SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No_______ (2) Yes X
No_______
As of March 25, 1994, the aggregate market value of the
voting stock held by nonaffiliates of the registrant was $-0-.
As of March 25, 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.
Documents Incorporated by Reference:
None
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PART I
Item 1. Description of Business
Amstar Corporation (the "Company" or "Amstar") is a
privately held Delaware corporation which was formed in l986 for
the purpose of effecting the merger (the "Merger") of its wholly
owned indirect subsidiary ("Acquisition") with and into AHI,
Inc., a Delaware corporation ("AHI"). On November 21, 1986,
Acquisition merged with and into AHI and AHI became a wholly
owned indirect subsidiary of the Company. AHI acquired the
former Amstar Corporation in a leveraged buy-out in February
1984.
On December 5, 1986, AHI adopted a plan of complete
liquidation pursuant to Section 332 of the Internal Revenue Code
of 1954, as amended, and, effective December 31, 1986, the assets
of AHI were distributed to wholly owned subsidiaries of the
Company which together owned all the outstanding shares of
capital stock of AHI.
On July 30, 1987, the Company sold its Spreckels sugar beet
processing operations and its Industrial Products Group to a
leveraged buy-out group including certain managers of those
units. The purchase price was approximately $170 million,
including the discharge of certain indebtedness, $15 million of
preferred stock, and warrants to purchase common stock of the new
corporation. On December 22, 1988, the Company sold the capital
stock of Amstar Sugar Corporation and other subsidiaries engaged
in the cane sugar refining and related packaging businesses to an
affiliate of Tate & Lyle PLC, London, England for approximately
$310 million. On March 28, 1991, the Company sold the capital
stock of Milford Products Corporation, a subsidiary engaged in
the manufacture and sale of saw blades and accessories, to a U.S.
subsidiary of Sandvik AB of Sweden, for approximately $19.7
million in cash. (See "Sale of Milford" at page 23.) The
Company had three subsidiaries engaged in the manufacture and
sale of specialized electronic equipment. Those units, all of
which have been sold, were Aiken Advanced Systems, Inc.,
California Instruments Corporation and Keltec Florida, Inc.
Those units constituted the Amstar Electronics Group (the
"Electronics Group"). (See note 3 to consolidated financial
statements at page S-8 for a discussion of discontinued
operations.)
On June 30, 1989, the holders of all the 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 the then outstanding shares of
common stock of EI Holdings Corp., a Delaware corporation ("EI
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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. Affiliates of
Merrill Lynch Capital Partners, Inc. ("ML Capital Partners"), a
subsidiary of Merrill Lynch & Co., Inc., hold an aggregate of
approximately 91.4% of the voting power of Esstar, and
approximately 76.2% of the total common equity of Esstar
including the shares of stock issuable upon exercise of
outstanding employee stock options exercisable within 60 days,
but not including shares issuable upon conversion of outstanding
shares of preferred stock and non-voting common stock into voting
common stock. The Company has an investment in certain
securities of ESSEX Holdings, Inc., a subsidiary of EI Holdings.
(See "Long-Term Investments" at page 18.) ESSEX Holdings, Inc.,
referred to herein as "Essex", changed its name from ESSEX
Industries, Inc., effective January 23, 1992.
In the Combination, Amstar issued (i) an aggregate of
413,362 shares of Amstar Common Stock to certain institutional
investors for $40.00 per share or an aggregate purchase price of
approximately $16.5 million in cash and (ii) an aggregate of
22,285 shares of Amstar Common Stock to certain other
institutional investors for $40.00 per share or an aggregate
purchase price of approximately $0.9 million in cash. In
addition, certain institutional investors purchased (i) an
aggregate of 404,050 shares of Amstar Common Stock held by Amstar
management investors for $40.00 per share or an aggregate
purchase price of approximately $16.2 million and (ii) an
aggregate of 32,599 shares of Amstar Common Stock for $40.00 per
share from an affiliate of ML Capital Partners for an aggregate
purchase price of approximately $1.3 million. Certain
institutional investors also purchased an aggregate of 435,750
shares of Amstar Common Stock held by certain Amstar management
investors for $40.00 per Amstar share for an aggregate purchase
price of approximately $17.4 million.
In connection with the Combination, Amstar (i) repurchased
49,550 shares of Amstar Common Stock from two former members of
Amstar management for $40.00 per share or an aggregate purchase
price of approximately $2.0 million, (ii) repurchased 250,000
shares of Amstar Common Stock from affiliates of ML Capital
Partners for $40.00 per share or an aggregate purchase price of
approximately $10.0 million, (iii) made a supplemental payment
aggregating approximately $0.5 million to two former Amstar
management investors, (iv) canceled an aggregate of 422,325
options to purchase Amstar Common Stock held by certain members
and former members of Amstar management for an aggregate payment
of approximately $12.8 million and (v) paid a dividend of
approximately $2.3 million to Esstar.
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Segment Information
The Company's business consists of one industry segment:
heavy-duty portable electric power tools. The power tools
segment is composed of Milwaukee Electric Tool Corporation
("METCO"). Milford Products Corporation ("Milford"), formerly
part of the power tools segment, was sold on March 28, 1991.
(See "Sale of Milford" at page 23.)
METCO is one of the three largest manufacturers and
distributors in the United States of heavy-duty portable electric
power tools and accessories sold to professional tradesmen and
consumers. METCO'S products include over 300 models of heavy-duty
portable electric tools and accessories, such as drills,
grinders, saws, blades, routers and hammers, substantially all of
which it manufactures.
Major METCO products include the following:
Diamond Drilling Equipment Saws
Band saws
Drills Chain saws
Pistol drills Circular saws
D-handle drills Jig saws
Right angle drills Miter saws
Compact drills Reciprocating saws
Super hole-shooters (Sawzall )
Cordless drills Worm drive saws
Screwdrivers
Screw-shooters, nut runners
Electromagnetic drill presses Adjustable clutch
screwdrivers
Grinders Drywall screwdrivers
Bench grinders Self-drilling, self-tapping
Right angle sander-grinders screwdrivers
Straight and die grinders Cordless screwdrivers
Hammers Power tool accessories
Hammer drills Selfeed bits
Rotary hammers Band saw blades
Hole saw blades
Reciprocating saw blades
Polishers
Sanders
Belt sanders
Circular sanders
Orbital sanders
Random orbit sanders
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Marketing and Distribution
The METCO sales organization includes a U.S. sales group; a
national accounts/home center sales group; a Canadian subsidiary
located in Scarborough, Ontario; and an international sales
operation located in Brookfield, Wisconsin.
METCO has company-owned service centers in 21 major U.S.
metropolitan areas and one in the Toronto, Canada, area. These
branches repair and service METCO's products, sell parts and
accessories, and handle order entry for the field sales force.
METCO also has a network of 392 independently-owned authorized
service stations to provide customers with post-sale warranty and
repair service.
METCO's products are sold throughout the U.S. and Canada to
distributors reaching the industrial and construction markets and
service trades. METCO also markets its tools and accessories
through hardware chains and building supply home centers. All
products are shipped from METCO's Distribution Center in Olive
Branch, Mississippi.
The markets in which METCO competes are highly competitive,
as portable electric tools are manufactured by a number of other
companies, both domestic and foreign. METCO competes primarily
on quality and, to a lesser extent, on price. METCO's end users
are primarily professional tradesmen.
Patents
The Company does not believe that any single patent is of
material importance to its business.
Research and Development
The Company's research and development costs amounted to
$4,531,000 for the year ended December 31, 1993, $3,986,000 for
the year ended December 31, 1992, and $3,387,000 for the year
ended December 31, 1991.
Employees
On March 1, 1994, the Company had approximately 1800
employees. The Company regards relations with its employees to
be satisfactory.
5
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Environmental Matters
The Company believes that it is in compliance in all
material respects with applicable environmental laws and
regulations. The Company expended approximately $0.6 million for
environmental quality projects in the year ended December 31,
1993, and anticipates the expenditure of approximately $0.7
million for environmental quality projects in the year ending
December 31, 1994.
Item 2. Properties
PROPERTIES OF THE COMPANY
Amstar Corporation Executive Office New Haven, CT
Milwaukee Electric Tool
Corporation General Office Brookfield, WI
Plants Blytheville, AR;Brookfield,
WI; Pewaukee, WI;
Jackson, MS
Technical Center Brookfield, WI
Distribution Center Olive Branch, MS
Sales and service Anaheim, CA; Atlanta, GA;
offices Boston, MA; Brookfield, WI;
Chicago, IL; Cincinnati, OH;
Cleveland, OH; Dallas, TX;
Denver, CO; Detroit, MI;
Houston, TX; Kansas City,
MO; Miami, FL; Minneapolis,
MN; New Orleans, LA; New
York, NY; Philadelphia, PA;
Phoenix, AZ; San Francisco,
CA; Seattle, WA; St. Louis,
MO
Milwaukee Electric Tool
(Canada) Ltd. Sales and service Scarborough, Ontario, Canada
office
METCO's general offices and plant in Brookfield, Wisconsin,
are owned. METCO's plants in Jackson, Mississippi, Blytheville,
Arkansas, and Pewaukee, Wisconsin, its distribution center in
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Olive Branch, Mississippi, and its technical center in
Brookfield, Wisconsin, are leased under leases which give METCO
options to purchase the properties. Manufacturing facilities
have an aggregate of approximately 400,000 square feet of area
and distribution facilities have an aggregate of approximately
150,000 square feet of area. In October 1990 METCO leased
approximately 75,000 square feet of additional manufacturing
space in Kosciusko, Mississippi. Commencement of manufacturing
operations at that facility has been postponed indefinitely.
Item 3. Legal Proceedings
(a) The Company is involved in various matters of
litigation incidental to the normal conduct of its business. In
management's opinion the disposition of that litigation will not
have a material adverse impact on the financial condition of the
Company.
(b) Not applicable.
Item 4. Submission of Matters to a Vote of
Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters
There is no established public trading market for the common
stock.
Item 6. Selected Financial Data
See page 8.
7
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<TABLE>
AMSTAR CORPORATION AND SUBSIDIARIES
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(dollars in thousands)
The following selected historical financial data are derived from the consolidated financial statements of Amstar Corporation and
its subsidiaries. The Company's continuing operations include the operations of METCO for all periods presented and the operations
of Milford and its subsidiary through March 28, 1991 (the date on which the Company sold the stock of Milford). In connection with
the Combination, the Company and its subsidiaries changed their fiscal year end from June 30 to December 31, effective December 31,
1989.
The Selected Historical Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements and the
notes thereto.
<CAPTION>
Six Month Transition
Year Ended December 31, Period Ended Six Months Ended
Income Statement Data: 1993 1992 1991 1990 1989 December 31,1989 December 31, 1989
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $306,441 $266,405 $242,008 $276,127 $294,466 $140,810 $130,463
Costs of products sold and
operating expenses 207,752 180,480 168,655 183,697 195,487 94,158 86,312
Restructuring costs - - - - 22,764 -
Selling, general and administrative
expenses 58,023 49,272 50,687 50,505 50,908 25,821 23,687
Depreciation expense 6,439 5,494 5,311 4,146 4,035 2,120 2,214
Amortization of intangibles 4,609 4,520 4,088 4,086 4,177 2,116
Operating income 29,618 26,639 13,267 33,693 17,095 16,595 16,193
Interest and dividend income 14,869 13,109 28,806 29,022 25,360 13,715 1,756
Interest expense (23,591) (23,626) (36,076) (38,369) (40,134) (19,546) (19,290)
Other non-operating income (expense), net (21) (35) 311 (2,645) (204) (298) 1,579
Income from continuing operations
before provision for income taxes,
extraordinary gains, and cumulative
effects of changes in accounting
principles 20,875 16,087 6,308 21,701 2,117 10,466 238
Total provision (benefit) for income taxes 10,649 6,934 4,959 10,483 1,410 4,332 (984)
Income from continuing operations
before extraordinary gains, and
cumulative effects of changes in
accounting principles 10,226 9,153 1,349 11,218 707 6,134 1,222
Income (loss) from discontinued
operations, net of income taxes - - - - (38,882) (2,999) 78,151
Net income (loss) before extraordinary
item and cumulative effect of changes
in accounting principles $ 10,226 $ 9,153 $ 1,349 $ 11,218 $(38,175) $ 3,135 $ 79,373
Balance Sheet Data:
Working capital $ 48,515 $ 44,302 $ 49,979 $ 67,876 $ 72,580 $ 72,580 $232,773
Total assets 262,881 350,758 349,737 505,276 502,569 502,569 598,801
Capitalization:
Long-term debt 201,800 195,300 204,530 332,589 341,228 341,228 336,543
Common stockholder's equity (deficit) (20,873) 95,117 85,964 114,566 107,816 107,816 142,877
</TABLE> 8
<PAGE>
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
The following Summary of Operations with respect to the Company's
continuing operations for the years ended December 31, 1993, 1992, and
1991 is presented to accompany management's discussion of results of
operations. The Company's continuing operations for the periods set forth
above include METCO and its subsidiary for all periods presented, and
Milford and its subsidiary through March 28, 1991 (the date on which the
Company sold the stock of Milford). (See "Sale of Milford" at page 23.)
During the last several years the Company has divested several
operating units including the Spreckels Operations, the Industrial Products
Group, Amstar Sugar Corporation and the Electronics Group. Historically,
these operations have been reflected as Discontinued Operations in the
Company's financial statements. On April 15, 1992, the Company sold Keltec
Florida, Inc., the last of its operations which had been classified as
Discontinued Operations in its historical financial statements. (See
discussion at page 2.)
The Summary of Operations should be read in conjunction with the
Consolidated Financial Statements.
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AMSTAR CORPORATION
SUMMARY OF OPERATIONS
(dollars in millions)
Year Ended December 31,
1993 1992 1991
Net sales $306.4 $266.4 $242.0
Costs of products sold 214.1 186.0 174.0
Gross profit 92.3 80.4 68.0
Selling, general and administrative
expenses 58.1 49.3 50.6
Other expense 4.6 4.5 4.1
Operating income 29.6 26.6 13.3
Interest income 14.9 13.1 28.8
Interest expense (23.6) (23.6) (36.1)
Other non-operating income - - 0.3
(8.7) (10.5) (7.0)
Income before provision for income
taxes, extraordinary gain and
cumulative effect of changes in
accounting principles 20.9 16.1 6.3
Income tax provision 10.7 6.9 5.0
Income before extraordinary item and
cumulative effects of changes in
accounting principles 10.2 9.2 1.3
Extraordinary gain on repurchase of
113/8 Senior Subordinated Notes,
net of related income taxes - - 20.2
Income before cumulative effects of
changes in accounting principles 10.2 9.2 21.5
Cumulative effects of changes in
accounting principles (10.9) - -
Net income (loss) $ (0.7) $ 9.2 $ 21.5
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Year Ended December 31, 1993 Compared with
Year Ended December 31, 1992
Sales
Amstar's net sales were $306.4 million during the year ended December
31, 1993, an increase of $40.0 million or 15.0%, over the preceding year.
The increase is due to a 12.4% increase in unit sales of tools and
accessories, and a 2.3% increase in the average tool unit and accessory
selling price.
Income from Operations
Income from operations was $29.6 million during the year ended
December 31, 1993, compared with $26.6 million during the year ended
December 31, 1992. The improvement was due primarily to greater sales
volume during the 1993 period.
Gross margin was 30.1% of net sales during the year ended December 31,
1993, as compared with 30.2% during the year ended December 31, 1992.
Effective January 1, 1993, Amstar adopted Financial Accounting Standard No.
109, "Accounting for Income Taxes" ("FAS 109") (See note 9 to consolidated
financial statements at page S-14). This accounting change resulted in
additional depreciation included in costs of products sold of $0.6 million
during 1993. Exclusive of this accounting change, gross margin was 30.3%
of net sales, a slight increase over the prior year.
Selling, general, and administrative expenses, including corporate
expenses, increased 0.4% to 18.9% as a percentage of sales during the year
ended December 31, 1993, as compared with the preceding year. Effective
January 1, 1993, Amstar adopted Financial Accounting Standard No. 106,
"Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106")
(See note 8 to consolidated financial statements at page S-13). This
accounting change resulted in additional selling and administrative expense
of $0.8 million during 1993. Exclusive of FAS 106 charges and corporate
expenses, selling and administrative expenses increased by $8.6 million.
This represents an increase of 0.6% as a percentage of sales, resulting
from the expansion of sales and marketing programs.
Other Items
Interest expense, which primarily reflects interest on the 11-3/8%
Senior Subordinated Notes (the "Notes"), remained unchanged from the
preceding year at $23.6 million.
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Interest income, including $14.1 million of interest from loans
and advances to related parties, increased by $1.8 million during the
current year to $14.9 million. This increase is primarily the
result of additional accretion of interest on the Senior Subordinated
Discount Notes due in 1997 (the "Discount Notes"). 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" at page 29.) 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
and statement of changes in stockholder's equity as of December 31,
1993, and will reserve in full against the accretion of interest on
the Discount Notes subsequent to December 31, 1993. (See "Exchange of
Indebtedness" at page 15.)
The effective consolidated federal income tax rate for continuing
operations was 38.2% in 1993 compared with 30.9% in 1992, (See note 9
to the Consolidated Financial Statements starting at page S-14.)
12
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Results of Operations
Year Ended December 31, 1992 Compared with
Year Ended December 31, 1991
Sales
Amstar's net sales were $266.4 million during the year ended
December 31, 1992, an increase of $24.4 million or 10.1% over the year
ended December 31, 1991. Milford, which was sold on March 28, 1991,
accounted for $5.9 million of net sales during the year ended December
31, 1991. (See "Sale of Milford" at page 23.) Exclusive of Milford,
net sales increased $30.3 million, or 12.8%, from the preceding year.
The increase is due to a 10.0% increase in unit sales of tools and
accessories, and a 2.5% increase in the average tool unit and
accessory selling price.
Income from Operations
Income from operations was $26.6 million during the year ended
December 31, 1992, compared with $13.3 million during the year ended
December 31, 1991. The improvement was due to greater sales volume
and improved gross margin.
Gross margin improved to 30.2% of net sales during the year ended
December 31, 1992, from 28.1% during the year ended December 31, 1991,
primarily because of higher production levels in 1992 as compared to
1991. 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 1992 as
compared to 1991. Additionally, manufacturing efficiencies were
experienced during 1992 resulting from the Company's conversion to
cellular manufacturing during 1990 and 1991.
