1
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the Company
and its predecessors for the five years ended December 31, 1997. The selected
financial data for the Company for 1996 and 1997 were derived from the audited
consolidated financial statements of the Company for the period from June 19,
1996 (inception) through December 31, 1996 and for the year ended December 31,
1997, included elsewhere in this Report. The selected financial data for the
predecessors for 1996 and 1995 were derived from the audited combined financial
statements of Eagle Window & Door, Inc. and Subsidiaries and Taylor Building
Products Company included elsewhere in this Report; and the audited combined
financial statements of Mallyclad Corporation and Vyn-L Corporation included
elsewhere in this Report. The historical financial data for the Predecessors for
1994 were derived from the audited combined financial statements of Eagle Window
& Door, Inc. and Subsidiaries and Taylor Building Products Company that are not
included in this Report; and the audited combined financial statements of
Mallyclad Corporation and Vyn-L Corporation that are not included in this
Report. The selected financial data for the predecessors for 1993 were derived
from the unaudited combined financial statements of Eagle Window & Door, Inc.
and Subsidiaries and Taylor Building Products Company, that are not included in
this Report; the unaudited financial statements of Mallyclad Corporation, that
are not included in this Report; and the unaudited financial statements of Vyn-L
Corporation which are not included in this Report.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements along with the notes thereto
of the Company, Eagle Window & Door, Inc. and Subsidiaries and Taylor Building
Products Company, and Mallyclad Corporation and Vyn-L Corporation included
elsewhere in this Report.
================================================================================
Predecessors(2) The Company(1), (3)
--------------------------------------- ----------------------------------
Pre-Acq. 1996
1993 1994 1995 1996 AAPC Combined(4) 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Statement of Operations Data:
Sales.............................................. $116,809 $97,209 $76,955 $41,887 $25,249 $ 67,136 $ 94,252
Cost of Sales...................................... 103,260 87,181 71,164 35,430 19,027 54,457 74,304
------------------------------------------------------------------------
Gross Profit..................................... 13,549 10,028 5,791 6,457 6,222 12,679 19,948
Selling, general & administrative expenses......... 20,211 14,929 12,983 7,440 4,060 11,500 17,178
Restructuring charge............................... 0 0 840 0 0 0 0
------------------------------------------------------------------------
Operating income (loss).......................... (6,662) (4,901) (8,032) (983) 2,162 1,179 2,770
Interest expense (income), net..................... 2,023 2,040 1,755 1,143 756 1,899 3,928
Other expense (income)............................. (192) (93) 299 480 5 485 (3)
------------------------------------------------------------------------
Income (loss) before provision for income
taxes.......................................... (8,493) (6,848) (10,086) (2,606) 1,401 (1,205) (1,155)
Income tax provision (benefit)..................... (2,975) (2,508) (3,578) (908) 640 (268) (390)
------------------------------------------------------------------------
Income (loss) before extraordinary item............ (5,518) (4,340) (6,508) (1,698) 761 (937) (765)
Extraordinary item, net of income tax benefit of
$282,000......................................... 0 0 0 0 0 0 (494)
------------------------------------------------------------------------
Net income (loss)................................ $ (5,518) $(4,340) $(6,508) $(1,698) $ 761 $ (937) $ (1,259)
------------------------------------------------------------------------
Net income per common share before extraordinary
item............................................. $ .10 $ (.06)
Extraordinary item................................. -- (.04)
Basic income (loss) per common share............... $ .10 $ (.10)
Diluted income (loss) per common share............. $ .09 $ (.10)
Weighted average common shares outstanding,
basic............................................ 7,884,000 12,982,200
Weighted average common shares outstanding,
diluted.......................................... 8,160,000 12,982,200
Other Data:
Depreciation & amortization........................ $ 3,354 $ 3,976 $ 3,392 $ 2,698 $ 442 $ 3,140 $ 2,680
Capital expenditures............................... 2,229 1,993 2,621 1,683 429 2,112 1,548
Balance Sheet Data:
Cash and cash equivalents.......................... $ 250 $ 288 $ 861 $ 964 $ 40,132
Total assets....................................... 50,895 39,440 26,629 42,744 158,324
Working Capital (Deficit).......................... 29,047 (5,276) (9,736) 176 61,472
Long-term debt and capital lease obligations (5)... 22 0 0 23,010 126,518
Stockholders' Equity (Deficit)..................... 37,002 2,540 (3,969) 4,277 5,581
================================================================================
(1) For financial reporting purposes, the Company represents AAPC after giving
effect to the series of transactions described below.
ETC was formed in June 1996. Effective June 25, 1996, ETC's ultimate
controlling shareholder acquired Mallyclad and Vyn-L. Subsequently, on
December 18, 1996, Mallyclad and Vyn-L were merged into ETC. Based on the
control maintained by this
18
2
shareholder, the merger was considered a transaction among companies under
common control and, accordingly, accounted for at the shareholder's
historical cost and included in the accounts of ETC effective June 25, 1996.
Effective August 29, 1996, ETC acquired Eagle and Taylor. The acquisition was
accounted for as a purchase with the assets acquired and the liabilities
assumed recorded at estimated fair values and the results of operations
included in ETC's financial statements from the date of acquisition.
Effective December 18, 1996, ETC acquired and combined with FCEI. The
acquisition was accounted for as a purchase and, accordingly, the assets
acquired and liabilities assumed by ETC were recorded at their estimated fair
values and the results of FCEI's operations and included in the financial
statements of ETC from the date of the acquisition. The merged entity
subsequently changed its name to American Architectural Products Corporation
(AAPC).
For the purposes of presenting the selected financial data, Eagle and Taylor,
and Mallyclad and Vyn-L are considered to be the Predecessors and their
financial data are presented on a combined basis. The financial data for the
period after the acquisitions are presented on different cost bases than the
financial data before the acquisitions and, therefore, are not comparable.
(2) Selected financial data for the Predecessors for 1993 through 1995 were
derived from the audited combined financial statements of Eagle and Taylor
for 1994 and 1995, and the unaudited combined financial statements of Eagle
and Taylor for 1993; the unaudited financial statements of Mallyclad for the
fiscal year ended November 30, 1993; the unaudited financial statements of
Vyn-l for the fiscal year ended February 28, 1994; and the audited combined
financial statements of Mallyclad and Vyn-L for the years ended November 30,
1994 and 1995. Selected financial data for the predecessors for 1996 were
derived from the audited combined financial statements of Eagle and Taylor
for the period January 1, 1996 through August 29, 1996, and the audited
combined financial statements of Mallyclad and Vyn-L for the period December
1, 1995 through June 30, 1996.
(3) Selected financial data for the Company for 1996 and 1997 were derived from
the audited financial statements of the Company for the period from June
1996 (inception) through December 31, 1996, and the audited financial
statements for the year ended December 31, 1997. These financial statements
include the operations of Mallyclad and Vyn-L from June 25, 1996, and the
operations of Eagle and Taylor from August 29, 1996. The results of
operations of Western and Thermetic are included in the Company's 1997
selected financial data from March 14, 1997 and July 18, 1997, respectively,
their acquisition dates. The results of operations of Binnings, Danvid,
American Glassmith and Modern are included in the Company's selected
financial data from December 10, 1997, their acquisition date.
(4) Selected financial data for Combined 1996 include the 1996 selected
financial data of the Predecessors (note (2) above) and the 1996 selected
financial data of the Company (notes (1) and (3) above) without giving
effect to purchase accounting or the impact of financing and capitalization
relating to the acquisitions of Eagle, Taylor, Mallyclad, Vyn-L and Forte.
(5) Includes revolving line of credit at December 31, 1996.
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3
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BACKGROUND
In August 1996, Eagle and Taylor were acquired by ETC as the foundation for the
consolidation of a series of acquisitions in the fenestration industry. In
December 1996, ETC acquired and combined with FCEI, a publicly held company
whose wholly owned subsidiary, Forte Inc., is a manufacturer of commercial
aluminum windows. Subsequent to this transaction, the entity changed its name to
American Architectural Products Corporation. ETC and Forte became wholly-owned
subsidiaries of the Company. AAPC has since acquired Western, Thermetic,
Binnings, Danvid, American Glassmith and Modern.
ETC was incorporated on June 19, 1996 and had no significant operations or
assets until it acquired two companies, Eagle and Taylor, on August 29, 1996.
The acquisitions of Eagle and Taylor was accounted for as a purchase, with the
assets acquired and the liabilities assumed recorded at estimated fair market
values and the results of the Eagle and Taylor operations included in ETC's
consolidated financial statements from the date of acquisition.
ETC's ultimate controlling stockholder acquired 100% ownership of two other
companies, Mallyclad and Vyn-L, on June 25, 1996. On December 18, 1996,
Mallyclad and Vyn-L collectively were merged into ETC concurrently with the FCEI
combination described below. The merger was accounted for at historic cost in a
manner similar to a pooling of interests. The operating results of Mallyclad and
Vyn-L from the date of its acquisition by ETC's ultimate controlling stockholder
are included in the consolidated financial statements. Eagle, Taylor, Mallyclad
and Vyn-L, are considered predecessors of ETC for financial reporting purposes.
On March 14, 1997, AAPC acquired the stock of Western and on July 18, 1997,
AAPC acquired the stock of Thermetic. The acquisitions were accounted for as
purchases, with the purchase prices allocated among the assets acquired and
liabilities assumed based on their estimated fair market values, and the results
of their operations were included in the consolidated financial statements from
the respective dates of acquisition.
On December 10, 1997, AAPC consummated the acquisitions of Binnings, Danvid,
American Glassmith, and Modern. The Company financed these acquisitions with a
portion of the proceeds from the issuance of $125,000,000 of 11 3/4% Senior
Notes due 2007 (Notes). The acquisitions were accounted for as purchases, with
purchase prices allocated among the assets acquired and liabilities assumed
based on their estimated fair market values. The results of their operations
were included in the AAPC consolidated financial statements from the December
10, 1997 acquisition date.
BASIS OF PRESENTATION
The following table sets forth net sales and expenses in aggregate dollars and
as a percentage of net sales for the Company and its predecessors -- Eagle,
Taylor, Mallyclad and Vyn-L -- for the years ended December 31, 1995, 1996 and
1997. As a result of the acquisitions discussed above, and the related
differences in cost bases of the assets and liabilities of the Company after the
acquisitions and the cost bases of the Predecessors, the results of operations
for the years presented are not comparable. Such lack of comparability is
explained in the discussion below. The following financial data should be read
in conjunction with the audited financial statements along with notes thereto of
the Company, Eagle Window & Door, Inc. and Subsidiaries and Taylor Building
Products Company, and Mallyclad Corporation and Vyn-L Corporation.
20
4
================================================================================
1995(1) 1996(2) 1997(3)
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except footnotes)
Net Sales........................................... $76,955 100.0% $67,136 100.0% $94,252 100.0%
Cost of Sales....................................... 71,164 92.5% 54,457 81.1% 74,304 78.9%
------------------------------------------------------------
Gross Profit...................................... 5,791 7.5% 12,679 18.9% 19,948 21.1%
Selling, general & administrative expenses (4)...... 12,983 16.9% 11,500 17.1% 17,178 18.2%
Restructuring charge................................ 840 1.1% 0 0.0% 0 0.0%
------------------------------------------------------------
Operating income (loss)........................... (8,032) (10.5)% 1,179 1.8% 2,770 2.9%
Interest expense (income), net (4).................. 1,755 2.3% 1,899 2.9% 3,928 4.1%
Other (income) expense.............................. 299 0.4% 485 0.7% (3) 0.0%
------------------------------------------------------------
Loss before income taxes............................ (10,086) (13.2)% (1,205) (1.8)% (1,155) (1.2)%
Income tax benefit (4).............................. (3,578) (4.7)% (268) (0.4)% (390) (0.4)%
------------------------------------------------------------
Loss before extraordinary item...................... (6,508) (8.5)% (937) (1.4)% (765) (0.8)%
Extraordinary item, net of income tax benefit of
$282,000.......................................... 0 0.0% 0 0.0% (494) (0.5)%
------------------------------------------------------------
Net loss............................................ $(6,508) (8.5)% $ (937) (1.4)% $(1,259) (1.3)%
------------------------------------------------------------
================================================================================
1. Financial data for 1995 is that of the predecessors and were derived from the
audited combined financial statements of Eagle and Taylor for the year ended
December 31, 1995 and the audited combined financial statements of Mallyclad
and Vyn-L for the fiscal year ended November 30, 1995. Because the financial
data of the predecessors is presented on cost bases different from that of
the Company after the acquisitions, the financial data are not comparable to
the 1996 and 1997 financial data (see notes (2) and (3) below)
2. Financial data presented for 1996 include the combination of financial data
of the Company and its predecessors -- Eagle and Taylor, Mallyclad and Vyn-L.
Financial data for the Company for 1996 were derived from the audited
consolidated financial statements of the Company for the period from June 19,
1996 (inception) through December 31, 1996. These financial statements
include the operations of Mallyclad and Vyn-L from June 25, 1996, and the
operations of Eagle and Taylor from August 29, 1996. Financial data for Eagle
and Taylor for 1996 were derived from the combined audited financial
statements of Eagle and Taylor for the period from January 1, 1996 to August
29, 1996. Financial data for Mallyclad and Vyn-L for 1996 were derived from
the audited combined financial statements of Mallyclad and Vyn-L for the
period December 1, 1995 to June 25, 1996. Because the financial data for 1996
include data of the Company and its Predecessors, which are presented on
different cost bases, such data are not comparable to the financial data for
1995 and 1997.
