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 September 30, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _________________TO ___________________.
Commission file number: 0-25634
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.)
860 Boardman - Canfield Road, Boca Building, Suite 107
Boardman Ohio 44512
(Address of principal executive offices)
(330) 965-9910
(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 (X) No ( )
THE INTERIM FINANCIAL STATEMENTS INCLUDED IN THIS QUARTERLY REPORT WERE
PREPARED BY THE COMPANY AND HAVE NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC
ACCOUNTANT AS REQUIRED BY RULE 10-01 (D) OF REGULATION S-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 October 31, 2002
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
FORM 10-Q
INDEX
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2002 and December 31, 2001
Consolidated Statements of Operations - Three and nine months ended
September 30, 2002 and 2001
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2002 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
Item 4. Controls and Procedures
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
CERTIFICATIONS OF CEO AND CFO
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(Unaudited)
September 30, December 31,
2002 2001
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 43,308 $ 2,762
Accounts receivable, less allowance
for doubtful accounts of $0 and $619 317 5,972
Prepaid expenses and other current assets 483 964
Assets held for sale 31,498 76,622
-------- --------
TOTAL CURRENT ASSETS 75,606 86,320
-------- --------
PROPERTY AND EQUIPMENT
Land and improvements 115 115
Buildings and improvements 910 1,144
Machinery, tools and equipment -- 36
Computers and office equipment 251 248
-------- --------
1,276 1,543
Less accumulated depreciation (397) (496)
-------- --------
NET PROPERTY AND EQUIPMENT 879 1,047
OTHER 2,213 671
-------- --------
$ 78,698 $ 88,038
======== ========
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(Unaudited)
September 30, December 31,
2002 2001
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable - trade $ 841 $ 763
Accrued Expenses
Compensation and related benefits 63 289
Other 1,874 1,284
Liabilities held for sale 9,184 22,337
Debtor-in-possession revolving credit and term loan -- 18,583
--------- ---------
TOTAL CURRENT LIABILITIES 11,962 43,256
Other 382 147
Liabilities subject to compromise 159,292 159,360
--------- ---------
TOTAL LIABILITIES 171,636 202,763
--------- ---------
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 (101,994) (123,781)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (92,938) (114,725)
--------- ---------
$ 78,698 $ 88,038
========= =========
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) (Unaudited)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
RESULTS OF DISCONTINUED OPERATIONS
Net Sales $ 29,432 $ 24,464 $ 80,443 $ 70,289
Cost of Sales 24,766 20,110 66,923 59,341
-------- -------- -------- --------
GROSS PROFIT 4,666 4,354 13,520 10,948
Selling Expense 2,775 2,376 7,745 7,018
Impairment Charge 8,400 -- 17,070 --
General and Administrative Expenses 1,086 1,296 3,493 4,210
Other (Income) Expense 69 105 91 108
-------- -------- -------- --------
INCOME (LOSS) BEFORE RESULTS OF
DISPOSED OPERATIONS (7,664) 577 (14,879) (388)
INCOME (LOSS) FROM DISPOSED
OPERATIONS (589) (8,510) 41,641 (6,566)
-------- -------- -------- --------
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS (8,253) (7,933) 26,762 (6,954)
RESULTS OF CONTINUING OPERATIONS
Corporate General and Administrative
and Other Expenses 768 3,376 2,619 5,293
Interest (Income) Expense, net (182) 477 71 1,514
Reorganization Costs 705 691 2,285 3,781
-------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS 1,291 4,544 4,975 10,588
-------- -------- -------- --------
NET INCOME (LOSS) $ (9,544) $(12,477) $ 21,787 $(17,542)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 13,822 13,822 13,822 13,822
======== ======== ======== ========
BASIC AND DILUTED INCOME (LOSS) PER
COMMON SHARE
Discontinued operations $ (0.60) $ (0.57) $ 1.94 $ (0.50)
Continuing operations (0.09) (0.33) (0.36) (0.77)
-------- -------- -------- --------
BASIC AND DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ (0.69) $ (0.90) $ 1.58 $ (1.27)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Nine months ended
September 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (4,975) $(10,588)
Adjustments to reconcile loss from continuing operations to net cash
used in operating activities:
Depreciation 52 250
Amortization -- 715
Provision for credit losses -- 1,797
Provision for reorganization costs -- 1,625
Changes in assets and liabilities, net of effects of business
acquisitions and divestitures and discontinued operations:
Accounts receivable 6 176
Prepaid and other current assets (269) 296
Other assets (344) 762
Accounts payable (242) (229)
Accrued expenses and other liabilities 205 180
Liabilities subject to compromise (69) 192
-------- --------
NET CASH USED FOR OPERATIONS BEFORE DISCONTINUED OPERATIONS (5,636) (4,824)
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 243 (623)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (5,393) (5,447)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment -- (7)
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS -- (7)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF DISCONTINUED
OPERATIONS 64,471 (1,206)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES 64,471 (1,213)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings on debtor-in-possession revolving
credit and term loan (18,583) 7,473
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS (18,583) 7,473
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF
DISCONTINUED OPERATIONS 51 (455)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (18,532) 7,018
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 40,546 358
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,762 158
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 43,308 $ 516
======== ========
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, Binnings Building Products,
Inc. (Binnings), Danvid Window Company (Danvid), and American Weather-Seal
Company (Weather-Seal). The Company sold Thermetic Glass, Inc. (TGI) and
Modern Window Corporation (Modern) in August 2002. In May 2002, the Company sold
Eagle Window and Door, Inc., the only remaining operating division of Eagle &
Taylor Company (ETC - formerly known as American Architectural Products, Inc.,
AAP) and Eagle Service Company (collectively "Eagle"). American Glassmith
Corporation (American Glassmith) was also a subsidiary at December 31, 2001 and
was sold in March 2002. Denver Window Corporation (Denver) was a subsidiary at
June 30, 2001 and was sold in September 2001.
