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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-44275
PROSPECTUS
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
[AMERICAN ARCH. LOGO]
OFFER TO EXCHANGE ITS 11 3/4% SENIOR NOTES DUE 2007 THAT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
11 3/4% SENIOR NOTES DUE 2007
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JUNE 12, 1998, UNLESS EXTENDED
American Architectural Products Corporation, a Delaware corporation (the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus (as the same may be amended or supplemented from time
to time, this "Prospectus") and in the accompanying Letter of Transmittal (the
"Exchange Offer"), to exchange its 11 3/4 % Senior Notes due 2007 (the "Exchange
Notes") for a like aggregate principal amount of its outstanding 11 3/4% Senior
Notes due 2007 (the "Outstanding Notes"), of which an aggregate principal amount
of $125,000,000 is outstanding as of the date hereof. The form and the terms of
the Exchange Notes will be the same in all material respects as the form and
terms of each of the Outstanding Notes, except that (i) the Exchange Notes will
be registered under the Securities Act of 1933, as amended (the "Securities
Act"), and hence will not bear legends restricting the transfer thereof and (ii)
holders of the Exchange Notes will not be entitled to certain rights of holders
of Outstanding Notes under the Exchange and Registration Rights Agreement dated
December 10, 1997 (the "Registration Rights Agreement"). See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer." The Exchange Notes will be
initially issued as a single, permanent global certificate. See "Description of
Exchange Notes."
The Outstanding Notes were issued and sold in a transaction exempt from the
registration requirements of the Securities Act and may not be offered or sold
in the United States unless so registered or pursuant to an applicable exemption
under the Securities Act. The Exchange Notes are being offered herewith in order
to satisfy certain obligations of the Company contained in the Registration
Rights Agreement. Based on no-action letters issued by the staff of the
Securities and Exchange Commission (the "Commission") to third parties, the
Company believes that the Exchange Notes to be issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by holders
thereof (other than (i) a broker-dealer who purchases such Exchange Notes from
the Company to resell pursuant to Rule 144A or any other available exemption
under the Securities Act, or (ii) a person that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such Exchange Notes. However, the Company has
not sought a no-action letter with respect to the Exchange Offer and there can
be no assurance the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Eligible holders wishing to accept the
Exchange Offer must represent to the Company that such conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. A broker-dealer may nonetheless be deemed to be an
"underwriter" under the Securities Act notwithstanding such disclaimer. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired by
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such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Outstanding Notes whose Outstanding Notes are not tendered and
accepted in the Exchange Offer will continue to hold such Outstanding Notes and
will be entitled to all the rights and preferences and will be subject to the
limitations applicable thereto under the indenture governing the Outstanding
Notes and the Exchange Notes. Following consummation of the Exchange Offer, the
holders of Outstanding Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the Outstanding Notes held by them. The Exchange Notes will evidence the
same debt as the Outstanding Notes and will be entitled to the benefits of the
indenture (the "Indenture"), dated December 10, 1997, governing the Outstanding
Notes and the Exchange Notes. The Outstanding Notes and the Exchange Notes are
sometimes referred to herein collectively as the "Notes."
The Notes will bear interest at the rate of 11 3/4% per annum, payable
semi-annually on June 1 and December 1, commencing June 1, 1998. The Notes will
mature on December 1, 2007. Except as described below, the Company may not
redeem the Notes prior to December 1, 2002. On or after such date, the Company
may redeem the Notes, in whole or in part, at any time, at the redemption prices
set forth herein, together with accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time and from time to time on or 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 (as defined) at a redemption price equal to
110.0% of the principal amount to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption, provided, that at least $82.0
million of the aggregate principal amount of the Notes remain outstanding
immediately after each such redemption. The Notes will not be subject to any
sinking fund requirement. Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to repurchase the Notes
at a price equal to 101% of the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of repurchase. There can be no
assurance that the Company will have funds available to repurchase the Notes
upon the occurrence of a Change of Control. See "Description of Exchange
Notes -- Optional Redemption -- Optional Redemption Upon Equity Offering" and
"Risk Factors -- Change of Control." Other than change of control provisions and
other restrictive covenants, including limitations on indebtedness and
restricted payments, as applicable, the Indenture does not contain any
provisions that afford holders of the Notes protection in the event of a highly
leveraged or other transaction that may adversely affect such holders. See
"Description of Exchange Notes" and "Risk Factors -- Substantial Leverage;
Ability to Service Debt" and "-- Change of Control."
The Outstanding Notes are and the Exchange Notes will be senior obligations
of the Company. The Outstanding Notes rank and the Exchange Notes will rank pari
passu in right of payment with all existing and future Senior Indebtedness (as
defined) of the Company and senior to all existing and future Subordinated
Obligations (as defined) of the Company. The Outstanding Notes are, and the
Exchange Notes will be, unconditionally guaranteed (the "Guarantees") by each of
the Company's subsidiaries on the issue date of the Notes and by each subsidiary
(excluding Unrestricted Subsidiaries (as defined)) of the Company acquired
thereafter (collectively, the "Subsidiary Guarantors"). The Guarantees are and
will be senior unsecured obligations of the Subsidiary Guarantors and rank and
will rank pari passu in right of payment with all existing and future Senior
Indebtedness of the Subsidiary Guarantors and senior in right of payment to all
Subordinated Obligations of the Subsidiary Guarantors.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange. The Company will accept
for exchange any and all validly tendered Outstanding Notes not withdrawn prior
to 5:00 p.m., New York City time, on June 12, 1998 unless extended by the
Company, (the "Expiration Date"). Tenders of Outstanding Notes may be withdrawn
at any time prior to the Expiration Date. The Exchange Offer is subject to
certain customary conditions. See "The Exchange Offer -- Conditions." The
Company has agreed to pay all expenses incident to the Exchange Offer. The
Company will not receive any proceeds from the Exchange Offer.
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The Outstanding Notes, which have been designated for trading on the PORTAL
Market, constitute securities for which there is no established trading market.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. The Company does not currently intend to list the Exchange
Notes on any securities exchange. To the extent that any Outstanding Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. No assurances can be
given as to the liquidity of the trading market for either the Outstanding Notes
or the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING NOTES IN ANY JURISDICTION
IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY HOLDERS WHO TENDER THEIR OUTSTANDING NOTES IN THE EXCHANGE OFFER.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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AVAILABLE INFORMATION
The Company and the Subsidiary Guarantors have filed with the Commission a
registration statement on Form S-4 (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") under the Securities Act
with respect to the Exchange Notes offered hereby. This Prospectus, which forms
a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, certain parts
of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, the Subsidiary
Guarantors and the Exchange Notes offered hereby, reference is made to the
Registration Statement. Any statements made in this Prospectus concerning the
provisions of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement otherwise filed with the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder, and in accordance therewith files periodic
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the following regional offices:
7 World Trade Center, Suite 1300, New York, NY 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of such
material may be obtained from the Public Reference Section of the Commission at
its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the fees prescribed by the Commission. The Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms including, with respect to the annual
information only, a report thereof by the Company's independent certified public
accountants and (ii) all reports that would be required to be filed on Form 8-K
if the Company were required to file such reports. In addition, for so long as
any of the Notes remain outstanding, the Company has agreed to make available to
any prospective purchaser of the Notes or beneficial owner of the Notes, in
connection with any sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Use of Proceeds," "Risk Factors," "Unaudited Pro Forma Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or industry results,
to differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other important factors include, among others: failure to
successfully integrate the Acquisitions into the Company's business; general
economic and business conditions; industry trends; competition; raw material
costs and availability; loss of any significant customers; changes in business
strategy or development plans; availability, terms and deployment of capital;
availability of qualified personnel and other factors referenced in this
Prospectus. See "Risk Factors." These forward-looking statements speak only as
of the date of this Prospectus, and the Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change
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in the Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
INDUSTRY DATA AND CERTAIN DEFINED TERMS
Unless otherwise indicated, all references in this Prospectus to industry
market data are derived from sources believed by the Company to be reliable.
As used in this Prospectus, the following terms refer to the following
existing subsidiaries of the Company: "ETC" refers to Eagle & Taylor Company, a
Delaware corporation formerly known as American Architectural Products, Inc.;
"Forte" refers to Forte, Inc., an Ohio corporation; "Western" refers to Western
Insulated Glass, Co., an Arizona corporation; and "Thermetic" refers to
Thermetic Glass, Inc., a Delaware corporation. In 1996, Eagle Window & Door,
Inc. ("Eagle"), Taylor Building Products Company ("Taylor"), Mallyclad
Corporation ("Mallyclad") and Vyn-L Corporation ("Vyn-L") were merged into ETC.
Eagle, Taylor and Mallyclad currently are operating divisions of ETC.
TRADEMARKS
The Company and its subsidiaries have registered trademarks on brand names
contained in this Prospectus, including Eagle(R), Encore(R) and Perma-Door(R).
This Prospectus also contains brand names and trademarks of companies other than
the Company and its subsidiaries.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and financial statements, including
the notes thereto, contained elsewhere in this Prospectus. Unless otherwise
indicated, all information contained herein assumes the consummation by the
Company of the acquisitions of Binnings Building Products, Inc. ("Binnings"),
Danvid Company, Inc. and Danvid Window Company (collectively, "Danvid"),
American Glassmith, Inc. ("American Glassmith") and Modern Window Corporation
("Modern") (each an "Acquisition" and, collectively, the "Acquisitions") which
occurred on December 10, 1997, but does not give effect to the subsequent
acquisition by the Company of the vinyl division of Easco Corporation or the
assets of Blackhawk Industries, Inc. or the pending acquisition of the
Weather-Seal division of the Louisiana-Pacific Corporation, which are described
herein under "Business--Subsequent and Pending Acquisitions." "EBITDA" refers to
earnings before interest, taxes, depreciation and amortization. Investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
American Architectural Products Corporation (the "Company" or "AAPC") is a
leading manufacturer and distributor of a broadly diversified line of windows,
doors and related products (collectively, "fenestration products") designed to
meet a variety of residential consumer demands in both the new construction and
repair/remodel markets. The Company distributes its products regionally
throughout the United States under a number of well-established brand names that
are recognized for their quality, value, engineering and customer service,
including "Eagle", "Taylor", "Perma-Door", "Binnings", "Danvid", "Western" and
"Encore." This brand name recognition and reputation have enabled the Company to
establish long-standing relationships with leading wholesalers, lumberyards,
do-it-yourself home centers, architects and building contractors. The Company's
products are marketed and distributed in all 48 contiguous states and are
manufactured in 11 separate facilities. Management believes that the Company's
broad product line, recognized brand names and national geographic scope enable
the Company to satisfy distinct regional product preferences and target fast
growing markets, thereby minimizing the Company's reliance on any single
geographic region. Management believes that the Company is a leading supplier of
residential fenestration products in each of the major regional markets in which
it competes. The Company's pro forma net sales and pro forma EBITDA were $192.4
million and $14.9 million, respectively, for the year ended December 31, 1997.
Total U.S. construction expenditures in 1996 were approximately $451
billion, of which residential construction expenditures comprised approximately
$179 billion. Residential fenestration product sales totaled approximately $15.1
billion in 1996, $7.9 billion of which represented sales to the new construction
market and $7.2 billion of which represented sales to the repair/remodel market.
Of the Company's total 1996 pro forma net sales, approximately 86% was
attributable to residential fenestration products. The National Wood Window and
Door Association ("NWWDA") has estimated that total U.S. sales of residential
windows, which represented approximately 67% of the Company's pro forma net
sales in 1996, increased from 33.4 million units in 1991 to 46.6 million units
in 1996, representing a compound annual growth rate ("CAGR") of 6.9%, and that
sales of residential entry doors, which represented approximately 17% of the
Company's pro forma net sales in 1996, increased from 11.2 million units in 1994
to 12.5 million units in 1996, representing a CAGR of 5.6%. Residential window
and door sales are expected to continue to increase over the next several years,
with NWWDA forecasting sales of residential windows and entry doors of 51.9
million units and 13.8 million units, respectively, in the year 2000. Management
believes that the residential fenestration products market is generally faster
growing and more stable than the commercial fenestration products market, with
relatively greater resistance to economic downturns and changes in interest
rates, especially in the repair/remodel sector.
The residential market is highly fragmented, which provides the Company
with a competitive advantage in the regions it serves as a single source
supplier of a broad array of brand name products. In 1995, the single largest
fenestration company in the U.S. had annual revenues of less than 6% of total
industry sales, and the 100 largest fenestration companies in the aggregate
comprised less than 50% of total industry sales. This industry fragmentation
presents significant opportunities for growth through acquisitions, a strategy
that the Company has been successful in implementing to date.
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The Company is one of a limited number of window and door manufacturers
which offer a broadly diversified product line, consisting of aluminum windows,
wood windows, polyvinyl chloride ("vinyl") windows, doors and other fenestration
products. Aluminum windows, which tend to be less expensive but also less
thermally efficient than wood or vinyl, are used primarily in the Southeastern,
Southern and Southwestern regions where thermal efficiency is not as important
as in other regions. Vinyl windows, which are the fastest growing segment of the
window market, are gaining in popularity due to their thermal efficiency, price
advantage over wood windows and improved composition technologies. Wood windows
are generally more expensive, although also more thermally efficient, than vinyl
or aluminum, and remain the preferred choice in medium- to high-end residential
architectural applications. While the Company markets its aluminum, vinyl and
wood products to specific markets based on distinct geographic preferences, the
Company's national manufacturing and distribution network and its diverse
product line allow the Company to respond efficiently to shifts in regional
consumer preferences and reduce the Company's reliance on any single geographic
region. The following table summarizes the percentage of pro forma net sales for
the nine months ended September 30, 1997 contributed by each of the Company's
main product categories:
PRODUCT CATEGORY SELECTED MAJOR BRAND NAMES GEOGRAPHIC FOCUS PERCENTAGE
---------------- -------------------------- ---------------- ----------
Aluminum Windows..... Binnings, Danvid, Western Southwest, Southeast, Midwest 36%
Wood Windows......... Eagle National 24
Vinyl Windows........ Vinyline, Modernview Southwest, Southeast, Midwest 15
Doors................ Taylor, Perma-Door, Encore National 19
Other Products....... Sumiglass National 6
---
Total 100%
===
The Company was formed through the consolidation of a number of
well-established fenestration products companies. In December 1996, the Company
combined Eagle, Taylor and Mallyclad with Forte, which commenced operations in
1989. The Company subsequently acquired Western in March 1997, Thermetic in July
1997 and each of Binnings, Danvid, American Glassmith and Modern in December
1997. The Company's strategy in combining these companies is to capitalize on
recognized brand names, broad geographic presence, regional market leadership,
reputation for superior product quality and customer service and multi-channel
distribution capabilities. The Company has developed a detailed cost savings and
integration strategy with respect to acquired companies, which includes the
consolidation of certain purchasing, production, administrative, sales and
management functions. The Company integrates the marketing efforts and
distribution network of each acquired entity with the Company's systems to
generate a broader overall distribution system for all of its products. The
Company's business plan includes diversifying and strengthening its product base
by acquiring additional fenestration products companies and related material
manufacturers which complement and enhance the Company's existing product lines,
distribution capabilities and marketing strategy.
The Company's principal executive offices are located at 755
Boardman-Canfield Road, South Bridge Executive Center, Building G West,
Boardman, Ohio 44512 and its telephone number is (330) 965-9910.
COMPETITIVE STRENGTHS
The Company's market leadership and financial performance are attributable
to a number of factors, including the following:
- - LEADING SHARE IN PRIMARY MARKETS
The Company believes it is a leading supplier of windows and doors for
residential consumers in each of the major regional markets it serves. The
Company's market position provides significant advantages over the Company's
smaller competitors in these highly fragmented markets due to purchasing,
manufacturing and distribution efficiencies.
- - ESTABLISHED AND RECOGNIZED BRAND NAMES
The Company believes many of its windows and doors receive national and
regional brand recognition, including products marketed under the "Eagle",
"Taylor", "Binnings", "Danvid", "Western", "Perma-Door",
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"Vinyline", "Modernview", "Encore" and "Sumiglass" brand names. The Company
believes that each of these brands has an established reputation within the
fenestration products industry for high quality, precision engineering and
superior customer service. The Company believes the strength of its brand names
and reputation will assist the Company in penetrating new markets and expanding
distribution in existing markets.
- - BROAD RANGE OF COMPLEMENTARY PRODUCTS
The Company is one of a limited number of window and door manufacturers
that offers a diversified product line consisting of aluminum, vinyl and wood
products. This diversity allows the Company to capture a broader customer base
by targeting specific economic and geographic regions with products tailored to
meet each region's particular preferences. Additionally, the Company can offer
wholesalers and do-it-yourself home center buyers a "one-stop" shopping solution
for many of their window and door needs.
- - STRENGTH IN MULTIPLE DISTRIBUTION CHANNELS
The Company distributes its products through a combination of sales to
wholesalers, lumberyards and do-it-yourself home centers and direct sales to
architects and independent building contractors. The Company believes that this
distribution strategy maximizes the Company's market penetration and reduces
reliance upon any single distribution channel for the sale of its products. In
addition, the Company has developed many long-standing relationships with key
distributors, which management believes provides the Company with a competitive
advantage as the Company further develops its national sales strategy.
- - NATIONAL GEOGRAPHIC SCOPE
While the Company focuses on marketing its aluminum, vinyl and wood
products to specific regional markets based on distinct regional preferences,
the Company's operations form a strong national manufacturing and distribution
network. This national geographic scope, together with the Company's broad
product line, enables the Company to rapidly respond to shifts in regional
consumer demand and reduces the Company's reliance on any single geographic
region for the sale of its products.
- - EMPHASIS ON RESIDENTIAL MARKET
The Company targets its marketing and distribution efforts primarily to the
residential fenestration market. Management believes that the residential
fenestration products market is generally faster growing and more stable than
the commercial fenestration products market, with relatively greater resistance
to economic downturns and changes in interest rates, especially in the
repair/remodel sector. Further, the residential market is highly fragmented,
which offers the Company a competitive advantage as a single source supplier of
a broad array of brand name residential products.
- - EXPERIENCED ENTREPRENEURIAL MANAGEMENT
The Company's management team has extensive experience in the fenestration
products industry. Collectively, the Company's top five executive officers have
a total of 95 years of experience in manufacturing and distributing windows and
doors. In addition, management has a strong track record of acquiring businesses
and integrating them into the existing operations of the Company. Eagle and
Taylor, which were acquired by the Company in August 1996, have experienced
increases in EBITDA from $(4.0) million for the year ended December 31, 1995 to
$8.4 million for the year ended December 31, 1997. The Company's officers,
including the Chairman of the Board, collectively have had significant
involvement in more than 130 acquisition transactions. As of December 31, 1997,
the Company's executive officers and directors collectively owned 84.1% of the
Company's outstanding Common Stock.
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BUSINESS STRATEGY
In order to enhance its leading market position and to maximize
profitability and cash flow, the Company's principal strategic objectives are as
follows:
- - LEVERAGE NATIONAL DISTRIBUTION SYSTEM, PRODUCT LINES AND BRAND NAME
RECOGNITION
The Company will seek to use its nationwide distribution system and broad
product line to penetrate new markets and increase share in existing markets. In
addition, management plans to leverage the Company's national scope by targeting
fast growing regions, thereby enhancing growth potential and reducing the
Company's dependence on any single geographic market. The Company also plans to
continue to capitalize on its well-recognized brand names and reputation for
quality and service to increase revenues by cross-selling its products through
its multiple distribution channels.
- - CONSOLIDATE OPERATIONS TO ACHIEVE COST SAVINGS AND BROADEN DISTRIBUTION
The Company has developed a detailed cost savings and integration strategy
with respect to acquired companies, which includes the consolidation of certain
administrative, sales and management functions. As the Company continues to
expand through acquisitions and internal growth, it will benefit from increased
size and the ability to gain purchasing leverage with its suppliers, thereby
reducing the costs of raw materials used in the manufacturing process. The
Company integrates the marketing efforts and distribution network of each
acquired entity with the Company's existing marketing and distribution systems
to generate a broader overall distribution system for both its existing products
and the newly acquired products. Through these and other measures, the Company
believes that it can effectively enhance the productivity and profitability of
the businesses it acquires and develop synergies with its existing businesses.
- - PURSUE STRATEGIC, COMPLEMENTARY ACQUISITION OPPORTUNITIES
The Company's business plan is to increase the Company's market share and
geographic and product diversity through additional acquisitions of established
fenestration product companies and related material manufacturers. Because the
fenestration industry is highly fragmented, the Company believes that
significant opportunities exist to make selected strategic acquisitions at
attractive valuations. The Company seeks out acquisition candidates that are
leaders in national or regional markets and that possess recognized brand names,
established reputations for superior customer service, strong existing
management and stable customer bases. Strategic acquisitions will allow the
Company to (i) further leverage its highly recognized brand names, (ii) achieve
significant cost reductions through centralized purchasing, sharing central
administrative services and application of the Company's best operating and
management practices, and (iii) further diversify the Company's geographic,
product and market focus.
- - EXPANSION OF VINYL PRODUCTS BUSINESS
The Company plans to expand its presence in the vinyl window and door
market, which is projected to be the fastest growing sector for residential
fenestration product sales. The acquisitions of Binnings, Danvid, Thermetic and
Modern provide the Company with a significant platform of vinyl fenestration
products and customers. Management intends to use the Company's well-recognized
brand names and established distribution channels to help it further penetrate
the highly fragmented vinyl window and door market.
- - VERTICAL INTEGRATION AND PRODUCTION EFFICIENCIES
The Company believes that it can reduce its operating costs and improve its
margins through vertical integration of its aluminum extrusion and decorative
glass production capabilities, along with any vinyl extrusion capacity that the
Company may develop, with its window and door manufacturing operations.
Additional cost savings can be realized through rationalization of product
lines, reconfiguration of production processes, reduction of inventory levels
and implementation of uniform management information systems across the
Company's various operating divisions. Improved gross margins would provide
increased pricing flexibility in relation to the Company's competitors.
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THE EXCHANGE OFFER
Issuer..................... American Architectural Products Corporation
Outstanding Notes.......... The Outstanding Notes were sold by the Company on
December 10, 1997 to NatWest Capital Markets
Limited and McDonald & Company Securities, Inc.
(collectively, the "Initial Purchasers") pursuant
to a Purchase Agreement, dated December 4, 1997
(the "Purchase Agreement"). The Initial Purchasers
subsequently resold the Outstanding Notes to
qualified institutional buyers pursuant to Rule
144A under the Securities Act or institutional
"accredited investors" (as defined in Rule 501
(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act) or outside the United States in
compliance with Regulation S under the Securities
Act.
Registration Rights
Agreement.................. Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into the
Registration Rights Agreement, which grants the
holders of the Outstanding Notes certain exchange
and registration rights. The Exchange Offer is
intended to satisfy such exchange and registration
rights which terminate upon the consummation of the
Exchange Offer.
Securities Offered......... $125,000,000 aggregate principal amount of 11 3/4%
Senior Notes due 2007 (the "Exchange Notes").
The Exchange Offer......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Outstanding Notes that are
properly tendered and accepted. The Company will
issue Exchange Notes on or promptly after the
Expiration Date. As of the date hereof, there is
$125,000,000 aggregate principal amount of
Outstanding Notes outstanding. The terms of the
Exchange Notes are identical in all material
respects to the terms of the Outstanding Notes for
which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes are
freely transferable by holders thereof (other than
as provided herein), and are not subject to any
covenant restricting transfer absent registration
under the Securities Act. See "The Exchange Offer".
The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Outstanding
Notes being tendered for exchange.
Based on no-action letters issued by the staff of
the Commission to third parties with respect to
similar transactions, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than (i) a
broker-dealer who purchases such Exchange Notes
from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities
Act, or (ii) a person that is an "affiliate" of the
Company within the meaning of Rule 405 of the
Securities Act) without compliance with the
registration and prospectus delivery requirements
of the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged
in, have no arrangement or understanding with any
person to participate in, and do not intend to
engage in, any distribution of the Exchange Notes.
However, the Company has not sought a no-action
letter with respect to the Exchange Offer and there
can be no assurance that the staff of the
Commission would make a similar determination with
respect to the
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Exchange Offer. Each holder of Exchange Notes,
other than a broker-dealer, must represent that
such conditions have been met. In addition, each
broker-dealer that receives Exchange Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal accompanying this
Prospectus states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. A
broker-dealer may nonetheless be deemed to be an
"underwriter" under the Securities Act
notwithstanding such disclaimer. This Prospectus,
as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities. Pursuant to the Registration Rights
Agreements, the Company has agreed that, for a
period of 180 days after the Expiration Date, it
will make this Prospectus available to any
broker-dealer for use in connection with any such
resale. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer" and "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the Commission enunciated in no-action letters
and, in the absence of an applicable exemption,
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure to
comply with such requirements in such instance may
result in such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Expiration Date............ 5:00 p.m., New York City time, on June 12, 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended. See "The Exchange Offer -- Expiration
Date; Extensions; Amendments".
Accrued Interest on the
Exchange Notes........... Each Exchange Note will bear interest from the most
recent date to which interest has been paid on the
Outstanding Notes or, if no interest has been paid
on such Outstanding Notes, from December 10, 1997.
Exchange Date.............. As soon as practicable after the close of the
Exchange Offer, the Company will accept for
exchange all Outstanding Notes properly tendered
and not validly withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. See "The
Exchange Offer -- Withdrawal of Tenders."
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to customary
conditions, certain of which may be waived by the
Company. The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such condition. The Exchange Offer is not
conditioned on any minimum aggregate principal
amount of Outstanding Notes being tendered for
exchange. See "The Exchange Offer -- Conditions."
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Consequences of Failure to
Exchange................. Any Outstanding Notes not tendered pursuant to the
Exchange Offer will remain outstanding and continue
to accrue interest. Such Outstanding Notes will
remain "restricted securities" under the Securities
Act, subject to the transfer restrictions described
herein. As a result, the liquidity of the market
for such Outstanding Notes could be adversely
affected upon completion of the Exchange Offer. See
"Risk Factors -- Consequences of Failure to
Exchange" and "The Exchange Offer -- Consequences
of Failure to Exchange."
Certain Federal Income Tax
Considerations........... The exchange of the Outstanding Notes for Exchange
Notes by tendering holders should not be a taxable
exchange for U.S. Federal income tax purposes, and
such holders should not recognize any taxable gain
or loss for U.S. Federal income tax purposes as a
result of such exchange. Holders of Exchange Notes
will continue to be required to include interest on
such Exchange Notes in gross income in accordance
with their method of accounting for U.S. Federal
income tax purposes. Holders should review the
information set forth under "Certain U.S. Federal
Income Tax Consequences" for a discussion of
certain U.S. Federal income tax consequences
relating to the Outstanding Notes and the Exchange
Notes prior to tendering the Outstanding Notes in
the Exchange Offer.
Use of Proceeds............ There will be no cash proceeds to the Company from
the Exchange Offer. See "Use of Proceeds."
PROCEDURES FOR TENDERING OUTSTANDING NOTES
Tendering Outstanding
Notes...................... Each beneficial owner owning interests in
Outstanding Notes ("Beneficial Owner") through a
DTC Participant (as defined) must instruct such DTC
Participant to cause Outstanding Notes to be
tendered in accordance with the procedures set
forth in this Prospectus and in the applicable
Letter of Transmittal. See "The Exchange
Offer -- Procedures for Tendering -- Outstanding
Notes held through DTC."
Each participant (a "DTC Participant") in the
Depository Trust Company ("DTC") holding
Outstanding Notes through DTC must (i)
electronically transmit its acceptance to DTC
through the DTC Automated Tender Offer Program
("ATOP"), for which the transaction will be
eligible, and DTC will then verify the acceptance,
execute a book-entry delivery to the Exchange
Agent's (as defined herein) account at DTC and send
an Agent's Message (as defined herein) to the
Exchange Agent for its acceptance, or (ii) comply
with the guaranteed delivery procedures set forth
in this Prospectus and in the Letter of
Transmittal. By tendering through ATOP, DTC
Participants will expressly acknowledge receipt of
the accompanying Letter of Transmittal and agree to
be bound by its terms and the Company will be able
to enforce such agreement against such DTC
Participants. See "The Exchange Offer -- Procedures
for Tendering -- Outstanding Notes held through
DTC" and "-- Guaranteed Delivery
Procedures -- Outstanding Notes held through DTC."
Each Holder must (i) complete and sign a Letter of
Transmittal, and mail or deliver such Letter of
Transmittal, and all other documents
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required by the Letter of Transmittal, together
with certificate(s) representing all tendered
Outstanding Notes, to the Exchange Agent at its
address set forth in this Prospectus and in the
Letter of Transmittal, or (ii) comply with the
guaranteed delivery procedures set forth in this
Prospectus. See "The Exchange Offer -- Procedures
for Tendering," "-- Exchange Agent" and
"-- Guaranteed Delivery Procedures -- Outstanding
Notes held by Holders."
By tendering, each holder will represent to the
Company that, among other things, (i) it is not an
affiliate of the Company, (ii) it is not a
broker-dealer tendering Outstanding Notes acquired
directly from the Company for its own account,
(iii) the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of such holder and (iv) it has
no arrangements or understandings with any person
to participate in the Exchange Offer for the
purpose of distributing the Exchange Notes. See
"The Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures................. DTC Participants holding Outstanding Notes through
DTC who wish to cause their Outstanding Notes to be
tendered, but who cannot transmit their acceptances
through ATOP prior to the Expiration Date, may
effect a tender in accordance with the procedures
set forth in this Prospectus and in the Letter of
Transmittal. See "The Exchange Offer -- Guaranteed
Delivery Procedures." Holders who wish to tender
their Outstanding Notes but (i) whose Outstanding
Notes are not immediately available and will not be
available for tendering prior to the Expiration
Date, or (ii) who cannot deliver their Outstanding
Notes, the Letter of Transmittal or any other
required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender in
accordance with the procedures set forth in this
Prospectus. See "The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights.......... The tender of Outstanding Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date, in accordance with the procedures set forth
in this Prospectus. See "The Exchange
Offer -- Withdrawal of Tenders."
Exchange Agent............. United States Trust Company of New York is serving
as Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer -- Exchange Agent."
Shelf Registration
Statement.................. Under certain circumstances described in the
Registration Rights Agreement, certain holders of
Outstanding Notes (including holders who are not
permitted to participate in the Exchange Offer or
who may not freely resell Exchange Notes received
in the Exchange Offer) may require the Company to
file and use its best efforts to cause to become
effective, a shelf registration statement under the
Securities Act, which would cover resales of
Outstanding Notes by such holders. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer."
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THE EXCHANGE NOTES
Securities Offered......... $125,000,000 aggregate principal amount of 11 3/4%
Senior Notes due 2007 that have been registered
under the Securities Act. The form and terms of the
Exchange Notes are identical in all material
respects to the terms of the Outstanding Notes for
which they may be exchanged pursuant to the
Exchange Offer, except for certain transfer
restrictions and registration rights relating to
the Outstanding Notes and except for certain
provisions providing for an increase in the
interest rate on the Outstanding Notes under
circumstances relating to the Exchange Offer. See
"Description of Exchange Notes."
Maturity Date.............. December 1, 2007.
Interest Payment Dates..... June 1 and December 1 of each year, commencing on
June 1, 1998.
Optional Redemption........ Except as described below and under "Change of
Control", the Company may not redeem the Notes
prior to December 1, 2002. On or after such date,
the Company may redeem the Notes, in whole or in
part, at any time at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time and from time to time on or
prior to November 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 received from one or more Equity
Offerings at a redemption price equal to 110% of
the principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of
redemption, provided that at least $82 million of
the aggregate principal amount of the Notes remain
outstanding immediately after each such redemption.
Change of Control.......... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the Notes at a price equal to 101% of
the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of
repurchase.
Ranking.................... The Outstanding Notes are, and the Exchange Notes
will be, senior unsecured obligations of the
Company and will rank pari passu in right of
payment with all existing and future Senior
Indebtedness of the Company (including the
Outstanding Notes) and will rank senior in right of
payment to all existing and future Subordinated
Obligations of the Company.
Guarantees................. The Outstanding Notes are, and the Exchange Notes
will be, unconditionally guaranteed, jointly and
severally, by each of the Subsidiary Guarantors.
The Guarantees will be senior unsecured obligations
of the Subsidiary Guarantors and will rank pari
passu in right of payment with all existing and
future Senior Indebtedness of the Subsidiary
Guarantors and senior in right of payment to all
existing and future Subordinated Obligations of the
Subsidiary Guarantors. The Guarantees may be
released upon the occurrence of certain events.
Restrictive Covenants...... The indenture under which the Outstanding Notes
were, and the Exchange Notes will be, issued (the
"Indenture") contains certain covenants that, among
other things, limit (i) the incurrence of
additional indebtedness by the Company and its
subsidiaries, (ii) the payment of dividends on, and
redemption of, capital stock of the Company and the
redemption of certain subordinated obligations of
the Company,
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(iii) investments, (iv) sales of assets and
subsidiary stock, (v) transactions with affiliates
and (vi) consolidations, mergers and transfers of
all or substantially all of the assets of the
Company. The Indenture also prohibits certain
distributions from subsidiaries. However, all the
limitations and prohibitions are subject to a
number of important qualifications and exceptions.
Exchange Offer and Absence
of a Public Market for the
Notes.................... The Exchange Notes will generally be freely
transferable (subject to the restrictions discussed
elsewhere herein) but will be new securities for
which there will not initially be a market. The
Outstanding Notes have been designated for trading
in the PORTAL market. The Company does not intend
to apply for a listing of the Exchange Notes, on
any securities exchange or on any automated dealer
quotation system. See "Plan of Distribution."
FOR MORE COMPLETE INFORMATION REGARDING THE NOTES, SEE "DESCRIPTION OF EXCHANGE
NOTES"
AND "DESCRIPTION OF OUTSTANDING NOTES".
RISK FACTORS
Prospective acquirors of the Exchange Notes should consider carefully all
of the information set forth in this Prospectus and, in particular, should
evaluate the specific factors set forth under "Risk Factors" for risks involved
with an acquisition of the Exchange Notes.
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SUMMARY FINANCIAL DATA
The following table sets forth certain summary financial data of the
Company as of December 31, 1997 and for the year then ended and are derived from
and described in the unaudited pro forma consolidated financial statement and in
the Company's consolidated financial statements included elsewhere in this
Prospectus. The summary unaudited pro forma consolidated statement of operations
data give effect to the offering of the Outstanding Notes (the "Offering") and
the Acquisitions as if they had occurred at January 1, 1997. The summary
unaudited pro forma consolidated financial data do not purport to represent what
the Company's results of operations or financial condition would have actually
been had the Offering and the Acquisitions been consummated as of such dates or
to project the Company's results of operations or financial condition for any
future period. The following information should be read in conjunction with the
consolidated financial statements and the unaudited pro forma consolidated
financial statement of the Company, the financial statements of Binnings
Building Products, Inc., the combined financial statements of Danvid Company,
Inc. and Danvid Window Company and, in each case, the notes thereto, included
elsewhere in this Prospectus.
YEAR ENDED
DECEMBER 31, 1997
--------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $94,252 $192,398
Income from operations.................................... 2,770 9,894
Interest expense, net..................................... 3,928 15,612
Income tax provision (benefit)............................ (390) 0
Net loss.................................................. (1,259) (5,625)
OTHER DATA:
EBITDA(2)................................................. 5,453 14,934
Depreciation and amortization............................. 2,680 4,947
Capital expenditures...................................... 1,548 2,585
Ratio of earnings to fixed charges(3)..................... N/A(4) N/A(4)
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 40,132
Working capital........................................... 61,472
Total assets.............................................. 158,324
Total debt(5)............................................. 126,518
Stockholders' equity...................................... 5,581
- ---------------
(1) The pro forma financial data of the Company were derived from the unaudited
pro forma consolidated financial statement included elsewhere in this
Prospectus.
(2) EBITDA represents income before interest, income taxes, depreciation and
amortization. EBITDA is presented here to provide additional information
about the Company's ability to meet its future debt service, capital
expenditure and working capital requirements. It is not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative either to net income as an
indicator of the Company's operating performance or to cash flows as an
indicator of the Company's liquidity.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes, extraordinary charge and fixed
charges. Fixed charges consist of the total of (i) interest, including the
amortization of deferred finance costs and (ii) that portion of rental
expense considered to represent interest cost (assumed to be one-third).
(4) No ratio is presented for historical 1997 or for pro forma 1997 (see
note(1)) since the earnings were less than fixed charges by $1.2 million and
$5.6 million, respectively.
(5) Total debt includes capital lease obligations.
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RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk, and this Prospectus and certain of the documents incorporated herein by
reference contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. Prospective investors should consider carefully the
following factors, in addition to the other information contained in this
Prospectus, prior to purchasing any of the securities offered hereby.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial indebtedness. As of December 31, 1997, after
the Offering and the refinancing of certain existing indebtedness of the Company
(the "Refinancing"), the Company had total indebtedness, including current
maturities, of approximately $126.5 million. See "Selected Financial Data" and
"Capitalization". The Indenture permits the Company to incur additional
indebtedness, including up to $25 million of Secured Indebtedness, and the
Company intends to secure a new revolving credit facility. The Company's ability
to service, or to refinance, its indebtedness (including the Notes) depends on
its future performance, which is subject to a number of factors, some of which
are beyond the Company's control, including general economic and market
conditions and competition. For the year ended December 31, 1997, the Company's
pro forma EBITDA was approximately $14.9 million.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following: (1)
the Company will have significant cash requirements to service debt, reducing
funds available for operations and future business opportunities and increasing
the Company's vulnerability to adverse economic and industry conditions and
competition; (2) the Company's leveraged position will increase its
vulnerability to competitive pressures; (3) the financial covenants and other
restrictions contained in the Indenture and other agreements relating to the
Company's indebtedness will require the Company to meet certain financial tests
and will restrict its ability to borrow additional funds, to dispose of assets
or to pay cash dividends on, or repurchase, preferred or common stock; and (4)
funds available for working capital, capital expenditures, acquisitions and
general corporate purposes will be limited. Any default under the documents
governing indebtedness of the Company could have a significant adverse effect on
the market value of the Notes. Certain of the Company's competitors currently
operate on a less leveraged basis and may have greater operating and financial
flexibility than the Company.
A significant portion of the Company's cash flow will be required to
service indebtedness and will not be available for other purposes. After giving
pro forma effect to the Offering and the Acquisitions as if they had been
consummated on January 1, 1997, the Company's fixed charges exceeded its
earnings as indicated by the pro forma loss before income taxes of $5.6 million
for the year ended December 31, 1997. In the absence of adequate operating
results and cash flows, the Company may be required to dispose of material
assets or operations or refinance its indebtedness to meet its debt service
obligations. There can be no assurance that the Company will be successful in
this regard should such actions become necessary or that it will not be
restricted from such actions under the terms of its credit facilities, including
the Indenture.
RANKING OF THE NOTES
The Outstanding Notes rank and the Exchange Notes will rank pari passu in
right of payment with all other existing and future unsecured senior
indebtedness of the Company. However, the Notes will be effectively subordinated
to all future and existing secured indebtedness of the Company and the
Subsidiary Guarantors and to all future and existing indebtedness of the
Company's subsidiaries that are not Subsidiary Guarantors. As of December 31,
1997, after the Offering and the Refinancing, the Company and the Subsidiary
Guarantors had approximately $1.5 million of secured indebtedness outstanding
and no other Senior Indebtedness outstanding with the exception of the Notes.
The Indenture will permit the Company and its subsidiaries to incur additional
indebtedness, subject to certain limitations, including up to an additional $25
million of secured debt. See "Description of Exchange Notes -- Ranking."
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CONSEQUENCES OF FAILURE TO EXCHANGE
The Outstanding Notes have not been registered under the Securities Act or
any state securities laws, and therefore, may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions, including the right
of the Company and the Trustee (as defined) in certain cases to require the
delivery of opinions of counsel, certifications and other information prior to
any such transfer. Outstanding Notes that remain outstanding after the
consummation of the Exchange Offer will continue to bear a legend reflecting
such restrictions on transfer. In addition, upon consummation of the Exchange
Offer, holders of Outstanding Notes that remain outstanding will not be entitled
to any rights to have such Outstanding Notes registered under the Securities Act
or to any similar rights under the Registration Rights Agreement (subject to
certain limited exceptions). The Company currently intends to register under the
Securities Act Outstanding Notes that remain outstanding after consummation of
the Exchange Offer only if such Outstanding Notes are held by Initial Purchasers
or persons ineligible to participate in the Exchange Offer (other than due
solely to the status of such holder as an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act). If Outstanding Notes are tendered
and accepted in the Exchange Offer, the market for untendered Outstanding Notes
is likely to diminish; accordingly, holders who do not tender their Outstanding
Notes may encounter difficulties in selling such notes following the Exchange
Offer. The Exchange Notes and any Outstanding Notes that remain outstanding
after consummation of the Exchange Offer will constitute a single series of debt
securities under the Indenture and, accordingly, will vote together as a single
class for purposes of determining whether holders of the requisite percentage in
outstanding principal amount of the Notes have taken certain actions or
exercised certain rights under the Indenture.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to repurchase all or a portion of the outstanding Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. The source of funds for any such repurchase will be the Company's
available cash or cash generated from operating or other sources, including,
without limitation, borrowings, sales of assets or sales of equity securities of
the Company. There can be no assurance that sufficient funds will be available
to make any required repurchase. If an offer to repurchase the Notes is required
to be made and the Company does not have available sufficient funds to pay for
Notes tendered for repurchase, an event of default would occur under the
Indenture. The occurrence of an event of default could result in acceleration of
the maturity of the Notes. See "Description of Exchange Notes."
LACK OF PROFITABLE OPERATIONS
The Company was formed through the consolidation of a number of companies
in the fenestration products industry, some of which had historically incurred
substantial operating losses and, in certain periods, negative cash flows. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company's pro forma net loss for the year ended December 31,
1997 was $5.6 million, and there can be no assurance that the Company will be
able to achieve and maintain profitability. The Company's ability to achieve
profitability is dependent upon a number of factors, including the successful
integration of acquired businesses and implementation of manufacturing
improvement and cost reduction efforts, as well as various factors beyond the
Company's control, such as the impact of raw material price fluctuations, the
demand for the Company's products, the level of residential and non-residential
construction and remodeling activity and expenditures, and the effect of general
economic conditions on the Company's markets. The failure of the Company to
achieve profitability could, among other things, hinder its ability to service
its debt, to consummate future acquisition transactions, to make capital
expenditures and to take advantage of other business opportunities, any one of
which could have a material adverse effect on the Company's financial condition
and results of operations.
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NO HISTORY OF COMBINED OPERATIONS; RISK OF TERMINATION OF CUSTOMER
RELATIONSHIPS; ACQUISITION RISKS
The operations of the Company, Binnings, Danvid and the other recently
acquired companies described herein have been conducted as separate and distinct
businesses, each with its own management team, sales force and operations. The
Company intends to manage its operations and the operations of the recently
acquired companies as an integrated entity. While the Company believes, based on
its history with prior acquisitions, that it can successfully integrate the
operations of the acquired companies, there can be no assurance that this will
be the case. There also can be no assurance that the Company will be able to
realize expected operating and economic efficiencies following the Acquisitions.
In many cases, the acquired companies have had longstanding relationships with
significant customers and distributors. There can be no assurance that these
relationships will continue on the same basis or at all following the
Acquisitions. The termination of major customer relationships would adversely
affect the Company's business.
The Company will continue to seek to acquire other complementary businesses
that will expand the Company's product offerings, distribution capabilities and
customer base. There is no assurance, however, that any future acquisition will
be successful or will achieve results comparable to the Company's existing
business. Furthermore, acquisitions of businesses entail the risk of assuming
contingent or unknown liabilities, such as environmental and tax liabilities not
reflected in financial statements. In light of certain potentially adverse tax
issues relating to the Acquisition of Danvid, the Company structured the
transaction as an asset purchase, which generally affords a lower risk of
successor liability than a stock acquisition. See "Business -- Business
Strategy" and " -- Company History."
