<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended: Commission File No.
March 31, 1994 33-27289
ADIENCE, INC.
Delaware 14-1671486
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1305 Grandview Avenue
Pittsburgh, Pennsylvania 15211
(Address of registrant's principal executive offices)
412-381-2600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days. Yes /X/ No / /
10,000,000 shares of common stock, par value $.01 per share, are
outstanding as of March 31, 1994.
<PAGE>
ADIENCE, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--
March 31, 1994 and December 31, 1993....................... 2
Consolidated Statements of Operations--
Post-Emergence Three Months Ended March 31, 1994;
Pre-Emergence Three Months Ended March 31, 1993............ 4
Consolidated Statements of Cash Flows--
Post-Emergence Three Months Ended March 31, 1994;
Pre-Emergence Three Months Ended March 31, 1993............ 5
Notes to Consolidated Financial Statements--March 31, 1994... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 16
PART II - OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K............................. 23
SIGNATURES............................................................... 24
- - ----------
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADIENCE, INC.
CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------
March 31, December 31,
1994 1993
(In thousands of dollars, except share data) (Unaudited) (Audited)
- - ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,022 $ 2,200
Accounts receivable, less allowance
(1994 - $1,279; 1993 - $1,287) 25,686 27,046
Inventories 18,800 18,650
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,773 1,924
Prepaid expenses, deposits and other 1,962 2,231
- - ------------------------------------------------------------------------------
Total current assets 50,243 52,051
- - ------------------------------------------------------------------------------
Deferred income taxes 3,609 3,609
Property, plant and equipment:
Land 2,763 2,763
Buildings 12,377 12,328
Machinery and equipment 25,306 24,877
- - ------------------------------------------------------------------------------
40,446 39,968
Less allowances for depreciation 8,040 7,151
- - ------------------------------------------------------------------------------
32,406 32,817
Other assets 4,737 4,720
Reorganization value in excess of
amounts allocable to identifiable assets, net 8,920 9,190
- - ------------------------------------------------------------------------------
Total assets $ 99,915 $102,387
==============================================================================
The accompanying notes are an integral part of these financial statements.
2
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ADIENCE, INC.
CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------
March 31, December 31,
1994 1993
(In thousands of dollars, except share data) (Unaudited) (Audited)
- - ------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Revolving lines of credit $ 12,411 $ 9,185
Current portion of long-term obligations 739 759
Accounts payable 10,236 11,424
Salaries, wages and withholdings 1,173 953
Payable to principal shareholder 577 569
Accrued expenses 4,018 3,727
Billings in excess of costs and estimated
earnings on uncompleted contracts 637 619
Accrued insurance 6,173 6,466
Accrued income taxes 1,056 1,569
Environmental liability 746 783
Deferred income taxes 66 66
- - ------------------------------------------------------------------------------
Total current liabilities 37,832 36,120
- - ------------------------------------------------------------------------------
Payable to principal shareholder 3,041 3,189
Long-term obligations 46,316 46,211
Deferred income taxes 3,930 3,930
Minority interest in subsidiary 3,368 3,428
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued and outstanding 10,000,000 shares 100 100
Additional paid-in capital 23,900 23,900
Retained deficit (18,252) (14,367)
Foreign currency translation (320) (124)
- - ------------------------------------------------------------------------------
Total shareholders' equity 5,428 9,509
- - ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 99,915 $102,387
==============================================================================
The accompanying notes are an integral part of these financial statements.
3
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ADIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- - ------------------------------------------------------------------------------
Post-emergence | Pre-emergence
Three Months | Three Months
Ended | Ended
March 31, | March 31,
(In thousands of dollars, except per share data) 1994 | 1993
- - ------------------------------------------------------------------------------
|
Net revenues $ 28,210 | $ 32,563
Costs and expenses: |
Cost of revenues 24,313 | 25,836
Selling, general and administrative 6,102 | 6,797
Amortization of intangible asset 270 | --
- - ------------------------------------------------------------------------------
30,685 | 32,633
- - ------------------------------------------------------------------------------
Operating loss (2,475) | (70)
- - ------------------------------------------------------------------------------
|
Other income (expense): |
Interest and other income 190 | 110
Interest expense (1,863) | (2,940)
- - ------------------------------------------------------------------------------
Loss before income taxes and |
minority interest in subsidiary (4,148) | (2,900)
- - ------------------------------------------------------------------------------
Income tax benefit (200) | (972)
- - ------------------------------------------------------------------------------
Loss before minority interest in subsidiary (3,948) | (1,928)
- - ------------------------------------------------------------------------------
Minority interest in subsidiary (63) | 2
- - ------------------------------------------------------------------------------
Net loss $ (3,885) | $ (1,930)
==============================================================================
|
Net loss per common share* $ (0.39) | $ *
Average common shares outstanding 10,000 | *
==============================================================================
* Earnings per share are not meaningful prior to June 30, 1993 due to the
reorganization--see Note 1.