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 Company elected to adopt the provision of the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment of or Disposal of Long-Lived Assets" issued in
August 2001. As of the end of the third quarter of 2002, all of the Company's
remaining operations are being marketed for sale. The assets and post-petition
liabilities of these businesses are classified as being held for sale in the
accompanying balance sheet. The statements of operations reflect the sales, cost
of sales, selling, general and administrative costs and other expenses of these
remaining operations and, together with the results of operations of businesses
sold prior to September 30, 2002 (classified as disposed operations), are
classified as discontinued operations. The results of continuing operations
include the Company's corporate activities including overhead expenses and costs
associated with the administration of the bankruptcy process.
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, 2002. 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, 2001
included in the annual report on Form 10-K.
The interim financial statements included in the Quarterly Report were prepared
by the Company and have not been reviewed by an independent public accountant as
required by Rule 10-01 (d) of Regulation S-X. No independent accountant has
reviewed these unaudited financial statements to determine whether any material
modifications should be made in order for them to be in conformity with the
generally accepted accounting principles for interim financial information.
The balance sheet at December 31, 2001 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. Certain prior period amounts have been reclassified to
conform with current period presentation.
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 "liabilities subject to compromise" 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
Company has requested the Bankruptcy Court approve an extension to January 16,
2003, during which time 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, 2001, 2000 and
1999, the Company incurred losses of $24.7 million, $42.4 million, and $47.1
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 through 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 (except for the write-down of goodwill) 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):
September 30, December 30,
2002 2001
-------- --------
Accounts payable $ 8,306 $ 8,316
Accrued interest payable 17,299 17,299
Accrued liabilities 1,188 1,188
Debt 132,500 132,557
-------- --------
Total liabilities subject to compromise $159,293 $159,360
======== ========
Interest on certain pre-petition debt is not accrued after the bankruptcy
filing. Such contractual interest expense not recorded totaled $3.8 million for
each of the three month periods ending September 30, 2002 and 2001 and $11.4
million and $11.5 million for of the nine month periods ending September 30,
2002 and 2001, respectively.
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 group of lenders (the DIP Facility) which was repaid in May 2002
with a portion of the proceeds from the Eagle sale as discussed in Note 3. At
December 31, 2001, $12.2 million and $6.4 million were outstanding under the DIP
Facility's line of credit and term note, respectively.
Reorganization Costs
The amounts reflected as reorganization costs in the consolidated statements of
operations consisted of the following (in thousands):
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
Professional fees $ 691 $ 664 $2,228 $1,943
Other 14 27 57 79
Plant closing -- -- -- 1,759
------ ------ ------ ------
Total Reorganization Costs $ 705 $ 691 $2,285 $3,781
====== ====== ====== ======
In February 2001, the Company announced the shutdown of its wood window
manufacturing operation in Ottawa, Ohio effective April 2001. In April 2001 the
Bankruptcy Court approved the shutdown plan which was substantially completed by
the end of April 2001. The plant closing charges reflected above are associated
with this restructuring effort and include severance costs of $619 thousand and
a loss on the liquidation of assets of $1.14 million. $555 thousand and $64
thousand of the accrued severance costs were paid during the second and third
quarters of 2001, respectively.
Professional fees incurred consisted primarily of consulting and legal fees for
bankruptcy activity and restructuring efforts.
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
During the second quarter of 2002, the Company committed to a plan to sell its
remaining operations: Weather-Seal's window manufacturing operations (AWS),
Binnings Building Products' Lexington, North Carolina operations (BBP), and
Danvid Window Company (Danvid).