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
The Company has developed a detailed cost savings and integration strategy
with respect to acquired companies, which includes the consolidation of certain
purchasing, production, administrative, sales and management functions. The cost
savings anticipated by management of the Company reflect numerous assumptions as
to purchasing and other efficiencies. There can be no assurance that the Company
will be able to realize expected operating and economic efficiencies following
the Acquisitions. In addition, there can be no assurance that unforeseen costs
and expenses or other factors will not offset, in whole or in part, the expected
cost savings or other components of the Company's operating plan.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Outstanding Notes are and the Exchange Notes will be obligations of the
Company and the Outstanding Notes are and the Exchange Notes will be
unconditionally guaranteed, jointly and severally, by each of the Subsidiary
Guarantors. If a court in a lawsuit for the benefit of any unpaid creditor of
the Company or any of the Subsidiary Guarantors, or a representative of the
Company's or such Subsidiary Guarantor's creditors, were to find that, at the
time the Company issued the Notes or the Subsidiary Guarantor issued its Note
Guarantee, the Company or such Subsidiary Guarantor, as the case may be, (1)
intended to hinder, delay or defraud any existing or future creditor, or (2) did
not receive reasonably equivalent value for issuing the Notes or the Note
Guarantee, as the case may be, and (a) was insolvent, (b) became insolvent as a
result of the issuance of the Notes or such Note Guarantee, (c) was engaged or
about to engage in a business or a transaction for which its remaining assets
were unreasonably small in relation to the business or transaction, or (d)
intended to incur, or believed or reasonably should have believed that it would
incur, debts beyond its ability to pay as they became due, then such court could
void the Notes and the Note Guarantees and void such transactions.
Alternatively, in such event, a court could subordinate the claims of the
holders of Notes and the Note Guarantees to claims of other creditors of the
Company or such Subsidiary Guarantor, as the case may be, or take other action
detrimental to holders of the Notes and the Note Guarantees. The Company
believes that, after giving effect to the Exchange Offer, the Company and the
Subsidiary Guarantors taken as a whole will be (i) neither insolvent nor
rendered insolvent by the incurrence of indebtedness in connection with the
Offering, (ii) in possession of sufficient capital to run their businesses
effectively and (iii) incurring debts within their ability to pay as the same
mature or become due.
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HOLDING COMPANY STRUCTURE
AAPC is a holding company with no business operations of its own. The
Company's only material assets are the direct and indirect equity interests in
its subsidiaries, through which the Company conducts its business operations.
Accordingly, AAPC will be dependent upon the earnings and cash flows of, and
dividends and distributions from, its direct and indirect subsidiaries to pay
its expenses, meet its obligations and pay interest and principal on the Notes.
There can be no assurance that these direct and indirect equity interests in
AAPC's subsidiaries will generate sufficient earnings and cash flows to pay
dividends to distribute funds to the Company to enable it to pay its expenses
and meet its obligations to pay interest and principal on the Notes.
GOVERNMENTAL REGULATION; ENVIRONMENTAL MATTERS
The past and present business operations of the Company, and the past and
present ownership and operation of real property by the Company, are subject to
extensive federal, state, local and foreign laws and regulations, including laws
and regulations relating to the discharge of materials into the environment, the
handling and disposal of wastes or otherwise relating to the health, safety and
protection of the environment. Although the Company believes it is in
substantial compliance with all such material laws and regulations, there can be
no assurance that the Company will not incur costs to comply with, or claims or
liabilities under, such laws and regulations. The Company is subject to various
claims and contingent liabilities in the ordinary course of business, including
with respect to employment-related matters, tax matters and environmental
matters. Although there can be no assurance in this regard, the Company believes
that known claims or contingencies will not have a material adverse effect on
its business, results of operations or financial condition.
RELIANCE ON KEY PERSONNEL
The success of the Company depends to a large degree on a number of key
employees, and the loss of the services provided by any of them could have a
material adverse effect on the Company. In particular, the loss of the services
provided by Frank J. Amedia, the Chief Executive Officer and President and a
director of the Company, could have a material adverse effect on the Company.
Mr. Amedia has entered into an employment agreement with the Company for an
initial three-year period. In addition, the Company may from time to time enter
into employment agreements with certain other key employees. There can be no
assurance, however, that any such employment agreements will prevent the Company
from losing the services of any of its key employees. See "Management."
CHANGES IN DEMAND FOR PRODUCTS
Demand in the window and door manufacturing industry is influenced by the
level of residential and non-residential construction activity. Trends in each
of these sectors directly impact the financial performance of the Company.
Accordingly, the strength of the U.S. economy, the age of existing homes, job
growth and interest rates have a direct impact on the Company. Any declines in
new housing starts, non-residential construction activity and/or the demand for
replacement/remodeling products could materially adversely affect the Company.
In addition, the Company believes that in several markets there has been a shift
to vinyl windows and doors. Although the Company is beginning to shift its
manufacturing and distribution emphasis toward vinyl in these markets, the
majority of its operations remain dependent on continuing demand for aluminum
and wood products. See "Business -- Industry Overview."
FLUCTUATIONS IN OPERATING RESULTS AND 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 the Company's products. 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. Seasonal fluctuation in the demand for the Company's products
could have a material adverse effect on the Company's
20
21
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FLUCTUATIONS IN RAW MATERIALS COSTS AND SUPPLY; RELIANCE ON MANUFACTURING
FACILITIES AND SUPPLIERS
The Company purchases aluminum, steel, vinyl, wood, glass and other raw
materials from various suppliers. While such materials are available from
numerous sources, commodity raw materials are subject to fluctuations in price.
Because such materials in the aggregate constitute significant components of the
Company's cost of goods sold, such fluctuations could have a material adverse
effect on the Company's results of operations. Although the Company historically
has been able to pass on gradual increases in raw material prices, there can be
no assurance that the Company will continue to be able to do so in the future.
In addition, sharp increases in material prices are more difficult to pass
through to the customer in a short period of time and may negatively impact the
short-term financial performance of the Company. Loss of or interruptions of
operations at any of the Company's manufacturing facilities could adversely
affect the Company's operations. In addition, although there are numerous
suppliers of raw materials to the Company's operations, the shift to a new
supplier could result in delays or higher costs, which could adversely affect
operating results. See "Business -- Manufacturing."
COMPETITION
The Company has numerous competitors in the fenestration products market,
at both the manufacturing and the distribution level. Certain of the Company's
principal competitors have substantially less leverage than the Company, have
greater financial and other resources, and have greater brand recognition.
Accordingly, such competitors may be better able to withstand changes in
conditions within the industries in which the Company operates and have
significantly greater operating and financial flexibility than the Company. As a
result of the competitive environment in the markets in which the Company
operates, the Company faces (and will continue to face) pressure on sales prices
of its products from competitors, as well as from large customers. As a result
of such pricing pressures, the Company may in the future experience reductions
in the profit margins on its sales, or may be unable to pass future raw material
price or labor cost increases on to its customers (which would also reduce
profit margins). In addition, there can be no assurance that the Company will
not encounter increased competition in the future, which could have a material
adverse effect on the Company's business. See "Business -- Competition."
POTENTIAL LABOR DISPUTES
Approximately 100 of the Company's 1,503 hourly employees are covered by a
collective bargaining agreement which expires in February, 2002. In addition,
the Company has experienced union-organizing activities at its Eagle facility.
The Company believes that its relations with its employees are satisfactory.
There can be no assurance, however, that the Company will not experience work
stoppages or slowdowns in the future. There also can be no assurance that the
Company's non-union facilities will not become subject to successful labor union
organizational efforts or that labor costs will not materially increase. See
"Business -- Employees."
CONTROLLING SHAREHOLDER
AAP Holdings, Inc. ("AAPH") was, as of September 30, 1997, the direct owner
of 7,548,633 shares of the Common Stock, $.001 par value, of the Company (the
"Common Stock") (which constituted approximately 57.7% of the Company's issued
and outstanding Common Stock as of such date) and held options to purchase an
additional 707,655 shares of the Company's Common Stock. Due to its ownership of
a majority of the Company's Common Stock, AAPH will be able to direct and
control the policies of the Company, including mergers, sales of all or
substantially all of the Company's assets, and similar transactions, which
transactions may result in a Change of Control under the Indenture or otherwise
adversely affect the interests of the holders of the Notes. See "Description of
Exchange Notes -- Change of Control."
21
22
ABSENCE OF PUBLIC MARKET
The Outstanding Notes were issued to, and the Company believes are
currently owned by, a relatively small number of beneficial owners. The
Outstanding Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchanged for Exchange Notes. See " -- Consequences of Failure to Exchange."
Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders (who are not affiliates of the Company)
without compliance with the registration and prospectus delivery requirements
under the Securities Act, they will constitute a new issue of securities with no
established trading market. If the Exchange Notes are traded after their initial
issuance, they may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar securities and
other factors including general economic conditions and the financial condition
of the Company. The Company does not intend to apply for a listing or quotation
of the Exchange Notes on any securities exchange or stock market. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Exchange Notes. The liquidity of, and trading market for, the Notes also may
be adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. Subject to certain provisions set forth in the Registration
Rights Agreement, the Company has agreed that, for a period of up to 180 days
after the consummation of the Exchange Offer, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale. However, under certain circumstances, the Company has the right to
require that Participating Broker-Dealers suspend the resale of Exchange Notes
pursuant to this Prospectus. Notwithstanding that the Company may cause the
resale of Exchange Notes pursuant to this Prospectus to be suspended, the
Company has no obligation to extend the 180-day period referred to above during
which Participating Broker-Dealers are entitled to use this Prospectus in
connection with such resales. See "The Exchange Offer -- Resale of the Exchange
Notes."
EXCHANGE OFFER ELIGIBILITY AND PROCEDURES
Any holder of the Outstanding Notes who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or any broker-dealer who
purchased Outstanding Notes from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities Act will not be permitted or
entitled to tender such Outstanding Notes in the Exchange Offer and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or other transfer of such Outstanding Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
See "The Exchange Offer -- Resale of the Exchange Notes."
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company set forth in "The Exchange Offer -- Purpose and
Effect of the Exchange Offer."
Issuance of the Exchange Notes in exchange for the Outstanding Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of the required documents. Therefore, holders of the Outstanding
Notes desiring to tender such Outstanding Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to tenders
of Outstanding Notes for exchange. See "The Exchange Offer -- Procedures for
Tendering."
22
23
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. Of the
approximately $118.5 million in net proceeds received by the Company from the
issuance of the Outstanding Notes, approximately $47.8 million was used to fund
the cash portion of the purchase price of the Acquisitions (including the
repayment of assumed debt) and approximately $33.8 million was used to repay
existing indebtedness. Approximately $36.9 million is intended to be used by the
Company for additional acquisitions, working capital and general corporate
purposes.
CAPITALIZATION
The following table presents the capitalization of the Company at December
31, 1997. The table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Consolidated Financial Statement" and the Financial Statements and notes
thereto in this Prospectus.
DECEMBER 31, 1997
-----------------
Cash and cash equivalents................................... $ 40,132
========
Long-term debt, including current maturities:
Existing senior debt......................................
11 3/4% Senior Notes, due 2007 (1)........................ $125,000
Capital lease and other obligations....................... 1,518
--------
Total debt........................................ 126,518
Total stockholders' equity.................................. 5,581
--------
Total capitalization.............................. $132,099
========
- ---------------
(1) The Outstanding Notes sold by the Company on December 10, 1997 are subject
to the Exchange Offer and on a pro forma basis will be replaced by the
Exchange Notes which are similar in amount and terms. Accordingly,
capitalization is not affected by the Exchange Offer.
23
24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENT
The accompanying unaudited pro forma consolidated statement of operations
for the year ended December 31, 1997 (the Pro Forma Financial Statement) of AAPC
illustrates the effects of the AAPC acquisitions of Western and Thermetic, and
the Offering and the Acquisitions (collectively, the "Transactions"). On March
14, 1997, AAPC acquired the stock of Western, and on July 18, 1997, AAPC
acquired the stock of Thermetic. On December 10, 1997 concurrently with the
Offering, AAPC consummated the acquisitions of Binnings, Danvid, American
Glassmith, and Modern. 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 AAPC consolidated financial statements from the respective
dates of acquisition.
In the Pro Forma Financial Statement, the historical results of operations
of Western and Thermetic for the periods prior to their inclusion in the AAPC
consolidated financial statements are presented as "Completed Acquisitions"; and
the historical results of operations of Binnings, Danvid, American Glassmith and
Modern for the period prior to their inclusion in the AAPC consolidated
financial statements are presented as "Acquisitions" (due to the significance of
Binnings and Danvid, their historical financial data is presented separately
under this heading). The Pro Forma Financial Statement for the year ended
December 31, 1997 is based on the historical statement of operations of AAPC for
that period, of the Completed Acquisitions for the periods in 1997 prior to the
dates such acquisitions were consummated, and of the Acquisitions for the period
from January 1, 1997 through December 10, 1997, the date upon which the
Acquisitions were consummated. The Pro Forma Financial Statement gives effect to
the Transactions as though each transaction had occurred on January 1, 1997.
A pro forma balance sheet is not presented because the Transactions were
completed prior to December 31, 1997 and are reflected in the balance sheet
included in the December 31, 1997 consolidated financial statements of AAPC
which are included elsewhere herein.
The Pro Forma Financial Statement reflects pro forma adjustments that are
based upon available information and assumptions that the Company believes are
reasonable and does not necessarily reflect the results of operations of AAPC
that actually would have resulted had the Completed Acquisitions and the
Offering and Acquisitions to which pro forma effect is given been consummated as
of the date or for the period indicated, or that may be obtained in the future.
In preparing the Pro Forma Financial Statement, the Company believes it has
utilized reasonable methods to conform the basis of presentation. The pro forma
adjustments reflect those adjustments appropriate to present pro forma financial
statement, pursuant to regulations prescribed by the Commission. The Pro Forma
Financial Statement does not reflect certain changes in the operating cost
structure of the companies acquired that are contemplated in connection with the
Transactions.
The Pro Forma Financial Statement should be read in conjunction with the
historical financial statements of AAPC, Western, Thermetic, Binnings and
Danvid. See "Note 2--Recapitalization and Acquisitions" to the AAPC consolidated
financial statements regarding the Company's historical acquisition
transactions.
24
25
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
AAPC
PRO FORMA PRO FORMA
BEFORE OFFERING
OFFERING ACQUISITIONS AND
COMPLETED PRO FORMA AND ---------------------------- ACQUISITION
AAPC ACQUISITIONS(1) ADJUSTMENTS ACQUISITIONS BINNINGS DANVID OTHERS ADJUSTMENTS
---------- --------------- ----------- --------------- -------- ------- ------- -----------
Net sales........... $ 94,252 $3,969 $ 0 $98,221 $42,180 $41,339 $10,658 $ 0
Cost of sales....... 74,304 3,144 (23)(2) 77,425 29,591 33,822 8,110 3(6)
---------- ------ ----- ------- ------- ------- ------- -------
Gross Profit...... 19,948 825 23 20,796 12,589 7,517 2,548 (3)
Selling, general and
administrative
expenses.......... 17,178 642 137(3) 17,957 9,598 5,404 2,581 (1,987)(7)
---------- ------ ----- ------- ------- ------- ------- -------
Income (loss) from
operations...... 2,770 183 (114) 2,839 2,991 2,113 (33) 1,984
Interest expense.... 3,928 142 209(4) 4,279 2,566 23 156 8,588(8)
Other (income)
expense --
net............... (3) 6 0 3 0 (88) (8) 0
---------- ------ ----- ------- ------- ------- ------- -------
Income (loss)
before income
taxes........... (1,155) 35 (323) (1,443) 425 2,178 (181) (6,604)
Income tax provision
(benefit)......... (390) (45) 435(5) 0 9 830 0 (839)(5)
---------- ------ ----- ------- ------- ------- ------- -------
Income (loss) from
continuing
operations...... (765) 80 (758) (1,443) 416 1,348 (181) (5,765)
Dividends on
Preferred Stock... (75) 0 0 (75) 0 0 0 0
---------- ------ ----- ------- ------- ------- ------- -------
Income (loss)
available to
common
stockholders.... $ (840) $ 80 $(758) $(1,518) $ 416 $ 1,348 $ (181) $(5,765)
========== ====== ===== ======= ======= ======= ======= =======
Basic and dilutive
income/(loss) per
common share...... $(0.06) $(0.11)
Weighted average
number of shares
outstanding(9).... 12,982,200 350,100 13,332,300 362,500
SUPPLEMENTAL
INFORMATION:
Depreciation and
amortization... $2,680 $142 $65 $2,887 $751 $193 $345 $771
AAPC
PRO FORMA
----------
Net sales........... $192,398
Cost of sales....... 148,951
--------
Gross Profit...... 43,447
Selling, general and
administrative
expenses.......... 33,553
--------
Income (loss) from
operations...... 9,894
Interest expense.... 15,612
Other (income)
expense --
net............... (93)
--------
Income (loss)
before income
taxes........... (5,625)
Income tax provision
(benefit)......... 0
--------
Income (loss) from
continuing
operations...... (5,625)
Dividends on
Preferred Stock... (75)
--------
Income (loss)
available to
common
stockholders.... $ (5,700)
========
Basic and dilutive
income/(loss) per
common share...... $(0.42)
Weighted average
number of shares
outstanding(9).... 13,694,800
SUPPLEMENTAL
INFORMATION:
Depreciation and
amortization... $4,947
25
26
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(1) Represents historical financial data of the Completed Acquisitions for
the periods prior to their inclusion in the AAPC consolidated financial
statements.
(2) Represents reduction in depreciation and amortization expense in cost
of sales resulting from adjustments to asset bases and useful lives
relating to the Completed Acquisitions as follows:
Depreciation and amortization in cost of sales based on
asset bases resulting from Completed Acquisitions..... $ 120
Eliminate depreciation and amortization in historical
cost of sales......................................... (143)
-----
$ (23)
=====
(3) Represents incremental selling, general and administrative costs
relating to the Completed Acquisitions as follows:
Depreciation and amortization in selling, general and
administrative expenses based on asset bases resulting
from Completed Acquisitions........................... $ 94
Elimination of depreciation and amortization in
historical selling, general and administrative
expenses.............................................. (6)
----
Incremental depreciation and amortization in selling,
general and administrative expenses................... 88
----
Additional compensation to officers under terms of
employment agreements entered into in connection with
the Completed Acquisitions............................ 49
----
$137
====
(4) Represents incremental interest expense relating to the debt of the
Company resulting from the Completed Acquisitions as follows:
Interest on Western term loans at weighted average rate
of 10.8%.............................................. $ 32
Interest on Western revolving credit facility at rate
of 9.5%............................................... 12
Interest on AAPC unsecured promissory notes at rate of
10%................................................... 20
Interest on $2,500,000 Convertible Debenture at rate of
7%.................................................... 96
Interest expense relating to the obligation to issue
additional shares of common stock on the first
anniversary date of the Thermetic acquisition......... 47
Amortization of debt issue costs....................... 4
Elimination of historical interest expense............. (2)
----
$209
====
(5) Adjustment is made to eliminate tax provision (benefit) in determining
pro forma loss from continuing operations when a loss before income
taxes is presented. Management believes that sufficient evidence would
not have existed to recognize a deferred tax asset relating to these
losses.
(6) Represents incremental depreciation and amortization expense in cost of
sales resulting from adjustments to asset bases and useful lives
relating to the Acquisitions as follows:
Depreciation and amortization in cost of sales based on
asset bases resulting from Acquisitions............... $ 841
Elimination of depreciation and amortization in
historical cost of sales.............................. (838)
-----
$ 3
=====
26
27
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(7) Represents incremental costs (savings) in selling, general and
administrative expenses as follows:
Depreciation and amortization in selling, general and
administrative expenses based on asset bases resulting
from the Acquisitions................................. $ 1060
Elimination of depreciation and amortization in
historical selling, general and administrative
expenses.............................................. (291)
-------
Incremental depreciation and amortization in selling,
general and administrative expenses................... $ 769
-------
Savings on insurance costs due to the use of lower
contractual rates of the Company to provide insurance
coverage on the Acquisitions.......................... (379)
Elimination of compensation to executive officers,
former owners and members of the boards of directors
which will be nonrecurring as a result of the
Acquisitions.......................................... (2,377)
-------
$(1,987)
=======
(8) Adjustment for interest represents the recording of interest expense on
the Notes issued in the Offering and the elimination of historical
interest expense as follows:
Interest on Notes issued in the Offering............... $14,688
Amortization of deferred financing costs relating to
the Notes from the Offering........................... 599
Other interest relating to the Acquisitions............ 135
Elimination of historical interest expense............. (6,834)
-------
$ 8,588
=======
(9) Weighted average number of shares used in pro forma presentation
includes the weighted average number of shares outstanding for 1997
adjusted to give effect to (a) the shares issued in connection with the
Acquisitions and (b) the shares issued and committed to be issued in
connection with the acquisition of Thermetic had these transactions
taken place at January 1, 1997. Common stock equivalents are excluded
as the effect would be anti-dilutive.
27
28
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and
its Predecessors for the five years ended December 31, 1997. The selected
historical 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 Prospectus.
The selected historical financial data for the Predecessors for 1995 and
1996 were derived from the audited combined financial statements of Eagle Window
& Door, Inc. and Subsidiaries and Taylor Building Products Company included
elsewhere in this Prospectus, and the audited combined financial statements of
Mallyclad Corporation and Vyn-L Corporation included elsewhere in this
Prospectus. The selected 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 and the audited
combined financial statements of Mallyclad Corporation and Vyn-L Corporation
that are not included elsewhere in this Prospectus. The selected historical
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 Prospectus; the
unaudited financial statements of Mallyclad Corporation that are not included in
this Prospectus; and the unaudited financial statements of Vyn-L Corporation
that are not included in this Prospectus.
The following table also sets forth pro forma financial data of the Company
which were derived from the unaudited pro forma consolidated financial statement
included elsewhere in this Prospectus.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Consolidated Financial Statement," and the
historical financial statements and 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
Prospectus.
28
29
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSORS(2)
---------------------------------------
1993 1994 1995 1996
-------- ------- -------- -------
STATEMENT OF OPERATIONS DATA:
Net sales................................... $116,809 $97,209 $ 76,955 $41,887
Cost of sales............................... 103,260 87,181 71,164 35,430
-------- ------- -------- -------
Gross profit............................. 13,549 10,028 5,791 6,457
Selling, general and admin. expenses........ 20,211 14,929 12,983 7,440
Restructuring charge........................ 0 0 840 0
-------- ------- -------- -------
Income (loss) from operations............ (6,662) (4,901) (8,032) (983)
Interest expense............................ 2,023 2,040 1,755 1,143
Other (income) expense -- net............... (192) (93) 299 480
-------- ------- -------- -------
Income (loss) before income taxes........ (8,493) (6,848) (10,086) (2,606)
Income tax provision (benefit).............. (2,975) (2,509) (3,578) (908)
-------- ------- -------- -------
Income (loss) before extraordinary item..... (5,518) (4,339) (6,508) (1,698)
Extraordinary loss, net income tax
benefit.................................... 0 0 0 0
-------- ------- -------- -------
Net income (loss)........................ (5,518) (4,339) (6,508) (1,698)
Dividends on Preferred Stock................ 0 0 0 0
-------- ------- -------- -------
Net income (loss) available to common
stockholders........................... $ (5,518) $(4,339) $ (6,508) $(1,698)
======== ======= ======== =======
Basic and dilutive income (loss) per common
share......................................
Weighted average shares outstanding.........
OTHER DATA:
EBITDA(6)................................... $ (3,116) $ (832) $ (4,939) $ 1,235
Depreciation and amortization............... 3,354 3,976 3,392 2,698
Capital expenditures........................ 2,229 1,993 2,621 1,683
Ratio of earnings to fixed charges(7)....... N/A(8) N/A(8) N/A(8) N/A(8)
COMPANY(1)(3)
------------------------------------------
COMBINED PRO FORMA
1996 1996(4) 1997 1997(5)
------- -------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales................................... $25,249 $67,136 $94,252 $192,398
Cost of sales............................... 19,027 54,457 74,304 148,951
------- -------- ------- --------
Gross profit............................. 6,222 12,679 19,948 43,447
Selling, general and admin. expenses........ 4,060 11,500 17,178 33,553
Restructuring charge........................ 0 0 0 0
------- -------- ------- --------
Income (loss) from operations............ 2,162 1,179 2,770 9,894
Interest expense............................ 756 1,899 3,928 15,612
Other (income) expense -- net............... 5 485 (3) (93)
------- -------- ------- --------
Income (loss) before income taxes........ 1,401 (1,205) (1,155) (5,625)
Income tax provision (benefit).............. 640 (268) (390) 0
------- -------- ------- --------
Income (loss) before extraordinary item..... 761 (937) (765) (5,625)
Extraordinary loss, net income tax
benefit.................................... 0 0 (494) 0
------- -------- ------- --------
Net income (loss)........................ 761 (937) (1,259) (5,625)
Dividends on Preferred Stock................ 0 0 (75) (75)
------- -------- ------- --------
Net income (loss) available to common
stockholders........................... $ 761 $ (937) $(1,334) $ (5,700)
======= ======== ======= ========
Basic and dilutive income (loss) per common
share...................................... $ (0.10) $ (0.42)
Weighted average shares outstanding......... 12,982,200 13,694,800
OTHER DATA:
EBITDA(6)................................... $ 2,599 $ 3,834 $ 5,453 $ 14,934
Depreciation and amortization............... 442 3,140 2,680 4,947
Capital expenditures........................ 429 2,112 1,548 2,585
Ratio of earnings to fixed charges(7)....... 2.69x N/A(9) N/A(10) N/A(10)
PREDECESSORS(2) COMPANY(1)(3)
------------------------------ ------------------
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------
1993 1994 1995 1996 1997
------- -------- --------- ------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 250 $ 288 $ 861 $ 964 $ 40,132
Working capital (deficit).............................................. 29,047 (5,276) (9,736) 176 61,472
Total assets........................................................... 50,895 39,440 26,629 42,744 158,324
Total debt(11)......................................................... 22 0 0 23,010 126,518
Stockholders' equity................................................... 29,047 2,540 (3,969) 4,277 5,581
29
30
- ---------------
(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 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 are 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 purposes of presenting the selected financial data, Eagle and Taylor,
and Mallyclad and Vyn-L are considered to be 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 Forte are included in the Company's 1996 selected financial
data from December 18, 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 the Acquisitions 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) The pro forma financial data of the Company were derived from the unaudited
pro forma consolidated financial statement included elsewhere in this
Prospectus and do not necessarily reflect the results of operations or the
financial position of the Company that actually would have resulted had the
Completed Acquisitions and the Offering and Acquisitions to which pro forma
effect is given been consummated as of the date or for the periods
indicated. In preparing the unaudited pro forma consolidated financial
statement, the Company believes it has utilized reasonable methods to
conform the basis of presentation. The pro forma adjustments reflect those
adjustments appropriate to present pro forma financial statements pursuant
to regulations prescribed by the Commission.
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(6) EBITDA represents income (loss) from continuing operations before interest,
income taxes, and depreciation and amortization. EBITDA is presented here
to provide additional information about the Company's ability to meet its
future debt service, capital expenditure and working capital requirements.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative either
to net income as an indicator of the Company's operating performance or to
cash flows as a measure of the Company's liquidity.
(7) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income taxes, extraordinary charges
and fixed charges. Fixed charges consist of the total of (i) interest,
including the amortization of deferred finance costs and (ii) that portion
of rental expense considered to represent interest cost (assumed to be
one-third).
(8) No ratio is presented for this period as the earnings were inadequate to
cover fixed charges. Earnings were less than fixed charges by $8.5 million,
$6.8 million, $10.1 million and $2.6 million for the Predecessors' fiscal
years 1993, 1994 and 1995 and for periods in fiscal 1996 prior to their
acquisitions by the Company, respectively.
(9) No ratio is presented for 1996 on a combined basis (see note (4)) as the
earnings were less than the fixed charges by $1.2 million.
(10) No ratio is presented for historical 1997 or for pro forma 1997 (see
note(5)) as the earnings were less than fixed charges by $1.2 million and
$5.6 million, respectively.
(11) Includes capital lease obligations and excludes intercompany payable.
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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 Forte Computer Easy, Inc.
("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 and Thermetic. Concurrently with the Offering, AAPC consummated
the acquisitions of Binnings, Danvid, American Glasssmith 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 acquisition 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.
Concurrently with the Offering, AAPC consummated the acquisitions of
Binnings, Danvid, American Glassmith, and Modern. The Company financed these
acquisitions through the issuance of $125,000,000 of 11 3/4% Senior Notes
(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. See the financial statements of Binnings Building Products
Company and of Danvid Company, Inc. and Danvid Window Company included elsewhere
in this Prospectus.
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 past two years are not comparable. Such lack of comparability is
explained in the discussion below. The following financial data should be read
in conjunction with the
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historical 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.
1995(1) 1996(2) 1997(3)
---------------- ---------------- ----------------
(DOLLARS IN THOUSAND, 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 (4)........................... 1,755 2.3% 1,899 2.8% 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............................. (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 loss............................. 0 0.0% 0 0.0% (494) (0.5%)
------- ----- ------- ----- ------- -----
Net loss....................................... $(6,508) (8.5%) $ (937) (1.4%) $(1,259) (1.3%)
======= ===== ======= ===== ======= =====
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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 basis 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 basis, such data are not comparable to the financial data for
1995 and 1997.
3. Financial data for 1997 were derived from 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
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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 penetration 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
from new customer additions and an improved product mix.
Cost of Sales -- Cost of Sales increased from $59.5 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 with 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.
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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 the companies acquired
in 1997, interest of $0.9 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 net loss of $1.2 million, resulting in 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 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.
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 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.
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36
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. Prior to the Offering, the Company financed acquisitions through
secured senior debt facilities and subordinated debt. In December 1997, the
Company issued $125,000,000 of 11 3/4% 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 purposes and
finance future acquisitions.
Approximately $33.8 million of the net proceeds of the Offering 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.
The Company's principal liquidity requirements will be for debt service
requirements under the Notes and for working capital needs and capital
expenditures. The Company's annual debt service requirements,
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37
including capital lease obligations, following the consummation of the Offering
will increase from $6.4 million to $15.5 million based on outstanding
obligations on December 31, 1997.
The Company is presently in negotiations to secure a revolving credit
facility of $25 million to provide additional liquidity. In addition, the
Company had approximately $40.1 million of cash remaining after giving effect to
the Offering. The Company believes that cash generated from operations together
with proceeds from the Offering and 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 Corporation, an
Austintown, Ohio manufacturer of vinyl extrusions for the fenestration industry.
The cash payment for this acquisition was $13.3 million. Also in January, the
Company purchased all of the assets of Blackhawk Architectural Products, a steel
entry 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 or adverse condition. In March 1998, the Company sold its Mallyclad
division to a related party for a cash inflow of $1.2 million.
Cash payments on long term debt were $23.6 million for 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. 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 $0.4 million 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.
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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 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.
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BUSINESS
THE COMPANY
The Company is a leading manufacturer and distributor of a broadly
diversified line of windows, doors and related products designed to meet a
variety of residential consumer demands in both the new construction and
repair/remodel markets. The Company distributes its products regionally
throughout the United States under a number of well-established brand names that
are recognized for their quality, value, engineering and customer service,
including "Eagle", "Taylor", "Perma-Door", "Binnings", "Danvid", "Western",
"Modernview", "Vinyline", "Encore" and "Sumiglass". This brand name recognition
and reputation have enabled the Company to establish long-standing relationships
with leading wholesalers, lumberyards, do-it-yourself home centers, architects
and building contractors. The Company's products are marketed and distributed in
all 48 contiguous states and are manufactured in 11 separate facilities.
Management believes that the Company's broad product line, recognized brand
names and national geographic scope enable the Company to satisfy distinct
regional product preferences, target fast growing markets, thereby minimizing
the Company's reliance on any single geographic region. Management believes that
the Company is a leading supplier of residential fenestration products in each
of the major regional markets in which it competes. The Company's pro forma net
sales and pro forma EBITDA were $192.4 million and $14.9 million, respectively,
for the year ended December 31, 1997.
Total U.S. construction expenditures in 1996 were approximately $451
billion, of which residential construction expenditures comprised approximately
$179 billion. Residential fenestration product sales totaled approximately $15.1
billion in 1996, $7.9 billion of which represented sales to the new construction
market and $7.2 billion of which represented sales to the repair/remodel market.
Of the Company's total 1996 pro forma net sales, approximately 86% was
attributable to residential fenestration products. The NWWDA has estimated that
total U.S. sales of residential windows, which represented approximately 67% of
the Company's pro forma net sales in 1996, increased from 33.4 million units in
1991 to 46.6 million units in 1996, representing a CAGR of 6.9%, and that sales
of residential entry doors, which represented approximately 17% of the Company's
pro forma net sales in 1996, increased from 11.2 million units in 1994 to 12.5
million units in 1996, representing a CAGR of 5.6%. Residential window and door
sales are expected to continue to increase over the next several years, with
NWWDA forecasting sales of residential windows and entry doors of 51.9 million
units and 13.8 million units, respectively, in the year 2000. Management
believes that the residential fenestration products market is generally faster
growing and more stable than the commercial fenestration products market, with
relatively greater resistance to economic downturns and changes in interest
rates, especially in the repair/remodel sector.
The residential market is highly fragmented, which provides the Company
with a competitive advantage in the regions it serves as a single source
supplier of a broad array of brand name products. In 1995, the single largest
fenestration company in the U.S. had annual revenues of less than 6% of total
industry sales, and the 100 largest fenestration companies in the aggregate
comprised less than 50% of total industry sales. This industry fragmentation
presents significant opportunities for growth through acquisitions, a strategy
that the Company has been successful in implementing to date.
The Company is one of a limited number of window and door manufacturers
which offer a broadly diversified product line, consisting of aluminum windows,
wood windows, polyvinyl chloride ("vinyl") windows, doors and other fenestration
products. Aluminum windows, which tend to be less expensive but also less
thermally efficient than wood or vinyl, are used primarily in the Southeastern,
Southern and Southwestern regions where thermal efficiency is not as important
as in other regions. Vinyl windows, which are the fastest growing segment of the
window market, are gaining in popularity due to their thermal efficiency, price
advantage over wood windows and improved composition technologies. Wood windows
are generally more expensive, although also more thermally efficient, than vinyl
or aluminum, and remain the preferred choice in medium- to high-end residential
architectural applications. While the Company markets its aluminum, vinyl and
wood products to specific markets based on distinct geographical preferences,
the Company's national manufacturing and distribution network and its diverse
product line allow the Company to respond efficiently
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to shifts in regional consumer preferences and reduce the Company's reliance on
any single geographic region. The following table summarizes the percentage of
the Company's pro forma net sales for the nine months ended September 30, 1997
contributed by each of the Company's main product categories:
PRODUCT CATEGORY SELECTED MAJOR BRAND NAMES GEOGRAPHIC FOCUS PERCENTAGE
---------------- -------------------------- ---------------- ----------
Aluminum Windows....... Binnings, Danvid, Western Southwest, Southeast, Midwest 36%
Wood Windows........... Eagle National 24
Vinyl Windows.......... Vinyline, Modernview Southwest, Southeast, Midwest 15
Doors.................. Taylor, Perma-Door, Encore National 19
Other Products......... Sumiglass National 6
---
Total 100%
===
The Company was formed through the consolidation of a number of
well-established fenestration products companies. In December 1996, the Company
combined Eagle, Taylor and Mallyclad with Forte, which commenced operations in
1989. The Company subsequently acquired Western in March 1997, Thermetic in July
1997 and each of Binnings, Danvid, American Glassmith and Modern concurrently
with the closing of the Offering of the Outstanding Notes. The Company's
strategy in combining these companies is to capitalize on recognized brand
names, broad geographic presence, regional market leadership, reputation for
superior product quality and customer service and multi-channel distribution
capabilities. The Company has developed a detailed cost savings and integration
strategy with respect to acquired companies, which includes the consolidation of
certain purchasing, production, administrative, sales and management functions.
The Company integrates the marketing efforts and distribution network of each
acquired entity with the Company's systems to generate a broader overall
distribution system for all of its products. The Company's business plan
includes diversifying and strengthening its product base by acquiring additional
fenestration products companies and related material manufacturers which
complement and enhance the Company's existing product lines, distribution
capabilities and marketing strategy.
COMPETITIVE STRENGTHS
The Company's market leadership and financial performance are attributable
to a number of factors, including the following:
- - LEADING SHARE IN PRIMARY MARKETS
The Company believes it is a leading supplier of windows and doors for
residential consumers in each of the major regional markets it serves. The
Company's market position provides significant advantages over the Company's
smaller competitors in these highly fragmented markets due to purchasing,
manufacturing and distribution efficiencies.
- - ESTABLISHED AND RECOGNIZED BRAND NAMES
The Company believes many of its windows and doors receive national and
regional brand recognitions, including products marketed under the "Eagle",
"Taylor", "Binnings", "Danvid", "Western", "Perma-Door", "Vinyline",
"Modernview", "Encore" and "Sumiglass" brand names. The Company believes that
each of these brands has an established reputation within the fenestration
products industry for high quality, precision engineering and superior customer
service. The Company believes the strength of its brand names and reputation
will assist the Company in penetrating new markets and expanding distribution in
existing markets.
- - BROAD RANGE OF COMPLEMENTARY PRODUCTS
The Company is one of a limited number of window and door manufacturers
that offers a diversified product line consisting of aluminum, vinyl and wood
products. This diversity allows the Company to capture a broader customer base
by targeting specific economic and geographic regions with products tailored to
meet
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each region's particular preferences. Additionally, the Company can offer
wholesalers and do-it-yourself home center buyers a "one-stop" shopping solution
for many of their window and door needs.
- - STRENGTH IN MULTIPLE DISTRIBUTION CHANNELS
The Company distributes its products through a combination of sales to
wholesalers, lumberyards and do-it-yourself home centers and direct sales to
architects and independent building contractors. The Company believes that this
distribution strategy maximizes the Company's market penetration and reduces
reliance upon any single distribution channel for the sale of its products. In
addition, the Company has developed many long-standing relationships with key
distributors, which management believes provides the Company with a competitive
advantage as the Company further develops its national sales strategy.
- - NATIONAL GEOGRAPHIC SCOPE
While the Company focuses on marketing its aluminum, vinyl and wood
products to specific regional markets based on distinct regional preferences,
the Company's operations form a strong national manufacturing and distribution
network. This national geographic scope, together with the Company's broad
product line, enables the Company to rapidly respond to shifts in regional
consumer demand and reduces the Company's reliance on any single geographic
region for the sale of its products.
- - EMPHASIS ON RESIDENTIAL MARKET
The Company targets its marketing and distribution efforts primarily to the
residential fenestration market. Management believes that the residential
fenestration products market is generally faster growing and more stable than
the commercial fenestration products market, with relatively greater resistance
to economic downturns and changes in interest rates, especially in the
repair/remodel sector. Further, the residential market is highly fragmented,
which offers the Company a competitive advantage as a single source supplier of
a broad array of brand name residential products.
- - EXPERIENCED ENTREPRENEURIAL MANAGEMENT
The Company's management team has extensive experience in the fenestration
products industry. Collectively, the Company's top five executive officers have
a total of 95 years of experience in manufacturing and distributing windows and
doors. In addition, management has a strong track record of acquiring businesses
and integrating them into the existing operations of the Company. Eagle and
Taylor, which were acquired by the Company in August 1996, have experienced
increases in EBITDA from ($4.0) million for the year ended December 31, 1995 to
$8.4 million for the year ended December 31, 1997. The Company's officers,
including the Chairman of the Board, collectively have had significant
involvement in more than 130 acquisition transactions. As of December 31, 1997,
the Company's executive officers and directors collectively owned 84.1% of the
Company's outstanding Common Stock.
BUSINESS STRATEGY
In order to enhance its leading market position and to maximize
profitability and cash flow, the Company's principal strategic objectives are as
follows:
- - LEVERAGE NATIONAL DISTRIBUTION SYSTEM, PRODUCT LINES AND BRAND NAME
RECOGNITION
The Company will use its nationwide distribution system and broad product
line to penetrate new markets and increase share in existing markets. In
addition, management will leverage the Company's national scope by targeting
fast growing regions, thereby enhancing growth potential and reducing the
Company's dependence on any single geographic market. The Company also plans to
continue to capitalize on its well-recognized brand names and reputation for
quality and service to increase revenues by cross-selling its products through
its multiple distribution channels.
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- - CONSOLIDATE OPERATIONS TO ACHIEVE COST SAVINGS AND BROADEN DISTRIBUTION
The Company has developed a detailed cost savings and integration strategy
with respect to acquired companies, which includes the consolidation of certain
administrative, sales and management functions. As the Company continues to
expand through acquisitions and internal growth, it will benefit from increased
size and the ability to gain purchasing leverage with its suppliers, thereby
reducing the costs of raw materials used in the manufacturing process. The
Company integrates the marketing efforts and distribution network of each
acquired entity with the Company's existing marketing and distribution systems
to generate a broader overall distribution system for both its existing products
and the newly acquired products. Through these and other measures, the Company
believes that it can effectively enhance the productivity and profitability of
the businesses it acquires and develop synergies with its existing businesses.
- - PURSUE STRATEGIC, COMPLEMENTARY ACQUISITION OPPORTUNITIES
The Company's business plan is to increase the Company's market share and
geographic and product diversity through additional acquisitions of established
fenestration product companies and related material manufacturers. Because the
fenestration industry is highly fragmented, the Company believes that
significant opportunities exist to make selected strategic acquisitions at
attractive valuations. The Company seeks out acquisition candidates that are
leaders in national or regional markets and that possess recognized brand names,
established reputations for superior customer service, strong existing
management and stable customer bases. Strategic acquisitions will allow the
Company to (i) further leverage its highly recognized brand names, (ii) achieve
significant cost reductions through centralized purchasing, sharing central
administrative services and application of the Company's best operating and
management practices, and (iii) further diversify the Company's geographic,
product and market focus.
- - EXPANSION OF VINYL PRODUCTS BUSINESS
The Company plans to expand its presence in the vinyl window and door
market, which is projected to be the fastest growing sector for residential
fenestration product sales. The acquisitions of Binnings, Danvid, Thermetic and
Modern provide the Company with a significant platform of vinyl fenestration
products and customers. Management intends to use the Company's well-recognized
brand names and established distribution channels to help it further penetrate
the highly fragmented vinyl window and door market.
- - VERTICAL INTEGRATION AND PRODUCTION EFFICIENCIES
The Company believes that it can reduce its operating costs and improve its
margins through vertical integration of its aluminum extrusion and decorative
glass production capabilities, along with any vinyl extrusion capacity that the
Company may develop, with its window and door manufacturing operations.
Additional cost savings can be realized through rationalization of product
lines, reconfiguration of production processes, reduction of inventory levels
and implementation of uniform management information systems across the
Company's various operating divisions. Improved gross margins would provide
increased pricing flexibility in relation to the Company's competitors.
COMPANY HISTORY
The Company was formed through the consolidation of a number of
established, well-known fenestration companies. Eagle and Taylor, which have
been engaged in manufacturing fenestration products since 1977 and 1946,
respectively, were acquired by the Company in August 1996. Concurrent with the
acquisition of Eagle and Taylor, the Company also acquired Mallyclad and Vyn-L,
which are engaged in steel processing and vinyl-metal laminates manufacturing.
The operations of Eagle, Taylor, Mallyclad and Vyn-L were combined with the
operations of Forte, Inc., an existing subsidiary of the Company that has been
engaged in the manufacture and distribution of residential and non-residential
windows, window and door security screens, and storm windows and doors since
1990.
The Company continued the expansion of its fenestration products business
through the acquisitions of Western on March 14, 1997 and Thermetic on July 18,
1997. Western primarily markets aluminum windows
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and doors for medium- and high-end residential applications in the Southwestern
U.S., and Thermetic's vinyl windows and doors are sold primarily in the Midwest.
The Company consummated the acquisitions of each of Binnings, Danvid, American
Glassmith and Modern concurrently with the closing of the Offering of the
Outstanding Notes. Both Binnings and Danvid produce aluminum and vinyl windows
and doors, with Binnings' sales concentrated in the Southeastern and Eastern
regions and Danvid's sales concentrated in the Southern and Southwestern
regions. American Glassmith designs, manufactures and assembles a wide variety
of decorative glass lites for residential fenestration applications. Modern
produces vinyl windows for sale in the Midwest region. Unless otherwise
indicated, all information contained herein assumes the consummation by the
Company of each of the Acquisitions.
