U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
---------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2001
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD From _________________ to ____________________.
Commission file number: 0-25634
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AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 87-0365268
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3000 Northwest 125th St., Miami, Florida 33167
(Address of principal executive offices)
(305) 681-0848
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common stock, $.001 par value, 13,821,616 shares outstanding at
November 30, 2001
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
FORM 10-Q
INDEX
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 2000 and
March 31, 2001
Consolidated Statements of Operations - Three months ended
March 31, 2000 and 2001
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 2001
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(Unaudited)
March 31, December 31,
2001 2000
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,622 $ 158
Accounts receivable, less allowance
for doubtful accounts of $1,687 and $1,764 28,856 25,517
Inventories 25,559 25,121
Prepaid expenses and other current assets 4,917 4,703
Assets of discontinued operations, net 1,647 1,734
Assets held for sale 1,405 1,421
--------- ---------
TOTAL CURRENT ASSETS 64,006 58,654
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 1,538 1,538
Buildings and improvements 15,018 13,529
Machinery, tools and equipment 29,762 29,244
Computers and office equipment 6,919 7,437
--------- ---------
53,237 51,748
Less accumulated depreciation (15,418) (13,825)
--------- ---------
NET PROPERTY AND EQUIPMENT 37,819 37,923
--------- ---------
OTHER
Cost in excess of net assets acquired, net
of accumulated amortization of $3,259
and $2,987 13,706 13,939
Deferred financing costs, net of accumulated
amortization of $244 and $6 709 947
Other, net of accumulated amortization of $777 and $717 2,078 2,154
--------- ---------
TOTAL OTHER ASSETS 16,493 17,040
--------- ---------
$ 118,318 $ 113,617
========= =========
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(Unaudited)
March 31, December 31,
2001 2000
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Debtor-in-possession revolving credit and term loan $ 23,032 $ 16,743
Accounts payable - trade 9,921 3,654
Payable to seller for purchase price adjustment 850 850
Accrued Expenses
Compensation and related benefits 3,968 3,068
Current portion of warranty obligations 1,686 1,692
Other 4,255 3,609
--------- ---------
TOTAL CURRENT LIABILITIES 43,712 29,616
Accrued warranty obligations, less current portion 3,251 3,305
Other 2,316 2,744
Liabilities subject to compromise 162,311 167,990
--------- ---------
TOTAL LIABILITIES 211,589 203,655
--------- ---------
STOCKHOLDERS' DEFICIT
Preferred stock, Series A convertible, $.001 par,
20,000,000 shares authorized; no shares
outstanding -- --
Preferred stock, Series B convertible, $.01
par, 30,000 shares authorized; no shares
outstanding -- --
Common stock, $.001 par, 100,000,000 shares
authorized; 14,321,616 issued; 13,821,616 shares outstanding 14 14
Additional paid-in capital 9,142 9,142
Treasury stock, at cost (100) (100)
Retained deficit (102,328) (99,094)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (93,272) (90,038)
--------- ---------
$ 118,318 $ 113,617
========= =========
See accompanying notes to consolidated financial statements.
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Three months ended
March 31,
-----------------------
2001 2000
-----------------------
Net Sales $ 56,840 $ 68,999
Cost of Sales 49,037 57,407
-------- --------
GROSS PROFIT 7,803 11,592
Selling Expense 5,237 6,808
General and Administrative Expenses 4,491 6,008
-------- --------
LOSS FROM CONTINUING OPERATIONS (1,925) (1,224)
-------- --------
Other Income (Expense)
Interest expense, net (539) (4,619)
Gain on sale of business -- 3,593
Miscellaneous (107) (249)
-------- --------
Total Other Expense (646) (1,275)
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE
REORGANIZATION COSTS AND INCOME TAX BENEFIT (2,571) (2,499)
Reorganization Costs 646 --
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX BENEFIT (3,217) (2,499)
Income Tax Benefit -- --
-------- --------
LOSS FROM CONTINUING OPERATIONS (3,217) (2,499)
LOSS FROM DISCONTINUED OPERATIONS (17) --
-------- --------
NET LOSS $ (3,234) $ (2,499)
======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Continuing operations $ (0.23) $ (0.17)
Discontinued operations -- --
-------- --------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.23) $ (0.17)
======== ========
See accompanying notes to consolidated financial statements.