In October 2002, the Company signed an agreement to sell substantially all of
the assets of AWS for approximately $6.63 million and the assumption of certain
post-petition liabilities. The Company recognized an impairment charge of $5.9
million at September 30, 2002 to adjust the recorded value of AWS' long-lived
assets to their estimated fair value based on the expected proceeds from the
sale.
Also in October 2002, the Company agreed to sell substantially all of the assets
of BBP for approximately $5.95 million and the assumption of certain
post-petition liabilities. The Company recognized an impairment charge of $2.5
million at September 30, 2002 to adjust the recorded value of BBP's long-lived
assets to their estimated fair value based on the expected sale proceeds.
The sale prices under both agreements are subject to working capital adjustments
to be determined as of the transaction closing date. Both agreements have been
submitted to the Bankruptcy Court for approval. The following summarizes the
results of operations for the three month and nine month periods ending
September 30, 2002 and 2001 for each of these entities (in thousands):
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales
AWS $ 8,244 $ 7,718 $ 21,501 $ 23,063
BBP 5,229 4,754 14,503 13,852
Danvid 16,088 13,377 45,626 37,929
Eliminations (129) (1,385) (1,187) (4,555)
-------- -------- -------- --------
Total $ 29,432 $ 24,464 $ 80,443 $ 70,289
======== ======== ======== ========
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Income (Loss) before Disposed
Operations
AWS $ (5,347) $ (36) $ (5,365) $ (1,736)
BBP (2,150) 208 (4,031) 510
Danvid (167) 405 (5,483) 838
-------- -------- -------- --------
Total $ (7,664) $ 577 $(14,879) $ (388)
======== ======== ======== ========
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. The Company discontinued manufacturing operations at Forte in
May 2000 The Company is actively marketing the remaining property for sale and
recorded a loss on disposal of $437,000 in the first quarter of 2002 to write
down the recorded value of this property to the estimated fair value based on
the expected selling price.
In January 2001, the Company announced the discontinuance of its Eagle Window
and Door Center, Inc. (EWDC) operations in Boardman, Ohio. The Company
substantially completed its plan to exit this business in December 2001.
On January 31, 2002 the Company completed the sale of Weather-Seal's aluminum
extrusion operations (the Aluminum Extrusion Group or AEG) for $1.5 million cash
and the assumption of certain post-petition liabilities. During the second
quarter of 2002, the Company began to actively market certain real property of
AEG which was not included in the January 2002 sale. The net book value of this
property has been reclassified as held for sale at December 31, 2001 and June
30, 2002.
On February 15, 2002, the Company completed the sale of certain assets of the
Binnings Pan American (Pan Am) and TM Window and Door (TM) divisions of Binnings
for $500,000 cash, a $1.7 million note receivable and the assumption of certain
liabilities. During the second quarter of 2002, the company recorded additional
losses of $1,002,000 and $538,000 on the disposal of BPA and TM, respectively
resulting from the write-down of the value of accounts receivable retained by
the Company after the sale.
AEG and a portion of Pan Am comprised the Company's extrusion segment. Extrusion
products consist of aluminum extrusions used primarily in the fenestration
products industry. These businesses supplied a portion of the raw materials used
in the manufacture of windows by the Company. The consummation of these
transactions completes the Company's exit from the extrusion segment. As a
result, the Company now operates in one business segment, residential
fenestration products.
On March 22, 2002, the Company completed the sale of certain assets of American
Glassmith (AGI) for $350,000 cash plus the assumption of certain post-petition
liabilities.
On May 6, 2002, the Company completed the sale of Eagle for $63.5 million plus
the assumption of certain liabilities. The Company recognized a gain of $47.8
million on the sale, net of $0.6 million in income tax expense, for the nine
months ended September 30, 2002.
In August 2002, the Company completed the sale of substantially all of the
assets of TGI for $1.3 million plus the assumption of certain post-petition
liabilities. The Company recorded an impairment charge of $840 thousand during
the first quarter of 2002 based on the expected proceeds from the sale. This
charge is included in the loss on disposal.