Selling, general, and administrative expenses, including corporate
expenses, declined 2.4% as a percentage of sales during the year ended
December 31, 1992, compared with 1991, due to several factors.
Exclusive of Milford and corporate expenses, selling and
administrative expenses increased by $1.5 million during the current
year. This represents a decrease of 1.4% as a percentage of sales,
however, because of the increase in sales volume. The remaining
portion of the decline in selling and administrative expenses as a
percentage of sales is the result of a decrease in corporate expenses
of $1.4 million, and the sale of Milford, whose selling and
administrative expenses, as a percentage of sales, had exceeded the
Company's, as a whole.
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Other Items
Interest expense, which primarily reflects interest on the Notes,
decreased by $12.5 million during 1992, as compared with 1991. The
decrease is primarily due to the repurchase of $30.0 million principal
amount of the Notes on March 28, 1991, and the reduction of $86.6
million principal amount of the Notes on December 31, 1991, resulting
from the exchange of debt. (See "Exchange of Indebtedness" at page
15.) Additionally, during the year ended December 31, 1991, the
Company incurred interest expense in connection with tax payments
related to prior years' tax returns.
Interest income, primarily reflecting interest from loans and
advances to related parties, decreased by $15.7 million during 1992 to
$13.1 million, as compared to the prior year, primarily as a result of
the exchange of indebtedness that occurred on December 31, 1991.
During 1992, the Company recorded $12.2 million of interest income
representing an increase of that amount in the accreted value of the
Discount Notes. (See "Exchange of Indebtedness" at page 15.)
The effective consolidated federal income tax rate for continuing
operations was 30.9% in 1992 compared with 56.7% in 1991. (See note 9
to the Consolidated Financial Statements starting at page S-14.)
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Restructuring
The following related transactions affecting the financial
structure of Amstar and Essex occurred on December 31, 1991.
Consummation of Tender Offer by Essex
On December 31, 1991, Essex, pursuant to the Offer to Purchase
dated November 12, 1991, and related letter of transmittal (as
amended, supplemented and extended, the "Offer"), accepted for
payment, and thereby purchased, $86.6 million principal amount of
Amstar's Notes. The Notes purchased by Essex were purchased at a
price of $750 per $1,000 principal amount, plus interest accrued
thereon from August 15, 1991, to December 31, 1991, the date of
acceptance for payment. The accrued interest payable on the Notes
purchased in the Offer was reimbursed to Essex by Amstar.
Exchange of Indebtedness
Concurrent with the purchase of the Notes by Essex pursuant to the
Offer, Amstar exchanged, pursuant to the Debt Exchange Agreement dated
as of December 31, 1991, between Amstar and Essex (the "Debt Exchange
Agreement"), (a)(i) $100.0 million principal amount of 14%
Subordinated Debentures due 1997 of Essex (the "Debentures") held by
Amstar, plus the right to accrued interest thereon and (ii) $25.0
million accreted value of Senior Subordinated Discount Notes due 1997
of Essex (the "Discount Notes") held by Amstar for (b) the $86.6
million principal amount of Notes purchased pursuant to the Offer (the
"Debt Swap"). In connection with the consummation of the Debt Swap,
the Board of Directors of Amstar received the opinion of a nationally
recognized investment banking firm to the effect that the
consideration received by Amstar in the Debt Swap was fair, from a
financial point of view, to securities holders of Amstar.
As of March 25, 1994, there was outstanding $195.3 million
principal amount of 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 a subsidiary of the
Company).
As of December 31, 1993, Amstar held approximately $107.8 million
accreted value of Discount Notes. 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" at page 29.) 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.
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Accordingly, the Company has classified the Discount Notes as an
offset to stockholder's equity in the consolidated balance sheet and
statement of changes in stockholder's equity as of December 31, 1993,
and will reserve in full against the accretion of interest on the
Discount Notes subsequent to December 31, 1993.
Amendment of Discount Note Indenture
In response to a condition imposed by the lenders under Essex's
bank credit agreement (the "Essex Credit Agreement") with respect to
consummation of the amendments to the Essex Credit Agreement described
below, Amstar and Essex amended the terms of the indenture governing
the Discount Notes (the "Discount Note Indenture") pursuant to the
Second Supplemental Indenture dated as of December 31, 1991 (the
"Second Supplemental Indenture"). The Second Supplemental Indenture
amended the Discount Note Indenture to provide that, 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. In addition, the Second Supplemental Indenture
amended the Discount Note Indenture to (i) increase the amount of
indebtedness permitted to be incurred by Essex under the revolving
loan portion of the Essex Credit Agreement by an additional $3.0
million and (ii) permit ESSEX Industries, Inc., a newly formed wholly
owned subsidiary of Essex, to guarantee, and to provide a pledge of
its assets in connection with, indebtedness incurred under the Essex
Credit Agreement, provided that the new subsidiary does not hold
tangible assets material to the operations of Essex and its
subsidiaries as a whole. The new subsidiary was incorporated under
the name ESSEX Holdings, Inc. and changed its name to ESSEX
Industries, Inc., effective January 23, 1992. (See reference at page 3
to the related name change by Essex.)
Refinancing of Amstar Credit Agreement
On December 31, 1991, METCO entered into a credit agreement (the
"Credit Agreement") with Heller Financial, Inc. ("Heller"). The
Credit Agreement provides for a primary letter of credit facility of
$15.0 million, a primary revolving 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"). The
Credit Agreement expires and all obligations outstanding thereunder
become due and payable on December 31, 1995. All amounts outstanding
under the Credit Facility are Senior Indebtedness for purposes of the
Indenture, dated as of February 15, 1987, between Amstar and Chemical
Bank, as Trustee (the "Indenture").
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The Credit Facility replaced the revolving credit agreement (the
"Revolving Credit Agreement") dated as of June 28, 1989 between
Amstar, METCO and The Bank of New York ("BNY") and the letter of
credit agreement (the "Letter of Credit Agreement") dated as of June
28, 1989, between Amstar, BNY, Amstar Technical Products Company,
Inc., a Delaware corporation ("ATP"), and Akadvans Corporation
(formerly called Aiken Advanced Systems, Inc.), a Delaware corporation
("Akadvans"). ATP is a wholly owned subsidiary of Amstar and Akadvans
is a wholly owned subsidiary of ATP. Pursuant to a Release and
Termination Agreement dated as of December 31, 1991, between Amstar,
METCO and BNY, BNY released its interest in the collateral granted in
connection with the Revolving Credit Agreement, and such agreement and
the Letter of Credit Agreement were terminated.
The loans made pursuant to the Credit Facility are secured by a
first security interest in substantially all the real and personal
property of METCO, the capital stock of METCO and 65% of the capital
stock of METCO's sole subsidiary. Additionally, Amstar has guaranteed
the indebtedness of METCO under the Credit Agreement pursuant to the
terms of a secured guaranty, executed in connection with the Credit
Facility, as amended on December 31, 1992 (the "Secured Guaranty").
METCO has granted a security interest in all of its intellectual
property pursuant to a copyright assignment agreement, a patent
assignment agreement, and a trademark assignment agreement. The
obligations of Amstar under the Secured Guaranty are secured by a
pledge of all the capital stock of METCO pursuant to a pledge
agreement between Amstar and Heller. METCO's pledge of 65% of the
capital stock of its sole subsidiary is evidenced by a subsidiary
pledge agreement.
Financial Condition
Years Ended December 31, 1993, 1992, and 1991
Working Capital
The working capital of the Company was $48.5 million on December
31, 1993, $44.3 million on December 31, 1992, and $50.0 million on
December 31, 1991.
The accounting change caused by the adoption of FAS 109 effective
January 1, 1993, resulted in a $6.3 million increase in the carrying
value of the inventory as compared to the balance at December 31,
1992. The accounting change also resulted in the reclassification of
approximately $11.2 million of current tax liabilities to noncurrent
liabilities, and the recording of a current deferred tax liability of
$3.5 million. Additionally, during the year ended December 31, 1993,
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the Company transferred $4.0 million of noncurrent tax liabilities to
Esstar, resulting in a reduction in the Company's Receivable from
Esstar. All other working capital changes during 1993 were normal
period-to-period variations.
During the year ended December 31, 1992, the payment of the full
amount of an income tax receivable of $15.75 million was received by
the Company, and was used to reduce outstanding indebtedness under the
Company's revolving credit facility. All other working capital
changes were normal period-to-period variations during 1992.
The current ratio was 2.0 to 1.0 at December 31, 1993, as compared
to 1.9 to 1.0 at December 31, 1992, and 2.1 to 1.0 at December 31,
1991. The ratios changed due to the changes in working capital
accounts described above.
Under the terms of the tax sharing agreement with Esstar, the
Company provides and pays income taxes as if it files its own
consolidated return. During the year ended December 31, 1993, the
Company paid Esstar $6.8 million of such taxes. During the year ended
December 31, 1992 and 1991, $6.6 million and $16.5 million,
respectively, of such taxes were paid.
Receivable from Esstar represents advances made to Esstar, which
primarily result from normal period-to-period cash management
operations of the Company, and which are due and payable to the
Company on demand. Additionally, during 1993, the Company transferred
$4.0 million of noncurrent tax liabilities to Esstar, resulting in a
reduction in the Company's receivable from Esstar. Beginning in 1991,
the receivable bears interest at 10% per annum.
Long-Term Investments
Prior to October 31, 1989, the Company held a $15.0 million
preferred stock investment and warrants to purchase six percent of the
outstanding common stock of Spreckels Industries, Inc. ("Spreckels").
The stock and warrants were acquired in July 1987 as part of the sales
price for Spreckels operations and the Industrial Products Group. On
October 31, 1989, as permitted by the terms of the preferred stock,
Spreckels exchanged the preferred stock, plus dividends accrued to
that date, for a Junior Subordinated Note due July 31, 1995, in the
principal amount on the exchange date of $16.8 million, and bearing
interest at 13% per annum. On February 13, 1991, the Company sold the
note and the warrants for an aggregate price of $15.0 million. The
proceeds from the sale were used for working capital requirements of
the Company, which included payment of accrued interest on the
indebtedness of the Company.
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On June 30, 1989, in connection with the Combination, the Company
made an intercompany loan to Essex (the "Intercompany Loan"). The
Intercompany Loan was evidenced by $152.7 million aggregate principal
amount of 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 each
due on 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 receive accrued interest thereon, and $25.0 million accreted value
of the Discount Notes, for $86.6 million of the Notes (the "Debt
Swap"). (See "Exchange of Indebtedness" at page 15.) 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" at page 29.) 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 and statement
of changes in stockholder's equity as of December 31, 1993, and will
reserve in full against the accretion of interest on the Discount
Notes subsequent to December 31, 1993.
Financial data and a discussion of the results of operations and
financial condition of Essex for the year ended December 31, 1993, are
included in this report commencing at page 25.
Effective at the close of business on December 31, 1989, the
Company sold substantially all of the assets of Aiken Advanced
Systems, Inc., a wholly-owned subsidiary in the Electronics Group, for
a purchase price of approximately $7.2 million, which approximated the
book value of those assets, and the assumption of specified
liabilities. Of the $7.2 million, $0.25 million was in cash with the
remainder payable under a promissory note bearing interest at 16% per
annum and payable in four semi-annual installments beginning July 2,
1990. Approximately $2.6 million in cash was received by the Company
during the year ended December 31, 1990, in partial payment of the
principal of the promissory note. As of December 31, 1990, the
obligor was not in compliance with certain terms and conditions of the
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promissory note. As a result of discussions the Company had with the
purchaser to resolve a dispute regarding the original purchase price,
the promissory note was amended to reduce the remaining principal
balance of the indebtedness to $1.6 million, as of January 1, 1991, to
provide that it would mature on December 31, 1992, and that it would
bear interest at 12% per annum in 1991 and at 16% per annum in 1992.
As of March 25, 1994, the obligor had not paid the quarterly interest
installments due on June 30, September 30 and December 31, 1992. The
promissory note matured on December 31, 1992, and was not paid at that
time. The Company fully reserved for the value of this note during
the year ended December 31, 1990.
Leverage, Credit Availability and Liquidity
As of December 31, 1993, 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
a subsidiary of the Company). Subsequent to December 31, 1993, Essex
informed the Company that Essex wrote off the remaining balance of its
goodwill (See "Goodwill Write-off" at page 29.) Accordingly, as of
December 31, 1993, the Company has 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 December 31, 1993, as compared to
2.1 to 1.0 on December 31, 1992, and 2.4 to 1.0 on December 31, 1991.
The adoption of FAS 106 and FAS 109 had a cumulative effect of
reducing equity by $11.0 million during the year ended December 31,
1993. Additionally, the Company declared a dividend of $7.5 million
on May 10, 1993 (See "Dividend" at page 23.)
On June 28, 1989, the Company entered into the Revolving Credit
Agreement which provided for loans, secured by accounts receivable, of
up to $30.0 million with interest payable at the prime rate, or the
reserve adjusted Eurodollar rate plus 7/8%.
On December 31, 1991, METCO entered into the Credit Agreement with
Heller, which replaced the Revolving Credit Agreement. (See
"Refinancing of Amstar Credit Agreement" at page 16.) The Credit
Agreement provides for a primary revolving 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,
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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 February 28, 1994, METCO's
operating cash flow met those ratios. The loans made and letters of
credit issued pursuant to the Credit Agreement are secured by
substantially all the real and personal property of METCO, the capital
stock of METCO and 65% of the capital stock of METCO's sole
subsidiary. Additionally, the Company has guaranteed the indebtedness
of METCO under the Credit Agreement. On December 31, 1993, there was
$14.6 million outstanding under the primary revolving facility,
including $8.1 million of letters of credit, and there were letters of
credit of $15.0 million outstanding under the primary letter of credit
facility. As of the same date, there was $45.4 million of available
credit remaining under the terms of the Credit Agreement. (See
"Refinancing of Amstar Credit Agreement" at page 16.)
As of March 25, 1994, there was $25.9 million outstanding under
the primary revolving facility, including $9.5 million of letters of
credit, and there were $15.0 million of letters of credit outstanding
under the primary letter of credit facility. There was $34.1 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 February 28, 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.
As a result of the Debt Swap on December 31, 1991, (see "Exchange
of Indebtedness" at page 15), the Company incurred a capital loss
which it carried back to a prior year in which the Company paid
federal taxes on capital gains. The Company recorded an income tax
receivable of $15.75 million on its balance sheet as of December 31,
1991, in connection with this transaction. Payment of the full amount
of that receivable was received by the Company on March 23, 1992, and
was used to reduce outstanding indebtedness under the Credit Facility.
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Management believes that funds generated by the operations of the
Company combined with its credit availability are adequate to meet its
working capital, capital expenditures and other funding requirements.
Debt and preferred stock agreements of Esstar require that the
Company apply the proceeds of certain asset sales to reduce the
Company's indebtedness. These agreements may require Amstar to
repurchase a portion of the outstanding Notes as well as repaying
other borrowings which may be outstanding.
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 believes that the positive trends
reflected in its fiscal 1993 operating results have continued into the
first quarter of fiscal 1994, there can be no assurance as to the
Company's operating performance in 1994 or as to the other conditions
necessary to consummate a refinancing. Therefore, there can be no
assurance that a refinancing or other transaction, if pursued, would
occur. Esstar has advised the Company that it is reviewing potential
alternatives with respect to its consolidated financial and corporate
structure.
Repurchase of 11-3/8% Senior Subordinated Notes
During the six month period ended December 31, 1989, the Company
repurchased, in the open market, $12.1 million principal amount of the
Notes. On May 1, 1990, the Company repurchased, in the open market,
an additional $11.0 million principal amount of the Notes. As of
December 31, 1990, $311.9 million principal amount of the Notes were
outstanding. These transactions resulted in a gain of approximately
$1.3 million at December 31, 1989, and $3.0 million at December 31,
1990, net of related costs and a provision for income taxes.
On March 28, 1991, the Company used $16.5 million of the proceeds
from the sale of Milford to repurchase $30.0 million principal amount
of the Notes. (See "Sale of Milford" at page
23.) In addition, on December 31, 1991, in connection with the Debt
Swap, Amstar cancelled $86.6 million of Notes received in the Debt
Swap. (See "Exchange of Indebtedness" at page 15.) The gains
resulting from these transactions of $20.2 million, net of related
costs and a provision for income taxes during 1991, in addition to the
gain resulting from the repurchase during 1990, have been reflected as
extraordinary items in the Summary of Operations at page 10. At
December 31, 1993, $195.3 million principal amount of the Notes was
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outstanding (excluding $3.5 million principal amount of the Notes
beneficially owned by the Company that are held pursuant to an escrow
agreement to secure certain obligations of a subsidiary of the
Company).
Cash Interest Expense
During each of the years ended December 31, 1993 and 1992, the
Company's cash interest expense related to the Notes was $22.2
million. During 1992 the Company's cash interest expense related to
the Notes was $13.3 million less than 1991 as a result of the $116.6
million reduction in the principal amount of Notes outstanding that
occurred during 1991 (see "Repurchase of 11-3/8% Senior Subordinated
Notes"). In addition, as a result of the exchange and cancellation of
the $100.0 million principal amount of the Debentures, the Company no
longer receives $14.0 million annual interest income in cash from
Essex. (See "Exchange of Indebtedness" at page 15.)
Dividend
On May 10, 1993, the Company declared, and subsequently paid on
June 28, 1993, a dividend in the aggregate amount of $7.5 million on
its issued and outstanding shares of capital stock, all of which are
owned by Esstar. The Company did not declare any dividends during
1992 or 1991.
Inflation
Inflation has not had a significant effect on the Company's
operations during the 1991 through 1993 fiscal periods.
Capital Expenditures
Capital expenditures for continuing operations were $8.3 million,
$6.8 million, and $7.0 million during the years ended December 31,
1993, 1992 and 1991, respectively. Expenditures during 1993, 1992,
and 1991 include a portion of a project to further increase the
automation of motor manufacturing and other projects related to new
product development and cost reduction.
