to 2.5%, with borrowings under the secondary revolving loan
facility bearing the higher interest rates. There is a 2.0% per
annum fee on all outstanding letters of credit and a 0.5% per annum
fee on the unused portion of the Credit Facility. In addition, if
METCO's operating cash flow, as defined, does not meet certain
minimum ratios for a specified period of time, these interest rates
will increase by 1.0% on the Credit Facility borrowings and by 0.5%
on the outstanding letters of credit. As of October 31, 1994,
METCO's operating cash flow met those ratios. The loans made and
letters of credit issued pursuant to the Credit Agreement are
secured by substantially all the real and personal property of
METCO, the capital stock of METCO and 65% of the capital stock of
a METCO subsidiary. Additionally, the Company has guaranteed the
indebtedness of METCO under the Credit Agreement. On September 30,
1994, there were $29.6 million outstanding under the primary
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revolving facility, including $9.5 million of letters of credit,
and there was $15.0 million of letters of credit outstanding under
the primary letter of credit facility. As of the same date, there
was $30.4 million of available credit remaining under the terms of
the Credit Agreement.
As of November 7, 1994, there was $28.1 million outstanding
under the primary revolving facility, including $9.5 million of
letters of credit, and there was $15.0 million of letters of credit
outstanding under the primary letter of credit facility. There was
$31.9 million of availability remaining under the terms of the
primary revolving facility as of the same date.
The indenture for the Notes and the Credit Agreement contain
various covenants that restrict the business activities of the
Company. As of October 31, 1994, Amstar was in compliance with the
covenants in those agreements. The Company anticipates that the
Company and its subsidiaries will remain in compliance with all
such covenants during the next twelve months.
Management believes that funds generated by the operations of
the Company, combined with its credit availability, are adequate to
meet its working capital, capital expenditure, and other funding
requirements.
Debt and preferred stock agreements of Esstar require that the
Company apply the proceeds of certain asset sales to reduce the
Company's indebtedness. These agreements may require Amstar to
repurchase a portion of the outstanding Notes as well as repay
other borrowings which may be outstanding.
The Company is in the process of reviewing various
alternatives to its present capital structure, including the
potential refinancing of indebtedness outstanding under the Notes.
The Company has received and is reviewing a preliminary proposal
from Merrill Lynch & Co. in connection with such a potential
refinancing. Such a refinancing, if pursued, would be subject to
a number of factors, including market conditions, economic
conditions and the Company's operating performance. While the
Company has experienced positive trends in its operating results
during fiscal 1993 and for the nine months ended September 30,
1994, there can be no assurance as to the Company's operating
performance during the remainder of 1994 nor as to the other
conditions necessary to consummate a refinancing. Therefore, there
can be no assurance that a refinancing or other transaction, if
pursued, would occur. Esstar has advised the Company that it is
reviewing potential alternatives with respect to its consolidated
financial and corporate structure.
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Dividends
As of November 7, 1994, Amstar had not declared a current year
dividend on its issued and outstanding shares of capital stock, all
of which are owned by Esstar.
Cuban Claim
The Company holds a claim for compensation for operations of
a predecessor corporation seized by Cuba in 1960. The amount of
the claim, certified at approximately $81.0 million by the Foreign
Claims Settlement Commission of the United States in 1969, plus
interest accrued in accordance with the terms of the certification,
currently is up to approximately $587.0 million. There is no
assurance that the Company will ever receive compensation in
settlement of the claim, and no value is recorded on the Company's
financial statements for this claim. The receipt of consideration
in satisfaction of such claim will depend on a number of
uncertainties, including economic and political conditions in Cuba
and the policies of the United States government.
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ESSEX HOLDINGS, INC.
General
In connection with the Combination, the Company made the
Intercompany Loan to Essex which was evidenced by $252.7 million
aggregate principal amount of securities, which consisted of the
Discount Notes and the Debentures. As a result of the Debt Swap at
December 31, 1991, the Debentures, together with accrued interest
thereon as of that date, and $25.0 million accreted value of the
Discount Notes, have been redeemed and are no longer outstanding as
indebtedness of Essex due to Amstar. (See "Long-Term Investments"
on page 11.)
Essex, through its wholly owned subsidiaries, is engaged in
the manufacture and distribution of architectural hardware and
related products primarily for the non-residential building market.