The corporate organizational structure of the Company and its subsidiaries
is as follows:
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
- -------------------------------------------------------------------------------------
Eagle & Taylor Forte Western Thermetic Binnings Danvid American Modern
Company Glassmith
Operating Divisions:
Eagle, Taylor,
Mallyclad, Vyn-L
SUBSEQUENT AND PENDING ACQUISITIONS
Subsequent to the offering of the Outstanding Notes, the Company has
consummated two acquisitions and signed a letter of intent to acquire the
Weather-Seal division of Louisiana-Pacific Corporation. These acquisitions and
the pending acquisition expand the Company's presence in the manufacture and
sale of vinyl fenestration products.
On January 23, 1998, the Company, through its wholly-owned subsidiary,
VinylSource, Inc. ("VinylSource"), acquired substantially all of the assets of
the Easco Vinyl Division of Easco Corporation for approximately $13.3 million
and the assumption of certain liabilities. VinylSource, located in Youngstown,
Ohio, manufactures vinyl window and door profiles. The Easco Vinyl Division
recorded net sales of approximately $16.1 million for the fiscal year ended
December 31, 1997.
On January 26, 1998, the Company also acquired substantially all of the
assets of Blackhawk Industries, Inc. ("Blackhawk") of Fort Atkinson, Wisconsin,
in exchange for $400,000 and the assumption of certain liabilities and
obligations of Blackhawk. Sales of Blackhawk products, which consist primarily
of steel security screens and steel security screen doors, totalled $2,500,000
for the fiscal year ended December 31, 1997.
The Company recently signed a letter of intent with Louisiana-Pacific
Corporation to acquire its Weather-Seal division ("Weather-Seal"). The Company's
obligation to consummate the acquisition of Weather-Seal is subject to
Hart-Scott-Rodino Act approval, the absence of pending litigation concerning the
transaction or the assets to be acquired thereby, the absence of any material
adverse change prior to the closing date, and completion of the Company's due
diligence investigation. If the acquisition is not consummated for any reason
other than the foregoing, then Louisiana-Pacific Corporation may terminate the
letter of intent and retain the $1.0 million deposit of the Company as a
termination fee. Weather-Seal operates six manufacturing facilities in Ohio,
producing vinyl and wood windows and patio doors for new construction and
renovation. Weather-Seal also produces aluminum and vinyl extrusions for
internal use and sales to third parties. Sales of Weather-Seal products
approximated $53.5 million in 1997.
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INDUSTRY OVERVIEW
General
Total U.S. construction expenditures in 1996 were approximately $451
billion, of which residential construction expenditures were approximately $179
billion. The demand for residential fenestration products is influenced
significantly by both the level of new home construction activity as well as the
level of construction activity in the replacement/remodel sector. In 1996,
spending on residential fenestration products in the U.S. totaled approximately
$15.1 billion, consisting of approximately $7.9 billion in new construction
spending and $7.2 billion in repair/remodel spending. As indicated in the table
below, generally favorable economic conditions have resulted in robust
construction activity in both of these sectors, and these favorable trends in
the U.S. housing and construction industry have, in turn, resulted in strong
demand for residential fenestration products.
KEY INDUSTRY DATA
1991 1992 1993 1994 1995 1996E 1997F 1998F 1999F 2000F
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(ALL FIGURES IN MILLIONS, EXCEPT DOLLARS)
Residential prime window sales (units)... 33.4 39.1 42.4 45.2 44.5 47.7 46.1 45.3 48.8 51.9
Residential entry door sales (units)..... * * * 11.2 11.5 12.5 10.5 12.0 12.5 13.8
Steel residential entry door sales
(units)................................ * * * 7.6 7.9 7.7 7.5 9.0 9.6 10.7
New single-family housing starts
(units)................................ .840 1.030 1.126 1.196 1.076 1.160 1.100 1.050 1.160 1.180
Residential improvement expenditures ($
in billions)........................... $40.7 $47.9 $58.3 $61.6 $59.8 $68.0 $67.0 $72.3 $75.5 $78.6
- ---------------
* Data not available.
Source: NWWDA 1996 Industry Statistical Review and Forecast
The demand for residential fenestration products has also increased as a
result of changes in design trends and consumer preferences in recent years.
Homeowners seeking to differentiate their residences are demanding more
elaborate windows and doors as well as a greater number of windows and doors.
Heightened demand for feature windows, massive entryways, greater design options
on interior doors, and decorative glass have all contributed to the industry's
growth.
While the fenestration industry remains highly sensitive to the level of
new home construction activity, spending on residential remodeling and
replacement activity has increased and is currently comparable to the level of
spending on new home construction activity. Both the short-term and long-term
outlook for remodeling is positive due to the continued growth in the inventory
of existing homes and the aging of the housing stock. The increase in remodeling
and repair benefits all fenestration product lines, including interior and entry
doors, energy efficient and custom windows and garage doors and decorative
glass. Spending on each increases as a result of the shift in consumer attitudes
toward windows and doors from merely a functional component of a house to an
important element in the design of the home.
Product Composition
The percentage of total residential windows and doors made of wood,
aluminum or vinyl varies significantly by region. A homeowner's or homebuilder's
choice of construction materials is based on factors such as cost, thermal
efficiency, ease of maintenance, architectural taste and regional custom. In the
Southern, Southeastern and Southwestern regions, aluminum windows are
historically the most widely used product because of their low cost, durability
and suitability to warm climates. Since aluminum is the least costly window
alternative, homebuilders often prefer aluminum products to control costs.
Aluminum is not used as frequently in the Northern and Northeastern regions
because of historical architectural trends and the usually superior insulating
qualities of wood and vinyl windows.
Of the three primary construction materials used in residential windows and
doors, wood is the most thermally efficient material. Wood windows and doors
generally are more expensive and require more
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maintenance than aluminum or vinyl products. Total U.S. sales of all-wood
windows have declined slightly in the 1990s, while sales of aluminum-clad wood
windows and vinyl-clad wood windows have grown. Exterior cladding allows
vinyl-clad and aluminum-clad wood windows to offer greater durability and less
maintenance along with an aesthetically pleasing wooden interior.
The vinyl window and door market is projected to be the fastest growing
area for fenestration product sales over the next several years. Vinyl windows
began to increase in popularity in the mid-1980s as a replacement product in the
Northern regions and, because of favorable pricing and product improvements,
they are also becoming a popular choice in new construction. Vinyl windows and
doors are generally more expensive than aluminum windows and doors but less
expensive than wood products. Historically, vinyl windows have been less popular
than aluminum windows in warmer climates because of the higher cost of vinyl and
because initial models of vinyl windows were unable to withstand prolonged solar
exposure. However, recent advances in vinyl composition technology have
increased the quality and durability of vinyl windows and doors.
The following charts illustrate the estimated unit market shares of
aluminum, wood and vinyl residential windows in the new residential construction
segment, the repair/remodel segment and the total residential construction
market:
[GRAPHICS IN PROSPECTUS]
Total
New Construction Repair/Remodel Residential Construction
------------------ ----------------- ------------------------
Aluminum 18.2% Aluminum 15.0% Aluminum 16.5%
Vinyl 27.7% Vinyl 45.2% Vinyl 36.7%
Wood 54.1% Wood 39.8% Wood 46.8%
Source: NWWDA 1996 Industry Statistical Review and Forecast.
Industry Fragmentation
The fenestration products market is highly fragmented and historically has
been characterized by small, entrepreneurial businesses. In 1995, the single
largest fenestration company posted sales of approximately $1.4 billion, and
management believes that no single manufacturer of vinyl, wood and metal doors
and windows currently has annual revenues exceeding 6% of total industry sales.
The 100 largest fenestration manufacturing companies accounted for less than 50%
of total industry sales in 1995.
More recently, growing public demand for higher performance and more
elaborate windows and doors has resulted in increased manufacturing costs. These
increased costs, as well as competitive pressures arising from better
technology, higher levels of computerization and enhanced marketing efforts,
have led to a shift away from small, independent manufacturers toward larger
manufacturers that have the ability to spread higher costs across broader
product lines and greater sales volumes and better respond to accelerated lead
times. This industry fragmentation presents significant opportunities for growth
through acquisitions, a strategy the Company has been successful in implementing
to date. In particular, the Company intends to focus on expanding its presence
in the fast-growing vinyl window and door market.
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PRODUCTS
The Company's multiple product lines can generally be separated into the
following categories: (i) aluminum windows; (ii) wood windows; (iii) vinyl
windows; (iv) doors; and (v) other fenestration products.
Aluminum Windows. The Company produces aluminum windows, including
single/double hung, horizontal rolling, fixed light and specialty windows, at
its Binnings and Danvid facilities. In addition, Western manufactures a full
line of aluminum products designed for the luxury home market in Arizona,
California and Nevada. Western's aluminum products include horizontal rolling
windows, casement windows, arched configurations and window wall systems. Forte
manufactures aluminum double-hung windows, projection windows and casement
windows at its Youngstown, Ohio plant, which are primarily targeted for use in
office buildings, schools and other non-residential buildings in the upper
Midwest and mid-Atlantic states.
Wood Windows. Eagle, located in Dubuque, Iowa, manufactures a full line of
wood windows and doors. The Company's wood windows are all preservative treated
to withstand harsh weather conditions and are targeted at the higher priced
segment of the residential window market. Since Eagle's products are available
with primed, unprimed, stained or painted exteriors and interiors, consumers
have flexibility in choosing the finish they prefer. Eagle's products, which
include casement and double hung windows, picture windows and geometrically
shaped windows, are generally purchased for use in high-end custom residential
construction and renovation. Unlike most of its competitors who use thin-rolled
aluminum in the manufacture of aluminum-clad windows, the Company manufactures
extruded aluminum-clad casement and double hung windows and auxiliary windows.
The thicker extruded aluminum cladding, a layer of aluminum attached to a wooden
interior framework, is designed to provide superior frame rigidity, long product
life, resistance to warping and easy maintenance. The Company's aluminum-clad
windows are available in 50 different colors and offer greater customization
options than many competitive products. The customer has the option of selecting
from stained, primed, painted or unfinished interior surfaces and from a number
of pre-finished exterior surfaces, certain of which are resistant to ultraviolet
(UV) ray degradation and salt spray. The Company's aluminum-clad wood windows
are designed for use in high-end residential and non-residential construction
and renovation.
Vinyl Windows. Thermetic and Modern manufacture vinyl replacement windows
sold under the trade name Vinyline and vinyl windows and doors for use in new
construction under the trade name Modernview. Vinyl windows manufactured by
Binnings are sold throughout the Southeast as less expensive alternatives to
wood windows. Danvid also manufactures vinyl windows that are sold primarily in
the Southern and Southwestern U.S. The Company's business strategy includes
continued emphasis on expanding its vinyl fenestration products business through
additional acquisitions and through internal growth.
Doors. Taylor designs and manufactures a complete line of steel entry
doors and advanced steel patio door systems. These products are sold under the
trade names Taylor and Perma-Door. The Taylor stainable steel entry door models
are manufactured with a special surface texture in order to allow durable
staining. The steel entry systems are insulated using a urethane core to enhance
energy efficiency. The Company also manufactures and markets insulated steel
garage door panels under the trade names Encore and Taylor. The Encore garage
door panels are constructed from galvanized, roll-formed laminated steel and
feature multicoat rust protection, rigid foam core insulation and 18-gauge steel
hinge reinforcements for extra strength and durability. The Company manufactures
vinyl-clad steel doors from vinyl-metal laminates produced at its Mallyclad
facility. Currently, the Company sells its vinyl-clad steel doors primarily to
the manufactured housing market. At its Eagle division, the Company produces
wood patio doors and French doors for use in high-end custom residential new
construction and renovation, and Western's aluminum products include sliding
glass doors.
Other Fenestration Products. The Company's other fenestration products
include security screens and security screen doors, aluminum storm windows and
storm doors and decorative glass lites. One of Forte's key products is a
unitized security screen and window combination, designed to be functional and
aesthetically pleasing, which it markets to schools, institutions and other
office buildings. American Glassmith designs, manufactures and assembles
decorative glass lites for a variety of residential applications, including
windows,
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doors, transoms, cabinets, and sidelites. The decorative glass lites are
primarily distributed in the Northern United States. The American Glassmith
division also manufactures laminated glass which is sold under the Sumiglass
trademark. Sumiglass products are used in doors, windows, sidelites, room
partitions, office dividers, skylights and glass handrails. Sumiglass products
are distributed nationally.
Within most of its product lines, the Company offers a variety of options
in terms of price and performance characteristics. The Company markets certain
lines to high-end custom home builders and contractors and to several niche
non-residential markets, including hotels and motels, schools, colleges,
restaurants, and nursing homes. These premium product lines are characterized by
superior cladding and performance characteristics (i.e., strength, durability
and low water/air infiltration), decorative glass and a variety of flexible
options. The premium aluminum-clad windows and doors offer high levels of frame
rigidity, longevity, warping resistance, and easy maintenance. All of the
Company's premium products are designed to promote energy efficiency. Customers
may select either clear insulated glass or low-E glass for more extreme
climates. The Company also offers more moderately priced and lower priced
options for window and door consumers.
Some of the Company's products are currently manufactured for selected
regional distribution. For example, the Company manufactures a full line of
aluminum window and door products designed primarily for the luxury home market
in Arizona, Southern California and Nevada. This line includes horizontal
rolling windows, casement windows, sliding glass doors, Duo-Pane insulating
glass, retro-fit and conversion systems, sound control products, multi-slide
doors, geometric shaped configurations, and window wall systems. Danvid's
aluminum windows target the tract housing market in Texas and the Southeast,
where the lower cost of aluminum windows and the temperate climate make aluminum
windows the product of choice.
DISTRIBUTION AND MARKETING
The Company uses multiple distribution channels and brand names to maximize
market penetration. The Company distributes its windows and doors through (i)
one-step distribution to major do-it-yourself home centers, lumberyards and
specialty window and door stores; (ii) two-step distribution to wholesalers who
resell to do-it-yourself home centers and lumberyards; and (iii) direct sales to
homebuilders, remodelers and contractors. The following charts summarize the
Company's various distribution channels:
DIRECT ONE-STEP TWO-STEP
DISTRIBUTION DISTRIBUTION DISTRIBUTION
- ------------ ------------ ------------
AAPC AAPC AAPC
Wholesaler
Retailer* Retailer*
End User** End User** End User**
- ---------------
* Retailers typically include retail home centers, lumberyards and, in one-step
distribution, Company-owned distribution centers.
** End users typically include remodelers, contractors, homeowners and
homebuilders.
In one-step distribution, the Company distributes to do-it-yourself home
centers and lumberyards and specialty window and door stores. These customers
maintain low levels of inventory and therefore require more frequent deliveries
and generally require higher levels of customer service than two-step
distributors. In two-step distribution, the Company sells to wholesalers who
resell the products to lumberyards and do-it-yourself home centers. Two-step
distributors are primarily utilized to service smaller retailers in rural areas
that do not generate sufficient volume to purchase directly from the Company. In
contrast to one-step distributors, two-step distributors often carry large
inventory positions in order to service the needs of its retail customers who
generally carry limited amounts of inventory.
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The Company markets its products on a national basis, in all 48 contiguous
states, and in Mexico through a sales force consisting of salaried and
commissioned sales representatives. Divisional sales managers coordinate the
marketing activities among the Company and the sales representatives. The sales
representatives concentrate on serving the Company's one-step, two-step,
remodeler, and non-residential contractor customers with marketing, sales and
service support. The Company's marketing strategy emphasizes customer service
and support. Management believes the key to effectively addressing changing
customer requirements, expanding existing customer base, and building supply
relationships with new distributors is the ability to respond with product,
delivery, and service in a complete and time-sensitive fashion.
As a long-time manufacturer and distributor of windows and doors, the
Company has developed long-standing relationships with many key distributors.
The Company believes that the strength of these relationships is a competitive
advantage as the Company further develops its national sales strategy. By
combining its regional leadership position with its broad offering of well-known
products, the Company strives to use the distributor relationships to increase
the penetration of its products into new geographic markets. For example, a
regional distributor who is familiar with the Company's products that have
historically been sold in that region may have a need for some of the Company's
products that are not well-known in that region. Distributors tend to
concentrate their business with a relatively small number of suppliers, and an
existing relationship with a distributor often will provide the Company with an
advantage over other potential suppliers. Accordingly, the Company's marketing
efforts focus on both "cross-selling" to its existing customers as well as
introducing new customers to its extensive product line.
PROPERTIES
The Company's manufacturing facilities and administrative offices are
located at the following sites:
OWNED/
LOCATION SIZE (FT(2)) LEASED PRODUCTS MANUFACTURED/SERVICES PERFORMED
-------- ------------ ------ -----------------------------------------
Eagle
Dubuque, Iowa.................. 320,000 Owned Wood windows and doors and aluminum-clad
windows and doors; administration
Eagle
Dubuque, Iowa.................. 12,000 Leased Sales and Purchasing
Taylor
West Branch, Michigan.......... 210,000 Owned Custom insulated steel entry systems,
steel garage doors and vinyl-clad doors;
administration
Mallyclad
Madison Heights, Michigan...... 39,000 Leased Vinyl-metal laminates, steel processing
Forte
Youngstown, Ohio............... 156,000 Owned Aluminum windows and security windows,
screens and doors; administration
Western
Phoenix, Arizona............... 46,600 Leased Custom aluminum-clad windows and doors
Corporate Headquarters
Boardman, Ohio................. 6,400 Leased Executive offices; administration
Thermetic
Toluca, Illinois............... 70,000 Owned Vinyl doors and windows
Danvid
Carrollton, Texas.............. 169,000 Leased Aluminum windows and doors; vinyl windows
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OWNED/
LOCATION SIZE (FT(2)) LEASED PRODUCTS MANUFACTURED/SERVICES PERFORMED
-------- ------------ ------ -----------------------------------------
Binnings
Lexington, North Carolina...... 268,000 Owned Vinyl windows, aluminum windows and storm
windows and doors; administration
Binnings
North Miami Beach, Florida..... 158,000 Owned Aluminum windows and aluminum-clad patio
doors; distribution
American Glassmith
Columbus, Ohio................. 60,000 Leased Decorative glass lites and laminated
glass products; administration
Modern
Detroit, Michigan.............. 28,000 Owned Vinyl doors and windows
---------
TOTAL..................... 1,543,000
The Company also operates six distribution centers in Florida and one in
Colorado. Management believes the Company's manufacturing, distribution and
administrative facilities are sufficient to meet its current needs.
MANUFACTURING
Wood, extruded aluminum, steel, polyvinyl chloride and glass are the
primary raw materials used in the Company's manufacturing process. These raw
materials are readily available and may be procured from numerous suppliers. The
Company believes there are currently sufficient alternative sources of raw
materials to support its foreseeable manufacturing needs. The Company generally
manufactures products to fill specific purchase orders, and the purchase of raw
materials is usually closely linked to specific purchase orders. The Company is
often able to reduce its exposure to raw materials price increases through
purchasing controls and its ability to pass on price increases to its customers.
See "Risk Factors -- Fluctuations in Raw Materials Costs and Supply."
The Company manufactures and distributes a broad line of aluminum, vinyl
and wood windows and doors. In the aluminum window fabrication process,
extrusions are cut to size and notched and mechanically fastened to form frames,
comprised of sills and jambs, and sashes, comprised of center bars, lock rails,
lift rails and sash rails. Raw glass, purchased cut-to-size or sized in-house,
is insulated and finished. Prepared glass and component parts are assembled by
product type and transferred to a staged shipping area. In the vinyl fabrication
process, vinyl frame extrusions are cut, notched and welded. The frame is then
placed on assembly lines on which insulated glass and sashes are installed. In
the fabrication of wood window and door products, pre-cut, precision-milled wood
components are glued and screwed together, sanded and affixed with appropriate
hardware. These units are then glazed and packaged for final shipment.
The Company acts primarily as a designer, manufacturer, and finisher of its
end products. Except for custom molding the wood components of its windows and
doors and manufacturing decorative glass lites, the Company does not generally
manufacture the component parts used in the manufacture of its products. Among
the component parts purchased from third-party suppliers are extruded aluminum
and PVC. The Company extrudes aluminum at its Binnings facility and intends to
further vertically integrate to increase its internal aluminum extrusion
capacity and add PVC extrusion capacity. The outsourcing of select component
parts manufacturing allows the Company to focus on designing and assembling high
quality products for their target consumers. In addition, the Company intends to
consolidate the operations of Forte and Modern, which is expected to result in
increased production efficiency and cost savings.
In addition, the Company manufactures vinyl-metal laminates for sale to
other manufacturers for a number of uses, including non-residential roofing, and
extrudes small quantities of aluminum for sale to third parties.
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COMPETITION
The fenestration products industry traditionally has been highly fragmented
and competitive. In 1995, the single largest fenestration company had annual
revenues of less than 6% of total industry sales, and the 100 largest
fenestration companies in the aggregate comprised less than 50% of total
industry sales. The Company believes that it competes with other fenestration
product manufacturers primarily on the basis of the breadth of its product
lines, the reliability and speed of its services, and the quality, design and
cost of its products. The Company's main competitors include such firms as
Andersen Windows, JELD-WEN, and Pella Corporation that manufacture products
which compete with many of the Company's product lines on a nationwide basis, as
well as other firms that manufacture a more limited array of products or
distribute their products on a regional or local level only. As consolidation in
the fenestration industry continues, competition on a nationwide basis is also
likely to increase. In addition, any decreases in total market demand for
residential fenestration products would be likely to result in increased
industry competition.
BACKLOG
The Company has no material long-term customer supply contracts. The
Company's products are ordinarily manufactured to fill specific purchase orders,
and orders are generally filled within 60 days of submission of the purchase
order. Accordingly, the Company typically does not maintain significant backlog.
INTELLECTUAL PROPERTY
As of the date of this Prospectus, the Company owned 16 domestic patents, 4
foreign patents and 10 domestic patent applications. Additionally, the Company
owned 29 domestic trademark registrations, 6 foreign trademark registrations, 13
domestic trademark applications and 2 foreign trademark applications. The
patents are of the design, manufacturing, and process types and the trademark
protection applies to entity name protection, as well as product names. There
can be no assurance that other parties will not independently duplicate or
develop similar technologies or design around patented aspects of the Company's
technologies, or that any of the Company's patents, trademarks or pending
applications will afford the Company meaningful protection against competitors.
Litigation may also be necessary to enforce the Company's intellectual property
rights or to determine the scope and validity of others' proprietary rights,
which could result in substantial costs to the Company. The failure of the
Company's to protect its proprietary information could have a material adverse
effect on the Company's business.
GOVERNMENTAL REGULATION AND INDUSTRY STANDARDS
The Company is subject to federal and state laws and regulations governing
the emission of particulate matter and the use, storage, handling and disposal
of certain paints, solvents and other chemicals used in the production of vinyl
cladding and adhesion. Although the Company believes that its activities comply
with the current standards prescribed by law, the risk of accidental
contamination to the environment or injury cannot be eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the available resources of the Company. In
addition, each of the Company's production facilities is subject to regulation
by a number of governmental authorities, including regulations relating to
occupational health and safety, as well as federal and state laws governing such
matters as overtime and minimum wages. The Company believes that its operations
comply in all material respects with all applicable regulatory requirements.
However, any failure to comply with applicable regulations, or the adoption of
new regulations or changes in existing regulations, could impose additional
compliance costs on the Company, require a cessation of certain activities or
otherwise have a material adverse impact on the Company's business and results
of operations.
The Company also adheres to voluntary fenestration industry performance
guidelines established by the NWWDA and the American Architectural
Manufacturers' Association which, in turn, are used by the architectural
community for establishing window and door performance standards for both
residential and non-residential applications. Both of these organizations
establish threshold performance criteria, which qualify products for specific
levels of performance in the categories of water penetration, air infiltration,
and
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structural window and door integrity. Although the Company has historically used
commercial facilities to carry out product testing, the Company is establishing
a testing facility in its Youngstown, Ohio facility that will be capable of
performing these tests.
EMPLOYEES
As of December 15, 1997, the Company employed approximately 2,000 persons.
Of these, approximately 1,500 are hourly and approximately 500 are salaried.
Approximately 100 of the Company's hourly employees are covered by a collective
bargaining agreement which expires in February, 2002. The Company believes that
its relations with its employees are satisfactory. There can be no assurance,
however, that the Company will not experience work stoppages or slowdowns in the
future. In addition, there can be no assurance that the Company's non-union
facilities will not become subject to labor union organizational efforts or that
labor costs will not materially increase.
The Company is a party to an action before the National Labor Relations
Board (the "NLRB"). In early 1996, the International Association of Machinists
(the "IAM") attempted to organize the employees at Eagle. The IAM contested 47
voters, arguing that they were not eligible to vote. The Company disputed this
challenge, and the 8th Circuit Court of Appeals ruled in favor of the Company.
Although the unionization proposal failed to pass on the initial vote, the NLRB
is in the process of determining whether to require the Company to hold a second
election.
LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of its business, none of which, after giving effect to the
Company's existing insurance coverage, is expected to have a material adverse
effect on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages (as of September 1, 1997)
and positions of directors and executive officers of the Company. The Board of
Directors of the Company currently consists of nine (9) members. Directors hold
office until their successors have been duly elected and qualified. Officers are
chosen by and serve at the discretion of the Board of Directors. A summary of
the background and experience of each of these individuals is set forth after
the table.
NAME AGE POSITION
- ---- --- --------
George S. Hofmeister....................... 45 Chairman of the Board
Frank J. Amedia............................ 44 President, Chief Executive Officer and Director
Joseph Dominijanni......................... 40 Treasurer and Director
Richard L. Kovach.......................... 35 Vice President and Chief Financial Officer
Jeffrey V. Miller.......................... 50 Acting Chief Operating Officer
Donald E. Lambrix, Jr...................... 55 Vice President -- Manufacturing
J. Larry Powell............................ 54 Vice President -- Marketing & Sales
Jonathan K. Schoenike...................... 37 General Counsel and Secretary
John J. Cafaro............................. 45 Director
William R. Jackson, Jr..................... 64 Director
John Masternick............................ 71 Director
James E. Phillips.......................... 41 Director
Charles E. Trebilcock...................... 70 Director
James K. Warren............................ 32 Director
George S. Hofmeister has served as the Chief Executive Officer and Chairman
of the Board since December 19, 1996. Mr. Hofmeister has served as Chief
Executive Officer and Chairman of the Board of American Commercial Holdings,
Inc. ("ACH"), the parent company of AAPH, since January 1996 and continues to
serve in such roles. Mr. Hofmeister also continues to serve as Vice Chairman of
Tube Products, Inc., a manufacturer of automobile exhaust systems. Mr.
Hofmeister has held that position since February 14, 1996. From June 1, 1991
until December 15, 1995, Mr. Hofmeister served as Chief Executive Officer and
Chairman of the Board of EWI, Inc., a manufacturer of automotive metal
stampings.
Frank J. Amedia joined the Company's Board of Directors on June 8, 1994
following the acquisition of Forte, Inc. by the Company, and has served as its
President and Chief Executive Officer since that date. From June 8, 1994 until
December 19, 1996, Mr. Amedia also served as the Chairman of the Board of
Directors of the Company. Prior to joining the Company, Mr. Amedia was President
and Chief Executive Officer of Forte, which he founded in 1989 in Youngstown,
Ohio as a welded aluminum security screen and storm door fabricator and expanded
through various acquisitions. Forte's products were distributed through a
manufacturers' representative distribution business established by Mr. Amedia in
1986. Prior to founding the manufacturers' representative business, Mr. Amedia
served in various capacities for the Youngstown Metropolitan Housing Authority.
Joseph Dominijanni has served as the Company's Treasurer since December 19,
1996. Mr. Dominijanni has also served as the Vice President -- Finance of ETC
since its inception. Mr. Dominijanni also currently serves as Vice
President -- Finance of ACH, the parent corporation of AAPH, and American
Commercial Industries, Inc., ("ACI"), which is principally engaged in the
manufacturing of automotive components. Mr. Dominijanni joined ACH and ACI in
May 1996. Mr. Dominijanni served as Vice President -- Finance of EWI, Inc. a
manufacturer of automotive metal stampings, from June 1990 until April 1996.
Prior to 1990, Mr. Dominijanni was a Senior Manager with the accounting firm of
Price Waterhouse.
Richard L. Kovach joined the Company in January 1997 as its Vice President
and Chief Financial Officer. From 1991 until joining the Company, Mr. Kovach
assisted clients with finance and operations
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management issues in the Financial Advisory Services and Management Consulting
practice of Ernst & Young. From 1988 until 1991, Mr. Kovach was Manager of
Financial Planning at Ferro Corporation. Prior to joining Ferro Corporation, Mr.
Kovach was a staff auditor with Arthur Andersen & Co.'s Small Business Group.
Jeffrey V. Miller joined the Company in May 1997 as Acting Chief Operating
Officer. From 1995 to 1997, Mr. Miller served as President of the North American
Window Division of Gentek Building Products. From 1992 through 1994, Mr. Miller
was Director of Vinyl Operations for SNE Corporation, a division of Ply Gem
Industries. Mr. Miller was general manager of the New Construction Window
Division and Vice President of Technology and Corporate Development for Chelsea
Building Products from 1989 to 1992.
Donald E. Lambrix, Jr. became the Company's Vice President -- Manufacturing
in December 1996 after serving as Vice President of Operations for the Company's
Forte subsidiary since 1990. Mr. Lambrix previously served as Vice President of
a multiple facility fenestration products manufacturer. Mr. Lambrix has received
industry recognition for his development of state-of-the-art welding, testing
and certification procedures.
Jonathan K. Schoenike joined the Company in August 1997 as General Counsel
and has served as Secretary since November 1997. Prior to joining the Company,
Mr. Schoenike served for over 5 years as Assistant Counsel for The Cafaro
Company, a major domestic shopping mall developer engaged in the ownership,
operation and management of enclosed regional shopping centers.
J. Larry Powell, the Company's Vice President -- Marketing and Sales,
joined the Company in October 1996. Mr. Powell co-founded Blackhawk Industries,
a manufacturer of steel security screen and storm door products, in 1992 and
served on its Board of Directors and as its Vice President until 1996. From 1987
to 1991, Mr. Powell served as Vice President -- Marketing and Sales for
Sugarcreek Window & Door. Mr. Powell has been employed in the fenestration
industry since the early 1970s, principally in the marketing of residential and
commercial steel and aluminum window products and doors. In addition, Mr. Powell
founded and developed a nationwide marketing representative group that sells a
full range of fenestration products.
John J. Cafaro joined the Board of Directors in December 1996. Mr. Cafaro
also serves as the Executive Vice President of The Cafaro Company, a major
domestic shopping mall developer engaged in the ownership, operation and
management of enclosed regional shopping centers. Mr. Cafaro has been a
principal officer of The Cafaro Company for the past 20 years.
William R. Jackson, Jr. has served as a director of the Company since
December 19, 1996. Mr. Jackson has also served since 1982 on the Board of
Directors of Pitt-Des Moines, Inc., a steel construction, engineering and metal
products manufacturer. Mr. Jackson was also President and Treasurer of Pitt-Des
Moines, Inc. from 1983-87.
John Masternick has been a director of the Company since June 14, 1994. Mr.
Masternick is a practicing attorney in Girard, Ohio, and is the Chairman of the
Board of Directors of Omni Manor, Inc. and Windsor House, Inc., owners and
operators of skilled nursing and extended care facilities in northeastern Ohio
and western Pennsylvania.
James E. Phillips has been a member of the Company's Board of Directors
since December 19, 1996. Mr. Phillips is also an attorney and has practiced with
the law firm of Arter & Hadden since 1985. Additionally, Mr. Phillips has served
as President and director of GPI Incorporated ("GPI") and Profile Extrusion
Company ("PEC") since April 1, 1994 and of Daymonex Limited ("Daymonex") since
May 2, 1996. GPI, PEC and Daymonex are engaged in the aluminum extrusion
industry. Mr. Phillips is also Vice Chairman of ACH.
Charles E. Trebilcock has been a director of the Company since June 14,
1994. Since 1964, Mr. Trebilcock has served as Chairman of Liberty Industries,
Inc., an Ohio-based manufacturer of industrial lumber packaging products and
equipment. Mr. Trebilcock is also a partner in Kings Company, which is also a
manufacturer of industrial lumber packaging products and equipment.
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James K. Warren has been a director of the Company since February 28, 1997.
Mr. Warren holds the office of Vice President -- Corporate Planning of ETC.
Since February 1, 1996, Mr. Warren has been employed by ACI, most recently as
its Chief Financial Officer. During the same time, Mr. Warren has also held the
position of Vice President -- Corporate Planning for ACH, the parent company of
ACI and AAPH. Mr. Warren was previously a practicing attorney with the law firm
of Arter & Hadden.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding annual and
long-term compensation for services rendered to the Company during the fiscal
years ended December 31, 1996, 1995 and 1994 by Frank J. Amedia. No other
executive officers of the Company had a total salary and bonus in fiscal 1996,
1995 or 1994 that exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
FISCAL ------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2)
- --------------------------- ------ --------- ------ ---------------
Frank J. Amedia................................... 1996 $168,718 $0 --
Chief Executive Officer and President(1) 1995 $198,315 $0 --
1994 $137,294 $0 --
- ---------------
(1) The amount of compensation paid to Mr. Amedia for 1994 consists of $47,384
paid from October 1, 1993 through June 7, 1994 (paid by Forte, Inc.) and an
additional $89,910 paid to Mr. Amedia following the closing of the
acquisition of Forte on June 7, 1994.
(2) Other compensation to Mr. Amedia did not exceed $50,000 or 10% of his total
annual salary and bonus during any fiscal year.
In connection with the Acquisitions, the Board of Directors has approved
the payment of special bonuses and fees, which were contingent upon successful
consummation of the Acquisitions, to eleven key officers, employees and
consultants of the Company. The aggregate amount of such bonuses and fees
approved by the Board of Directors is $905,000, including $250,000 allocated to
Mr. Amedia.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Frank J. Amedia
for services as Chief Executive Officer and President. This agreement requires
Mr. Amedia to devote his full time to the Company during normal business hours
in exchange for a base annual salary of $350,000, subject to annual increases at
the discretion of the Board of Directors. In addition, Mr. Amedia is entitled to
receive bonuses at the discretion of the Board of Directors in accordance with
the Company's bonus plans in effect from time to time, and the Company will pay
certain life and disability insurance premiums on behalf of Mr. Amedia. The
agreement has an initial three-year term and provides that Mr. Amedia may not
compete with the Company anywhere in the United States while he is employed by
the Company and for a two-year period following the termination of Mr. Amedia's
employment. In addition, the Board of Directors has approved the payment to Mr.
Amedia of a bonus equal to 0.39% of the total consideration paid by the Company
for each acquisition transaction consummated during 1998.
STOCK OPTION GRANTS
No stock options, stock appreciation rights or restricted stock awards were
granted to or exercised by any officers, directors or employees of the Company
or its subsidiaries during the fiscal year ended December 31, 1996. The Company
entered into definitive stock option agreements with Mr. Amedia and Mr.
Masternick dated December 18, 1996, memorializing the terms of stock options
granted in 1994. On December 19, 1996, the Board of Directors of the Company
granted options to purchase 2,000 shares of common stock to each of Anthony E.
DePrima, Arnold Parnell and Dr. Chester Amedia, former members of the Board of
Directors of
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the Company, in recognition of their many years of service to the Company. These
options have an exercise price of $4.69 per share and expire on December 19,
2001. Dr. Amedia is the brother of Frank J. Amedia, the President and Chief
Executive Officer of the Company.
OPTION VALUES
The following table sets forth certain information concerning each exercise
of stock options during the year ended December 31, 1996 by each of the Named
Executive Officers and the aggregated fiscal year-end value of the unexercised
options of each such Named Executive Officer.
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
END($)(1) SHARES VALUE FISCAL YEAR END(#) AT FISCAL YEAR
--------- ACQUIRED ON REALIZED --------------------------- ---------------------------
EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
Frank J. Amedia................ 0 $0 426,244 0 $932,409 $0
- ---------------
(1) Based on average of reported bid and ask prices for the Company's common
stock on December 31, 1996.
As of September 30, 1997, options to purchase a total of 1,644,425 shares
of the Company's common stock were outstanding, including options to purchase
707,655 shares issued to AAPH on December 18, 1996, with exercise prices ranging
from $3.75 to $6.19 per share.
STOCK OPTION PLANS
In May of 1992, the Board of Directors of the Company adopted an Employee
Incentive Stock Option Plan (the "Option Plan"). Options to purchase an
aggregate of up to 500,000 shares of the Company's common stock were authorized
under the Option Plan. Options granted under the Option Plan have a maximum
duration of ten years from the date of grant.
The Company has also adopted the 1996 Stock Option Plan (the "1996 Plan"),
which authorizes the Board to grant options to Directors and employees of the
Company to purchase in the aggregate an amount of shares of common stock equal
to 10% of the shares of common stock issued and outstanding from time to time,
but which aggregate amount shall in no event exceed 10,000,000 shares of common
stock. Directors, officers and other employees of the Company who, in the
opinion of the Board of Directors, are responsible for the continued growth and
development and the financial success of the Company are eligible to be granted
options under the 1996 Plan at the discretion of the Board of Directors. Options
may be nonqualified options, incentive stock options, or any combination of the
foregoing. In general, options granted under the 1996 Plan are not transferable
and expire ten (10) years after the date of grant. The per share exercise price
of an incentive stock option granted under the 1996 Plan may not be less than
the fair market value of the common stock on the date of grant. Incentive stock
options granted to persons who have voting control over 10% or more of the
Company's capital stock are granted at 110% of the fair market value of the
underlying shares on the date of grant and expire five years after the date of
grant. No option may be granted after December 19, 2006.
The 1996 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1996 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
As of September 30, 1997, options to purchase a total of 309,000 shares of
common stock were outstanding under the 1996 Plan, at exercise prices ranging
from $4.69 to $6.19 per share.
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401(k) PLAN
Eligible employees of the Company may direct that a portion of their
compensation, up to a legally established maximum, be withheld by the Company
and contributed to a 401(k) plan. All 401(k) plan contributions are placed in a
trust fund to be invested by the 401(k) plan's trustee, except that the 401(k)
plan permits participants to direct the investment of their account balances
among mutual or investment funds available under the Plan. The 401(k) plan
provides a matching contribution of 50% of a participant's contributions up to a
maximum of seven percent of the participant's annual salary. Amounts contributed
to participant accounts under the 401(k) plan and any earnings or interest
accrued on the participant accounts are generally not subject to federal income
tax until distributed to the participant and may not be withdrawn until death,
retirement or termination of employment.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Audit Committee, which is comprised of William R. Jackson,
Jr., Charles E. Trebilcock and Joseph Dominijanni, is responsible for reviewing
and making recommendations regarding the Company's employment of independent
auditors, the annual audit of the Company's financial statements and the
Company's internal accounting controls, practices and policies.
The Company's Compensation Committee is responsible for making
recommendations to the Board of Directors regarding compensation arrangements
for executive officers of the Company, including annual bonus compensation, and
consults with management of the Company regarding compensation policies and
practices. The Compensation Committee also makes recommendations concerning the
adoption of any compensation plans in which management is eligible to
participate, including the granting of stock options and other benefits under
such plans. The Compensation Committee is comprised of George S. Hofmeister,
Frank J. Amedia, and John Masternick.
DIRECTORS' TERMS AND COMPENSATION
The Company's Board of Directors is currently comprised of nine members.
Each director is elected for a period of one year at the Company's annual
meeting of shareholders and serves until his or her successor is duly elected
and qualified. Directors who are not employees of the Company or affiliates of
AAPH, which currently consists of Messrs. Cafaro, Jackson, Masternick and
Trebilcock, currently receive the following annual compensation: (i) options to
purchase 2,000 shares of common stock at an exercise price equal to the average
of the reported closing bid and asked prices on the date of grant, vesting in
full after one year if the director attends at least four of the regularly
scheduled meetings of the Board of Directors and at least 75% of all meetings of
the Board of Directors in 1997 (such options will be exercisable for a period of
five years following the vesting date and will be issued pursuant to the
Company's 1996 Stock Option Plan); and (ii) a fee of $1,000 for each Board of
Directors meeting attended in person. All directors are reimbursed for expenses
incurred in connection with attendance at meetings of the Board of Directors or
committees thereof. Directors who are also officers of the Company are not
compensated for their services as a director.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1990, the U.S. Small Business Administration loaned $409,000 to
Forte (the "SBA Loan"). Mr. Amedia and his wife were personally liable on the
SBA Loan. As of September 30, 1997, the balance owed on the SBA Loan was
approximately $173,000. The Company used a portion of the net proceeds of the
Offering to repay this loan.
The Company acquired all of the issued and outstanding common stock of
Forte from Frank Amedia and John Masternick on June 8, 1994, in exchange for
3,311,010 shares of the Company's common stock and options to acquire 475,770
shares of the Company's common stock.
On October 20, 1994, Forte borrowed $850,000 from The City of Youngstown,
Ohio. Mr. Amedia and his wife were guarantors of this loan. As of September 30,
1997, the balance owed to The City of Youngstown
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under the loan agreement was approximately $850,000. The Company used a portion
of the net proceeds of the Offering to repay this loan.
In December 1994, Mr. Amedia and Mr. Masternick and their wives executed
guarantees in favor of the Second National Bank of Warren with respect to a loan
to Forte in the original principal amount of $647,030. The proceeds of this loan
were used to finance improvements to Forte's manufacturing facilities. As of
September 30, 1997, the balance owed on this loan was approximately $522,000.
The Company used a portion of the net proceeds of the Offering to repay this
loan.
Pursuant to the reorganization of the Company and ETC on December 18, 1996
(the "Reorganization") the Company acquired all of the issued and outstanding
stock of ETC in exchange for 1,000,000 shares of Series A Preferred Stock of the
Company. In April 1997, AAPH converted the Series A Preferred Stock pursuant to
its terms into 7,548,633 shares of common stock of the Company. In addition, the
Company issued to AAPH options to purchase up to 879,834 shares of common stock,
of which options to purchase 172,178 shares have subsequently terminated. Such
options are identical in price and exercise terms to the previously outstanding
options.
In connection with the Reorganization of the Company and AAPH, the Company
and its subsidiary, ETC, agreed to use their best efforts to secure the release
of Amedia, Masternick and Hofmeister from all obligations as either a co-obligor
or guarantor of Company or ETC debt. In addition, the Company agreed to
indemnify, defend and hold harmless Amedia, Masternick and Hofmeister against
any loss, cost or expense which any of them may incur as a result of being a
co-obligor or guarantor of any Company or ETC debt. Furthermore, the Company and
AAPH agreed not to dispose of assets securing any Company or ETC debt without
the prior written consent of any person who is a co-obligor or guarantor of such
debt.
In addition, in connection with the Reorganization, the Company agreed that
ETC would pay a management fee to AAPH of $250,000 during 1997 and to reimburse
AAPH and its affiliates for out-of-pocket expenses incurred in providing
services to ETC. The management fee agreement terminated on December 31, 1997.
The Company agreed to pay AAPH an acquisition consulting fee of one percent (1%)
of the transaction price of each acquisition transaction consummated by the
Company with respect to which AAPH or its affiliates provides acquisition
consulting services. For purposes of calculating the acquisition fee, the
transaction price means the aggregate amount of consideration paid by the
Company or its affiliates for the acquisition in the form of cash, stock, stock
options, warrants, debt instruments and other assumed liabilities. The
acquisition consulting fee agreement will terminate on December 18, 1998, except
with respect to acquisition transactions already in progress at such date.
As security for certain promissory notes dated August 29, 1996 (the
"MascoTech Notes") in the aggregate original principal amount of $8,000,000
which were issued by ETC to MascoTech, Inc. ("MascoTech"), AAPH granted
MascoTech an option to purchase up to 20% of the shares of the Company's common
stock held by AAPH. The Company agreed that if the MascoTech Notes were not
repaid in full on or before December 31, 1997 and MascoTech exercised its option
with respect to any shares of the Company's common stock held by AAPH, the
Company would issue to AAPH, without payment therefor, a number of additional
shares of common stock equal to the number of shares as to which such option was
exercised. The Company also agreed to use its best efforts to cause all amounts
owed under the MascoTech Notes to be repaid in full on or before December 31,
1997. The Company used a portion of the net proceeds of the Offering to repay in
full the MascoTech Notes.