The accompanying notes are an integral part of these financial statements.
4
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ADIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- - ------------------------------------------------------------------------------
Post-emergence | Pre-emergence
Three Months | Three Months
Ended | Ended
(In thousands of dollars) March 31, 1994 | March 31, 1993
- - ------------------------------------------------------------------------------
Cash flow from operating activities |
Net loss $ (3,885) | $ (1,930)
Non-cash expenses and revenues included in loss: |
Depreciation and amortization 1,538 | 1,107
Provisions for doubtful accounts 110 | 17
ESOP expense -- | 228
Minority interest (63) | 2
Changes in operating assets and liabilities: |
Accounts receivable 1,368 | (1,411)
Inventories, prepaid expenses, deposits and other 119 | (355)
Costs and estimated earnings in excess |
of billings on uncompleted contracts 151 | (444)
Income tax receivable -- | (1,078)
Accounts payable, salaries, wages and |
withholdings, accrued expenses, accrued |
insurance and payable to principal shareholder (1,108) | 2,857
Billings in excess of costs and estimated |
earnings on uncompleted contracts 18 | 331
Accrued income taxes (513) | --
Environmental liability (37) | (27)
Other (185) | 14
- - ------------------------------------------------------------------------------
Net cash used by operating activities (2,487) | (689)
- - ------------------------------------------------------------------------------
Cash flow form investing activities |
Purchase of property, plant and equipment (727) | (709)
Other (150) | (150)
- - ------------------------------------------------------------------------------
Net cash used by investing activities (877) | (859)
- - ------------------------------------------------------------------------------
Cash flows from financing activities |
Net borrowings on revolving lines of credit 3,226 | 639
Principal payments on long-term obligations (40) | (214)
- - ------------------------------------------------------------------------------
Net cash provided by financing activities 3,186 | 425
- - ------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (178) | (1,123)
Cash equivalents and beginning of period 2,200 | 2,048
- - ------------------------------------------------------------------------------
|
Cash and cash equivalents at end of period $ 2,022 | $ 925
==============================================================================
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1994
(Dollar amounts in thousands, except share data, unless otherwise noted)
NOTE 1 - BASIS OF PRESENTATION AND COMPANY REORGANIZATION
- - ---------------------------------------------------------
Adience, Inc. ("Adience" or "Company") has experienced continued losses from
continuing operations (before reorganization items) both pre- and post-
emergence under Chapter 11. In addition, a write down of reorganization value
in excess of amounts allocable to identifiable assets was recorded at December
31, 1993, based on management's belief that a permanent impairment of this
asset now exists. The Company is currently seeking to replace and improve the
terms of its line of credit financing agreement with Congress Financial
Corporation (Congress) which expires June 30, 1994.
The continued viability of the Company is dependent upon, among other factors,
the ability to generate sufficient cash from operations, financing, or other
sources that will meet ongoing obligations over a sustained period.
Management has prepared detailed operating and financial plans which combine
multifunctional resources as teams to respond better to customer needs, make
an investment in product and service opportunities expected to produce a
greater return on investment, continue a cost control program begun in 1993,
and assume refinancing of the line of credit arrangement. Management believes
that the successful implementation of this plan will enable the Company to
continue as a going concern for a reasonable period.
There can be no assurance however, that such activities will achieve the
intended improvement in results of operations or financial position.
A Prepackaged Plan of Reorganization under Chapter 11 of the Bankruptcy Code
(the "Prepackaged Plan") was filed by Adience and the Unofficial Committee of
Noteholders of Adience on February 22, 1993. The Prepackaged Plan was
confirmed by the United States Bankruptcy Court for the Western District of
Pennsylvania on May 4, 1993 and consummated on June 30, 1993.
The Prepackaged Plan provided for a restructuring of Adience's capital
structure and allowed the holders of $66 million aggregate principal amount of
Adience's 15% Senior Subordinated Notes ("Old Reset Notes") to exchange them
for $49 million aggregate principal amount of new 11% Senior Secured Notes
("New Secured Notes") due June 15, 2002, plus common stock representing 55% of
the outstanding common stock of Adience. The Prepackaged Plan also included
forgiveness of accrued interest totaling approximately $8.8 million. The
value of the cash and securities distributed was $17.5 million less than the
allowed claims; the resultant gain was recorded as an extraordinary gain.
6
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 1 - CONTINUED
- - ------------------
Neither Adience Canada, a wholly-owned subsidiary, or Information Display
Technology, Inc. (IDT), a majority-owned subsidiary of Adience, guarantee the
new 11% Notes issued by Adience under the Prepackaged Plan. The new Notes are
secured by a lien on all the assets of Adience, including the stock of IDT.
Adience Canada and IDT did not file plans of reorganization.
The sum of allowed claims plus post petition liabilities exceeded the
reorganization value of the assets of Adience immediately before the date of
consummation. Also, the Company experienced a change in control as pre-
reorganization holders of common stock received less than 50% of the new
common stock issued pursuant to the Prepackaged Plan. AICPA SOP 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
("SOP 90-7"), requires that under these circumstances, a new reporting entity
is created and assets and liabilities should be recorded at their fair values.