Sale of Milford
On March 28, 1991, the Company sold the stock of Milford, and
entered into a covenant not to compete, for an aggregate consideration
of approximately $19.7 million in cash, which was in excess of
Milford's net book value at December 31, 1990. Of the proceeds, $16.5
million was used to repurchase $30.0 million principal amount of the
Notes. (See "Repurchase of 11-3/8% Senior Subordinated Notes" at page
22.) The net assets, revenues and operating income of Milford were
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not material to the consolidated net assets and operating results of
the Company.
In connection with the sale, Milford sold its equipment for the
production of reciprocating saws and hole saws to METCO. The
equipment was moved from Milford's Branford, Connecticut plant to
METCO's main plant in Brookfield, Wisconsin.
Also in connection with the sale, the Company entered into an
agreement with the buyer under which it agreed to provide, through a
wholly owned subsidiary, for the remediation of certain environmental
conditions found on Milford's Branford, Connecticut plant site during
an investigation carried out by the buyer prior to the sale. Based on
the results of an investigation carried out by environmental
consultants, it is presently estimated that the cost of remediation
will not exceed $1.0 million. The Company's obligations are secured
in part by the pledge by the Company of $3.5 million aggregate
principal amount of the Notes. In addition, the Company agreed to
assume the responsibility for all workers' compensation claims
incurred by Milford through March 28, 1991, which are estimated to be
$2.8 million, as of December 31, 1993. A wholly owned subsidiary of
the Company has recorded a reserve for the estimated costs of the
remediation and the Company has recorded a reserve for the workers'
compensation liability. As of December 31, 1993, the Company had
expended $0.3 million on the environmental remediation and $1.7
million in workers' compensation claims. Also, $1.1 million of
Milford indebtedness associated with Milford's Branford, Connecticut
plant remained with Milford in connection with the sale.
Cuban Claim
The Company holds a claim for compensation for operations of a
predecessor corporation seized by Cuba in 1960. The amount of the
claim, certified at approximately $81.0 million in 1969 by the Foreign
Claims Settlement Commission of the United States, plus interest
accrued in accordance with the terms of the certification, currently
is up to approximately $587.0 million. There is no assurance that the
Company will ever receive compensation in settlement of the claim, and
no value is recorded on the Company's financial statements for this
claim. The receipt of consideration in satisfaction of such claim
will depend on a number of uncertainties, including economic and
political conditions in Cuba and the policies of the United States
government.
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ESSEX Holdings, Inc.
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 of the Discount Notes, were
redeemed and are no longer outstanding as indebtedness of Essex due to
Amstar. (See "Exchange of Indebtedness" at page 15.) For a
description of the securities held as an investment see the discussion
at page 18 and note 5 to the Amstar Consolidated Financial Statements
starting at page S-9.
Essex, through its wholly owned subsidiaries, is engaged in the
manufacture and distribution of architectural hardware and related
products primarily for the non-residential building market. The
subsidiaries and their businesses include the manufacture and
distribution of locks, locksets, door closers and exit devices by
Sargent Manufacturing Company and Sargent of Canada, Ltd., a Canadian
corporation; metal doors and frames by Curries Company ("Curries");
wood doors by Graham Manufacturing Corporation ("Graham")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 September 6, 1991, Essex sold the capital stock of Arrow Lock
Manufacturing Company ("Arrow") to a subsidiary of Securitas AB of
Sweden for an aggregate consideration of approximately $28.7 million
(see "Sale of Arrow" at page 34).
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 has recorded the impact of this fine in the accompanying
financial statements as of and for the year ended December 31, 1993.
On March 31, 1993, and April 1, 1993, respectively, Mr. Gibson and Mr.
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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 sentences
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. The appeals with respect to
Messrs. Haversat and Gibson are proceeding.
Six civil class actions on behalf of direct purchasers of
architectural hinges were initiated against McKinney and the other
indicated 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. Summary of Operations, ESSEX Holdings,
Inc. discussion of Results of Operations and Financial Condition, and
the Audited Consolidated Financial Statements of ESSEX Holdings, Inc.
set forth herein 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 reclassifications have been
made to the 1992 and 1991 income statement data provided in the Essex
Summary of Operations in order for the presentation to be in
conformity with the 1993 income statement data. The information
reported reflects all adjustments (consisting only of normal recurring
accruals and the cumulative effect of changes in accounting principles
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 period presented. The
ESSEX Summary of Operations should be read in conjunction with the
financial statements of ESSEX Holdings, Inc. and notes thereto
included in this report.
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ESSEX HOLDINGS, INC.
SUMMARY OF OPERATIONS
(dollars in millions)
Year Ended December 31,
1993 1992 1991
Income Statement Data:
Net sales $ 204.3 $188.2 $203.6
Costs of products sold 186.0 171.4 182.6
Gross profit 18.3 16.8 21.0
Selling, general and
administrative expenses 33.6 27.6 34.9
Amortization of goodwill and
other expense 10.1 6.9 6.5
Goodwill write-off 82.3 - -
Loss from operations (107.7) (17.7) (20.4)
Interest expense 23.3 23.1 43.4
Loss before benefit from income
taxes, extraordinary gain and
cumulative effects of changes
in accounting principles (131.0) (40.8) (63.8)
Income tax benefit (5.2) (1.7) (15.9)
Loss before extraordinary item and
cumulative effects of changes
in accounting principles $(125.8) $(39.1) $(47.9)
Depreciation and amortization
included above:
Cost of sales $ 37.2 $ 32.0 $ 34.1
Other expense 4.8 5.6 5.1
Balance Sheet Data:
Working capital $ 12.4 $ 13.8 $ 23.3
Total assets 131.8 235.7 272.5
Capitalization:
Long-term debt, including notes
payable to Amstar 205.6 204.9 211.8
Common stockholder's equity (deficit) (156.5) (37.9) 1.2
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Results of Operations
Year Ended December 31, 1993 Compared with
December 31, 1992
Sales
Essex's net sales for the year ended December 31, 1993, were
$204.3 million, an increase of $16.1 million, or 8.6% over the
preceding year. The increase resulted from greater unit sales and,
to a lesser extent, higher average selling prices of certain Essex
products during 1993.
Income from Operations
Excluding the write-off of the December 31, 1993 goodwill
balance of $82.3 million, Essex incurred a loss from operations of
approximately $25.4 million during the year ended December 31,
1993, as compared to a loss from operations of $17.7 million during
the 1992 period. The greater loss during 1993 is due to an
increase in selling and administrative expenses of $6.0 million and
an increase in other expenses of $3.2 million, which were partially
offset by an increase in gross profit of $1.5 million.
Gross margin, excluding depreciation and amortization expense,
was 27.2% during 1993 as compared with 25.9% during the preceding
year. Higher margins are the result of manufacturing efficiencies
and higher production levels. Higher production levels resulted in
the spreading of fixed production costs over a larger number of
units, thus reducing the per unit cost of products sold, and
increasing gross margin during 1993 as compared with 1992.
Depreciation increased during the year ended December 31, 1993, as
a result of Essex's adoption of FAS 109. This accounting change
resulted in additional depreciation included in costs of products
sold of $4.9 million during 1993.
As a percentage of sales, selling and administrative expenses
increased by 1.7% to 16.4% during 1993, as compared to the prior
year. Effective January 1, 1993, Essex adopted FAS 106. This
accounting change resulted in additional selling and administrative
expense of $1.5 million during 1993. Exclusive of FAS 106 charges,
selling and administrative expenses increased by $4.5 million,
representing an increase of 1.0% as a percentage of net sales. The
increase is primarily due to the introduction of new sales and
marketing programs.
Other expenses, which primarily reflects amortization of
goodwill and other intangible assets, increased by $3.2 million
during 1993 as compared with 1992. During 1993, a $2.0 million
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fine was imposed on McKinney relating to the antitrust suit (see
discussion at page 25). Additionally, Essex recorded a $2.5
million reserve for costs associated with the Graham plant move
(see "Graham Plant Move" at page 34) and other reorganization costs.
Exclusive of these nonrecurring costs, other expense declined by
$1.3 million during the year ended December 31, 1993 as compared to 1992.
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 its
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. (See "Financial Condition" at page 32.)
Other Items
Interest expense of $23.3 million during 1993 increased by
$0.2 million, in comparison with the prior year. During the current
year, Essex recorded $14.1 million of interest expense,
representing an increase of that amount in the accreted value of
Discount Notes. Essex will continue to record interest expense
under the terms of the Discount Notes through maturity. (See
"Exchange of Indebtedness" at page 15.)
Essex recorded an income tax benefit of $5.2 million dollars
in 1993, as compared with an income tax benefit of $1.7 million in
1992. (See note 6 to the Consolidated Financial Statements
starting at page 51.)
29
<PAGE>
Results of Operations
Year Ended December 31, 1992 Compared with
December 31, 1991
Sales
Essex's net sales for the year ended December 31, 1992, of
$188.2 million were $15.4 million, or 7.6%, below 1991 net sales.
The decrease during 1992 resulted from the sale of Arrow, which
accounted for sales of $17.3 million during the year ended December
31, 1991. (See "Sale of Arrow" at page 34.) Exclusive of Arrow,
Essex's sales increased during 1992 by 1.0% over the prior year.
Income from Operations
Essex incurred a loss from operations of approximately $17.7
million during the year ended December 31, 1992, as compared to a
loss from operations of $20.4 million during the 1991 period. The
decline in loss is due to a reduction in selling and administrative
expenses of $7.3 million, which was partially offset by a reduction
in gross profit of $4.2 million during 1992. During the year ended
December 31, 1991, Arrow accounted for $1.3 million of the
operating loss.
Gross margin, excluding depreciation and amortization expense,
declined to 25.9% during the year ended December 31, 1992, as
compared to 27.1% a year earlier. Lower margins in 1992 are due to
the continued decline in the commercial segment of the construction
industry. Arrow accounted for $1.6 million of gross profit during
the year ended December 31, 1991.
As a percentage of sales, selling and administrative expenses
decreased by 2.4% to 14.7% during the 1992 period, as compared to
the prior year period. The decline is due primarily to cost
reductions gained through a continuing effort to improve marketing
efficiencies and by consolidating various Essex marketing programs.
Additionally, Essex incurred certain nonrecurring organization
costs during 1991 associated with a restructuring of various Essex
marketing programs. Arrow accounted for $2.8 million of selling
and administrative expenses during the year ended December 31,
1991.
Other Items
Interest expense of $23.1 million during 1992 decreased by
$20.3 million, in comparison with the prior year, primarily as a
result of the exchange of indebtedness that occurred on December
31, 1991. During 1992, Essex recorded $12.2 million of interest
expense, representing an increase of that amount in the accreted
value of Discount Notes. (See "Exchange of Indebtedness" at page
15.)
30
<PAGE>
Essex recorded an income tax benefit of $1.7 million dollars
in 1992, as compared with an income tax benefit of $15.9 million in
1991. (See note 6 to the Consolidated Financial Statements
starting at page 51.)
31
<PAGE>
Financial Condition
Years Ended December 31, 1993, 1992, and 1991
Leverage, Credit Availability and Liquidity
At December 31, 1993, Essex had $226.9 million of debt
outstanding of which $21.3 million was current. The debt consisted
of $111.0 million of senior borrowings under the Essex Credit
Agreement, $107.8 million accreted value of the Discount Notes held
by Amstar and $8.1 million of non-acquisition related debt.
The Essex Credit Agreement contains various covenants that
restrict the business activities of Essex. On March 31 and June
30, 1991, Essex was not in compliance with certain of the covenants
under the Essex Credit Agreement, which compliance was waived
pursuant to the Essex Credit Agreement. In July 1991, the Essex
Credit Agreement was amended to modify covenants related to
quarterly measurements of minimum cash flows and leverage and
interest coverage ratios through and including the quarter ended
September 30, 1991. On December 31, 1991, the Essex Credit
Agreement was again amended to, among other things, modify certain
covenants related to quarterly and annual measurements of minimum
cash flows and leverage and interest coverage ratios through the
maturity of the Essex Credit Agreement. In addition, the December
31, 1991, amendment modified the principal amortization required
under the Essex Credit Agreement to be $7.5 million in 1991; $10.0
million in 1992; $20.0 million in 1993; $21.0 million in 1994;
$57.7 million upon the expiration of the term loan and long-term
loan portions of the Essex Credit Agreement in 1995 and repayment
of all borrowings outstanding upon the expiration of the revolving
loan portion of the Essex Credit Agreement in 1996. On December
29, 1992, the Essex Credit Agreement was again amended to, among
other things, modify certain covenants related to quarterly and
annual measurements of minimum cash flows, and ratios related to
working capital, leverage and interest coverage, through December
31, 1993. As of December 31, 1993, Essex was in compliance with
the covenants under the Essex Credit Agreement. On March 28, 1994,
the Essex Credit Agreement was again amended to, among other
things, modify certain covenants related to quarterly and annual
measurements of minimum cash flows and interest coverage, through
December 31, 1994. Essex anticipates that Essex and its
subsidiaries will remain in compliance with all such amended
covenants. In addition, the March 28, 1994, amendment modified the
principal amortization required under the Essex Credit Agreement,
requiring $3.0 million of the $10.5 million due on June 30, 1994,
and $2.0 million of the $10.5 million due on December 31, 1994, to
be paid as of the effective date of the amendment. The aggregate
principal amortization for 1994 of $21.0 million remains unchanged.
32
<PAGE>
Borrowings under the Essex Credit Agreement bear interest as
follows, as of December 31, 1993: $103.9 million at the three
month Adjusted Eurodollar Rate plus 3.5% (approximately 6.75%); and
$7.1 million at the prime rate of Bankers Trust Company plus 1.5%
(7.5%). Under the terms of the March 28, 1994 amendment to the
Essex Credit Agreement, the interest rate on borrowings under the
Essex Credit Agreement will increase by 0.5% on August 1, 1994, an
additional 0.5% on October 1, 1994 and an additional 0.5% on
January 1, 1995, in consideration of the covenant amendments
referred to above.
On September 6, 1991, upon consummation of the Arrow sale, the
commitment under the revolving loan portion of the Essex Credit
Agreement was reduced by $8.0 million to $42.0 million. On
December 31, 1991, the commitment under the Essex Credit Agreement
was increased by $3.0 million to $45.0 million of which up to $5.0
million may be used for the issuance of letters of credit. As of
March 25, 1994, Essex had available but unused capacity of $4.3
million under the Essex Credit Agreement.
During the year ended December 31, 1993, the working capital
of Essex decreased by $1.4 million. The current portion of the
Senior borrowings under the Essex Credit Agreement increased by
$1.0 million to $21.0 million at December 31, 1993.
The decrease in working capital of $10.8 million during the
year ended December 31, 1992, as compared to the year ended
December 31, 1991, is primarily due to the increase in the current
maturity of long-term debt of $10.0 million as of December 31,
1992. The current portion of the senior borrowings under the Essex
Credit Agreement increased by $10.0 million to $20.0 million at
December 31, 1992.
Capital expenditures of Essex, which relate primarily to new
product development and cost reduction projects, were $4.7 million
during the year ended December 31, 1993, as compared to $2.7
million for the year ended December 31, 1992, and $1.9 million in
1991. Additionally, during 1993, Curries expended $5.8 million
related to the construction of a new manufacturing facility in
Mason City, Iowa, which was funded through the issuance of General
Obligation Urban Renewal Bonds by the City of Mason City, Iowa.
(See note 3 beginning at page 44).
On June 28, 1993, Essex received a $7.5 million capital
contribution from Esstar.
Under the terms of a tax sharing agreement with Esstar, Essex
accounts for income taxes as if it filed its own consolidated tax
return. Also, Esstar may give Essex the tax benefit of losses
33
<PAGE>
which are incurred by Essex and utilized by Esstar in filing the
Esstar consolidated tax return. During the year ended December 31,
1993, $5.2 million of such benefit was transferred from Esstar to
Essex. During the years ended December 31, 1992 and 1991, $1.7
million and $15.9 million, respectively, of such tax benefits were
transferred.
For the years ended December 31, 1993, 1992 and 1991, Essex
incurred losses of $121.7 million, $39.1 million and $38.7 million,
respectively, and has a stockholder's deficit of $156.5 million at
December 31, 1993. Included in the loss for 1993 is a write-off of
Essex's remaining goodwill balance of $82.3 million at December 31,
1993, based on the projection that Essex will be unable to recover
this asset through future operations. (See note 2 to the
Consolidated Financial Statements starting at page 42.)
Additionally, Essex was required to amend certain financial
covenants under the Essex Credit Agreement through December 31,
1994, and cannot, without the financial support of Esstar, generate
sufficient cash flow from operations to meet its debt service
requirements during 1994. In addition, the term loan portion under
the Essex Credit Agreement matures between June 30, 1995 and
December 31, 1995, and the revolving loan portion under the
Essex Credit Agreement matures on December 31, 1996. Essex has
informed the Company that it is reviewing various alternatives to
its present financial structure, including refinancing its debt
instruments and raising additional capital. There can be no
assurance however, that such a refinancing or capital restructuring
will take place. Essex's management believes that funds generated
from the operations of Essex, including benefits it may receive
under the tax sharing agreement with Esstar and capital
contributions it may receive from Esstar, combined with its credit
availability, will be adequate to meet its working capital, capital
expenditure and other funding requirements during the next twelve
months.
Graham Plant Move
On February 11, 1994, Essex announced that Graham's plant and
corporate headquarters would be moved from Marshfield, Wisconsin to
Mason City, Iowa, where its operations will be near those of
Curries. A reserve for this reorganization has been recorded as
of December 31, 1993.
Sale of Arrow
On September 6, 1991, Essex sold the stock of Arrow for
approximately $28.7 million, resulting in a gain of approximately
$2.0 million. The net assets, revenues and operating income of
Arrow were not material to the consolidated net assets and
operating results of Essex.
34
<PAGE>
In connection with the sale, Essex received $10.0 million in
cash and received a promissory note for the balance of the selling
price, which note was secured by an escrow deposit under a deposit
security agreement with Bankers Trust Company. On December 31,
1991, Essex received $17.4 million of accreted value of this note
and received the remaining amount, $1.8 million of accreted value,
on June 30, 1992.
The net proceeds from the sale were used to reduce the
principal amount outstanding under the Essex Credit Agreement. Of
the $10.0 million received on September 6, 1991, $8.35 million was
used to reduce the borrowings outstanding under the revolving
portion of the Essex Credit Agreement and $1.65 million was used to
reduce the term portion of the borrowings under the Essex Credit Agreement.