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Three months ended
March 31,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $(3,217) $(2,499)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities before reorganization
costs:
Depreciation 1,609 2,079
Amortization 530 518
Gain on sale of business -- (3,593)
Reorganization costs 646 --
Changes in assets and liabilities, net of effects of business
acquisitions and divestitures and discontinued operations:
Accounts receivable (3,339) (1,181)
Inventories (438) 1,583
Prepaid and other current assets (214) (97)
Other assets 17 (284)
Accounts payable 6,267 (1,765)
Accrued expenses and other liabilities 908 4,111
Liabilities subject to compromise (5,679) --
------- -------
NET CASH USED IN OPERATING ACTIVITIES BEFORE REORGANIZATION COSTS (2,910) (1,128)
NET CASH USED FOR REORGANIZATION COSTS (496) --
------- -------
NET CASH USED IN OPERATION ACTIVITIES (3,406) (1,128)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,489) (699)
Proceeds from the sale of business -- 4,521
------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,489) 3,822
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving line of credit 6,289 (1,626)
Payments on long-term debt and capital lease
Obligations -- (385)
------- -------
NET CASH PROVIDED BY (USED IN)FINANCING ACTIVITIES 6,289 (2,011)
------- -------
CASH FLOWS PROVIDED BY CONTINUING OPERATIONS 1,394 683
CASH FLOWS PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 70 (717)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,464 (34)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 158 56
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,622 $ 22
======= =======
See accompanying notes to consolidated financial statements.
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
American Architectural Products Corporation (AAPC or the Company) is
principally engaged in the business of manufacturing residential and
architectural windows and doors through its wholly-owned subsidiaries, Eagle &
Taylor Company (ETC - formerly known as American Architectural Products, Inc.,
AAP), Thermetic Glass, Inc. (Thermetic), Binnings Building Products, Inc.
(Binnings), Danvid Window Company (Danvid), Modern Window Corporation (Modern),
American Glassmith Corporation (American Glassmith), Denver Window Corporation
(Denver), Eagle Window and Door Center, Inc. (EWDC) and American Weather-Seal
Company (Weather-Seal). Western Insulated Glass Co. (n.k.a. WIG Liquidation
Company) (Western) and VinylSource, Inc. (VinylSource) were sold in March 2000
and May 2000, respectively.
In addition, in May 2000, the Company completed its previously announced plan to
exit its commercial business segment activities carried out through Forte. Forte
has been reflected as a discontinued operation in the accompanying financial
statements and, accordingly, unless otherwise stated, the accompanying notes for
all periods presented exclude amounts related to this discontinued operation.
On December 18, 2000, the Company filed for voluntary protection under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court in
the Northern District of Ohio (the Bankruptcy Court). The Company is presently
operating its business as a debtor-in-possession under Chapter 11 and is subject
to the jurisdiction and supervision of the Bankruptcy Court. The accompanying
consolidated financial statements have been prepared in accordance with AICPA
Statement of Position 90-7 (SOP 90-7), "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" as more fully described in Note 2.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of
financial position and results of operations have been made. Operating results
for interim periods are not necessarily indicative of results that may be
expected for the year ended December 31, 2001. The information included in this
Form 10-Q should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto of the Company for the year ended December 31, 2000
included in the annual report on Form 10-K.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
2. Bankruptcy Proceedings and Going Concern Considerations:
On December 18, 2000, the Company and its subsidiaries filed for voluntary
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court in the Northern District of Ohio (the
Bankruptcy Court). The Company is presently operating its businesses as a
debtor-in-possession under Chapter 11 and is subject to the jurisdiction and
supervision of the Bankruptcy Court. In Chapter 11 cases, substantially all
liabilities as of the date of the filing of the petition for reorganization are
subject to the treatment set forth under a plan of reorganization to be voted
upon by the Company's impaired creditors and stockholders and confirmed by the
Bankruptcy Court. The ultimate amount and treatment terms for such liabilities
are subject to a plan of reorganization and, accordingly, are not presently
determinable. In addition, on December 18, 2000, the Bankruptcy Court issued an
order authorizing the Company to pay certain pre-petition claims of essential
vendors and suppliers. Accordingly, these amounts have been paid or are included
in the appropriate liability captions on the consolidated balance sheets.