3. Financial data for 1997 were derived from the consolidated financial
statements of the Company for the year ended December 31, 1997. Because the
financial data of the Company for 1997 are presented on different cost bases,
such data are not comparable to the financial data for 1995 and 1996.
4. In addition to comparability issues relating to differences in asset and
liability bases described in notes (1) through (3) above, other factors
affect the comparability of the financial data from year to year. The former
parent of Eagle and Taylor provided treasury functions and allocated various
general and administrative expenses. Interest expense allocated by the former
parent of Eagle and Taylor approximated $1.8 million in 1995 and $1.1 million
for the eight months ended August 29, 1996 and was treated as contributed
capital of Eagle and Taylor by the former parent. A management fee based on
budgeted sales was charged by the former parent to Eagle and Taylor,
approximating $1.3 million and $1.0 million for the year ended December 31,
1995 and the eight months ended August 29, 1996, respectively. Other expenses
charged to Eagle and Taylor by the former parent that were specifically
incurred for those companies for items such as general insurance, health
insurance and workers compensation insurance approximated $3.6 million and
$1.7 million for the year ended December 31, 1995, and the eight months ended
August 29, 1996, respectively. Eagle and Taylor filed their tax returns on a
consolidated basis with their former parent and all provisions for federal
and state income taxes, including provisions for deferred taxes, were
provided through intercompany accounts. Because these charges to Eagle and
Taylor from their former parent may differ from such charges for those
entities as part of the Company, comparison of 1995, 1996 and 1997 may not be
meaningful.
RESULTS OF OPERATIONS
Results of operations for the periods presented reflect a number of significant
events or factors. In 1995, the operations at Taylor were restructured by
eliminating non-core product lines and closing related manufacturing and
distribution facilities (the "Taylor Restructuring"). The near term impact of
these measures was a significant decrease in total sales and a nonrecurring
restructuring charge; however, in recent periods these measures have produced an
increase in gross margins at this operation. Gross profit from Taylor was
negatively impacted by the introduction of an automated door line, which was
installed in 1993. While attempting to reach targeted operational efficiencies,
Taylor was required to run a dual line for manufacturing doors from 1993 until
1995, which adversely affected gross margin. Also, during the majority of the
period for which results of operations are presented, Eagle and Taylor were
being marketed for sale by their former parent. This had a negative effect on
sales at both divisions since distributors and their customers were concerned
about the future of these businesses. The sale of these facilities to the
Company in August 1996 permitted the divisions to stabilize their long-standing
relationships with customers by eliminating the uncertainty concerning the
direction and strategy of these businesses. This resulted in increased sales at
Eagle during 1996 and 1997.
The future operations of the Company will depend on a number of factors,
including the successful integration of the acquired companies to take advantage
of their increased purchasing power, distribution capabilities and product
lines; continued improvements in manufacturing processes, including greater
vertical integration; establishment of company-wide management information
systems; increased penetra-
21
5
tion of fast growing markets, both product (such as vinyl) and geographic;
continued growth in the new home and repair/remodel markets; stability in raw
material prices; continuation of key customer and distributor relationships; and
other factors.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO COMBINED YEAR ENDED DECEMBER 31,
1996
Net Sales. Net Sales increased by $27.1 million, or 40.4%, to $94.2 million
in 1997 as compared to $67.1 million in 1996. The increase was primarily the
result of the acquisitions of Western, Thermetic, Binnings, Danvid, American
Glassmith, and Modern. The acquisitions accounted for $13.1 million or 48.3% of
the total increase in net sales. The remaining increase was primarily due to
higher revenues at Eagle, which had an increase in net sales of $11.2 million.
The increase in revenue was primarily a result of increased volumes generated by
stabilized customer relationships, new customer additions and an improved
product mix.
Cost of Sales. Cost of sales increased from $54.5 million, or 81.1% of net
sales, for the year ended December 31, 1996, to $74.3 million or 78.9% of net
sales for the year ended December 31, 1997. The $19.8 million or 36.3% increase
in cost of sales is comprised of a $10.0 million increase resulting from the
above listed acquisitions and $9.8 million due to overall volume increases.
Gross Profit. Gross Profit for the year ended December 31, 1997 was $19.9
million, representing an increase of $7.3 million or 57.3%, from 1996. Gross
profit attributable to the companies acquired during 1997 was $3.1 million or
42.5% of the overall increase. The remaining $4.2 million increase resulted
primarily from Eagle's increase of $4.0 million, Taylor's increase of $2.0
million, partially offset by the negative margin of $1.0 million from the
Company's contract commercial product line. Gross profit as a percentage of
sales increased from 18.9% in 1996 to 21.1% in 1997 as a result of an increase
in sales volumes relative to fixed costs.
Selling, General, and Administrative Expenses. SG&A expenses increased $5.7
million or 49.6% to $17.2 million in 1997 as compared to $11.5 million in 1996.
SG&A expenses as a percentage of sales were 18.2% in 1997 compared to 17.1% in
1996. The increase between years was primarily the result of the inclusion of
newly acquired companies of $2.6 million and additional administrative costs
related to the addition of a corporate headquarters and corporate management of
$2.4 million for the year.
Operating Income. Operating income increased $1.6 million from an operating
income of $1.2 million in 1996 to an operating income of $2.8 million for 1997.
The increase is attributable to additional operating income of $0.5 million from
acquired companies and the increase in gross profit from existing operations,
partially offset by an increase in selling, general and administrative expenses.
Interest Expense. Interest expense for the years ended December 31, 1997 and
1996 was $3.9 million and $1.9 million, respectively. The $2.0 million increase
is attributable to interest of $0.3 million from companies acquired in 1997,
interest of $0.9 million on the Notes issued in December 1997 and interest on
additional borrowings related to the operations and working capital of $0.8
million. The previous parent of Eagle and Taylor allocated interest expense to
the entities during the eight months ended August 29, 1996 (predecessor period),
and accordingly, interest is not comparable with the same period in 1996.
Income Taxes. The Company recorded a tax benefit of $0.4 million at December
31, 1997 on a net loss before extraordinary items of $1.2 million, resulting in
a tax benefit at an effective tax rate of 33.8%. Prior to their acquisitions,
Eagle and Taylor were included in the consolidated return of their former
parent, and accordingly, the provision for income taxes for the year ended
December 31, 1996 is not indicative of the amounts that would have been recorded
on a separate basis and are not comparable.
Extraordinary Loss. In 1997, the Company recorded an extraordinary item, loss
on extinguishment of debt of $0.5 million, net of related tax benefit of $0.3
million, relating to a prepayment penalty and deferred financing costs charged
to expense on the retirement of existing debt with a portion of proceeds of the
Notes.
Net Loss. The Company's consolidated net loss increased to $1.3 million in
1997 as compared to $0.9 million in 1996. The factors cited above were
responsible for the increase in the net loss.
COMPARISON OF COMBINED YEAR ENDED DECEMBER 31, 1996 TO COMBINED YEAR ENDED
DECEMBER 31, 1995
Net Sales. Net Sales decreased 12.9%, to $67.1 million, for 1996 as compared
to $77.0 million for 1995. The decrease was primarily a result of the Taylor
Restructuring. This was offset in part by nominal increases in net sales for the
remaining operations as a result of increases in volume and pricing during the
year.
Cost of Sales. Cost of sales decreased from $71.2 million, or 92.5% of net
sales, for the year ended December 31, 1995, to $54.5 million, or 81.1% of net
sales, for the year ended December 31, 1996. The $16.7 million, or 23.5%,
decrease in cost of sales is primarily due to the $15.5 million decrease in cost
of sales at Taylor due to the Taylor Restructuring, which was substantially
completed in 1995. The decrease in cost of sales as a percentage of sales
reflects efficiencies gained from the Taylor Restructuring and production
efficiencies arising from the increased use of automated manufacturing equipment
at Taylor.
22
6
Gross Profit. Gross profit for the year ended December 31, 1996 was $12.7
million, representing an increase of $6.9 million, or 119.0%, from 1995. Gross
profit as a percentage of sales increased from 7.5% in 1995 to 18.9% in 1996 due
to margin improvements resulting from the Taylor Restructuring. In addition,
lower depreciation for the period subsequent to the acquisition of Eagle and
Taylor due to lower bases of assets, based on the allocation of purchase price,
compared to the historical bases of assets prior to the acquisition, improved
gross profit.
Selling, General, and Administrative Expenses. SG&A expenses, as a percentage
of sales, were 17.1% in 1996 compared to 16.9% in 1995. The percentage increase
was due primarily to the decrease in revenues between years while SG&A expenses
did not decline proportionately due to the fixed nature of certain expenditures
in this category. Although SG&A as a percentage of sales increased, total SG&A
expenses decreased by $1.5 million, or 11.5%, to $11.5 million in 1996. The
Taylor Restructuring accounted for a $2.7 million reduction in SG&A expenses,
which was partially offset by an increase in SG&A expenses for Eagle of $1.1
million.
Operating Income (Loss). Operating income, excluding the nonrecurring
restructuring charges in 1995, increased by $8.4 million from the operating loss
of $7.2 million in 1995. This is attributable to the improved operating profit
resulting from the Taylor restructuring and the reduction in SG&A expenses.
Interest Expense. Interest expense, as a percentage of sales, was 2.9% in
1996 compared to 2.3% in 1995. Interest expense increased by approximately $0.1
million, or 5.6%, to $1.9 million in 1996. The former parent of Eagle and Taylor
provided cash management services to Eagle and Taylor and charged interest
expense relating to the amounts payable to affiliates. This interest expense
approximated $1.8 million in 1995 and $1.1 million for the eight months ended
August 29, 1996. Interest expense for the combined year ended December 31, 1996
also includes approximately $0.8 million incurred by the Company during its
ownership of Eagle and Taylor.
Income Taxes. The Company has recorded a tax benefit of $0.3 million on a
loss before taxes of $1.2 million for the combined year ended December 31, 1996.
The benefit results from income tax expense recorded at an effective rate of 46%
on income before taxes for the period under the Company's ownership and an
income tax benefit recorded at an effective rate of 35% on losses before taxes
of the Predecessors. The effective rate for the period under the Company's
ownership was determined using the Company's operating results and the bases of
its assets and liabilities adjusted for purchase accounting for the
acquisitions, and differs from the statutory tax rates as a result of valuation
allowance adjustment, non-deductible expenses and state taxes. Prior to the
acquisitions, Eagle and Taylor were included in the consolidated income tax
returns of their parent and recorded income taxes in their accounts at a
prescribed effective rate. Accordingly, income taxes for the combined year ended
December 31, 1996 are not indicative of the amounts that would have been
recorded on a stand-alone basis and are not comparable to prior years.
Net Loss. The Company's consolidated net loss decreased by $5.6 million, or
86.2%, to $0.9 million in 1996 compared to $6.5 million net loss incurred in
1995. The Company reported net income of $0.8 million for the period under its
ownership. The factors cited above were responsible for the decrease in net loss
of the Company.
YEAR 2000
The Company is in the process of performing a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, the Year 2000 problem may have a
material impact on the operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1995, 1996 and 1997, the Company's principal
sources of funds consisted of cash from operations and various financings. The
Company financed acquisitions through secured senior debt facilities and
subordinated debt. In December 1997, the Company issued $125,000,000 of 11.75%
Senior Notes, due 2007, to extinguish existing debt, finance the acquisitions of
Binnings, Danvid, American Glassmith and Modern and provide working capital,
fund general corporate expenses and finance future acquisitions.
Approximately $33.8 million of the net proceeds of the Notes were used to
repay indebtedness under existing debt agreements, including prepayment
penalties. The weighted average interest rate of the indebtedness repaid on
December 10, 1997 was 9.7%. The Company used approximately $47.8 million of the
net proceeds to pay the cash portion of the purchase price for the acquisitions
consummated on December 10, 1997.
23
7
The Company's principal liquidity requirements are for debt service
requirements under the Notes and for working capital needs and capital
expenditures. The Company's annual debt service requirements, including capital
lease obligations, will increase from $6.4 million in 1997 to $15.5 million
based on outstanding obligations as of December 31, 1997.
The Company is presently in negotiations to secure a revolving credit facility
of $25 million to provide additional liquidity. The Company believes that cash
generated from operations together with the expected proceeds from the revolving
credit facility will be sufficient to permit the Company to meet its expected
operating needs, planned capital expenditures and debt service requirements.
However, there can be no assurance that sufficient funds will be available from
operations or under future revolving credit or other borrowing arrangements to
meet the Company's cash needs. Future acquisitions may require additional
financing and there can be no assurance that such funds would be available on
terms satisfactory to the Company, if at all. Furthermore, the Company is
limited in obtaining future financing under the terms of the Notes. In addition,
the Company's future operating performance and ability to meet its financial
obligations will be subject to future economic conditions and to financial,
business and other factors, many of which will be beyond the Company's control.