The December 31, 1991, proceeds of $17.4 million were used to reduce
the revolving portion of the Essex Credit Agreement by $3.7 million
and the term portion of the Essex Credit Agreement by $13.7
million. The remaining $1.8 million received on June 30, 1992, was
used to reduce the principal amount outstanding under the term
portion of the borrowings under the Essex Credit Agreement.
35
<PAGE>
ESSEX HOLDINGS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Report of Independent Public Accountants 37
Statements:
Essex Holdings, Inc. and Subsidiaries Consolidated 38
Balance Sheets as of December 31, 1993 and 1992.
Essex Holdings, Inc. and Subsidiaries Consolidated 39
Statements of Operations for the years ended December
31, 1993, 1992 and 1991.
Essex Holdings, Inc. and Subsidiaries Consolidated 40
Statements of Changes in Stockholder's Equity
(Deficit) for the years ended December 31, 1993, 1992
and 1991.
Essex Holdings, Inc. and Subsidiaries Consolidated 41
Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991.
Notes to Consolidated Financial Statements 42
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
ESSEX Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of ESSEX
Holdings, Inc. (formerly ESSEX Industries, Inc., a Delaware corporation
and a wholly-owned subsidiary of EI Holdings Corp.) and subsidiaries as
of December 31, 1993 and 1992, and the related consolidated statements of
operations, changes in stockholder's equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ESSEX Holdings, Inc.
and subsidiaries as of December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in notes 5 and 6 to the consolidated financial statements,
effective January 1, 1993, the Company changed its methods of accounting
for income taxes and postretirement benefits other than pensions.
New Haven, Connecticut
February 21, 1994
(except with respect to the matter discussed in Note 3,
as to which the date is March 28, 1994)
37
<PAGE> ESSEX HOLDINGS, INC. AND SUBSIDIARIES
(formerly ESSEX Industries, Inc., and
a wholly-owned subsidiary of EI Holdings Corp.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(dollar amounts in thousands)
ASSETS 1993 1992
CURRENT ASSETS:
Cash and cash equivalents $ 1,419 $ 1,504
Accounts receivable, net of allowance
for doubtful accounts of $1,519 and
$1,787 26,058 23,125
Inventories 36,116 38,369
Other 2,002 843
Total current assets 65,595 63,841
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 7,741 7,566
Buildings and leasehold improvements 25,937 25,494
Machinery and equipment 48,031 42,102
Building construction in progress 6,675 -
88,384 75,162
Less - accumulated depreciation
and amortization 32,144 24,616
56,240 50,546
GOODWILL AND OTHER INTANGIBLES
net of accumulated amortization of
$144,786 and $122,727 6,555 118,714
OTHER 3,442 2,579
$131,832 $235,680
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
1993 1992
CURRENT LIABILITIES:
Current maturities of long-term debt $ 21,295 $ 20,057
Accounts payable 15,781 13,381
Payable to ESSTAR Incorporated 4,163 6,137
Accrued payroll and employee benefits costs 4,166 3,589
Other accrued expenses 7,750 6,889
Total current liabilities 53,155 50,053
LONG-TERM DEBT, less current maturities 97,849 111,202
NOTES AND ACCRUED INTEREST PAYABLE TO
RELATED PARTY 107,759 93,703
ACCRUED EMPLOYEE BENEFIT COSTS AND OTHER 29,524 18,620
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7)
STOCKHOLDER'S EQUITY (DEFICIT):
Class A common stock, $.01 par value,
1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital 160,778 153,278
Retained earnings (deficit) (312,905) (191,176)
Excess of pension liability over
unrecognized prior service cost (4,328) -
Total stockholder's equity
(deficit) (156,455) (37,898)
$131,832 $235,680
The accompanying notes are an integral part
of these consolidated financial statements.
38
<PAGE> ESSEX HOLDINGS, INC. AND SUBSIDIARIES
(formerly ESSEX Industries, Inc., and a
wholly-owned subsidiary of EI Holdings Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(amounts in thousands)
1993 1992 1991
Net sales $ 204,337 $188,195 $203,616
Costs of products sold 185,991 171,399 182,653
Gross profit 18,346 16,796 20,963
Selling, general and admini-
strative expenses 33,613 27,627 34,831
Amortization of goodwill and
other expense, net 10,098 6,832 6,532
Goodwill write-off 82,287 - -
Operating loss (107,652) (17,663) (20,400)
Interest expense 23,348 23,154 43,418
Loss before benefit from
income taxes, extraordinary
gain and cumulative effect
of changes in accounting
principles (131,000) (40,817) (63,818)
Benefit from income taxes 5,167 1,670 15,889
Loss before extraordinary
gain and cumulative effect
of changes in accounting
principles (125,833) (39,147) (47,929)
Extraordinary gain on utilization
of net operating loss
carryforwards - - 9,200
Loss before cumulative effect
of changes in accounting
principles (125,833) (39,147) (38,729)
Cumulative effect of changes in
accounting principles 4,104 - -
Net loss $(121,729) $(39,147) $(38,729)
The accompanying notes are an integral part
of these consolidated financial statements.
39
<PAGE>
ESSEX HOLDINGS, INC. AND SUBSIDIARIES
(formerly ESSEX Industries, Inc., and
a wholly-owned subsidiary of EI Holdings Corp.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
(dollar amounts in thousands)
Excess of
Pension
Liability
Over
Additional Retained Unrecognized
Common Stock Paid-In Earnings Prior
Shares Amount Capital (Deficit) Service Cost
Balance, January 1, 1991 1,000 $ - $ 43,025 $(113,300) $ -
EI Holdings Corp. capital
contribution - - 66,770 - -
Gain on Debt Swap with related
party, net of tax effect
(note 3) - - 43,483 - -
Net loss - - - (38,729) -
Balance, December 31, 1991 1,000 - 153,278 (152,029) -
Net loss - - - (39,147) -
Balance, December 31, 1992 1,000 - 153,278 (191,176) -
EI Holdings Corp. capital
contribution - - 7,500 - -
Net loss - - - (121,729) -
Excess of pension liability over
unrecognized prior service cost - - - - (4,328)
Balance, December 31, 1993 1,000 $ - $160,778 $(312,905) $(4,328)
40
<PAGE> ESSEX HOLDINGS, INC. AND SUBSIDIARIES
(formerly ESSEX Industries, Inc., and
a wholly-owned subsidiary of EI Holdings Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1993 1992 1991
Loss before extraordinary gain and cumulative
effect of changes in accounting principles $(125,833) $(39,147) $(47,929)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 41,688 37,558 39,204
Goodwill write-off 82,287 - -
Accretion of non-cash interest 14,056 12,222 13,889
Gain on sale of Arrow Lock
Manufacturing Company - - (2,049)
Change in operating assets and liabilities,
net of effects of company sold:
Accounts receivable, net (2,431) 915 2,180
Inventories 2,253 2,019 2,506
Other current assets (1,159) (488) 283
Other assets 27 (420) (127)
Accounts payable 2,400 599 (1,196)
Payable to ESSTAR Incorporated (1,973) (70) 632
Accrued payroll and employee benefit
costs 577 (104) (1,249)
Other accrued expenses 860 (3,219) 4,116
Other noncurrent liabilities 3,207 2,113 4,187
Net cash provided by (used in) operating activities 15,959 11,978 14,447
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (4,754) (2,733) (1,877)
Proceeds from sale of Arrow Lock Manufacturing
Company - - 28,747
Net cash provided by (used in) investing
activities (4,754) (2,733) 26,870
CASH FLOWS FROM FINANCING ACTIVITIES:
EI Holdings Corp. capital contribution 7,500 - 66,770
Proceeds from (payment of) bank revolving loan
agreement and other debt, net 1,210 2,680 (8,580)
Repayments of long-term bank borrowings (20,000) (11,857) (22,956)
Repayments of debt related to Debt Swap, net
of tax effect - - (78,152)
Net cash used in financing activities (11,290) (9,177) (42,918)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (85) 68 (1,601)
CASH AND CASH EQUIVALENTS, beginning of year 1,504 1,436 3,037
CASH AND CASH EQUIVALENTS, end of year $ 1,419 $ 1,504 $ 1,436
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for:
Interest $ 9,030 $ 8,739 $ 29,389
Income taxes $ 33 $ 190 $ 395
The accompanying notes are an integral part
of these consolidated financial statements.
41
<PAGE> ESSEX HOLDINGS, INC. AND SUBSIDIARIES
(formerly ESSEX Industries, Inc., and
a wholly-owned subsidiary of EI Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
1. Organization and Operations:
On June 30, 1989, the holders of all the outstanding shares
of common stock of EI Holdings Corp. (the Parent) and Amstar
Corporation (Amstar) exchanged (the Exchange) their
respective shares for common stock of ESSTAR Incorporated
(ESSTAR). As a result of the combination, the Parent
and Amstar each became direct, wholly-owned subsidiaries of
ESSTAR. The combination was treated as a pooling-of-interests.
On January 23, 1992, ESSEX Industries, Inc. changed its name to
ESSEX Holdings, Inc. (the Company). On November 7, 1991,
the Company formed a new subsidiary which, on January 23,
1992, changed its name from ESSEX Holdings, Inc. to ESSEX
Industries, Inc. For the years ended December 31, 1993,
1992 and 1991, the Company has incurred losses of
$121,729,000, $39,147,000 and $38,729,000, respectively,
and has a stockholder's deficit of $156,455,000 at December
31, 1993. Included in the loss for 1993 is a write-off of
the Company's remaining goodwill balance of $82,287,000 at
December 31, 1993, based on the projection that the Company
will be unable to recover this asset through future
operations (see Note 2). Additionally, the Company was
required to amend certain financial covenants through
December 31, 1994 under its Bank Credit Agreement (see Note 3),
and cannot, without the financial support of ESSTAR,
generate sufficient cash flow from operations to meet its
debt service requirements during 1994. Management is
reviewing various alternatives to the Company's overall
financial structure, including refinancing its debt
instruments and raising additional capital. There can be no
assurance however, that such a refinancing or capital
restructuring will take place. Management believes that
funds generated from the operations of the Company,
including benefits it may receive under the tax sharing
arrangement with ESSTAR and capital contributions it may
receive from ESSTAR, combined with its credit availability,
will be adequate to meet its obligations during 1994.
2. Summary of Significant Accounting Policies:
Principles of consolidation -
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries: Sargent
Manufacturing Company; Sargent of Canada, Ltd.; McKinney
Products Company (McKinney); Arrow Lock Manufacturing
Company (through September 6, 1991); Curries Company
(Curries); Graham Manufacturing Corporation and ESSEX
Industries, Inc. (formerly ESSEX Holdings, Inc.)
(collectively, the Subsidiaries). The Subsidiaries
primarily manufacture locks, doors, hinges and related
products. All significant intercompany transactions and
accounts have been eliminated in consolidation.
42
<PAGE> Effective September 6, 1991, the Company sold the stock of
Arrow Lock Manufacturing Company for approximately
$28,747,000, which resulted in a gain of approximately
$2,049,000. This gain is included in amortization of
goodwill and other expense, net in the accompanying 1991
consolidated statement of operations.
Inventories -
The Company values its inventories at the lower of cost,
using the first-in, first-out (FIFO) method, or market and
includes materials, labor and manufacturing overhead.
Inventories at December 31, 1993 and 1992 consisted of the
following (in thousands):
1993 1992
Raw materials and parts $ 7,048 $ 8,107
Work-in-process 19,987 21,091
Finished goods 9,081 9,171
$36,116 $38,369
Depreciation and amortization -
Property, plant and equipment are depreciated or amortized
using the straight-line method over the estimated useful
lives of the assets ranging from 7 to 31.5 years. Leasehold
improvements are amortized over the shorter of the lease
term or their estimated useful lives.
Goodwill and other intangible assets -
Goodwill and other intangible assets includes $84,639,000 at
December 31, 1992 of the excess of cost over the fair value
of assets acquired and liabilities assumed related to the
December 29, 1988 acquisition of the Company and its
subsidiaries by its Parent, which was being amortized over
40 years, but was fully written off in 1993. Other
intangible assets include $25,372,000 at December 31, 1992,
of product technology, engineering drawings, service
contracts and patents, which were being amortized over an
average life of 5 years and became fully amortized at
December 31, 1993. Also included are deferred financing and
transaction fees of $6,555,000 and $8,703,000 at December
31, 1993 and 1992, respectively, which are being amortized
over an average life of 8 years.
Since the Exchange, the Company 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 the Company related to the
nonresidential segment of the construction industry,
combined with significantly increased competitive pressures.
During December 1993, when the Company 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 its Bank Credit Agreement (see
Note 3). Additionally, during this period, there was a
43
<PAGE> consolidation of certain of the Company's competitors, which
led the Company to believe that there might be additional
pressure on profit margins in the future. These events
caused the Company to reevaluate its longer term operating
projections and its ability to recover the remaining balance
of its goodwill recorded on the Company's balance sheet.
The methodology used by the Company 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 the
Company would incur a net loss of approximately $8,000,000
during the remaining 35 year amortization period, including
a net loss of over $100,000,000 during the first 15 years,
without regard to goodwill amortization. Accordingly, the
Company wrote off the remaining balance of its goodwill of
$82,287,000 in the fourth quarter of 1993.
Workers' compensation -
The Company is partially self-insured for workers'
compensation claims. Included in the accompanying financial
statements is a liability for workers' compensation claims
based on an assessment of claims outstanding, as well as an
estimate, based on experience, of incurred claims which have
not yet been reported.
Cash and cash equivalents -
For purposes of the consolidated statements of cash flows,
the Company considers all highly liquid debt instruments
with an original maturity of three months or less to be cash
equivalents.
Reclassifications -
Certain reclassifications have been made to the 1991 and
1992 financial statements in order for them to be presented in
conformity with the 1993 financial statements.
3. Long-Term Debt:
Long-term debt at December 31, 1993 and 1992 consisted of
the following (in thousands):
1993 1992
Bank loans $111,044 $131,019
Notes and accrued interest
payable to related party 107,759 93,703
Other 8,100 240
Total 226,903 224,962
Less - current maturities (21,295) (20,057)
$205,608 $204,905
44
<PAGE>
Bank loans -
At December 31, 1993, the Company and its Subsidiaries had
outstanding borrowings of $111,044,000 pursuant to a Bank
Credit Agreement (the Agreement). The loans consist of a
Term Loan to the Company for $57,819,000, and a Revolving
Loan and Long-Term Loan (collectively, the Loans) for
$34,125,000 and $19,100,000, respectively, to the
Subsidiaries. Borrowings of up to $45,000,000 (including up
to $5,000,000 for letters-of-credit) are available under the
Revolving Loan, limited to 54% of eligible inventory plus 85% of
eligible accounts receivable, as defined. At December 31, 1993,
additional borrowings of $3,294,000 were available
under the Revolving Loan. The Term Loan must be repaid in
periodic principal amounts, as defined in the Agreement,
with full payment on or before June 30, 1995. The Long-Term
Loan is due and payable on or before December 31, 1995. The
Revolving Loan commitment expires on December 31, 1996.
The Loans bear interest, at the option of the Company, at
either the prime lending rate (6.0% at December 31, 1993)
plus 1.5%, or the Eurodollar rate (3.375% at December 31,
1993) plus 3.0% for Revolving Loans or 3.5% for Term and
Long-Term Loans. Additionally, the Company is required to
pay a commitment fee of 0.5% per annum of the daily unused
portion of the commitments under the Loans. On March 28,
1994, the Agreement was amended, thereby increasing the
interest rate on borrowings under the Agreement by 0.5% on
July 1, 1994, an additional 0.5% on October 1, 1994 and an
additional 0.5% on January 1, 1995.
The Agreement contains various restrictive covenants
including, but not limited to, maximum ratios of consolidated
senior liabilities to consolidated net worth (1.35 to 1.00 at
December 31, 1993, decreasing to 0.78 to 1.00 at December 31,
1996), minimum ratios of consolidated earnings before
interest and taxes to consolidated cash interest expense,
as defined (1.80 to 1.00 at December 31, 1993, increasing to
13.00 to 1.00 at December 31, 1996), minimum ratios of
consolidated current assets to consolidated current
liabilities (1.60 to 1.00 at December 31, 1993 and
thereafter), minimum consolidated operating cash flow
($21,500,000 at December 31, 1993, increasing to $43,800,000
at December 31, 1996) and minimum consolidated cash flow
($7,800,000 at December 31, 1993, increasing to $36,500,000
at December 31, 1996). At December 31, 1993, the Company was in
compliance with these financial covenants. Under the terms of the
March 28, 1994 amendment, the 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. The Company anticipates that it will be in
compliance with these amended covenants.
The Agreement does not permit the declaration or payment of
any dividends or other distributions on any shares of any
class of stock of the Company's Parent, except for a dividend
payable solely in shares of that class of stock and only to
the holders of that class of stock.
45
<PAGE> Under the terms of the Agreement, the Company and its
subsidiaries entered into interest rate agreements with
respect to a portion of their borrowings. The Company has
entered into agreements which will effectively cap the
Eurodollar base rate component at a rate of 7.0% through June
24, 1994 for $50,000,000 of principal borrowings and 5.0%
through March 15, 1995 for $70,000,000 of principal
borrowings. The Company would be exposed to a loss of this
interest rate protection in the event of nonperformance by
the other party to the interest rate agreement. However, the
Company does not anticipate nonperformance by the other
party.
Borrowings under the Agreement are secured by substantially
all of the assets of the Company and its subsidiaries.
At December 31, 1993, there were $2,985,000 of outstanding
letters-of-credit.
Notes and accrued interest payable to related party -
Concurrent with the Exchange, the Company issued, and Amstar
purchased, $152,733,000 aggregate principal amount of Senior
Subordinated Discount Notes due 1997 and $100,000,000
aggregate principal amount of 14% Subordinated Debentures due
1997 for an aggregate cash purchase price of $175,000,000.