In connection with the acquisition of Western in March 1997, Mr. Amedia and
Mr. Hofmeister co-signed unsecured promissory notes in the aggregate original
principal amount of $453,753 payable to the former shareholders of Western and
the organization that brokered the acquisition. As of September 30, 1997, the
outstanding balance on the notes was $453,753. In addition, Mr. Amedia co-signed
a promissory note to one of the former shareholders of Western in the original
principal amount of $100,000. The amount outstanding under this Note was
approximately $100,000 as of September 30, 1997. The Company used a portion of
the net proceeds of the Offering to repay these notes.
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Profile Extrusion Company ("PEC") loaned the Company $92,537 on May 19,
1997 and an additional $5,203 on September 28, 1997. In connection therewith,
the Company issued to PEC warrants to purchase a total of 27,926 shares of
common stock at an exercise price of $3.50 per share, expiring on September 1,
1998. The Company used a portion of the net proceeds of the Offering to repay
this loan. PEC is a wholly-owned subsidiary of ACH.
In June 1997, Mr. Amedia pledged 133,333 shares of common stock to secure
the repayment of a short-term debt incurred by the Company in the original
principal amount of $250,000. The Company agreed to issue shares of common stock
to Mr. Amedia to replace any shares as to which the lender exercises its
security interest. The Company used a portion of the net proceeds of the
Offering to repay this loan.
In September 1997, William R. Jackson, Jr., a director of the Company,
loaned the Company $200,000. In connection therewith, the Company issued to Mr.
Jackson warrants to purchase a total of 57,143 shares of common stock at an
exercise price of $3.50 per share, expiring in September 1998. The Company used
a portion of the net proceeds of the Offering to repay this loan.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 30,
1997, concerning the beneficial ownership of the Company's Common Stock by (i)
each beneficial owner of more than 5% of the Company's common stock, (ii) each
director and the Chief Executive Officer of the Company, and (iii) all directors
and the Chief Executive Officer of the Company as a group. To the knowledge of
the Company, all persons listed below have sole voting and investment power with
respect to their shares, except to the extent that authority is shared by their
respective spouses under applicable law.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
-----------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT
--------------------------- ---------- -------
AAP Holdings, Inc........................................... 10,907,959(2)(3) 80.8%
George S. Hofmeister........................................ 10,910,459(3)(4) 80.8%
Frank J. Amedia............................................. 3,359,326(5) 24.9%
John Masternick............................................. 371,680(6) 2.8%
William R. Jackson, Jr...................................... 73,287(7) *
Charles E. Trebilcock....................................... 52,832(8) *
Joseph Dominijanni.......................................... 2,000 *
James K. Warren............................................. 400 *
John J. Cafaro.............................................. 0 0
James E. Phillips........................................... 0 0
All directors and the Chief Executive Officer of the Company
as a group (9 persons).................................... 11,410,658(9) 83.9%
- ---------------
* Less than 1%
(1) The address of each beneficial owner is c/o American Architectural Products
Corporation, 755 Boardman-Canfield Road, Building G West, Boardman, Ohio
44512.
(2) Does not include 707,655 shares of Common Stock which are subject to
unexercised options that are exercisable only upon the occurrence of certain
contingencies. Includes 2,933,082 shares of common stock owned by Mr.
Amedia, and 426,244 shares of Common Stock subject to unexercised options
that were exercisable on June 30, 1997 or within sixty days thereafter. In
connection with the Reorganization, Mr. Amedia granted AAP Holdings, Inc. an
irrevocable proxy to vote all shares of Common Stock currently or hereafter
owned by Mr. Amedia with respect to certain matters, including any matter
submitted to the shareholders of the Company relating to the repayment of
amounts owing to MascoTech, Inc. under those certain Promissory Notes dated
August 29, 1996 in the original principal amount of $8,000,000. The proxy
expired on December 31, 1997.
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(3) George S. Hofmeister, Chairman of the Board of Directors of the Company, is
the controlling shareholder of the corporate parent of AAP Holdings, Inc.
(4) Includes 10,907,959 shares of Common Stock beneficially owned by AAP
Holdings, Inc. (see footnote (2) above). Mr. Hofmeister is the controlling
shareholder of the corporate parent of AAP Holdings, Inc.
(5) Includes 426,244 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 1997 or within sixty days
thereafter. Does not include 100,000 shares of Common Stock which are
subject to unvested options.
(6) Includes 47,526 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 1997 or within sixty days
thereafter.
(7) Includes 57,143 shares of Common Stock which are subject to unexercised
warrants that were exercisable on September 30, 1997 or within sixty days
thereafter.
(8) Includes 25,832 shares of Common Stock owned individually and 25,000 shares
held by a custodian for the benefit of an individual retirement account of
Mr. Trebilcock. Also includes 2,000 shares of Common Stock which are subject
to unexercised options that were exercisable on September 30, 1997 or within
sixty days thereafter.
(9) Includes 532,913 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 1997 or within sixty days
thereafter as described above.
SHARES ELIGIBLE FOR FUTURE SALE
As of November 30, 1997, the Company had a total of 12,987,386 shares of
Common Stock outstanding. As of November 30, 1997, the Company had outstanding
warrants and options (including options outstanding under the Company's stock
option plans) entitling the holders thereof to acquire an aggregate of 1,800,922
shares of Common Stock, of which warrants, options and exchange rights covering
1,495,922 shares are currently exercisable. Various holders of Common Stock,
warrants and options have "piggyback" and demand registration rights to register
such Common Stock and shares issuable upon exercise of such warrants and options
for public sale under the Securities Act. See "Description of Capital Stock."
The preparation and filing of any registration statements filed in connection
with the exercise of registration rights will be at the expense of the Company.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is a Delaware corporation and its affairs are governed by its
Certificate of Incorporation and Bylaws and by the Delaware General Corporation
Law. The following description of the Company's capital stock is qualified in
its entirety by reference to the provisions of the Company's Certificate of
Incorporation and Bylaws. The authorized capital stock of the Company consists
of 100,000,000 shares of common stock, par value $.001 per share ("Common
Stock"), and 20,000,000 shares of preferred stock, par value $.001 per share
(the "Preferred Stock"). As of November 30, 1997, there were 12,987,386 shares
of Common Stock issued and outstanding, which were held of record by 456
shareholders, and there were no shares of Preferred Stock issued and
outstanding. In addition, 1,800,922 shares of Common Stock have been reserved
for issuance by the Company upon exercise of stock options and common stock
purchase warrants.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and do not have cumulative voting rights.
Subject to the rights of holders of outstanding shares of Preferred Stock, if
any, the holders of Common Stock are entitled to share ratably in dividends, if
any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. In the event of the
liquidation, dissolution, or winding up of the Company, subject to the rights of
holders of outstanding Preferred Stock, if any, the holders of Common Stock are
entitled to share ratably in all assets
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available for distribution to the shareholders after payment of the Company's
liabilities. The Common Stock has no preemptive or other subscription rights,
and there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All of the outstanding shares of Common Stock are fully
paid and nonassessable. The transfer agent and registrar for the Common Stock is
American Securities Transfer and Trust, Inc. of Denver, Colorado.
PREFERRED STOCK
The Board of Directors, without any vote or action of the shareholders, has
the authority to issue up to 20,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, conversion and
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company. Further, the
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no present plans to issue any shares
of Preferred Stock.
OTHER SECURITIES
Options and Warrants. The Company has issued options to purchase an
aggregate of 1,644,425 shares of Common Stock, with exercise prices ranging from
$3.75 to $6.19 per share and various expiration dates through February 27, 2007.
See "Management -- Stock Option Plans." In connection with a June 1997 financing
transaction, the Company also issued warrants to purchase 71,428 shares of
Common Stock at an exercise price of $3.50 per share, expiring on June 5, 1998,
and in connection with a September 1997 financing transaction the Company issued
warrants to purchase 57,143 shares of Common Stock at an exercise price of $3.50
per share, expiring in September 1998. 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. Finally, the Company is obligated to issue to the
former shareholders of Thermetic an amount of Common Stock with a market price
of $1,000,000 on January 18, 1999. Each of the foregoing options and warrants
provide, among other things, for the adjustment of the price per share and
number of shares issuable upon exercise of such options or warrants upon a
merger or consolidation of the Company, reclassification of the Company's
securities, or a stock split, subdivision or combination of the Company's
securities. No warrant holder or optionee has any stockholder rights with
respect to the shares issuable upon exercise of the warrants or options held by
such holder until such warrants or options are exercised and the purchase price
is paid for the shares.
Registration Rights. Pursuant to agreements by and among the Company and
certain holders of Common Stock (the "Holders"), the Holders may request that
the Company file a registration statement under the Securities Act and, upon
such request and subject to certain conditions, the Company generally will be
required to use its best efforts to effect any such registration. In addition,
if the Company proposes to register any of its securities, either for its own
account or for the account of other stockholders, the Company is required, with
certain exceptions, to notify the Holders and, subject to certain conditions and
limitations, to include in such registration all of the shares of Common Stock
requested to be included by the Holders. Various stockholders have demand and
"piggyback" registration rights with respect to a total of 7,548,633 shares of
Common Stock, and various holders of options and warrants have "piggyback"
registration rights with respect to a total of 150,000 shares of common stock
underlying such options and warrants. In addition, the former shareholders of
Thermetic have demand and "piggyback" registration rights with respect to
384,000 shares of Common Stock and an aggregate number of additional shares of
Common Stock issuable in January 1999 having a fair market value of $1,000,000
at that time.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Outstanding Notes were, and the Exchange Notes are to be, issued under
the Indenture, dated as of December 10, 1997, among the Company, the Subsidiary
Guarantors and United States Trust Company of New York, as Notes Trustee (the
"Notes Trustee"), a copy of which is available upon request to the Company. The
Exchange Notes and the Outstanding Notes will constitute a single series of debt
securities under the Indenture. The following is a summary of certain provisions
of the Indenture and the Notes and does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Indenture (including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended) and
the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Notes Trustee in New York, New York),
except that, at the option of the Company, payment of interest may be made by
check mailed to the address of the holders as such address appears in the Note
Register. Initially, the Notes Trustee will act as Paying Agent and Registrar
for the Notes. The Notes may be presented for registration of transfer and
exchange at the offices of the Registrar, which initially will be the Notes
Trustee's corporate trust office. The Company may change any Paying Agent and
Registrar without notice to holders of the Notes.
For each Outstanding Note accepted for exchange, the holder of such
Outstanding Note will receive an Exchange Note having a principal amount equal
to that of the surrendered Outstanding Note.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF NOTES
The Notes will mature on December 1, 2007. Each Note will bear interest at
the rate of 11 3/4% per annum from the date of issuance, or from the most
recent date to which interest has been paid or provided for, and will be payable
semiannually on June 1 and December 1 of each year (each an "Interest Payment
Date"), commencing on June 1, 1998, to holders of record at the close of
business on the May 15 or November 15 immediately preceding the Interest Payment
Date. The interest rate on the Notes is subject to increase under certain
circumstances. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. The Notes will not be entitled to the benefit
of any sinking fund.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option
of the Company prior to December 1, 2002. On and after such date, the Notes will
be redeemable, at the Company's option, in whole or in part, at any time upon
not less than 30 nor more than 60 days' prior notice mailed by first-class mail
to each holder's registered address, at the following redemption prices
(expressed in percentages of principal amount), if redeemed during the 12-month
period commencing on December 1 of the years set forth below, plus accrued and
unpaid interest to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
Interest Payment Date):
REDEMPTION
PERIOD PRICE
------ ----------
2002...................................................... 105.000%
2003...................................................... 103.333%
2004...................................................... 101.667%
2005 and thereafter....................................... 100.000%
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Optional Redemption Upon Equity Offering. In addition, at any time prior
to December 1, 2000, the Company may, at its option, redeem up to 35% of the
aggregate principal amount of the Notes, with net cash proceeds of one or more
Equity Offerings so long as there is a Public Market at the time of such
redemption, at a redemption price equal to 110% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the date of redemption;
provided, however, that after any such redemption the aggregate principal amount
of the Notes outstanding must equal at least $82 million. In order to effect the
foregoing redemption with the proceeds of any Equity Offering, the Company shall
make such redemption not more than 90 days after the consummation of any such
Equity Offering.
Selection. In the case of any partial redemption, selection of the Notes
for redemption will be made by the Notes Trustee on a pro rata basis, by lot or
by such other method as the Notes Trustee in its sole discretion shall deem to
be fair and appropriate; provided, however, that if a partial redemption is made
with proceeds of an Equity Offering, selection of the Notes or portion thereof
for redemption shall be made by the Notes Trustee only on a pro rata basis,
unless such method is otherwise prohibited. Notes may be redeemed in part in
multiples of $1,000 principal amount only. Notice of redemption will be sent, by
first class mail, postage prepaid, at least 45 days (unless a shorter period is
acceptable to the Notes Trustee) prior to the date fixed for redemption to each
holder whose Notes are to be redeemed at the last address for such holder then
shown on the registry books. If any Note is to be redeemed in part only, the
notice of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. On and after any redemption date,
interest will cease to accrue on the Notes or part thereof called for redemption
as long as the Company has deposited with the Paying Agent funds in satisfaction
of the redemption price pursuant to the Indenture.
RANKING
The Outstanding Notes are, and the Exchange Notes will be, senior unsecured
obligations of the Company and the Outstanding Notes rank and the Exchange Notes
will rank pari passu in right of payment with all existing and future Senior
Indebtedness of the Company (i.e., all indebtedness that is not by its terms
expressly subordinate or junior in right of payment to any other Indebtedness of
the Company) and senior in right of payment to any existing and future
Subordinated Obligations of the Company that is not Senior Debt of the Company.
The Notes (and the Note Guarantees) will be effectively subordinated to any
secured debt of the Company and the Subsidiary Guarantors, to the extent of the
assets serving as security therefor. As of September 30, 1997, on a pro forma
basis after giving effect to the Offering and the Refinancing, the aggregate
principal amount of outstanding Senior Indebtedness of the Company and the
Subsidiary Guarantors to which the Notes would have been effectively
subordinated would have been approximately $1.6 million. The Indenture provides
that the Company may Incur up to $25 million of senior Secured Indebtedness.
NOTE GUARANTEES
Each Subsidiary Guarantor unconditionally guarantees on a senior basis,
jointly and severally, to each holder and the Notes Trustee, as primary obligor
and not as a surety, the full and prompt payment of principal of and interest on
the Notes, and of all other obligations of the Company under the Indenture.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Note Guarantee or pursuant to its contribution obligations under the
Indenture) result in the obligations of such Subsidiary Guarantor under the Note
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal or state law. Each Subsidiary Guarantor that makes a payment or
distribution under a Note Guarantee shall be entitled to contribution from each
other Subsidiary Guarantor in pro rata amount based on the Adjusted Net Assets
of each Subsidiary Guarantor.
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Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation.
Subject to certain conditions, each Subsidiary Guarantor may also consolidate
with or merge into or sell all or substantially all its assets to a corporation,
partnership or trust other than the Company or another Subsidiary Guarantor
(whether or not affiliated with the Subsidiary Guarantor). Upon the sale or
disposition of a Subsidiary Guarantor (or all or substantially all of its
assets) to a Person (whether or not an Affiliate of the Subsidiary Guarantor)
which is not a Subsidiary of the Company, which sale or disposition is otherwise
in compliance with the Indenture (including the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock"),
such Subsidiary Guarantor shall be deemed released from all its obligations
under the Indenture and its Note Guarantee and such Note Guarantee shall
terminate; provided, however, that any such termination shall occur only to the
extent that all obligations of such Subsidiary Guarantor under and all of its
guarantees of, and under all of its pledges of assets or other security
interests which secure, any other Indebtedness of the Company shall also
terminate upon such release, sale or transfer.
Subsequent to the Issue Date, separate financial information for the
Subsidiary Guarantors will not be provided except to the extent required by
Regulation S-X under the Securities Act.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder will have the right to require the Company to repurchase
all or any part of such holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant Interest Payment Date): (i)
any sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all of the assets of the Company
and its Subsidiaries; or (ii) a majority of the Board of Directors of the
Company or of any direct or indirect holding company thereof shall consist of
Persons who are not Continuing Directors of the Company; or (iii) the
acquisition by any Person or Group (other than the Management Group) of the
power, directly or indirectly, to vote or direct the voting of securities having
more than 35% of the ordinary voting power for the election of directors of the
Company or of any direct or indirect holding company thereof; provided that no
Change of Control shall be deemed to occur pursuant to this clause (iii) so long
as the Management Group owns an amount of securities representing the power,
directly or indirectly, to vote or direct the voting of securities having more
than 50.0% of the ordinary voting power for the election of directors of the
Company or of any direct or indirect holding company thereof.
Within 20 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes in
connection with such Change of Control, the Company shall mail a notice to each
holder with a copy to the Notes Trustee stating: (1) that a Change of Control
has occurred and that such holder has the right to require the Company to
purchase such holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on a record date to
receive interest on the relevant Interest Payment Date); (2) the repurchase date
(which shall be no earlier than 50 days nor later than 60 days from the date
such notice is mailed); and (3) the procedures determined by the Company,
consistent with the Indenture, that a holder must follow in order to have its
Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries. With respect to the disposition of property or
assets, the phrase "all or substantially all" as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which
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is the law which governs the Indenture) and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the property or assets of a Person,
and therefore it may be unclear as to whether a Change of Control has occurred
and whether the Company is required to make an offer to repurchase the Notes as
described above.
Future Senior Indebtedness of the Company and its Subsidiaries may contain
prohibitions of certain events that would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that: (i) the
Company and its Restricted Subsidiaries may Incur Indebtedness which is
expressly subordinate and junior in right of payment to, the Notes, if no
Default or Event of Default shall have occurred and be continuing at the time of
such Incurrence or would occur as a consequence of such Incurrence and the
Consolidated Coverage Ratio would be equal to at least 2.00 to 1.00; and (ii)
the Company and its Restricted Subsidiaries may Incur Senior Indebtedness if no
Default or Event of Default shall have occurred and be continuing at the time of
such Incurrence or would occur as a consequence of such Incurrence and the
Consolidated Coverage Ratio would be at least equal to (x) 2.25 to 1.00 if such
Indebtedness is Incurred prior to December 1, 1999, and (y) 2.00 to 1.00 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Secured Indebtedness (including, without limitation, any renewal,
extension, refunding, restructuring, replacement or refinancing thereof
referred to in the definition thereof); provided, however, that the
aggregate principal amount of all Secured Indebtedness Incurred pursuant to
this clause (i) does not exceed $25.0 million at any time outstanding, less
the aggregate principal amount thereof repaid with the net proceeds of
Asset Dispositions;
(ii) Indebtedness represented by Capitalized Lease Obligations,
mortgage financing or purchase money obligations, in each case Incurred for
the purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in a Permitted Business or
Incurred to refinance any such purchase price or cost of construction or
improvement, in each case Incurred no later than 365 days after the date of
such acquisition or the date of completion of such construction or
improvement; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (ii) shall not exceed $5.0
million at any time outstanding;
(iii) Indebtedness of the Company owing to and held by any
Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to
and held by the Company or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other
event which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or any Wholly-Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
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(iv) Indebtedness represented by (a) the Notes, (b) the Note
Guarantees, (c) Existing Indebtedness and (d) any Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause (iv) or
Incurred pursuant to paragraph (a) above;
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred in anticipation of, or to
provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Subsidiary or was otherwise
acquired by the Company); provided, however, that at the time such
Restricted Subsidiary is acquired by the Company, the Company would have
been able to Incur $1.00 of additional Indebtedness pursuant to paragraph
(a) above after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (v) and (B) Refinancing Indebtedness Incurred by a
Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of
its Restricted Subsidiaries to their customers in the ordinary course of
their business, (B) in respect of performance bonds or similar obligations
of the Company or any of its Restricted Subsidiaries for or in connection
with pledges, deposits or payments made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations and (C) arising from Guarantees to suppliers, lessors,
licensees, contractors, franchises or customers of obligations (other than
Indebtedness) incurred in the ordinary course of business;
(vii) Indebtedness under Currency Agreements and Interest Rate
Agreements; provided, however, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate
Agreements are entered into for bona fide hedging purposes of the Company
or its Restricted Subsidiaries (as determined in good faith by the Board of
Directors of the Company) and correspond in terms of notional amount,
duration, currencies and interest rates as applicable, to Indebtedness of
the Company or its Restricted Subsidiaries Incurred without violation of
the Indenture or to business transactions of the Company or its Restricted
Subsidiaries on customary terms entered into in the ordinary course of
business;
(viii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credits, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness or other
obligations incurred by any Person acquiring all or any portion of such
business assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by the Company or any of its Restricted
Subsidiaries in connection with such disposition; provided, however, that
the principal amount of any Indebtedness Incurred pursuant to this clause
(viii) when taken together with all Indebtedness Incurred pursuant to this
clause (viii) and then outstanding, shall not exceed $2.0 million;
(ix) Indebtedness consisting of (A) Guarantees by the Company (so long
as the Company could have Incurred such Indebtedness directly without
violation of the Indenture) and (B) Guarantees by a Restricted Subsidiary
of Senior Indebtedness incurred by the Company without violation of the
Indenture (so long as such Restricted Subsidiary could have Incurred such
Indebtedness directly without violation of the Indenture);
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument issued by the
Company or its Subsidiaries drawn against insufficient funds in the
ordinary course of business in an amount not to exceed $250,000 at any
time, provided that such Indebtedness is extinguished within two business
days of its incurrence; and
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(xi) Indebtedness (other than Indebtedness described in clauses
(i) - (x)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(xi) and then outstanding, will not exceed $10.0 million (it being
understood that any Indebtedness Incurred under this clause (xi) shall
cease to be deemed Incurred or outstanding for purposes of this clause (xi)
(but shall be deemed to be Incurred for purposes of paragraph (a)) from and
after the first date on which the Company or its Restricted Subsidiaries
could have Incurred such Indebtedness under the foregoing paragraph (a)
without reliance upon this clause (xi)).
(c) Neither the Company nor any Restricted Subsidiary shall Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the Company
unless such Indebtedness shall be subordinated to the Notes to at least the same
extent as such Subordinated Obligations. No Restricted Subsidiary shall Incur
any Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Guarantor Subordinated Obligation of
such Subsidiary Guarantor unless such Indebtedness shall be subordinated to the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee to at
least the same extent as such Guarantor Subordinated Obligation.
(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries)
except (A) dividends or distributions payable in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock and (B) dividends or distributions payable to the Company or a
Restricted Subsidiary of the Company which holds any equity interest in the
paying Restricted Subsidiary (and if the Restricted Subsidiary paying the
dividend or making the distribution is not a Wholly-Owned Subsidiary, to its
other holders of Capital Stock on a pro rata basis), (ii) purchase, redeem,
retire or otherwise acquire for value any Capital Stock of the Company held by
Persons other than a Wholly-Owned Subsidiary of the Company or any Capital Stock
of a Restricted Subsidiary of the Company held by any Affiliate of the Company,
other than a Wholly-Owned Subsidiary (in either case, other than in exchange for
its Capital Stock (other than Disqualified Stock)), (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations or (iv) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement or Investment
as described in preceding clauses (i) through (iv) being referred to as a
"Restricted Payment"); if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); or (2) the Company is not able to incur
an additional $1.00 of Indebtedness pursuant to paragraph (a) under "Limitation
on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of (A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the first day of the fiscal
quarter beginning on or after the Issue Date to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment as to which
financial results are available (but in no event ending more than 135 days prior
to the date of such Restricted Payment) (or, in case such Consolidated Net
Income shall be a deficit, minus 100% of such deficit); (B) the aggregate net
proceeds received by the Company from the issue or sale of its Capital Stock
(other than Disqualified Stock) or other capital contributions subsequent to the
Issue Date (other than net proceeds received from an issuance or sale of such
Capital Stock to (x) a Subsidiary of the Company, (y) an employee stock
ownership plan or similar trust or (z) management employees of the Company or
any Subsidiary of the Company (other than sales of Capital Stock (other than
Disqualified Stock) to management employees of the Company pursuant to bona fide
employee stock option plans of the Company); provided, however, that the value
of any non-cash net proceeds shall be as determined by the Board of Directors in
good faith, except that in the event the value of any noncash net proceeds shall
be $2.0 million or more, the value shall be as
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determined in writing by an independent investment banking firm of nationally
recognized standing); (C) the amount by which Indebtedness of the Company is
reduced on the Company's balance sheet upon the conversion or exchange (other
than by a Restricted Subsidiary of the Company) subsequent to the Issue Date of
any Indebtedness of the Company convertible or exchangeable for Capital Stock of
the Company (less the amount of any cash, or other property, distributed by the
Company upon such conversion or exchange); and (D) the amount equal to the net
reduction in Investments (other than Permitted Investments) made after the Issue
Date by the Company or any of its Restricted Subsidiaries in any Person
resulting from (i) repurchases or redemptions of such Investments by such
Person, proceeds realized upon the sale of such Investment to an unaffiliated
purchaser, repayments of loans or advances or other transfers of assets by such
Person to the Company or any Restricted Subsidiary of the Company or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously
included in the calculation of the amount of Restricted Payments; provided,
however, that no amount shall be included under this Clause (D) to the extent it
is already included in Consolidated Net Income.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary, an employee stock ownership plan
or similar trust or management employees of the Company or any Subsidiary of the
Company); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from clause (3) (B) of paragraph
(a); (ii) any purchase or redemption of Subordinated Obligations of the Company
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of the Company in compliance with the
"Limitation on Indebtedness" covenant; provided, further, that such purchase or
redemption shall be excluded in the calculation of the amount of Restricted
Payments; (iii) any purchase or redemption of Subordinated Obligations as a
result of a Change of Control (provided that the covenant described in
"Limitation on Repayment upon a Change of Control" is complied with) and (iv)
any purchase or redemption of Subordinated Obligations from Net Available Cash
to the extent permitted under "Limitation on Sales of Assets and Subsidiary
Stock" below; provided, further, that such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments; and (iv)
dividends paid within 60 days after the date of declaration if at such date of
declaration such dividend would have complied with this provision; provided,
however, that such dividend shall be included in the calculation of the amount
of Restricted Payments; provided, however, that in the case of clauses (i),
(ii), (iii) and (iv) no Default or Event of Default shall have occurred or be
continuing at the time of such payment or as a result thereof.
(c) For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Board of Directors) of the assets so
utilized in making such Restricted Payment, provided, however that (i) in the
case of any Restricted Payment made with capital stock or indebtedness, such
Restricted Payment shall be deemed to be made in an amount equal to the greater
of the fair market value thereof and the liquidation preference (if any) or
principal amount of the capital stock or indebtedness, as the case may be, so
utilized, and (ii) in the case of any Restricted Payment in an aggregate amount
in excess of $2.0 million, a written opinion as to the fairness of the valuation
thereof (as determined by the Company) for purposes of determining compliance
with the "Limitation on Restricted Payments" covenant in the Indenture shall be
issued by an independent investment banking firm of national standing.
(d) Not later than the date of making any Restricted Payment, the Company
shall deliver to the Notes Trustee an officer's certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available quarterly
financial statements, and a copy of any required investment banker's opinion.
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Limitation on Liens. The Indenture will provide that the Company will not
and will not permit any Restricted Subsidiary to, directly or indirectly, create
or permit to exist any Liens except for Permitted Liens.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any such Restricted Subsidiary to
(i) pay dividends or make any other distributions on its Capital Stock or pay
any Indebtedness or other obligation owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company, except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date; (b) any encumbrance or restriction
with respect to such a Restricted Subsidiary pursuant to an agreement relating
to any Indebtedness issued by such Restricted Subsidiary on or prior to the date
on which such Restricted Subsidiary was acquired by the Company and outstanding
on such date (other than Indebtedness Incurred in anticipation of, or to provide
all or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary of the Company or was acquired by the
Company); (c) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement evidencing Indebtedness Incurred without
violation of the Indenture or effecting a refinancing of Indebtedness issued
pursuant to an agreement referred to in clauses (a) or (b) or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) or (b) or
this clause (c); provided, however, that the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any of such agreement,
refinancing agreement or amendment, taken as a whole, are no less favorable to
the holders of the Notes in any material respect, as determined in good faith by
the Board of Directors of the Company, than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in agreements in effect at, or
entered into on, the Issue Date; (d) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture, (C) that is included in a licensing
agreement to the extent such restrictions limit the transfer of the property
subject to such licensing agreement or (D) arising or agreed to in the ordinary
course of business and that does not, individually or in the aggregate, detract
from the value of property or assets of the Company or any of its Subsidiaries
in any manner material to the Company or any such Restricted Subsidiary; (e) in
the case of clause (iii) above, restrictions contained in security agreements,
mortgages or similar documents securing Indebtedness of a Restricted Subsidiary
to the extent such restrictions restrict the transfer of the property subject to
such security agreements; (f) in the case of clause (iii) above, any instrument
governing or evidencing Indebtedness of a Person acquired by the Company or any
Restricted Subsidiary of the Company at the time of such acquisition, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; provided, however, that
such Indebtedness is not incurred in connection with or in contemplation of such
acquisition; (g) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and (h) encumbrances or
restrictions arising or existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any of its Restricted Subsidiaries to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Company's Board of Directors
(including as to the value of all non-cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 80% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Cash Equivalents and (iii) an amount equal to 100% of the Net Available
Cash from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) (A) first, to the extent the Company or any
Restricted Subsidiary elects (or is required by the terms of any Secured
Indebtedness), (x) to prepay, repay or purchase Secured Indebtedness or (y) to
the investment in or acquisition of Additional Assets within 270 days from the
later of the date of such Asset Disposition or the receipt of such Net
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Available Cash; (B) second, within 270 days from the receipt of such Net
Available Cash, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to make an offer to purchase Notes at
101% of their principal amount plus accrued and unpaid interest, if any,
thereon; (C) third, within 90 days after the later of the application of Net
Available Cash in accordance with clauses (A) and (B) and the date that is one
year from the receipt of such Net Available Cash, to the extent of the balance
of such Net Available Cash after application in accordance with clauses (A) and
(B), to prepay, repay or repurchase Indebtedness (other than Preferred Stock) of
the Company or of a Wholly-Owned Subsidiary (in each case other than
Indebtedness owed to the Company); and (D) fourth, to the extent of the balance
of such Net Available Cash after application in accordance with clauses (A), (B)
and (C), to the investment in or acquisition of Additional Assets, (x) the
making of Temporary Cash Investments, (y) the prepayment, repayment or purchase
of Indebtedness of the Company (other than Indebtedness owing to any Subsidiary
of the Company) or Indebtedness of any Subsidiary (other than Indebtedness owed
to the Company or any of its Subsidiaries) or (z) any other purpose otherwise
permitted under the Indenture, in each case within the later of 45 days after
the application of Net Available Cash in accordance with clauses (A), (B) and
(C) or the date that is one year from the receipt of such Net Available Cash;
provided, however, that, in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A), (B), (C) or (D) above, the
Company or such Restricted Subsidiary shall retire such Indebtedness and shall
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant at any
time exceed $5 million. The Company shall not be required to make an offer for
Notes pursuant to this covenant if the Net Available Cash available therefor
(after application of the proceeds as provided in clause (A)) is less than $5
million for any particular Asset Disposition (which lesser amounts shall be
carried forward for purposes of determining whether an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of Senior Indebtedness of the Company or
Senior Indebtedness of any Restricted Subsidiary of the Company and the release
of the Company or such Restricted Subsidiary from all liability on such Senior
Indebtedness in connection with such Asset Disposition (in which case the
Company shall, without further action, be deemed to have applied such assumed
Indebtedness in accordance with clause (A) of the preceding paragraph) and (y)
securities received by the Company or any Restricted Subsidiary of the Company
from the transferee that are promptly (and in any event within 60 days)
converted by the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a) (iii) (B), the Company will be required to purchase
Notes tendered pursuant to an offer by the Company for the Notes at a purchase
price of 101% of their principal amount plus accrued and unpaid interest, if
any, to the purchase date in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of the Notes tendered pursuant to the offer is less than the Net
Available Cash allotted to the purchase of the Notes, the Company will apply the
remaining Net Available Cash in accordance with clauses (a)(iii)(C) or (D)
above.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of the Company, other than a
Wholly-Owned Subsidiary (an "Affiliate Transaction") unless: (i) the terms of
such Affiliate Transaction are no less favorable to the Company or such
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Restricted Subsidiary, as the case may be, than those that could be obtained at
the time of such transaction in arm's length dealings with a Person who is not
such an Affiliate; (ii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $1.0 million, the terms of such transaction have
been approved by a majority of the members of the Board of Directors of the
Company and by a majority of the disinterested members of such Board, if any
(and such majority or majorities, as the case may be, determines that such
Affiliate Transaction satisfies the criteria in (i) above); and (iii) in the
event such Affiliate Transaction involves an aggregate amount in excess of $2.0
million, the Company has received a written opinion from an independent
investment banking firm of nationally recognized standing that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary, as the case
may be, from a financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, or any stock options and stock ownership
plans for the benefit of employees, officers and directors, consultants and
advisors approved by the Board of Directors of the Company, (iii) loans or
advances to employees in the ordinary course of business of the Company or any
of its Restricted Subsidiaries in aggregate amount outstanding not to exceed
$250,000 to any employee or $500,000 in the aggregate at any time, (iv) any
transaction between Wholly-Owned Subsidiaries, (v) indemnification agreements
with, and the payment of fees and indemnities to, directors, officers and
employees of the Company and its Restricted Subsidiaries, in each case in the
ordinary course of business, (vi) transactions pursuant to agreements in
existence on the Issue Date which are (x) described in the Prospectus or (y)
otherwise, in the aggregate, immaterial to the Company and its Restricted
Subsidiaries taken as a whole, (vii) any employment, non-competition or
confidentiality agreements entered into by the Company or any of its Restricted
Subsidiaries with its employees in the ordinary course of business, or (viii)
the issuance of Capital Stock of the Company (other than Disqualified Stock).
Limitation on Issuances of Capital Stock of Restricted Subsidiaries. The
Company will not permit any of its Restricted Subsidiaries to issue any Capital
Stock to any Person (other than to the Company or a Wholly-Owned Subsidiary of
the Company) or permit any Person (other than the Company or a Wholly-Owned
Subsidiary of the Company) to own any Capital Stock of a Restricted Subsidiary
of the Company, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of the Company; provided, however,
that this provision shall not prohibit (x) the Company or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Indenture.
Limitation on Repayment upon a Change of Control. The Company will not
make an offer to repurchase any Subordinated Obligations if they are required to
do so pursuant to a Change of Control until at least 60 days after the
occurrence of such Change of Control and shall not purchase any Subordinated
Obligations for 30 days following the time the Company is required to make
purchases of the Notes under the Indenture following such Change of Control.
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
Guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction with respect to any property or assets unless (i) the Company or
such Restricted Subsidiary, as the case may be, would be entitled pursuant to
the Indenture to Incur Indebtedness secured by a Permitted Lien on such property
or assets in an amount equal to the Attributable Indebtedness with respect to
such Sale/Leaseback Transaction, (ii) the Net Cash Proceeds from such
Sale/Leaseback Transaction are at least equal to the fair market value of the
property or assets subject to such Sale/Leaseback Transaction (such fair market
value determined, in the event such property or assets have a fair market value
in excess of $1.0 million, no more than 30 days prior to the effective date of
such Sale/Leaseback Transaction, by the Board of Directors of the Company as
evidenced by a resolution of such Board) and (iii) the net cash proceeds of such
Sale/Leaseback Transaction are applied in accordance with the provisions
described under "Limitation on Sales of Assets and Subsidiary Stock."
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SEC Reports. The Company will file with the Notes Trustee and provide to
the holders of the Notes, within 15 days after it files them with the
Commission, copies of the annual reports and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) which the Company files with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. In the event
that the Company is not required to file such reports with the Commission
pursuant to the Exchange Act, the Company will nevertheless deliver such
Exchange Act information to the holders of the Notes within 15 days after it
would have been required to file it with the Commission.
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-- Limitation on Indebtedness" at the time of Designation
(assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "-- Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture further provides that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"-- Limitation on Restricted Payments."
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Notes Trustee certifying compliance with the
foregoing provisions.
Taxes. The Company will, and will cause its Restricted Subsidiaries to,
pay and discharge when due and payable all taxes, levies, imposts, duties or
other governmental charges ("Taxes") imposed on it or on its income or profits
or on any of its properties except such Taxes which are being contested in good
faith in appropriate proceedings and for which adequate reserves have been
established in accordance with GAAP.
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Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to, any Person, unless: (i) the resulting, surviving or transferee Person
(the "Successor Company") shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, by supplemental indenture, executed
and delivered to the Notes Trustee, in form satisfactory to the Notes Trustee,
all the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as having
been incurred by the Successor Company or such Restricted Subsidiary at the time
of such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company (A) shall have a Consolidated Net Worth equal or greater to
the Consolidated Net Worth of the Company immediately prior to such transaction
and (B) shall be able to incur at least an additional $1.00 of Indebtedness
pursuant to paragraph (a) of "Limitation on Indebtedness"; (iv) the Company
shall have delivered to the Notes Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture; and (v) there
has been delivered to the Notes Trustee an Opinion of Counsel to the effect that
holders of the Notes will not recognize income, gain or loss for U.S. Federal
income tax purposes as a result of such consolidation, merger, conveyance,
transfer or lease and will be subject to U.S. Federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such consolidation, merger, conveyance, transfer or lease had not occurred.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in the
case of a lease of all or substantially all its assets, the Company will not be
released from the obligation to pay the principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for 30
days, (ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under the "Merger and Consolidation" covenant described under
"Certain Covenants" above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations under the covenants described under
"Change of Control" above or under covenants described under "Certain Covenants"
above (in each case, other than a failure to purchase Notes which shall
constitute an Event of Default under clause (ii) above), other than "Merger and
Consolidation," (v) the failure by the Company or any Subsidiary Guarantor to
comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) Indebtedness of the Company or any Restricted Subsidiary is not
paid within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $2.0 million and such default shall
not have been cured or such acceleration rescinded after a 10-day period, (vii)
certain events of bankruptcy, insolvency or reorganization of the Company or a
Significant Subsidiary (the "bankruptcy provisions"), (viii) any judgment or
decree for the payment of money in excess of $2.0 million (to the extent not
covered by insurance) is rendered against the Company or a Significant
Subsidiary and such judgment or decree shall remain undischarged or unstayed for
a period of 60 days after such judgment becomes final and non-appealable (the
"judgment default provision"), or (ix) any Note Guarantee by a Significant
Subsidiary ceases to be in full force and effect (except as contemplated by the
terms of the Indenture) or any Subsidiary Guarantor that is a Significant
Subsidiary denies or disaffirms its obligations under the Indenture or its Note
Guarantee and such Default continues for 10 days. However, a default under
clause (iv) or (v) will not constitute an Event of Default until the Notes
Trustee or the holders
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of 25% in principal amount of the outstanding Notes notify the Company of the
default and the Company does not cure such default within the time specified in
clause (iv) or (v) after receipt of such notice.
If an Event of Default occurs and is continuing, the Notes Trustee or the
holders of at least 25% in principal amount of the outstanding Notes by notice
to the Company may declare the principal of and accrued and unpaid interest, if
any, on all the Notes to be due and payable. Upon such a declaration, such
principal and accrued and unpaid interest shall be due and payable immediately.
If an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs, the principal of and accrued and unpaid
interest on all the Notes will become and be immediately due and payable without
any declaration or other act on the part of the Notes Trustee or any holders.
Under certain circumstances, the holders of a majority in principal amount of
the outstanding Notes may rescind any such acceleration with respect to the
Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Notes Trustee, if an Event of Default occurs and is continuing, the Notes
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders unless
such holders have offered to the Notes Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder may
pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Notes Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Notes Trustee to pursue the remedy, (iii) such holders
have offered the Notes Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Notes Trustee has not complied with such
request within 60 days after the receipt of the request and the offer of
security or indemnity and (v) the holders of a majority in principal amount of
the outstanding Notes have not given the Notes Trustee a direction that, in the
opinion of the Notes Trustee, is inconsistent with such request within such
60-day period. Subject to certain restrictions, the holders of a majority in
principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Notes Trustee or of exercising any trust or power conferred on the Notes
Trustee. The Notes Trustee, however, may refuse to follow any direction that
conflicts with law or the Indenture or that the Notes Trustee determines is
unduly prejudicial to the rights of any other holder or that would involve the
Notes Trustee in personal liability. Prior to taking any action under the
Indenture, the Notes Trustee shall be entitled to indemnification satisfactory
to it in its sole discretion against all losses and expenses caused by taking or
not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Notes Trustee, the Notes Trustee must mail to each holder notice of
the Default within 90 days after it occurs. Except in the case of a Default in
the payment of principal of, premium (if any) or interest on any Note, the Notes
Trustee may withhold notice if and so long as its board of directors, a
committee of its board of directors or a committee of its Trust officers in good
faith determines that withholding notice is in the interests of the holders of
the Notes. In addition, the Company is required to deliver to the Notes Trustee,
within 90 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the Notes Trustee,
within 30 days after the occurrence thereof, written notice of any events which
would constitute certain Defaults.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the holders of a majority in principal amount of the Notes
then outstanding. However, without the consent of each holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the amount of
Notes whose holders must consent to an amendment, (ii) reduce the stated rate of
or extend the stated time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption or repurchase of any Note or change the time at
which any Note may be redeemed as described under "Optional Redemption" above,
(v) make any Note payable in money other than that stated in the Note,
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(vi) impair the right of any holder to receive payment of principal of and
interest on such holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
holder's Notes or (vii) make any change in the amendment provisions which
require each holder's consent or in the waiver provisions.
Without the consent of any holder, the Company and the Notes Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation, partnership, trust or
limited liability company of the obligations of the Company under the Indenture,
to provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add
further Guarantees with respect to the Notes, to secure the Notes, to add to the
covenants of the Company for the benefit of the holders or to surrender any
right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any holder or to comply with any requirement of
the Commission in connection with the qualification of the Indenture under the
Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders, or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries, the judgment default provision and the Note
Guarantee provision described under "Events of Default" above and the
limitations contained in clauses (iii) and (iv) under "Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries), (viii) or (ix) under "Events of Default" above or
because of the failure of the Company to comply with clause (iii) or (iv) under
"Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Notes Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Notes Trustee of
an Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
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SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect (except as otherwise
expressly provided for in the Indenture) when either (i) all outstanding Notes
have been delivered (other than lost, stolen or destroyed Notes which have been
replaced) to the Notes Trustee for cancellation or (ii) all outstanding Notes
have become due and payable, whether at maturity or as a result of the mailing
of a notice of redemption pursuant to the terms of the Indenture and the Company
has irrevocably deposited with the Notes Trustee funds sufficient to pay at
maturity or upon redemption all outstanding Notes, including interest thereon
(other than lost, stolen, mutilated or destroyed Notes which have been
replaced), and, in either case, the Company has paid all other sums payable
under the Indenture. The Notes Trustee is required to acknowledge satisfaction
and discharge of the Indenture on demand of the Company accompanied by an
Officer's Certificate and an Opinion of Counsel at the cost and expense of the
Company.
TRANSFER AND EXCHANGE
Upon any transfer of a Note, the registrar may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and to
pay any taxes and fees required by law or permitted by the Indenture. The
registrar is not required to transfer or exchange any Notes selected for
redemption nor is the registrar required to transfer or exchange any Notes for a
period of 15 days before a selection of Notes to be redeemed. The registered
holder of a Note may be treated as the owner of it for all purposes.
CONCERNING THE NOTES TRUSTEE
United States Trust Company of New York is the Notes Trustee under the
Indenture and has been appointed by the Company as registrar and paying agent
with regard to the Notes. The Notes Trustee's current address is 114 West 47th
Street, New York, New York 10036.
The Indenture contains certain limitations on the rights of the Notes
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim a security or otherwise. The Notes Trustee will be permitted to
engage in other transactions; however, if it acquires any conflicting interest
(as defined) it must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Notes Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured) the Notes Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Notes
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any of the holders of the Notes issued
thereunder unless they shall have offered to the Notes Trustee security and
indemnity satisfactory to it.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or a Restricted Subsidiary of the Company;
(iii) Capital Stock constituting a minority interest in any Person that at such
time is a Restricted Subsidiary of the Company; or (iv) Permitted Investments of
the type and in the amounts described in clause (viii) of the
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definition thereof; provided, however, that, in the case of clauses (ii) and
(iii), such Restricted Subsidiary is primarily engaged in a Permitted Business.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (x) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including, without
limitation, the probable liability of such Subsidiary Guarantor with respect to
its contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under the Note Guarantees, of such Subsidiary Guarantor at such date
and (y) the present fair salable value of the assets of such Subsidiary
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Subsidiary Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities incurred or assumed on such
date and after giving effect to any collection from any Subsidiary by such
Subsidiary Guarantor in respect of the obligations of such Subsidiary under the
Note Guarantees), excluding debt in respect of the Note Guarantees, as they
become absolute and matured.