Cash provided by operations was $2.6 million, $4.5 million and $1.5 million
for the years ended December 31, 1995, 1996 and 1997, respectively. The decrease
in operating cash for 1997 over the prior years reflects increases in the
Company's working capital accounts which primarily consisted of an increase in
accounts receivable of $1.2 million, a decrease in accounts payable of $1.9
million, offset by a $1.2 million decrease in inventories. The Company's working
capital requirements for inventory and accounts receivable are impacted by
changes in raw material costs, the availability of raw materials, growth of the
Company's business and seasonality. As a result, such requirements may fluctuate
significantly.
Capital expenditures for the years ended December 31, 1995, 1996 and 1997 were
$2.6 million, $2.1 million and $1.5 million, respectively. Capital outlays
included manufacturing equipment and computer software and hardware. In
addition, in 1996 the Company entered into a $1.6 million capital lease to
purchase computer hardware and software. Management expects that its capital
expenditure program will continue at a sufficient level to support the strategic
and operating needs of the Company's operating subsidiaries. This level of
expenditure may be higher than historical levels. Future capital expenditures
are expected to be funded from internally generated funds, leasing programs and
the Company's credit facilities.
The Company made cash payments of $53.0 million relating to acquisitions in
1997. This compares to $12.8 million in 1996. In January 1998, the Company
purchased all of the assets of the vinyl division of EASCO Aluminum Company, an
Austintown, Ohio manufacturer of vinyl extrusions for the fenestration industry.
The cash payment for this acquisition was $13.3 million. Also in January 1998,
the Company purchased all of the assets of Blackhawk Architectural Products, a
steel security door manufacturer for a cash payment of $400,000. In February
1998, the Company signed a Letter of Intent with Louisiana Pacific to purchase
its Weather-Seal division. This division consists of six manufacturing
facilities throughout Ohio producing aluminum and vinyl extrusions, and wood and
vinyl windows. The Letter of Intent obligated the Company to make a $1 million
deposit into an escrow account, which will be applied toward the purchase price.
The deposit will be considered a termination fee payable to Louisiana Pacific in
the event the transaction does not close because the Company abandons or
otherwise fails to consummate the transaction unless because of discovery or
occurrence of any material adverse condition. In March 1998, the Company sold
its Mallyclad division to a related party for $1.2 million.
Cash payments on long term debt were $23.6 million for the year ended December
31, 1997 as compared to $1.1 million for the year ended December 31, 1996. Net
activity on the Company's lines of credit resulted in cash outflows of $5.9
million in 1997. The Company generated proceeds of $125.0 million from the
issuance of the Notes in December 1997. In addition the Company paid
approximately $6.0 million in related fees and expenses associated with the debt
financing. The Company expects to pursue additional financing opportunities to
fund its growth strategy. The Company raised $425 thousand through the issuance
of preferred stock during the second and third quarters of 1997. The funds were
used for general corporate purposes during this time period.
The Company believes that cash flow from operations, together with other
sources of funds, will be adequate to meet its anticipated requirements for
working capital, capital expenditures and debt service costs.
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
24
8
quarters. The Company believes that its 1997 acquisitions in the southwestern
and southeastern United States will 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 and borrowings to satisfy working capital requirements, are usually
at their highest level during the second and third quarters.
CYCLICALITY
Demand in the window and door manufacturing 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.
25
9
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets at December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Operations for the period from
June 19, 1996 (date of inception) to December 31, 1996
and the year ended December 31, 1997................... F-5
Consolidated Statements of Stockholders' Equity for the
period from June 19, 1996 (date of inception) to
December 31, 1996 and the year ended December 31,
1997................................................... F-6
Consolidated Statements of Cash Flows for the period from
June 19, 1996 (date of inception) to December 31, 1996
and the year ended December 31, 1997................... F-7
Notes to Consolidated Financial Statements................ F-8
EAGLE WINDOW AND DOOR, INC. AND SUBSIDIARIES AND TAYLOR
BUILDING PRODUCTS COMPANY
Independent Auditors' Report.............................. F-22
Combined Balance Sheets at December 31, 1995 and August
29, 1996............................................... F-23
Combined Statements of Operations and Accumulated Deficit
for the year ended December 31, 1995 and for the eight
months ended August 29, 1996........................... F-24
Combined Statements of Cash Flows for the year ended
December 31, 1995 and for the eight months ended August
29, 1996............................................... F-25
Notes to Combined Financial Statements.................... F-26
MALLYCLAD CORPORATION AND VYN-L CORPORATION
Report of Independent Certified Public Accountants........ F-31
Combined Balance Sheets at November 30, 1995 and June 30,
1996................................................... F-32
Combined Statements of Operations and Retained Earnings
for the year ended November 30, 1995 and for the seven
months ended June 30, 1996............................. F-33
Combined Statements of Cash Flows for the year ended
November 30, 1995 and for the seven months ended June
30, 1996............................................... F-34
Notes to Combined Financial Statements.................... F-35
F-1
10
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
American Architectural Products Corporation
We have audited the accompanying consolidated balance sheets of American
Architectural Products Corporation as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows from the date of inception (June 19, 1996) to December 31, 1996 and for
the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Architectural Products Corporation as of December 31, 1996 and 1997, and the
results of its operations and its cash flows from the date of inception (June
19, 1996) to December 31, 1996 and for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Troy, Michigan
February 26, 1998
F-2
11
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 964,062 $ 40,132,238
Accounts receivable, less allowance for doubtful accounts
of $439,000 and $839,000............................... 6,302,694 18,602,772
Advances to affiliates.................................... 463,750 134,518
Inventories (Note 3)...................................... 10,971,144 21,458,399
Prepaid expenses and other current assets................. 664,401 1,619,946
----------- ------------
TOTAL CURRENT ASSETS........................................ 19,366,051 81,947,873
----------- ------------
PROPERTY AND EQUIPMENT (Note 6)
Land and improvements..................................... 281,096 3,283,865
Buildings and improvements................................ 5,409,631 15,253,783
Machinery, tools and equipment............................ 8,244,548 20,139,885
Computers and office equipment............................ 2,524,884 2,821,989
----------- ------------
16,460,159 41,499,522
Less accumulated depreciation............................. (321,315) (3,551,874)
----------- ------------
NET PROPERTY AND EQUIPMENT.................................. 16,138,844 37,947,648
----------- ------------
OTHER
Cost in excess of net assets acquired, net of accumulated
amortization of $74,000 and $464,000 (Note 2).......... 6,850,059 29,846,895
Deferred financing costs.................................. 381,936 5,985,360
Other..................................................... 7,001 2,595,933
----------- ------------
TOTAL OTHER ASSETS.......................................... 7,238,996 38,428,188
----------- ------------
$42,743,891 $158,323,709
=========== ============
See accompanying notes to consolidated financial statements.
F-3
12
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line-of-credit (Note 4)......................... $ 5,476,759 $ --
Accounts payable -- trade................................. 5,766,803 9,352,228
Payable to seller for purchase price adjustment........... 1,462,500 --
Accrued Expenses
Compensation and related benefits...................... 838,717 3,521,683
Current portion of warranty obligations................ 1,100,000 1,991,544
Other.................................................. 2,558,901 4,976,105
Current portion of capital lease obligations (Note 6)..... 488,984 573,161
Current maturities of long-term debt (Note 5)............. 1,497,653 60,848
----------- ------------
TOTAL CURRENT LIABILITIES................................... 19,190,317 20,475,569
LONG-TERM DEBT, less current maturities (Note 5)............ 14,478,317 125,114,401
LONG-TERM CAPITAL LEASE OBLIGATIONS, less current portion
(Note 6).................................................. 1,067,616 769,620
ACCRUED WARRANTY OBLIGATIONS, less current portion.......... 3,281,079 2,834,183
OTHER....................................................... 450,000 3,548,801
----------- ------------
TOTAL LIABILITIES........................................... 38,467,329 152,742,574
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 8 and 9)
Preferred stock, Series A convertible, $.001 par,
20,000,000 shares authorized; 1,000,000 shares
outstanding in 1996.................................... 1,000 --
Preferred stock, Series B convertible, $.01 par, 30,000
shares authorized; no shares outstanding............... -- --
Common stock, $.001 par, 100,000,000 shares authorized;
4,860,580 and 13,458,479 shares outstanding............ 4,861 13,458
Additional paid-in capital................................ 3,679,612 6,310,641
Retained earnings (deficit)............................... 591,089 (742,964)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY.................................. 4,276,562 5,581,135
----------- ------------
$42,743,891 $158,323,709
=========== ============
See accompanying notes to consolidated financial statements.
F-4
13
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FROM DATE OF INCEPTION
(JUNE 19, 1996) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
---------------------- ------------
NET SALES................................................... $25,248,908 $ 94,252,582
COST OF SALES............................................... 19,026,604 74,304,379
----------- ------------
GROSS PROFIT................................................ 6,222,304 19,948,203
SELLING EXPENSE............................................. 1,908,900 6,849,158
GENERAL AND ADMINISTRATIVE EXPENSES......................... 2,150,968 10,329,496
----------- ------------
INCOME FROM OPERATIONS...................................... 2,162,436 2,769,549
----------- ------------
OTHER INCOME (EXPENSE)
Interest expense.......................................... (755,758) (3,927,924)
Miscellaneous............................................. (5,589) 3,644
----------- ------------
TOTAL OTHER INCOME (EXPENSE)................................ (761,347) (3,924,280)
----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.... 1,401,089 (1,154,731)
INCOME TAXES (BENEFIT) (NOTE 10)............................ 640,000 (390,000)
----------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 761,089 (764,731)
EXTRAORDINARY ITEM
Loss on extinguishment of debt, net of income tax benefit
of $282,000 (Note 5)................................... -- (494,110)
----------- ------------
NET INCOME (LOSS)........................................... $ 761,089 $ (1,258,841)
=========== ============
BASIC INCOME (LOSS) PER COMMON SHARE (NOTE 12)
Income (loss) before extraordinary item................... $ .10 $ (.06)
Extraordinary item........................................ -- (.04)
----------- ------------
BASIC NET INCOME (LOSS) PER COMMON SHARE.................. $ .10 $ (.10)
=========== ============
DILUTED INCOME (LOSS) PER COMMON SHARE (NOTE 12)
Income (loss) before extraordinary item................... $ .09 $ (.06)
Extraordinary item........................................ -- (.04)
----------- ------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE................ $ .09 $ (.10)
=========== ============
See accompanying notes to consolidated financial statements.
F-5
14
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FROM DATE OF INCEPTION (JUNE 19, 1996) TO DECEMBER 31, 1996
AND YEAR ENDED DECEMBER 31, 1997
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK ADDITIONAL RETAINED
-------------------- --------------- -------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
------ ------ ------ ------ ------ ------ ------- ---------
Capital contribution in
connection with acquisition
of Mallyclad and Vyn-L
(Note 2)................... -- $ -- -- $ -- -- $ -- $ 77,473 $ --
Distribution to stockholder
of Mallyclad............... -- -- -- -- -- -- -- (170,000)
Issuance of common stock for
cash....................... -- -- -- -- 10 1 604,999 --
Recapitalization (Note 2).... 1,000,000 1,000 -- -- (10) (1) (999) --
Issuance of shares in reverse
acquisition (Note 2)....... -- -- -- -- 4,860,580 4,861 2,998,139 --
Net income for the period.... -- -- -- -- -- -- -- 761,089
---------- ------- ------ ---- ---------- ------- ---------- -----------
Balance, December 31, 1996... 1,000,000 1,000 -- -- 4,860,580 4,861 3,679,612 591,089
Conversion of preferred
stock, Series A to common
stock(Note 1).............. (1,000,000) (1,000) -- -- 7,548,632 7,548 (6,548) --
Issuance of shares to an
officer (Note 1)........... -- -- -- -- 171,842 172 (172) --
Issuance of preferred stock,
Series B (Note 8).......... -- -- 4,250 43 -- -- 500,169 --
Issuance of warrants to
purchase common stock...... -- -- -- -- -- -- 120,500 --
Conversion of preferred
stock, Series B to common
stock (Note 8)............. -- -- (4,250) (43) 108,810 109 (66) --
Issuance of common stock
options in exchange for
services................... -- -- -- -- -- -- 68,000 --
Issuance of shares in
connection with
acquisitions (Note 2)...... -- -- -- -- 768,615 768 1,949,146 --
Discount on conversion of
Series B Preferred, treated
as dividends (Note 8)...... -- -- -- -- -- -- -- (75,212)
Net loss for the year........ -- -- -- -- -- -- -- (1,258,841)
---------- ------- ------ ---- ---------- ------- ---------- -----------
Balance, December 31, 1997... -- $ -- -- $ -- 13,458,479 $13,458 $6,310,641 $ (742,964)
========== ======= ====== ==== ========== ======= ========== ===========
TOTAL
STOCKHOLDERS'
EQUITY
------
Capital contribution in
connection with acquisition
of Mallyclad and Vyn-L
(Note 2)................... $ 77,473
Distribution to stockholder
of Mallyclad............... (170,000)
Issuance of common stock for
cash....................... 605,000
Recapitalization (Note 2).... --
Issuance of shares in reverse
acquisition (Note 2)....... 3,003,000
Net income for the period.... 761,089
-----------
Balance, December 31, 1996... 4,276,562
Conversion of preferred
stock, Series A to common
stock(Note 1).............. --
Issuance of shares to an
officer (Note 1)........... --
Issuance of preferred stock,
Series B (Note 8).......... 500,212
Issuance of warrants to
purchase common stock...... 120,500
Conversion of preferred
stock, Series B to common
stock (Note 8)............. --
Issuance of common stock
options in exchange for
services................... 68,000
Issuance of shares in
connection with
acquisitions (Note 2)...... 1,949,914
Discount on conversion of
Series B Preferred, treated
as dividends (Note 8)...... (75,212)
Net loss for the year........ (1,258,841)
-----------
Balance, December 31, 1997... $ 5,581,135
===========
See accompanying notes to consolidated financial statements.