On December 31, 1991, the Company purchased $86,600,000
principal amount of Amstar's publicly held 11.375% Senior
Subordinated Notes (the Notes), in the open market, for
$64,950,000. The purchase was financed by the $65,000,000 of
proceeds received from ESSTAR in the form of capital
contributed to the Company. Concurrent with the purchase,
the Company exchanged the Notes for outstanding indebtedness
due Amstar of $100,000,000 of its Subordinated Debentures,
$5,833,000 of accrued interest related to this debt and
$25,000,000 of its Senior Subordinated Discount Notes (the
Debt Swap). The resulting gain on the Debt Swap of
$65,883,000 is reflected in the accompanying 1991 statement
of changes in stockholder's equity (deficit), net of a
federal tax provision of $22,400,000, as an increase to
additional paid-in capital.
As a result of the Debt Swap, the Company has no outstanding
obligations related to the 14% Subordinated Debentures and
has $107,759,000 and $93,703,000 at December 31, 1993 and
1992, respectively, of outstanding obligations related to the
Senior Subordinated Discount Notes.
Commencing August 1, 1994, the Senior Subordinated Discount
Notes will bear interest at 15% per annum, payable
semi-annually. At the option of the Company, the payment of
interest in cash may be deferred until the February 1, 1997
maturity date of these notes. If the cash interest payments
are deferred, the Company will settle its interest obligation
through the issuance of additional securities in lieu of
cash.
46
<PAGE> These notes are subject to redemption after August 1, 1994,
in whole or in part, at the election of the Company, at a
redemption price equal to 104.29%, 102.14% and 100% of the
outstanding principal balance as of the first day of August
1994, 1995, and 1996, respectively.
The Company recognized $14,056,000, $12,222,000 and
$27,889,000 for the years ended December 31, 1993, 1992 and
1991, respectively, of interest expense related to these
notes payable to affiliate. Included in this interest
expense is $14,056,000, $12,222,000 and $13,889,000 of
interest accretion which was added to the carrying value of
the Senior Subordinated Discount Notes during the years ended
December 31, 1993, 1992 and 1991, respectively. These
interest amounts are included in the accompanying
consolidated statements of operations.
Other -
Included in other debt is a capital lease obligation which
Curries entered into on April 29, 1993 with the City of Mason
City, Iowa (the City), whereby the City agreed to construct a
manufacturing facility (the Facility) for Curries and, upon
completion, Curries agreed to lease the Facility from the
City. To finance the construction, the City issued
$7,000,000 of General Obligation Urban Renewal Bonds (the
Bonds). Approximately $325,000 of the proceeds of these
bonds have been retained by the City in a debt service
reserve account. The bonds are dated June 1, 1993 and will
mature on June 1, 2008.
Interest on the Bonds is payable semiannually beginning
December 1, 1993 at variable rates ranging from 6.1% to 7.1%.
Principal is payable annually, beginning June 1, 1995, in
installments ranging from $300,000 to $750,000. At December
31, 1993, proceeds of this offering that had not yet been
used to fund construction costs totaled $874,000 and are included
in other assets in the accompanying consolidated balance sheet.
As stated above, upon completion of the Facility, Curries
will enter into a capital lease with the City. Base rent
payments will be equal to the amounts necessary to fund the
scheduled bond principal and interest payments and will be
payable at the beginning of each month. The lease is collateralized
by the Facility and land on which it is being constructed.
Aggregate maturities of all long-term debt for each of the
succeeding five years subsequent to December 31, 1993, and
thereafter, are as follows:
Year Ending Amount
December 31, (in thousands)
1994 $ 21,295
1995 56,537
1996 34,804
1997 108,376
1998 and thereafter 5,891
$226,903
47
<PAGE> Maturities of the debt instruments may be accelerated upon
the occurrence of certain events as defined in the respective
agreements including, but not limited to, failure to make
principal and interest payments when due, breach of certain
covenants in the agreements and sale of the stock of the
Company. Additionally, certain of the debt instruments
require payment of premiums upon early retirement of the
debt.
4. Commitments and Related Matters:
Leases -
The Company and its subsidiaries lease certain property,
plant and equipment under noncancellable operating leases.
Operating lease rental expense amounted to approximately
$1,375,000, $1,340,000 and $1,881,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
The minimum future rental commitments for each of the next
five years subsequent to December 31, 1993, are as follows:
Year Ending
December 31, Amount
(in thousands)
1994 $1,260
1995 878
1996 793
1997 714
1998 315
Environmental liabilities -
The Company has incurred certain environmental obligations
incidental to the normal conduct of its business. The
estimated costs associated with such known obligations have
been recognized in the accompanying consolidated financial
statements.
5. Employee Retirement Plans:
Profit sharing and 401(k) plans -
Certain subsidiaries of the Company have profit sharing or
401(k) savings plans for substantially all of their
employees. Expense for these plans amounted to $807,000,
$744,000 and $840,000 for the years ended December 31, 1993,
1992 and 1991, respectively.
48
<PAGE> Pension plans -
Certain subsidiaries have union-sponsored, collectively
bargained, pension plans. The Company contributed $34,000,
$32,000 and $204,000 to these plans for the years ended
December 31, 1993, 1992 and 1991, respectively. The 1991
contributions include those made on behalf of Arrow (Note 2).
The contributions, which provide for pension as well as
other benefits, are determined in accordance with the
provisions of negotiated labor contracts and generally are
based on the number of hours worked. Information from the
plans' administrators is not available to determine vested
benefits.
Certain subsidiaries maintain defined benefit pension plans.
These subsidiaries have recorded a pension liability which
represents the excess of the subsidiaries' projected benefit
pension obligation over the related pension plan assets.
These liabilities will be funded over the average service
lives of the pension plan participants.
Pension expense of the Company-sponsored defined benefit
plans for the years ended December 31, 1993, 1992 and 1991
included the following components (in thousands):
1993 1992 1991
Service cost $ 734 $ 727 $ 705
Interest cost on projected
benefit obligations 2,791 2,624 2,317
Net amortization and deferral (77) (271) 791
Actual return on plan assets (1,481) (1,115) (2,215)
Net pension expense $ 1,967 $ 1,965 $ 1,598
The net liability of the pension plans, as included in
accrued employee benefit costs in the accompanying
consolidated balance sheets, as of December 31, 1993 and
1992, is set forth in the table below (in thousands):
1993 1992
Actuarial present value of:
Vested benefit obligation $ 33,267 $ 26,581
Accumulated benefit obligation $ 35,615 $ 29,578
Projected benefit obligation $ 39,162 $ 32,731
Plan assets at fair value (19,106) (18,416)
Projected benefit obligation in
excess of plan assets 20,056 14,315
Unrecognized gain (3,315) (1,619)
Accrued pension costs $ 16,741 $ 12,696
49
<PAGE>
The projected benefit obligation at December 31, 1993 and
1992 was determined using a weighted average discount rate of
7.25% and 8.5%, respectively, and assumed long-term rate of
compensation increases of 5.0% and 6.5%, respectively. The
assumed long-term rate of return on plan assets was 10%.
Included in 1993 stockholder's equity (deficit) is a
$4,328,000 charge reflecting the excess of pension liability
over unrecognized prior service cost which resulted primarily
from the 1993 change in actuarial assumptions.
Postretirement benefits -
Employees retiring from certain subsidiaries of the Company
on or after attaining age 62 and meeting specified criteria
are entitled to certain postretirement health care coverages
and life insurance. These benefits are subject to certain
limitations and the Company reserves the right to amend or
change the plan at any time.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions (SFAS 106).
SFAS 106 requires that the expected cost of postretirement
benefits be recognized in the financial statements during the
years that the employees render service. Commencing in 1993,
the Company accrues an actuarially determined charge for
postretirement benefits during the period in which active
employees become eligible for such future benefits. The
$1,569,000 cumulative effect of adopting this accounting
change, after giving consideration to a pre-existing accrual
at time of adoption, is reflected as a decrease to 1993 net
income. Additionally, the effect of this change during the
year ended December 31, 1993 was to reduce net income by
$1,501,000.
The following table reconciles the accrued postretirement
benefit liability as reflected on the balance sheet as of
December 31, 1993 (in thousands):
Retirees $2,987
Other fully eligible participants 935
Other active participants 3,414
Accrued postretirement benefit
liability $7,336
Net postretirement benefit expense for 1993 included the
following components:
Service cost $ 233
Interest cost on accumulated
postretirement benefit obligation 471
Change in actuarial assumption 1,107
Net postretirement benefit expense $1,811
50
<PAGE> For measurement purposes, a 10% annual rate of increase in
the per capita cost of covered health care claims was assumed
for 1994; the rate was assumed to decrease gradually to 5%
for 2004 and remain at that level thereafter. The health
care cost trend rate assumption has a significant effect on
the amounts reported. Increasing the assumed health care
cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1993 by $512,000 and the aggregate of the
service and interest cost components of net postretirement
health care cost for the year then ended by $61,000. The
weighted-average discount rate used in determining the
accumulated postretirement benefit liability was 8.25% at
time of adoption and 7.25% as of December 31, 1993.
Prior to 1993, the Company had recognized postretirement
health care costs on a modified cash basis. Postretirement
healthcare costs charged to expense were $248,000 and $83,000 in
1992 and 1991, respectively. Prior year financial
statements have not been restated to reflect this new method.
6. Income Taxes:
Under the terms of the tax sharing arrangement with ESSTAR,
the Company accounts for income taxes as if it filed its own
consolidated return. Should the Company incur a loss, ESSTAR
may contribute to the Company the tax benefit of the loss.
The 1993, 1992 and 1991 income tax benefits, which are
included in the accompanying consolidated statements of
operations, reflect the amount of benefit which ESSTAR
elected to contribute to the Company as a result of its
losses.
Effective January 1, 1993, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109). SFAS 109 utilizes
the liability method and deferred income taxes are determined
based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws. Prior
to the adoption of SFAS 109, the Company accounted for income
taxes using Accounting Principles Board Opinion No. 11. The
cumulative effect of adopting this accounting change as of
January 1, 1993, was to increase net income by $5,673,000.
Prior year financial statements have not been restated to
reflect this new method of accounting.
The provisions (benefits) for income taxes for the years ended
December 31, 1993, 1992 and 1991 were as follows (in thousands):
1993 1992 1991
Current:
Federal $(5,167) $(1,077) $(16,500)
State - (593) 611
(5,167) (1,670) (15,889)
51
<PAGE> The tax effect of significant temporary differences giving
rise to the Company's consolidated deferred tax assets and
liabilities at December 31, 1993, are as follows (in
thousands):
Current Asset Long-term Asset
(Liability) (Liability)
Post retirement benefits $ - $ 2,773
Employee benefit accruals - 4,087
Intangibles - 12,079
Federal net operating losses - 26,792
State net operating losses - 3,400
Other, net 3,945 2,887
3,945 52,018
Valuation allowance (3,945) (52,018)
Total deferred income taxes $ - $ -
Gross deferred tax assets of $58,701,000, net of a valuation
allowance of $55,863,000 and gross deferred tax liabilities
of $2,838,000 are included in the deferred tax balances as of
December 31, 1993.
The difference between the Company's Federal effective tax
rate for continuing operations and the statutory rate for the
years ended December 31, 1993, 1992 and 1991 arises from the
following:
1993 1992 1991
Federal statutory rate (35.0)% (34.0)% (34.0)%
Increase (decrease)
resulting from:
Goodwill amortization
not deductible 0.6 2.1 1.2
Goodwill write-off 22.2 - -
Nondeductible expense 0.5 - -
Benefit not recognized 8.0 29.3 6.9
Effective Federal tax rate (3.9)% (2.6)% (25.9)%
52
<PAGE>
At December 31, 1993, the Company had approximately
$76,000,000 of federal net operating loss carryforwards which
can be used, subject to certain limitations, to offset future
federal taxable income, if any. The carryforwards expire
beginning in the year 2003. As of December 31, 1993, the
Company had approximately $30,000,000 of state net operating
loss carryforwards which can be used, subject to certain
limitations, to offset future state taxable income, if any.
These carryforwards expire beginning in the year 1994. The
future timing and ultimate realization of the tax benefits
from these net operating loss carryforwards may be limited
based upon the application of statutory regulations.
For the year ended December 31, 1993, additional depreciation
and amortization expense of $4,897,000 was recognized as a
result of the adoption of SFAS 109.
Included in the accompanying consolidated statement of
operations for the year ended December 31, 1991, is
$9,200,000 of extraordinary gain resulting from the
utilization of federal net operating loss carryforwards.
7. Litigation:
On May 22, 1990, a federal grand jury in St. Louis indicted
McKinney and three unrelated corporations for allegedly
violating the antitrust laws. McKinney has entered a plea of
nolo contendere and the court has accepted the plea. Five
present or former executives of three of the indicted
corporations, including two officers of the Company, were
also indicted. These two officers of the Company have entered
pleas of nolo contendere and the court has accepted such
pleas. On March 31, 1993, McKinney was fined $2,000,000,
payable over a five year period. This amount is included in
other expense in the accompanying consolidated statement of
operations for the year ended December 31, 1993. In 1993, the
two officers of the Company were each fined $250,000. The
United States Department of Justice filed notices of appeal
with respect to the sentences imposed on McKinney and the two
officers. McKinney and the officers 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. The appeals with respect to the two
officers are proceeding.
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
providing for an aggregate payment of $4,000,000. This
settlement agreement has been approved by the court, and
payment was made in 1990.
53
<PAGE>
Three class actions on behalf of California indirect
purchasers and a class action on behalf of Alabama indirect
purchasers of architectural hinges have been initiated
against McKinney and the three other corporate defendants.
McKinney and other corporate defendants entered into a
settlement agreement with plaintiffs' counsel with respect to
two of the three California actions and with respect to the
Alabama action. These settlement agreements have 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. No
provision has been made in the Company's financial statements
for any liability and related expense to be incurred in
resolving the remaining indirect purchaser litigation as the
amount is presently not determinable.
The Company is involved in various other matters of
litigation incidental to the normal conduct of its business.
In management's opinion, the disposition of this litigation
will not have a material adverse impact on the financial
condition of the Company.
8. Related Party Transactions:
The Company, Amstar and ESSTAR share facilities and personnel
related to corporate and administrative activities. Charges
of $2,149,000, $2,227,000 and $1,738,000 for these costs have
been allocated to the Company for the years ended December
31, 1993, 1992 and 1991, respectively.
Certain members of management of the Company are participants
in the ESSTAR stock option plans.
At December 31, 1993 and 1992, there were $4,163,000 and
$6,137,000, respectively, of advances from ESSTAR which are
due and payable on demand. The advances bear interest at 10%
of the average outstanding monthly balance.
In connection with the Debt Swap and related transactions at
December 31, 1991, the Company incurred certain advisory,
legal and financing fees. As a result, the Company incurred
$2,270,000 in such fees, of which $750,000 were paid to an
affiliate of a primary stockholder of ESSTAR. Of these fees,
$1,770,000 were paid by ESSTAR in the form of contributed
capital to the Company. At December 31, 1993 and 1992,
$840,000 and $1,120,000, respectively, of such fees are
included in goodwill and other intangible assets in the
accompanying consolidated balance sheets and are being
amortized over six years.
9. Disclosures about Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
54
<PAGE>
Cash and cash equivalents, accounts receivable and payable,
and accrued current liabilities -
For these short-term account balances, the carrying amount is
a reasonable estimate of fair value.
Bank loans -
The carrying amount is a reasonable estimate of fair value as
the debt is frequently repriced based on prime and Eurodollar
rates, and there has been no significant change in credit
risks since the financing was amended on December 31, 1991.
Notes and accrued interest payable to related party -
The notes and accrued interest payable to related party are
obligations for which there is no public market and no quoted
market price is available.
The Company believes that since the date of the Exchange, any
increase in the credit risk of these notes was offset by
changes in interest rates on similar subordinated debt
instruments during that same period and, therefore, the
carrying amount of the debt is a reasonable estimate of its
fair value. In addition, it is the Company's intent to repay
the full principal amount outstanding by the maturity date of
the debt.
10. Industry Segment Data:
The Company's products are all included in one segment, the
locks, doors and related products segment. The Company's
principal plants and other facilities are located in the
United States, with a small installation located in Canada.
55
<PAGE>
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements
See Item 14(a)(1) for the reference made therein to the
financial statements.
(b) Supplementary Data
Not applicable.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors1 and Executive Officers of the Registrant
Name Age Position
Howard B. Wentz, Jr. (64) Chairman of the Board
and Director
Robert A. Haversat (57) President, Chief
Executive Officer
and Director
Roger D. Chesley (50) Vice President and
General Counsel
Jeffrey A. Mereschuk (41) Vice President, Treasurer
and Chief Financial
Officer
James J. Burke, Jr. (42) Director
A. J. Fitzgibbons, III (48) Director
Alexis P. Michas (36) Director
Jerry G. Rubenstein (63) Director
__________________________
1Each of the Directors of the Company is also a Director of
Esstar. Directors of the Company do not receive any retainer or
meeting fees from the Company. Mr. Rubenstein receives an annual
retainer of $20,000 from Esstar, for his service as a director of
Esstar.
56
<PAGE>
Mr. Wentz joined Duff-Norton Company, Inc. in 1969, the year
after that former subsidiary was acquired by Amstar, as Vice
President-Operations. He became President of Duff-Norton in 1970,
and its Chief Executive Officer in 1972. Elected as Vice President
of Amstar in 1972, Mr. Wentz has been a member of its Board of
Directors since 1976. He served Amstar as Executive Vice President
and Chief Operating Officer from January 1979 until January 1981,
and President and Chief Operating Officer from January 1981 until
July 1, 1982. He was named Chief Executive Officer of Amstar on
July 1, 1982, and elected to the additional post of Chairman of the
Board effective February 1, 1983. Mr. Wentz holds a B.S.E. degree
from Princeton University and an M.B.A. from the Harvard Graduate
School of Business Administration. He retired from Amstar on June
30, 1989, and relinquished his positions of Chairman of the Board,
President and Chief Executive Officer. He continued as a director.
On July 27, 1989, Mr. Wentz was elected Chairman of the Board of
Amstar. Mr. Wentz is Chairman of the Board and a director of
Esstar, and was elected to those positions in June 1989. He also is
a director of Colgate-Palmolive Company, Crompton & Knowles
Corporation and Tambrands, Inc. He was elected Chairman of the
Board of Tambrands, Inc. in June 1993.