The results of operations for AEG, Pan Am, TM, AGI, Eagle, TGI, EWDC and Forte
have been presented as results of disposed operations in the accompanying
financial statements for all periods. The Company did not recognize income tax
benefits on the losses from these operations. Net sales and net losses from
disposed operations before inter-company eliminations by segment for each period
consist of the following (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------------------------------
EXTRUSION
BPA SEGMENT BPA FORTE &
AEG EXTRUSION SUB-TOTAL RESIDENTIAL TM AGI EAGLE TGI EWDC TOTAL
----------------------------- -----------------------------------------------------------------------
Net Sales $ -- $-- $ -- $ -- $-- $ -- $-- $ -- $ -- $--
============================= =======================================================================
Income (loss) from
operations $ -- $-- $ -- $ -- $-- $ -- $-- $(194) $ -- $(194)
Gain (loss) on disposal (351) -- (351) (145) (4) 138 (37) 5 (1) (395)
----------------------------- -----------------------------------------------------------------------
Income (loss) from
disposed operations $(351) $-- $(351) $(145) $(4) $138 $(37) $(189) $ (1) $(589)
============================= =======================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------------------------------------------------------------
EXTRUSION
BPA SEGMENT BPA FORTE &
AEG EXTRUSION SUB-TOTAL RESIDENTIAL TM AGI EAGLE TGI EWDC TOTAL
------------------------------- -----------------------------------------------------------------------
Net Sales $ 2,855 $ 1,147 $ 4,002 $ 7,472 $ 2,484 $ 1,597 $20,445 $1,741 $ 17 $ 37,758
=============================== =======================================================================
Income (loss) from
operations $ (595) $(1,041) $(1,636) $(6,782) $(1,871) $(1,101) $ 3,092 $ 47 $(259) $ (8,510)
Gain (loss) on disposal -- -- -- -- -- -- -- -- -- --
------------------------------- -----------------------------------------------------------------------
Income (loss) from
disposed operations $ (595) $(1,041) $(1,636) $(6,782) $(1,871) $(1,101) $ 3,092 $ 47 $(259) $ (8,510)
=============================== =======================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------------------------
EXTRUSION
BPA SEGMENT BPA FORTE &
AEG EXTRUSION SUB-TOTAL RESIDENTIAL TM AGI EAGLE TGI EWDC TOTAL
------------------------------- -----------------------------------------------------------------------
Net Sales $ 874 $ 419 $ 1,293 $ 2,829 $ 1,158 $ 1,159 $23,203 $ 3,829 $ 5 $ 32,183
=============================== =======================================================================
Income (loss) from
operations $ (409) $(267) $ (676) $(1,582) $ (393) $ (393) $ 967 $ (331) $ (57) $ (2,465)
Gain (loss) on disposal (657) -- (657) (1,369) (788) 437 47,764 (835) (446) 44,106
------------------------------- -----------------------------------------------------------------------
Income (loss) from
disposed operations $(1,066) $(267) $(1,333) $(2,951) $(1,181) $ 44 $48,731 $(1,166) $(503) $ 41,641
=============================== =======================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------------------------------------------------------------
EXTRUSION
BPA SEGMENT BPA FORTE &
AEG EXTRUSION SUB-TOTAL RESIDENTIAL TM AGI EAGLE TGI EWDC TOTAL
=============================== =======================================================================
Net Sales $ 9,296 $ 3,568 $ 12,864 $ 24,076 $ 8,064 $ 4,997 $59,896 $4,524 $ 285 $114,706
------------------------------- -----------------------------------------------------------------------
Income (loss) from
operations $(1,547) $(1,074) $ (2,621) $ (7,250) $(1,992) $(1,301) $ 6,988 $ (26) $(364) $ (6,566)
Gain (loss) on disposal -- -- -- -- -- -- -- -- -- --
------------------------------- -----------------------------------------------------------------------
$(1,547) $(1,074) $ (2,621) $ (7,250) $(1,992) $(1,301) $ 6,988 $ (26) $(364) $ (6,566)
=============================== =======================================================================
The assets and liabilities of AEG, BPA, TM, AGI, Eagle, TGI, EWDC, Forte, AWS,
BBP, and Danvid which were sold or are being sold are classified as assets held
for sale and liabilities held for sale, respectively, in the accompanying
consolidated balance sheets. As part of the agreement on the sale of Taylor
Building Products, Inc. in December 1999, the Company retained the real
property. This property is also classified as held for sale at September 30,
2002 and December 31, 2001. The buyer was required to purchase the property
within a period not to exceed nineteen months from the closing date, provided
certain conditions were met. The obligation of the buyer to purchase the real
property is currently being contested.