This accounting treatment is referred to in these statements as "fresh start
reporting". The Company's basis of accounting for financial reporting
purposes changed on June 30, 1993 as a result of applying SOP 90-7.
Specifically, application of SOP 90-7 required the adjustment of the Company's
assets and liabilities to reflect a reorganization value generally
approximating the fair value of the Company as a going concern on an
unleveraged basis, the elimination of its retained deficit, and adjustments to
its capital structure to reflect consummation of the Prepackaged Plan. Fresh
start reporting has not been adopted by Adience Canada and IDT.
The consolidated statements of operations and cash flows after June 30, 1993
are not comparable to the respective financial statements prior to such date,
accordingly a solid black line has been shown to separate it from prior year
information since it is not prepared on a comparable basis.
Reorganization value at the June 30, 1993 consummation date was determined by
management with the assistance of independent advisors. The methodology
employed involved estimation of enterprise value (i.e., the market value of
the Company's debt and shareholders' equity), taking into account a discounted
cash flow analysis, as well as the capitalization of earnings and cash flow
approaches. The discounted cash flow analysis was based on five-year cash
flow projections prepared by management.
7
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 1 - CONTINUED
- - ------------------
The five-year cash flow projections were based on estimates and assumptions
about circumstances and events that have not yet taken place. Such estimates
and assumptions are inherently subject to significant economic and competitive
uncertainties and contingencies beyond the control of the corporation,
including, but not limited to, those with respect to the future courses of the
Company's business activity. Accordingly, there will usually be differences
between projections and actual results because events and circumstances
frequently do not occur as expected; and those differences may be material.
The assumptions included: a rate of sales growth of approximately 2.5% per
annum in excess of the anticipated rate of inflation; selling, general and
administrative expenses, after adjustment for non-recurring items, increase in
line with the rate of sales growth; operating profit margins for each of the
five years are approximately equal to one half of the average annual operating
profit margins achieved during the most recent profitable period of 1988-1990;
and effective tax rates of 33%.
At June 30, 1993, the adjustment to record confirmation of the plan of $23
million was allocated to assets and liabilities as follows:
Inventories $ 1,287
Property, plant and equipment 19,448
Reorganization value in excess of amounts
allocable to identifiable assets 18,329
Intangible assets (3,032)
Deferred income taxes (1,108)
Additional paid-in capital (10,896)
Prepaid contribution to employee stock ownership plan (863)
----------
$ 23,165
==========
Current assets and liabilities were recorded at fair value. Property, plant
and equipment was recorded at reorganization value, which approximated fair
value in continued use, based on an independent appraisal. In addition, under
SOP 90-7, the long-term debt was recorded at present values on June 30, 1993.
The resulting unamortized discount is being accreted to interest expense over
the term of the New Secured Notes.
8
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 1 - CONTINUED
- - ------------------
Based on the allocation of equity value in conformity with SOP 90-7, the
portion of the equity value which was not attributed to specific tangible or
identifiable intangible assets of the reorganized Company of $18,329 was
reported as "reorganization value in excess of amounts allocable to
identifiable assets". This value was initially being amortized on a straight
line basis in equal annual amounts over 9 years. On a quarterly basis,
management will continue to evaluate the recoverability of the unamortized
portion of the reorganization value in excess of amounts allocable to
identifiable assets by comparing actual cash flows with the projected cash
flows used to arrive at the reorganization value. Should a material
difference exist, management will then consider whether the assumptions made
in the preparation of the projected cash flows are still reasonable. If
management is of the opinion that new projected cash flows are required and
that a permanent impairment of the remaining reorganization value has
occurred, a reduction of some or all of the unamortized value will be
immediately recognized.
In the fourth quarter of 1993, the Company recorded a charge of $8 million to
reduce the recorded reorganization value in excess of amounts allocable to
identifiable assets based on management's comparison of actual cash flows
post-emergence through December 31, 1993, with the projected cash flows used
to arrive at the reorganization value. This comparison resulted in the
preparation of new cash flow projections, which in turn led the Company to the
conclusion that permanent impairment of the reorganization value has occurred
and that an immediate reduction of approximately 50% of the remaining
unamortized value needs to be recognized.
The Company has adopted "fresh start reporting" in accordance with SOP 90-7 in
preparing its consolidated balance sheet as of June 30, 1993. The balance
sheet became the opening balance sheet for Adience, Inc., as reorganized, on
July 1, 1993.
The accompanying unaudited consolidated financial statements of Adience have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The consolidated results of operations for the three months ended March 31,
1994 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1994.
9
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 2 - PRO FORMA RESULTS OF OPERATIONS
- - ----------------------------------------
The following consolidating pro forma statement of operations reflects the
financial results of the Company as if the reorganization had been effective
January 1, 1993:
10
<PAGE>
<TABLE>
ADIENCE, INC.