The subsidiaries and their businesses include the manufacture and
distribution of locks, locksets, door closers and exit devices by
Sargent Manufacturing Company and Sargent of Canada, Ltd., a
Canadian corporation; metal doors and frames by Curries Company
("Curries"); wood doors by Graham Manufacturing Company; and hinges
and stainless steel washroom accessories by McKinney Products
Company ("McKinney"). On November 7, 1991, Essex formed a new
subsidiary which, on January 23, 1992, changed its name from ESSEX
Holdings, Inc. to ESSEX Industries, Inc. (and, on January 23, 1992,
Essex changed its name from ESSEX Industries, Inc. to ESSEX
Holdings, Inc.). This subsidiary conducts sales and marketing
activities for the domestic operating subsidiaries of Essex.
On May 22, 1990, a federal grand jury in St. Louis indicted
McKinney, and three unrelated corporations, for allegedly violating
the antitrust laws. McKinney entered a plea of nolo contendere and
the court accepted the plea. Five present or former executives of
three of the indicted corporations, including Robert A. Haversat,
President and Chief Executive Officer of the Company and of Essex,
and formerly President of McKinney, and David B. Gibson, President
of McKinney, also were indicted. Messrs. Haversat and Gibson
entered pleas of nolo contendere and the court accepted such pleas.
On March 31, 1993, in the United States District Court in St.
Louis, Missouri, McKinney was fined $2.0 million, payable over a
five year period. Essex recorded the impact of this fine during
the quarter ended March 31, 1993. On March 31, 1993, and April 1,
1993, respectively, Mr. Gibson and Mr. Haversat were also fined in
the United States District Court in St. Louis, each in the amount
of $250,000. The United States Department of Justice filed notices
of appeal with respect to the fines imposed on McKinney and Messrs.
Gibson and Haversat. McKinney and the individual defendants filed
responsive notices of appeal to preserve its and their rights
should the government proceed with an appeal.
Subsequently, the United States and McKinney entered into a
stipulation to terminate the appeals, thereby bringing to a
conclusion the criminal action against McKinney. With respect to
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Messrs. Haversat and Gibson, the United States Court of Appeals
found that the District Court judge failed to properly apply the
sentencing guidelines and remanded both of their cases to the
District Court for resentencing. In the resentencing upon remand,
Mr. Gibson was sentenced to eight months home detention, subject to
work release, and twelve months probation. Mr. Haversat was
sentenced to eight months confinement and twelve months probation,
with a recommendation that the initial four months be at a facility
subject to work release and with an order that the remaining four
months be subject to work release. In resentencing Mr. Haversat
the District Court judge stated that he would have reconsidered his
earlier findings that were relied upon by the Court of Appeals in
ordering the remand but for the limitation imposed on him in the
order of the Court of Appeals. Notice of appeal of Mr. Haversat's
recently imposed sentence has been filed.
Six civil class actions on behalf of direct purchasers of
architectural hinges were initiated against McKinney and the other
indicted corporations. McKinney and two of the other corporate
defendants entered into a settlement agreement of $4.0 million with
respect to those actions. This settlement agreement was approved
by the court, and payment was made in 1990. Three class actions on
behalf of California indirect purchasers and a class action on
behalf of Alabama indirect purchasers of architectural hinges were
initiated against McKinney and the three other corporate
defendants. McKinney and other corporate defendants entered into
a settlement agreement with respect to two of the three California
actions and with respect to the Alabama action. Those settlement
agreements received court approval and payment was made as of
December 31, 1992. It is presently expected that a satisfactory
resolution of the third California class action will be obtained.
The ESSEX Holdings, Inc. Condensed Consolidated Statements of
Operations, Balance Sheets, Statements of Cash Flows and the
Management's Discussion and Analysis of Results of Operations and
Financial Condition set forth herein as of and for the quarter and
nine month period ended September 30, 1994, have been furnished to
the Company by the management of Essex and are included herein to
provide investors in the Company with information about Essex.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted,
although the management of Essex believes that the disclosures are
adequate to make the information presented not misleading. The
information reported reflects all adjustments (consisting only of
normal recurring accruals and the cumulative effect of the changes
in accounting principals discussed in the Notes to Condensed
Consolidated Financial Statements) which are, in the opinion of
Essex management, necessary to a fair statement of the results for
the periods presented. The results of operations for the nine
month period ended September 30, 1994, are not necessarily
indicative of the results to be expected for the full year. These
condensed financial statements should be read in conjunction with
the financial statements and the notes thereto included in
Amstar's latest annual report on Form 10-K.