An unsecured creditors' committee has been appointed by the Bankruptcy Court.
The official committee and legal representatives are the primary entities with
which the Company is negotiating the terms of a plan of reorganization. The
Bankruptcy Court has approved an extension to January 18, 2002, during which the
Company has the exclusive right to file a reorganization plan.
The consolidated financial statements of the Company and its subsidiaries were
prepared on the going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. However, during the years ended December 31, 2000, 1999 and
1998, the Company incurred losses of $41.9 million, $47.1 million and $8.8
million, respectively. Further, the Company's ongoing debt service obligations
included semi-annual interest payments of approximately $7.3 million, due each
June 1 and December 1 through December 1, 2007. The indenture governing the
Notes provides that an "Event of Default" includes the default in any payment of
interest on the Notes when due, continued for 30 days. The Company did not have
sufficient liquidity to make the June 1, 2000 or December 1, 2000 interest
payment. Accordingly, the Company was in default of the indenture. Furthermore,
the Company was in violation of certain of its covenants under the line of
credit facility at December 31, 1999 but obtained waivers for those violations.
These events, among other things, led to the Chapter 11 filings; therefore, the
realization of assets and liquidation of liabilities is subject to significant
uncertainty.
In the Chapter 11 proceedings (subject, in certain circumstances, to Bankruptcy
Court approval), the debtors may sell or otherwise dispose of assets, and
liquidate or settle liabilities, for amounts other than those reflected in the
consolidated financial statements. The amounts reported in the consolidated
financial statements do not give effect to any adjustments to the carrying value
of assets or amounts of liabilities that might result as a consequence of
actions taken pursuant to a plan of reorganization, which adjustments could be
material. The continuation of the Company as a going concern is contingent upon,
among other factors, the ability of the debtors to (1) formulate and file a plan
which will gain the approval of the creditors and other parties in interest and
confirmation by the Bankruptcy Court; (2) maintain debtor-in-possession
financing; (3) achieve profitable operations; (4) obtain adequate shipments of
merchandise from suppliers at acceptable credit terms; and (5) obtain post
reorganization financing. There can be no assurances that the above conditions
can be met.
Liabilities Subject to Compromise
As reflected in the consolidated financial statements, "liabilities subject to
compromise" refer to liabilities incurred prior to the commencement of the
Chapter 11 case. The amounts of the various liabilities that are subject to
compromise are set forth below. These amounts represent the Company's estimate
of known or potential pre-petition claims to be resolved in connection with the
Chapter 11 case. Such claims remain subject to future adjustments. Adjustments
may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3)
rejection of executory contracts and unexpired leases; (4) the determination as
to the value of any collateral securing claims; (5) proofs of claim; or (6)
other events. Payment terms for these amounts will be established in connection
with the Chapter 11 case.
Liabilities subject to compromise in the consolidated balance sheet consist of
the following items (in thousands):
March 31, December 31,
2001 2000
-------- --------
Accounts payable $ 10,200 $ 15,469
Accrued interest payable 17,299 17,584
Accrued liabilities 1,206 1,205
Debt 133,607 133,732
-------- --------
Total liabilities subject to compromise $162,312 $167,990
======== ========
Interest on certain pre-petition debt is not accrued after the bankruptcy
filing. Such contractual interest expense not recorded totaled $3.9 million for
the year to date March 31, 2001.