"Affiliate" of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a "disposition") by the Company or any of
its Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of inventory in the
ordinary course of business, (iii) a disposition of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of the business
of the Company and its Restricted Subsidiaries and that is disposed of in each
case in the ordinary course of business, (iv) dispositions of property for net
proceeds which, when taken collectively with the net proceeds of any other such
dispositions under this clause (iv) that were consummated since the beginning of
the calendar year in which such disposition is consummated, do not exceed $1.0
million, and (v) transactions permitted under "Certain Covenants -- Merger and
Consolidation" above. Notwithstanding anything to the contrary contained above,
a Restricted Payment made in compliance with the "Limitation on Restricted
Payments" covenant shall not constitute an Asset Disposition except for purposes
of determinations of the Consolidated Coverage Ratio.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
indebtedness, the quotient obtained by dividing (i) the sum of the product of
the numbers of years (rounded upwards to the nearest month) from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption multiplied by the amount of such payment by (ii)
the sum of all such payments.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
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"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's Investors Service, Inc. ("Moody's") or Standard and Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ("S&P") and in each case
maturing within one year after the date of acquisition, (vi) investment funds
investing 95% of their assets in securities of the types described in clauses
(i)-(v) above, (vii) readily marketable direct obligations issued by any state
of the United States of America or any political subdivision thereof having one
of the two highest rating categories obtainable from either Moody's or S&P and
(viii) Indebtedness or preferred stock issued by Persons with a rating of "A" or
higher from S&P or "A2" or higher from Moody's.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
item to the extent it represents an accrual of or reserve for cash disbursements
for any subsequent period prior to the stated maturity of the Notes) and less
(x) the aggregate amount of contingent and "earnout" payments in respect of any
Permitted Business acquired by the Company or any Restricted Subsidiary that are
paid in cash during such period and (y) to the extent added in calculating
Consolidated Net Income, non-cash items (excluding such non-cash items to the
extent they represent an accrual for cash receipts reasonably expected to be
received prior to the Stated Maturity of the Notes), in each case for such
period. Notwithstanding the foregoing, the income tax expense, depreciation
expense and amortization expense of a Subsidiary of the Company shall be
included in Consolidated Cash Flow only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (A) if the Company or any of its Restricted Subsidiaries has incurred any
Indebtedness since the beginning of such period and through the date of
determination of the Consolidated Coverage Ratio that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (1) such Indebtedness as if such Indebtedness had
been incurred on the first day of such period (provided that if such
Indebtedness is incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by the Board
of Directors of the Company) shall be deemed outstanding for purposes of this
calculation), and (2) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(B) if since the beginning of such period any Indebtedness of the Company or any
of its Restricted Subsidiaries has been repaid, repurchased, defeased or
otherwise discharged (other than Indebtedness under a revolving credit or
similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and the underlying commitment terminated and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period,
(C) if since the beginning of such period the Company or any of its Restricted
Subsidiaries shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, Consolidated Cash Flow for such period shall be reduced by an
amount equal to the Consolidated Cash Flow (if positive) attributable to the
assets which are the subject of such Asset Disposition for such period or
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increased by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such period, and Consolidated Interest Expense for such
period shall be (i) reduced by an amount equal to the Consolidated Interest
Expense attributable to any Indebtedness of the Company or any of its Restricted
Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect
to the Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary of the Company is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale) and (ii) increased
by interest income attributable to the assets which are the subject of such
Asset Disposition for such period, (D) if since the beginning of such period the
Company or any of its Restricted Subsidiaries (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary of the Company (or any
Person which becomes a Restricted Subsidiary of the Company as a result thereof)
or an acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder which constitutes all or substantially all of
an operating unit of a business, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (E) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the Company or was merged with or into the Company or
any Restricted Subsidiary of the Company since the beginning of such period)
shall have made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (C) or (D) above if made by
the Company or a Restricted Subsidiary of the Company during such period,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries determined in accordance
with GAAP, plus, to the extent not included in such interest expense (i)
interest expense attributable to Capitalized Lease Obligations, (ii) capitalized
interest, (iii) amortization of debt discount, (iv) non-cash interest expense,
(v) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing, (vi) interest actually paid
by the Company or any such Restricted Subsidiary under any Guarantee of
Indebtedness or other obligation of any other Person, (vii) net payments
(whether positive or negative) pursuant to Interest Rate Agreements, (viii) the
cash contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust and (ix) cash and Disqualified Stock dividends in respect
of all Preferred Stock of Subsidiaries and Disqualified Stock of the Company
held by Persons other than the Company or a Wholly-Owned Subsidiary and less (a)
to the extent included in such interest expense, the amortization of capitalized
debt issuance costs and (b) interest income. Notwithstanding the foregoing, the
Consolidated Interest Expense with respect to any Restricted Subsidiary of the
Company, that was not a Wholly-Owned Subsidiary, shall be included only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and its consolidated Subsidiaries determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income (i) any net income (loss) of any person acquired by
the Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted
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Subsidiary is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Restricted Subsidiary, directly
or indirectly, to the Company (other than restrictions in effect on the Issue
Date with respect to a Restricted Subsidiary of the Company and other than
restrictions that are created or exist in compliance with the "Limitation on
Restrictions on Distributions from Restricted Subsidiaries" covenant), (iii) any
gain or loss realized upon the sale or other disposition of any assets of the
Company or its consolidated Restricted Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) which are not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person, (iv) any extraordinary gain or
loss, (v) the cumulative effect of a change in accounting principles, (vi) the
net income of any Person, other than a Restricted Subsidiary, except to the
extent of the lesser of (A) cash dividends or distributions actually paid to the
Company or any of its Restricted Subsidiaries by such Person and (B) the net
income of such Person (but in no event less than zero), and the net loss of such
Person (other than an Unrestricted Subsidiary) shall be included only to the
extent of the aggregate Investment of the Company or any of its Restricted
Subsidiaries in such Person and (vii) any non-cash expenses attributable to
grants or exercises of employee stock options. Notwithstanding the foregoing,
for the purpose of the covenant described under "Certain Covenants -- Limitation
on Restricted Payments" only, there shall be excluded from Consolidated Net
Income any dividends, repayments of loans or advances or other transfers of
assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary
to the extent such dividends, repayments or transfers increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D)
thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of the Company ending prior to the taking of any
action for the purpose of which the determination is being made and for which
financial statements are available (but in no event ending more than 135 days
prior to the taking of such action), as (i) the par or stated value of all
outstanding Capital Stock of the Company plus (ii) paid in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts attributable
to Disqualified Stock.
"Continuing Director" of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of the Indenture or (ii) was nominated for election or elected to the Board
of Directors of such Person with the affirmative vote of a majority of the
Continuing Directors of such Person who were members of such Board of Directors
at the time of such nomination or election.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
final Stated Maturity of the Notes, or (ii) is convertible into or exchangeable
(unless at the sole option of the issuer thereof) for (a) debt securities or (b)
any Capital Stock referred to in (i) above, in each case at any time prior to
the final Stated Maturity of the Notes.
"Equity Offering" means an offering for cash by the Company of its common
stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
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"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued, thereon,
after application of the net proceeds of the Outstanding Notes as described in
the Prospectus.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Notes Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Group" shall mean any "group" for purposes of Section 13(d) of the
Exchange Act.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter incurred) which is expressly subordinate or junior
in right of payment to the obligations of such Subsidiary Guarantor under the
Note Guarantee pursuant to a written agreement.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v)) entered into in the ordinary
course of business of such Person to the extent that such letters of credit are
not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third business day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except (x) trade payables and accrued expenses incurred in
the ordinary course of business and (y) contingent or "earnout" payment
obligations in respect of any Permitted Business acquired by the Company or any
Restricted Subsidiary), which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such
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Indebtedness is assumed by such Person, (vii) all Indebtedness of other Persons
to the extent Guaranteed by such Person, (viii) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Restricted Subsidiary of the Company,
any Preferred Stock of such Restricted Subsidiary to the extent such obligation
arises on or before the Stated Maturity of the Notes (but excluding, in each
case, accrued dividends) with the amount of Indebtedness represented by such
Disqualified Stock or Preferred Stock, as the case may be, being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed repurchase price; provided that, for purposes hereof the "maximum fixed
repurchase price" of any Disqualified Stock or Preferred Stock, as the case may
be, which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Stock or Preferred Stock, as the
case may be, as if such Disqualified Stock or Preferred Stock, as the case may
be, were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based on the fair
market value of such Disqualified Stock or Preferred Stock, as the case may be,
such fair market value shall be determined in good faith by the Board of
Directors of the Company and (ix) to the extent not otherwise included in this
definition, obligations under Currency Agreements and Interest Rate Agreements.
Unless specifically set forth above, the amount of Indebtedness of any Person at
any date shall be the outstanding principal amount of all unconditional
obligations as described above, as such amount would be reflected on a balance
sheet prepared in accordance with GAAP, and the maximum liability of such
Person, upon the occurrence of the contingency giving rise to the obligation, of
any contingent obligations described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market
value of the net assets of such Restricted Subsidiary of the Company at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Notes Trustee.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Group" means George S. Hofmeister, Frank J. Amedia and AAP
Holdings, Inc. and each member of the immediate family of any of the foregoing
natural persons and any trust or similar device created for the benefit of any
one or more of the foregoing and each Person which acquires a direct or indirect
beneficial ownership interest in shares of stock of the Company as an executor
or administrator for or by way of inheritance or bequest from one or more of the
foregoing natural persons following the death of such Person.
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"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition) therefrom in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all distributions and other payments required to
be made to any Person owning a beneficial interest in assets subject to sale or
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition, (iii) the deduction of appropriate amounts to be provided by
the seller as a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Disposition, provided
however, that upon any reduction in such reserves (other than to the extent
resulting from payments of the respective reserved liabilities), Net Available
Cash shall be increased by the amount of such reduction to reserves, and
retained by the Company or any Restricted Subsidiary of the Company after such
Asset Disposition and (iv) any portion of the purchase price from an Asset
Disposition placed in escrow (whether as a reserve for adjustment of the
purchase price, for satisfaction of indemnities in respect of such Asset
Disposition or otherwise in connection with such Asset Disposition) provided,
however, that upon the termination of such escrow, Net Available Cash shall be
increased by any portion of funds therein released to the Company or any
Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor, general partner or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"Officer" means the Chairman of the Board, the Vice-Chairman of the Board,
the Chief Executive Officer, the Chief Financial Officer, the President, any
Vice-President, the Treasurer or the Secretary of the Company.
"Note Guarantee" means the Guarantee of the Notes by a Subsidiary
Guarantor.
"Officer's Certificate" shall mean a certificate signed by two Officers of
the Company, at least one of whom shall be the principal executive, financial or
accounting officer of the Company.
"Opinion of Counsel" means a written opinion, in form and substance
acceptable to the Notes Trustee, from legal counsel who is acceptable to the
Notes Trustee.
"Permitted Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture, as reasonably determined
by the Company's Board of Directors.
"Permitted Investment" means an Investment by the Company or any of its
Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the Company;
provided, however, that the primary business of such Wholly-Owned Subsidiary is
a Permitted Business; (ii) another Person if as a result of such Investment such
other Person becomes a Wholly-Owned Subsidiary of the Company or is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Wholly-Owned Subsidiary of the Company; provided,
however, that in each case such Person's primary business is a Permitted
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any of its Restricted Subsidiaries, created or acquired in the
ordinary course of business and payable or dischargeable in accordance
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with customary trade terms; (v) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans and advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary in an aggregate amount outstanding at any one time not to exceed
$250,000 to any one employee or $1.0 million in the aggregate; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any of its Restricted
Subsidiaries or in satisfaction of judgments or claims; (viii) a Person engaged
in a Permitted Business or a loan or advance by the Company the proceeds of
which are used solely to make an investment in a Person engaged in a Permitted
Business or a Guarantee by the Company of Indebtedness of any Person in which
such Investment has been made provided, however, that no Permitted Investments
may be made pursuant to this clause (viii) to the extent the amount thereof
would, when taken together with all other Permitted Investments made pursuant to
this clause (viii), exceed $5.0 million in the aggregate (plus, to the extent
not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (viii), or any release or other
cancellation of any Guarantee constituting such Permitted Investment); (ix)
Persons to the extent such Investment is received by the Company or any
Restricted Subsidiary as consideration for asset dispositions effected in
compliance with the covenant described under "Limitations on Sales of Assets and
Subsidiary Stock"; (x) prepayments and other credits to suppliers made in the
ordinary course of business consistent with the past practices of the Company
and its Restricted Subsidiaries; and (xi) Investments in connection with
pledges, deposits, payments or performance bonds made or given in the ordinary
course of business in connection with or to secure statutory, regulatory or
similar obligations, including obligations under health, safety or environmental
obligations.
"Permitted Liens" means: (i) Liens granted by the Company and the
Guarantors which secure Indebtedness to the extent the Indebtedness is incurred
pursuant to clause (i) of paragraph (b) under the "Limitation on Indebtedness"
covenant; (ii) Liens in favor of the Company; (iii) Liens on property of a
Person existing at the time such Person is acquired by or merged into or
consolidated with the Company or any Restricted Subsidiary thereof; provided
that such Liens were in existence prior to the contemplation of such acquisition
and do not extend to any assets of the Company or its Restricted Subsidiaries
other than those acquired in connection with such merger or consolidation; (iv)
Liens to secure the performance of obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary
course of business; (v) Liens existing on the Issue Date; (vi) Liens in respect
of extensions, renewals, refundings or refinancings of any Indebtedness secured
by the Liens referred to in clauses (i), (ii), (iii) and (v) above and (viii)
below; provided that the Liens in connection with such extensions, renewals,
refundings or refinancings shall be limited to all or part of the specific
property which was subject to the original Lien; (vii) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded; provided that any reserve or other
appropriate provisions as shall be required in conformity with GAAP shall have
been made therefor; (viii) any Lien securing purchase money obligations incurred
in compliance with paragraph (b)(ii) of the "Limitation on Indebtedness"
covenant, provided that such Liens do not extend to any property (other than the
property so purchased) owned by the company or its Restricted Subsidiaries and
is not incurred more than 30 days after the incurrence of such Indebtedness
secured by such Lien; (ix) Liens to secure Capitalized Lease Obligations (except
in respect of Sale/Leaseback Transactions) on real or personal property of the
Company to the extent consummated in compliance with paragraph (b)(ii) of the
"Limitation on Indebtedness" covenant, provided that such Liens do not extend to
or cover any property of the Company of any of its Subsidiaries other than the
property subject to such Capitalized Lease Obligation; and (x) Liens incurred in
the ordinary course of business of the company or any Restricted Subsidiary
thereof with respect to obligations that do not exceed $1 million at any one
time outstanding and that (A) are not incurred in connection with the borrowing
of money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (B) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of the business by the Company or such Restricted Subsidiary.
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"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision hereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
A "Public Market" exists at any time with respect to the common stock of
the Company if (a) the common stock of the Company is then registered with the
Securities and Exchange Commission pursuant to Section 12(b) or 12(g) of the
Exchange Act and traded either on a national securities exchange or in the
National Association of Securities Dealers Automated Quotation System and (b) at
least 15% of the total issued and outstanding common stock of the Company as
applicable, has been distributed prior to such time by means of an effective
registration statement under the Securities Act of 1933.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated Maturity
of the Notes and (B) Stated Maturity of the Indebtedness being refinanced, (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the lesser of (A) the
Average Life of the Notes and (B) the Average Life of the Indebtedness being
refinanced and, (iii) the Refinancing Indebtedness is in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to (or 101% of, in the case of a refinancing of the Notes in
connection with a Change of Control) or less than the sum of the aggregate
principal amount (or if issued with original issue discount, the aggregate
accredited value) then outstanding of the Indebtedness being refinanced (plus
the amount of any premium required to be paid in connection therewith and
reasonable fees and expenses therewith) provided, further, that Refinancing
Indebtedness shall not include Indebtedness of a Subsidiary which refinances
Indebtedness of the Company.
"Restricted Subsidiary" means any Subsidiary of the Company other an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Secured Indebtedness" means any Senior Indebtedness of the Company or a
Subsidiary Guarantor secured by a Lien.
"Senior Indebtedness" in the case of the Notes means Indebtedness that is
not by its terms expressly subordinate or junior in right of payment to any
other Indebtedness of the Company or the Note Guarantee of a Restricted
Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligations" means Indebtedness that is expressly subordinate
or junior in right of payment to any other Indebtedness of the Company or the
Note Guarantee of a Restricted Subsidiary.
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"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of the Company.
"Subsidiary Guarantor" means each Subsidiary of the Company in existence on
the Issue Date and each Subsidiary (other than Unrestricted Subsidiaries)
created or acquired by the Company after the Issue Date.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P,
(v) Investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's and
(vi) Investments in mutual funds whose investment guidelines restrict such
funds' investments to those satisfying the provisions of clauses (i) through (v)
above.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any Restricted Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; provided,
however, that each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of such designation, and does not thereafter create, Incur,
issue, assume, guarantee or otherwise becomes liable with respect to any
Indebtedness other than Non-Recourse Debt and either (A) the Subsidiary to be so
designated has total consolidated assets of $10,000 or less or (B) if such
Subsidiary has consolidated assets greater than $10,000, then such designation
would be permitted under "Limitation on Restricted Payments." The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary subject to the limitations contained in "Limitation on Designations
of Unrestricted Subsidiaries."
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly-Owned Subsidiary.
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DESCRIPTION OF OUTSTANDING NOTES
The terms of the Outstanding Notes are identical in all material respects
to the Exchange Notes, except that the Outstanding Notes have not been
registered under the Securities Act, are subject to certain restrictions on
transfer and are entitled to certain registration rights under the Registration
Rights Agreement (which rights terminate upon the consummation of the Exchange
Offer, except under limited circumstances) (see "Description of Exchange
Notes"). In addition, the Registration Rights Agreement provides that if (i)
within 60 days of the Issue Date (as defined herein) or a Shelf Request (as
defined herein), neither an exchange offer registration statement nor a resale
shelf registration statement has been filed, (ii) within 150 days of the Issue
Date or a Shelf Request, neither an exchange offer registration statement nor a
resale shelf registration statement has been declared effective, (iii) within
180 days of the Issue Date, an exchange offer has not been consummated or (iv)
either the exchange offer registration statement or the resale shelf
registration statement has been declared effective and such registration
statement ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Outstanding Notes during periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iv), a "Registration Default"), interest ("Additional Interest") will
accrue on the Outstanding Notes (in addition to the stated interest on the
Outstanding Notes) from and including the date on which any such Registration
Default shall occur to but excluding the date on which all Registration Defaults
have been cured. Additional Interest will accrue at a rate of 0.50% per annum
during the 30-day period immediately following the occurrence of any
Registration Default and shall increase by 0.50% per annum with respect to each
subsequent 30-day period, but in no event shall such rate exceed 2.0% per annum.
The Exchange Notes are not entitled to any such Additional Interest (subject to
certain limited exceptions). The Outstanding Notes and the Exchange Notes will
constitute a single series of debt securities under the Indenture. See
"Description of Exchange Notes."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were originally sold by the Company on December 10,
1997 to the Initial Purchasers pursuant to the Purchase Agreement among the
Company, the Subsidiary Guarantors and the Initial Purchasers. The Initial
Purchasers subsequently resold the Outstanding Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities Act, or institutional
"accredited investors" (as defined in Rule 501(a) (1), (2), (3) or (7) of
Regulation D under the Securities Act) or outside the United States in
compliance with Regulation S under the Securities Act. Pursuant to the Purchase
Agreement, the Company entered into the Registration Rights Agreement, pursuant
to which the Company has agreed, for the benefit of the holders of the
Outstanding Notes, at the Company's cost, to use its best efforts to (i) file a
registration statement with the Commission within 60 days after the Issue Date
of the Outstanding Notes with respect to the Exchange Offer for the Outstanding
Notes, and (ii) cause the registration statement to be declared effective under
the Securities Act within 150 days after the Issue Date. Upon the registration
statement being declared effective, the Company will offer the Exchange Notes in
exchange for the Outstanding Notes. The Company will keep the Exchange Offer
open for no less than 30 business days (or longer if required by applicable law)
after the date on which notice of the Exchange Offer is mailed to the holders of
the Outstanding Notes.
For each Outstanding Note properly tendered and accepted pursuant to the
Exchange Offer, the holder of such Outstanding Note will receive an Exchange
Note having a principal amount equal to that of the Outstanding Note tendered.
Interest on each Exchange Note will accrue from the last respective interest
date on which interest was paid on the Outstanding Note tendered in exchange
therefor or, if no interest has been paid on such Outstanding Note, from the
Issue Date.
Each holder of the Outstanding Notes who wishes to exchange the Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to represent in
the Letter of Transmittal that (i) it is not an affiliate of the Company or the
Subsidiary Guarantors, (ii) the Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days after the Issue
Date, or, under certain circumstances, if the Initial Purchasers or any holder
of Outstanding Notes (other than the Initial Purchasers) who is not eligible to
participate in the Exchange Offer shall so request (each a "Shelf Request"), the
Company will at its cost, (a) within 60 days of such Shelf Request, file a shelf
registration statement covering resales of the Outstanding Notes (a "Shelf
Registration Statement"), (b) use its best efforts to cause such Shelf
Registration Statement to be declared effective under the Securities Act no
later than 150 days following a Shelf Request and (c) use its best efforts to
keep effective such Shelf Registration Statement until the earlier of two years
after the Issue Date and such time as all of the applicable Outstanding Notes
have been sold thereunder. The Company will, in the event of the filing of a
Shelf Registration Statement, provide to each holder of the Outstanding Notes
copies of the prospectus which is a part of such Shelf Registration Statement,
notify each such holder when such Shelf Registration Statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the Outstanding Notes. A holder that sells its Outstanding Notes
pursuant to a Shelf Registration Statement generally will be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
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If the Company or the Subsidiary Guarantors fail to comply with the above
provisions or if such Shelf Registration Statement fails to become effective,
then, as liquidated damages, Additional Interest shall become payable with
respect to the Outstanding Notes as follows:
(i) if the registration statement for the Exchange Offer or the Shelf
Registration Statement is not filed within 60 days following the Issue
Date, the Additional Interest shall accrue on the Outstanding Notes over
and above the stated interest percentage at a rate of 0.50% per annum for
the first 30 days commencing on the 61st day after the Issue Date, such
Additional Interest increasing by an additional 0.50% per annum at the
beginning of each subsequent 30-day period;
(ii) if the registration statement for the Exchange Offer or the Shelf
Registration Statement is not declared effective within 150 days following
the Issue Date, the Additional Interest shall accrue on the Outstanding
Notes over and above the stated interest percentage at a rate of 0.50% per
annum for the first 30 days commencing on the 151st day after the Issue
Date, such Additional Interest increasing by an additional 0.50% per annum
at the beginning of each subsequent 30-day period; or
(iii) if (A) the Company has not exchanged all Outstanding Notes
validly tendered in accordance with the terms of the Exchange Offer on or
prior to 180 days after the Issue Date or (B) the registration statement
for the Exchange Offer ceases to be effective at any time prior to the time
that the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of the Issue Date (unless all the Outstanding Notes have
been sold thereunder or as otherwise provided herein), then the Additional
Interest shall accrue on the Outstanding Notes over and above the stated
interest percentage of 0.50% per annum for the first 30 days commencing on
(x) the 181st day after the Issue Date with respect to the Notes validly
tendered and not exchanged by the Company, in the case of (A) above, or (y)
the day of the registration statement for the Exchange Offer ceases to be
effective or usable for its intended purpose in the case of (B) above, or
(z) the day the Shelf Registration Statement ceases to be effective in the
case of (C) above, the rate of such Additional Interest increasing by an
additional 0.50% per annum at the beginning of each subsequent 30-day
period;
provided, however, that the Additional Interest payable on the Outstanding Notes
may not exceed in the aggregate 2.0% per annum; and provided further, that (1)
upon the filing of the registration statement for the Exchange Offer or the
Shelf Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of such registration statement for the Exchange Offer or the Shelf
Registration Statement (in the case of (ii) above), or (3) upon the exchange of
Exchange Notes for all Outstanding Notes tendered (in the case of clause (iii)
(A) above), or upon the effectiveness of the registration statement which had
ceased to remain effective in the case of clause (iii) (B) above, or upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause (iii) (C) above), the Additional Interest
accruing on the Outstanding Notes as a result of such clause (or the relevant
subclause thereof) shall cease to accrue.
Any Additional Interest due pursuant to clauses (i), (ii) or (iii) above
will be payable in cash, on the same original interest payment dates as interest
on the Outstanding Notes. The aggregate Additional Interest will be determined
by multiplying the applicable rate of such Additional Interest by the principal
amount of the Outstanding Notes multiplied by a fraction, the numerator of which
is the number of days such Additional Interest was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months),
and the denominator of which is 360.
The summary herein of all material provisions of the Registration Rights
Agreement does not purport to be exhaustive and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which is available upon request to the Company.
Following the consummation of the Exchange Offer, holders of the
Outstanding Notes who were eligible to participate in the Exchange Offer but who
did not tender their Outstanding Notes will not have any further exchange or
registration rights and such Outstanding Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
such Outstanding Notes could be adversely affected.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all
Outstanding Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes accepted in the Exchange Offer. Holders may tender some or all
of their Outstanding Notes pursuant to the Exchange Offer. However, Outstanding
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof. The Exchange Notes will evidence the same debt as the
Outstanding Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus $125,000,000 aggregate principal amount
of Outstanding Notes are outstanding. The Company has fixed the close of
business April 23, 1998 as the record date for the Exchange Offer for purposes
of determining the person to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of the Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the Outstanding Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions of
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than the transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
June 12, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, (i) to delay accepting any Outstanding
Notes, to extend the Exchange Offer or to terminate the Exchange Offer if any of
the conditions set forth below under "-- Conditions" shall not have been
satisfied, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders.
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PROCEDURES FOR TENDERING
The tender of Outstanding Notes pursuant to any of the procedures set forth
in this Prospectus and in the Letter of Transmittal will constitute a binding
agreement between the Tendering Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal. The tender of Outstanding Notes will constitute an agreement to
deliver good and marketable title to all tendered Outstanding Notes prior to the
Expiration Date free and clear of all liens, charges, claims, encumbrances,
interests and restrictions of any kind. Holders must follow the procedures set
forth in this Prospectus in order to properly and effectively tender Outstanding
Notes.
EXCEPT AS PROVIDED IN "-- GUARANTEED DELIVERY PROCEDURES," UNLESS THE
OUTSTANDING NOTES BEING TENDERED ARE DEPOSITED BY THE HOLDER WITH THE EXCHANGE
AGENT PRIOR TO THE EXPIRATION DATE (ACCOMPANIED BY A PROPERLY COMPLETED AND DULY
EXECUTED LETTER OF TRANSMITTAL), THE COMPANY MAY, AT ITS OPTION, REJECT SUCH
TENDER. ISSUANCE OF OUTSTANDING NOTES WILL BE MADE ONLY AGAINST DEPOSIT OF
TENDERED OUTSTANDING NOTES AND DELIVERY OF ALL OTHER REQUIRED DOCUMENTS.
NOTWITHSTANDING THE FOREGOING, DTC PARTICIPANTS TENDERING THROUGH ATOP WILL BE
DEEMED TO HAVE MADE VALID DELIVERY WHERE THE EXCHANGE AGENT RECEIVES AN AGENT'S
MESSAGE (DEFINED BELOW) PRIOR TO THE EXPIRATION DATE.
Outstanding Notes held through DTC. Each Beneficial Owner holding
Outstanding Notes through a DTC Participant must instruct such DTC Participant
to cause its Outstanding Notes to be tendered in accordance with the procedures
set forth in this Prospectus.
Pursuant to an authorization given by DTC to the DTC Participants, each DTC
Participant holding Outstanding Notes through DTC must (i) electronically
transmit its acceptance through ATOP, and DTC will then verify the acceptance,
execute a book-entry delivery to the Exchange Agent's account at DTC and send an
Agent's Message to the Exchange Agent for its acceptance, or (ii) comply with
the guaranteed delivery procedures set forth below and in the Notice of
Guaranteed Delivery. See "-- Guaranteed Delivery Procedures."
The Exchange Agent will (promptly after the date of this Prospectus)
establish accounts at DTC for purposes of the Exchange Offer with respect to
Outstanding Notes held through DTC, and any financial institution that is a DTC
Participant may make book-entry delivery of interests in Outstanding Notes into
the Exchange Agent's account through ATOP. However, although delivery of
interests in the Outstanding Notes may be effected through book-entry transfer
into the Exchange Agent's account through ATOP, an Agent's Message in connection
with such book-entry transfer, and any other required documents, must be
transmitted to and received by the Exchange Agent at its address set forth under
"-- Exchange Agent," or the guaranteed delivery procedures set forth below must
be complied with, in each case, prior to the Expiration Date. Delivery of
documents to DTC does not constitute delivery to the Exchange Agent. The
confirmation of a book-entry transfer into the Exchange Agent's account at DTC
as described above is referred to herein as a "Book-Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
each DTC Participant tendering through ATOP that such DTC Participants have
received a Letter of Transmittal and agree to be bound by the terms of the
Letter of Transmittal and that the Company may enforce such agreement against
such DTC Participants.
Cede & Co., as the Holder of the global certificates representing the
Outstanding Notes (a "Global Security"), will tender a portion of each Global
Security equal to the aggregate principal amount due at the stated maturity or
number of shares for which instructions to tender are given by DTC Participants.
Outstanding Notes held by Holders. Each Holder must (i) complete and sign
and mail or deliver the accompanying Letter of Transmittal, and any other
documents required by the Letter of Transmittal, together with certificate(s)
representing all tendered Outstanding Notes, to the Exchange Agent at its
address set forth
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under "-- Exchange Agent," or (ii) comply with the guaranteed delivery
procedures set forth below and in the Notice of Guaranteed Delivery. See
"-- Guaranteed Delivery Procedures."
All signatures on a Letter of Transmittal must be guaranteed by any member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor" institution
within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution"); provided, however, that signatures on a Letter of Transmittal
need not be guaranteed if such Outstanding Notes are tendered for the account of
an Eligible Institution including (as such terms are defined in Rule 17Ad-15):
(i) a bank; (ii) a broker, dealer, municipal securities dealer, municipal
securities broker, government securities dealer or government securities broker;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings institution that is a
participant in a Securities Transfer Association recognized program.
If a Letter of Transmittal or any Outstanding Note is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, agent, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person must so indicate when signing, and proper evidence satisfactory to
the Company of the authority of such person so to act must be submitted.
Holders should indicate in the applicable box in the Letter of Transmittal
the name and address to which substitute certificates evidencing Outstanding
Notes for amounts not tendered are to be issued or sent, if different from the
name and address of the person signing the Letter of Transmittal. In the case of
issuance in a different name, the employer identification or social security
number of the person named must also be indicated. If no instructions are given,
such Outstanding Notes not tendered, as the case may be, will be returned to the
person signing the Letter of Transmittal.
By tendering, each Holder and each DTC Participant will make to the Company
the representations set forth in the third paragraph under the heading
"-- Purpose and Effect of the Exchange Offer."
No alternative, conditional, irregular or contingent tenders will be
accepted (unless waived). By executing a Letter of Transmittal or transmitting
an acceptance through ATOP, as the case may be, each Tendering Holder waives any
right to receive any notice of the acceptance for purchase of its Outstanding
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Outstanding Notes will be resolved by the
Company, whose determination will be final and binding. The Company reserves the
absolute right to reject any or all tenders that are not in proper form or the
acceptance of which may, in the opinion of counsel for the Company, be unlawful.
The Company also reserves the absolute right to waive any condition to the
Exchange Offer and any irregularities or conditions of tender as to particular
Outstanding Notes. The Company's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding. Unless waived, any irregularities in connection with
tenders must be cured within such time as the Company shall determine. The
Company and the Exchange Agent shall not be under any duty to give notification
of defects in such tenders and shall not incur liabilities for failure to give
such notification. Tenders of Outstanding Notes will not be deemed to have been
made until such irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering Holder, unless otherwise provided in the Letter
of Transmittal, as soon as practicable following the Expiration Date.
LETTERS OF TRANSMITTAL AND OUTSTANDING NOTES MUST BE SENT ONLY TO THE
EXCHANGE AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES TO THE
COMPANY OR DTC.
The method of delivery of Outstanding Notes and Letters of Transmittal, any
required signature guarantees and all other required documents, including
delivery through DTC and any acceptance through ATOP, is at the election and
risk of the persons tendering and delivering acceptances or Letters of
Transmittal and, except as otherwise provided in the applicable Letter of
Transmittal, delivery will be deemed made only
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when actually received by the Exchange Agent. If delivery is by mail, it is
suggested that the Holder use properly insured, registered mail with return
receipt requested, and that the mailing be made sufficiently in advance of the
Expiration Date to permit delivery to the Exchange Agent prior to the Expiration
Date.
GUARANTEED DELIVERY PROCEDURES
Outstanding Notes held through DTC. DTC Participants holding Outstanding
Notes through DTC who wish to cause their Outstanding Notes to be tendered, but
who cannot transmit their acceptances through ATOP prior to the Expiration Date,
may cause a tender to be effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by mail, hand delivery,
facsimile transmission or overnight courier) substantially in the form
provided by the Company herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection
therewith (as described above) are received by the Exchange Agent within
three New York Stock Exchange ("NYSE") trading days after the date of the
execution of the Notice of Guaranteed Delivery.
Outstanding Notes held by Holders. Holders who wish to tender their
Outstanding Notes and (i) whose Outstanding Notes are not immediately available,
(ii) who cannot deliver their Outstanding Notes, the Letter of Transmittal or
any other required documents to the Exchange Agent or (iii) who cannot complete
the procedures for book-entry transfer, prior to the Expiration Date, may effect
a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder,
the certificate number(s) of such Outstanding Notes and the principal
amount of Outstanding Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three NYSE trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Outstanding Notes (or a
confirmation of book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility), and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation or
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
upon three NYSE trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
Outstanding Notes held through DTC. DTC Participants holding Outstanding
Notes who have transmitted their acceptances through ATOP may, prior to 5:00
p.m., New York City time, on the Expiration Date, withdraw the instruction given
thereby by delivering to the Exchange Agent, at its address set forth under
"-- Exchange Agent," a written, telegraphic or facsimile notice of withdrawal of
such instruction. Such notice of withdrawal must contain the name and number of
the DTC Participant, the principal amount due at
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the Stated Maturity date of the Outstanding Notes to which such withdrawal
related and the signature of the DTC Participant. Withdrawal of such an
instruction will be effective upon receipt of such written notice of withdrawal
by the Exchange Agent.
Outstanding Notes held by Holders. Holders may withdraw a tender of
Outstanding Notes in the Exchange Offer, by a telegram, telex, letter or
facsimile transmission notice of withdrawal received by the Exchange Agent at
its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Outstanding Notes to be withdrawn (the "Depositor"),
(ii) identify the Outstanding Notes to be withdrawn (including the certificate
number(s) and principal amount due at the Stated Maturity of such Outstanding
Notes, or, in the case of Outstanding Notes transferred by book-entry transfer,
the name and number of the account at the Book-Entry Transfer Facility to be
credited), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Outstanding Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Outstanding Notes register the transfer of such Outstanding Notes into the name
of the person withdrawing the tender and (iv) specify the name in which any such
Outstanding Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Outstanding Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer and no Exchange Notes will be issued with respect thereto unless the
Outstanding Notes so withdrawn are validly retendered. Any Outstanding Notes
which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Outstanding Notes may be retendered by following one
of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date.
All signatures on a notice of withdrawal must be guaranteed by an Eligible
Institution; provided, however, that signatures on the notice of withdrawal need
not be guaranteed if the Outstanding Notes being withdrawn are held for the
account of an Eligible Institution.
A withdrawal of an instruction or a withdrawal of a tender must be executed
by a DTC Participant or a Holder, as the case may be, in the same manner as the
person's name appears on its transmission through ATOP or Letter of Transmittal,
as the case may be, to which such withdrawal relates. If a notice of withdrawal
is signed by a trustee, partner, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person must so indicate when signing
and must submit with the revocation appropriate evidence of authority to execute
the notice of withdrawal. A DTC Participant or a Holder may withdraw an
instruction or a tender, as the case may be, only if such withdrawal complies
with the provisions of this Prospectus.
A withdrawal of a tender of Outstanding Notes by a DTC Participant or a
Holder, as the case may be, may be rescinded only by a new transmission of an
acceptance through ATOP or execution and delivery of a new Letter of
Transmittal, as the case may be, in accordance with the procedures described
herein.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange securities for, any Outstanding
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Outstanding Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the judgment of the Company upon written advice of counsel, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or any material adverse development has
occurred in any existing action or proceeding with respect to the Company
or any of the subsidiaries; or
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(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the judgment
of the company and based on written advice of counsel, could reasonably be
expected to materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its discretion and based on written advice of
counsel, deem necessary for the consummation of the Exchange Offer as
contemplated hereby.
If any of the conditions are not satisfied, the Company may (i) refuse to
accept any Outstanding Notes and return all tendered Outstanding Notes to the
tendering holders, (ii) extend the Exchange Offer and retain all Outstanding
Notes tendered prior to the expiration of the Exchange Offer, subject, however,
to the rights of holders to withdraw such Outstanding Notes (see "-- Withdrawal
of Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Outstanding Notes which have not
been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
United States Trust Company of New York
114 West 47th Street, 25th Floor
New York, NY 10036-1532
Attention: James Nesci
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, as reflected in the Company's accounting records on the date
of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Outstanding Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Outstanding Notes may be resold only (i) to the Company (upon redemption thereof
or otherwise), (ii) so long as the Outstanding Notes are eligible for resale
pursuant to Rule 144A, to a person inside the United States whom the seller
reasonably believes is a qualified
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institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, in accordance with Rule 144
under the Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes
in the ordinary course of business, whether or not such person is the holder
(other than (i) a broker-dealer who purchases such Exchange Notes from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) who receives Exchange Notes in
exchange for Outstanding Notes, and who is not participating, does not intend to
participate, and has no arrangement or understanding with person to participate,
in the distribution of the Exchange Notes, will be allowed to resell the
Exchange Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the Exchange Notes a prospectus
that satisfies the requirements of Section 10 of the Securities Act. However, if
any holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Exchange Notes, such
holder cannot rely on the position of the staff of the Commission enunciated in
such no-action letters or any similar interpretive letters, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Exchange Notes, where such
Securities were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Outstanding Notes must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
For a description of the procedures for such resales by Participating
Broker-Dealers, see "Plan of Distribution."
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
U.S. FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN THE EXCHANGE OFFER AND
OWNING AND DISPOSING OF OUTSTANDING NOTES OR EXCHANGE NOTES
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to a holder that exchanges Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer, but does not purport to be a
complete analysis of all the potential tax considerations relating thereto. This
summary is based upon current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), final, temporary, and proposed regulations of the
Treasury Department, administrative rulings and pronouncements of the Internal
Revenue Service (the "IRS") and judicial decisions currently in effect, all of
which are subject to different interpretations and to change, possibly with
retroactive effect. The discussion does not deal with all aspects of U.S.
Federal income taxation that may be relevant to particular investors in light of
their personal investment circumstances (for example, to persons holding
Outstanding Notes or Exchange Notes as part of a "conversion" transaction or as
a part of a "hedge" or "hedging" transaction, "integrated" transaction, or as a
position in a "straddle" for U.S. Federal income tax purposes), nor does it
discuss U.S. Federal income tax considerations applicable to certain types of
investors subject to special treatment under the U.S. Federal income tax laws
(for example, insurance companies, tax-exempt organizations, financial
institutions, traders or dealers in securities or currencies or persons that
have a "functional currency" other than the U.S. dollar, and taxpayers subject
to the alternative minimum tax). In addition, the discussion does not consider
the effect of any foreign, state, local, gift, estate or other tax laws that may
be applicable to a particular investor. The Company has not sought any ruling
from the IRS with respect to the statements made and the conclusions reached in
the following summary, and there can be no assurance that the IRS will agree
with such statements and conclusions. The discussion assumes that investors hold
Outstanding Notes and will hold Exchange Notes as capital assets within the
meaning of Section 1221 of the Code.
EACH INVESTOR CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR EXCHANGE
NOTES PURSUANT TO THE EXCHANGE OFFER SHOULD CONSULT ITS TAX ADVISOR REGARDING
THE PARTICULAR TAX CONSEQUENCES OF PARTICIPATING IN THE EXCHANGE OFFER AND
OWNING AND DISPOSING OF THE EXCHANGE NOTES, AND THE EFFECT THAT ITS PARTICULAR
CIRCUMSTANCES MAY HAVE ON SUCH CONSEQUENCES, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL, GIFT, ESTATE, AND FOREIGN TAX LAWS.
U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Notes and Exchange Notes that
is (i) a citizen or resident (as defined in Section 7701(b)(1) of the Code) of
the United States or any state thereof, (ii) a corporation or partnership
created or organized under the laws of the United States or any political
subdivision thereof (including the District of Columbia) (including any other
partnership treated as a United States person under any applicable U.S. Treasury
regulations, but excluding a partnership that meets the definition contained in
this clause (ii) but is not treated as a United States person under any such
U.S. Treasury regulations), (iii) an estate or trust described in Section
7701(a)(30) of the Code, or (iv) a person whose worldwide income or gain is
otherwise subject to U.S. Federal income taxation on a net income basis (a "U.S.
Holder").
Outstanding Notes and Exchange Notes
The Exchange Offer. The exchange of Outstanding Notes for Exchange Notes
pursuant to the Exchange Offer should not constitute a significant modification
of the terms of the Outstanding Notes and, accordingly, such exchange should not
be treated as a taxable event for U.S. Federal income tax purposes. Therefore,
such exchange should have no U.S. Federal income tax consequences to U.S.
Holders of Outstanding Notes, and each U.S. Holder of Exchange Notes will
continue to be required to include interest on the Exchange Notes in its gross
income in accordance with its method of accounting for U.S. Federal income tax
purposes.
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Payment of Interest and Additional Interest. Interest on an Outstanding
Note or Exchange Note generally will be includable in the income of a U.S.
Holder as ordinary income at the time such interest is received or accrued, in
accordance with such U.S. Holder's method of accounting for U.S. Federal income
tax purposes. The Outstanding Notes were treated by the Company as issued
without original issue discount ("OID") within the meaning of the Code.
Additional Interest will accrue on the Outstanding Notes upon the occurrence of
certain events described under "The Exchange Offer -- Purpose and Effect of the
Exchange Offer." Because the Company determined that, when the Outstanding Notes
were issued, there was only a remote possibility that such events would occur,
the Company determined that Additional Interest should not be taken into account
in concluding that the Outstanding Notes were issued without OID.
Amortizable Bond Premium
Generally, the excess of a U.S. Holder's tax basis in an Outstanding Note
or Exchange Note over the amount payable at maturity is bond premium that the
U.S. Holder may elect to amortize under Section 171 of the Code on a yield to
maturity basis over the period from the U.S. Holder's acquisition date to the
maturity date of the Outstanding Note or Exchange Note. The amortizable bond
premium is treated as an offset to interest income on the Outstanding Note or
Exchange Note for United States Federal income tax purposes. A U.S. Holder who
elects to amortize bond premium must reduce its tax basis in the Outstanding
Note or Exchange Note by the deductions allowable for amortizable bond premium.
An election to amortize bond premium is revocable only with the consent of the
IRS and applies to all obligations owned or acquired by the U.S. Holder on or
after the first day of the taxable year to which the election applies.
An Outstanding Note or Exchange Note may be called or submitted for
redemption at a premium prior to maturity. See "Description of Exchange
Notes -- Optional Redemption." An earlier call date is treated as the maturity
date of the Outstanding Note or Exchange Note and the amount of bond premium is
determined by treating the amount payable on such call date as the amount
payable at maturity, if such a calculation produces a smaller bond premium than
the method described in the preceding paragraph. If a U.S. Holder is required to
amortize and deduct the bond premium by reference to a certain call date, the
Outstanding Note or Exchange Note will be treated as maturing on that date for
the amount then payable. If the Outstanding Note or Exchange Note is not
redeemed on that call date, the Outstanding Note or Exchange Note will be
treated as reissued on that date for the amount of the call price on that date.