-16-
<PAGE>
<TABLE>
ESSEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars)
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Net sales $59,109 $ 55,151 $168,962 $151,324
Costs of products sold 43,245 49,425 124,180 139,087
Gross profit 15,864 5,726 44,782 12,237
Selling, general and
administrative expenses 9,613 8,758 28,644 24,542
Other expense, net 935 1,282 2,750 6,031
Operating income (loss) 5,316 (4,314) 13,388 (18,336)
Interest expense 6,622 5,857 18,753 17,532
Loss before benefit from income
taxes and cumulative effects of
changes in accounting principles (1,306) (10,171) (5,365) (35,868)
Provision for (benefit from)
income taxes 9 20 (3,626) (1,184)
Loss before cumulative effects of
changes in accounting principles (1,315) (10,191) (1,739) (34,684)
Cumulative effects of changes in
accounting principles -- -- -- 4,104
Net loss $(1,315) $(10,191) $ (1,739) $(30,580)
Depreciation and amortization
included above:
Cost of products sold $ 886 $ 9,117 $ 2,486 $ 27,691
Other expense, net 560 1,125 1,673 3,675
See accompanying notes
-17-
</TABLE>
<PAGE>
ESSEX HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
September 30, December 31,
1994 1993
ASSETS
Current Assets:
Cash and cash equivalents $ 1,537 $ 1,419
Accounts receivable 33,235 26,058
Inventories 38,276 36,116
Other 1,229 2,002
Total current assets 74,277 65,595
Property, plant and equipment, net 59,373 56,240
Other intangibles, net 5,332 6,555
Other assets 2,574 3,442
Total Assets $141,556 $131,832
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term
debt $ 46,784 $ 21,295
Accounts payable 22,294 15,781
Payable to ESSTAR Incorporated 7,317 4,163
Accrued payroll and employee
benefit costs 3,341 4,166
Other current liabilities 7,729 7,750
Total current liabilities 87,465 53,155
Long-term debt, less current
maturities 61,105 97,849
Notes and accrued interest payable
to related party 119,693 107,759
Accrued employee benefit costs 27,487 29,524
Stockholder's Equity (Deficit):
Common stock $.01 par value, 1,000
shares authorized, issued and
outstanding -- --
Additional paid-in capital 164,778 160,778
Retained earnings (deficit) (314,644) (312,905)
Excess of pension liability over
unrecognized prior service cost (4,328) (4,328)
Total stockholder's equity
(deficit) (154,194) (156,455)
Total Liabilities and Stockholder's
Equity (Deficit) $141,556 $131,832
See accompanying notes
-18-
<PAGE>
ESSEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
Nine Months Ended
September 30,
1994 1993
Cash flows from operating activities:
Net loss $(1,739) $(30,580)
Adjustments to reconcile net loss
to net cash provided by operations:
Cumulative effects of changes in
accounting principles -- (4,104)
Depreciation 2,486 5,434
Amortization of goodwill and
other intangibles 1,673 25,932
Accretion of non-cash interest 11,934 10,378
14,354 7,060
Change in operating assets and
liabilities, net of accounting change:
Accounts receivable (7,177) (5,554)
Inventories (2,160) 2,848
Other current assets 773 (1,411)
Other assets 418 (71)
Accounts payable and accrued
expenses 8,821 1,651
Other noncurrent liabilities (2,037) 2,785
Net cash provided by operations 12,992 7,308
Cash flows from investing activities:
Purchases of property, plant and
equipment, net (5,619) (4,226)
Net cash used for investing activities (5,619) (4,226)
Cash flows from financing activities:
Contribution of capital 4,000 7,500
Net decrease in long-term debt (11,255) (4,343)
Net cash used for financing
activities (7,255) 3,157
Increase in cash and cash equivalents 118 6,239
Cash and cash equivalents, beginning
of period 1,419 1,504
Cash and cash equivalents, end
of period $ 1,537 $ 7,743
See accompanying notes
-19-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Effective January 1, 1993, Essex adopted Statement of
Financial Accounting Standards 109, "Accounting for Income Taxes"
("SFAS 109") and Statement of Financial Accounting Standards 106,
"Accounting for Postretirement Benefits Other Than Pensions"
("SFAS 106"). The adoption of these accounting changes resulted
in a one-time cumulative credit to income aggregating $4.1
million. (See Note 2.)