CONSOLIDATING PRO FORMA STATEMENT OF OPERATIONS
UNAUDITED
<CAPTION>
F o r t h e T h r e e M o n t h s E n d e d M a r c h 3 1, 1 9 9 3
- - -----------------------------------------------------------------------------------------------------------------------------------
Pro Forma Unconsolidated
Unconsolidated Adjustments Adience ADIENCE ADIENCE, INC.
ADIENCE Debit Credit Pro Forma IDT CANADA CONSOLIDATED
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 19,893 $ 19,893 $ 10,682 $ 1,988 $ 32,563
Costs and expenses:
Cost of revenues (16,034) $ 930(1) (16,964) (8,513) (1,289) (26,766)
Selling, general and administrative (4,154) $ 235(1) (3,919) (2,155) (488) (6,562)
Amortization of intangible asset 270(1) (270) (270)
- - -----------------------------------------------------------------------------------------------------------------------------------
(20,188) 1,200 235 (21,153) (10,668) (1,777) (33,598)
- - -----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (295) 1,200 235 (1,260) 14 211 (1,035)
Other income (expense):
Interest and other income 66 66 20 24 110
Interest expense (2,921) 1,111(2) (1,810) (18) (1) (1,829)
- - -----------------------------------------------------------------------------------------------------------------------------------
(2,885) 1,111 (1,744) 2 23 (1,719)
- - -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations
before income taxes and minority
interest in subsidiary (3,150) 1,200 1,346 (3,004) 16 234 (2,754)
Income taxes (benefit) (1,072) (1,072) 6 94 (972)
- - -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations
before minority interest in subsidiary (2,078) 1,200 1,346 (1,932) 10 140 (1,782)
Minority interest in subsidiary (2) (2) (2)
- - -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations $ (2,080) $1,200 $1,346 $ (1,934) $ 10 $ 140 $ (1,784)
===================================================================================================================================
(/TABLE)
11
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 2 - CONTINUED
- - -------------------
(1) Reflects a three month impact of additional depreciation expense
resulting from the write-up of property, plant and equipment, the
amortization of the write-up in inventory values, the amortization of
reorganization value in excess of fair value, and the reduction of ESOP
expense and goodwill amortization which was written off in conjunction
with fresh start reporting.
(2) Interest expense on reorganized long-term debt.
NOTE 3 - INVENTORIES
- - --------------------
Inventories consist primarily of raw materials of $7,778 and $7,512, work-in-
process of $2,391 and $2,374 and finished goods of $8,631 and $8,764 at March
31, 1994 and December 31, 1993, respectively.
NOTE 4 - CONTRACTS IN PROGRESS
- - ------------------------------
The status of contract costs on uncompleted construction contracts was as
follows:
- - ------------------------------------------------------------------------------
Costs and estimated Billings in excess
earnings in of costs and
excess of billings estimated earnings Total
- - ------------------------------------------------------------------------------
March 31, 1994:
Costs and estimated
earnings of $1,622 $21,042 $6,565
Billings 19,269 7,202
- - ------------------------------------------------------------------------------
$ 1,773 $ 637 $1,136
==============================================================================
December 31, 1993:
Costs and estimated
earnings of $1,649 $20,113 $6,218
Billings 18,189 6,837
- - ------------------------------------------------------------------------------
$ 1,924 $ 619 $1,305
==============================================================================
Accounts receivable at March 31, 1994 and December 31, 1993 include amounts
billed but not yet paid by customers under retainage provisions of
approximately $2,711 and $2,989, respectively. Such amounts are generally due
within one year.
12
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ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 5 - INCOME TAX PAYMENTS
- - ----------------------------
For the three month periods ended March 31, 1994 and 1993 the Company made
income tax payments totaling $377 and $23, respectively.
NOTE 6 - LINES OF CREDIT
- - ------------------------
On the consummation date of the plan of reorganization, June 30, 1993, Adience
entered into a financing agreement with Congress through the twelve month
period ending June 30, 1994. Under this agreement, Adience may request loan
advances not to exceed the lesser of $12 million or available collateral (80%
of eligible accounts receivable less than 90 days plus 30% of raw material and
finished goods inventory). The loan is collateralized by accounts receivable,
inventory, fixed assets, intangible assets and Adience's shares of IDT. In
addition, IDT has guaranteed the Adience line of credit and has pledged as
collateral its own accounts receivable, inventory and equipment. The interest
rate on the loan is 2.5% over the prime rate (effective rate of 8.75% at March
31, 1994). At March 31, 1994 Adience had borrowed $12,411 under the credit
facility, including checks in transit of $1,396.
In addition, IDT entered into a financing agreement with Congress, which was
also subsequently renewed through June 30, 1994. Under this agreement, IDT
may request loan advances not to exceed the lesser of $3 million or available
collateral (80% of eligible accounts receivable less than 90 days plus 30% of
raw material and finished goods inventory). The loan is collateralized by
accounts receivable, inventory and fixed assets. Adience guarantees IDT's
debt to Congress. The interest rate on the loan is 2.5% over the prime rate.