If an Outstanding Note or Exchange Note purchased at a premium is redeemed prior
to its maturity, a U.S. Holder who has elected to deduct the bond premium may be
permitted to deduct any remaining unamortized bond premium as an ordinary loss
in the taxable year of the redemption.
Market Discount
The resale of Outstanding Notes or Exchange Notes may be affected by the
market discount provisions of the Code. A U.S. Holder has market discount if an
Outstanding Note or Exchange Note is purchased (other than at original issue) at
an amount below the stated redemption price at maturity of the Outstanding Note
or Exchange Note. A de minimis amount of market discount is ignored. A U.S.
Holder of an Outstanding Note or Exchange Note with market discount must either
elect to include market discount in income as it accrues or treat a portion of
the gain recognized on the disposition or retirement of the Outstanding Note or
Exchange Note as ordinary income. The amount of gain treated as ordinary income
would equal the lesser of (i) the gain recognized (or the appreciation, in the
case of a nontaxable transaction such as a gift) or (ii) the portion of the
market discount that accrued on a ratable basis (or, if elected, on a constant
interest rate basis) while the Outstanding Note or Exchange Note was held by the
U.S. Holder.
A U.S. Holder who acquires an Outstanding Note or Exchange Note at a market
discount also may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Outstanding Note or Exchange Note until the U.S. Holder
disposes of the Outstanding Note or Exchange Note in a taxable transaction.
Moreover, to the extent of any accrued market discount on such Outstanding Note
or Exchange Note, (i) any partial principal payment received with respect to an
Outstanding Note or Exchange Note will be includible as ordinary income and
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(ii) the fair market value of the Outstanding Note or Exchange Note on certain
otherwise non-taxable transfers (such as gifts) will be includible as ordinary
income.
A U.S. Holder of Outstanding Notes or Exchange Notes acquired at a market
discount may elect for United States Federal income tax purposes to include
market discount in gross income as the discount accrues, either on a
straight-line basis or on a constant interest rate basis. This current inclusion
election, once made, applies to all market discount obligations acquired by the
U.S. Holder on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the IRS. If a
U.S. Holder of Outstanding Notes or Exchange Notes makes such an election, the
foregoing rules with respect to the recognition of ordinary income on sales and
other dispositions of such debt instruments and on any partial principal payment
with respect to the Outstanding Notes or Exchange Notes, and the deferral of
interest deductions on indebtedness incurred or maintained to purchase or carry
such debt instruments, would not apply.
Sale, Exchange or Redemption of the Outstanding Notes or Exchange Notes.
Subject to the discussion of the Exchange Offer above, upon the sale,
exchange or redemption of an Outstanding Note or Exchange Note, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued interest income or market discount not previously
included in income which is taxable as ordinary income) and (ii) such U.S.
Holder's adjusted tax basis in the Outstanding Note or Exchange Note. A U.S.
Holder's adjusted tax basis in an Outstanding Note or Exchange Note generally
will equal the cost of the Outstanding Note or Exchange Note to such U.S. Holder
increased by the amount of interest income on the Outstanding Note or Exchange
Note previously taken into income by the U.S. Holder but not yet received by the
U.S. Holder and by the amount of any market discount previously taken into
income by the U.S. Holder and reduced by the amount of any bond premium
amortized by the U.S. Holder with respect to the Outstanding Notes or Exchange
Notes and by any principal payments on an Outstanding Note or Exchange Note.
Gain or loss realized by a U.S. Holder on the sale, exchange, redemption or
other disposition of an Outstanding Note or Exchange Note generally will be
capital gain or loss. Such capital gain will be taxed at a reduced rate for a
U.S. Holder who is not a corporation and who holds an Outstanding Note or
Exchange Note for greater than one year and at a further reduced rate for a U.S.
Holder who is not a corporation and who holds an Outstanding Note or Exchange
Note for more than eighteen months (subject to the market discount rules
discussed above).
NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Notes and Exchange Notes who is
not a U.S. Holder (a "Non-U.S. Holder").
Interest on Outstanding Notes or Exchange Notes. Payments of interest on
the Outstanding Notes or the Exchange Notes by the Company or any agent of the
Company to any Non-U.S. Holder will not be subject to U.S. Federal withholding
tax, provided that such interest income is not effectively connected with the
conduct of a United States trade or business of the Non-U.S. Holder and provided
that (i) the Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company
entitled to vote; (ii) the Non-U.S. Holder is not a controlled foreign
corporation that is related to the Company through stock ownership; (iii) either
(A) the beneficial owner of the Outstanding Notes or the Exchange Notes
certifies (by submitting to the Company or its agent a Form W-8 (or a suitable
substitute form)) in compliance with applicable laws and regulations to the
Company or its agent, under penalties of perjury, that it is not a "United
States person" as defined in the Code and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution"), holds the Outstanding Notes or the Exchange Notes on
behalf of the beneficial owner and provides a statement to the Company or its
agent in which it certifies that a Form W-8 (or a suitable substitute form) has
been received from the beneficial owner by it or by a financial institution
between it and the beneficial owner and furnishes the payor with a copy thereof;
and (iv) the Non-U.S. Holder is not a bank which acquired the Outstanding Notes
or the
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Exchange Notes in consideration for an extension of credit made pursuant to a
loan agreement entered into in the ordinary course of business. Recently
promulgated Treasury regulations that will be effective January 1, 1999 (the
"1999 Regulations"), provide alternative methods for establishing exemptions
from withholding on payments to foreign persons. Under the 1999 Regulations, the
furnishing of the names of the beneficial owners of Outstanding Notes or
Exchange Notes and a copy of such beneficial owner's Form W-8 by a financial
institution with respect to beneficial owners, described in clause (iii)(B)
above, will not be required where the financial institution is a "qualified
intermediary" which has entered into a withholding agreement with the IRS
pursuant to such regulations. A Non-U.S. Holder that is not exempt from tax
under these rules will be subject to U.S. Federal income tax withholding at a
rate of 30% unless the interest is effectively connected with the conduct of a
United States trade or business, in which case the interest will be subject to
the U.S. Federal income tax on net income that applies to United States persons
generally. Non-U.S. Holders should consult applicable income tax treaties, which
may provide different rules, subject to compliance with certain requirements, to
document entitlement to treaty benefits.
Prior to the effective date of the 1999 Regulations, payments of interest
to a Non-U.S. Holder that is a foreign partnership are subject to the rules
described in the prior paragraph. The 1999 regulations will require, in the case
of Outstanding Notes or Exchange Notes held by a foreign partnership, that the
certification described in clause (iii) of the preceding paragraph be provided
by the partners rather than by the foreign partnership unless the foreign
partnership has entered into a withholding agreement with the United States as a
"withholding foreign partnership." A look-through rule will apply in the case of
tiered partnerships.
Except to the extent that an applicable treaty otherwise provides, a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest if the interest income is effectively connected with the
conduct of a United States trade or business of the Non-U.S. Holder. Effectively
connected interest received by a corporate Non-U.S. Holder may also, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate (or, if applicable, a lower treaty rate). Even though such effectively
connected interest is subject to income tax, and may be subject to the branch
profits tax, it is not subject to withholding tax if the Non-U.S. Holder
delivers to the payor a withholding certificate stating that the income is
effectively connected with a U.S. trade or business.
Sale of Outstanding Notes or Exchange Notes. A Non-U.S. Holder generally
will not be subject to U.S. Federal income tax on gain recognized, if any, upon
the sale or exchange of Outstanding Notes or Exchange Notes unless (i) the gain
is effectively connected with the conduct of a trade or business within the
United States by the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who
is a nonresident alien individual and holds the Outstanding Notes or Exchange
Notes as a capital asset, such Non-U.S. Holder is present in the United States
for 183 or more days in the taxable year and certain other circumstances are
present, or (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding may apply to certain
noncorporate holders with respect to (i) principal and interest payments on an
Outstanding Note or Exchange Note or (ii) proceeds of a sale of an Outstanding
Note or Exchange Note. Such payments generally will be subject to backup
withholding at a rate of 31% unless the payee of such payments supplies the
payor or its agent with a taxpayer identification number, certified under
penalties of perjury, and certain other information, or otherwise establishes,
in the manner prescribed by law, an exemption from backup withholding.
The 1999 Regulations would modify certain of the rules discussed above
generally with respect to payments on the Outstanding Notes and Exchange Notes
made after December 31, 1998. In particular, in the case of payments to foreign
partnerships (other than payments to foreign partnerships that qualify as
"withholding foreign partnerships" within the meaning of such Treasury
regulations and payments to foreign partnerships that are effectively connected
with the conduct of a trade or business in the United States), the partners of
such partnership will be required to provide the certification discussed above
in order to provide an exemption from backup withholding tax and information
reporting requirements.
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Any amount withheld under such backup withholding rules from a payment to a
holder will be allowed as a credit against the holder's U.S. Federal income tax,
provided that the holder furnishes the required information to the IRS. In
addition, certain penalties may be imposed by the IRS on a holder who is
required to supply information but does not do so in the proper manner.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PARTICIPANT IN THE EXCHANGE OFFER SHOULD CONSULT WITH ITS OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PARTICIPANT OF
PARTICIPATING IN THE EXCHANGE OFFER AND OWNING AND DISPOSING OF THE EXCHANGE
NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME
AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretations of the staff of the Division of Corporation
Finance of the SEC set forth in no-action letters issued to third parties, the
Company believes that, except as described below, Exchange Notes issued pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the respective holders thereof without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that (i) such Exchange Notes are acquired in the ordinary course of
such holder's business and (ii) such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
of the Exchange Notes. A holder of Outstanding Notes that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act or that is a
broker-dealer that purchased Outstanding Notes from the Company to resell
pursuant to an exemption from registration under the Securities Act (a) cannot
rely on such interpretations by the staff of the Division of Corporation Finance
of the SEC, (b) will not be permitted or entitled to tender such Outstanding
Notes in the Exchange Offer and (c) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Outstanding Notes unless such sale or transfer is
made pursuant to an exemption from such requirements. In addition, any holder
who tenders Outstanding Notes in the Exchange Offer with the intention or for
the purpose of participating in a distribution of the Exchange Notes cannot rely
on such interpretations by the staff of the Division of Corporation Finance of
the SEC and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the secondary resale
transaction. Unless an exemption from registration is otherwise available, any
such resale transaction should be covered by an effective registration statement
containing selling security holders information required by Item 507 of
Regulation S-K under the Securities Act. To date, the staff of the Division of
Corporation Finance of the SEC has taken the position that a broker-dealer that
has acquired securities in exchange for securities that were acquired by such
broker-dealer as a result of market-making activities or other trading
activities may fulfill the prospectus delivery requirements with the prospectus
contained in an exchange offer registration statement.
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company set forth in "The Exchange Offer -- Purpose and
Effect of the Exchange Offer."
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. This Prospectus may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired as a result of market-making
activities or other trading activities. Subject to certain provisions set forth
in the Registration Rights Agreement, the Company has agreed that, for a period
of up to 180 days after the consummation of the Exchange Offer, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Risk Factors -- Absence of Public Market" and "The Exchange
Offer -- Resale of the Exchange Notes."
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold
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from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
from any such resale of Exchange Notes and any commissions or concessions
received by any such person may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
Subject to certain provisions set forth in the Registration Rights
Agreement, for a period of 180 days after the date the Exchange Offer is
consummated, the Company will promptly send additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any Participating
Broker-Dealer that requests such documents in the Letter of Transmittal. The
Company has agreed to pay the expenses incident to the Exchange Offer, other
than any discounts or commissions incurred upon the sale of the Exchange Notes.
The Company will indemnify each Participating Broker-Dealer selling Exchange
Notes against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The validity of the Exchange Notes issued pursuant to the Exchange Offer
will be passed upon for the Company by Squire, Sanders & Dempsey L.L.P.,
Phoenix, Arizona.
EXPERTS
The financial statements and schedules included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP; Semple &
Cooper, P.L.C.; Clifton Gunderson, L.L.C.; Fox, Byrd & Golden P.C.; and Arthur
Andersen LLP, independent public accountants, to the extent and for the periods
set forth in the respective reports of such firms contained herein and in the
Registration Statement. All such financial statements and schedules have been
included herein in reliance upon such reports given upon the authority of such
firms as experts in auditing and accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
As reported on Form 8-K dated February 17, 1997 (the "Form 8-K"), the
Company engaged BDO Seidman, LLP as its independent auditors to replace the firm
of Semple & Cooper, P.L.C., who was dismissed at the same time. The decision to
change accountants was approved by the Board of Directors of the Company. The
reports of Semple & Cooper, P.L.C. on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1994 and 1995, and in subsequent
interim periods, there were no disagreements with Semple & Cooper, P.L.C. on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedures which, if not resolved to the satisfaction of
Semple & Cooper, P.L.C., would have caused Semple & Cooper, P.L.C. not to
respond fully to any inquiries from BDO Seidman, LLP.
The Company requested Semple & Cooper, P.L.C. to furnish it a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the above statement. Semple & Cooper, P.L.C. furnished the Company with a
copy of a letter dated February 20, 1997 containing such a statement, which was
filed as Exhibit 1 to Amendment No. 1 to the Company's Current Report on Form
8-K dated February 17, 1997 regarding the dismissal of Semple & Cooper, P.L.C.
101
102
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
Report of Independent Certified Public Accountants........ F-3
Consolidated Balance Sheets at December 31, 1996 and
1997................................................... F-4
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-6
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-7
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-8
Notes to Consolidated Financial Statements................ F-9
EAGLE WINDOW AND DOOR, INC. AND SUBSIDIARIES AND TAYLOR
BUILDING PRODUCTS COMPANY
Independent Auditors' Report.............................. F-25
Combined Balance Sheets at December 31, 1995 and August
29, 1996............................................... F-26
Combined Statements of Operations and Accumulated Deficit
for the year ended December 31, 1995 and for the eight
months ended August 29, 1996........................... F-27
Combined Statements of Cash Flows for the year ended
December 31, 1995 and for the eight months ended August
29, 1996............................................... F-28
Notes to Combined Financial Statements.................... F-29
MALLYCLAD CORPORATION AND VYN-L CORPORATION
Report of Independent Certified Public Accountants........ F-35
Combined Balance Sheets at November 30, 1995 and June 30,
1996................................................... F-36
Combined Statements of Operations and Retained Earnings
for the year ended November 30, 1995 and for the seven
months ended June 30, 1996............................. F-37
Combined Statements of Cash Flows for the year ended
November 30, 1995 and for the seven months ended June
30, 1996............................................... F-38
Notes to Combined Financial Statements.................... F-39
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................. F-42
Consolidated Balance Sheets at December 31, 1995 and
September 30, 1996 (Unaudited)......................... F-43
Consolidated Statements of Operations for the year ended
December 31, 1995 and for the nine months ended
September 30, 1995 and 1996 (Unaudited)................ F-45
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1995, and for the nine
months ended September 30, 1996 (Unaudited)............ F-46
Consolidated Statements of Cash Flows for the year ended
December 31, 1995, and for the nine months ended
September 30, 1995 and 1996 (Unaudited)................ F-47
Notes to Consolidated Financial Statements................ F-50
WESTERN INSULATED GLASS, CO.
Independent Auditors' Report.............................. F-60
Balance Sheets at October 31, 1996 and January 31, 1997
(Unaudited)............................................ F-61
Statement of Income and Retained Earnings for the year
ended October 31, 1996, and for the three months ended
January 31, 1996 and 1997 (Unaudited).................. F-62
Statements of Cash Flows for the year ended October 31,
1996, and for the three months ended January 31, 1996
and 1997 (Unaudited)................................... F-63
Notes to Financial Statements............................. F-64
F-1
103
PAGE
-----
THERMETIC GLASS, INC.
Independent Auditor's Report.............................. F-67
Balance Sheets at December 31, 1996 and June 30, 1997
(Unaudited)............................................ F-68
Statements of Operations and Accumulated Deficit for the
year ended December 31, 1996 and for the six months
ended June 30, 1996 and 1997 (Unaudited)............... F-69
Statements of Cash Flows for the year ended December 31,
1996, and for the six months ended June 30, 1996 and
1997 (Unaudited)....................................... F-70
Notes to Financial Statements............................. F-72
BINNINGS BUILDING PRODUCTS, INC.
Report of Independent Public Accountants.................. F-77
Balance Sheets at December 31, 1995 and 1996, and
September 30, 1997 (Unaudited)......................... F-78
Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended
September 30, 1997 (Unaudited)......................... F-79
Statements of Stockholders' Deficit for the years ended
December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1997 (Unaudited)............ F-80
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended
September 30, 1997 (Unaudited)......................... F-81
Notes to Financial Statements............................. F-82
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
Report of Independent Certified Public Accountants........ F-94
Combined Balance Sheets at July 28, 1996 and July 27,
1997................................................... F-95
Combined Statements of Income and Retained Earnings for
the years ended July 28, 1996 and July 27, 1997........ F-96
Combined Statements of Cash Flows for the years ended July
28, 1996 and July 27, 1997............................. F-97
Notes to Combined Financial Statements.................... F-101
Independent Auditor's Report.............................. F-105
Combined Balance Sheet at July 31, 1995................... F-106
Combined Statement of Operations and Retained Earnings for
the year ended July 31, 1995........................... F-107
Combined Statement of Cash Flows for the year ended July
31, 1995............................................... F-108
Notes to the Combined Financial Statements................ F-110
F-2
104
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-3
105
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-4
106
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-5
107
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-6
108
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 TOTAL
-------------------- --------------- -------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------ ------ ------ ------ ------- --------- ------
Capital contribution in
connection with
acquisition of
Mallyclad and Vyn-L
(Note 2).............. -- $ -- -- $ -- -- $ -- $ 77,473 $ -- $ 77,473
Distribution to
stockholder of
Mallyclad............. -- -- -- -- -- -- -- (170,000) (170,000)
Issuance of common stock
for cash.............. -- -- -- -- 10 1 604,999 -- 605,000
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 -- 3,003,000
Net income for the
period................ -- -- -- -- -- -- -- 761,089 761,089
---------- ------- ------ ---- ---------- ------- ---------- ----------- -----------
Balance, December 31,
1996.................. 1,000,000 1,000 -- -- 4,860,580 4,861 3,679,612 591,089 4,276,562
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 -- 500,212
Issuance of warrants to
purchase common
stock................. -- -- -- -- -- -- 120,500 -- 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 -- 68,000
Issuance of shares in
connection with
acquisitions (Note
2).................... -- -- -- -- 768,615 768 1,949,146 -- 1,949,914
Discount on conversion
of Series B Preferred,
treated as dividends
(Note 8).............. -- -- -- -- -- -- -- (75,212) (75,212)
Net loss for the year... -- -- -- -- -- -- -- (1,258,841) (1,258,841)
---------- ------- ------ ---- ---------- ------- ---------- ----------- -----------
Balance, December 31,
1997.................. -- $ -- -- $ -- 13,458,479 $13,458 $6,310,641 $ (742,964) $ 5,581,135
========== ======= ====== ==== ========== ======= ========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
109
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-8
110
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.
F-9
111
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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.
F-10
112
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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.
F-11
113
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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.
F-12
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AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
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 $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
F-13
115
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
$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
=========== =========== ===========
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
F-14
116
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
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-15
117
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.
F-16
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AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT: (CONTINUED)
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 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.
F-17
119
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-18
120
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS: (CONTINUED)
("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 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.
F-19
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AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS: (CONTINUED)
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.
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)
======== =========
F-20
122
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES: (CONTINUED)
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.
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.
F-21
123
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
========= ========== =====
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.
F-22
124
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. NET INCOME (LOSS) PER COMMON SHARE: (CONTINUED)
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.
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 Corporation, an Austintown, Ohio manufacturer of vinyl
extrusions for the fenestration industry. The Company also purchased
F-23
125
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS: (CONTINUED)
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 Mallyclad Corporation to a related party
for $1.2 million.
F-24
126
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-25
127
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-26
128
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE
FOR THE YEAR EIGHT MONTHS
ENDED 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-27
129
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE
FOR THE YEAR EIGHT MONTHS
ENDED 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-28
130
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).
F-29
131
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)
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 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-30
132
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.
F-31
133
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)
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 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
F-32
134
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)
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 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.
F-33
135
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-34
136
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-35
137
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED BALANCE SHEETS
NOVEMBER 30,
1995 JUNE 30, 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-36
138
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
SEVEN
YEAR ENDED MONTHS
NOVEMBER 30, ENDED
1995 JUNE 30, 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-37
139
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
SEVEN
YEAR ENDED MONTHS
NOVEMBER 30, ENDED
1995 JUNE 30, 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-38
140
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.
F-39
141
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
2. INVENTORIES
Inventories consisted of the following:
NOVEMBER 30
1995 JUNE 30, 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:
YEAR ENDED SEVEN MONTHS
NOVEMBER 30, ENDED
1995 JUNE 30, 1996
---- -------------
Current federal................................... $20,686 $ --
Deferred.......................................... -- --
------- -------
Total............................................. $20,686 $ --
======= =======
F-40
142
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. TAXES ON INCOME (CONTINUED)
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.
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-41
143
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Forte Computer Easy, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Forte
Computer Easy, Inc. and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presents fairly, in all material respects, the consolidated financial position
of Forte Computer Easy, Inc. and Subsidiaries as of December 31, 1995, and the
consolidated results of its operations, changes in stockholders' equity, and
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
SEMPLE & COOPER, P.L.C.
Phoenix, Arizona
May 28, 1996
F-42
144
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
(UNAUDITED)
Current Assets:
Cash...................................................... $ 143,254 $ 255,549
Accounts receivable, less allowance for doubtful accounts
and returns of $299,939 and $0, respectively........... 437,160 198,394
Inventory................................................. 1,666,832 1,782,078
Prepaid expenses.......................................... 31,474 15,002
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 246,472 43,574
----------- -----------
Total Current Assets................................... 2,525,192 2,294,597
----------- -----------
Property, Plant and Equipment:
Land...................................................... 74,969 74,969
Buildings and improvements................................ 2,957,795 2,968,203
Equipment, machinery and tooling.......................... 2,099,581 1,839,282
Office furniture and equipment............................ 122,709 85,423
Vehicles.................................................. 140,787 171,725
Airplane.................................................. 207,600 --
----------- -----------
5,603,441 5,139,602
Less: accumulated depreciation............................ (1,196,182) (1,118,303)
----------- -----------
4,407,259 4,021,299
----------- -----------
Other Assets:
Net assets of discontinued operations..................... 74,000 --
Goodwill, net............................................. 360,533 318,926
Other intangible costs, net............................... 27,170 29,598
Deposits and other........................................ 3,467 2,913
----------- -----------
465,170 351,437
----------- -----------
$ 7,397,621 $ 6,667,333
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-43
145
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
(UNAUDITED)
Current Liabilities:
Current portion of long-term debt......................... $ 243,438 $ 242,000
Revolving line of credit.................................. 107,906 107,906
Amount due officer........................................ 18,013 18,013
Accounts payable.......................................... 596,369 353,673
Accrued liabilities....................................... 457,170 53,455
Net liabilities of discontinued operations................ -- 209,945
Accrued costs of discontinued operations.................. 277,619 --
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 371,778 17,408
----------- -----------
Total Current Liabilities.............................. 2,072,293 1,002,400
----------- -----------
Long-Term Debt, Net of Current Portion...................... 4,021,664 4,429,684
Lease Deposit............................................... 9,575 9,575
Deferred Tax Liability...................................... 160,573 92,273
----------- -----------
4,191,812 4,531,532
----------- -----------
Commitments................................................. -- --
Stockholders' Equity:
Preferred stock -- $.01 par value; 20,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock -- $.01 par value; 50,000,000 shares
authorized; 48,460,111 shares issued and outstanding;
1,718,422 shares subscribed............................ 484,601 484,601
Paid-in capital........................................... 2,669,485 2,413,902
Common stock subscribed................................... 79,143 79,143
Accumulated deficit....................................... (1,727,609) (1,840,724)
----------- -----------
1,505,620 1,136,922
Less: Treasury stock, 456,317 shares at cost.............. (372,104) (3,521)
----------- -----------
1,133,516 1,133,401
----------- -----------
$ 7,397,621 $ 6,667,333
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-44
146
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED NINE MONTHS ENDED
------------ ------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
Net Revenues........................................ $ 5,426,260 $ 4,361,288 $ 2,635,113
Cost of Revenues.................................... 4,540,722 3,541,366 2,087,032
----------- ----------- -----------
Gross Profit........................................ 885,538 819,922 548,081
Selling, General and Administrative................. 747,659 532,900 497,196
----------- ----------- -----------
Income Loss......................................... 137,879 287,022 50,885
Other Income (Expense):
Gain on sale of assets............................ -- -- 123,439
Other income (expense)............................ 22,086 37,018 12,841
Rental income..................................... 86,929 67,596 71,905
Interest expense.................................. (352,403) (254,879) (285,646)
Amortization of intangibles....................... -- (44,699) (49,932)
----------- ----------- -----------
Income (Loss) from Continuing Operations before
Provision for Income Taxes........................ (105,509) 92,058 (76,508)
Provision for Income Tax Benefit (Expense).......... 54,971 (34,900) 29,000
----------- ----------- -----------
Loss from Continuing Operations..................... (50,538) (57,158) (47,508)
Discontinued Operations:
Loss from operations of software division and disk
fulfillment division........................... (1,149,518) (560,990) (35,454)
Loss on disposal of disk fulfillment division....... (245,419) -- (30,153)
----------- ----------- -----------
Net Loss............................................ $(1,445,475) $ (503,832) $ (113,115)
=========== =========== ===========
Earnings per Share Income (loss) from continuing
operations........................................ -- -- --
Loss of discontinued operations and operations to
be disposed of................................. (.03) (.01) --
Income (loss) from disposal of disk and
fulfillment division........................... -- -- --
----------- ----------- -----------
Net Income (Loss)................................... $ (.01) $ (.01) $ --
=========== =========== ===========
Weighted Average Shares Outstanding................. 50,000,000 49,630,799 49,813,420
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-45
147
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 31, 1994 THROUGH SEPTEMBER 30, 1996
COMMON
SHARES PAID-IN STOCK TREASURY ACCUMULATED TOTAL
PREFERRED OF COMMON COMMON CAPITAL SUBSCRIBED STOCK DEFICIT EQUITY
--------- ---------- -------- ---------- ---------- --------- ----------- -----------
Balance, December 31,
1994...................... -- 48,460,111 $484,601 $2,669,485 $79,143 -- $ (282,134) $ 2,951,095
Acquisition of 456,317
shares of treasury stock,
at cost................... -- -- -- -- -- $(372,104) -- (372,104)
Net loss.................... -- -- -- -- -- -- (1,445,475) (1,445,475)
--------- ---------- -------- ---------- ------- --------- ----------- -----------
Balance, December 31,
1995...................... -- 48,460,111 484,601 2,669,485 79,143 (372,104) (1,727,609) 1,133,516
Sale of Treasury Shares
(unaudited)............... -- -- -- (255,583) -- 368,583 -- 113,000
Net loss (unaudited)........ -- -- -- -- -- -- (113,115) (113,115)
--------- ---------- -------- ---------- ------- --------- ----------- -----------
Balance, September 30, 1996
(unaudited)............... $ -- 48,460,111 $484,601 $2,413,902 $79,143 $ (3,521) $(1,840,724) $ 1,133,401
========= ========== ======== ========== ======= ========= =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-46
148
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS ENDED
------------ ------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
Cash Flows from Operating Activities:
Net Loss.......................................... $(1,445,475) $ (503,832) $ (113,115)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization.................. 378,886 281,977 227,451
Amortization of software development costs..... 109,899 141,247 --
Amortization of intangibles.................... 76,078 65,201 49,932
Decrease in provision for returns and doubtful
accounts..................................... (180,468) (71,947) --
Gain on sale of assets......................... -- (77,601) (123,439)
Decrease in provision for inventory
obsolescence................................. (284,540) -- --
Impairment of intangible assets of discontinued
operations................................... 246,083 -- --
Cash received from purchase of subsidiary...... -- -- --
Changes in Assets and Liabilities:
(Increase) Decrease in Assets:
Accounts receivable............................ 1,272,684 591,626 174,660
Inventory...................................... 908,156 416,386 (115,246)
Prepaid expenses............................... 80,204 68,031 16,472
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 72,848 (44,541) 202,898
Deposits and intangibles....................... 5,433 5,641 (10,199)
Increase (Decrease) in Liabilities:
Accounts payable............................... (1,692,059) (385,410) (242,696)
Accrued liabilities............................ (12,103) 25,055 (371,904)
Amount due officer............................. 713 -- --
Accrued costs of discontinued operations....... 277,619 -- (207,827)
Net liabilities of discontinued operations..... -- -- 303,945
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 231,618 124,025 (354,370)
Net deferred tax liability..................... (154,828) (308,700) (68,300)
----------- ----------- -----------
Net cash provided by (used by) operating
activities.............................. $ (109,252) $ 327,158 $ (631,738)
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-47
149
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
Cash Flows from Investing Activities:
Capital expenditures............................... $(153,285) $(121,943) $ (97,376)
Computer software development costs................ (30,102) (30,102) --
Proceeds from the sale of assets................... 686,250 50,000 250,000
--------- --------- -----------
Net cash provided by (used by) investing
activities............................... 502,863 (102,045) 152,624
--------- --------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of treasury stock............... 75,000 -- 113,000
Proceeds from debt................................. 337,971 337,971 2,942,000
Principal payments on debt......................... (785,959) (661,085) (2,463,591)
Payments on amount due officers, net............... -- (20,164) --
--------- --------- -----------
Net cash provided by (used by) financing
activities............................... (372,988) (343,278) 591,409
--------- --------- -----------
Net Increase (Decrease) in Cash...................... 20,623 (118,165) 112,295
Cash, Beginning of Year.............................. 122,631 122,631 143,254
--------- --------- -----------
Cash, End of Year.................................... $ 143,254 $ 4,466 $ 255,549
========= ========= ===========
F-48
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FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
Payment of accrued liability with equity in a
building........................................... $ -- $ -- $ 31,811
======== ======== ========
Negotiated accounts payable settlement reductions of
discontinued operations............................ $124,744 $ -- $ --
======== ======== ========
Purchase of treasury stock through the reduction of
accounts receivable and accrual of expenses........ $372,104 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements
F-49
151
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
Forte Computer Easy, Inc. is a Corporation which was duly formed and
organized under the laws of the State of Utah. Through June 8, 1994, the
acquisition date of Forte, Inc. and Arizona Disk Fulfillment, Inc., the Company
was principally engaged in the business of software publishing. Based upon the
aforementioned acquisitions, the Company expanded its operations through the
acquired subsidiaries into manufacturing of commercial and architectural
fenestration products, and into computer disk duplication and fulfillment
services for software publishers and technology based industries throughout the
United States.
In late 1995, the Company decided to discontinue its operations in the
software publishing and computer disk duplication and fulfillment divisions, as
disclosed in Note 10, Discontinued Operations.
ACQUISITION OF SUBSIDIARIES:
Effective June 8, 1994, the Company finalized the acquisition of all of the
outstanding stock of Forte, Inc. and Subsidiary, an Ohio corporation and Arizona
Disk Fulfillment, Inc., an Arizona corporation.
The acquisition of Forte, Inc. was effected through the exchange of
32,479,290 (unaudited) shares, of which 1,718,422 (unaudited) shares are
subscribed of the Company's common stock for all of the outstanding shares of
Forte, Inc. under a tax-free reorganization within the meaning of Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. The acquisition
was accounted for financial statement purposes as a reverse acquisition, with
Forte, Inc. as the acquiring company.
The acquisition of Arizona Disk Fulfillment, Inc. was completed through the
payment of $150,000 (unaudited) and the issuance of 1,900,000 (unaudited) shares
of the Company's common stock for all of the outstanding shares of Arizona Disk
Fulfillment, Inc. This transaction was also completed as a tax-free
reorganization.
For financial accounting purposes, the acquisitions are accounted for as
purchases in accordance with Accounting Principles Board Opinion No. 16. For tax
reporting purposes, these acquisitions were structured as tax-free
reorganizations.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Forte
Computer Easy, Inc. and its wholly-owned subsidiaries, Forte, Inc. and Arizona
Disk Fulfillment, Inc. All significant inter-company balances and transactions
have been eliminated in consolidation.
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.
UNAUDITED FINANCIAL STATEMENTS:
The unaudited interim consolidated financial statements include all
adjustments for normal recurring accruals considered necessary to present fairly
the Company's consolidated statements for the periods presented. Operating
results for the nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
F-50
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FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION:
Computer Software:
The Company recognizes its computer software sales revenue in accordance
with the American Institute of Certified Public Accountants Statement of
Position 91-1 regarding software revenue recognition. Product revenue is
recognized, net of an allowance for estimated returns, upon product shipment.
The Company has established a program which enables distributors to return
products for credit against future purchases.
CONTRACTING REVENUES:
The Company recognizes contract manufacturing income from fixed-price and
modified-fixed price contracts on the percentage-of-completion method of
accounting. Direct labor is allocated on a standard cost basis, based on the
estimated time to manufacture each type of production unit, and manufacturing
overhead is allocated by manufacturing labor hours. Installation labor is
allocated by contract as incurred. Contract material costs are accumulated on a
standard cost basis based upon the type of production unit manufactured under
contract. The amount recorded as the percentage complete for each individual
contract is based upon the units of production method. The cost of materials
purchased but not utilized in completion of the manufacturing process are not
considered in determining the progress toward completion.
Incurred contract costs include all direct material utilized, labor costs,
installation costs and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs, factory costs, and
depreciation. Selling, general and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job performance,
job conditions and estimated profitability, including those arising from final
contract settlements, may result in revisions to cost and revenue and are
recognized in the period in which the revisions are determined.
The asset, "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts" represents revenues recognized in excess of amounts
billed, and the liability "Billings in Excess of Costs and Estimated Earnings on
Uncompleted Contracts" represents revenues recorded in excess of recognized
costs and estimated earnings.
CONCENTRATIONS OF RISK:
The Company sells its software inventory on credit primarily to software
distributors and national retailers who market the Company's products and other
software products principally in the United States. The majority of the
Company's consolidated accounts receivable balance as of December 31, 1995 is
due from six major customers.
In addition, the Company currently has two major contracts in process from
its fenestration operations, which together represent approximately 54 percent
of the total contracts in process at December 31, 1995. These two contracts were
substantially completed at December 31, 1995.
ACCOUNTS RECEIVABLE:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable, based on a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts
receivable.
F-51
153
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
on the weighted average basis for software product inventory, and the first-in,
first-out basis for all other inventory.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is computed
by the straight-line method over the estimated useful lives of the related
assets for financial reporting purposes and on an accelerated method for tax
purposes. The estimated useful lives are as follows:
Buildings............................................ 31.5-40 years
Leasehold improvements............................... 5-7 years
Office furniture and fixtures........................ 7-10 years
Equipment............................................ 5-15 years
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to operations as incurred.
Betterments or renewals are capitalized when incurred. For the year ended
December 31, 1995, depreciation expense was $378,886. For the nine months ended
September 30, 1995 and 1996, depreciation expense was $281,977 and $277,451
(unaudited), respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS:
The Company capitalizes software development costs in accordance with
Financial Accounting Standards Board Statement No. 86. Software development
costs not qualifying for capitalization are expensed as research and development
costs, as incurred. These costs totaled approximately $175,708 for the year
ended December 31, 1995.
Capitalized costs are amortized on a product-by-product basis using
straight-line amortization with useful lives of three to five years. The Company
evaluates the estimated net realizable value of each software product at each
balance sheet date and records write-downs to net realizable value for any
products for which net book value is in excess of net realizable value. During
the year ended December 31, 1995, amortization of capitalized software
development costs charged to cost of revenues totaled $109,899. Based upon
management's decision to phase-out the software division in 1995, all
capitalized software development costs were written off.
GOODWILL:
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the date of acquisition and is being amortized
on the straight-line method over eight to 25 years. Amortization expense charged
to operations for the years ended December 31, 1995 amounted to $47,567.
Amortization expense charged to operations for the nine months ended September
30, 1995 and 1996 was $39,447 and $41,602 (unaudited), respectively. The Company
evaluates the estimated net realizable value of its goodwill at each balance
sheet date, and records writedowns if the carrying value exceeds the expected
future net operating cash flows from the related operations. If the expected
future net operating cash flows are less than the carrying value, the Company
recognizes an impairment loss equal to the amount by which the carrying value
exceeds the discounted expected future net operating cash flows from the related
operations. During the current year the Company recognized an impairment of
intangible assets of discontinued operations in the approximate amount of
$246,083.
F-52
154
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INTANGIBLE COSTS:
Other intangible costs are comprised primarily of deferred loan costs,
which are amortized over the term of the related loan on a straight-line basis.
Amortization for the year ended December 31, 1995 amounted to $28,511. For the
nine months ended September 30, 1995 and 1996, amortization of other intangible
costs was $5,252 and $8,325, respectively.
INCOME TAXES:
Effective January 1, 1993, the Company implemented Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income, and tax net operating loss
and credit carryforwards. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
in deferred tax assets and liabilities during the period.
2. SEGMENT REPORTING:
The following table presents the total assets of Forte Computer Easy, Inc.
and Subsidiaries at December 31, 1995, and the net revenues and net loss of
Forte Computer Easy, Inc. and Subsidiaries for the year ended December 31, 1995,
are as follows:
1995
----
Total Assets:
Forte Computer Easy, Inc.................................. $ 150,198
Forte, Inc................................................ 7,260,315
Arizona Disk Fulfillment, Inc............................. (12,892)
-----------
Total..................................................... $ 7,397,621
===========
Net Revenues:
Forte Computer Easy, Inc.................................. $ 1,010,242
Forte, Inc................................................ 5,426,260
Arizona Disk Fulfillment, Inc............................. 1,541,650
Less: amount included in discontinued operations.......... (2,551,892)
-----------
Total..................................................... $ 5,426,260
===========
Net Loss:
Forte Computer Easy, Inc.................................. $(1,026,029)
Forte, Inc................................................ (50,538)
Arizona Disk Fulfillment, Inc............................. (368,908)
-----------
Total..................................................... $(1,445,475)
===========
F-53
155
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACTS IN PROGRESS:
Costs and estimated earnings in excess of billings and billings in excess
of costs and estimated earnings on uncompleted contracts consist of the
following:
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
Costs incurred on uncompleted contracts.................... $4,466,544 $ 882,983
Profit earned to date...................................... 1,623,862 415,165
---------- ----------
6,090,406 1,298,148
Less: billings to date..................................... 6,215,712 1,271,982
---------- ----------
$ (125,306) $ 26,166
========== ==========
Presentation in the accompanying balance sheets, is as follows:
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 246,472 $ 43,574
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (371,778) (17,408)
--------- --------
$(125,306) $ 26,166
========= ========
4. INVENTORIES:
Inventories consist of the following:
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
Raw materials.............................................. $1,761,561 $1,669,078
Finished goods............................................. 110,188 185,000
Work in process............................................ 44,185 38,000
Packaging materials and components......................... 10,898 --
Less: amounts included in net assets of discontinued
operations............................................... (260,000) (110,000)
---------- ----------
$1,666,832 $1,782,078
========== ==========
5. REVOLVING CREDIT LINE:
The Company had an operating agreement for a line of credit under which it
could borrow $300,000 or 80% of the eligible accounts receivable of Computer
Easy International, Inc. at a monthly rate of 3%. The credit line was terminated
on August 31, 1995, as the Company is in default.
6. RELATED PARTY TRANSACTIONS:
The Company sells fenestration products to a contractor, whose owner is
related to an officer of the Company. Sales for the year ended December 31, 1995
totaled $43,459 and revenue for the nine months ended September 30, 1996 was $0.
No amount is owed the Company at December 31, 1995 and September 30, 1996.
F-54
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FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company performs management services for various rental properties
owned by an officer of the Company. Management services billed during the year
ended December 31, 1995 and during the nine months ended September 30, 1996
amounted to $49,804 and $37,724, respectively. Amounts included in accounts
receivable at December 31, 1995 and September 30, 1996 totaled $14,109 and
$44,802, respectively, and in the opinion of management, are expected to be
collected.
7. INCOME TAXES:
For financial accounting and tax reporting purposes, the Company reports
income and expenses on the accrual basis of accounting. For the year ended
December 31, 1995, the Company made provisions for net federal and state income
tax benefits in the approximate amounts of $69,100 and $155,000, respectively.
This tax benefit was due to the net increase of the deferred tax asset arising
from the net operating loss carryforwards.
At December 31, 1995, there are federal and state net operating loss
carryforwards available to offset future federal and state taxable income,
expiring as follows:
FEDERAL NET STATE NET
EXPIRATION OPERATING LOSS EXPIRATION OPERATING LOSS
DECEMBER 31, CARRYFORWARD DECEMBER 31, CARRYFORWARD
- ------------------------ -------------- ------------------------ --------------
2002.................. $ 86,238 1997.................... $ 74,152
2005.................. 74,252 1998.................... 608,297
2008.................. 608,297 1999.................... 564,044
2009.................. 564,044 2000.................... 1,014,207
----------
2010.................. 1,014,207
----------
$2,347,038 $2,260,700
========== ==========
Federal net operating losses are further limited due to ownership changes
to approximately $300,000 per year.
Deferred income taxes arise from timing differences resulting from revenues
and costs reported for financial accounting and tax reporting purposes in
different periods. Deferred income taxes represent the tax liability or asset
based on different depreciation methods used for financial accounting and tax
reporting purposes, research and development costs which are expended as period
costs for tax reporting purposes, contract accounting under the percentage of
completion method for financial reporting and completed contract basis for tax
purposes, and differences in asset basis for financial reporting and tax
purposes due to the purchase method of accounting used in the business
acquisitions.
Components of the net deferred tax liability are as follows:
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
Deferred Tax Asset:
Estimated benefit from federal and state net operating
loss carryforwards.................................... $ 704,111 $ 758,800
Deferred Income Taxes Payable:
Depreciation differences................................. (510,450) (521,000)
Contract accounting differences.......................... (354,234) (330,073)
--------- ---------
Net deferred tax liability................................. $(160,573) $ (92,273)
========= =========
F-55
157
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT:
Long-term debt consists of the following:
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
Borrowings under loan agreements with a bank............... $2,796,125 $3,254,707
Lines of credit with a bank................................ 495,000 250,000
Borrowings under other loan agreements..................... 1,050,977 1,166,977
---------- ----------
4,342,102 4,671,684
Less: amount included in net assets of discontinued
operations .......................................... (77,000) --
---------- ----------
Total long-term debt....................................... 4,265,102 4,671,684
Less: current portion of long-term debt.................... (243,438) (242,000)
---------- ----------
Long-term debt............................................. $4,021,664 $4,429,684
========== ==========
Borrowings under loan agreements and lines of credit with a bank are
collateralized by equipment, inventory, accounts receivable, assignment of a
$400,000 life insurance policy on an officer of the Company, and an assignment
of rents on an operating lease. The loan agreements have interest rates varying
from 8.25 percent per annum to variable rates of prime plus 2.25 percent per
annum. The prime rate at December 31, 1995 and September 30, 1996 was 8.5
percent and 8.25 percent, respectively.
Borrowings under other loan agreements are collateralized by equipment and
real estate and have interest rates varying from 3 percent to 10 percent per
annum.
On January 30, 1996, Forte, Inc. restructured its long-term debt with a
bank. The debt restructure consolidated nine existing loans, and provides for a
15 year amortization, with a five year call. The gross proceeds of the debt
restructure amounted to $2,675,000, with an interest rate of two points over the
bank's prime rate. The initial rate of interest is 10.5 percent. The loan
agreement calls for monthly payments, including principal and interest, of
$25,000 for the period February, 1996 through July, 1996, and thereafter monthly
payments, including principal and interest, of $30,000. The note is secured by a
first mortgage assignment of rents on property leased by the Company; a blanket
assignment of life insurance on an officer, in the amount of $1,650,000, and all
inventory, accounts, contract rights, equipment, fixtures and general
intangibles.