A summary of the assets and liabilities held for sale is as follows (in
thousands):
SEPTEMBER 30, 2002
------------------------------------------------------------------------------------------------
FORTE &
TAYLOR AEG EAGLE EWDC AWS BBP DANVID TOTAL
------------------------------------------------------------------------------------------------
Accounts receivable - net $ -- $ -- $ -- $ -- $2,844 $2,215 $ 5,677 $10,736
Inventories -- -- -- -- 2,304 2,669 2,247 7,220
Property and equipment 1,315 1,278 725 360 4,076 2,687 1,757 12,198
Other -- -- -- -- 135 38 1,171 1,344
------------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE $1,315 $1,278 $725 $360 $9,359 $7,609 $10,852 $31,498
================================================================================================
Accounts payable - trade $ -- $ -- $ -- $ -- $ 682 $ 844 $ 1,782 $ 3,308
Accrued expenses -- -- -- -- 1,666 580 3,630 5,876
------------------------------------------------------------------------------------------------
LIABILITIES HELD FOR SALE $ -- $ -- $ -- $ -- $2,348 $1,424 $ 5,412 $ 9,184
================================================================================================
DECEMBER 31, 2001
------------------------------------------------------------------------------------------------------
FORTE &
TAYLOR AEG BPA TM AGI EAGLE EWDC TGI AWS BBP DANVID TOTAL
------------------------------------------------------------------------------------------------------
Accounts receivable - net $ -- $ 718 $ 200 $ 300 $ -- $ 8,057 $ -- $ 502 $ 1,633 $ 1,602 $ 3,195 $16,207
Inventories -- 1,141 3,391 39 128 6,730 -- 765 1,998 2,617 1,533 18,342
Property and equipment 1,357 1,215 211 813 456 5,614 823 1,251 10,318 5,178 1,838 29,074
Cost in excess of net
assets acquired -- -- -- -- -- 2,036 -- -- -- 1,747 6,923 10,706
Other -- -- 55 -- 29 648 -- -- 160 29 1,372 2,293
------------------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE $1,357 $3,074 $3,857 $1,152 $613 $23,085 $823 $2,518 $14,106 $11,173 $14,861 $76,622
======================================================================================================
Accounts payable - trade $ -- $ 203 $1,625 $ 430 $191 $ 2,017 $ -- $ 142 $ 902 636 $ 1,003 $ 7,149
Accrued expenses -- 182 969 687 119 6,562 -- 224 1,783 725 3,654 14,905
Capital lease obligations -- -- -- -- -- 283 -- -- -- -- -- 283
------------------------------------------------------------------------------------------------------
LIABILITIES HELD FOR SALE $ -- $ 385 $2,594 $1,117 $310 $ 8,862 $ -- $ 366 $ 2,685 $ 1,361 $ 4,657 $22,337
======================================================================================================
4. COST IN EXCESS OF NET ASSETS ACQUIRED (GOODWILL)
On January 1, 2002 the Company adopted the provisions of SFAS 142, "Goodwill and
Other Intangible Assets", which requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The Company ceased
amortization of goodwill on January 1, 2002 and reviews goodwill for impairment
at least annually.
In conjunction with the adoption of SFAS 142, the Company reviewed goodwill
(classified within "Assets Held for Sale" at December 31, 2001) for impairment
at June 30, 2002. This review indicated that the implied fair value of the
Company's goodwill, based on projected undiscounted cash flows, is $0;
therefore, the Company recorded an impairment charge of $8.7 million at June 30,
2002.
The Company recorded amortization expense related to goodwill of $101 thousand
and $304 thousand during the three month and nine month periods ended September
30, 2001, respectively. No amortization expense was recorded during 2002.
5. CONTINGENCIES
As discussed in Note 3, the Company sold the Aluminum Extrusion Group (AEG)
during the first quarter of 2002. However, the Company did not sell the land and
buildings used by AEG. One of those properties, the Norton facility, is now
actively being marketed and is classified as held-for-sale in the accompanying
balance sheets.
The tenants of the other property, the Boardman facility (Boardman), vacated the
premises in September 2002. Since that time, the Company has undergone efforts
to prepare the property for sale, including performing an environmental review.
In conjunction with those efforts, soil testing is being conducted to determine
the extent of environmental remediation required. The Company estimates that the
cost to clean up Boardman ranges from approximately $135 thousand to $520
thousand depending on the outcome of the soil testing. The Company has accrued
the minimum estimate at September 30, 2002.
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 and nine months ended September 30, 2002 and 2001, 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 and nine months ended September 30, 2002 and 2001.
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
Company has requested the Bankruptcy Court approve an extension to January 16,
2003, during which time 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 (except for the write-down of goodwill) 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.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and revenues
and expenses during the periods reported. Actual results could differ from those
estimates. The Company's significant accounting policies are described in Note 1
of the Consolidated Financial Statements included in the 2001 Annual Report. The
Company believes the following are the critical accounting policies which could
have the most significant effect on the Company's reported results and require
the most difficult, subjective or complex judgements by management. Unless
otherwise noted, the Company has not made any changes in estimates or
assumptions since December 31, 2001 that had a significant effect on the
reported amounts.
Discontinued Operations
The Company elected to adopt the provisions of the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment of or Disposal of Long-Lived Assets" issued
in August 2001. As of June 30, 2002, all of the Company's remaining operations
are being marketed for sale. The assets and post-petition liabilities of these
businesses are classified as being held for sale in the accompanying balance
sheet. The Statements of Operations reflect the sales, cost of sales, selling,
general and administrative costs and other expenses of these remaining
operations and, together with the results of operations of businesses either
sold or under agreement to sell prior to September 30, 2002 (classified as
disposed operations), are classified as discontinued
operations.