Mr. Haversat was elected President and Chief Executive Officer
and a Director of Amstar in July 1989. He is President and Chief
Executive Officer of Esstar, and was elected to those positions in
June 1989. Since January 1989 he also has been Chairman of the
Board, President and Chief Executive Officer of Essex and EI
Holdings. From August 1987 to January 1989, Mr. Haversat was
President, Chief Executive Officer and a director of a predecessor
of Essex. From September 1986 to August 1987, Mr. Haversat was
Group Vice President of ESSEX Hardware, Inc. ("EHI"), formerly
Foster Hardware and Bank Equipment Corporation, and a Vice President
of four subsidiaries of EHI. Previously, he was President and Chief
Executive Officer of McKinney Products Company and its predecessors
since 1978. On May 22, 1990, Mr. Haversat was indicted by a federal
grand jury for violations of the antitrust laws and on April 1,
1993, he was fined $250,000 following entry of a plea of nolo
contendere. (See discussion at pages 25 and 26.) Mr. Haversat is
a member of the Board of Trustees of Quinnipiac College and of Yale-
New Haven Hospital.
Mr. Chesley joined Amstar as a member of the Law Department in
1977. He was elected Assistant Secretary in 1978 and appointed
General Attorney in 1981. He was elected Assistant General Counsel
in 1982. In 1985, Mr. Chesley was elected Vice President and
General Counsel. Mr. Chesley also is Vice President and General
Counsel of Esstar. He was elected to those positions in June 1989.
He is a member of the New York Bar and holds an LL.B from Harvard
Law School. He received a B.S. in economics from the Wharton School
of the University of Pennsylvania.
Mr. Mereschuk was elected a Vice President of Amstar on July 27,
1989, and Chief Financial Officer on October 1, 1989, and Treasurer
on June 30, 1993. He also is Vice President, Treasurer, Chief Financial
Officer and Assistant Secretary of Esstar, having been elect
57
<PAGE>
those positions, except Treasurer, in June 1989. He was elected
Treasurer on June 30, 1993. He also is Treasurer of METCO, having
been elected to that position on December 31, 1991. Since January
1989, Mr. Mereschuk has been Vice President-Finance and Secretary of
Essex and EI Holdings.
Mr. Burke has been a Director of Amstar since 1986. Mr. Burke
joined Merrill Lynch & Co. in 1979 and was an associate in the
Mergers and Acquisitions Group until 1983, when he was elected a
Vice President. In 1985, he was elected a Managing Director of
Merrill Lynch & Co. and an Executive Vice President of ML Capital
Partners, the leveraged buyout unit of Merrill Lynch. In January
1987, Mr. Burke was elected President and Chief Executive Officer
of ML Capital Partners. Mr. Burke is a director of Esstar. He is
also a director of Borg-Warner Security Corporation, Pathmark
Stores, Inc., AnnTaylor Stores Corporation, London Fog Corporation,
United Artists Theatre Circuit, Inc., World Color Press, Inc. and
Wherehouse Entertainment, Inc. Mr. Burke holds a B.A. degree from
Brown University and an M.B.A. degree from the Harvard Graduate
School of Business Administration.
Mr. Fitzgibbons has been a Director of Amstar since July 1989.
Mr. Fitzgibbons has been a director since 1987, Executive Vice
President since 1988 and a Senior Vice President from 1987 to 1988
of ML Capital Partners. He has been a Managing Director of Merrill
Lynch & Co. since 1978. Mr. Fitzgibbons is a director of Essex, EI
Holdings and Esstar. He is also a director of Eckerd Corporation,
Borg-Warner Security Corporation, Borg-Warner Automotive, Inc. and
United Artists Theatre Circuit, Inc. Mr. Fitzgibbons holds a B.A.
degree from Boston College and an M.B.A. degree from the Columbia
University Graduate School of Business.
Mr. Michas has been a Director of Amstar since July 1989. Mr.
Michas has been a director since 1988, Partner since 1993, Senior
Vice President since 1989, Vice President from 1987 to 1989 and
Assistant Vice President from 1985 to 1987 of ML Capital Partners.
He has been a Managing Director since February 1991, a Director
since 1989 and a Vice President since 1987 of Merrill Lynch & Co.
Mr. Michas is a director of Essex, EI Holdings and Esstar. He is
also a director of Eckerd Corporation, Borg-Warner Security
Corporation, Borg-Warner Automotive, Inc. and Blue Bird Corporation.
Mr. Michas holds a B. A. degree from Harvard College and an M.B.A.
degree from the Harvard Graduate School of Business Administration.
Mr. Rubenstein has been a Director of Amstar since 1986. Mr.
Rubenstein was employed by IU International Corporation ("IU") from
1966 through 1975 and was elected President of such entity in 1973.
Mr. Rubenstein left IU in 1975 and since that time has been the
President, and has had the controlling interest in, Omni Management
Associates, a private investment company, and its predecessor firms.
Mr. Rubenstein is a director of Esstar and Supermarkets General
Holdings Corporation. Mr. Rubenstein holds a B.B.A. from the City
College of New York.
58
<PAGE>
<TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of plan and non-plan compensation provided or arranged for
by the Company or a subsidiary of the Company that was awarded to, earned by, or paid to (i) the
chief executive officer of the Company, and (ii) the four most highly compensated executive officers
of the Company or a subsidiary of the Company for the years ended December 31, 1993, 1992 and 1991.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<CAPTION>
OTHER ANNUAL ALL OTHER(3)
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION COMPENSATION
<S> <C> <C> <C> <C> <C>
ROBERT A. HAVERSAT(1) 1993 - - - -
PRESIDENT AND CEO 1992 - - - -
OF THE COMPANY 1991 - - - -
JOHN W. AMES 1993 $133,667 $ 67,164 $3,498 $ 20,812
SENIOR VICE PRESIDENT 1992 130,000 48,943 3,128 18,310
ADMINISTRATION OF METCO 1991 120,016 31,680 3,081 14,944
RICHARD C. GROVE 1993 $234,504 $120,729 $9,304 $120,369
PRESIDENT AND CEO 1992 225,004 93,089 8,379 111,749
OF METCO 1991 188,193 49,835 9,010 112,753
DENNIS L. SCHMIDT 1993 $115,117 $ 50,048 $3,786 $ 17,482
VICE PRESIDENT - FINANCE 1992 110,006 36,203 3,313 15,528
AND CONTROLLER OF METCO 1991 90,012 24,817 3,165 11,790
HOWARD B. WENTZ, JR.(1) 1993 - - - -
CHAIRMAN OF THE BOARD 1992 - - - -
OF THE COMPANY 1991 - - - -
1. The Company has been a holding company, without any employees, since June 30, 1989.
Messrs. Haversat and Wentz are employed by ESSTAR, the parent corporation of the
Company, Mr. Haversat as President and CEO and Mr. Wentz as Chairman of the Board.
All of Mr. Haversat's and Mr. Wentz's compensation is provided by ESSTAR. The
Company, and other subsidiaries of ESSTAR, are charged by ESSTAR on a proportionate
basis for the services provided them by Messrs. Haversat and Wentz. The charge to
the Company in 1993 amounted to $245,180 for Mr. Haversat and $158,950 for Mr. Wentz.
In each of the years, 1992 and 1991, the charge to the Company amounted to $145,600
for Mr. Haversat and $228,800 for Mr. Wentz.
(Notes continued on next page)
59
</TABLE>
<PAGE>
2. Amounts of bonus in the Bonus column are reported for the year
for which they were earned. Bonus payments are made in March of
the year following the year for which the bonus was earned.
3. All Other Compensation for Messrs. Ames and Schmidt, for each
year shown, was the contribution by METCO to their respective
participant accounts held by the trustee under METCO's
Employees' Profit Sharing Retirement Plan (the "Retirement
Plan"), a defined contribution plan that provides retirement
benefits for salaried and hourly employees of METCO. Under the
terms of the Retirement Plan, 25% of a participant's share of
METCO's contribution under the Retirement Plan for a year is
paid directly to the participant in cash, following the end of
the year, rather than to the trustee for the Retirement Plan.
The cash payments received by Messrs. Ames, Grove and Schmidt
for the years 1993, 1992 and 1991 as a result of their
participation in the Retirement Plan are included in the table
above under Bonus and not under All Other Compensation. For Mr.
Grove, All Other Compensation consists of the following amounts
for 1993, 1992 and 1991, respectively: $26,531, $25,749 and
$21,753 contributed to his account held by the trustee under the
Retirement Plan; $71,577, $64,000 and $46,000 accrued for the
benefit of his account under the Supplemental Retirement Benefit
Program ("SERP"); $22,261, $22,000 and $45,000, which are the
amounts of premiums paid by Esstar with respect to Mr. Grove
under an executive split-dollar life insurance policy. Under
the terms of the policy, a portion of those amounts will be
recovered by Esstar upon Mr. Grove's termination of employment.
For 1993, 1992 and 1991, the term-life insurance economic value
of the split-dollar life insurance premium for Mr. Grove were
the following respective amounts: $1,899, $1,712 and $1,597.
Since the inception of the SERP in 1989, a total of $267,521 has
been accrued for the benefit of Mr. Grove's account under the
SERP. Of that total amount, a total of $226,577 was accrued in
the years 1990 through 1993 and has been reported on Form 10-K
as All Other Compensation for Mr. Grove for the year of accrual.
In 1993, Mr. Grove received a distribution of $112,291 of the
total of $267,521 that had been accrued for his benefit. That
distribution is not included in All Other Compensation for 1993
because of the prior reporting of accruals.
Effective on December 31, 1992, grants of options to purchase
class A common stock of Esstar were made by the Board of
Directors of Esstar under the Esstar Incorporated 1992
Management Investors Stock Option Plan to employees of Esstar
and its subsidiaries. The total number of options granted to
all employees consisted of grants of 134,544 Basic Options and
2,000,000 Additional Options. The option grants made to Messrs.
Haversat, Ames, Grove, Schmidt and Wentz were as follows: Mr.
Haversat, 34,789 Basic Options and 250,000 Additional Options;
Mr. Ames, 16,500 Additional Options; Mr. Grove 170,000
Additional Options; Mr. Schmidt, 4,349 Basic Options and 35,000
Additional Options; and Mr. Wentz, 295,000 Additional Options.
Basic Options were immediately exercisable. Additional Options
60
<PAGE>
are not exercisable until December 31, 1994.
The options all expire on December 31, 2001. The option
price for all option grants was $0.01 per share, which Esstar
has stated was not materially different from the fair market
value of the related stock at the date of grant. No amount
has been recorded under All Other Compensation with respect
to the option grants.
Employment Agreement
Mr. Grove entered into an employment agreement with Esstar,
effective as of June 30, 1989, which agreement is to be adopted by
METCO. Mr. Grove's employment agreement provides that upon
his resignation during the initial term of the agreement under
circumstances that make his resignation not wholly voluntary, he
will be entitled to receive a lump-sum severance payment equal to
his then annual base salary and the highest award received by him
under the METCO Bonus Plan or a bonus plan of the Company or its
predecessors, multiplied by the greater of (i) the number of years,
including fractional portions thereof, remaining in the initial
term, and (ii) one and one-half. The initial term of the agreement
was from June 30, 1989 to June 30, 1992, and extends automatically
for successive one year periods thereafter unless earlier
terminated. In the event of Mr. Grove's disability or death during
the initial term or an extended term he or his estate would be
entitled to receive his salary and accrued benefits earned up to
the last day of the month of his death and for six months
thereafter and a bonus prorated for the portion of the year for
which his salary is paid.
Retirement Benefits (Defined Benefit)
The Company's pension plan for salaried employees terminated
on June 30, 1989. No service under the plan accrued after that
date and benefits payable under the plan became fixed on that
date. The plan provided non-contributory benefits based upon both
years of service and the employee's highest consecutive 3-year
average annual compensation during the last 10 years of service,
including bonuses. Payment of benefits remaining to be paid under
the plan has been funded through the purchase of annuities with
assets held in the trust for the plan. Mr. Grove will be entitled
to receive at age 60 monthly pension payments of $4,433, assuming
he elects a single life basis of payment.
61
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Esstar owns 1,000 shares of common stock, par value $0.01 per
share, of the Company, which constitutes all of the shares of
capital stock of the Company which were outstanding as of March
25, 1994. Effective on July 23, 1992, the Company amended its
restated certificate of incorporation to change its authorized
capital to 1,000 shares of common stock, par value $0.01 per share,
and simultaneously converted each of its issued and outstanding
shares of common stock into .00016345 of a new share, resulting in
the 6,118,097 shares of common stock then outstanding being
converted into 1,000 issued and outstanding shares of common stock.
No director or executive officer of the Company owns any shares of
common stock of the Company.
Item 13. Certain Relationships and Related Transactions
All of the Directors of the Company are also Directors of
Esstar. Three of the six members of the Board of Directors of both
the Company and Esstar are employees of ML Capital Partners.
In connection with the Combination, the Company entered into
a tax sharing agreement with Esstar. Pursuant to the terms of
such agreement, the Company accounts for income taxes as if it
filed its own consolidated tax return. (See "Working Capital" at
page 17.)
Merrill Lynch & Co., an affiliate of ML Capital Partners, acted
as exclusive dealer manager for Essex in connection with the
solicitation of the holders of the Notes and the purchase by Essex
on December 31, 1991, of $86.6 million principal amount of the
Notes. (See "Consummation of Tender Offer by Essex" at page
15.) Essex paid Merrill Lynch & Co. a fee of $749,500 for its
services as dealer manager.
On December 31, 1991, affiliates of ML Capital Partners
purchased 500,000 shares of convertible preferred stock of Esstar
at a price per share of $100, or an aggregate purchase price of
$50,000,000. The proceeds of the sale, along with the proceeds
of the sale of 150,000 of such shares to certain other investors,
were contributed by Esstar to Essex on December 31, 1991, for the
purpose of providing Essex with the funds necessary to purchase
$86,600,000 principal amount of the Notes on that date. (See
"Consummation of Tender Offer by Essex" at page 15.)
During 1993 METCO paid $110 thousand to a consultant for
management development and leadership training programs conducted
by the consultant for METCO employees. The consultant is a
brother-in-law of Richard C. Grove, president of METCO.
62
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a) Documents filed as part of this Form 10-K
(1) Financial Statements
The consolidated financial statements,
together with the report thereon of Arthur Andersen
& Co. dated February 21, 1994, filed with this
report are listed in the accompanying Index to
Consolidated Financial Statements and Schedules (S-
1).
(2) Financial Statement Schedules
The financial statement schedules filed with
this Report are listed in the accompanying Index to
Consolidated Financial Statements and Schedules (S-
1).
(3) Exhibits
The Exhibits filed with this report are
listed in the Exhibit Index commencing at page 66.
Each management contract or compensatory plan
or arrangement required to be filed as an exhibit
to this Report pursuant to Item 14(c) is
identified in the Exhibit Index by the sign #
immediately beneath the numerical listing of the filing
in the Index.
(b) Reports on Form 8-K
None
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Jeffrey A. Mereschuk
Jeffrey A. Mereschuk
Vice President and
Chief Financial Officer
Dated: March 30, 1994
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
* President and Director
Robert A. Haversat (Principal Executive Officer)
/s/ Jeffrey A. Mereschuk Vice President and Chief
Jeffrey A. Mereschuk Financial Officer
(Principal Financial Officer)
/s/ John D. Speridakos Controller
John D. Speridakos (Principal Accounting Officer)
Dated: March 30, 1994
64
<PAGE>
Directors:
*
James J. Burke, Jr.
*
A. J. Fitzgibbons, III
*
Alexis P. Michas
*
J. G. Rubenstein
*
Howard B. Wentz, Jr.
*By /s/ Kenneth J. Jones
Kenneth J. Jones
Attorney-in-Fact
March 30, 1994
65
<PAGE>
EXHIBIT INDEX
(2)* - Agreement and Plan of Merger, dated as of November 14,
1986, by and among the Registrant, Acquisition and AHI.
(3) (i)(1)* - Restated Certificate of Incorporation of the Registrant.
(i)(2)* - Certificate of Amendment, effective December 9, 1986.
(i)(3)* - Certificate of Amendment, effective December 31, 1986.
(i)(4) - Certificate of Amendment, effective July 23, 1992.
(Incorporated by reference to exhibit (3) to Form 10-Q
of the Registrant for the quarter ended June 30, 1992)
(ii)(1)* - By-Laws of the Registrant, as amended to January 28,
1987.
(ii)(2) - Amendment to the By-Laws, effective July 27, 1989.
(Incorporated by reference to the same numbered exhibit
to Form 10-K of the Registrant for the year ended June
30, 1989.)
(4)* - Indenture dated as of February 15, 1987, between the
Company and Chemical Bank, as Trustee.
(10) (ix)(8)** - Milwaukee Electric Tool Corporation Bonus Plan.
#
(x)*** - Supplementary Retirement Benefit Program for Certain
# Key Executives of ESSTAR Incorporated and its
Subsidiaries.
_____________
* Incorporated by reference to the same numbered exhibit to
Registration Statement of the Registrant on Form S-1 (File No. 33-
10740).
** Incorporated by reference to the same numbered exhibit to Form
10-K of the Registrant for the transition period from July 1,
1989, to December 31, 1989.
*** Incorporated by reference to the same numbered exhibit to Form 10-K
of the Registrant for the year ended December 31, 1992.
# Required to be filed as an exhibit pursuant to Item 14(c).
66
<PAGE>
(xiii)(3) - Indenture dated as of June 30, 1989, between ESSEX
Industries, Inc. and ____________________, as Trustee,
and acknowledged by Amstar
Corporation, relating to Senior
Subordinated Discount Notes due 1997.
(Incorporated by reference to Exhibit 3 to Form 8-K of
the Registrant, Date of Report: June 30, 1989.)
(xiii)(4)* - First Supplemental Indenture dated as of June 30, 1989,
between ESSEX Industries, Inc. and____________________, as
Trustee, and acknowledged by Amstar Corporation,
relating to Senior Subordinated Discount Notes due 1997.
(xiii)(5)** - Second Supplemental Indenture dated as of December 31, 1991,
between ESSEX Industries, Inc. and ____________, as Trustee,
and acknowledged by Amstar Corporation, relating to Senior
Subordinated Discount Notes due 1997.
(xiv) - Letter of Credit Agreement, dated as of June 28, 1989,
among Amstar Corporation, Amstar Technical Products
Company, Inc, Aiken Advanced Systems, Inc. and The Bank
of New York. (Incorporated by reference to Exhibit 4 to
Form 8-K of the Registrant, Date of Report: June 30, 1989).