At March 31, 1994, there were no borrowings under this agreement.
Both Adience and IDT pay commitment fees on the unused portion of their credit
facility of 0.5%. Under the terms of the financing agreements, both companies
are required to maintain certain financial ratios and meet other financial
conditions. The agreements do not allow the companies to incur additional
indebtedness, pay cash dividends, make certain investments, advances or loans,
and limits annual capital expenditures. As of March 31, 1994, Adience and IDT
were in compliance with the covenants of their respective agreements.
Adience's ability to continue to comply with such conditions is dependent upon
Adience's ability to achieve specified levels of sales, profitable operations
and borrowing availability. Waivers or amendments may be required in the
future to ensure compliance. Inability to achieve compliance could affect
Adience's access to further borrowings or require it to secure additional
capital by other means.
13
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 6 - CONTINUED
- - ------------------
Both companies anticipate the financing agreements with Congress will be
renewed at June 30, 1994 or, alternatively, both companies will be able to
secure financing from other sources.
NOTE 7 - LONG-TERM OBLIGATIONS
- - ------------------------------
- - ------------------------------------------------------------------------------
March 31, December 31,
1994 1993
- - ------------------------------------------------------------------------------
Long-term obligations consisted of the following:
New Senior Secured Notes due in 2002,
interest at 11% $49,079 $49,079
Notes payable with monthly installments
of principal and interest of $22
through December 1997, interest at 10% 793 836
Capital lease obligations 762 745
Other (interest ranges from 10% to 13%) 546 560
- - ------------------------------------------------------------------------------
51,180 51,220
Less current portion 739 759
- - ------------------------------------------------------------------------------
50,441 50,461
Discount on New Senior Secured Notes 4,125 4,250
- - ------------------------------------------------------------------------------
$46,316 $46,211
==============================================================================
In connection with the Plan of Reorganization, $49,079 of New Senior Secured
Notes with an annual interest rate of 11% were issued under an indenture
agreement dated as of June 30, 1993. The New Senior Secured Notes are
redeemable at the option of Adience after December 15, 1997. The New Senior
Secured Notes are not guaranteed by subsidiaries of Adience. The New Notes
are secured by a lien on all the assets of Adience, including the stock of
IDT.
Adience, on a consolidated basis, has agreed to certain restrictive covenants
which are ordinary to such financings including, among other things,
limitations on asset sales, limitations on additional indebtedness and
restrictions on the payment of dividends.
14
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- - --------------------------------------
At March 31, 1994, Adience had $1,643 in irrevocable standby letters of credit
outstanding, not reflected in the accompanying consolidated financial
statements, as guarantees in force for various insurance policies, performance
and bid bonds. These instruments are usually for a period of one year or the
duration of the contract. The letters of credit reduce Adience's availability
under the Congress credit facility.
In February 1992, IDT was cited by the Ohio Environmental Protection Agency
(the "Ohio EPA") for violations of Ohio's hazardous waste regulations,
including speculative accumulation of waste and illegal disposal of hazardous
waste on the site of its Alliance, Ohio facility. IDT had $783 accrued at
December 31, 1993 for the clean up of this site.
In December 1993, IDT and Adience signed a consent order with the Ohio EPA and
Ohio Attorney General which required IDT and Adience to pay to the State of
Ohio a civil penalty of $200 (of which IDT paid $175 and Adience paid $25).
In addition, the consent order requires the payment of stipulated penalties of
up to $1 per day for failure to satisfy certain requirements of the consent
order including milestones in the closure plan. IDT expects that the work to
be conducted under the closure plan will be substantially completed in 1994,
subject to IDT receiving all necessary approvals from the Ohio EPA. At March
31, 1994, environmental accruals amounted to $746 which represents
management's reasonable estimate of the amounts remaining to be incurred in
this matter, including the costs of effecting the closure plan, bonding and
insurance costs, penalties and legal and consultants' fees. Since 1991,
Adience and IDT have together paid $360 (excluding the civil penalty) for the
environmental clean-up related to the Alliance facility.
Under the acquisition agreement pursuant to which IDT acquired the property
from Adience, Adience represented and warranted that, except as otherwise
disclosed to IDT, no hazardous material has been stored or disposed of on the
property. No disclosure of storage or disposal of hazardous material on the
site was made. Accordingly, Adience is required to indemnify IDT for any
losses in excess of $250. IDT has notified Adience that it is claiming the
right to indemnification for all costs in excess of $250 incurred by IDT in
this matter, and has received assurance that Adience will honor such claim.
Adience has reimbursed IDT $266; if Adience is financially unable to honor its
remaining obligation, such costs would be borne by IDT.