Accounting for Contingencies
The Company accrues for contingencies in accordance with SFAS No. 5, "Accounting
for Contingencies," or when it is probable that a liability or loss has been
incurred and the amount can be reasonably estimated. Contingencies by their
nature relate to uncertainties that require our exercise of judgment both in
assessing whether or not a liability or loss has been incurred and estimating
any amount of potential loss. The most important contingencies affecting the
Company's financial statements include the establishment and assessment of the
allowance for doubtful accounts, excess and obsolete inventory reserves, product
warranty reserves and litigation and environmental accruals.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying amount of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. The Company evaluates the
recoverability of goodwill annually or more frequently if events or
circumstances indicate that an asset might be impaired. The Company uses
judgment when applying the impairment rules to determine when an impairment test
is necessary. Factors the Company considers which could trigger an impairment
review include significant underperformance relative to historical operating
results or forecasted operating results, a significant decrease in the market
value of an asset, a significant change in the extent or manner in which an
asset is used, and significant negative industry or economic trends.
Restructuring Activities
The Company accrues the cost of restructuring activities in accordance with
Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)," depending upon the facts and
circumstances surrounding the situation. Management exercises judgment in
estimating the total costs of each of these activities. As the Company
implements restructuring activities, the actual costs may differ from the
estimated costs due to changes in the facts and circumstances that were not
foreseen at the time of the initial assessment.
Accounting Change
On January 1, 2002 the Company adopted the provisions of SFAS 142, "Goodwill and
Other Intangible Assets", which requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The Company ceased
amortization of goodwill on January 1, 2002 and reviewed goodwill for impairment
in June 2002 at which time it was all written off.
New Accounting Standards
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued. The
Statement updates, clarifies and simplifies existing accounting pronouncements.
While the technical corrections to existing pronouncements are not substantive
in nature, in some instances, they may change accounting practice. The
provisions of this standard must be applied for financial statements issued on
or after May 15, 2002, with early application encouraged. Application of the
standard has no material effect on the Company's financial position or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement addresses the requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002.
DISCONTINUED OPERATIONS
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. The Company discontinued manufacturing operations at Forte in
May 2000. The Company is actively marketing the remaining property for sale.
In January 2001, the Company announced the discontinuance of its EWDC
operations. The Company substantially completed its plan to exit this business
in December 2001.
In December 2001, the Company agreed to sell certain assets of Weather-Seal's
aluminum extrusion operations (the Aluminum Extrusion Group or AEG) for $1.5
million cash. The Company completed this sale on January 31, 2002. Also, in
December 2001, the Company entered into an agreement to sell certain assets of
the Binnings Pan American (BPA) and TM Window and Door (TM) divisions of
Binnings for $500,000 cash, a $1.7 million note receivable and the assumption of
certain liabilities. This transaction closed February 15, 2002. AEG and a
portion of Pan Am comprised the Company's extrusion segment. Extrusion products
consist of aluminum extrusions
used primarily in the fenestration products industry. These businesses supplied
a portion of the raw materials used in the manufacture of windows by the
Company. The consummation of these transactions completes the Company's exit
from the extrusion segment.
In February 2002, the Company signed an agreement to sell substantially all of
the assets of American Glassmith (AGI) for $350,000 cash and the assumption of
certain post-petition liabilities. This sale was completed on March 22, 2002.
On May 6, 2002, the Company sold ETC's Eagle Window and Door, Inc. division and
its subsidiary, Eagle Service Company (collectively, "Eagle"), for approximately
$63.5 million and recognized a $47.8 million gain on disposal at that time.
In August 2002, the Company completed the sale of substantially all of the
assets of TGI for $1.3 million, and the assumption of certain post-petition
liabilities. The Company recorded an impairment charge of $840 thousand during
the first quarter of 2002 based on the expected proceeds from the sale. This
charge is recognized as a loss on disposal.
In October 2002, the Company signed an agreement to sell substantially all of
the assets of AWS for approximately $6.63 million and the assumption of certain
post-petition liabilities. The Company recognized an impairment charge of $5.9
million at September 30, 2002 to adjust the recorded value of AWS' long-lived
assets to their estimated fair value based on the expected proceeds from the
sale.
Also in October 2002, the Company agreed to sell substantially all of the assets
of BBP for approximately $5.95 million and the assumption of certain
post-petition liabilities. The Company recognized an impairment charge of $2.5
million at September 30, 2002 to adjust the recorded value of BBP's long-lived
assets to their estimated fair value based on the expected sale proceeds.