(xv) - Revolving Credit Agreement, dated as of June 28, 1989,
among Milwaukee Electric Tool Corporation, Amstar
Corporation and The Bank of New York. (Incorporated by
reference to Exhibit 5 to Form 8-K of the Registrant,
Date of Report: June 30, 1989.)
(xvi)** - The Credit Agreement, dated as of December 31, 1991, between
Milwaukee Electric Tool Corporation, as borrower and Heller
Financial, Inc., as agent and lender.
(xvi)(1)*** - Waiver and First Amendment to Credit Agreement dated December
31,1992, between Milwaukee Electric Tool Corporation and
Heller Financial, Inc., as agent and lender.
(xvi)(2) - Second Amendment, dated October 26, 1993, to Credit Agreement
dated as of December 31, 1991,between Milwaukee Electric Tool
Corporation, as borrower and Heller Financial Inc., as agent
and lender. (Incorporated by reference to Exhibit 10(i) to
Form 10-Q of the Registrant for the quarter ended September
30, 1993.)
_________________
* Incorporated by reference to the same numbered exhibit to Form
10-K of the Registrant for the year ended June 30, 1989.
** Incorporated by reference to the same numbered exhibit to Form 8-K
of the Registrant, Date of Report: December 31, 1991.
*** Incorporated by reference to the same numbered exhibit to Form 10-K of
the Registrant for the year ended December 31, 1992.
67
<PAGE>
(xvi)(3) - Reaffirmation, dated October 26, 1993, of Amstar Corporation,
acknowledging the Second Amendment to Credit Agreement and
reaffirming its obligations under the Secured Guaranty dated
as of December 31, 1991, in favor of Heller Financial, Inc.
(Incorporated by reference to Exhibit 10(ii) to Form 10-Q of
the Registrant for the quarter ended September 30, 1993.)
(xvii)** - The Secured Guaranty of Amstar Corporation, dated as of
December 31, 1991, in favor of Heller Financial, Inc. as
agent, and the lenders specified therein.
(xvii)(1)* - Amended and Restated Secured Guaranty of Amstar Corporation
dated as of December 31, 1992, in favor of Heller Financial,
Inc. as agent, and the lenders specified therein.
(xviii)** - Assignment of Copyrights and Licenses, dated as of December
31, 1991, between Milwaukee Electric Tool Corporation and
Heller Financial, Inc. as agent.
(xix)** - Assignment of Patents, dated as of December 31, 1991, between
Milwaukee Electric Tool Corporation and Heller Financial, Inc
as agent.
(xx)** - Assignment of Trademarks, dated as of December 31, 1991,
between Milwaukee Electric Tool Corporation and Heller
Financial, Inc. as agent.
(xxi)** - Pledge Agreement, dated as of December 31, 1991, between
Amstar Corporation and Heller Financial, Inc. as agent.
(xxii)** - Subsidiary Pledge Agreement, dated as of December 31, 1991,
between Milwaukee Electric Tool Corporation and Heller
Financial, Inc. as agent.
________________
* Incorporated by reference to the same numbered exhibit to Form 10-K
of the Registrant for the year ended December 31, 1992.
** Incorporated by reference to the same numbered exhibit to Form 8-K
of the Registrant, Date of Report: December 31, 1991.
68
<PAGE>
(xxiii)** - Post-Closing Agreement, dated as of December 31, 1991,
between Milwaukee Electric Tool Corporation and Heller
Financial, Inc. as agent.
(xxiv)** - Debt Exchange Agreement, dated as of December 31, 1991,
between Amstar Corporation and ESSEX Industries, Inc.
(22)* - List of subsidiaries of the Registrant.
(25) - Power of attorney.
(28)* - ESSTAR Incorporated 1992 Management Investors Stock
# Option Plan
(28)(viii)*** - Agreement entered into by ESSTAR Incorporated with Richard
# C. Grove, as of June 30, 1989.
______________________
* Incorporated by reference to the same numbered exhibit to Form 10-K
of the Registrant for the year ended December 31, 1992.
** Incorporated by reference to the same numbered exhibit to Form 8-K
of the Registrant, Date of Report: December 31, 1991.
*** Incorporated by reference to the same numbered exhibit to Registration
Statement of the Registrant on Form S-1 (Regis. No. 33-10740).
# Required to be filed as an exhibit pursuant to Item 14(c).
69
<PAGE>
S-1
AMSTAR CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
and Schedules
Page
Report of Independent Public Accountants S-2
Statements:
Amstar Corporation and Subsidiaries Consolidated
Balance Sheets as of December 31, 1993 and December
31, 1992. S-3
Amstar Corporation and Subsidiaries Consolidated
Statements of Operations for the years ended
December 31, 1993, 1992, and 1991. S-4
Amstar Corporation and Subsidiaries Consolidated
Statements of Changes in Stockholder's Equity (Deficit)
for the years ended December 31, 1993, 1992, and 1991. S-5
Amstar Corporation and Subsidiaries Consolidated
Statements of Cash Flows for the years ended December
31, 1993, 1992, and 1991. S-6
Notes to Consolidated Financial Statements S-7
Schedules - For the Years Ended December 31, 1991,
1992, and 1993
IV Indebtedness of and to Related Parties -
Not Current S-19
V Property, Plant and Equipment S-20
VI Accumulated Amortization and Depreciation of
Property, Plant and Equipment S-21
VIII Valuation and Qualifying Accounts S-22
X Supplementary Income Statement Information S-23
Separate financial statements of the Registrant have been omitted because (i)
the consolidated statements of the Registrant and its subsidiaries are filed,
and (ii) the Registrant is primarily an operating company and all subsidiaries
are wholly owned and are not indebted to any person other than the Registrant
in an amount which is material in relation to the total consolidated assets, as
of December 31, 1993, excepting indebtedness incurred in the ordinary course of
business which is not overdue and which matures within one year from the date
of its creation. Schedules other than those listed in the index are omitted
because they are not required or are not applicable or because the required
information is included in the financial statements or notes thereto.
<PAGE>
S-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholder of Amstar Corporation:
We have audited the accompanying consolidated balance sheets of
Amstar Corporation (a Delaware corporation and wholly-owned
subsidiary of ESSTAR Incorporated) and subsidiaries as of December
31, 1993 and 1992, and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for each
of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Amstar Corporation and subsidiaries as of December
31, 1993 and 1992, and the results of their operations and their
cash flows for each of the three years in the period ended December
31, 1993 in conformity with generally accepted
accounting principles.
As discussed in Notes 8 and 9 to the consolidated financial
statements, effective January 1, 1993, the Corporation changed its
methods of accounting for income taxes and postretirement benefits
other than pensions.
New Haven, Connecticut
February 21, 1994
<PAGE> S-3
AMSTAR CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of ESSTAR Incorporated)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1992
(dollar amounts in thousands)
ASSETS 1993 1992
CURRENT ASSETS:
Cash and cash equivalents $ 2,554 $ 6,483
Accounts receivable, net of allowance
for doubtful accounts of $788 and $725 54,943 43,542
Receivable from ESSTAR Incorporated 946 7,167
Inventories 38,671 36,643
Other 861 955
Total current assets 97,975 94,790
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 1,578 1,490
Buildings and structures 9,627 9,036
Machinery and equipment 81,218 69,957
92,423 80,483
Less - accumulated depreciation
and amortization 28,328 23,220
64,095 57,263
NOTES AND ACCRUED INTEREST RECEIVABLE
FROM RELATED PARTY - 93,703
GOODWILL AND OTHER INTANGIBLES, net of
accumulated amortization of $29,236
and $24,627 99,787 104,137
OTHER 1,024 865
$ 262,881 $350,758
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 15,895 $ 15,028
Accrued interest 8,331 8,331
Accrued income taxes 1,179 10,258
Accrued payroll and employee
benefit costs 11,223 9,024
Deferred income taxes 3,467 -
Other accrued expenses 9,365 7,847
Total current liabilities 49,460 50,488
LONG-TERM DEBT 201,800 195,300
DEFERRED INCOME TAXES 9,851 3,388
OTHER NONCURRENT LIABILITIES 22,643 6,465
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock $.01 par value, 1,000 shares
authorized, issued and outstanding - -
Additional paid-in capital 64,814 64,814
Retained earnings 22,072 30,303
Notes and accrued interest receivable
from related party (107,759) -
Total stockholder's equity
(deficit) (20,873) 95,117
$ 262,881 $350,758
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> S-4
AMSTAR CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of ESSTAR Incorporated)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(amounts in thousands)
1993 1992 1991
Net sales $306,441 $266,405 $242,008
Costs of products sold 214,191 185,974 173,966
Gross profit 92,250 80,431 68,042
Selling, general and
administrative expenses 58,023 49,272 50,687
Amortization of goodwill and
other intangibles 4,609 4,520 4,088
Operating income 29,618 26,639 13,267
Interest income 14,869 13,109 28,806
Interest expense (23,591) (23,626) (36,076)
Other income (expense) (21) (35) 311
Income before income
taxes, extraordinary
gain and cumulative
effect of changes in
accounting principles 20,875 16,087 6,308
Income taxes:
Provision for state and local
income taxes 2,679 1,963 1,380
Provision for Federal income
taxes 7,970 4,971 3,579
10,649 6,934 4,959
Income before extraordinary
gain and cumulative effect
of changes in accounting
principles 10,226 9,153 1,349
Extraordinary gain on retirement
of Senior Subordinated Notes,
net of related income taxes - - 20,182
Income before cumulative
effect of changes in
accounting principles 10,226 9,153 21,531
Cumulative effect changes in
accounting principles (10,957) - -
Net income (loss) $ (731) $ 9,153 $ 21,531
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
<TABLE>
S-5
AMSTAR CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of ESSTAR Incorporated)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(dollar amounts in thousands)
<CAPTION>
Notes and
Additional Accrued Interest
Common Stock Paid-in Retained Receivable From
Shares Amount Capital Earnings Related Party
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1991 1,000 $ - $64,814 $49,752 $ -
Net income - - - 21,531 -
Loss on Debt Swap with
related party, net of
related income taxes
(Note 5) - - - (50,133) -
Balance, December 31, 1991 1,000 - 64,814 21,150 -
Net income - - - 9,153 -
Balance, December 31, 1992 1,000 - 64,814 30,303 -
Dividend paid to ESSTAR
Incorporated - - - (7,500) -
Net loss - - - (731) -
Reclassification of notes
and accrued interest
receivable from related
party - - - - (107,759)
Balance, December 31, 1993 1,000 $ - $64,814 $22,072 $(107,759)
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE> S-6
AMSTAR CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of ESSTAR Incorporated)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(amounts in thousands)
<CAPTION> 1993 1992 1991
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before extraordinary gain and cumulative
effect of changes in accounting principles $ 10,226 $ 9,153 $ 1,349
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 6,439 5,494 5,311
Amortization of goodwill and other intangibles 4,609 4,520 4,088
Accretion of non-cash interest (14,056) (12,222) (13,889)
Provision for deferred taxes 193 - -
Changes in operating assets and liabilities,
net of effects of subsidiary sold:
Receivables (6,320) (5,504) 3,716
Inventories 4,282 (2,691) 15,700
Refundable income taxes - 15,750 (15,750)
Other current assets 94 222 (498)
Other assets (418) (198) 731
Accounts payable 867 (63) (5,931)
Accrued income taxes (9,079) 1,709 (25)
Accrued payroll and employee benefit costs 2,199 785 (182)
Deferred taxes (3,026) - -
Other current liabilities 1,518 1,780 (557)
Other noncurrent liabilities 7,854 (3,103) 540
Net cash provided by (used in) operating
activities 5,382 15,632 (5,397)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of discontinued operations - 6,695 3,037
Purchases of property, plant and equipment, net (8,311) (6,786) (6,981)
Decrease in notes receivable - - 15,000
Proceeds from sale of subsidiary, net of cash sold - - 19,662
Net cash provided by (used in)investing activities (8,311) (91) 30,718
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Senior Subordinated Notes, net of tax effect - - (15,718)
Increase (decrease) in revolving credit agreement 6,500 (8,951) (10,420)
Repayment of capital lease obligations - (289) (23)
Dividend paid to ESSTAR Incorporated (7,500) - -
Net cash used in financing activities (1,000) (9,240) (26,161)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,929) 6,301 (840)
CASH AND CASH EQUIVALENTS, beginning of period 6,483 182 1,022
CASH AND CASH EQUIVALENTS, end of period $ 2,554 $ 6,483 $ 182
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $23,520 $23,626 $ 39,846
Income taxes $ 2,453 $ 8,799 $ 20,019
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
S-7
AMSTAR CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of ESSTAR Incorporated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
1. Organization:
On June 30, 1989, the holders of all the outstanding shares
of common stock of Amstar Corporation (the Corporation)
exchanged (the Amstar Exchange) such shares for shares of
common stock of ESSTAR Incorporated (ESSTAR). Simultaneously
with the Amstar Exchange, the holders of all the outstanding
shares of common stock of EI Holdings Corp. (EIH) exchanged
(the Essex Exchange and together with the Amstar Exchange,
the Combination) such shares for shares of ESSTAR common
stock. As a result of the Combination, the Corporation and
EIH each became direct, wholly-owned subsidiaries of ESSTAR.
The Combination was treated as a pooling-of-interests.
2. Summary of Significant Accounting Policies:
Principles of consolidation -
The accompanying consolidated financial statements include
the accounts of Amstar Corporation and its wholly-owned
subsidiaries Milwaukee Electric Tool Corporation (Metco),
Milford Products Corporation (Milford)through March 28,
1991, and Milrem Corp. (Milrem). All significant
intercompany transactions and accounts have been eliminated
in consolidation.
On March 28, 1991, the Corporation sold the stock of
Milford, and entered into a covenant not to compete, for
$19,662,000 in cash, which was in excess of Milford's net book
value. Under the terms of the Stock Purchase
Agreement, a subsidiary of the Corporation provided a
letter-of-credit for $2,500,000 and placed in escrow
$3,500,000 principal amount of the Corporation's 11.375%
Senior Subordinated Notes as security for the performance of
certain environmental remediation obligations of the
Corporation to the purchaser. Such obligations are accrued
and are currently estimated to cost substantially less than
the security.
Depreciation and amortization -
Property, plant and equipment are depreciated or amortized,
using the straight-line method, over the estimated useful
lives of the assets ranging from 20 to 45 years for
buildings and structures and 3 to 16 years for machinery and
equipment. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives.
Expenditures for repairs and maintenance are charged against
income as incurred. Renewals and betterments are
capitalized.
<PAGE> S-8
Goodwill and other intangibles -
Goodwill and other intangibles represent the excess of cost
over the fair value of assets acquired and liabilities
assumed related to a previous acquisition of the Corporation
and are being amortized, on a straight-line basis, over 40
years for goodwill and 7.5 to 10 years for other intangible
assets. The unamortized balances of goodwill and other
intangibles were $95,242,000 and $4,545,000, respectively,
at December 31, 1993 and $98,148,000 and $5,989,000,
respectively, at December 31, 1992.
The Corporation continually evaluates whether events and
circumstances have occurred which indicate that the
remaining estimated useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be
recoverable. The Corporation uses an estimate of its related
business segment's undiscounted net income over the remaining
life of goodwill in measuring whether the goodwill is recoverable.
Research and development -
The Corporation's research and development costs are charged
to expense as incurred and amounted to $4,531,000,
$3,986,000 and $3,387,000 for the years ended December 31,
1993, 1992 and 1991, respectively.
Product liability and workers' compensation -
The Corporation is partially self-insured for product
liability and workers' compensation claims. The Corporation
accrues for its product liability and workers' compensation
claims based on an assessment of claims outstanding, as well
as an estimate, based on experience, of incurred workers'
compensation claims which have not yet been reported.
Stockholder's equity -
Effective on July 23, 1992, through a reverse stock split,
the Corporation converted the then issued and outstanding
6,118,097 shares of common stock to 1,000 shares of common
stock. The number of shares as presented in the
accompanying consolidated financial statements has been
retroactively restated to reflect the reverse stock split.
Cash and cash equivalents -
For purposes of the consolidated statements of cash flows, the
Corporation considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents.
3. Discontinued Operations:
On October 31, 1989, the Corporation converted preferred stock
and related warrants, which represented the Corporation's continuing
investment in a previously sold subsidiary, into a subordinated
note receivable. This note, which bore interest at 13% per annum,
was payable semi-annually on March 31 and September 30 of each year.
During 1991, the Corporation sold the note receivable for an
aggregate price of $15,000,000.
<PAGE> S-9
Effective April 15, 1992, the Corporation sold substantially
all of the assets of Keltec Florida, Inc. The proceeds
received from the sale, net of related costs, approximated
the book value of the assets. This company had previously
been recorded as a discontinued operation.
Net sales of all discontinued businesses approximated
$8,122,000, and $30,792,000 for the years ended December 31,
1992 and 1991, respectively.
4. Inventories:
Substantially all inventories are valued at the lower of
cost, under the last-in, first-out method (LIFO), or market
and include materials, labor and manufacturing overhead. As
a result of the application of purchase accounting in 1986,
the financial accounting basis of the inventories changed,
while the basis for federal income tax reporting purposes
did not. Accordingly, as of December 31, 1993 the LIFO
inventories reflected in the accompanying consolidated
balance sheets are stated at an amount $17,952,000 greater
than the LIFO inventories reported for federal income tax
purposes.
At December 31, 1993 and 1992, the LIFO inventories
reflected in the consolidated balance sheets are $5,721,000
and $11,140,000, respectively, less than current costs. The
decrease in the LIFO reserve results primarily from the
reclassification of deferred taxes related to the adoption of
Statement of Financial Accounting Standards No. 109,
accounting for Income Taxes (Note 9).
During 1991, the Corporation liquidated certain LIFO
inventories that were carried at lower costs prevailing in
prior years. The effect of this liquidation was to increase
operating income by approximately $1,900,000.
Inventories at December 31, 1993 and 1992 consisted of the
following:
1993 1992
(amounts in thousands)
Raw materials and parts $14,859 $18,118
Work-in-process 1,167 853
Finished goods 22,645 17,672
$38,671 $36,643
5. Notes Receivable from Related Party:
Concurrent with the Combination, ESSEX Holdings, Inc.