Adience is engaged in various other legal actions arising in the ordinary
course of business. Management believes, after discussions with internal and
external counsel, that the ultimate outcome of the proceedings will not have a
material adverse effect on Adience's consolidated financial position.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reorganization and Fresh-Start Reporting
- - ----------------------------------------
Adience, Inc. has experienced continued losses from continuing operations
(before reorganization items) both pre- and post-emergence under Chapter 11.
In addition, a write down of reorganization value in excess of amounts
allocable to identifiable assets was recorded at December 31, 1993, based on
management's belief that a permanent impairment of this asset existed. The
Company is currently seeking to replace and improve the terms of its line of
credit financing agreement with Congress Financial Corporation (Congress)
which expires June 30, 1994.
The continued viability of the Company is dependent upon, among other factors,
the ability to generate sufficient cash from operations, financing, or other
sources that will meet ongoing obligations over a sustained period.
Management has prepared detailed operating and financial plans which combine
multifunctional resources as teams to respond better to customer needs, make
an investment in product and service opportunities expected to produce a
significantly greater return on investment, continue a cost control program
begun in 1993, and assume refinancing of the line of credit arrangement on
improved terms. Management believes that the successful implementation of
this plan will enable the Company to continue as a going concern for a
reasonable period.
There can be no assurance however, that such activities will achieve the
intended improvement in results of operations or financial position.
On February 22, 1993, Adience and the unofficial committee of noteholders of
Adience filed a "prepackaged" plan of reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Reorganization"). The Prepackaged Plan
was confirmed by the United States Bankruptcy Court for the Western District
of Pennsylvania on May 4, 1993 and consummated on June 30, 1993.
The filing was precipitated by a combination of an overall decline in the
demand for refractory products and services during 1991 and 1992 caused by a
decrease in the production of refractory using industries in the United
States, particularly steel, and losses from discontinued operations. The
primary purposes of the Prepackaged Plan were to reduce Adience's debt service
requirements and overall indebtedness, to realign its capital structure and to
provide Adience with greater liquidity. Neither IDT nor Adience Canada, Inc.
filed a plan of reorganization.
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<PAGE>
The Prepackaged Plan provided for a restructuring of Adience's capital
structure and allowed the holders of $66 million aggregate principal amount of
Adience's Senior Subordinated Reset Notes ("Old Subordinated Notes") to
exchange them for $49 million aggregate principal amount of new 11% Senior
Secured Notes ("New Senior Notes") due June 15, 2002, plus common stock
representing 55% of the outstanding common stock of Adience. The Prepackaged
Plan also included forgiveness of outstanding interest totaling approximately
$8.8 million. The value of the cash and securities distributed was $17.5
million less than the allowed claims; the resultant gain was recorded as an
extraordinary gain.
In connection with the Reorganization described above, Adience applied the
provisions of the American Institute of Certified Public Accountants'
Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") as of June 30, 1993.
The Company's basis of accounting for financial reporting purposes changed as
a result of applying SOP 90-7. Specifically, SOP 90-7 required the adjustment
of the Company's assets and liabilities to reflect a reorganization value
generally approximating the fair value of the Company as a going concern on an
unleveraged basis, the elimination of its accumulated deficit, and adjustments
to its capital structure to reflect consummation of the Prepackaged Plan.
Accordingly, the results of operations after June 30, 1993 are not comparable
to the results of operations prior to such date.
Results of Operations
- - ---------------------
Three Months Ended March 31, 1994 Compared with Three Months Ended March 31,
1993.
Net revenues by industry segment for the three months ended March 31, 1994 and
1993 were as follows:
Three Months Ended
March 31,
Post-emergence Pre-emergence
Net Revenues 1994 1993 % Change
- - ------------------------------------------------------------------------------
Heat Technology Division $22,126 $21,881 1 %
IDT 6,084 10,682 (43)%
- - ------------------------------------------------------------------------------
Total $28,210 $32,563 (13)%
==============================================================================
Net revenues for the Heat Technology division remained consistent with prior
period's net revenues.
17
<PAGE>
Included in net revenues for IDT for the period ended March 31, 1993 is one
large project with incremental revenues of $2.2 million. This was
substantially completed in the fourth quarter of 1993. Also included in the
period ended March 31, 1993 were $900 of revenues attributable to IDT's
Kensington division, which was sold during December 1993. The remaining
decline is attributable to construction delays caused by extreme weather
conditions during the winter months. Construction activity is expected to
increase during the second and third quarters of 1994.
Three Months Ended
March 31,
Post-emergence Pre-emergence
Cost of Revenues 1994 1993 % Change
- - ------------------------------------------------------------------------------
Heat Technology Division $19,255 $17,323 11 %
IDT 5,058 8,513 (41)%
- - ------------------------------------------------------------------------------
Total $24,313 $25,836 (6)%
==============================================================================
Cost of revenues for the Heat Technology division increased by a higher
percentage than the net revenue increase for the three months ended March 31,
1994. Competitive pressure continues to prevent the Heat Technology division
from improving its gross margins. In addition, due to the application of SOP
90-7 as of June 30, 1993, buildings and machinery and equipment were written
up by $13 million to fair value, resulting in an increase in depreciation
expense in the period ending March 31, 1994 of 27%.