As of September 30, 2002, all of the Company's remaining operations are being
marketed for sale. The assets and post-petition liabilities of these businesses
are classified as being held for sale in the accompanying balance sheet. The
Statement of Operations reflects the sales, cost of sales, selling, general and
administrative costs and other expenses of these remaining operations and,
together with the results of operations of businesses sold prior to September
30, 2002 (classified as disposed operations), are classified as discontinued
operations. The following discussion and analysis refer only to the operations
of the Company not classified as disposed operations.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED September 30, 2002 AND 2001
DISCONTINUED OPERATIONS
Net Sales Net Sales increased $4.9 million from $24.5 million for the three
months ended September 30, 2001 to $29.4 for the same period in 2002. The
increase in sales is due to increased volumes at all three of the Company's
remaining operations with almost half of the increase generated by the Company's
southern aluminum and vinyl window manufacturer, Danvid.
Gross Profit Gross profit increased $0.3 million to $4.7 million during the
three months ended September 30, 2002 from gross profit of $4.4 million during
the three months ended September 30, 2001. The Company's Weather-Seal operations
reflected improved gross profit of $0.5 million for the three month period
ending September 30, 2002 compared to the comparable period in 2001. This
additional gross profit was offset slightly by a decrease in gross profit at
Danvid despite the increased sales volumes there, due to a change in product mix
and higher scrap costs resulting from using a different glass product. Danvid's
decreased gross profit was the primary contributor to an overall decrease in
gross margin of 1.9%. Gross margin for the three month period ending September
30, 2001 was 17.8% as compared to 15.9% for the three month period ending
September 30, 2002.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses before impairment charges were $3.9 million for the
three months ended September 30, 2002 compared to $3.7 million for the
comparable period in 2001 reflecting an increase of $0.2 million. This increase
is due to increased selling expenses of $0.4 million in support of increased
sales volumes which were offset slightly by a $0.2 million decrease in general
and administrative expenses realized by all three of the Company's operations.
Impairment Charge. At September 30, 2002 the Company recorded impairment charges
of $5.9 million and $2.5 million at it's Weather-Seal and Binnings operations,
respectively. These charges reflect the difference in the carrying values of
those operation's long-lived assets as compared to their fair value as evidenced
by the expected proceeds from the sale of those assets. No impairment charges
were recorded by those businesses during the three months ended September 30,
2001.
Loss before Disposed Operations. The impairment charges recorded by AWS and
Binnings totaling $8.4 million were the primary factors contributing to the loss
before disposed operations for the three month period ending September 30, 2002
of $7.6 million. This compares to income before disposed operations of $0.6
million for the three months ended September 30, 2001.
CONTINUING OPERATIONS
Corporate General and Administrative and Other Expenses. Corporate general and
administrative and other expenses decreased $2.6 million from $3.4 million for
the three months ended September 30, 2001 to $0.8 million for the three months
ended September 30, 2002. During the third quarter in 2001, the Company recorded
a reserve of approximately $2.1 million relating to a note receivable from a
prior business divestiture. Additionally, the Company fully amortized deferred
charges related to the DIP Facility in December 2001; therefore, amortization
expense decreased approximately $0.3 million during the three months ended
September 30, 2002 compared to the three months ended September 30, 2001. The
divestiture of various businesses during 2002 has contributed to further
decreases in Corporate overhead costs.
Interest Expense. The Company recognized no interest expense during the three
month period ended September 30, 2002 as the DIP Facility was repaid in May 2002
with a portion of the proceeds from the sale of Eagle. During the same period,
the Company recognized $0.2 million in interest income on its investment of the
remaining proceeds from the Eagle sale. The Company incurred approximately $0.5
million of net interest expense during the three month period ended September
30, 2001.
Reorganization Costs. Reorganization costs were approximately $0.7 million for
both three month periods ended September 30, 2001 and 2002. These costs consist
primarily of professional fees.
Income Taxes. The Company established a full valuation allowance on its income
tax benefit recorded for the three months ended September 30, 2002 and 2001.
COMPARISON OF NINE MONTHS ENDED September 30, 2002 AND 2001
DISCONTINUED OPERATIONS
Net Sales. During the nine months ended September 30, 2002, net sales were
$80.4 million representing an increase of $10.1 million over year-to-date
September 30, 2001 net sales of $70.3 million. The increase is primarily due to
increased sales volumes at the Company's Danvid operation.
Gross Profit. Gross profit increased by $2.6 million from $10.9 million during
the nine months ended September 30, 2001 to $13.5 million for the comparable
period in 2002 resulting from increased sales volumes. Gross margin for the same
period increased 1.2% to 16.8% for the nine months ended September 30, 2002 from
15.6% for the nine months ended September 30, 2001. The shutdown of
Weather-Seal's Ottawa operations in the second quarter of 2001 was a significant
contributor the improved gross margins realized during this period.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses before impairment charges for the nine months ended
September 30, 2002 as compared to the comparable period in 2001 remained
consistent at $11.2 million in each year.