(formerly ESSEX Industries, Inc.) (ESSEX) issued, and the
Corporation purchased, $152,733,000 aggregate principal amount
of Senior Subordinated Discount Notes due 1997 and $100,000,000
aggregate principal amount of 14% Subordinated Debentures due
1997, for an aggregate cash purchase price of $175,000,000.
<PAGE> S-10
On December 31, 1991, EIH, through its wholly-owned subsidiary
ESSEX, purchased in the open market $86,600,000 principal amount
of the Corporation's 11.375% Senior Subordinated Notes for
$64,950,000. Concurrent with the purchase, ESSEX exchanged the
Senior Subordinated Notes for its outstanding indebtedness due
the Corporation of $100,000,000 of Subordinated Debentures,
$5,833,000 of related accrued interest and $25,000,000 of Senior
Subordinated Discount Notes (the Debt Swap). The resulting
loss on the Debt Swap of $65,883,000 is reflected in the
accompanying consolidated statement of changes in stock-
holder's equity for the year ended December 31, 1991, net
of a federal tax benefit of $15,750,000, as a decrease in
retained earnings. As of December 31, 1993 and 1992,
$116,874,000 aggregate principal amount of Senior Subordinated
Discount Notes remained outstanding which have accreted values
of $107,759,000 and $93,703,000, respectively.
The Senior Subordinated Discount Notes will bear interest,
commencing August 1, 1994, at 15% per annum, payable semi-
annually. At the option of ESSEX, the payment of interest
in cash may be deferred until the February 1, 1997 maturity
date of these notes. If the cash interest payments are
deferred, the Corporation will receive additional securities
in lieu of cash. These notes are subject to redemption
after August 1, 1994, in whole or in part, at the election
of ESSEX, at a redemption price equal to 104.29%, 102.14%
and 100% of the outstanding principal balance as of the
first day of August 1994, 1995 and 1996, respectively.
For the years ended December 31, 1993, 1992 and 1991, the
Corporation recognized $14,056,000, $12,222,000 and
$27,889,000 of interest income, respectively, related to
these notes receivable from affiliate. Included in this
interest income is $14,056,000, $12,222,000 and $13,889,000
of debt discount amortization which was added to the
carrying value of the Senior Subordinated Discount Notes
during the years ended December 31, 1993, 1992 and 1991, respectively.
Subsequent to year end, Essex informed the Corporation that as
of December 31, 1993, ESSEX wrote off the remaining balance of
its goodwill of $82,287,000 based on ESSEX's projections of
future net income. Based on this information, the Corporation
determined that, as of December 31, 1993, the ultimate realization
of a portion of the Senior Subordinated Discount Notes may be in
doubt. Accordingly, the Corporation has classified the Senior
Subordinated Discount Notes as an offset to stockholder's equity in
the accompanying consolidated balance sheet and statement of changes
in stockholder's equity (deficit) as of December 31, 1993, and will
reserve in full against the accretion of interest on the Senior
Subordinated Discount Notes subsequent to December 31, 1993.
6. Long-Term Debt:
Long-term debt at December 31, 1993 and 1992 consisted of
the following:
1993 1992
(amounts in thousands)
11.375% Senior Subordinated Notes $195,300 $195,300
Bank debt 6,500 -
$201,800 $195,300
<PAGE> S-11
Bank debt -
On December 31, 1991, Metco entered into a credit agreement
with a lending institution which provides for a primary
letter of credit facility of $15,000,000, a primary
revolving facility of $45,000,000 (of which up to
$15,000,000 may be used for additional letters of credit)
and, effective October 26, 1993, a secondary revolving loan
facility of $15,000,000 (collectively the Credit Facility).
Borrowings under the revolving facilities are limited to 90%
of eligible accounts receivable, 65% of eligible inventory,
and the primary letter of credit borrowing base of
$15,000,000, as defined. At December 31, 1993, additional
borrowings of $45,438,000 were available under the Credit
Facility. The Credit Agreement expires and all obligations
outstanding thereunder become due and payable on December
31, 1995. Interest on outstanding borrowings is payable at
either the London Interbank Offered Rate (3.25-3.8125% at
December 31, 1993) plus 3.0% to 3.75% or the prime rate (6.0%
at December 31, 1993) plus 1.75% to 2.50%, depending upon the
nature of the borrowing. If Metco's operating cash flow, as
defined, does not meet certain minimum ratios for a specified
period of time, then interest rates will be increased by 1.0%.
Borrowings under the Credit Facility are secured by a first
security interest on substantially all of the real and
personal property of Metco, the capital stock of Metco, and
65% of the capital stock of Metco's sole subsidiary. Additionally,
the Corporation has guaranteed the indebtedness of Metco.
The Credit Facility contains certain restrictive provisions
on both Metco and the Corporation. The Metco restrictive
provisions include, among others, that Metco may not incur certain
additional indebtedness, incur certain contingent liabilities,
sell or dispose of certain assets, or make certain investments.
Metco is also subject to financial covenants including
maximum annual capital expenditures ($8,000,000 in 1993
increasing to $8,500,000 by 1995; provided that up to
$2,000,000 not expended in any fiscal year may be carried over
and expended in the next succeeding fiscal year),
consolidated net income before interest, depreciation,
amortization and taxes (EBIDAT), as defined, ($38,000,000 in
1993 increasing to $42,000,000 by 1995), EBIDAT as a ratio of
interest expense, as defined (5.0 to 1.0 in 1993 and
thereafter), and EBIDAT as a ratio of fixed charges, as
defined (1.0 to 1.0 in 1993 and thereafter).
The Corporation's restrictive provisions include, among
others, that the Corporation may not incur certain additional
indebtedness, incur certain contingent liabilities, or pay
dividends or certain other payments to ESSTAR except as set forth
in the Credit Facility. In addition, the Corporation is also
subject to a financial covenant that the ratio of certain of its
income divided by certain of its interest expense, as defined, must
not be less than 1.0 to 1.0. At December 31, 1993, Metco and the
Corporation were in compliance with the covenants in the Credit Facility.
<PAGE> S-12
This Agreement provides for 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. The outstanding
standby letters-of-credit at December 31, 1993 and 1992 were
$22,992,000 and $24,250,000, respectively. In addition, the
Corporation had $70,000 and $88,000 in documentary letters-
of-credit outstanding at December 31, 1993 and 1992,
respectively. In the event that the Corporation terminates
the Credit Facility during 1994, the Corporation would pay a
termination fee of $750,000.
11.375% Senior Subordinated Notes -
The indenture agreement under which the 11.375% Senior
Subordinated Notes (the Notes) were issued does not require
sinking fund payments. Interest is payable semi-annually and
the Notes are due on February 15, 1997. The Notes are
redeemable at the option of the Corporation at a redemption
price of 103.8% of the principal amount in 1993, declining
thereafter to 100% of the principal amount by 1996.
During the year ended December 31, 1991, the Corporation
repurchased in the open market $30,000,000, at a cost of
$16,500,000, of principal amount of its 11.375% Senior
Subordinated Notes plus all accrued interest through the
repurchase date. In addition, ESSEX purchased in the open
market an additional $86,600,000 principal amount of the
11.375% Senior Subordinated Notes at a cost of $64,950,000
(Note 5). The gain of $20,182,000, net of related costs and
after a provision for income taxes of $12,215,000, is reflected
as an extraordinary gain in the accompanying consolidated
statement of operations for the year ended December 31, 1991.
The indenture agreement limits the amount of dividends which
the Corporation can pay to ESSTAR to 50% of cumulative net
income, as defined, as adjusted for certain equity
transactions. As of December 31, 1993, approximately
$5,030,000 was available for future distribution.
Maturities under the debt instruments may be accelerated
upon the occurrence of certain events as defined in the
respective agreements including, but not limited to, failure
to make principal and interest payments when due and breach
of certain covenants in the agreements.
7. Commitments and Related Matters:
Leases -
The Corporation and its subsidiaries lease property, plant
and equipment under a number of leases extending for varying
periods of time. Operating lease rental expense amounted to
approximately $2,866,000, $2,857,000 and $3,074,000 for the
years ended December 31, 1993, 1992 and 1991, respectively.
<PAGE> S-13
Minimum rental commitments as of December 31, 1993, under
non-cancelable leases with terms of more than one year, are
as follows:
Year Ending Amount
December 31, (in thousands)
1994 $2,541
1995 1,826
1996 1,045
1997 354
1998 181
Thereafter 207
$6,154
Environmental liabilities -
The Corporation has incurred certain environmental
obligations incidental to the normal conduct of its
business. The estimated costs associated with such known
obligations have been recognized in the accompanying
consolidated financial statements.
8. Retirement Benefits:
Profit sharing plans -
Metco has a profit sharing plan for substantially all of its
employees. Expense for this plan amounted to $8,221,000,
$7,381,000 and $5,704,000, for the years ended December 31,
1993, 1992 and 1991, respectively.
Other postretirement benefits -
Employees retiring from the Corporation on or after
attaining age 55 and meeting certain criteria are entitled to
postretirement health care coverage and life insurance
benefits. These benefits are subject to certain limitations
and the Corporation reserves the right to change or
terminate the benefits at any time.
Effective January 1, 1993, the Corporation adopted Statement
of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other than Pensions
(SFAS 106). SFAS 106 requires that the cost of
postretirement benefits be recognized in the financial
statements during the years employees render service.
Commencing in 1993, the Corporation accrues an actuarially
determined charge for postretirement benefits during the
period in which active employees become eligible for such
future benefits. The $8,324,000 cumulative effect of
adopting this accounting change, net of a tax benefit of
$2,911,000, is reflected as a decrease to 1993 net income.
Additionally, the effect of this change during the year
ended December 31, 1993 was to reduce net income by $776,000.
<PAGE> S-14
The following table reconciles the accrued postretirement
benefit liability as reflected on the accompanying
consolidated balance sheet as of December 31, 1993 (in
thousands):
Retirees $6,314
Other fully eligible participants 1,074
Other active participants 2,418
Accrued postretirement benefit liability $9,806
Net postretirement benefit expense for 1993 included the
following components:
Service cost $ 152
Interest cost on accumulated postretirement
benefit obligation 732
Change in actuarial assumptions (259)
Net postretirement benefit expense $ 625
For measurement purposes, as of December 31, 1993 a 10%
annual rate of increase in the per capita cost of covered
health care claims was assumed for 1994, with the rate
assumed to decrease gradually to 5% for 2004 and remain at
that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported.
Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by
$819,000 and the aggregate of the service and interest cost
components of net postretirement health care cost for the
year then ended by $142,000. The weighted-average discount
rate used in determining the accumulated postretirement
benefit liability was 8.25% at time of adoption and 7.25% as
of December 31, 1993. The $259,000 change in actuarial
assumptions results from the decrease in the weighted-
average discount rate, as well as a decrease in the Metco rate
of increase in the per capita cost of health care claims.
Prior to 1993, the Corporation recognized postretirement
health care benefits on a modified cash basis. Post-
retirement health care benefits charged to expense were
$404,000 and $326,000 in 1992 and 1991, respectively. Prior
year financial statements have not been restated to reflect
this new method of accounting.
9. Income Taxes:
Under the terms of the tax sharing agreement with ESSTAR,
the Corporation provides income taxes as if it files its own
consolidated return.
<PAGE> S-15
Effective January 1, 1993, the Corporation adopted the
provisions of Statement of Financial Accounting Standards
109, Accounting for Income Taxes (SFAS 109). SFAS 109
utilizes the liability method and deferred taxes are
determined based on the estimated future tax effects of
differences between the financial statements and tax bases
of assets and liabilities given the provisions of enacted
tax laws. Prior to the implementation of SFAS 109, the
Corporation accounted for income taxes using Accounting
Principles Board Opinion No. 11. The cumulative effect of
adopting this accounting change as of January 1, 1993, was
to reduce net income by $5,544,000. Prior year financial
statements have not been restated to reflect this new
method.
The provisions for income taxes for the years ended December
31, 1993, 1992 and 1991 were as follows (in thousands):
1993 1992 1991
Current:
Federal $ 7,736 $4,971 $3,579
State and local 2,720 1,963 1,380
10,456 6,934 4,959
Deferred:
Federal 234 - -
State and local (41) - -
193 - -
Total provision $10,649 $6,934 $4,959
The tax effect of the primary temporary differences giving
rise to the Corporation's consolidated deferred tax assets
and liabilities at December 31, 1993 are as follows (in
thousands):
Current Asset Long-Term Asset
(Liability) (Liability)
Inventory related $(6,667) $ -
Post-retirement benefits - 4,104
Depreciation and amortization - (15,472)
State net operating losses - 1,150
Federal net operating losses - 1,050
Other, net 3,499 1,319
(3,168) (7,849)
Valuation allowance (299) (2,002)
Total deferred income taxes $(3,467) $(9,851)
Gross deferred tax assets of $12,708,000, net of a valuation
allowance of $2,301,000 and gross deferred tax liabilities of
$23,725,000 are included in the deferred tax balances as of
December 31, 1993.
<PAGE> S-16
The difference between the Corporation's Federal effective
tax rate for continuing operations and the statutory tax
rate for the years ended December 31, 1993, 1992 and 1991
arises from the following:
1993 1992 1991
Federal statutory rate 35.0% 34.0% 34.0%
Increase (decrease) resulting
from:
Goodwill amortization not
deductible 4.9 6.1 14.2
State income taxes (4.5) (4.1) (7.4)
Non-deductible depreciation - 2.1 5.3
Reduction of prior year tax
liability - (2.7) -
Deductible reserves - (4.5) -
Statutory rate change 1.9 - -
Other, net .9 - 10.6
Effective Federal tax rate 38.2% 30.9% 56.7%
As a result of differences in the recognition of expenses for
tax and financial statement purposes, the 1992 and 1991
provisions for Federal income taxes are more (less) than
the amount currently payable due to the following (in
thousands):
1992 1991
Accelerated depreciation $ (714) $(539)
Employee benefit reserves (86) (114)
Insurance reserves (275) (42)
Disposition of assets 1,768 -
Other 350 285
$1,043 $(410)
At December 31, 1993, the Corporation had approximately $3,000,000
of Federal net operating loss carryforwards which can
be used, subject to certain limitations, to offset
future Federal taxable income, if any. The carryforwards
expire beginning in the year 2007. As of December 31, 1993, the
Corporation had approximately $10,000,000 of state net
operating loss carryforwards which can be used, subject to
certain limitations, to offset future state taxable income,if
any. These carryforwards expire beginning in the year 1997.
For the year ended December 31, 1993, additional depreciation
and amortization expense of $614,000 was recognized as a
result of the adoption of SFAS 109.
At December 31, 1993, the Corporation had a $1,140,000
payable to its Parent, which is net against receivable from
ESSTAR in the accompanying consolidated balance sheet related to
Federal income taxes.
<PAGE> S-17
10. Litigation:
The Corporation is involved in various matters of litigation
incidental to the normal conduct of its business. In
management's opinion, the disposition of that litigation
will not have a material adverse impact on the Corporation's
financial condition or results of operations.
11. Related Party Transactions:
In connection with the Combination, ESSTAR and its
subsidiaries incurred certain advisory, legal and financing
fees. As a result, the Corporation paid $1,572,000 in such
fees, of which $975,000 were paid to an affiliate of a
primary stockholder of ESSTAR. Of these fees, $382,000 and
$492,000 are included in goodwill and other intangible
assets in the accompanying consolidated balance sheets as of
December 31, 1993 and 1992, respectively, and are being amortized
over eight years, concurrent with the length of the respective debt.
During the year ended December 31, 1993, the Corporation
paid a dividend to its parent in the amount of $7,500,000.
There were no dividends declared or paid in 1992 or 1991.
The Corporation, ESSEX and ESSTAR share facilities and
personnel related to corporate administrative activities.
Charges of $3,960,000, $3,960,000, and $5,210,000 for these
costs have been allocated to the Corporation for the years
ended December 31, 1993, 1992 and 1991, respectively, and are
based on time and expenses incurred by ESSTAR.
Certain members of management of the Corporation participate
in ESSTAR's stock option plans.
Receivable from ESSTAR represents advances by the
Corporation to ESSTAR. The advances bear interest at 10% of
the average outstanding monthly balance.
12. Disclosures about Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Cash and cash equivalents, accounts receivable and payable,
and accrued current obligations -
For these short-term account balances, the carrying amount is
a reasonable estimate of fair value.
11.375% Senior Subordinated Notes -
The fair value of the Notes is estimated to be $200,000,000,
based on the most recent traded price known at December 31, 1993.
<PAGE> S-18
Bank loans -
The carrying value is a reasonable estimate of fair value as
the debt is frequently repriced based on prime and London
Interbank Offered rates, and there has been no significant
change in credit risks since the financing was obtained in
1991.
13. Industry Segment Data:
The Corporation's products are all included in one segment,
the power tool segment. The Corporation's principal plants
and other facilities are located in the United States, with a
small installation located in Canada.
<PAGE>
EXHIBIT (25)
POWER OF ATTORNEY
Each person whose signature appears below constitutes and
appoints Roger D. Chesley, Kenneth J. Jones and Jeffrey A.
Mereschuk, each of them, his true and lawful attorney-in-fact and
agents for him and in his name, place and stead, and in the
capacities indicated below, to sign the Annual Report on Form
10-K of Amstar Corporation for the year ended December 31, 1993,
and to sign any and all amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission.
Signature Title Date
/s/ Howard B. Wentz, Jr. Chairman of the Board March 1, 1994
Howard B. Wentz, Jr. and Director
/s/ Robert A. Haversat President and Director Feb. 28, 1994
Robert A. Haversat (Principal Executive
Officer)
/s/ Jeffrey A. Mereschuk Vice President, Feb. 22, 1994
Jeffrey A. Mereschuk Chief Financial Officer
and Treasurer
/s/ John D. Speridakos Controller (Principal Feb. 22, 1994
John D. Speridakos Accounting Officer)
<PAGE>
/s/ James J. Burke, Jr. Director March 1, 1994
James J. Burke, Jr.
/s/ A.J. Fitzgibbons,III Director March 1, 1994
A. J. Fitzgibbons, III
/s/ Alexis P. Michas Director March 1, 1994
Alexis P. Michas
/s/ Jerry G. Rubenstein Director March 1, 1994
Jerry G. Rubenstein