Cost of revenues for IDT decreased at a rate comparable to the decrease in net
revenues.
Three Months Ended
Selling, General and March 31,
Post-emergence Pre-emergence
Administrative Expenses 1994 1993 % Change
- - ------------------------------------------------------------------------------
Heat Technology Division $4,468 $4,642 (4)%
IDT 1,634 2,155 (24)%
- - ------------------------------------------------------------------------------
Total $6,102 $6,797 (10)%
==============================================================================
Selling, general and administrative expenses decreased during the first
quarter of 1994 as a result of cost containment programs implemented at IDT.
In addition, on July 1, 1993 the company suspended any future recognition of
expense related to the Employee Stock Ownership Plan (ESOP) which was
established during 1989. Accordingly, Adience has no intention at this time
to issue more shares of its common stock to the ESOP. Contributions to the
ESOP charged to expense for the three months ended March 31, 1993 amounted to
$228.
18
<PAGE>
Interest expense decreased 37% for the three months ended March 31, 1994 to
$1.9 million from $2.9 million for the three months ended March 31, 1993. The
decrease was primarily due to the restructuring of the Senior Secured Reset
Notes from $66 million to $49 million and a reduction of interest on the New
Notes from 15% to 11%.
The Company remains in a net operating loss position. Therefore, the Company
does not anticipate that the new tax laws will have a significant effect on
its result of operations in fiscal 1994.
Liquidity and Sources of Capital
- - --------------------------------
The Company's principal sources of liquidity are cash from operations, cash on
hand, and certain credit facilities available to the Company.
Management of the Company believes that cash on hand and funds from
operations, together with borrowings under credit facilities described below,
will be sufficient to cover its working capital, capital expenditure and debt
service requirements through 1994. The Company is actively seeking an
increase in its credit line through its current lender or different financing
resources. The Company expects average borrowings to increase over 1993
levels. The Company intends to seek further to strengthen its financial
position and increase its financial flexibility and may from time to time
consider possible additional transactions, including other capital market
transactions.
Net cash flows used by operating activities totaled $2.5 million for the three
months ended March 31, 1994 as compared to $700 in the comparable period of
1993. The decreased investment in working capital (exclusive of cash and cash
equivalents) of $3.3 million during 1994 relates primarily to lower trade
receivable arising from a decrease in sales for IDT and an increase in short-
term borrowings. Inventory balances for IDT increased by 14% over 1993 levels
in anticipation of increased sales during the upcoming months.
Capital expenditures used approximately $700 of funds through March 31, 1994.
During 1993, Adience committed to purchase a new plant facility to expand
current production of a specific product line. The estimated total cost of
this facility and the necessary capital expenditures for machinery and
equipment is $1.8 million and is expected to be partially financed through the
Pennsylvania Industrial Development Authority. It is anticipated that
necessary capital expenditures in future years will not exceed depreciation
expense but will represent a material use of operating funds.
Adience and IDT together had $2.2 million in available credit as of March 31,
1994 under their short-term borrowing arrangements with Congress.
Short-term liquidity is dependent, in large part, on general economic
conditions and the effect on the steel industry. Due to the cyclical nature
of the steel business and considering current trends and industry forecasts,
it appears the period of low steel demand has ended.
19
<PAGE>
On the consummation date of the plan of reorganization, June 30, 1993, Adience
entered into a financing agreement with Congress for the twelve month period
ending June 30, 1994. Under this agreement, Adience may request loan advances
not to exceed the lesser of $12 million or available collateral (80% of
eligible accounts receivable less than 90 days plus 30% of raw material and
finished goods inventory). The loan is collateralized by accounts receivable,
inventory, fixed assets, intangible assets and Adience's shares of IDT. In
addition, IDT guaranteed the Adience line of credit and has pledged its own
accounts receivable, inventory and equipment. The interest rate on the loan
is 2.5% over the prime rate (effective rate of 8.75% at March 31, 1994). At
March 31, 1994 Adience had borrowed $12,411 under the credit facility,
including checks in transit of $1,396. Letters of credit issued under the
facility totaled $943 at March 31, 1994, which reduced the availability under
the financing arrangement in a like amount.
IDT also renewed its financing agreement with Congress through June 30, 1994.
Under this agreement, IDT may request loan advances not to exceed the lesser
of $3 million or available collateral (80% of eligible accounts receivable
less than 90 days plus 30% of raw material and finished goods inventory). The
loan is collateralized by accounts receivable, inventory and fixed assets.
Adience has guaranteed IDT's debt to Congress. The interest rate on the loan
is 2.5% over the prime rate. At March 31, 1994, no amounts were outstanding
under this agreement. Letters of credit issued under the facility totaled
$700 at March 31, 1994, which reduced the availability under the financing
arrangement in a like amount.