Debtor-In-Possession Financing
In connection with the bankruptcy filing, the Company obtained an aggregate $35
million debtor-in-possession credit facility, subject to an available collateral
base, from a lender (the DIP Facility) which expires upon either the effective
date of the plan of reorganization or forty-five days after the filing date if
the final financing order has not been duly entered on or prior to such date,
but no later than two years from entry date of the interim financing order
entered on docket of bankruptcy case. The credit is secured by certain accounts
receivable, inventories and property and equipment of the Company. This facility
consists of up to a $29 million line of credit, including a $5 million
subfacility for issuance of letters of credit, and a multiple draw term loan in
an aggregate principal amount not to exceed $10 million. Interest is payable on
a monthly basis based upon the interest rate applicable to the line of credit
and the term loan of the prime rate plus .75% and 1.5% respectively. By
agreement, the facility has a commitment fee on unused portions of .5% at March
31, 2001. At March 31, 2001, the interest rate was 8.75% on the line of credit
and 9.0% on the term loan, with aggregate availability of $8.5 million under the
facility. This facility has priority in the bankruptcy proceeding.
The DIP Facility requires the Company to meet a number of covenants which
include minimum quarterly earnings before interest, taxes, depreciation,
amortization and certain non-cash gains and losses as defined in the credit
agreement (EBITDA) and minimum fixed charge coverage ratios. The Company was in
violation of these covenants as outlined in the facility on March 31, June 30,
and September 30, 2001. The Company obtained a waiver releasing it from its
requirement to meet that threshold for the first and second quarters of 2001.
Outstanding balances (in thousands) are as follows:
March 31, December 31,
2001 2000
------- -------
Line of credit $15,032 $ 8,743
Term loan 8,000 8,000
------- -------
$23,032 $16,743
======= =======
Reorganization Costs
The amounts reflected as reorganization costs in the consolidated statement of
operations consist primarily of professional fees for the year to date March 31,
2001.
3. Inventories
Inventories consisted of the following (in thousands):
March 31, December 31,
2001 2000
------- -------
Finished goods $ 6,625 $ 6,793
Work-in-process 4,678 3,177
Raw materials 14,256 15,151
------- -------
$25,559 $25,121
======= =======
4. Assets Held for Sale
As part of the agreement on the sale of Taylor Building Products, Inc. in
December 1999, the Company retained the real property which has a book value of
$1.4 million. However, the buyer is required to purchase the property within a
period not to exceed nineteen months from the closing date, provided certain
conditions are met. The obligation of the buyer to purchase the real property is
currently being contested.
5. Net Loss Per Share
Basic and diluted loss per common share amounts were computed by dividing net
loss by the weighted average number of common shares outstanding. A summary of
the basic and diluted loss per share amounts is as follows:
Three months ended
March 31,
----------------------------
2001 2000
----------------------------
(In Thousands, Except Per
Share Data)
EARNINGS
Continuing operations $ (3,217) $ (2,499)
Discontinued operations (17) --
----------------------------
$ (3,284) $ (2,499)
============================
SHARES
Basic and diluted 13,822 14,322
PER COMMON SHARE - BASIC AND DILUTED
Continuing operations $ (0.23) $ (0.17)
Discontinued operations -- --
----------------------------
$ (0.23) $ (0.17)
============================
For all periods presented, certain common stock equivalents were excluded from
the computation of diluted net loss per share since their inclusion in the
computation would have an anti-dilutive effect.
6. Comprehensive Income
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. For the three
months ended March 31, 2001 and 2000, comprehensive income for the Company did
not differ from net income.
7. Income Taxes
The Company established a full valuation allowance on its income tax benefit for
the three months ended March 31, 2001 and 2000.