F-6
15
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM DATE OF INCEPTION
(JUNE 19, 1996) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
---------------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 761,089 $ (1,258,841)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Extraordinary loss on extinguishment of debt........... -- 416,110
Depreciation........................................... 325,460 2,102,288
Amortization........................................... 117,038 578,044
Gain on sale of equipment.............................. (29,400) (44,767)
Deferred income taxes.................................. 311,469 (672,000)
Changes in assets and liabilities
Accounts receivable -- trade........................... 1,771,004 (1,229,121)
Advances to affiliates................................. (463,750) 329,232
Inventories............................................ (793,164) 1,171,735
Prepaid and other current assets....................... (86,800) 100,319
Other assets........................................... (6,601) 5,143
Accounts payable....................................... 2,312,844 (1,904,306)
Accrued expenses....................................... 1,031,527 1,858,017
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 5,250,716 1,451,853
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of equipment....................... 98,200 130,500
Purchase of property and equipment........................ (429,048) (1,547,644)
Acquisitions of businesses, net of cash acquired.......... (12,781,372) (52,899,930)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES....................... (13,112,220) (54,317,074)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving
lines-of-credit........................................ 5,476,759 (5,936,759)
Proceeds from long-term debt.............................. 4,213,000 127,094,806
Payments for debt issue costs............................. (425,102) (6,052,860)
Payments on long-term debt and capital lease
obligations............................................ (1,121,564) (23,567,590)
Issuance of common and preferred stock and capital
contributions.......................................... 682,473 495,800
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 8,825,566 92,033,397
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 964,062 39,168,176
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 964,062
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 964,062 $ 40,132,238
============ ============
See accompanying notes to consolidated financial statements.
F-7
16
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION
American Architectural Products Corporation (AAPC or the Company) is
principally engaged in the business of manufacturing residential, commercial and
architectural windows and doors through its wholly-owned subsidiaries, Eagle &
Taylor Company (formerly known as American Architectural Products, Inc. -- AAP),
Forte, Inc. (Forte), Western Insulated Glass Co. (Western), Thermetic Glass,
Inc. (Thermetic), Binnings Building Products, Inc. (Binnings), Danvid Window
Company (Danvid), Modern Window Corporation (Modern) and American Glassmith
Corporation (American Glassmith).
AAP was incorporated on June 19, 1996 and had no significant operations or
assets until it acquired Eagle Window and Door, Inc. (Eagle) and Taylor Building
Products Company (Taylor) on August 29, 1996 (see Note 2). The accounts of Eagle
and Taylor are included in the consolidated financial statements from the August
29, 1996 acquisition date. AAP subsequently changed its name to Eagle & Taylor
Company.
On June 25, 1996, AAP's ultimate controlling stockholder acquired ownership of
Mallyclad Corp. (Mallyclad) and Vyn-L Corporation (Vyn-L). On December 18, 1996,
Mallyclad and Vyn-L were merged into AAP. Based on the control maintained by
this stockholder over AAP, Mallyclad and Vyn-L, the merger was considered to be
a transaction among companies under common control and was accounted for at
historical cost in a manner similar to a pooling of interests. Accordingly, the
accounts of Mallyclad and Vyn-L are included in the consolidated financial
statements from the June 25, 1996 acquisition date.
Prior to December 18, 1996, Forte Computer Easy, Inc. (FCEI) had a single
wholly-owned operating subsidiary, Forte, Inc. (Forte), based in Youngstown,
Ohio. Forte manufactures large contract commercial aluminum windows and security
screen windows and doors.
On December 18, 1996, pursuant to an Agreement and Plan of Reorganization
dated October 25, 1996 between FCEI and AAP Holdings, Inc. (the Agreement), FCEI
acquired all of the issued and outstanding shares of capital stock of AAP in
exchange for 1,000,000 shares of Series A Convertible Preferred Stock of FCEI
(the Series A Preferred). Under the terms of the Agreement and the Series A
Preferred, AAP Holdings, Inc. obtained 60 percent of the voting control of FCEI.
Although FCEI is the parent of AAP following the transaction, the transaction
was accounted for as a recapitalization of AAP and a purchase by AAP of FCEI
because the stockholders of AAP obtained a majority of the voting rights in FCEI
as a result of the transaction (see Note 2). The 1996 consolidated financial
statements include the accounts of AAP for the period from its inception (June
19, 1996), and the accounts of FCEI from December 18, 1996, the effective date
of the acquisition.
At a special stockholders' meeting held on April 1, 1997, FCEI stockholders
approved the reincorporation of FCEI in Delaware. Consequences of the
reincorporation plan included the change of FCEI's name to American
Architectural Products Corporation; an increase in the authorized common stock
of the Company to 100,000,000 shares; a 1 for 10 reverse stock split of the
Company's common stock; the conversion of 1,000,000 shares of Series A Preferred
held by AAP Holdings, Inc. into 7,548,632 shares of common stock; and the
issuance of 171,842 shares of common stock to an officer to satisfy a commitment
of the Company. The reincorporation did not result in any substantive change to
the Company's business, assets, liabilities, net worth or operations, nor did it
result in any change in the ownership interest of any stockholder of the
Company. The number of shares and per share amounts give retroactive recognition
to the changes in capital structure for all periods presented.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of AAPC and its
wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
F-8
17
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, payables and accrued expenses
approximate fair value because of the short maturity of these items. Based on
the borrowing rates currently available to the Company, the carrying amounts of
long-term debt approximate fair value.
REVENUE RECOGNITION
The Company operates in two industry segments, the residential and specialty
commercial window and door products segment and the large commercial contract
window and door products segment (see Note 13). Revenues from the residential
and specialty commercial products segment are recorded upon the shipment of
product to the customer. Revenues from the large commercial contract segment are
recognized using the percentage-of-completion method of accounting in the
proportion that costs bear to total estimated costs at completion. Revisions of
estimated costs or potential contract losses are recognized in the period in
which they are determined. Costs in excess of billings, billings in excess of
costs and retainages recorded were not material as of December 31, 1996 and
1997.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturity of three
months or less.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with various major financial
institutions. The Company performs periodic evaluations of the relative credit
standing of these institutions and limits the amount of exposure with any
institution. At December 31, 1997, deposits and highly liquid investments
totalling approximately $38 million were on deposit at two financial
institutions.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across many
geographic areas. However, the Company is principally engaged in the business of
manufacturing residential, commercial and architectural windows and doors.
Therefore, its customer base is concentrated in the construction business.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the following estimated useful
lives:
Buildings and improvements.................................. 20-25
Machinery and equipment..................................... 7-10
Computers and office equipment.............................. 3-7
Tools, dies and fixtures.................................... 3-7
Expenditures for renewals and betterments are capitalized. Expenditures for
maintenance and repairs are charged against income as incurred.
LONG-LIVED ASSETS
The Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable.
F-9
18
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is being amortized over 25 years using
the straight-line method. The Company periodically evaluates the recoverability
of the cost in excess of net assets acquired by allocating the cost in excess of
net assets acquired to the assets being tested for recoverability and by
comparing anticipated undiscounted future cash flows from operating activities
with the carrying amounts of the related assets. The factors considered by
management in performing this assessment include current operating results,
business prospects, market trends, competitive activities and other economic
factors.
DEFERRED FINANCING COSTS
Costs to obtain financing have been capitalized and are being amortized using
the straight-line method over the term of the underlying debt.
WARRANTY OBLIGATIONS
Certain of the Company's subsidiaries sell their products with limited
warranties of two to 25 years. Accrued warranty obligations are estimated based
on claims experience and levels of production. Warranty obligations estimated to
be satisfied within one year are classified as current liabilities in the
accompanying consolidated balance sheets.
INCOME TAXES
The income tax provision is computed using the liability method. Deferred
taxes are recorded for the expected future tax consequences of temporary
differences between the financial reporting and the tax bases of the Company's
assets and liabilities.
AAP filed its income tax return on a consolidated basis with its former parent
company until December 18, 1996, the date of reorganization with FCEI.
ADVERTISING
The cost of advertising is charged against income as incurred. Advertising
expense was $263,000 for the period from inception to December 31, 1996 and
$948,000 for the year ended December 31, 1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated.
Additionally, in June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," (SFAS 131) which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 establishes standards for the
reporting by public companies of information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements. It also establishes
standards for disclosures regarding products and services, geographic areas and
major customers. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
(SFAS 132), which revises employers' disclosures about pension and
F-10
19
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
other postretirement benefit plans. SFAS 132 does not change the measurement or
recognition of those plans and is effective for fiscal years beginning after
December 15, 1997.
Management has not fully evaluated the impact, if any, these standards may
have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
2. RECAPITALIZATION AND ACQUISITIONS:
RECAPITALIZATION AND ACQUISITION OF FCEI
Effective December 18, 1996, FCEI acquired the stock of AAP in a reverse
acquisition in which AAP's stockholders acquired voting control of FCEI. The
acquisition was accomplished through an exchange of stock in which FCEI
exchanged 1,000,000 shares of Series A Preferred and options to purchase 879,834
shares of FCEI common stock for 100% of the outstanding stock of AAP. Upon
completing the transaction, the stockholders of AAP controlled 60% of the voting
rights of the combined Company.
For financial reporting purposes, AAP is deemed to be the acquiring entity.
The merger has been reflected in the accompanying consolidated financial
statements as (a) the recapitalization of AAP (whereby the issued and
outstanding stock of AAP was converted into 1,000,000 shares of Series A
Preferred and options to purchase 879,834 shares of common stock -- see Note 9)
and (b) the issuance of the securities discussed in the following paragraph by
AAP in exchange for all of the outstanding equity securities of FCEI.
In the merger, AAP is deemed to have issued 4,860,580 shares of common stock,
committed itself to issue an additional 171,842 shares of common stock and to
have issued 586,556 stock options to FCEI stockholders (see Note 9). The
estimated fair value assigned to the securities issued was $3,003,000, which was
determined based on the estimated fair value of the securities of AAP which were
obtained by the FCEI stockholders in the reverse acquisition, an assessment of
the trading prices of FCEI stock preceding the reverse acquisition, and the
appraised value of the FCEI assets acquired.
The acquisition was recorded using the purchase method of accounting.
Accordingly, the consideration of $3,100,000, including transaction costs, was
allocated to the FCEI net assets acquired based on estimated fair values
including current assets of $1,871,000, property and equipment of $7,516,000,
long-term debt of $4,030,000 and current liabilities of $2,257,000. The results
of FCEI's operations are included in the accompanying consolidated financial
statements from the date of acquisition.
ACQUISITION OF EAGLE AND TAYLOR
On August 29, 1996, AAP acquired the stock and certain assets and liabilities
of Eagle and Taylor. Eagle is based in Dubuque, Iowa and manufactures and
distributes aluminum clad and all wood windows and doors. Taylor is based in
West Branch, Michigan and manufactures entry and garage doors. The acquisition
was accounted for as a purchase. The purchase price approximated $22,202,000 and
was allocated to the net assets acquired based on estimated fair values
including current assets of $17,123,000, property and equipment of $6,805,000,
accrued warranty obligations of $4,600,000, and current and other liabilities of
$4,362,000. Cost in excess of net assets acquired of $7,236,000 was recorded and
is being amortized over 25 years. Subordinated notes payable to the seller
totalling $8,000,000 were used to finance a portion of the acquisitions (see
Note 5). The results of Eagle and Taylor operations are included in the
accompanying consolidated financial statements from the August 29, 1996
acquisition date.
ACQUISITION OF MALLYCLAD AND VYN-L
The June 25, 1996 acquisition of Mallyclad and Vyn-L was accounted for as a
purchase. Mallyclad and Vyn-L are based in Madison Heights, Michigan and process
and manufacture vinyl clad steel and aluminum coils and cut-to-length sheets.
The purchase price approximated $1,009,000 and was allocated to net assets
acquired based on estimated fair values including current assets of $900,000,
property and equipment of $205,000, other assets of
F-11
20
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
$170,000, and current liabilities of $266,000. The accounts of Mallyclad and
Vyn-L are included in the accompanying consolidated financial statements from
the June 25, 1996 acquisition date.
ACQUISITION OF WESTERN
On March 14, 1997, the Company acquired all of the stock of Western. Western
is based in Phoenix, Arizona and manufactures custom residential aluminum
windows and doors. The acquisition was accounted for as a purchase. The purchase
price approximated $2,400,000 and was allocated to net assets acquired based on
estimated fair values including current assets of $1,976,000, property and
equipment of $961,000, and current liabilities of $537,000. Notes to sellers
approximating $779,000 were used to finance a portion of the acquisition.