SFAS 109 requires an asset and liability approach of
accounting for income taxes rather than the deferred method
previously used. The cumulative effect of adopting this
accounting change as of January 1, 1993, was to increase net
income by $5.7 million. The effect of this change on the Balance
Sheet was to increase the carrying value of accounts receivable;
property, plant and equipment; and goodwill and other intangibles,
net, by $0.5 million, $2.9 million, and $4.1 million,
respectively.
SFAS 106 requires the accrual method of accounting for
postretirement benefits other than pensions. In prior years, the
expense was recognized on a modified cash basis. The cumulative
effect of adopting this accounting change as of January 1, 1993,
was to reduce net income by $1.6 million.
2. As discussed in Note 1, Essex adopted SFAS 109 effective
January 1, 1993. Accordingly, the September 30, 1994 and 1993
deferred income taxes reflect the tax consequences on future years
of differences between the tax and financial reporting bases of
assets and liabilities. Since Essex has recorded a valuation
allowance against its net deferred tax assets, Essex has no deferred
tax assets or liabilities on its Consolidated Balance Sheet. Prior
to 1993, provisions were made for deferred income taxes where
differences existed between the time that transactions affected
taxable income and the time that these transactions entered into the
determination of income for financial statement purposes.
Under the terms of the tax sharing agreement with Esstar,
Essex accounts for income taxes as if it filed its own
consolidated return. Should Essex incur a loss, Esstar may
contribute to Essex the tax benefit of the loss. During the nine
month period ended September 30, 1994, Essex reversed $1.9 million
of valuation allowance reflecting the realization of deferred tax
assets. The provision for (benefit from) income taxes for the
quarters and nine month periods ended September 30, 1994 and 1993
were as follows (thousands of dollars):
Quarter Ended Nine Month Period Ended
September 30, September 30,
1994 1993 1994 1993
Current:
Federal $ 9 $ 20 $(3,626) $(1,184)
State -- -- -- --
$ 9 $ 20 $(3,626) $(1,184)
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Quarter Ended September 30, 1994 and 1993
Sales
Consolidated Essex net sales for the quarter ended September
30, 1994 were $59.1 million, an increase of $4.0 million, or 7.2%,
from the prior year period. The increase during the 1994 period
resulted from increased unit sales and, to a lesser extent, higher
average selling prices of certain Essex products during the
current period.
Income from Operations
Essex had income from operations of $5.3 million during the
quarter ended September 30, 1994, as compared to a loss from
operations of $4.3 million during the 1993 period. Operating
results improved during the current period as the result of
several factors. An increase during the current quarter in gross
profit of $10.1 million and a reduction in other expense, net, of
$0.3 million were partially offset by an increase in selling,
general and administrative expenses of $0.9 million.
During 1993, certain intangible assets became fully
amortized. As a result, depreciation and amortization included in
cost of sales declined by $8.3 million, resulting in an increase
in the gross profit. Additionally, gross margin, excluding
depreciation and amortization expense, improved to 28.3% during
the quarter ended September 30, 1994, as compared with 26.9% a
year earlier. The improved gross margin is due mainly to higher
production levels during the current quarter. Higher production
levels resulted in the spreading of fixed overhead costs over a
larger number of units, thus reducing the per unit cost of
products sold, and increasing gross margin during the current
quarter.
As a percentage of sales, selling, general and admin-
istrative expenses increased by 0.4% to 16.3% during the quarter
ended September 30, 1994, as compared to the prior year period.
The increase is due primarily to the continuing expansion of sales
and marketing programs.
Other expense, net, decreased by $0.3 million during the
current quarter in comparison with the prior year period as a
result of the write-off of goodwill as of December 31, 1993. (See
"Goodwill Write-off" on page 23.)