8. Segment Information
Three months ended March 31
----------------------------------------------------------------
2001 2000
------------------------------ ------------------------------
Residential Extrusion Residential Extrusion
--------------- -------------- --------------- --------------
(in thousands)
Revenues from external customers $ 53,344 $ 3,496 $ 59,713 $ 7,539
Intersegment revenues -- 576 688 1,059
Operating profit (loss) (806) (311) 1,063 (747)
Total assets 102,828 7,485 116,965 19,523
A reconciliation of combined operating profit for the residential and extrusion
segments to consolidated loss before income taxes is as follows:
Three months ended
March 31
-------------------------------------
2001 2000
-------------------------------------
(in thousands)
Total (loss) profit from operating segments $ (1,117) $ 316
Less:
Corporate and eliminations 808 1,540
Other (income) expenses 107 (3,344)
Interest expense, net 539 4,619
Reorganization costs 646 --
-------------------------------------
Loss from continuing operations before income taxes $ (3,217) $ (2,499)
=====================================
10. Discontinued Operation
On December 16, 1999, the Board of Directors of the Company approved a plan to
abandon its commercial business segment, conducted through its wholly-owned
subsidiary, Forte, which manufactured aluminum windows used in commercial
applications such as schools, dormitories, hospitals, institutions, municipal
buildings and military buildings. The Company discontinued manufacturing
operations at Forte in May 2000 and is actively seeking a buyer for its
remaining assets. The results of operations for Forte have been presented as
discontinued operations in the accompanying financial statements for all
periods. Net revenues generated by Forte for three months ended March 31, 2001
and 2000 were $36 thousand and $417 thousand, respectively. The Company did not
recognize income tax benefits on the losses from discontinued operations. The
loss from discontinued operations for the period ended March 31, 2001 and March
31, 2000 were $17 thousand and $0, respectively, and consisted of the loss
generated from operations.
The net assets of Forte have been reported in the accompanying consolidated
balance sheet as assets of discontinued operations, net and are classified as
current and non-current based on the expected timing of recoverability. A
summary of the net assets of this discontinued business is as follows:
March 31, December 31,
2001 2000
-----------------------------
(in thousands)
Accounts receivable $ 104 $ 204
Property, plant and equipment 1,543 1,530
-----------------------------
Net Assets $ 1,647 $ 1,734
=============================
11. Subsequent Event
In February 2001, the Company announced the shutdown of its wood window
manufacturing operation in Ottawa, Ohio, effective April 2001. The Company
recognized approximately $1.8 million of shutdown costs in the second quarter of
2001.
In December 2001, the Company entered into an agreement to sell certain assets
of its Binnings Pan Am and TM Window and Door divisions. Also in December 2001,
the Company agreed to sell certain assets of its American Weather-Seal Co.'s
aluminum extrusion operations. Both agreements also provide for the assumption
of certain liabilities by the buyers. These agreements are now pending approval
from the US Bankruptcy Court, and are subject to better offers. Approval is
expected during the first quarter of 2002.
12. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, "Business Combinations" which
requires that all business combinations be accounted for under a single method,
the purchase method. Use of the pooling-of-interests method is no longer
permitted. SFAS 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001. It will have no effect on the
Company's financial statements unless the Company enters into a business
combination.