Both Adience and IDT pay commitment fees on the unused portion of their credit
facilities. Under the terms of the financing agreements, Adience is required
to maintain minimum levels of net worth of $1,500 and working capital of
$12,000. The agreements additionally contain other restrictive covenants
applicable to Adience and its subsidiaries which, among other things, limit
(i) the incurrence of additional indebtedness, (ii) the granting of liens,
(iii) the making of loans, investments and guaranties, (iv) transactions with
affiliates, (v) the payment of dividends and other distributions, (vi) the
making of annual capital expenditures, and (vii) the disposition of real
property.
As of March 31, 1994, Adience and IDT were in compliance with the covenants of
their respective agreements. Adience's ability to continue to comply with
such conditions is dependent upon Adience's ability to achieve specified
levels of sales, profitable operations and borrowing availability. Waivers or
amendments may be required in the future. Inability to achieve compliance
could affect Adience's access to further borrowings or require it to secure
additional capital by other means.
Both Adience and IDT anticipate that either the financing agreements with
Congress will be renewed at June 30, 1994 or, alternatively, both companies
will be able to secure financing from other sources.
20
<PAGE>
Long-term liquidity is dependent upon the Company's ability to operate
profitably and generate cash flow following favorable changes made to its
capital structure and the restructuring of its management structure.
Adience's New Senior Notes are due in June 2002, and may not be redeemed at
the option of Adience prior to December 15, 1997. Adience has not yet
formulated plans to meet these long-term debt requirements. The Indenture
under which the New Senior Notes were issued contains restrictive covenants
similar to those included in the financing agreements with Congress, and
additionally limits the use of cash proceeds from the sale of Adience's
assets. The Indenture provides that Adience may not make any asset sale
outside of the ordinary course of business unless (i) such asset sale is for
fair value and (ii) at least 50% of the consideration therefor received by
Adience is in the form of cash and/or cash equivalents. In the case of the
sale by Adience of all or substantially all of the stock of IDT or any other
asset for which the gross cash proceeds exceed $2 million, Adience is
required, within 180 days after the receipt of the net cash proceeds of such
asset sale, to make an offer to repurchase the New Senior Notes at a price
equal to 100% of the principal amount of the New Senior Notes plus accrued
interest thereon. In addition, a default on the Congress financing agreement
will result in a default under the Indenture.
Both internal and external factors are material to the Company's long-term
liquidity. External factors include general economic conditions, the
performance of the steel industry and spending by public school systems.
Long-term liquidity is dependent upon the Company's ability to control costs
during periods of low demand so as to sustain positive cash flow from
operations. The Company, even after Reorganization, continues to operate with
a significant amount of interest-bearing debt. Should additional financing be
needed, the Company's access to new sources of capital or the amount of
available and unused lines of bank credit may be limited.
In February 1992, IDT was cited by the Ohio Environmental Protection Agency
(the "Ohio EPA") for violations of Ohio's hazardous waste regulations,
including speculative accumulation of waste and illegal disposal of hazardous
waste on the site of its Alliance, Ohio Facility. IDT had $783 accrued at
December 31, 1993 for the clean-up of this site.
In December 1993, IDT and Adience signed a consent order with the Ohio EPA and
Ohio Attorney General which required IDT and Adience to pay to the State of
Ohio a civil penalty of $200 (of which IDT paid $175 and Adience paid $25).
In addition, the consent order requires the payment of stipulated penalties of
up to $1 per day for failure to satisfy certain requirements of the consent
order including milestones in the closure plan. IDT expects that the work to
be conducted under the closure plan will be substantially completed in 1994,
subject to IDT receiving all necessary approvals from the Ohio EPA. At March
31, 1994, environmental accruals amounted to $746 which represents
management's reasonable estimate of the amounts remaining to be incurred in
this matter, including the costs of effecting the closure plan, bonding and
insurance costs, penalties and legal and consultants' fees. Since 1991,
Adience and IDT have together paid $360 (excluding the civil penalty) for the
environmental clean-up related to the Alliance facility.
21
<PAGE>
Under the acquisition agreement pursuant to which IDT acquired the property
from Adience, Adience represented and warranted that, except as otherwise
disclosed to IDT, no hazardous material has been stored or disposed of on the
property. No disclosure of storage or disposal of hazardous material on the
site was made, accordingly, Adience is required to indemnify IDT for any
losses in excess of $250. IDT has notified Adience that it is claiming the
right to indemnification for all costs in excess of $250 incurred by IDT in
this matter, and has received assurance that Adience will honor such claim.
Adience has reimbursed IDT $266; if Adience is financially unable to honor its
remaining obligation, such costs would be borne by IDT.
22
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
March 31, 1994.
23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADIENCE, INC.
Date: May 13, 1994 By: /s/ Fletcher L. Byrom
------------------- ----------------------------------
Fletcher L. Byrom
Chairman and
Chief Executive Officer
Date: May 13, 1994 By: /s/ Stephen M. Grimshaw
------------------- ----------------------------------
Stephen M. Grimshaw
Vice President - Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
24
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