Additionally, Western was financed with a revolving line-of-credit and term
notes with a bank totalling approximately $1,400,000. The accounts of Western
are included in the accompanying consolidated financial statements from the
March 14, 1997 acquisition date.
ACQUISITION OF THERMETIC
On July 18, 1997, the Company acquired all of the stock of Thermetic, a
Toluca, Illinois manufacturer of residential vinyl windows. The acquisition was
accounted for as a purchase. The purchase price approximated $4,500,000 and was
allocated to net assets acquired based on estimated fair values including
current assets of $1,700,000, property and equipment of $2,300,000, current
liabilities of $1,400,000 and long-term liabilities of $2,100,000. Costs in
excess of net assets acquired of $4,000,000 was recorded and is being amortized
over 25 years.
The Thermetic acquisition was financed through the issuance of $2,500,000 in
convertible secured debentures to the seller, the issuance of 384,000 shares of
the Company's common stock and a commitment to issue an aggregate number of
additional shares of the Company's common stock eighteen months after closing
having a market value of $1,000,000 when issued. The accounts of Thermetic are
included in the accompanying consolidated financial statements from the July 18,
1997 acquisition date.
ACQUISITIONS OF BINNINGS, DANVID, AMERICAN GLASSMITH AND MODERN
On December 10, 1997, the Company acquired all of the outstanding stock of
Binnings Building Products, Inc. (Binnings), and substantially all of the assets
of Danvid Company, Inc. and Danvid Window Company (collectively Danvid),
American Glassmith, Inc. (American Glassmith), and Modern Window Corporation
(Modern), collectively the "Acquisitions". Binnings, located in Lexington, North
Carolina, manufactures residential vinyl windows and aluminum windows and storm
doors. Danvid, located in Carrollton, Texas, manufacturers and installs
residential aluminum windows and doors and vinyl windows. American Glassmith,
located in Columbus, Ohio, manufactures decorative glass lites and laminated
glass. Modern, located in Oak Park, Michigan, manufactures residential vinyl
windows and doors. Each of these acquisitions was accounted for as a purchase.
The purchase prices and allocation of these purchase prices are as follows:
MODERN &
AMERICAN
BINNINGS DANVID GLASSMITH
----------- ----------- -----------
PURCHASE PRICE.............................................. $26,987,000 $17,403,000 $ 5,704,000
=========== =========== ===========
ALLOCATION
Current assets............................................ $13,281,000 $ 5,343,000 $ 2,526,000
Property and equipment.................................... 14,667,000 1,876,000 2,785,000
Other assets.............................................. 157,000 2,151,000 50,000
Current liabilities....................................... 4,521,000 3,048,000 907,000
Long-term liabilities..................................... 1,323,000 2,151,000 342,000
----------- ----------- -----------
NET ASSETS ACQUIRED......................................... $22,261,000 $ 4,171,000 $ 4,112,000
=========== =========== ===========
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS
ACQUIRED.................................................. $ 4,726,000 $13,232,000 $ 1,592,000
=========== =========== ===========
F-12
21
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
The accounts of the Acquisitions were included in the Company's consolidated
financial statements from the December 10, 1997 acquisition date. The
Acquisitions were financed primarily with a portion of the proceeds from the
issuance of $125,000,000 of 11 3/4% Senior Notes due on December 1, 2007 (see
Note 5).
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma information for the year ended December 31, 1996 has
been prepared assuming that the offering of $125,000,000 of 11 3/4% Senior Notes
due December 1, 2007 (the Offering) and the acquisitions of FCEI, Eagle &
Taylor, Mallyclad and Vyn-L, Western, Thermetic, Binnings, Danvid, American
Glassmith and Modern had occurred on January 1, 1996. The following pro forma
information for the year ended December 31, 1997 has been prepared assuming that
the Offering and the acquisitions of Western, Thermetic, Binnings, Danvid,
American Glassmith and Modern had occurred on January 1, 1997. The pro forma
information includes adjustments for interest expense for the Senior Notes,
adjustments to selling, general and administrative expenses for decreases in
compensation expense for certain officers and members of Board of Directors of
the Acquisitions, adjustments to depreciation expense based on the estimated
fair market value of the property and equipment acquired, amortization of cost
in excess of net assets acquired arising from the acquisitions, and adjustments
for income taxes.
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net sales................................................... $ 176,000 $ 192,000
Net loss.................................................... (7,000) (5,600)
Basic and diluted net loss per common share................. (.53) (.42)
=========== ===========
3. INVENTORIES:
Inventories consisted of the following:
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Raw materials............................................... $ 7,664,000 $12,980,000
Work-in-process............................................. 1,266,000 3,071,000
Finished goods.............................................. 2,041,000 5,407,000
----------- -----------
$10,971,000 $21,458,000
=========== ===========
4. REVOLVING LINE-OF-CREDIT:
At December 31, 1996, the Company had $5,477,000 outstanding under a
subsidiary's revolving line-of-credit facility whereby the subsidiary could
borrow or issue letters-of-credit of up to $13,000,000 based on available
collateral. Borrowings accrue interest at 1.5% above the prime rate and interest
was payable monthly. The outstanding borrowings were paid in full in 1997 with a
portion of the proceeds of the Notes (see Note 5).
F-13
22
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
11 3/4% senior notes, due 2007.............................. $ -- $125,000,000
Term notes payable to bank, due August 2001, payable in
monthly installments of $55,407 plus interest at the prime
rate plus 1.5%............................................ 3,113,000 --
Subordinated notes payable, due August 1999, with interest
payable monthly at the rate of 10%........................ 8,000,000 --
Term note payable to bank, due January 2001, payable in
monthly installments of $30,000 including interest at the
prime rate plus 2.0%, secured by substantially all of the
assets of a subsidiary.................................... 2,625,000 --
Other....................................................... 2,238,000 175,000
----------- ------------
15,976,000 125,175,000
Less current portion........................................ 1,498,000 61,000
----------- ------------
$14,478,000 $125,114,000
=========== ============
In December 1997, the Company issued $125,000,000 of 11.75% Senior Notes (the
"Notes"). The Notes are senior unsecured obligations of the Company and will
mature on December 1, 2007. Interest on the Notes is payable semi-annually on
June 1 and December 1 of each year, commencing June 1, 1998. The Notes are
unconditionally guaranteed by each of the Company's subsidiaries and by each
subsidiary acquired thereafter.
Of the approximately $118.5 million in net proceeds received by the Company
from the issuance of the Notes, approximately $47.8 million was used to fund the
cash portion of the purchase price of the Acquisitions (including the repayment
of the assumed debt) and approximately $33.8 million was used to repay
substantially all of the existing indebtedness of the Company. The remaining
proceeds are intended to be used by the Company for additional acquisitions,
working capital and general corporate purposes.
Except as set forth below, the Company may not redeem the Notes prior to
December 1, 2002. On or after December 1, 2002, the Company may redeem the
Notes, in whole or in part, at any time, at redemption prices ranging from 105%
of the principal amount in 2002 to 100% of the principal amount in 2005 and
thereafter, together with accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time prior to December 1, 2000, the Company may,
subject to certain requirements, redeem up to 35% of the aggregate principal
amount of the Notes with the cash proceeds of one or more public equity
offerings at a redemption price equal to 110% of the principal amount to be
redeemed, together with accrued and unpaid interest.
The provisions of the Notes limit the Company and its subsidiaries from
incurring additional indebtedness unless the Company meets certain consolidated
coverage ratios as defined in the Notes. Notwithstanding this restriction, the
Company is permitted to incur secured indebtedness of $25 million. Other
covenants of the Notes include, but are not limited to, limitations on
restricted payments, as defined, such as payment of dividends, repurchase of the
Company's capital stock, redemption of subordinated obligations, certain
investments, in addition to limitations on sale/leaseback transactions,
affiliate transactions and mergers or consolidations.
The approximate maturities of long-term debt are as follows: 1998 -- $61,000;
1999 -- $54,000; 2000 -- $58,000; 2001 -- $2,000; 2002 -- $-0-; and thereafter
- -$125,000,000.
In connection with the repayment of existing indebtedness from the proceeds of
the Notes, the Company recognized as expense deferred financing costs related to
the existing indebtedness and incurred a prepayment penalty resulting in an
extraordinary loss of $494,000 ($.04 per share), net of related income tax
benefits of $282,000.
6. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
Certain leased assets are capitalized and consist of computer equipment and
delivery equipment with a cost of $1,578,000 and $1,931,000 at December 31, 1996
and 1997, respectively. Accumulated depreciation related to these
F-14
23
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
leased assets was $-0- and $388,000 at December 31, 1996 and 1997, respectively.
The Company also leases buildings and equipment under operating leases.
At December 31, 1997, the future minimum lease payments under operating and
capital leases are as follows:
OPERATING LEASES CAPITAL LEASES
---------------- --------------
1998........................................................ $2,412,000 $ 654,000
1999........................................................ 1,863,000 734,000
2000........................................................ 1,260,000 51,000
2001........................................................ 1,017,000 38,000
2002........................................................ 746,000 8,000
Thereafter.................................................. 1,248,000 --
---------- ----------
Total............................................. $8,546,000 1,485,000
==========
Less amount representing interest........................... 142,000
----------
Net present value........................................... 1,343,000
Less current portion........................................ 573,000
----------
Long-Term Capital Lease Obligations......................... $ 770,000
==========
Rental expense incurred for operating leases was $217,000 and $844,000, from
the period from inception to December 31, 1996 and for the year ended December
31, 1997, respectively.
LITIGATION
At December 31, 1997, the Company is a defendant in several lawsuits. The
Company may be liable in these matters to the extent that the lawsuits are found
in favor of the plaintiffs and to the extent that these matters are not covered
by the Company's insurance. In the opinion of management, such liabilities, if
any, would not have a material effect on the consolidated financial statements
of the Company.
7. BENEFIT PLANS:
All eligible nonunion employees of the Company participate in 401(k) plans
which include provisions for Company matching contributions. Additionally, union
employees at a subsidiary participate in a multiemployer pension plan into which
that subsidiary contributes $0.22 per hour worked. Expenses incurred relating to
these plans were $89,000 and $399,000 from inception to December 31, 1996 and
for the year ended December 31, 1997.
8. STOCKHOLDERS' EQUITY:
SERIES A PREFERRED STOCK
The Series A Preferred is voting preferred stock and has the same number of
votes as the number of shares of common stock into which the Series A Preferred
would be convertible if converted in full on the record date.
No dividends may be paid with respect to the common stock unless a dividend is
paid to the holders of the Series A Preferred. Any dividends paid are required
to be allocated pro rata among the holders of the common stock and Series A
Preferred as though the Series A Preferred had been converted in full to common
stock on the dividend payment date.
The Series A Preferred has a liquidation preference over the common stock in
the amount of $.10 per share. Any amounts remaining will be allocated to the
common stock and Series A Preferred holders as if the Series A Preferred had
been converted in full upon such liquidation.
SERIES B PREFERRED STOCK
In 1997, the Company received proceeds of $425,000 from the private placement
of 4,250 shares of Series B Cumulative Redeemable Convertible Preferred Stock
(the Series B Preferred). The Series B Preferred accrues cumulative dividends at
the annual rate of $8.00 per share commencing July 1, 1998, payable either in
cash or
F-15
24
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
common stock at the election of the Company. Each share of Series B Preferred is
convertible, at the option of the holder, into shares of common stock. The
redemption price of $100 per share of Series B Preferred plus any cumulative
unpaid dividends can be used to purchase shares of common stock at market value.
However, a discount from the quoted market price of common stock was applicable
for holders exercising conversion rights prior to August 31, 1997 and the
discounts are accounted for as dividends to the holders. As of December 31,
1997, all of the Series B preferred shares issued have been converted to common
stock.
The Series B Preferred is voting preferred stock and each share of Series B
Preferred Stock entitles the holder to one vote. The Series B Preferred will be
entitled to vote as a separate class with respect to all matters that would
adversely affect the powers, preferences or rights of Series B Preferred Stock.
STOCK WARRANTS
In April and June 1997, the Company issued promissory notes with detachable
stock warrants to accredited investors for proceeds totalling $450,000. The
warrants, which expire in one year, grant the note holders the right to purchase
128,571 shares of the Company's common stock at $3.50 per share. The fair value
attributable to these warrants has been recognized as additional paid in capital
and the resulting discount was amortized over the term of the notes which ended
in December 1997. Furthermore, in connection with an additional series of
financing transactions, the Company issued warrants to purchase 27,926 shares of
common stock at an exercise price of $3.50 per share, expiring on September 1,
1998.
9. STOCK OPTIONS:
As part of the consideration paid in the acquisition of FCEI in December 1996,
the Company is deemed to have issued to certain FCEI stockholders options to
purchase an aggregate of 586,556 shares of the Company's common stock at prices
ranging from $2.50 to $5.00 per share ("FCEI Options"). The FCEI Options were
deemed to have been issued in exchange for previously outstanding options
granted under the FCEI Employee Incentive Stock Option Plan.