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Nine Months Ended September 30, 1994 and 1993
Sales
Consolidated Essex net sales for the nine month period ended
September 30, 1994 were $169.0 million, an increase of $17.6
million, or 11.7%, from the prior year period. The increase
during the 1994 period resulted from increased unit sales and, to
a lesser extent, higher average selling prices of certain Essex
products during the current period.
Income from Operations
Essex had income from operations of $13.4 million during the
nine month period ended September 30, 1994, as compared to a loss
from operations of $18.3 million during the 1993 period. The
improvement in operations during the current period is the result
of several factors. An increase during the current period in
gross profit of $32.5 million and a reduction in other expense,
net, of $3.3 million were partially offset by an increase in
selling, general and administrative expenses of $4.1 million.
During 1993, certain intangible assets became fully
amortized. As a result, depreciation and amortization included in
cost of sales declined by $25.2 million, resulting in an increase
in the gross profit. Additionally, gross margin, excluding
depreciation and amortization expense, improved to 28.0% during
the nine months ended September 30, 1994, as compared with 26.4%
a year earlier. The improved gross margin is due mainly to higher
production levels during the current period. Higher production
levels resulted in the spreading of fixed overhead costs over a
larger number of units, thus reducing the per unit cost of
products sold, and increasing gross margin during the current
quarter.
As a percentage of sales, selling, general and admin-
istrative expenses increased by 0.7% to 17.0% during the nine
month period ended September 30, 1994, as compared to the prior
year period. The increase is due primarily to the continuing
expansion of sales and marketing programs.
Other expense, net, decreased by $3.3 million during the nine
month period ended September 30, 1994, in comparison with the
prior year period. During the 1993 period, Essex recorded a $2.0
million charge related to the antitrust suit. (See "ESSEX
Holdings, Inc. - General" on page 15.) Additionally, Essex wrote
off the remaining balance of its goodwill as of December 31, 1993.
This resulted in a reduction in amortization of $2.0 million
during the current period as compared to the prior year period.
(See "Goodwill Write-off" on page 23).
-22-
<PAGE>
Goodwill Write-off
Since the Combination in 1989, Essex has not achieved its
sales or earnings projections established at that time due
primarily to the general economic recession and its impact on
certain markets served by Essex related to the nonresidential
segment of the construction industry, combined with significantly
increased competitive pressures. During December 1993, when Essex
prepared its operating plans for 1994, it determined that it most
likely would not be in compliance with certain financial ratio
covenants during 1994 under the Essex Credit Agreement.
Additionally, during this period, there was consolidation of
certain Essex competitors, which led Essex to believe that there
might be additional pressure on profit margins in the future.
These events caused Essex to reevaluate its longer term operating
projections and its ability to recover the remaining balance of
goodwill recorded on the Essex balance sheet. The methodology
used by Essex to assess the recoverability of its goodwill
involved the projection of its net income over the remaining 35
year amortization period of the goodwill. This projection
indicated that Essex would incur a net loss of approximately $8.0
million during the remaining 35 year amortization period,
including a net loss of over $100.0 million during the first 15
years, without regard to goodwill amortization. Accordingly,
Essex wrote off the remaining balance of its goodwill of $82.3
million, as of December 31, 1993.
Other Items
Interest expense during the nine month period ended September
30, 1994, of $18.8 million included $11.9 million of interest
representing an increase of that amount in the accreted value of
the Discount Notes. Essex will continue to record interest
expense under the terms of the Discount Notes through maturity.
(See "Long-Term Investments" on page 11.)
Leverage, Credit Availability and Liquidity
At September 30, 1994, Essex had $227.6 million of debt
outstanding, of which $46.8 million was current with $8.3 million
due in 1994. The debt consisted of $99.8 million of senior
borrowings under the Essex Credit Agreement with Bankers Trust
Company (the "Essex Credit Agreement"), $119.7 million accreted
value of the Discount Notes held by Amstar, and $8.1 million of
the other nonacquisition related debt.
The Essex Credit Agreement contains various covenants that
restrict the business activities of Essex. On March 28, 1994, the
Essex Credit Agreement was amended to, among other things, modify
certain covenants related to quarterly and annual measurements of
minimum cash flows and interest coverage, through December 31,
1994. As of September 30, 1994, Essex was in compliance with the
-23-
<PAGE>
material covenants under the Essex Credit Agreement, as amended.