Impairment Charge. During the year-to-date period ended September 30, 2002, the
Company recorded $17.1 million in impairment charges. $8.7 of these charges
related to the write-off of goodwill recorded during the second quarter as a
result of the Company's impairment review. The remaining $8.4 million impairment
charge results from the write-downs of the Company's long-lived assets at
Weather-Seal and Binnings of $5.9 million and $2.5 million, respectively, to
their estimated fair value based on the expected proceeds from the sale of those
assets.
Loss before Disposed Operation. The Company recognized a loss before disposed
operations of $14.9 million for the nine months ended September 30, 2002 as
compared to a loss of $0.4 million for the comparable period in 2001. The
current year-to-date loss is due to the $17.1 million impairment charge. The
remaining $2.2 million income before disposed operations results from the
improved gross profit and consistent selling, general and administrative
expenses during the year-to-date period ended September 30, 2002 as compared to
the year-to-date period ended September 30, 2001.
CONTINUING OPERATIONS
Corporate General and Administrative and Other Expenses. Corporate general and
administrative and other expenses decreased $2.7 million from $5.3 million
during the nine months ended September 30, 2001 to $2.6 million for the
comparable period in 2002. During the third quarter in 2001, the Company
recorded a provision to reserve a note receivable from a prior business
divestiture of approximately $2.1 million. Also, during the nine months ended
September 30, 2001, the company had amortized approximately $0.7 million of
deferred charges related to the DIP Facility in 2001. The charges were fully
amortized in 2001.
Interest Expense, net. Net Interest expense decreased $1.4 million from $1.5
million for the nine months ended September 30, 2002 to $0.1 million for the
nine months ended September 30, 2002. This decrease is due to the repayment of
the Company's DIP credit Facility in May 2002. The Company has also recognized
interest income of $0.3 million from the investment of the net proceeds from the
sale of Eagle after repayment of the DIP Facility.
Income Taxes. The Company established a full valuation allowance on its income
tax benefit recorded for the nine months ended September 30, 2002 and 2001.
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, 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 before discontinued operations was $5.6
million and $4.8 million for the nine months ended September 30, 2002 and 2001,
respectively. The Company received approximately $1.2 million in the third
quarter of 2001 in satisfaction of an amount receivable in conjunction with a
previous business divestiture which offset a portion of the cash used in
operations primarily for interest payments on the DIP credit Facility and
reorganization costs.
Net activity on the Company's line of credit resulted in a use of cash of $18.6
million during the nine months ended September 30, 2002 and a source of cash of
$7.5 million for the same period of 2001. The Company used a portion of the
proceeds from the sale of Eagle to repay the DIP Facility in May 2002. The
remaining proceeds are invested in a money market mutual fund which is used to
fund the Company's operating requirements. The proceeds from the sale of Eagle
are included in net cash provided by investing activities of discontinued
operations in the accompanying financial statements.
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 operations 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 is subject to fluctuating interest rates that may impact, adversely
or otherwise, the results of operations and cash flows for its cash and cash
equivalents, primarily in money market mutual fund investments. The estimated
fair value of cash and cash equivalents approximates the principal amounts
reflected in the Company's balance sheets.
Item 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the disclosure controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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
As previously disclosed, the Company entered into an agreement in December 2001
to sell certain assets of the Binnings Pan American (BPA) and TM Window and Door
(TM) divisions of its subsidiary Binnings Building Products, Inc. for
consideration consisting of $500,000 cash, a $1.7 million note receivable and
the assumption of certain liabilities. This transaction closed on February 15,
2002. On August 30, 2002, the Company announced that an investigation is being
conducted into certain matters relating to conduct of the purchaser and its
principals with respect to this transaction. The Company is unable to predict
the duration or potential results of the investigation at this time.
The Company has been engaging in negotiations with third party buyers regarding
the potential sale of substantially all of the operating assets of each of
Weather-Seal, Binnings, and Danvid. George Hofmeister, Chairman of the Board of
Directors of the Company, has advised the Company that he potentially may have a
pecuniary interest in such a transaction and, as such, will abstain from any
action taken by the Board of Directors with respect thereto.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
During the third quarter of 2002, the company filed the following current
reports on Form 8-K:
September 10, 2002 under Item 5: Other Events.
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: November 14, 2002 /s/ Joseph Dominijanni
--------------------------------------
Joseph Dominijanni
Chief Executive Officer
/s/ Douglas J. Thomas
--------------------------------------
Douglas J. Thomas
Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph Dominijanni, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Architectural
Products Corporation,
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Joseph Dominijanni
--------------------------------------
Joseph Dominijanni
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas J. Thomas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Architectural
Products Corporation,
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Douglas J. Thomas
--------------------------------------
Douglas J. Thomas
Chief Financial Officer