As part of the recapitalization of AAP that occurred in connection with the
acquisition of FCEI (see Note 2), AAP Holdings, Inc. received options to
purchase 879,834 shares of common stock of the Company ("AAPH Options"). The
AAPH Options are equivalent to 1.5 times the number of shares of the Company's
common stock subject to the 586,556 FCEI Options. The AAPH Options are identical
in price and exercise terms to the FCEI Options and are exercisable only to the
extent that the FCEI Options are exercised.
At December 31, 1997, 471,770 FCEI Options and 707,655 AAPH Options remain
outstanding. These exercisable options have an option price of $3.75 and expire
in 1998.
In 1996, the Company adopted the American Architectural Products Corporation
Stock Option Plan (the "Plan") whereby 10,000,000 shares of the Company's common
stock have been authorized for issuance under the Plan. Shares of common stock
have been made available for grant to directors, officers, key employees and
non-employees at the discretion of the Board of Directors. The exercise price of
stock options granted to employees and non-employee directors equals the market
price or 110% of the market price of the Company's common stock at the date of
grant. The stock options issued to employees have a ten year term and vest in
20% increments over five years. Stock options issued to non-employee directors
have a ten year term and vest within one year.
Certain options have been granted to non-employees based on negotiated terms.
Stock options issued to non-employees are recorded at fair value with a related
charge against income.
The Company applies the intrinsic value method in accounting for its stock
options issued to employees. Accordingly, no compensation cost has been
recognized for stock options issued to employees. The following table sets forth
the Company's net income (loss) and net income (loss) available per common share
on a pro forma basis
F-16
25
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS: (CONTINUED)
had compensation expense for the Company's stock options issued to employees
been determined based on the fair value at the grant dates:
FROM DATE OF INCEPTION
(JUNE 19, 1996) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
---------------------- -----------------
NET INCOME (LOSS)
As reported......................................... $ 761,000 $(1,259,000)
Pro forma........................................... $ 761,000 $(1,329,000)
BASIC NET INCOME (LOSS) PER COMMON SHARE
As reported......................................... $ .10 $ (.10)
Pro forma........................................... $ .10 $ (.10)
DILUTED NET INCOME (LOSS) PER COMMON SHARE
As reported......................................... $ .09 $ (.10)
Pro forma........................................... $ .09 $ (.10)
The fair value for the these stock options was estimated at the dates of grant
using a Black-Scholes option pricing model with the following
weighted -- average assumptions: a risk-free interest rate of 6.5%, a dividend
yield percentage of 0%, common stock volatility of .35 and an expected life of
the options of 5 years.
A summary of activity related to stock options for the Company's plan from the
date of inception to December 31, 1996 and for the year ended December 31, 1997
is as follows.
1996 1997
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
Outstanding, beginning of the period................. -- $ -- 6,000 $4.69
Granted.............................................. 6,000 4.69 534,000 5.31
Exercised............................................ -- -- -- --
Forfeited............................................ -- -- -- --
----- ----- ------- -----
Outstanding, end of the period....................... 6,000 $4.69 540,000 $5.30
===== ===== ======= =====
The weighted average fair value of the options granted during the periods
ended December 31, 1996 and 1997 were $1.97 and $1.87, respectively.
The following is a summary of stock options outstanding and exercisable at
December 31, 1997:
OUTSTANDING EXERCISABLE
----------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE (YEARS) PRICE NUMBER PRICE
- ----------- ------ ------------ -------- ------ --------
$3.88 -- $4.69......................... 131,000 8.38 $4.02 41,000 $4.32
$5.43 -- $6.19......................... 409,000 7.98 5.72 104,000 5.44
------- ---- ----- ------- -----
540,000 8.08 $5.30 145,000 $5.12
======= ==== ===== ======= =====
In February 1998, the Board of Directors rescinded 209,000 and 100,000 stock
options with an exercise price of $5.63 and $6.19, respectively. These stock
options were reissued in February 1998 at the following prices: 209,000
options -- $3.56; and 100,000 options -- $3.92.
F-17
26
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
The provision for income taxes (income tax benefit) for the period from the
date of inception to December 31, 1996 and for the year ended December 31, 1997
consist of the following:
FROM DATE OF
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
CURRENT
Federal................................................... $269,000 $ --
State..................................................... 60,000 --
-------- ---------
329,000 --
DEFERRED.................................................... 311,000 (390,000)
-------- ---------
$640,000 $(390,000)
======== =========
Significant components of deferred tax assets and liabilities as of December
31, 1996 and 1997 are as follows:
DECEMBER 31,
------------------------
1996 1997
---------- ----------
DEFERRED TAX ASSETS
Net operating loss carryforwards.......................... $ 850,000 $3,940,000
Allowance for doubtful accounts........................... 150,000 280,000
Accrued warranty obligations.............................. 1,520,000 1,660,000
Accrued postretirement benefits........................... 150,000 150,000
Other accruals............................................ 250,000 730,000
Other..................................................... 60,000 170,000
---------- ----------
2,980,000 6,930,000
---------- ----------
DEFERRED TAX LIABILITIES
Depreciation.............................................. 2,090,000 6,220,000
Other..................................................... 180,000 480,000
---------- ----------
2,270,000 6,700,000
---------- ----------
NET DEFERRED TAX ASSETS..................................... 710,000 230,000
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS................. (710,000) (230,000)
---------- ----------
NET DEFERRED TAXES.......................................... $ -- $ --
========== ==========
In recording certain acquisitions, the Company established a valuation
allowance against the entire net deferred tax assets acquired, based on
uncertainties surrounding the expected realization of these assets. In 1996 and
1997, the Company reversed the valuation allowances by $311,000 and $685,000,
respectively, and accordingly reduced cost in excess of net assets acquired.
F-18
27
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES: (CONTINUED)
The actual income tax expense (income tax benefit) attributable to earnings
(loss) for the period from inception to December 31, 1996 and for the year ended
December 31, 1997 differed from the amounts computed by applying the U.S.
federal tax rate of 34 percent to pretax earnings as a result of the following:
1996 1997
-------- ---------
Tax at U.S. federal statutory rate.......................... $470,000 $(390,000)
Expenses not deductible for tax purposes.................... 40,000 240,000
Valuation allowance adjustment.............................. 100,000 (240,000)
State income taxes, net of federal income tax benefit....... 40,000 --
Other....................................................... (10,000) --
-------- ---------
PROVISION FOR INCOME TAXES.................................. $640,000 $(390,000)
======== =========
At December 31, 1997, the Company and its subsidiaries had net operating loss
carryforwards of approximately $15,600,000 for income tax purposes which expire
between 1999 and 2012. Due to changes in ownership, utilization of approximately
$14,300,000 of the net operating loss carryforwards is limited to approximately
$550,000 per year. The remaining $1,300,000 may be utilized without limitation.
11. RELATED PARTY TRANSACTIONS:
The Company paid management fees to its majority stockholder of approximately
$120,000 and $250,000 for the period from inception to December 31, 1996 and for
the year ended December 31, 1997. Additionally, the Company paid $835,000 for
acquisition services and $571,000 for other transaction services in 1997 to its
majority stockholder. In 1997, the Company paid $450,000 to a Company affiliated
with AAPH Holdings, Inc. for air charter services.
12. NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share amounts have been computed in accordance
with Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128). Basic net income (loss) per common share amounts were computed by
dividing net income (loss) less preferred stock dividends by the weighted
average number of common shares outstanding. Diluted income (loss) per share
amounts give effect to dilutive common stock equivalents outstanding.
A summary of the basic and diluted earnings (loss) per share computations
follow.
DATE OF INCEPTION (JUNE 16, 1996)
TO DECEMBER 31, 1996
------------------------------------
PER SHARE
INCOME SHARES AMOUNT
--------- ---------- ---------
Income before extraordinary item........................... $ 761,000
Preferred stock dividends.................................. --
---------
BASIC INCOME PER COMMON SHARE
Income available to common stockholders.................. 761,000 7,884,000 $ .10
=====
EFFECT OF DILUTIVE SECURITIES
Common Stock Options..................................... 276,000
--------- ---------- -----
DILUTIVE EARNINGS PER COMMON SHARE......................... $ 761,000 8,160,000 $ .09
========= ========== =====
F-19
28
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. NET INCOME (LOSS) PER COMMON SHARE: (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
------------------------------------
PER SHARE
LOSS SHARES AMOUNT
--------- ---------- ---------
Loss before extraordinary item............................. $(765,000)
Preferred stock dividends.................................. (75,000)
---------
BASIC LOSS PER COMMON SHARE
Loss available to common stockholders.................... (840,000) 12,982,000 $(.06)
=====
EFFECT OF DILUTIVE SECURITIES
Common Stock Options..................................... --
--------- ---------- -----
DILUTIVE LOSS PER COMMON SHARE............................. $(840,000) 12,982,000 $(.06)
========= ========== =====
The weighted average number of common shares outstanding for 1996 includes the
7,548,632 common shares issued upon the conversion of all of the Series A
Preferred (which based on its terms, the Company believed was common stock in
substance) and the 171,842 shares issued by the Company in 1997 to fulfill an
obligation to an officer.
The weighted average number of common shares outstanding for 1997 includes
approximately 300,000 additional common shares issuable in January 1999 in
connection with the Thermetic acquisition based on the average market price.
13. SEGMENT INFORMATION:
The Company operates in two separate segments. The first includes the
manufacturing and distribution of residential and specialty commercial
fenestration products. The product lines within this segment include aluminum,
wood and vinyl windows, doors, and other fenestration products such as storm
windows and doors, and decorative glass. The second classification is large
contract commercial fenestration products including aluminum windows, security
windows, screens and doors used primarily in commercial buildings such as
schools and dormitories, office and governmental buildings, and low-income
housing.
INFORMATION BY SEGMENT
RESIDENTIAL
AND SPECIALTY CONTRACT
COMMERCIAL COMMERCIAL
FENESTRATION FENESTRATION
PRODUCTS PRODUCTS
------------- ------------
1997
Net sales................................................... $ 91,695,000 $ 2,558,000
Operating income (loss)..................................... 7,255,000 (1,554,000)
Assets employed at year-end................................. 105,223,000 10,694,000
Depreciation and amortization............................... 1,980,000 700,000
Capital expenditures........................................ 1,499,000 --
============ ===========
The segment information does not include the identifiable assets and operating
expenses of corporate administration.
Segment information for 1996 is not presented because the Company's operations
were primarily in the residential and specialty commercial fenestration products
segment. The contract commercial fenestration products segment was acquired in
December 1996 and its results of operations from the date of acquisition were
not significant.
F-20
29
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
FROM DATE OF INCEPTION
(JUNE 19, 1996) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
---------------------- ------------
CASH PAID DURING THE PERIOD FOR
Interest................................................ $ 620,000 $ 3,017,000
Income taxes............................................ 70,000 228,000
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock and debt issued and liabilities assumed in
acquisitions............................................ $27,981,000 $22,465,000
Capital lease obligations................................. 1,578,000 --
Distribution to stockholder............................... 170,000 --
15. SUBSEQUENT EVENTS:
In January 1998, the Company purchased all of the assets of the vinyl division
of EASCO Aluminum Company, an Austintown, Ohio manufacturer of vinyl extrusions
for the fenestration industry. The Company also purchased all of the assets of
Blackhawk Architectural Products, a manufacturer of steel entry doors for the
residential fenestration market. The combined purchase price of these
acquisitions was $14.8 million.
In February 1998, the Company signed a Letter of Intent with Louisiana Pacific
to purchase its Weather-Seal division. This division consists of six
manufacturing facilities throughout Ohio producing aluminum and vinyl
extrusions, and wood and vinyl windows. The Letter of Intent obligated the
Company to make a $1 million deposit into an escrow account and which will be
applied toward the purchase price. The deposit will be considered a termination
fee payable to Louisiana Pacific in the event the transaction does not close
because the Company abandons or otherwise fails to consummate the transaction
unless because of the discovery or occurrence of any material or adverse
condition.
In March 1998, the Company sold its Mallyclad division to a related party for
$1.2 million.
F-21
30
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders of
Eagle Window & Door, Inc. and Subsidiaries and
Taylor Building Products Company (Wholly-Owned Subsidiaries)
We have audited the accompanying combined balance sheets of Eagle Window &
Door, Inc. and Subsidiaries and Taylor Building Products Company (Wholly-Owned
Subsidiaries), as of December 31, 1995 and August 29, 1996, and the related
combined statements of operations and accumulated deficit, and cash flows for
the year ended December 31, 1995 and the eight months ended August 29, 1996.
These combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Eagle
Window & Door, Inc. and Subsidiaries and Taylor Building Products Company
(Wholly-Owned Subsidiaries) as of December 31, 1995 and August 29, 1996, and the
results of their combined operations and cash flows for the year ended December
31, 1995 and the eight months ended August 29, 1996 in conformity with generally
accepted accounting principles.
SEMPLE & COOPER, P.L.C.