Essex anticipates that Essex and its subsidiaries will remain in
compliance with all such amended covenants through December 31,
1994; however, amendment of certain covenants under the Essex
Credit Agreement may be necessary subsequent to December 31, 1994.
In addition, the March 28, 1994, amendment modified the principal
amortization required under the Essex Credit Agreement, requiring
$3.0 million of the principal payment due on June 30, 1994, and
$2.0 million of the principal payment due on December 31, 1994, to
be paid as of the effective date of the amendment. On June 30,
1994, the aggregate principal amortization for 1994 was adjusted
from $21.0 million to $20.6 million, reflecting the application of
the proceeds of an asset sale in 1991. Essex is required to repay
$56.9 million upon the expiration of the term loan and long-term
loan portions of the Essex Credit Agreement during 1995, and to
repay all borrowings outstanding upon the expiration of the
revolving loan portion of the Essex Credit Agreement in 1996.
Borrowings under the Essex Credit Agreement bear interest as
follows, as of September 30, 1994: $95.2 million at the applicable
Adjusted Eurodollar Rate, plus 3.5% - 4.0% (approximately 8.7%);
and $4.6 million at the prime rate of Bankers Trust Company, plus
2.0% (9.75%).
As of November 7, 1994, Essex had available but unused
borrowing capacity of $2.8 million under the Essex Credit
Agreement.
On April 29, 1993, Curries entered into a Development
Agreement with the City of Mason City, Iowa, (the "City")
providing for the construction of a manufacturing facility for
Curries. The construction has been financed through the issuance,
by the City, of $6.7 million of General Obligation Urban Renewal
Bonds (the "Bonds"). Upon completion of the construction of the
facility in March, 1994, Curries took occupancy of the facility
under the terms of a 15 year lease agreement between Curries and
the City. The Development Agreement and the related lease
agreement have been accounted for as a capitalized lease
obligation in the accompanying financial statements. The
capitalized lease obligation has an implicit interest rate of 6.7%
per annum.
All changes in working capital are normal period-to-period
variations exclusive of current maturities of long-term debt.
During the nine months ended September 30, 1994, Essex
received capital contributions totaling $4.0 million from Esstar.
Also during that period, Essex received $4.1 million of tax
benefit payments from Esstar.
-24-
<PAGE>
Essex's management believes that funds generated by the
operations of Essex, including benefits it may receive under the
tax sharing agreement with Esstar, combined with its credit
availability and capital contributions it may receive from Esstar,
are adequate to meet its working capital, capital expenditure and
other funding requirements through December 31, 1994.
On June 30, 1995, Essex will have to repay $37.8 million of
principal upon the maturity of a portion of the Essex Credit
Agreement. Essex has advised the Company that it anticipates that
it will not be able repay this amount from currently available
sources of funds, and has indicated that is in the process of
reviewing potential refinancing of its indebtedness outstanding
under the Essex Credit Agreement.
-25-
<PAGE>
PART II. OTHER INFORMATION
NONE.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AMSTAR CORPORATION
(Registrant)
Dated: November 11, 1994 By/s/ Jeffrey A. Mereschuk Principal
Jeffrey A. Mereschuk Financial
Vice President, Officer
Treasurer and Chief
Financial Officer
Dated: November 11, 1994 By/s/ John D. Speridakos Principal
John D. Speridakos Accounting
Controller Officer
-26-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1994
<PERIOD-END> SEP-30-1994
<CASH> 93
<SECURITIES> 0
<RECEIVABLES> 65,085
<ALLOWANCES> 0
<INVENTORY> 46,451
<CURRENT-ASSETS> 118,153
<PP&E> 68,337
<DEPRECIATION> 0
<TOTAL-ASSETS> 283,749
<CURRENT-LIABILITIES> 52,992
<BONDS> 195,300
<COMMON> 0
0
0
<OTHER-SE> (12,803)
<TOTAL-LIABILITY-AND-EQUITY> 283,749
<SALES> 264,251
<TOTAL-REVENUES> 264,251
<CGS> 179,210
<TOTAL-COSTS> 179,210
<OTHER-EXPENSES> 49,741
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,120
<INCOME-PRETAX> 16,534
<INCOME-TAX> 8,464
<INCOME-CONTINUING> 8,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,070
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