At December 31, 1995, the approximate aggregate maturities of debt for the
succeeding five years, are as follows:
YEAR ENDED
DECEMBER 31, AMOUNT
- ------------------------------------------ ------
1996.................................... $ 243,438
1997.................................... 266,386
1998.................................... 259,495
1999.................................... 279,841
2000.................................... 293,443
Subsequent................................ 2,922,499
----------
$4,265,102
==========
9. INCENTIVE STOCK OPTION PLANS AND STOCK OPTIONS:
In May, 1992, the Board of Directors adopted an Employee Incentive Stock
Option Plan which was approved by the shareholders in May, 1992. The plan calls
for reservation of 5,000,000 shares of the
F-56
158
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCENTIVE STOCK OPTION PLANS AND STOCK OPTIONS (CONTINUED)
Company's common stock. The plan also provides for the issuance of options to
purchase the Company's common stock at 100% of the fair market value at the date
of grant. Options have a maximum duration of ten years after the date of grant.
As part of the Plan and Agreement of Reorganization with Forte, Inc., stock
options were granted to the former stockholders of Forte, Inc. for 4,717,698
shares at $.375 per share and are exercisable through June 8, 1998. The Plan
also provides for the Company to enter into separate Stock Option Agreements
dated June 7, 1994, whereby the Company has the right, for a period of one year
from June 8, 1994, to purchase 30 percent of the shares owned by certain major
stockholders at the rate of $.50 per share. The number of shares which can be
redeemed by the Company under this agreement is 1,940,202. The Company did not
exercise any of its options to repurchase any of the returned shares.
Outstanding options would be adjusted in the event of any forward or
reverse stock split or similar activity.
Stock option activity is as follows:
(UNAUDITED)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 OPTION PRICE
---- ---- ------------
Outstanding, beginning of period............. $6,815,548 $5,815,548 $.25 - $.50
Granted during the period.................... -- -- .375
Exercised during the period.................. -- -- .00
Cancelled during the period.................. 1,000,000 -- .00
---------- ---------- -----------
$5,815,548 $5,815,548 $.25 - $.50
========== ========== ===========
In addition, during the year ended December 31, 1995, the Company sold
150,000 shares of common stock, at $.50 per share, subject to put options. The
put options provide the purchasers the right to put the shares to the Company
one year after the date of issuance of the common stock at $.625 per share or
two years after the date of issuance at $.75 per share. As of the balance sheet
date at December 31, 1995 and September 30, 1996, an accrual for the put option,
in the amount of $75,000, has been made.
10. DISCONTINUED OPERATIONS:
SOFTWARE DIVISION
On September 6, 1995, Forte Computer Easy, Inc. sold its rights to the
Floor Plan Plus(TM) and 3D Design(TM) lines for $691,889, together with a
$200,000 contingent payment based upon future performance goals of the acquiring
company, International Microcomputer Software, Inc. (NASDAQ:IMSI). These product
lines represent a significant portion of the historical sales of the software
operating division. The Company determined that it was in the best long-range
interest of the Company to phase-out the software division. Proceeds from the
sale were utilized for debt reduction of this division.
The software division's operating loss for the year ended December 31, 1995
of $1,026,029 (net of income tax benefit of $16,500), is shown separately in the
accompanying statements of operations for the year ended December 31, 1995 and
for the nine months ended September 30, 1996 and 1995.
A provision of $50,000 for expected operating losses during the final
phase-out period in 1996 has been made at December 31, 1995.
F-57
159
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DISCONTINUED OPERATIONS (CONTINUED)
Net revenue for the software division for 1995 was $1,010,242. This revenue
is not included in net revenue in the accompanying statement of operations.
ARIZONA DISK FULFILLMENT, INC.
The disk and fulfillment division operating loss for the year ended
December 31, 1995 of $368,908 (net of income tax benefit of $18,500), is shown
separately in the accompanying statement of operations.
Estimated losses on the disposal of the disk and fulfillment division of
$227,619, which includes $80,000 for expected operating losses for the period
January 1, 1996 to August 31, 1996, have been provided for at December 31, 1995.
Net revenue for the disk fulfillment division for 1995 was $1,541,650. This
revenue is not included in net revenue in the accompanying statement of
operations.
On August 5, 1996, the Company entered into a Stock Purchase Agreement
pursuant to which it agreed to sell 100 percent of the issued and outstanding
common stock of Arizona Disk Fulfillment, Inc. to Beverly and James W. Schmidt.
Mr. Schmidt has served as president of Arizona Disk Fulfillment, Inc. since
1993. The sale of Arizona Disk Fulfillment, Inc. by the Company was fully
consummated in August, 1996.
11. ASSETS AND LIABILITIES TO BE DISPOSED OF:
Assets and liabilities of the following operating divisions to be disposed
of consisted of the following at December 31, 1995 and September 30, 1996:
(unaudited)
DISK AND
SOFTWARE FULFILLMENT
DECEMBER 31, 1995: DIVISION DIVISION TOTAL
- ------------------ -------- ----------- --------
Accounts receivable........................ $ -- $ 60,000 $ 60,000
Inventory.................................. -- 260,000 260,000
Equipment and property..................... 110,000 262,000 372,000
Deposits................................... -- 16,000 16,000
-------- -------- --------
Total assets..................... 110,000 598,000 708,000
-------- -------- --------
Current portion of long-term debt.......... 70,000 -- 70,000
Accounts payable and current accrued
liabilities.............................. -- 557,000 557,000
Long-term debt............................. -- 7,000 7,000
-------- -------- --------
70,000 564,000 634,000
-------- -------- --------
Net Assets to be Disposed of............... $ 40,000 $ 34,000 $ 74,000
======== ======== ========
F-58
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FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ASSETS AND LIABILITIES TO BE DISPOSED OF (CONTINUED)
SEPTEMBER 30, 1996: (UNAUDITED)
- -------------------------------
Software Division:
Inventory................................................... $110,000
Miscellaneous assets........................................ 9,080
--------
Total assets...................................... 119,080
--------
Accounts payable............................................ 85,989
Accrued liabilities......................................... 243,036
--------
329,025
--------
Net liabilities of discontinued operations.................. $209,945
========
Assets and liabilities are shown at their expected net realizable value,
and have been separately classified in the accompanying balance sheets.
12. LITIGATION:
The Company is a defendant in a lawsuit filed by an individual for
non-compliance and other claims related to an employment agreement. The lawsuit
seeks actual and punitive damages in excess of $129,000. The Company's legal
counsel believes that the lawsuit is without merit. Therefore, as of December
31, 1995, and September 30, 1996 no accrual has been made for a loss contingency
related to the subject litigation claim. Management intends to vigorously defend
its position.
The Company is a defendant in a lawsuit filed by a corporation for claims
relating to a contractual agreement. The plaintiff has proposed a settlement in
the amount of $11,000. Counsel anticipates this matter to be resolved in the
near future.
13. SUBSEQUENT EVENT:
Subsequent to the balance sheet date of December 31, 1995, the Company
entered into an agreement with a former shareholder to purchase all of the
outstanding common stock owned by the shareholder. The common stock was acquired
in exchange for the relief of debt owing the Company and discounted future
services to be provided by the Company, in the aggregate amount of $372,000. The
financial statements at December 31, 1995 give retroactive effect to this
transaction. In addition, the Company believes that it has a claim for
additional shares of common stock controlled by the shareholder, in the amount
of approximately 260,000 shares.
F-59
161
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors of
Western Insulated Glass, Co.
We have audited the accompanying balance sheet of Western Insulated Glass,
Co. as of October 31, 1996, and the related statements of operations and
retained earnings, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 our audit of the financial statements provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Western Insulated Glass, Co.
as of October 31, 1996, in conformity with generally accepted accounting
principles.
SEMPLE & COOPER, L.L.P.
Phoenix, Arizona
June 3, 1997
F-60
162
WESTERN INSULATED GLASS, CO.
BALANCE SHEETS
(UNAUDITED)
OCTOBER 31, JANUARY 31,
1996 1997
---- ----
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 296,387 $ 265,150
Accounts receivable....................................... 664,163 579,818
Inventory................................................. 865,392 824,402
Prepaid expenses and other current assets................. 18,112 13,585
----------- -----------
Total Current Assets................................... 1,844,054 1,682,955
NONCURRENT ASSETS:
Deposits and other noncurrent assets...................... 12,171 16,920
Cash surrender value of life insurance, net............... 23,819 24,711
Property, plant & equipment, net.......................... 204,483 211,207
----------- -----------
Total Noncurrent Assets................................ 240,473 252,838
----------- -----------
Total Assets................................................ $ 2,084,527 $ 1,935,793
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable-related parties............................. $ 1,245,707 $ 1,245,707
Accounts payable.......................................... 259,194 221,594
Accrued expenses.......................................... 25,797 1,800
Accrued payroll........................................... 230,207 55,804
Interest payable.......................................... 339,857 340,857
Income taxes payable...................................... 20,584 47,166
----------- -----------
Total Current Liabilities.............................. 2,121,346 1,912,928
STOCKHOLDER'S EQUITY (DEFICIT):
Preferred stock, no par value; 2,000,000 shares
authorized, 1,620,000 shares issued, none
outstanding............................................ 426,099 426,099
Common stock, no par value; 1,000,000 shares authorized,
180,000 shares issued and 90,000 shares outstanding.... 47,344 47,344
Retained earnings......................................... 1,199,738 1,259,422
----------- -----------
1,673,181 1,732,865
Less: Treasury stock at cost.............................. (1,710,000) (1,710,000)
----------- -----------
Total Stockholder's Equity (Deficit)................... (36,819) 22,865
----------- -----------
Total Liabilities & Stockholder's Equity (Deficit).......... $ 2,084,527 $ 1,935,793
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-61
163
WESTERN INSULATED GLASS, CO.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ------------------------
1996 1996 1997
---- ---- ----
Sales................................................ $5,820,726 $1,259,184 $1,331,549
Cost of Sales........................................ 3,867,411 899,839 950,287
---------- ---------- ----------
Gross Profit....................................... 1,953,315 359,345 381,262
Selling, General and Administrative Expenses......... 1,304,102 290,099 283,281
---------- ---------- ----------
Income from Operations............................. 649,213 69,246 97,981
Other Income (Expense):
Interest Income (Expense), net..................... -- (4,088) 1,119
Other Expense...................................... (8,114) (6,827) (5,843)
---------- ---------- ----------
(8,114) (10,915) (4,724)
---------- ---------- ----------
Income Before Income Taxes......................... 641,099 58,331 93,257
Provision for Income Taxes........................... 228,584 20,999 33,573
---------- ---------- ----------
Net Income......................................... 412,515 37,332 59,684
Retained earnings, beginning......................... 787,223 787,223 1,199,738
---------- ---------- ----------
Retained earnings, ending............................ $1,199,738 $ 824,555 $1,259,422
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-62
164
WESTERN INSULATED GLASS, CO.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ----------------------
1996 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 412,515 $ 37,332 $ 59,684
Adjustment to reconcile net income to cash from
operating activities--Depreciation............... 68,933 11,892 17,674
Changes in operating assets and liabilities:
Accounts receivable, net......................... (110,325) 50,999 84,345
Inventories...................................... (40,237) (31,693) 40,990
Prepaid expenses and other current assets........ (3,526) 0 4,527
Accounts payable................................. (34,055) (49,508) (36,600)
Accrued expenses................................. 176,748 (16,869) (198,400)
Income taxes payable............................. 20,584 20,995 26,582
Other............................................ 0 14,614 (5,641)
--------- --------- ---------
Net cash provided by (used in) operating
activities..................................... 490,637 37,762 (6,839)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (106,821) (16,095) (24,398)
--------- --------- ---------
Net cash used in investing activities............ (106,821) (16,095) (24,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable-related parties.......... (222,338) 0 0
--------- --------- ---------
Net cash used in financing activities............ (222,338) 0 0
Net Increase (Decrease) in Cash....................... 161,478 21,667 (31,237)
Cash, Beginning Balance............................... 134,909 154,680 296,387
--------- --------- ---------
Cash, Ending Balance.................................. $ 296,387 $ 176,347 $ 265,150
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-63
165
WESTERN INSULATED GLASS, CO.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES:
OPERATIONS:
Western Insulated Glass, Co. (the Company) is a Corporation duly formed and
organized under the laws of Arizona. The Company is engaged in the manufacturing
and retail sales of luxury residential and light commercial windows.
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.
INVENTORY:
Inventory is stated at the lower of cost or market. Inventory costs are
stated at last invoice cost, which approximates cost using the first-in,
first-out method and consisted of the following:
(UNAUDITED)
OCTOBER 31 JANUARY 31,
1996 1997
---- ----
Raw materials........................................ $ 744,073 $ 708,821
Work in process...................................... 61,411 58,533
Finished goods....................................... 59,908 57,048
----------- -----------
$ 865,392 $ 824,402
=========== ===========
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Depreciation is
provided for using the accelerated and straight-line methods 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.
INCOME TAXES:
For financial accounting and tax reporting purposes, the Company reports
revenues and costs on the accrual basis of accounting. The financial reporting
basis of the Company's assets and liabilities approximates the tax basis.
Accordingly, no deferred taxes are recorded for the future tax consequences of
differences in bases, and income tax expense is computed by applying statutory
rates to pretax earnings.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited interim financial statements include the
accounts of Western Insulated Glass, Co. In the opinion of management, all
adjustments (consisting only of recurring adjustments) necessary for a fair
presentation of financial position and results of operations have been made.
Operating results for the period ended January 31, 1997 are not necessarily
indicative of the results for a full fiscal year. These unaudited interim
financial statements should be read in conjunction with the financial statements
and notes thereto of the Company for the fiscal year ended October 31, 1996.
F-64
166
WESTERN INSULATED GLASS, CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. CONCENTRATION OF CREDIT RISK:
The Company maintains cash at three financial institutions. Deposits not to
exceed $100,000 at each financial institution are insured by the Federal Deposit
Insurance Corporation. At October 31, 1996, the Company had uninsured cash in
the amount of $254,171.
3. RELATED PARTY TRANSACTIONS:
NOTES PAYABLE--RELATED PARTIES:
At October 31, 1996, notes payable-related parties consist of the
following:
10% note payable to the stockholder, due on demand; secured
by treasury stock......................................... $1,215,707
Two 6% notes payable to an officer of the Company, with
interest only payments due quarterly, principal due
October, 1997............................................. 30,000
----------
$1,245,707
==========
At October 31, 1996, accrued interest payable of $339,857 relates to the
aforementioned notes payable-related parties.
LEASE COMMITMENT:
The Company is currently leasing its manufacturing facility in Phoenix,
Arizona from an officer of the Company under a non-cancellable operating lease.
Rent expense under the lease agreement for the year ended October 31, 1996, was
$192,000.
A schedule of future minimum lease payments due under the non-cancellable
operating lease agreement at October 31, 1996, is as follows:
YEAR AMOUNT
---- ------
1997........................................................ $ 192,000
1998........................................................ 192,000
1999........................................................ 192,000
2000........................................................ 192,000
2001........................................................ 192,000
Subsequent.................................................. 80,000
----------
$1,040,000
==========
4. TREASURY STOCK:
Treasury stock is shown at cost and consists of 1,620,000 shares of
preferred stock, and 90,000 shares of common stock.
5. CASH SURRENDER VALUE OF LIFE INSURANCE:
The Company is a beneficiary of insurance policies on the life of a
corporate officer. The cash surrender value at October 31, 1996 is net of 8%
notes payable in the amount of $50,000, which were collateralized by the cash
value of the policies.
6. ECONOMIC DEPENDENCY:
The Company purchases a substantial portion of its product from three
suppliers. During the year ended October 31, 1996, purchases from these
suppliers approximated 70 percent of total purchases. At October 31, 1996,
amounts due to the suppliers included in accounts payable were $161,554.
F-65
167
WESTERN INSULATED GLASS, CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ECONOMIC DEPENDENCY: (CONTINUED)
During the year ended October 31, 1996, sales to a single customer were
approximately 10 percent of total sales. At October 31, 1996, the amount due
from the customer, included in accounts receivable was $94,234.
7. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases various pieces of equipment under non-cancellable
operating lease agreements expiring through June, 2000. Rent expense under the
operating lease agreements for the year ended October 31, 1996 was $18,270.
As of October 31, 1996, a schedule of future minimum lease payments due
under the non-cancellable operating lease agreements, is as follows:
YEAR ENDING
OCTOBER 31, AMOUNT
- ----------- ------
1997................................................................ $16,608
1998................................................................ 15,696
1999................................................................ 12,960
2000................................................................ 7,940
-------
$53,204
=======
EMPLOYMENT CONTRACT:
The Company has entered into an employment contract with its president
through March, 2000 that provides for a minimum annual salary and incentives
based on the Company's attainment of specified levels of earnings. In connection
with the acquisition of the Company by American Architectural Products
Corporation (See Note 9), this agreement was revised so that as of October 31,
1996, the total future commitment, excluding incentives, was $285,000.
8. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(K) plan for all eligible employees, which
includes provisions for Company matching contributions. Expense relating to the
Company matching contributions was $10,538 for the year ended October 31, 1996.
9. SUBSEQUENT EVENTS:
On March 14, 1997, 100 percent of the Company's outstanding stock was
acquired by American Architectural Products Corporation, in exchange for cash
and the assumption of certain liabilities, in the approximate amount of
$2,400,000. The financial statements do not give effect to this transaction.
F-66
168
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Thermetic Glass Inc.
We have audited the accompanying balance sheet of Thermetic Glass Inc. as
of December 31, 1996, and the related statement of operations and accumulated
deficit and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Thermetic Glass Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Clifton Gunderson L.L.C.
Peoria, Illinois
October 3, 1997
F-67
169
THERMETIC GLASS, INC.
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
1996 1997
---- ----
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 4,948 $ 0
Accounts receivable....................................... 594,025 697,358
Inventory................................................. 846,008 1,013,359
Prepaid expenses and other current assets................. 67,143 54,817
----------- -----------
Total Current Assets................................... 1,512,124 1,765,534
NONCURRENT ASSETS:
Deposits and other noncurrent assets...................... 107,585 110,445
Property, plant & equipment, net.......................... 1,670,287 1,557,892
----------- -----------
Total Noncurrent Assets................................ 1,777,872 1,668,337
----------- -----------
Total Assets................................................ $ 3,289,996 $ 3,433,871
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable--current, including capital lease
obligations............................................ $ 1,046,573 $ 1,442,761
Accounts payable and accrued expenses..................... 305,554 380,368
----------- -----------
Total Current Liabilities.............................. 1,352,127 1,823,129
LONG-TERM LIABILITIES:
Notes payable--long-term, including capital lease
obligations............................................ 1,866,747 1,636,482
Other liabilities......................................... 0 6,074
----------- -----------
Total Long-Term Liabilities............................ 1,866,747 1,642,556
----------- -----------
Total Liabilities........................................... 3,218,874 3,465,685
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock of no par value; authorized 500,000 shares;
issued and outstanding 1,000 shares.................... 1,000 1,000
Additional paid in capital................................ 2,300,000 2,300,000
Accumulated deficit....................................... (2,229,878) (2,332,814)
----------- -----------
Total Stockholders' Equity (Deficit)................... 71,122 (31,814)
----------- -----------
Total Liabilities & Stockholders' Equity.................... $ 3,289,996 $ 3,433,871
=========== ===========
The accompanying summary of significant accounting policies and notes are
an integral part of the financial statements.
F-68
170
THERMETIC GLASS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1997
---- ---- ----
Sales............................................ $ 4,966,666 $ 1,888,909 $ 2,305,029
Cost of Sales.................................... 4,190,384 1,664,490 1,936,713
----------- ----------- -----------
Gross Profit................................... 776,282 224,419 368,316
Selling, General and Administrative Expenses..... 822,785 376,189 340,583
----------- ----------- -----------
Income (loss) from Operations.................. (46,503) (151,770) 27,733
Other Income (Expense):
Interest Expense, net.......................... (235,062) (116,484) (126,315)
Other Expense.................................. 16,350 22,448 (4,354)
----------- ----------- -----------
(218,712) (94,036) (130,669)
----------- ----------- -----------
Loss Before Income Taxes....................... (265,215) (245,806) (102,936)
Provision for Income Taxes....................... 677,124 0 0
----------- ----------- -----------
Net loss....................................... (942,339) (245,806) (102,936)
Accumulated Deficit, beginning................... (1,287,539) (1,287,539) (2,229,878)
----------- ----------- -----------
Accumulated Deficit, ending...................... $(2,229,878) $(1,533,345) $(2,332,814)
=========== =========== ===========
The accompanying summary of significant accounting policies and notes
are an integral part of the financial statements.
F-69
171
THERMETIC GLASS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.......................................... $(942,339) $(102,936) $(245,806)
Adjustment to reconcile net loss to cash from
operating activities--
Depreciation and amortization.................. 204,517 115,860 109,364
Changes in operating assets and liabilities:
Accounts receivable, net....................... (22,379) (103,333) (38,903)
Inventories.................................... (119,684) (167,351) 12,832
Prepaid expenses and other current assets...... (3,299) 12,326 22,904
Accounts payable and accrued expenses.......... 104,731 74,814 23,117
Deferred tax asset............................. 677,124 0 0
Other.......................................... 0 3,214 4,785
--------- --------- ---------
Net cash used in operating activities.......... (101,329) (167,406) (111,707)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ (97,933) (3,465) (111,755)
--------- --------- ---------
Net cash used in investing activities.......... (97,933) (3,465) (111,755)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable....................... 750,000 -- --
Principal payments on notes payable............... (390,000) -- --
Proceeds from issuance of long-term debt.......... 30,000 165,923 213,850
Principal payments on long-term debt.............. (191,464) -- --
Principal payments on obligations under capital
leases......................................... (3,938) -- --
--------- --------- ---------
Net cash from financing activities............. 194,598 165,923 213,850
Net Decrease in Cash................................ (4,664) (4,948) (9,612)
Cash, Beginning Balance............................. 9,612 4,948 9,612
--------- --------- ---------
Cash, Ending Balance................................ $ 4,948 $ 0 $ 0
========= ========= =========
ADDITIONAL CASH FLOW INFORMATION
Cash paid during the year for interest............ $ 227,259 -- --
========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred when the
Company entered into leases for new trucks..... $ 109,894 -- --
========= ========= =========
The accompanying summary of significant accounting policies and notes
are an integral part of the financial statements.
F-70
172
THERMETIC GLASS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Thermetic Glass Inc. is a manufacturer of vinyl windows and doors with
sales concentrated mainly in the Midwest and is dependent upon the Midwest
economy. The Company's products are readily available, and the Company is not
dependent on a single supplier or only a few suppliers.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
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.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation on plant
and equipment is calculated using straight-line or accelerated methods over the
estimated useful lives of the assets. Equipment held under capital leases is
amortized straight line over the shorter of the lease term or estimated useful
life of the asset. Accumulated depreciation was $1,087,000 and $1,213,000 at
December 31, 1996 and June 30, 1997, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced by a
valuation allowance if it is deemed more likely than not that some or all of the
deferred tax assets will not be realized.
PATENT AND TRADEMARK
These assets are amortized over the estimated useful lives of the
respective assets using the straight-line method.
INTERIM FINANCIAL INFORMATION
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the
accounts of Thermetic Glass, Inc. In the opinion of management, all adjustments
(consisting only of recurring adjustments) necessary for a fair presentation of
financial position and results of operations have been made. Operating results
for the period ended June 30, 1997 are not necessarily indicative of the results
for a full year. These unaudited interim financial statements should be read in
conjunction with the financial statements and notes thereto of the Company for
the year ended December 31, 1996.
INVENTORIES
At June 30, 1997, inventory consisted of the following:
Raw materials............................................... $ 904,929
Work in process............................................. 0
Finished goods.............................................. 108,430
----------
$1,013,359
==========
This information is an integral part of the accompanying financial statements.
F-71
173
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--PROPERTY, PLANT, AND EQUIPMENT
A summary of property, plant, and equipment at December 31, 1996 follows:
Land........................................................ $ 10,800
Buildings................................................... 1,030,516
Machinery and equipment..................................... 1,407,256
Vehicles.................................................... 243,533
Furniture and fixtures...................................... 65,108
----------
$2,757,213
==========
Depreciation expense for the year ended December 31, 1996 was $202,297.
Certain property and equipment is pledged as collateral on notes payable
and long-term debt as described in Notes 2 and 5 to the financial statements.
NOTE 2--NOTES PAYABLE TO BANK--CURRENT
Notes payable to bank at December 31, 1996:
9 percent, $200,000 limit, due September 20, 1997; secured
by $90,000 certificate of deposit of major shareholder and
$110,000 personal guarantee of major shareholder.......... $200,000
Prime plus 1 percent, $100,000 limit, due April 3, 1997;
secured by accounts receivable, machinery and equipment,
and inventories........................................... 100,000
Prime plus 1 percent, $250,000 limit, due August 9, 1997;
secured by accounts receivable, machinery and equipment,
and inventories........................................... 160,000
--------
460,000
--------
Unsecured notes payable to shareholders at December 31, 1996:
10 percent, due on demand................................... 100,000
8.5 percent, due on demand.................................. 100,000
8.5 percent, due on demand.................................. 50,000
8.5 percent, due on demand.................................. 50,000
8.5 percent, due on demand.................................. 50,000
--------
350,000
--------
Other unsecured notes payable to employees and others at December 31, 1996:
8 percent, due on demand.................................... 6,000
8 percent, due on demand.................................... 20,000
8 percent, due on demand.................................... 20,000
7 percent, due on demand.................................... 20,000
--------
66,000
--------
$876,000
========
F-72
174
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
Note payable to major shareholder, secured by substantially
all assets of the Company, is due as follows:
June 1, 2024 at 8.5 percent, payable in monthly
installments of $12,920, including interest............ $1,644,154
8.0 percent note payable to bank, due in monthly
installments of $3,393, including interest, through
January, 1997; secured by accounts receivable, machinery
and equipment, and inventories............................ 3,353
7.5 percent note payable to bank, due in monthly
installments of $2,302, including interest, through March,
1997; secured by accounts receivable, machinery and
equipment, and inventories................................ 6,841
6.5 percent note payable to bank, due in monthly
installments of $651, including interest, through
November, 1997; secured by a van.......................... 6,936
7.5 percent note payable to bank, due in monthly
installments of $1,377, including interest, through
January, 1998; secured by accounts receivable, machinery
and equipment, and inventories............................ 17,125
8.25 percent note payable to bank, due in monthly
installments of $1,229, including interest, through June,
1998; secured by accounts receivable, machinery and
equipment, and inventories................................ 20,774
7.5 percent note payable to bank, due in monthly
installments of $1,607, including interest, through
September, 1998; secured by accounts receivable, machinery
and equipment, and inventories............................ 31,520
8.25 percent note payable to bank, due in monthly
installments of $945, including interest, through
September 1999; secured by accounts receivable, machinery
and equipment, and inventories............................ 27,775
Prime plus 1 percent note payable to bank, due in monthly
installments of $6,614, including interest, through July,
1999; secured by accounts receivable, machinery and
equipment, and inventories................................ 172,886
----------
Total long-term debt........................................ 1,931,364
Less current installments................................... 157,026
----------
Long-Term Debt, excluding current installments.............. $1,774,338
==========
The aggregate maturities of long-term debt for each of the years subsequent
to December 31, 1996 are as follows:
Year ending December 31:
1997................................................... $ 157,026
1998................................................... 122,045
1999................................................... 59,449
2000................................................... 20,212
2001................................................... 21,999
2002-2024.............................................. 1,550,633
----------
$1,931,364
==========
F-73
175
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--INCOME TAXES
Income tax expense amounted to $677,124 for 1996. The actual expense for
1996 differs from the "expected" tax expense (computed by applying the
applicable U.S. federal corporate income tax rate of 34 percent to loss before
income taxes) as follows:
Computed "expected" tax benefit............................. $(90,173)
Surtax...................................................... 3,489
State income taxes, net of federal benefit.................. 67,851
Nondeductible expenses...................................... 5,091
Prior year underaccrual..................................... 59,894
Change in beginning of the year balance of the valuation
allowance for deferred tax assets allocated to income tax
expense................................................... 634,058
Other, net.................................................. (3,086)
--------
$677,124
========
The components of income tax expense for 1996 are as follows:
CURRENT DEFERRED TOTAL
------- -------- -----
Federal.................................... $ -- $574,320 $574,320
State...................................... -- 102,804 102,804
-------- -------- --------
$ -- $677,124 $677,124
======== ======== ========
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1996 are presented below:
Deferred tax assets:
Net operating loss carryforwards.......................... $ 841,153
Vacation accrual.......................................... 7,243
Accounts receivable, due to allowance for doubtful
accounts............................................... 46,400
Interest not currently deductible......................... 11,678
Inventories, due to additional costs inventoried for tax
purposes............................................... 15,493
Depreciation.............................................. 14,855
----------
Total gross deferred tax assets........................ 936,822
Less valuation allowance.................................. (935,087)
----------
Net deferred tax assets................................ 1,735
Deferred tax liabilities:
Capital leases............................................ (1,735)
----------
Net Deferred Tax Assets..................................... $ --
==========
The valuation allowance for deferred tax assets as of January 1, 1996 was
$97,320. The net change in the valuation allowance for the year ended December
31, 1996 was an increase of $837,767.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income
of approximately $2,400,000. The Company has recorded a valuation allowance to
reflect the estimated amount of deferred tax
F-74
176
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--INCOME TAXES (CONTINUED)
assets which may not be realized due to the expiration of net operating loss
carryforwards and other deferred assets that may not be realized.
At December 31, 1996, the Company has the following net operating loss and
investment tax credit carryforwards for income tax purposes:
NET OPERATING INVESTMENT
YEAR OF EXPIRATION LOSSES TAX CREDITS
------------------ ------ -----------
1998.......................................... $ -- $1,430
1999.......................................... -- 195
2000.......................................... 175,160 --
2001.......................................... 52,793 --
2002.......................................... 811,470 --
2003.......................................... 450,222 --
2004.......................................... 204,743 --
2006.......................................... 1,513 --
2010.......................................... 174,295 --
2011.......................................... 232,687 --
NOTE 5--RELATED PARTY TRANSACTIONS
The Company is obligated to repurchase outstanding common stock from its
minority shareholders in the event of death or other termination of employment
with the Company. The terms of the agreement indicate the repurchase price per
share to be the greater of $1.00 per share or the book value per share ($71 at
December 31, 1996). (The minority shareholders own 180 shares of the outstanding
common stock.) In the event the Company cannot finance the repurchase, the
Company's major shareholder is obligated to purchase the minority shareholder's
common stock.
NOTE 6--CAPITAL LEASES
In May and November of 1996, the Company entered into two capital leases
for vehicles that expire in May 2002 and November 2001, respectively. At
December 31, 1996, the gross amounts recorded under the capital leases were as
follows:
Vehicles.................................................... $151,113
Less accumulated amortization............................... 49,495
--------
$101,618
========
Amortization for the year ended December 31, 1996 was $8,276 and is
included in depreciation expense.
F-75
177
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6--CAPITAL LEASES (CONTINUED)
The present value of future minimum capital lease payments, exclusive of
certain assessments which are also payable by the Company, as of December 31,
1996 is:
1997........................................................ $ 31,920
1998........................................................ 31,920
1999........................................................ 31,920
2000........................................................ 31,920
2001........................................................ 30,572
2002........................................................ 6,560
--------
Total minimum lease payments.............................. 164,812
Less amount representing interest........................... 58,856
--------
Present value of net minimum capital lease payments....... 105,956
Less current installments of obligations under capital
leases.................................................... 13,547
--------
Obligations under Capital Leases, Excluding Current
Installments.............................................. $ 92,409
========
NOTE 7--BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are located in the Midwest. The Company had
no customers that accounted for more than 10 percent of the Company's sales in
1996. The Company had thirty-four customers in 1996, each of whom had an
accounts receivable balance which exceeded 5 percent of the Company's total
stockholders' equity at December 31, 1996. Accounts receivable from these
customers totaled approximately $564,000 at December 31, 1996.
NOTE 8--401(k) PLAN
In 1996, the Company adopted a 401(k) plan covering all employees who have
completed one year of service by January 1 and attained age 21. The Company
matches 25 percent of the employees' contributions up to 6 percent of their
income. The expense for 1996 was $10,317.
NOTE 9--SUBSEQUENT EVENT
On July 18, 1997, all of the stock of Thermetic Glass Inc. was acquired by
American Architectural Products Corporation (AAPC) in exchange for cash, AAPC
common stock, convertible secured debentures payable to the seller, and the
assumption of certain liabilities. The accompanying financial statements do not
give effect to this transaction.
F-76
178
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Binnings Building Products, Inc.:
We have audited the accompanying balance sheets of Binnings Building
Products, Inc. (a Delaware corporation) as of December 31, 1995 and 1996, and
the related statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Binnings Building Products,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
March 21, 1997 (except with respect to
the matters discussed in Note 10 as to
which the date is December 10, 1997).
F-77
179
BINNINGS BUILDING PRODUCTS, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
ASSETS ------------------------- -------------------------
(SUBSTANTIALLY ALL PLEDGED -- NOTE 4) 1995 1996 1996 1997
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 200,000 $ 844,000 $ 533,000 $ 1,074,000
Receivables
Trade................................................... 4,062,000 4,948,000 5,157,000 5,003,000
Other................................................... 98,000 87,000 145,000 98,000
Inventories............................................... 5,915,000 6,549,000 6,014,000 5,351,000
Prepaid expenses.......................................... 352,000 619,000 704,000 585,000
----------- ----------- ----------- -----------
Total current assets................................ 10,627,000 13,047,000 12,553,000 12,111,000
----------- ----------- ----------- -----------
Property, plant and equipment, at cost:
Land...................................................... 2,189,000 2,189,000 2,189,000 2,189,000
Buildings................................................. 8,825,000 8,829,000 8,825,000 8,865,000
Machinery and equipment................................... 6,828,000 7,249,000 7,159,000 7,648,000
----------- ----------- ----------- -----------
17,842,000 18,267,000 18,173,000 18,702,000
Less -- Accumulated depreciation.......................... (7,779,000) (8,461,000) (8,318,000) 8,772,000
----------- ----------- ----------- -----------
10,063,000 9,806,000 9,855,000 9,930,000
----------- ----------- ----------- -----------
Deferred income taxes (Note 9).............................. 448,000 262,000 393,000 161,000
----------- ----------- ----------- -----------
Other assets, net........................................... 222,000 251,000 265,000 287,000
----------- ----------- ----------- -----------
$21,360,000 $23,366,000 $23,066,000 $22,489,000
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt (Note 4)............. $ 350,000 $ 7,044,000 $ 7,128,000 $14,339,000
Accounts payable and accrued liabilities (Note 3)......... 3,728,000 4,377,000 4,137,000 3,500,000
Deferred income taxes (Note 9)............................ 448,000 262,000 393,000 161,000
----------- ----------- ----------- -----------
Total current liabilities........................... 4,526,000 11,683,000 11,658,000 18,000,000
Long-term debt to certain common stockholders, net of
current maturities (Note 4)............................... 20,628,000 13,860,000 13,994,000 6,550,000
Other long-term debt, net of current maturities (Note 4).... 163,000 76,000 97,000 14,000
Other long-term obligations (Note 4)........................ 0 218,000 0 218,000
Puttable common stock, voting, 59,524 shares issued and
outstanding at December 31, 1996, and September 30, 1997
(unaudited) (Note 4)...................................... 0 139,000 0 139,000
----------- ----------- ----------- -----------
Total liabilities................................... 25,317,000 25,976,000 25,749,000 24,921,000
----------- ----------- ----------- -----------
Commitments and contingencies (Notes 4, 5 and 6)
Stockholders' deficit:
Preferred stock, Series A, $1 par value, 8% cumulative,
500,000 shares authorized; 168,775 and 149,158 shares
issued and outstanding at December 31, 1995 and 1996,
respectively, 168,775 (unaudited) and 149,158
(unaudited) shares issued and outstanding at September
30, 1996 and 1997, respectively, stated at $10 per share
liquidating preference price, redeemable at $10 per
share at the Company's option (Note 6).................. 1,688,000 1,492,000 1,688,000 1,492,000
Preferred stock, Series B, $1 par value, 9% cumulative,
500,000 shares authorized; 35,000 and 30,000 shares
issued and outstanding at December 31, 1995 and 1996,
respectively, 35,000 (unaudited) and 30,000 (unaudited)
shares issued and outstanding at September 30, 1996 and
1997, respectively, stated at $10 per share liquidating
preference price, redeemable at $10 per share at the
Company's option (Note 6)............................... 350,000 300,000 350,000 300,000
Common stock, $.01 par value, 1,000,000 shares authorized,
voting, 187,291 and 158,176 shares issued and
outstanding at December 31, 1995 and 1996, respectively,
158,176 (unaudited) shares issued and outstanding at
September 30, 1996 and 1997............................. 2,000 2,000 2,000 2,000
Common stock purchase options (Note 6).................... 103,000 103,000 103,000 0
Capital in excess of par value............................ 236,000 330,000 236,000 330,000
Accumulated deficit....................................... (6,336,000) (4,837,000) (5,062,000) (4,556,000)
----------- ----------- ----------- -----------
Total stockholders' deficit......................... (3,957,000) (2,610,000) (2,683,000) (2,432,000)
----------- ----------- ----------- -----------
$21,360,000 $23,366,000 $23,066,000 $22,489,000
=========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-78
180
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 -----------------------------
--------------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------- -------------
(UNAUDITED)
Net sales....................... $35,465,000 $34,503,000 $43,060,000 $31,645,000 $33,932,000
Cost of sales................... 26,245,000 25,353,000 30,191,000 22,370,000 24,653,000
----------- ----------- ----------- ----------- -----------
Gross profit.................... 9,220,000 9,150,000 12,869,000 9,275,000 9,279,000
Selling, general and
administrative expenses....... 8,271,000 7,764,000 8,778,000 6,356,000 7,342,000
----------- ----------- ----------- ----------- -----------
Income from operations.......... 949,000 1,386,000 4,091,000 2,919,000 1,937,000
----------- ----------- ----------- ----------- -----------
Other expense (income):
Interest...................... 2,540,000 2,527,000 2,370,000 1,591,000 1,574,000
Amortization of other
assets..................... 86,000 88,000 16,000 12,000 15,000
Other, net.................... (91,000) 16,000 38,000 20,000 12,000
----------- ----------- ----------- ----------- -----------
2,535,000 2,631,000 2,424,000 1,623,000 1,601,000
----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes.............. (1,586,000) (1,245,000) 1,667,000 1,296,000 336,000
Provision for income taxes (Note
9)............................ 0 0 29,000 22,000 8,000
----------- ----------- ----------- ----------- -----------
Net income (loss)............... $(1,586,000) $(1,245,000) $ 1,638,000 $ 1,274,000 $ 328,000
=========== =========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-79
181
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
COMMON
PREFERRED PREFERRED STOCK CAPITAL IN
STOCK, STOCK, COMMON PURCHASE EXCESS OF ACCUMULATED
SERIES A SERIES B STOCK OPTION PAR VALUE DEFICIT TOTAL
---------- --------- ------ --------- ---------- ----------- -----------
Balance, December 31, 1993......... $1,696,000 $ 0 $2,000 $ 325,000 $236,000 $(3,327,000) $(1,068,000)
Net loss......................... 0 0 0 0 0 (1,586,000) (1,586,000)
Issuance of 35,000 shares of
Preferred Stock, Series B (Note
6)............................. 0 350,000 0 0 0 0 350,000
Redemption of common stock
purchase options, net (Note
6)............................. 0 0 0 (222,000) 0 (178,000) (400,000)
Repurchase of 819 shares of
Preferred Stock, Series A...... (8,000) 0 0 0 0 0 (8,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, December 31, 1994......... 1,688,000 350,000 2,000 103,000 236,000 (5,091,000) (2,712,000)
Net loss......................... 0 0 0 0 0 (1,245,000) (1,245,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, December 31, 1995......... 1,688,000 350,000 2,000 103,000 236,000 (6,336,000) (3,957,000)
Net income (unaudited)........... 0 0 0 0 0 1,274,000 1,274,000
---------- -------- ------ --------- -------- ----------- -----------
Balance, September 30, 1996
(unaudited)...................... 1,688,000 350,000 2,000 103,000 236,000 (5,062,000) (2,683,000)
Net income....................... 0 0 0 0 0 364,000 364,000
Repurchase of 29,115 shares of
common stock................... 0 0 0 0 (15,000) 0 (15,000)
Repurchase of 19,617 shares of
Preferred Stock, Series A...... (196,000) 0 0 0 109,000 0 (87,000)
Retirement of 5,000 shares of
Preferred Stock, Series B (Note
6)............................. 0 (50,000) 0 0 0 0 (50,000)
Puttable common stock redemption
accretion (Note 4)............. 0 0 0 0 0 (139,000) (139,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, December 31, 1996......... 1,492,000 300,000 2,000 103,000 330,000 (4,837,000) (2,610,000)
Net income (unaudited)........... 0 0 0 0 0 328,000 328,000
Redemption of common stock
purchase option (unaudited)
(Note 6)....................... 0 0 0 (103,000) 0 (47,000) (150,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, September 30, 1997
(unaudited)...................... $1,492,000 $300,000 $2,000 $ 0 $330,000 $(4,556,000) $(2,432,000)
========== ======== ====== ========= ======== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-80
182
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
-------------------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997
----------- ----------- ---------- ------------- -------------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).................................. $(1,586,000) $(1,245,000) $1,638,000 $ 1,274,000 $ 328,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation..................................... 870,000 858,000 691,000 545,000 477,000
Amortization..................................... 86,000 88,000 16,000 12,000 15,000
Gain on sale of property, plant and equipment.... (62,000) (6,000) (1,000) (1,000) 0
Conversion of accrued interest to long-term debt
(Note 4)....................................... 0 980,000 0 0 0
Minority interest in loss of joint venture....... 0 0 14,000 0 0
Accretion of capital appreciation rights (Note
4)............................................. 0 0 218,000 0 0
Change in current assets and liabilities:
(Increase) decrease in receivables............. 372,000 121,000 (837,000) (1,142,000) (66,000)
(Increase) decrease in inventories............. 391,000 939,000 (634,000) (99,000) 1,198,000
(Increase) decrease in prepaid expenses........ 1,000 (162,000) (267,000) (352,000) 34,000
Increase in other assets....................... 0 (67,000) (49,000) (15,000) (51,000)
Increase (decrease) in accounts payable and
accrued liabilities......................... 408,000 (613,000) 599,000 409,000 (877,000)
----------- ----------- ---------- ----------- ----------
Net cash provided by operating activities... 480,000 893,000 1,388,000 631,000 1,058,000
----------- ----------- ---------- ----------- ----------
Cash flows from investing activities:
Capital expenditures............................... (280,000) (405,000) (435,000) (338,000) (462,000)
Proceeds from sale of property, plant and
equipment........................................ 106,000 6,000 2,000 2,000 0
Investment in joint venture........................ 0 0 (2,000) (2,000) 0
Advances to joint venture.......................... 0 0 (38,000) (38,000) 0
----------- ----------- ---------- ----------- ----------
Net cash used in investing activities....... (174,000) (399,000) (473,000) (376,000) (462,000)
----------- ----------- ---------- ----------- ----------
Cash flows from financing activities:
Principal payments on capital lease and other
obligations...................................... (275,000) (178,000) (219,000) (164,000) (111,000)
Borrowings (repayments) on revolving credit
facility, net.................................... (111,000) (119,000) 174,000 329,000 (11,000)
Proceeds from issuance of preferred stock (Note
6)............................................... 350,000 0 0 0 0
Principal payments on notes payable................ 0 (28,000) (116,000) (87,000) (94,000)
Repurchase of Preferred Stock, Series A............ (8,000) 0 (87,000) 0 0
Repurchase of common stock......................... 0 0 (15,000) 0 0
Redemption of common stock purchase option (Note
6)............................................... (400,000) 0 0 0 (150,000)
Increase in deferred financing costs............... (29,000) (136,000) (8,000) 0 0
----------- ----------- ---------- ----------- ----------
Net cash used in (provided by) financing
activities................................ (473,000) (461,000) (271,000) 78,000 (366,000)
----------- ----------- ---------- ----------- ----------
Net (decrease) increase in cash...................... (167,000) 33,000 644,000 333,000 230,000
Cash, beginning of period............................ 334,000 167,000 200,000 200,000 844,000
----------- ----------- ---------- ----------- ----------
Cash, end of period.................................. $ 167,000 $ 200,000 $ 844,000 $ 533,000 $1,074,000
=========== =========== ========== =========== ==========
Supplemental disclosure -- Cash paid for interest.... $ 2,527,000 $ 1,436,000 $2,074,000 $ 1,530,000 $1,677,000
=========== =========== ========== =========== ==========
Supplemental disclosure -- Cash paid for income
taxes.............................................. $ 0 $ 0 $ 0 $ 0 $ 70,000
=========== =========== ========== =========== ==========
Supplemental schedule of noncash financing activities -- In 1997, the Company acquired equipment through the issuance of a
capital lease obligation of $139,000. In 1996, the Company retired 5,000 shares of $10 par value Preferred Stock, Series B,
without compensation to the preferred stockholder (Note 6). In 1995, the Company's accrued interest obligation of $245,000 at
December 31, 1994, was converted to long-term debt in 1995 (Note 4).