Phoenix, Arizona
January 31, 1997
F-22
31
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED BALANCE SHEETS
DECEMBER 31, AUGUST 29,
1995 1996
------------ ------------
ASSETS
Current Assets:
Cash (Note 2)............................................. $ 750,361 $ 395,859
Accounts receivable, net (Note 1)......................... 6,954,830 7,736,517
Inventory (Notes 1 and 3)................................. 8,330,593 8,483,224
Prepaids and other........................................ 448,426 314,240
------------ ------------
Total Current Assets................................... 16,484,210 16,929,840
------------ ------------
Property, Plant and Equipment, Net (Notes 1 and 4).......... 8,760,799 6,966,340
------------ ------------
Deposits and Other Assets................................... 55,370 93,376
------------ ------------
Total Assets........................................... $ 25,300,379 $ 23,989,556
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Accounts payable.......................................... $ 2,859,256 $ 2,429,053
Accrued wages and payroll taxes........................... 371,510 453,459
Payable to affiliates (Note 10)........................... 20,482,654 19,441,656
Other accrued expenses.................................... 1,527,296 2,346,756
Accrued warranty reserve--short-term portion (Note 9)..... 1,566,000 1,479,000
------------ ------------
Total Current Liabilities.............................. 26,806,716 26,149,924
------------ ------------
Long-Term Liabilities:
Accrued warranty reserve--long-term portion (Note 9)...... 3,258,800 3,148,412
------------ ------------
Commitments and Contingencies: (Note 5)..................... -- --
Stockholder's Deficit: (Note 6)
Common stock.............................................. 211,851 211,851
Additional paid-in capital................................ 26,081,937 27,224,456
Accumulated deficit....................................... (31,058,925) (32,745,087)
------------ ------------
Total Stockholder's Deficit............................ (4,765,137) (5,308,780)
------------ ------------
Total Liabilities and Stockholder's Deficit............ $ 25,300,379 $ 23,989,556
============ ============
The accompanying notes are an integral part of the combined financial
statements.
F-23
32
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE EIGHT
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, AUGUST 29,
1995 1996
------------------ -------------
Sales....................................................... $ 72,962,690 $ 39,971,058
Cost of Sales............................................... 67,642,530 33,832,799
------------ ------------
Gross Profit................................................ 5,320,160 6,138,259
Selling Expense............................................. 6,619,136 3,948,778
General and Administrative Expenses......................... 5,714,966 3,141,852
Restructuring Charge (Note 7)............................... 840,042 --
------------ ------------
Loss from Operations........................................ (7,853,984) (952,371)
------------ ------------
Other Income (Expense):
Interest expense (Note 10)................................ (1,755,177) (1,142,519)
Gain (Loss) on sale of assets............................. (375,325) (773,866)
Other..................................................... 38,984 274,661
------------ ------------
(2,091,518) (1,641,724)
------------ ------------
Loss before Income Tax Benefit.............................. (9,945,502) (2,594,095)
Income Tax Benefit (Note 1)................................. 3,557,425 907,933
------------ ------------
Net Loss.................................................... (6,388,077) (1,686,162)
Accumulated Deficit, Beginning of Year...................... (24,670,848) (31,058,925)
------------ ------------
Accumulated Deficit, End of Year............................ $(31,058,925) $(32,745,087)
============ ============
The accompanying notes are an integral part of the combined financial
statements.
F-24
33
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE EIGHT
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, AUGUST 29,
1995 1996
------------------ -------------
Cash Flows from Operating Activities:
Cash received from customers.............................. $ 73,112,175 $ 39,462,693
Cash paid to suppliers and employees...................... (70,132,913) (38,177,166)
Interest paid............................................. (3,686) --
Interest received......................................... 4,504 1,340
Restructuring costs....................................... (423,909) --
------------ ------------
Net cash provided by operating activities.............. 2,556,171 1,286,867
------------ ------------
Cash Flows from Investing Activities:
Cash received from sale of equipment...................... 558,265 37,289
Purchase of equipment..................................... (2,576,407) (1,678,658)
------------ ------------
Net cash used by investing activities.................. (2,018,142) (1,641,369)
------------ ------------
Cash Flows from Financing Activities:
Repayment of debt...................................... -- --
------------ ------------
Net cash used by financing activities.................. -- --
------------ ------------
Net increase (decrease) in cash............................. 538,029 (354,502)
Cash at beginning of year................................... 212,332 750,361
------------ ------------
Cash at end of year......................................... $ 750,361 $ 395,859
============ ============
Reconciliation of Net Loss to Net Cash Provided by Operating
Activities:
Net Loss.................................................... $ (6,388,077) $ (1,686,162)
------------ ------------
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities:
Depreciation.............................................. 3,310,040 2,661,961
(Gain) Loss on sale of assets............................. 375,325 773,866
Abandonment of fixed assets in restructuring.............. 416,131 --
Interest expense contributed to capital by Parent
Company................................................ -- 1,142,519
Changes in Assets and Liabilities:
Accounts receivable....................................... 946,420 (781,687)
Inventory................................................. 9,903,590 (152,631)
Prepaids and other........................................ 120,959 134,186
Deposits and other........................................ 76,899 (38,005)
Accounts payable.......................................... (483,538) (430,203)
Accrued wages and payroll taxes........................... (195,608) 72,539
Other accrued expenses.................................... (255,986) 828,870
Payable to affiliates..................................... (4,944,984) (1,040,998)
Accrued warranty reserve.................................. (325,000) (197,388)
------------ ------------
8,944,248 2,973,029
------------ ------------
Net cash provided by operating activities.............. $ 2,556,171 $ 1,286,867
============ ============
The accompanying notes are an integral part of the combined financial
statements.
F-25
34
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES:
BASIS OF PRESENTATION:
The combined financial statements include the financial position, results of
operations and cash flows of Eagle Window & Door, Inc. and Subsidiaries and
Taylor Building Products Company (the Companies). All material intercompany
transactions, accounts and balances have been eliminated.
Each Company is a wholly-owned subsidiary of MascoTech, Inc. Because of these
relationships, the financial statements of the Companies have been prepared on a
combined format as if they were a single entity. In addition, MascoTech, Inc.
performed the Companies' treasury function, and allocated expenses for various
services it provided (See Note 10).
Eagle Window & Door, Inc. and Subsidiaries (Eagle) are engaged in the
manufacture of aluminum clad and all wood windows and doors. Eagle's primary
market is the construction industry. Products are marketed through various
distributors located throughout the United States and Pacific Rim. Eagle's
wholly-owned subsidiaries, Eagle Window & Door of Bellevue, Inc. and Eagle
Service Company are engaged in the sale and distribution of windows and doors
throughout the United States.
The accompanying combined financial statements include the consolidated
accounts of Eagle Window & Door, Inc. and its wholly-owned subsidiaries, Eagle
Window & Door of Bellevue, Inc. and Eagle Service Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Taylor Building Products Company (Taylor) is engaged in the manufacture of
entry and garage doors. The Company markets entry doors under the brand names of
Perma Door and Taylor Door. The Perma Door brand is primarily marketed through
millwork distributors and the Taylor Door brand is primarily marketed through
installing dealers. The Company markets garage doors under the Taylor Door brand
name throughout the United States.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE:
Historical earnings per share data has not been presented in the accompanying
financial statements due to the subsequent acquisition of the two Companies by
American Architectural Products, Inc. and its reverse merger with a public
reporting company (See Note 13).
ACCOUNTS RECEIVABLE:
As of December 31, 1995 and August 29, 1996, allowances have been established
for potentially uncollectible accounts receivable in the amounts of $445,418 and
$791,521, respectively.
INVENTORY:
Inventory is stated at the lower of cost (first-in, first-out method) or
market. Inventories are reviewed periodically for obsolescence, and an allowance
established to record potentially obsolete inventory at net realizable value
(See Note 3).
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs that neither materially add to the value of the property
nor appreciably prolong its life are charged to expense as incurred. Betterments
or renewals are capitalized when incurred. Depreciation expense for the year
ended December 31, 1995 and the eight months ended
F-26
35
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES: (CONTINUED)
August 29, 1996, was $3,310,040 and $2,661,961, respectively. Assets are being
depreciated over their estimated useful lives, as follows:
YEARS
-----
Buildings and improvements.................................. 40
Machinery and equipment..................................... 6-15
Computer and office equipment............................... 10
Tools, dies and fixtures.................................... 3
INCOME TAXES:
The Companies file their income tax returns on a consolidated basis with their
parent company. All provisions for federal and state income taxes, including
provisions for deferred income taxes, are provided for through the intercompany
accounts.
ADVERTISING:
The cost of advertising is expensed as incurred. Advertising expense was
$1,192,915 and $479,300, respectively, for the year ended December 31, 1995 and
the eight months ended August 29, 1996.
2. CONCENTRATION OF CREDIT RISK:
The combined Companies maintain cash balances at various financial
institutions. At December 31, 1994 and 1995 and at August 29, 1996, the combined
Companies have uninsured cash in the approximate amounts of $734,000, $670,000
and $230,000, respectively.
3. INVENTORY:
As of December 31, 1995 and as of August 29, 1996, inventory consisted of the
following:
DECEMBER 31, AUGUST 29,
1995 1996
------------ ----------
Raw materials............................................... $ 7,106,775 $6,118,026
Work in process............................................. 1,215,724 1,366,212
Finished goods.............................................. 1,631,594 1,473,501
----------- ----------
9,954,093 8,957,739
Less: provision for obsolete inventory...................... (1,623,500) (474,515)
----------- ----------
$ 8,330,593 $8,483,224
=========== ==========
Included in the allowance for obsolete inventory as of December 31, 1995 is
approximately $1,260,000 for future losses from Taylor Building Products
Company's restructuring plan (See Note 7).
F-27
36
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
As of December 31, 1995 and August 29, 1996, property, plant and equipment
consisted of the following:
DECEMBER 31, AUGUST 29,
1995 1996
------------ ------------
Land and improvements....................................... $ 407,523 $ 408,934
Buildings and improvements.................................. 7,996,419 7,698,252
Machinery and equipment..................................... 10,807,526 11,276,992
Computer and office equipment............................... 3,238,291 2,223,089
Tools, dies and fixtures.................................... 1,962,048 3,698,385
------------ ------------
24,411,807 25,305,652
Less: accumulated depreciation.............................. (15,651,008) (18,339,312)
------------ ------------
$ 8,760,799 $ 6,966,340
============ ============
5. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
The Companies are currently leasing certain office and manufacturing space in
Dubuque, Iowa and West Branch, Michigan under non-cancellable operating lease
agreements which expire through July, 1997. The terms of the leases provide for
combined monthly payments totalling approximately $12,000. The lease terms also
require the Companies to pay common area maintenance, taxes, insurance and other
costs. The Companies are also leasing equipment under various non-cancellable
operating lease agreements which expire through July, 2000. Rent expense under
the operating lease agreements was $817,418 and $477,761, respectively, for the
year ended December 31, 1995 and the eight months ended August 29, 1996.
A schedule of future minimum lease payments due under the non-cancellable
operating lease agreements, is as follows:
YEAR ENDED
DECEMBER 31, AMOUNT
- ------------ ----------
1996................................................................. $ 595,370
1997................................................................. 330,465
1998................................................................. 221,577
1999................................................................. 88,472
2000................................................................. 4,729
----------
$1,240,613
==========
CONTINGENCIES:
Environmental Issue:
Based on an evaluation of Eagle's operating facility, asbestos-containing
materials were located in various sections of the facility. No provision or
accrual has been made to provide for any potential future costs for abatement
because, in management's opinion, they should not have a material adverse effect
upon the combined financial position of the Companies. In connection with the
sale of the Companies to American Architectural Products, Inc. (See Note 13),
the former parent of the Companies agreed to bear certain abatement costs
relating to this matter.
Litigation:
At December 31, 1995 and August 29, 1996, the Companies are a party to several
lawsuits. The Companies believe that the lawsuits are without merit and intend
to vigorously defend their position. Provision for a lawsuit that was settled
subsequent to December 31, 1995 for approximately $165,000 has been charged to
operations in the accompanying financial statements for the year ended December
31, 1995. A provision has been charged to
F-28
37
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
operations in the accompanying financial statements for the eight months ended
August 29, 1996 for approximately $100,000 for a lawsuit involving product
performance issues.
6. STOCKHOLDERS' EQUITY:
The stock of Taylor Building Products Company consists of 1,000 shares of $1
par value common stock authorized, issued and outstanding. The stock of Eagle
Window & Door, Inc. consists of 500,000 shares of $1 par value common stock
authorized, 210,851 shares issued and outstanding.
7. RESTRUCTURING CHARGE:
In September, 1995, Taylor's management adopted a restructuring plan to
address recurring operating losses. The goal of the plan was to reduce overhead
through a plan of business consolidation and simplification. The major
components to the plan were: (1) closure of its satellite locations in Florida
and Texas; (2) elimination of its "non-core" product lines; and (3) improve the
proficiency of its entry and garage door lines. As a result of the restructuring
plan, the Company incurred costs for liquidation of inventory, loss on the sale
and abandonment of fixed assets, severance pay, and other related costs. The
restructuring plan was completed during the first quarter of 1996.
The restructuring charge for the year ended December 31, 1995, consisted of
the following:
Loss on sale and abandonment of fixed assets................ $416,131
Severance pay............................................... 281,012
Other....................................................... 142,899
--------
$840,042
========
8. STATEMENTS OF CASH FLOWS:
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1995, the Companies recognized an investing
activity that affected equity, but did not result in cash receipts or payments.