In July 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets", which requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of the Statement which, for most companies, will be January 1, 2002.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations", which requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement will become effective on January 1,
2003. Management is currently assessing the impact of this pronouncement on its
financial statements.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment of or
Disposal of Long-Lived Assets". This Statement supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This Statement also amends ARB No. 51, "Consolidated
Financial Statements". The provisions of this Statement are effective January 1,
2002. Management is currently assessing the impact of this pronouncement on its
financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
On December 18, 2000, American Architectural Products Corporation (the Company)
and its subsidiaries filed for voluntary bankruptcy protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
the Northern District of Ohio (the Bankruptcy Court). The Company is presently
operating its businesses as a debtor-in-possession under Chapter 11 and is
subject to the jurisdiction and supervision of the Bankruptcy Court. In Chapter
11 cases, substantially all liabilities as of the date of the filing of the
petition for reorganization are subject to settlement under a plan of
reorganization to be voted upon by the Company's impaired creditors and
stockholders and confirmed by the Bankruptcy Court. The ultimate amount and
settlement terms for such liabilities are subject to a plan of reorganization
and, accordingly, are not presently determinable. In addition, on December 18,
2000, the Bankruptcy Court issued an order authorizing the Company to pay
certain pre-petition claims of essential vendors and suppliers. Accordingly,
these amounts have been paid or are included in the appropriate liability
captions on the consolidated balance sheets.
An unsecured creditors' committee has been appointed by the Bankruptcy Court.
The official committee and legal representatives are the primary entities with
which the Company is negotiating the terms of a plan of reorganization. The
Bankruptcy Court approved an extension to January 18, 2002, during which the
Company has the exclusive right to file a reorganization plan..
The consolidated financial statements of the Company and its subsidiaries were
prepared on the going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. However, during the years ended December 31, 2000, 1999 and
1998, the Company incurred losses of $41.9 million, $47.1 million and $8.8
million, respectively. Further, the Company's ongoing debt service obligations
included semi-annual interest payments of approximately $7.3 million, due each
June 1 and December 1 through December 31, 2007. The indenture governing the
Notes provides that an "Event of Default" includes the default in any payment of
interest on the Notes when due, continued for 30 days. The Company did not have
sufficient liquidity to make the June 1 or December 1, 2000 interest payments.
Accordingly, the Company was in default of the indenture. Furthermore, the
Company was in violation of certain of its covenants under the line of credit
facility at December 31, 1999 but obtained waivers for those violations. These
events, among other things, led to the Chapter 11 filings; therefore, the
realization of assets and liquidation of liabilities is subject to significant
uncertainty.
In the Chapter 11 proceedings (subject, in certain circumstances, to Bankruptcy
Court approval), the debtors may sell or otherwise dispose of assets, and
liquidate or settle liabilities, for amounts other than those reflected in the
consolidated financial statements. The amounts reported in the consolidated
financial statements do not give effect to any adjustments to the carrying value
of assets or amounts of liabilities that might result as a consequence of
actions taken pursuant to a plan of reorganization, which adjustments could be
material. The continuation of the Company as a going concern is contingent upon,
among other factors, the ability of the debtors to (1) formulate and file a plan
which will gain the approval of the creditors, shareholders and other parties in
interest and confirmation of the Bankruptcy Court; (2) maintain
debtor-in-possession financing; (3) achieve profitable operations; (4) obtain
adequate shipments of merchandise from suppliers at acceptable credit terms; and
(5) obtain post reorganization financing. There can be no assurances that the
above conditions can be met.
DISCONTINUED OPERATIONS
In December 1999, the Company announced the discontinuance of the operations of
its commercial business, Forte, Inc. The operating results of this business have
continually declined and the Company discontinued manufacturing operations in
May 2000. The Company is currently seeking a buyer for the remaining assets of
the business. The Company has accounted for Forte as a discontinued operation in
the accompanying financial statements. Therefore, the following discussion and
analysis refer only to continuing businesses of the Company.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Net Sales. Net sales for the three months ended March 31, 2001 were $56.8
million as compared with $69.0 million for the three months ended March 31,
2000. The decrease of $12.2 million results from $5.3 million of sales decrease
associated with divestiture of Western and VinylSource, and internal sales
declines in the quarter of $6.9 million. Net sales in the residential segment,
excluding acquisition and divestiture activity, decreased approximately $5.3
million since the comparable period of the prior year due primarily to lower
volumes in the aluminum-clad and vinyl window markets. Extrusion sales,
excluding acquisition and divestiture activities, were down $1.6 million
reflecting reduced aluminum sales due to declining demands with existing
customers.