This non-cash activity consisted of the write off notes receivable deemed
uncollectible in the amount of $344,473.
9. WARRANTY RESERVE:
The Companies sell the majority of their products with limited warranties of
two to 25 years. At December 31, 1995 and at August 29, 1996, the accompanying
financial statements include a reserve of $4,824,800 and $4,627,412,
respectively, for estimated warranty claims based on the Companies' historical
claims experience.
10. RELATED PARTY TRANSACTIONS:
As of December 31, 1995 and August 29, 1996, the Companies had amounts payable
to affiliates of $20,482,654 and, $19,441,656, respectively. These affiliates
represent primarily the parent company and subsidiaries of the parent company.
Various shared expenses were charged to the Companies through the payable to
affiliate account. These expenses included items such as general insurance,
health insurance, and workers compensation insurance, which were charged based
on specific identification of the expense. For the year ended December 31, 1995
and the eight months ended August 29, 1996, total expenses charged to the
Companies through specific identification were $3,588,020 and $1,613,407,
respectively.
In addition, MascoTech, Inc., the parent company, charged the Companies a
management fee based on budgeted sales for the various operating subsidiaries.
For the year ended December 31, 1995 and the eight months ended August 29, 1996,
total management fees charged to the Companies were $1,314,700 and $951,000,
respectively.
MascoTech, Inc. also provided cash management services for the Companies. For
the year ended December 31, 1995 and the eight months ended August 29, 1996, the
Companies had recorded interest expense relating to the
F-29
38
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
amounts payable to affiliates of $1,755,177 and $1,142,519, respectively.
Interest expense for the eight month period ended August 29, 1996 was treated as
contributed to capital by the Parent Company.
11. BENEFIT PLANS:
401K PROFIT SHARING PLAN AND PENSION PLAN:
The Companies' former parent sponsored the MascoTech, Inc. Salaried Savings
Plan. All salaried employees of the Company with three months of service, were
eligible to participate in the Plan. The Plan operated as a 401K Savings Plan.
The Plan did not provide for a discretionary matching or profit sharing
contribution. As such, no expense has been recorded for contributions in the
accompanying financial statements.
The Companies' former parent sponsored the MascoTech, Inc. Master Hourly
Employees' Pension Plan. All hourly employees of the Companies were eligible to
participate in the Plan with participation commencing on the date of hire.
Benefits in the Plan were vested and based on the number of years of credited
service.
Pursuant to the pending sale of the Companies to American Architectural
Products, Inc., in August, 1996, and in accordance with the Stock Purchase
Agreement, coverage under these plans ceased. The seller agreed to fully vest
all participants and pay benefits in the normal course of the plans. As such, no
liability has been reported in the accompanying combined financial statements
for any potential unfunded liabilities.
POST-RETIREMENT BENEFITS:
Taylor Building Products Company sponsors a post-retirement health benefit
program pursuant to its collective bargaining contract. Under the principal
terms of the contract, the Company will pay a retired employee with a minimum of
ten years service, a benefit of $100 per month after retirement at age 62. As of
the date of the financial statements, no material post-retirement benefit
obligation has been incurred.
LABOR FORCE:
Most of the hourly employees of Taylor Building Products Company, comprising
approximately 85 percent of the Taylor labor force, are covered under a
collective bargaining agreement. The contract expired in February, 1997, and was
renegotiated for an additional five years.
12. ECONOMIC DEPENDENCY:
For the year ended December 31, 1995, Eagle Window & Door, Inc. purchased
approximately 38 percent of their materials from two suppliers. For the eight
month period ended August 29, 1996, Eagle purchased approximately 15 percent of
their materials from one supplier. At December 31, 1995 and at August 29, 1996,
amounts due to the suppliers were $254,584 and $332,179, respectively.
For the year ended December 31, 1995, and for the eight month period ended
August 29, 1996, Taylor Building Products Company purchased approximately 16
percent and 20 percent, respectively, of their materials from one supplier. At
December 31, 1995, and at August 29, 1996, amounts due to the supplier were
approximately $452,000 and $362,000, respectively.
13. SUBSEQUENT EVENT:
ACQUISITION:
Effective August 29, 1996, the Companies were acquired by American
Architectural Products, Inc. (AAP). On December 18, 1996, American Architectural
Products Holdings, Inc. (AAPH, parent of AAP) consummated transactions
contemplated under an Agreement and Plan of Reorganization dated October 25,
1996. Under terms of this Agreement, all of the capital stock of AAP was
exchanged by AAPH for a 60 percent interest in Forte Computer Easy, Inc. The
financial statements do not give effect to these transactions.
F-30
39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Mallyclad Corporation and Vyn-L Corporation
We have audited the accompanying combined balance sheets of Mallyclad
Corporation and Vyn-L Corporation as of November 30, 1995 and June 30, 1996, and
the related combined statements of operations and retained earnings, and cash
flows for the year ended November 30, 1995 and the seven months ended June 30,
1996. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Mallyclad
Corporation and Vyn-L Corporation as of November 30, 1995 and June 30, 1996, and
the results of their combined operations and their combined cash flows for the
year ended November 30, 1995 and the seven months ended June 30, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Troy, Michigan
April 28, 1997
F-31
40
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED BALANCE SHEETS
NOVEMBER 30, JUNE 30,
1995 1996
------------ -----------
ASSETS (Note 3)
CURRENT ASSETS
Cash and equivalents...................................... $ 110,599 $ 229,615
Accounts receivable, less allowance for doubtful accounts
of $7,000 in 1996...................................... 530,410 358,731
Refundable income taxes................................... 26,160 26,160
Inventories (Note 2)...................................... 430,902 285,635
Prepaid expenses.......................................... 22,853 18,736
----------- -----------
TOTAL CURRENT ASSETS........................................ 1,120,924 918,877
----------- -----------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 128,391 128,391
Machinery and equipment................................... 2,203,868 2,205,604
Computers and office equipment............................ 85,184 87,420
----------- -----------
2,417,443 2,421,415
Less accumulated depreciation............................. (2,268,378) (2,304,178)
----------- -----------
NET PROPERTY AND EQUIPMENT.................................. 149,065 117,237
----------- -----------
OTHER ASSETS................................................ 59,481 32,896
----------- -----------
$ 1,329,470 $ 1,069,010
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit (Note 3)......................... $ 100,000 $ --
Accounts payable.......................................... 280,737 158,039
Accruals
Product claims......................................... 59,556 46,101
Commissions............................................ 28,181 20,150
Compensation........................................... 12,185 8,647
Other.................................................. 53,170 52,103
----------- -----------
TOTAL CURRENT LIABILITIES................................... 533,829 285,040
----------- -----------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY
Common stock, $1 par, authorized 50,000 shares;
outstanding 50,000 shares--Mallyclad Corporation....... 50,000 50,000
Common stock, $1 par, authorized 50,000 shares;
outstanding 38,000 shares--Vyn-L Corporation........... 38,000 38,000
Retained earnings......................................... 707,641 695,970
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 795,641 783,970
----------- -----------
$ 1,329,470 $ 1,069,010
=========== ===========
See accompanying notes to combined financial statements.
F-32
41
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
SEVEN
YEAR ENDED MONTHS ENDED
NOVEMBER 30, JUNE 30,
1995 1996
------------ ------------
Net Sales................................................... $3,991,882 $1,915,620
Cost of Goods Sold.......................................... 3,520,971 1,596,753
---------- ----------
Gross Profit................................................ 470,911 318,867
Selling, General and Administrative Expenses................ 648,990 349,671
---------- ----------
Loss from Operations........................................ (178,079) (30,804)
Other Income--Net........................................... 37,133 19,133
---------- ----------
Loss Before Taxes on Income................................. (140,946) (11,671)
Tax Benefits (Note 6)....................................... 20,686 --
---------- ----------
Net Loss.................................................... (120,260) (11,671)
Retained Earnings, beginning of period...................... 828,901 707,641
Dividends................................................... (1,000) --
---------- ----------
Retained Earnings, end of period............................ $ 707,641 $ 695,970
========== ==========
See accompanying notes to combined financial statements.
F-33
42
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
SEVEN
YEAR ENDED MONTHS ENDED
NOVEMBER 30, JUNE 30,
1995 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(120,260) $ (11,671)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 81,884 35,800
Changes in operating assets and liabilities:
Receivables.......................................... 117,057 171,679
Inventories.......................................... 96,573 145,267
Prepaid expenses..................................... (2,005) 4,117
Other assets......................................... 4,561 26,585
Accounts payable..................................... (179,635) (122,698)
Accruals............................................. (16,911) (26,091)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES......... (18,736) 222,988
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to property and equipment....................... (45,325) (3,972)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit
arrangements........................................... 100,000 (100,000)
Dividends paid............................................ (1,000) --
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 99,000 (100,000)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. 34,939 119,016
CASH AND EQUIVALENTS, at beginning of period................ 75,660 110,599
--------- ---------
CASH AND EQUIVALENTS, at end of period...................... $ 110,599 $ 229,615
========= =========
See accompanying notes to combined financial statements.
F-34
43
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Mallyclad Corporation (Mallyclad) manufactures vinyl clad steel and aluminum
cut to length sheets, primarily for the construction, appliance and automotive
industries. Vyn-L Corporation (Vyn-L) is a steel and aluminum processor,
performing shearing and forming functions for its customers.
Mallyclad and Vyn-L ("the Companies") were under common control and because of
these relationships, the financial statements of the Companies have been
prepared on a combined basis as if they were a single entity. All material
intercompany transactions, accounts and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of receivables, payables and accrued expenses approximate
fair value because of the short maturity of these items.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments consisting of money
market funds.
INVENTORIES
Inventories are stated at the lower of cost or market value determined on the
first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided for using
accelerated methods over the following estimated useful lives:
YEARS
-----
Leasehold improvements...................................... 7-31
Machinery and equipment..................................... 7-15
Computers and office equipment.............................. 5-7
Depreciation expense for the year ended November 30, 1995 and for the seven
months ended June 30, 1996, was $81,884 and $35,800, respectively.
Expenditures for renewals and betterments are capitalized. Expenditures for
maintenance and repairs are charged against income as incurred.
REVENUE RECOGNITION
Revenues from sales and the corresponding receivables are recorded upon the
shipment of product to the customer.
INCOME TAXES
The income tax provision is computed using the liability method. Deferred
taxes are recorded for the expected future tax consequences of temporary
differences between the financial reporting and the tax bases of the Companies'
assets and liabilities.
F-35
44
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consisted of the following:
NOVEMBER 30 JUNE 30,
1995 1996
------------ --------
Raw materials............................................... $355,670 $198,605
Finished goods.............................................. 75,232 87,030
-------- --------
$430,902 $285,635
======== ========
3. REVOLVING LINE OF CREDIT
Mallyclad had a $400,000 revolving line of credit secured by substantially all
of the assets of Mallyclad. The outstanding borrowings on the line were $100,000
and $-0-, respectively, as of November 30, 1995, and June 30, 1996. The interest
rate on the line was prime plus 1/2 percent. Interest expense was $5,086 and
$2,110, respectively, for the periods ended November 30, 1995 and June 30, 1996.
The revolving line of credit was terminated in connection with the acquisition
of the Company's common stock (see Note 9).
4. RETIREMENT PLAN
Mallyclad sponsors a defined contribution retirement plan for salaried
employees. Employees are eligible to participate in the Plan one year after
employment. Company contributions are required in the amount of 4.3 percent of
the participant's total compensation plus 4.3 percent of the participant's
compensation in excess of $30,000. Contributions were $30,974 and $17,500,
respectively, for the periods ended November 30, 1995, and June 30, 1996.
5. COMMITMENTS
The Companies leased their facilities from a related party under
non-cancellable operating lease agreements which commenced January 1, 1994. The
operating lease agreements are for a term of five years and provide for total
monthly payments of $16,168. Rent expense under the operating lease agreements
for the periods ended November 30, 1995, and June 30, 1996 was $163,000 and
$95,000, respectively.
6. TAXES ON INCOME
The benefits (expenses) for income taxes consist of the following:
SEVEN
YEAR ENDED MONTHS ENDED
NOVEMBER 30, JUNE 30,
1995 1996
------------ ------------
Current federal.......................................... $20,686 $ --
Deferred................................................. -- --
------- -------
Total.................................................... $20,686 $ --
======= =======
Significant components of deferred taxes consist of deferred tax assets
arising from accrued expenses, allowance for doubtful accounts and depreciation.
Management has recorded a full valuation allowance against these deferred tax
assets at November 30, 1995 and at June 30, 1996.
7. MAJOR CUSTOMERS
Two customers, each individually accounting for at least 10% of combined net
sales, accounted for 23% of net sales in 1995.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest approximated interest expense.
F-36
45
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
Cash paid for taxes on income for the periods ended November 30, 1995 and June
30, 1996 totaled $33,014 and $-0-, respectively.
9. SUBSEQUENT EVENT
On June 25, 1996, all of the outstanding stock of the Companies was purchased
by an individual. On December 18, 1996 Mallyclad and Vyn-L were merged into
American Architectural Products, Inc. (AAP), a Company controlled by this same
individual. These financial statements do not give effect to these transactions.
F-37