Gross Profit. Gross profit decreased $3.8 million to $7.8 million for the three
months ended March 31, 2001 from $11.6 million for the three months ended March
31, 2000. This decrease reflects a $0.6 million decline associated with the
divestiture of Western and Vinylsource and a $3.2 million decline internally
primarily attributable to the residential window businesses. This decline
results directly from the sales decline and higher fixed costs at the Company's
Eagle Window and Door (Eagle) operations due to the move to a new manufacturing
facility during the fourth quarter of 2000 and first quarter of 2001. The gross
margin for the three months ended March 31, 2001 was 13.7% compared to 16.8% for
the three months ended March 31, 2000. The decrease in gross margin reflects the
decline in the gross profit of the Company's residential window businesses
throughout the United States.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2001 were $9.7
million compared to $12.8 million for the comparable period in 2000. The effect
of the sale of Western and Vinylsource resulted in a net decrease of $0.8
million in selling, general and administrative expenses for the three month
period. Internally, the Company's selling, general and administrative costs
decreased $2.3 million, which was comprised of a $1.6 million decrease in the
residential segment and a $0.7 million decrease in corporate costs. The decrease
in the residential segment partially results from lower selling costs. The
remaining decline in residential window and corporate costs results from the
Company's cost reduction initiatives.
Operating (Loss) from Continuing Operations. The Company had a loss from
continuing operations for the three months ended March 31, 2001 of $1.9 million,
compared to a loss from continuing operations of $1.2 million for the three
months ended March 31, 2000.
Interest Expense. Interest expense decreased from $4.6 million for the three
months ended March 31, 2000 to $0.5 million for the three months ended March 31,
2001. During the first quarter of 2001, the Company did not recognize
approximately $3.9 million of interest expense due to the Chapter 11 filing (see
Note 2 to the consolidated financial statements).
Reorganization Costs. In conjunction with the filing, the Company recognized
reorganization costs of $0.6 million during the three months ended March 31,
2001. This amount consists primarily of professional fees related to the
Bankruptcy.
Income Taxes. The Company established a full valuation allowance on its income
tax benefit recorded for the three months ended March 31, 2001 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are for debt service requirements
under the 1997 $125 million, 11 3/4% Senior Notes (Notes), the note issued in
connection with the Weather-Seal acquisition, the revolving credit facility and
for working capital needs and capital expenditures. The Company's annual
principal and interest debt service requirements, including capital lease
obligations, remain uncertain until a plan of reorganization is filed and
approved by the Bankruptcy Court.
Cash used in operating activities was $3.3 million and $1.1 million for the
three months ended March 31, 2001 and 2000, respectively. The increase in cash
used in operations for 2001 over the prior year is due to increases in accounts
receivable and inventories and incurred reorganization costs.
Capital expenditures for the three months ended March 31, 2001 and 2000 were
$1.5 million and $0.7 million, respectively. The increase results primarily from
capital investments at the new Eagle manufacturing facility. Management expects
that its capital expenditure program will continue at a sufficient level to
support the strategic and operating needs of the Company. Future capital
expenditures are expected to be funded from internally generated funds, leasing
programs and the Company's current and future credit facilities. Cash provided
by investing activities in the three months ended March 31, 2000 included $4.5
million in cash received from the sale of Western, which closed in March 2000
for total consideration of $5.6 million. The sale included a note receivable for
$1.1 million that was prepaid at a discount in the second quarter of 2001.
Net activity on the Company's line of credit resulted in sources of cash of $6.3
million in the three months ended March 31, 2001 and a use of cash of $1.6
million for the same period of 2000. The Company paid approximately $0.1 million
on long-term debt and capital leases during the first three months of 2001
compared to $0.4 million of similar payments during the comparable period of
2000.
SEASONALITY
The Company's business is seasonal since its primary revenues are driven by
residential construction. Inclement weather during the winter months,
particularly in the northeast and midwest regions of the United States, usually
reduces the level of building and remodeling activity in both the home
improvement and new construction markets and, accordingly, has an adverse impact
on the demand for fenestration products. Traditionally, the Company's lowest
sales levels usually occur during the first and fourth quarters. The Company
believes that its acquisitions in the southwestern and southeastern United
States minimize the risk to the Company for potentially unusual inclement
weather conditions in the midwest and the northeast. Because a high percentage
of the Company's manufacturing overhead and operating expenses are relatively
fixed throughout the year, operating income has historically been lower in
quarters with lower sales. Working capital requirements are usually at their
highest level during the second and third quarters.
CYCLICALITY
Demand in the fenestration industry is influenced by new home construction
activity and the demand for replacement products. Trends in the housing sector
directly impact the financial performance of the Company. Accordingly, the
strength of the U.S. economy, the age of existing home stock, job growth,
consumer confidence, consumer credit, interest rates and migration of the
inter/intra U.S. population have a direct impact on the Company. Any declines in
new housing starts and/or demand for replacement products may adversely impact
the Company and there can be no assurance that any such adverse effects would
not be material.
INFLATION AND RAW MATERIAL COSTS
During the past several years, the rate of inflation has been relatively low and
has not had a significant impact on the Company's operations. However, the
Company purchases raw materials, such as aluminum, wood, vinyl and glass, that
are subject to fluctuations in price that may not reflect the general rate of
inflation, and are more closely tied to the supply of and demand for the
particular commodity. Specifically, there have been periods of significant and
rapid changes in aluminum prices, with a concurrent short-term impact on the
Company's operating margins. In some cases, generally where the increases have
been modest, the Company has been able to mitigate the effect of these price
increases over the long-term by passing them on to customers.
FORWARD-LOOKING STATEMENTS
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipate," "intend," and "believe"
and similar words or expressions are intended to identify forward-looking
statements. These statements speak only as of the date of this report. The
statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors, including changes in economic conditions in the markets served
by the Company, increasing competition, fluctuations in raw materials and energy
prices, and other unanticipated conditions. It is not possible to foresee or
identify all such factors. The Company makes no commitment to update any
forward-looking statement or to disclose any facts, events or circumstances
after the date hereof that may affect the accuracy of any forward-looking
statement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are affected by changes in short term interest rates
related to its line of credit facility and a promissory note to the former
parent of an acquired company. If the market rates for short term borrowings
increased by 1%, the impact would be an interest expense increase of $49,700
with a corresponding increase in loss before taxes of the same amount, for the
three months ended March 31, 2001. The amount was determined by considering the
impact of hypothetical interest rates on the Company's borrowing cost and debt
balances at March 31, 2001 by category.
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On December 18, 2000, the Company and its subsidiaries filed for voluntary
protection under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court in the Northern District of Ohio (the "Bankruptcy
Court"). The Company is presently operating its business as a
debtor-in-possession under Chapter 11 and is subject to the jurisdiction and
supervision of the Bankruptcy Court.
The Company and its subsidiaries are engaged in various litigation and have a
number of unresolved claims. While the amounts claimed are substantial and the
ultimate liability with respect to such litigation and claims cannot be
determined at this time, management believes that such liability, to the extent
not provided for through insurance or otherwise, is not likely to have a
material impact on the financial condition or the results of operations of the
Company. However, all such claims arising prior to December 18, 2000 must be
resolved through confirmation of the Company's plan of reorganization as such
plan may be approved by the Bankruptcy Court.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
See Note 2 to the Consolidated Financial Statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the first quarter of 2001, the company filed the following current
reports on Form 8-K:
January 17, 2001 under Item 3. Change in Registrants Certifying Accountant
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
Date: January 14, 2002 /s/ Joseph Dominijanni
--------------------------------
Joseph Dominijanni
President & Chief Executive Officer