The accompanying notes to financial statements are an integral part of these
statements.
F-81
183
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Binnings Building Products, Inc. (the Company) was incorporated in February
1986 under the laws of the state of Delaware. On April 29, 1986, the Company
(which was previously inactive) acquired substantially all of the assets and
assumed certain liabilities of the Binnings Building Products Division of
National Gypsum Company in a leveraged buyout transaction. The purchase price
was allocated to the assets purchased and liabilities assumed based on their
estimated fair values.
The Company is engaged in the manufacturing, marketing and distribution of
aluminum storm windows and doors, screens, primary windows, patio doors,
insulating glass and vinyl windows from its facilities in North Carolina and
Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Prior to 1996, the Company incurred losses before extraordinary items in
each year since 1988. As reflected in the accompanying financial statements, the
Company had net income of $1,638,000 in the year ended December 31, 1996,
$1,274,000 (unaudited) and $328,000 (unaudited) in the nine months ended
September 30, 1996 and 1997, respectively, and net losses of $1,245,000 and
$1,586,000 in the years ended December 31, 1995 and 1994, respectively, and had
an accumulated deficit of $4,837,000 at December 31, 1996 and $4,556,000
(unaudited) at September 30, 1997. The Company is in the highly competitive
building products market and its products are subject to substantial pricing
competition. The Company's primary raw material is subject to commodity-based
price fluctuations. The Company closed several distribution centers in Florida
in prior years and modified significant debt terms in 1995 (Note 4).
Management's plans for 1997 provide for increases in sales due to price
increases and increases in market penetration for its products. Management's
plans also include efforts to control selling, general and administrative
expenses as it increases its service area and product offerings.
Historically, the Company has not been in compliance with certain financial
covenants of its notes payable from certain common stockholders and has obtained
waivers from the holders of these notes. During 1997, the Company obtained
waivers from its lenders for its events of default through January 1, 1998. Upon
the expiration of these waivers, the Company will likely be in default of these
covenants (Note 4). Subsequent to the year ended December 31, 1996, the
revolving credit facility and notes payable to certain common stockholders were
repaid in conjunction with the purchase of all of the Company's outstanding
preferred and common shares by American Architectural Products Corporation (Note
10).
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business, rather than
through a process of forced liquidation. Management is of the opinion that
results of future operations will be sufficient to fund the Company's liquidity
requirements; however, there can be no assurance that the Company's operations
will continue to be profitable or produce positive cash flow. Accordingly, the
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Unaudited Interim Financial Information
The unaudited interim financial statements for the nine months ended
September 30, 1996 and 1997, include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the results of its operations for the periods presented. The
interim periods' results are not necessarily indicative of the results of
operations for a full fiscal year.
F-82
184
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity of three months or less.
Concentration of Credit Risk and Accounts Receivable
The Company's customers are concentrated in the Southeastern United States
construction and home improvement retail markets. No single customer accounted
for a significant amount of the Company's sales, and there were no significant
trade receivables outstanding from any single customer at December 31, 1994,
1995, 1996, September 30, 1996 and 1997. The Company performs on-going credit
evaluations of its customers' financial condition and generally does not require
collateral. Allowances for doubtful accounts are $138,000, $223,000, $203,000
(unaudited) and $378,000 (unaudited) at December 31, 1995 and 1996, and
September 30, 1996 and 1997, respectively.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives for financial
reporting purposes, presently ranging from 3 to 40 years, and accelerated
methods for income tax purposes.
The Company reviews the carrying values of property, plant and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated to be
generated during the remaining useful life to the carrying value of the asset.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method. Inventories consist of the
following:
DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------------
1995 1996 1996 1997
----------- ---------- ---------- ----------
(UNAUDITED)
Raw materials............... $ 3,144,000 $2,358,000 $2,216,000 $2,659,000
Work in process............. 1,652,000 1,832,000 1,442,000 839,000
Finished goods.............. 2,515,000 3,038,000 3,214,000 2,532,000
----------- ---------- ---------- ----------
7,311,000 7,228,000 6,872,000 6,030,000
Less -- Allowance to reduce
inventories to LIFO
cost...................... (1,396,000) (679,000) (858,000) (679,000)
----------- ---------- ---------- ----------
$ 5,915,000 $6,549,000 $6,014,000 $5,351,000
=========== ========== ========== ==========
During 1994, 1995 and 1996, the Company liquidated certain LIFO inventory
that was carried at lower costs which prevailed in prior years. The effect of
these liquidations was to decrease cost of goods sold by $104,000, $211,000 and
$8,000 in 1994, 1995 and 1996, respectively.
The Company prepares detail calculations of its LIFO inventory reserve as
of its fiscal year end. For the unaudited nine months ended September 30, 1996
and 1997, the Company estimated its allowance to reduce inventories to LIFO cost
based on the level and mix of inventory on hand and changes in prices of
significant
F-83
185
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
components of inventory. In management's opinion, the allowances at September
30, 1996 and 1997 are reasonable.
Other Assets
Other assets include deferred financing and other costs incurred primarily
in connection with the Company's financing arrangements. These costs are stated
at the remaining unamortized original cost and are being amortized on a
straight-line basis over the terms of the related loans. Accumulated
amortization of deferred financing and other costs was $49,000, $65,000, $61,000
(unaudited), and $111,000 (unaudited) at December 31, 1995 and 1996, and
September 30, 1996 and 1997, respectively.
Joint Venture
In 1996, the Company formed a joint venture with seven other equal
investors, consisting primarily of other manufacturers of window and door
products. The Company's ownership interest in the joint venture is 12.5%. The
joint venture was formed for the purpose of distributing vinyl windows
throughout the Southeastern United States to certain major retail customers.
The Company's share of losses incurred by the joint venture is recorded on
the equity method and is included in other expenses. The Company's share of
losses of the joint venture for the year ended December 31, 1996, and for the
nine months ended September 30, 1996 and 1997 were $14,000, $2,000 (unaudited)
and $0 (unaudited), respectively.
Income Taxes
Deferred income tax liabilities and assets are determined based on the
difference between the financial statement and income tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
using enacted income tax rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be
realized.
Revenue Recognition
The Company recognizes a sale when goods are shipped or when ownership is
assumed by the customer.
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
disclosures 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.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, payable 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.
F-84
186
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
Accounts payable -- Trade.... $2,049,000 $2,070,000 $2,168,000 $1,557,000
Payroll and related
benefits................... 728,000 1,097,000 824,000 1,266,000
Other........................ 951,000 1,210,000 1,145,000 677,000
---------- ---------- ---------- ----------
$3,728,000 $4,377,000 $4,137,000 $3,500,000
========== ========== ========== ==========
4. LONG-TERM DEBT:
The Company's long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
Borrowings from certain common
stockholders, secured by
substantially all assets....
Notes payable due September
1, 2000, with monthly
sinking fund requirements
of $10,475 beginning
October 1, 1995, interest
of 9.0% per annum payable
monthly.................. $ 659,000 $ 543,000 $ 572,000 $ 447,000
Notes payable due September
1, 2005, with monthly
sinking fund requirements
of $116,400 beginning
October 1, 1997, interest
of 9.25% per annum
payable monthly.......... 13,738,000 13,738,000 13,738,000 13,738,000
Revolving credit facility
due on August 31, 1999,
interest payable monthly
in arrears at the prime
rate (8.25% at December
31, 1996, and 8.50% at
September 30, 1997) plus
3%....................... 6,256,000 6,430,000 6,585,000 6,421,000
----------- ----------- ----------- -----------
Total borrowings......... 20,653,000 20,711,000 20,895,000 20,606,000
Capital lease obligations..... 151,000 22,000 54,000 122,000
Other......................... 337,000 247,000 270,000 175,000
----------- ----------- ----------- -----------
21,141,000 20,980,000 21,219,000 20,903,000
Less -- Current maturities.... 350,000 7,044,000 7,128,000 14,339,000
----------- ----------- ----------- -----------
$20,791,000 $13,936,000 $14,091,000 $ 6,564,000
=========== =========== =========== ===========
On September 1, 1995, the Company completed the renegotiation of
significant terms of its debt obligations. The notes payable to certain common
stockholders ($13,200,000 outstanding at December 31, 1994) were modified such
that the interest rates were reduced to 9% and 9.25% and the terms extended. In
addition, unpaid accrued interest of $1,225,000 on September 1, 1995, ($245,000
at December 31, 1994) was
F-85
187
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
converted to principal and will be repaid under similar terms as the
corresponding debt obligations. The 9.25% notes contain a mandatory redemption
clause which stipulates that in the event there are insurance or condemnation
proceeds, an Asset Disposition (as defined), or when there is excess cash
availability (as defined) exceeding $750,000, redemption payments equal to the
excess cash availability over $500,000 must be made (at no premium). There were
no events which occurred during 1996 or 1997 that required a redemption payment
to be made. The Company may also redeem, at its option, the notes payable at a
redemption price equal to 100% of the principal amount, subject to notification
requirements to the holders as specified in the Loan and Security agreements.
In lieu of a restructuring fee paid to holders of the 9.25% notes, the
Company issued capital appreciation rights exercisable for cash payments based
on the value of these rights, as defined. The holders of the capital
appreciation rights may receive payment on the appreciation of the rights, as
defined, following the earlier of (a) September 1, 2000, or (b) the sale or
transfer of all or substantially all of the assets of the Company, the sale or
transfer of a majority of its common stock or a majority of its voting common
stock, the public offering of its common stock or other capital stock, the
bankruptcy or insolvency of the Company, or any other extraordinary corporate
event or (c) the payment in full of the securities. The right to receive payment
on the appreciation of the rights expires on September 1, 2005. In addition to
the capital appreciation rights, the Company granted each holder an option to
put to the Company, in connection with the holder's demand for payment on the
capital appreciation rights, the common shares of the Company it holds, for
which the Company would be required to purchase these shares based on the value,
as defined, on such date. As defined in the agreements, the formula value of
these rights is recalculated at each fiscal year end. The Company accrues the
estimated purchase price of these rights ratably over the period to the earliest
stated payment date of September 1, 2000. Changes in the purchase price due to
the most recent fiscal year calculation are recognized prospectively over the
remaining period. At December 31, 1996, the purchase price for the capital
appreciation rights was approximately $1,019,000 and approximately $645,000
related to the common stock put options. In 1996, the Company recorded interest
expense of $218,000 and a corresponding long-term liability related to the
capital appreciation rights and a charge to accumulated deficit of $139,000 and
a corresponding common stock put option as a component of stockholders' deficit
in the accompanying balance sheets.
As of September 30, 1997, the Company has estimated the change in the
purchase price of these rights based on its unaudited results to date during
1997 and its budgeted results for the remainder of 1997 and determined no
additional accrual of interest expense for the capital appreciation rights or
accretion of the common stock put options is necessary for the nine months ended
September 30, 1997. Subsequent to the year ended December 31, 1996, all of the
Company's capital appreciation rights and the common stock put option were
extinguished in conjunction with the purchase of all of the outstanding
preferred and common shares of the Company by American Architectural Products
Corporation (Note 10).
In connection with modification of the Company's debt terms, the Company
increased its available borrowings under the revolving credit facility from
$6,570,000 to the lesser of $7,000,000 or the borrowing base of 85% of eligible
trade receivables, plus 45% of eligible inventory at the lower of cost or market
value on a first-in, first-out basis. Total credit availability resulting from
the borrowing base was $7,000,000, $7,000,000 (unaudited), and $6,979,000
(unaudited) at December 31, 1996 , September 30, 1996 and 1997, respectively, of
which $6,430,000, $6,585,000 (unaudited), and $6,421,000 (unaudited) was
outstanding at December 31, 1996, September 30, 1996 and 1997, respectively.
The debt agreements contain various covenants which, among other
requirements, limit dispositions of property, plant and equipment, require
maintenance of insurance satisfactory to the lenders, restrict payment of cash
dividends and dispositions of stock, prohibit additional debt, mergers and
acquisitions, and require
F-86
188
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
maintenance of certain financial covenants. At December 31, 1996, there were no
events of noncompliance with the debt agreements that were not waived by the
lenders. As of September 30, 1997, in the opinion of management, the Company
will not be in compliance with certain financial covenants upon expiration of
the waivers from the lenders in January 1998. Accordingly, the Company
classified the notes payable to certain common stockholders as current
liabilities as of September 30, 1997. Subsequent to the year ended December 31,
1996, the revolving credit facility and notes payable to certain common
stockholders were repaid in conjunction with the purchase of all of the
outstanding preferred and common shares of the Company by American Architectural
Products Corporation (Note 10).
During 1991, the Company entered into a capital lease for certain of its
data processing equipment. The lease contains a bargain purchase option. The net
book value of this equipment of approximately $126,000, $116,000, $119,000
(unaudited) and $109,000 (unaudited) at December 31, 1995 and 1996, September
30, 1996 and 1997, respectively, is included in property, plant and equipment in
the accompanying balance sheets.
Maturities of long-term debt are as follows as of December 31, 1996, and
September 30, 1997:
DECEMBER 31, SEPTEMBER 30,
PERIOD ENDING DECEMBER 31, 1996 1997
-------------------------- ------------ -------------
(UNAUDITED)
1997.............................. $ 7,044,000 $ 471,000
1998.............................. 1,460,000 13,941,000
1999.............................. 1,518,000 6,463,000
2000.............................. 1,620,000 28,000
2001.............................. 1,641,000 0
Thereafter........................ 7,697,000 0
----------- -----------
$20,980,000 $20,903,000
=========== ===========
5. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities and transportation equipment under
noncancellable operating leases expiring through 2001. Rental expense under
operating leases was approximately $377,000, $384,000, $471,000, $353,000
(unaudited) and $212,000 (unaudited) for the years ended December 31, 1994, 1995
and 1996 and the nine months ended September 30, 1996 and 1997, respectively.
The future minimum rental payments under these lease agreements having initial
or remaining terms in excess of one year are as follows as of December 31, 1996,
and September 30, 1997:
DECEMBER 31, SEPTEMBER 30,
PERIOD ENDING DECEMBER 31, 1996 1997
-------------------------- ------------ -------------
(UNAUDITED)
1997............................... $ 476,000 $ 134,000
1998............................... 401,000 432,000
1999............................... 327,000 358,000
2000............................... 112,000 139,000
2001............................... 8,000 18,000
---------- ----------
$1,324,000 $1,081,000
========== ==========
In prior years, the Company identified potential groundwater contamination
as part of continuous monitoring procedures in place at its Florida
manufacturing facility. The Company is in the process of implementing an
approved Remedial Action Plan (RAP) from the Dade County Department of
Environmen-
F-87
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BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
tal Resources (DERM), to address the groundwater conditions. Based on the
approved RAP, the cost of remediation will be approximately $150,000 to install,
operate and maintain the remediation system. The required period of monitoring
is dependent upon the results of the monitoring. Potential modification to the
RAP could occur if levels of contamination are found above or below specified
DERM limits. During 1993, a charge of $218,000 was provided to cover the
estimated future costs of this monitoring and other environmental investigation
and remediation costs. At December 31, 1996, and September 30, 1997,
respectively, remaining environmental accruals amounted to $166,000 and $159,000
(unaudited), respectively, and are included in accrued liabilities in the
accompanying balance sheets. In management's opinion, based upon the facts
currently known, adequate provision has been made for this contingency, and the
final resolution of all environmental matters will not have a material adverse
effect on the Company's financial position.
The Company is a party to certain legal actions and claims in the normal
course of business, none of which individually or in the aggregate, in the
opinion of management, based upon the facts currently known, are expected to
have a material adverse effect on the Company's financial position.
6. STOCKHOLDERS' DEFICIT:
In 1991, the Company issued common stock purchase options which, after full
exercise thereof, would give the holder a maximum of 49% of the common stock of
the Company. In 1994, the Company terminated those common stock purchase options
through payment of $400,000 in cash and issuance of common stock purchase
options which, after full exercise thereof, would give the holder a maximum of
10% of the voting common stock of the Company. The options were exercisable at a
price of $.01 per share on or before February 28, 1997. The Company retained the
right to terminate these options at a price as defined in the option agreement.
The price to terminate all of the options outstanding at December 31, 1996,
based on the terms of the agreement was $1,348,000. The options outstanding at
December 31, 1995 and 1996, were stated at fair market value based on the
purchase price of the terminated options in 1995 and were included in
stockholders' deficit in the 1995 and 1996 accompanying balance sheets. In
February 1997, the Company terminated the remaining outstanding common stock
purchase options through a payment of $150,000.
During 1994, the Company issued 9% Series B Preferred Stock (the previously
issued preferred stock now being designated as Series A Preferred Stock) to a
stockholder in exchange for cash of $350,000. An additional $50,000 was obtained
through the same stockholder in exchange for an exclusive supply agreement,
whereby the Company agreed to purchase from an unrelated supplier all of the
Company's requirements for specialty windows from October 1, 1994, to September
30, 1997, or longer, if required, to meet a total of $3,000,000 of purchases.
The unrelated supplier, in consideration to the stockholder for facilitating the
supply agreement, agreed to give the $50,000 to the stockholder and, in
addition, promised to pay the stockholder $50,000 in 1996 and 1997 so long as
the supply agreement is still in full force and effect. Additionally, the
stockholder, in consideration to the Company for entering into the agreement
with the unrelated supplier, agreed to transfer to the Company, at no cost,
5,000 shares of Series B Preferred Stock in 1996 and 1997 concurrently with its
receipt of the $50,000 payments so long as the supply agreement is still in full
force and effect. In 1996, the Company received the 5,000 shares of Series B
preferred stock from the stockholder. At September 30, 1997, the Company had not
met its minimum purchase commitments and thus, received no additional shares of
Series B Preferred Stock from the stockholder under this agreement. At September
30, 1997, the agreement was in full force and effect.
The Company and its stockholders have entered into an agreement which
restricts the right of the stockholders to sell or transfer their shares unless
specified conditions are met. The Company has a right of
F-88
190
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' DEFICIT: (CONTINUED)
first refusal, as defined in the agreement, to purchase any shares offered for
sale. The stockholders have certain registration rights and the right of first
refusal to purchase additional capital stock offered by the Company.
The Company has the right to redeem the cumulative preferred stock, Series
A and Series B, in whole or in part, at any time by giving notice of redemption
to all holders. The redemption price for such optional redemption is $10 per
share. In the event of liquidation, dissolution or winding up of the Company,
the Series B stockholders are given preference over the Series A and common
stockholders. Otherwise, all equity stockholders are given the same preference.
The holders of both series of the preferred stock are entitled to receive,
if and when declared by the Board of Directors, dividends of additional fully
paid and nonassessable shares of cumulative preferred stock at the rate of 8%
for Series A Preferred Stock and 9% for Series B Preferred Stock per annum
payable semiannually, commencing October 30, 1986, for the Series A Preferred
Stock and commencing April 30, 1995, for the Series B Preferred Stock. The
Company has not declared any dividends subsequent to April 30, 1988, and,
accordingly, as of December 31, 1996 and September 30, 1997, respectively,
approximately $1,428,000 and $1,485,000 (unaudited) Series A Preferred Stock
dividends are in arrears, and approximately $70,000 and $77,000 (unaudited) of
Series B Preferred Stock dividends are in arrears. Subsequent to the year ended
December 31, 1996, a stock dividend was declared on all stock dividends in
arrears for Series A Preferred Stock and Series B Preferred Stock in conjunction
with the purchase of all of the outstanding preferred and common shares of the
Company by American Architectural Products Corporation (Note 10).
Under an employment contract, an employee of the Company is eligible to
receive additional compensation and a bonus if the Company achieves certain
defined earnings levels. The additional compensation and bonus are payable all
or in part by one or more of the following methods: cash, common stock options
with an exercise price of $2.16 per share and stock appreciation rights
exercisable at a price of $2.16 per share. Under this agreement, $55,000 and
$57,000 (unaudited) were earned and paid to the employee for the year ended
December 31, 1996 and September 30, 1997, respectively. The employment contract
also granted the employee 37,500 options to purchase common stock of the Company
at an exercise price of $2.16 per share.
In September 1997, the Company entered into employment agreements with two
officers. Under these agreements, 16,750 options to purchase common stock of the
Company were granted. The exercise dates are December 31, 1998 through December
31, 2000 at exercise prices of $2.00 to $4.00 per share. Upon sale of the
Company on or before June 30, 1998, the exercise price is adjusted to $.50 per
share, as defined in the agreement (Note 10). At September 30, 1997, no stock
options are exercisable. In addition, 16,750 stock appreciation rights were
granted. The exercise price is $0.01 per right and are exercisable through
December 31, 2000. At September 30, 1997, no obligation had been earned under
the stock appreciation rights agreement (Note 10).
In December 1996, the Company entered into an agreement with a consultant
and issued warrants for the purchase of 70,889 shares of common stock. The
exercise price is based on a formula and vesting is based on triggering events,
as defined in the agreement. At September 30, 1997, these warrants are not
exercisable. Subsequent to the year ended December 31, 1996, the common stock
purchase warrants were extinguished in conjunction with the purchase of all of
the outstanding preferred and common shares of the Company by American
Architectural Products Corporation (Note 10).
7. BENEFIT PLANS:
Effective January 1, 1989, the Company established an enhanced 401(k)
defined contribution plan for substantially all employees. Under this plan,
employees may contribute between 2% and 15% of their salaries and wages with the
Company matching up to 100% of the first 3% of employee contributions. The
expense
F-89
191
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. BENEFIT PLANS: (CONTINUED)
under this plan was $58,000, $53,000, $66,000, $51,000 (unaudited) and $145,000
(unaudited) for the years ended December 31, 1994, 1995 and 1996, and the nine
months ended September 30, 1996 and 1997, respectively.
8. RELATED PARTIES:
During 1996 and the unaudited nine months ended September 30, 1996 and
1997, the Company sold certain finished products to the joint venture referred
to in Note 2. Sales to the joint venture totaled $1,542,000, $872,000
(unaudited) and $2,409,000 (unaudited) for the year ended December 31, 1996, and
the nine months ended September 30, 1996 and 1997, respectively. Accounts
receivable from the joint venture were $234,000, $240,000 (unaudited) and
$430,000 (unaudited) at December 31, 1996, and September 30, 1996 and 1997,
respectively.
9. INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition
of future tax benefits, to the extent that realization of such benefits is more
likely than not, attributable to deductible temporary differences between the
financial statement and income tax basis of assets and liabilities and net
operating loss carryforwards.
The net deferred income tax liability at December 31, 1995 and 1996, and
September 30, 1996 and 1997, is comprised of the following:
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
Assets................ $ 5,063,000 $ 4,341,000 $ 4,630,000 $ 4,216,000
Liabilities........... (5,063,000) (4,341,000) (4,630,000) (4,216,000)
----------- ----------- ----------- -----------
$ 0 $ 0 $ 0 $ 0
=========== =========== =========== ===========
F-90
192
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: (CONTINUED)
Temporary differences and carryforwards which give rise to significant
deferred income tax assets (liabilities) as of December 31, 1995 and 1996, are
as follows:
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
Current deferred income taxes --
Allowance for doubtful
accounts.................... $ 54,000 $ 87,000 $ 79,000 $ 147,000
Inventory valuation
differences................. (847,000) (947,000) (973,000) (836,000)
Accrued expenses not currently
deductible for income tax
purposes.................... 271,000 318,000 242,000 274,000
Accrued environmental
expenses.................... 62,000 131,000 120,000 128,000
Other.......................... 12,000 149,000 139,000 126,000
----------- ----------- ----------- -----------
Total current deferred income
taxes.......................... $ (448,000) $ (262,000) $ (393,000) $ (161,000)
=========== =========== =========== ===========
Long-term deferred income taxes--
Property, plant and equipment.... $(2,152,000) $(2,013,000) $(2,046,000) $(2,101,000)
Federal net operating loss
carryforwards............... 3,971,000 3,128,000 3,361,000 3,011,000
State net operating loss
carryforwards............... 501,000 295,000 467,000 289,000
Alternative minimum tax
carryforwards............... 0 29,000 22,000 37,000
Valuation allowance............ (1,872,000) (1,177,000) (1,411,000) (1,075,000)
----------- ----------- ----------- -----------
Total long-term deferred income
taxes.......................... $ 448,000 $ 262,000 $ 393,000 $ 161,000
=========== =========== =========== ===========
The income tax provision for the years ended December 31, 1994, 1995 and
1996, and for the nine-month periods ended September 30, 1996 and 1997, consists
of the following elements:
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------------
1994 1995 1996 1996 1997
---- ---- ------- ----------- -----------
(UNAUDITED)
Currently payable................... $0 $0 $29,000 $22,000 $8,000
Deferred payable.................... 0 0 0 0 0
-- -- ------- ------- ------
$0 $0 $29,000 $22,000 $8,000
== == ======= ======= ======
F-91
193
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: (CONTINUED)
A reconciliation between income taxes computed at the statutory federal
rate of 35% and the provisions for income taxes for the years ended December 31,
1994, 1995 and 1996, is as follows:
DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
Amount at statutory
federal rate......... $(555,000) $(436,000) $ 583,000 $ 454,000 $ 118,000
Change in valuation
allowance............ 468,000 311,000 (695,000) (461,000) (102,000)
Alternative minimum
taxes (AMT).......... 0 0 29,000 22,000 8,000
Nondeductible
expenses............. 2,000 2,000 47,000 43,000 12,000
Other.................. 85,000 123,000 65,000 (36,000) (28,000)
--------- --------- --------- --------- ---------
$ 0 $ 0 $ 29,000 $ 22,000 $ 8,000
========= ========= ========= ========= =========
In fiscal years 1994 and 1995 and prior years, the Company incurred
significant financial reporting and taxable losses principally as a result of a
capital structure that contained a substantial amount of high interest rate
debt. Although substantial net deferred income tax assets were generated during
these periods, a valuation allowance was established because in management's
assessment the historical operating trends made it uncertain whether the net
deferred income tax assets would be realized. Accordingly, no provision or
benefit for income taxes was recognized in 1994 and 1995.
During late 1995, the Company renegotiated the significant terms of its
debt obligations which lowered interest expense and provided liquidity for
operations. For the nine months ended September 30, 1996 and the year ended
December 31, 1996, the Company reported taxable income and net income for
financial reporting purposes. The provision for income taxes for the nine months
ended September 30, 1996 and the year ended December 31, 1996 of $22,000
(unaudited) and $29,000, respectively, is comprised solely of AMT as the Company
was able to utilize a portion of its net operating loss carryforwards. At
December 31, 1996 and at September 30, 1997, management determined, largely
because of the Company's prior losses, that it remains uncertain whether the net
deferred tax assets would be realized. As a result a valuation allowance of
$1,177,000 and $1,075,000 (unaudited) was recorded at December 31, 1996 and at
September 30, 1997, respectively.
For federal income tax reporting purposes, the Company had net operating
loss carryforwards of approximately $9,776,000 as of December 31, 1996. These
losses may be used to reduce future taxable income, if any, and expire from 2001
through 2010. These carryforwards may be subject to annual limitation in the
future in accordance with the Tax Reform Act of 1986 (Note 10). For state income
tax reporting purposes, the Company had net operating loss carryforwards of
approximately $5,291,000 as of December 31, 1996, which expire from 1997 through
2010.
10. SUBSEQUENT EVENTS:
Effective December 10, 1997, the stockholders of the Company sold all of
their outstanding preferred and common shares to American Architectural Products
Corporation (American) for approximately $26,500,000. In accordance with the
terms of the sale agreement, the revolving credit facility and notes payable to
certain common stockholders (Note 4) were repaid in full. The agreement provides
for a payment of approximately $1,100,000 to the holders of the 9.25% notes
payable extinguishing the holders' common stock put option and capital
appreciation rights as well as repurchasing 62,500 shares of common stock held
by the holders of the
F-92
194
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9.25% notes payable. On December 10, 1997, the Board of Directors of the Company
declared stock dividends payable to cover all Series A Preferred and Series B
Preferred stock dividends that were in arrears through the date of the sale of
the Company. The Company called all of the Series A Preferred and Series B
Preferred shares for redemption as of December 10, 1997. The Company expects to
redeem all of the Series A Preferred and Series B Preferred shares at the stated
redemption value of $10 per share. Payments to the holders of the Series A
Preferred and Series B Preferred shares totaling approximately $3,169,000 and
$394,000, respectively, will be made as the stock certificates are tendered by
the holders. The common stock purchase warrants held by a consultant expired
unexercised on December 10, 1997. Additionally, on December 10, 1997, the
holders of the 54,250 outstanding common stock options exercised their options
and purchased 54,250 shares of common stock of the Company. The amount to be
distributed to the common stockholders will represent the remaining proceeds
from the $26,500,000 payment by American after repayment of the notes payable,
revolving credit facility, Series A Preferred shares, Series B Preferred shares
and closing fees and expenses.
As a result of the purchase of the Company's common stock, the estimated
value associated with the 16,750 stock appreciation rights held by two officers
was approximately $117,000 at December 10, 1997. As of December 10, 1997, the
officers had not exercised their redemption rights.
On November 11, 1997, the Company signed a letter of intent to sell its
Miami production facility and real estate for approximately $4,500,000. The net
book value of the property was approximately $3,629,000 (unaudited) at September
30, 1997. Management anticipates the sale to close by the end of June 1998.
F-93
195
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Danvid Company, Inc. and Danvid Window Company
We have audited the accompanying combined balance sheets of Danvid Company,
Inc. and Danvid Window Company as of July 28, 1996 and July 27, 1997, and the
related combined statements of income and retained earnings and cash flows for
the years then ended. These financial statements are the responsibility of the
Companies' 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 combined 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.
As discussed in Note 6 to the accompanying combined financial statements,
the Companies may be subject to additional federal income tax liabilities as a
result of an investigation by the Internal Revenue Service.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Danvid
Company, Inc. and Danvid Window Company at July 28, 1996 and July 27, 1997, and
the results of their combined operations and their combined cash flows for the
years then ended in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Dallas, Texas
October 20, 1997
F-94
196
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED BALANCE SHEETS
JULY 28, JULY 27,
1996 1997
-------- --------
ASSETS
Current
Cash...................................................... $ 678,459 $1,059,761
Short-term investments (Note 4)........................... 1,004,967 1,052,250
Accounts receivable:
Trade, less allowance for doubtful accounts of $353,400
and $125,600.......................................... 3,846,336 4,667,013
Employees.............................................. 60,004 92,735
Other.................................................. 13,597 8,861
Inventories (Note 1)...................................... 1,099,859 1,151,992
Prepaid expenses.......................................... 31,275 39,998
Notes receivable -- current portion (Note 2).............. 11,748 12,342
Deferred tax benefit (Note 8)............................. 236,424 149,565
---------- ----------
Total current assets.............................. 6,982,669 8,234,517
---------- ----------
Machinery and equipment net (Note 3)........................ 398,643 443,071
---------- ----------
Other
Deposits.................................................. 26,903 23,300
Investments (Note 4)...................................... 38,485 55,300
Notes receivable, less current portion (Note 2)........... 58,606 39,010
Deferred tax benefit (Note 8)............................. 56,213 45,932
---------- ----------
Total other assets................................ 180,207 163,542
---------- ----------
$7,561,519 $8,841,130
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable -- trade................................. $2,833,765 $2,606,979
Notes payable -- current portion (Note 5)................. 17,033 36,781
Accrued expenses:
Payroll and payroll taxes.............................. 368,196 429,379
Profit-sharing plan contribution....................... 150,000 --
Other taxes............................................ 173,378 233,407
Warranty expenses -- current portion................... 324,294 354,139
Federal income taxes................................... 454,737 201,858
---------- ----------
Total current liabilities......................... 4,321,403 3,862,543
Notes payable, less current maturities (Note 5)............. 117,371 82,000
Accrued warranty expenses, less current portion............. 191,583 159,343
---------- ----------
Total liabilities................................. 4,630,357 4,103,886
---------- ----------
Commitments and contingencies (Notes 6, 7 and 10)
Shareholders' equity (Note 9)
Common stock -- par....................................... 1,000 1,000
Common stock -- no par.................................... 1,000 1,000
Retained earnings......................................... 3,059,162 4,848,429
---------- ----------
3,061,162 4,850,429
Less: Treasury stock, at cost (Note 9)...................... (130,000) (130,000)
Plus: Unrealized securities gain............................ -- 16,815
---------- ----------
Total shareholders' equity........................ 2,931,162 4,737,244
---------- ----------
$7,561,519 $8,841,130
========== ==========
See accompanying summary of accounting policies and notes to combined financial
statements.
F-95
197
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED
--------------------------
JULY 28, JULY 27,
1996 1997
-------- --------
Sales....................................................... $40,731,403 $42,003,176
Cost of Goods Sold.......................................... 33,777,787 33,807,196
----------- -----------
Gross Margin................................................ 6,953,616 8,195,980
----------- -----------
Operating Expenses:
Selling expenses.......................................... 1,412,078 2,039,554
General and administrative expenses....................... 4,115,884 3,637,973
----------- -----------
Total Operating Expenses.......................... 5,527,962 5,677,527
----------- -----------
Operating Profit............................................ 1,425,654 2,518,453
----------- -----------
Other Income (Expense):
Interest and dividend income.............................. 22,766 61,349
Other income.............................................. 53,055 51,826
Interest expense.......................................... (14,946) (2,656)
----------- -----------
Total Other Income (Expense)...................... 60,875 110,519
----------- -----------
Income Before Income Taxes.................................. 1,486,529 2,628,972
----------- -----------
Income Taxes (Benefit):
Current................................................... 744,607 737,565
Deferred.................................................. (138,079) 97,140
----------- -----------
Total Income Taxes................................ 606,528 834,705
----------- -----------
Net Income.................................................. 880,001 1,794,267
Retained Earnings, beginning of year........................ 2,184,161 3,059,162
Dividends................................................... (5,000) (5,000)
----------- -----------
Retained Earnings, end of year.............................. $ 3,059,162 $ 4,848,429
=========== ===========
See accompanying summary of accounting policies and notes to combined financial
statements.
F-96
198
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED
-------------------------
JULY 28, JULY 27,
1996 1997
-------- --------
Operating Activities:
Net income................................................ $ 880,001 $1,794,267
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 201,139 204,000
Deferred taxes......................................... (138,079) 97,140
Gain on investments.................................... -- (47,283)
Changes in operating assets and liabilities
Accounts receivable -- trade......................... 184,293 (820,677)
Accounts receivable -- other......................... 11,587 (27,995)
Inventories.......................................... 119,962 (52,133)
Prepaid expenses..................................... 164,871 (8,723)
Other assets......................................... 3,604 3,600
Accounts payable..................................... (94,868) (225,786)
Accrued expenses..................................... 808,750 (284,062)
----------- ----------
Net cash provided by operating activities................... 2,141,260 632,348
----------- ----------
Investing Activities:
Increase in short-term investments........................ (1,004,967) --
Decrease in non-current investments....................... 4,811 --
Payments received on notes receivable..................... 4,834 19,002
Purchase of property and equipment........................ (101,390) (248,428)
----------- ----------
Net cash used in investing activities....................... (1,096,712) (229,426)
----------- ----------
Financing Activities:
Dividends paid............................................ (5,000) (5,000)
Note payments............................................. (475,836) (16,620)
----------- ----------
Net cash used in financing activities....................... (480,836) (21,620)
----------- ----------
Increase in cash and cash equivalents....................... 563,712 381,302
Cash and Cash Equivalents:
Beginning of year......................................... 114,747 678,459
----------- ----------
End of year............................................... $ 678,459 $1,059,761
=========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest.................... $ 14,946 $ 2,656
=========== ==========
See accompanying summary of accounting policies and notes to combined financial
statements.
F-97
199
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Danvid Company, Inc. (the Company) is a manufacturer of residential windows
and doors with its office and facilities located in Carrollton, Texas. The
Company is related to Danvid Window Company (Affiliate) through common
management and shareholders. The Company's products are principally sold to
Danvid Window Company which sells the products to wholesalers, retailers and
builders. Approximately 92 and 98 percent of the Company's 1996 and 1997 sales
are to Danvid Window Company, respectively. These financial statements are the
combined financial statements of Danvid Company, Inc. and Danvid Window Company.
All significant intercompany accounts and transactions 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 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.
CASH AND CASH EQUIVALENTS
The Company and its Affiliate maintain a portion of their cash in bank
deposit accounts which at times may have exceeded federally insured amounts. The
companies have not experienced any losses in such accounts and believe they are
not exposed to any significant credit risk on cash and cash equivalents.
INVESTMENTS
Short-term investments are stated at fair value and include investments in
equity and bond mutual funds. In accordance with company policy, these
investments, which the Company intends to hold for less than one year but longer
than three months, are not included as cash equivalents. These securities are
considered trading securities with the unrealized holding gains and losses
reported in earnings.
Non-current investments are stated at fair value and include investments in
equity securities which the Company intends to hold for periods longer than one
year. Unrealized holding gains and losses on securities are carried as a
separate component of shareholders' equity.
ACCOUNTS RECEIVABLE
The Company's customers, as well as the Affiliate's customers, are
primarily related to the home building and remodeling industries. Trade accounts
receivable are normally uncollateralized and payment terms are generally 30
days. Management performs periodic reviews of the creditworthiness of customers
and provides an allowance for losses on receivables based upon prior years'
experience.
INVENTORIES
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventory costs include materials, direct labor, and
manufacturing overhead. Costs of miscellaneous manufacturing supplies are
expensed as incurred.
F-98
200
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MACHINERY AND EQUIPMENT
Machinery and equipment are stated at cost. Depreciation has been
calculated using an accelerated method over the estimated useful lives of the
assets as follows:
ESTIMATED USEFUL LIFE
---------------------
Transportation equipment.................................... 5 years
Office furniture and equipment.............................. 7 - 10 years
Machinery and shop equipment................................ 7 - 10 years
Computer equipment.......................................... 5 years
ACCRUED WARRANTY EXPENSES
The Company provides a 10-year warranty on its products and has established
a product warranty reserve. The warranty reserve is based on management's
estimates of future costs associated with fulfilling the warranty obligation.
Management's estimates were derived from the Company's historical experience.
REVENUES
The Company and Affiliate recognize revenue on its window products when
shipped to the customer. Repair, service, and freight revenue is recognized as
the services are performed. All sales between the Company and the Affiliate have
been eliminated.
INCOME TAXES
Statement of Financial Accounting Standards Board No. 109, "Accounting for
Income Taxes" (SFAS No. 109), provides for deferred income tax assets and
liabilities resulting from temporary differences (see Note 8). Temporary
differences are the differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years. In accordance with SFAS No. 109,
the Company has considered the need for a valuation allowance to reduce its
deferred tax asset to an amount which will, more likely than not, be realized.
No valuation allowance was considered necessary.
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.
F-99
201
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated.
Because of the recent issuance of these standards, management has been
unable to fully evaluate the impact, if any, they may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of these two standards.
F-100
202
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories are comprised of the following:
JULY 28, JULY 27,
1996 1997
-------- --------
Raw materials....................................... $ 620,917 $ 663,676
Work-in-process..................................... 143,773 180,678
Finished goods...................................... 335,169 307,638
---------- ----------
Total $1,099,859 $1,151,992
========== ==========
2. NOTES RECEIVABLE
Included in notes receivable is a loan due from a shareholder of the
Company totaling $8,320 and $13,520 at July 28, 1996 and July 27, 1997,
respectively. This loan is a demand note, bears no interest, and is payable
monthly. The loan is secured by an automobile owned by the officer.
The Company has an undivided interest in a note receivable with an
unrelated party that is secured by land and payable in quarterly installments of
principal and interest at 8 percent per annum. The note matures February 1,
2004.
The above referenced notes receivable have scheduled maturities as follows:
YEAR AMOUNT
---- ------
1998............................................... $12,342
1999............................................... 11,624
2000............................................... 8,777
2001............................................... 9,505
2002............................................... 9,104
-------
Total.............................................. $51,352
=======
3. MACHINERY AND EQUIPMENT
Machinery and equipment consists of the following:
1996 1997
---- ----
Transportation equipment............................ $ 522,806 $ 643,231
Office furniture and equipment...................... 15,194 24,399
Machinery and shop equipment........................ 502,088 613,410
Computer equipment.................................. 184,413 191,889
---------- ----------
Total............................................... 1,224,501 1,472,929
Accumulated depreciation............................ 825,858 1,029,858
---------- ----------
Net machinery and equipment......................... $ 398,643 $ 443,071
========== ==========
F-101
203
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS
The cost and estimated fair value of the investment securities are as
follows:
JULY 28, 1996
------------------------------------------------
COST GAIN LOSS FAIR VALUE
---- ---- ---- ----------
Trading securities (short-term)............... $1,004,967 $ -- $ -- $1,004,967
Available-for-sale securities (long-term)..... 38,485 -- -- 38,485
---------- ------- ------- ----------
Total investment securities................... $1,043,452 $ -- $ -- $1,043,452
========== ======= ======= ==========
JULY 27, 1997
------------------------------------------------
COST GAIN LOSS FAIR VALUE
---- ---- ---- ----------
Trading securities (short-term)............... $1,004,967 $47,283 $ - $1,052,250
Available-for-sale securities (long-term)..... 38,485 16,815 - 55,300
---------- ------- ------- ----------
Total investment securities................... $1,043,452 $64,098 $ - $1,107,550
========== ======= ======= ==========
5. NOTES PAYABLE
The Company and its Affiliate have an $800,000 line-of-credit with Comerica
Bank -- Texas which bears interest at prime rate plus one percent and is payable
on demand. This line-of-credit has no outstanding balance as of July 28, 1996 or
July 27, 1997. Any borrowings under the line-of-credit are collateralized by
inventory and accounts receivable.
Long-term debt consist of the following:
1996 1997
---- ----
13.65% installment note, payable monthly in the amount
of $717 including interest, due May 30, 1998 and
secured by an automobile............................. $ 28,404 $ 23,781
Non-interest bearing, promissory note to former
shareholder, payable monthly in the amount of $1,000,
secured by company stock............................. 106,000 94,000
-------- --------
Total.................................................. 134,404 117,781
Less: Current maturities............................... (17,033) (35,781)
-------- --------
Long-term debt......................................... $117,371 $ 82,000
======== ========
Future maturities of long-term debt at July 27, 1997 are as follows:
YEAR AMOUNT
---- --------
1998.................................................... $ 35,781
1999.................................................... 12,000
2000.................................................... 12,000
2001.................................................... 12,000
2002.................................................... 12,000
Thereafter.............................................. 34,000
--------
Total......................................... $117,781
========
F-102
204
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Internal Revenue Service is currently conducting an investigation of
the Companies and their shareholders. Although there have not been any
assessments against the Companies, the Companies may be subject to additional
federal income tax liabilities. The ultimate outcome of the investigations and
their effects on the Companies cannot presently be determined. Accordingly no
provision for any liability that may result upon the resolution of this matter
has been recognized in the combined financial statements.
At July 27, 1997, the Companies are defendants in several lawsuits. The
Companies 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 Companies' insurance. In the opinion of management, such
liabilities, if any, would not have a material effect on the combined financial
statements.
At July 27, 1997, the Company was committed to various operating leases of
its office, production facility, production and office equipment, and
transportation equipment. Operating lease expense was approximately $1,135,000
and $1,080,000 for the years ended 1996 and 1997, respectively.
Future estimated minimum lease payments under operating leases at July 27,
1997, are as follows:
YEAR AMOUNT
---- ------
1998..................................................... $1,072,440
1999..................................................... 1,033,145
2000..................................................... 736,536
2001..................................................... 699,716
2002..................................................... 578,212
Thereafter............................................... 1,431,128
----------
Total.......................................... $5,551,177
==========
7. EMPLOYEE BENEFIT PLANS
The Company and its Affiliate have adopted qualified defined contribution
profit-sharing plans during fiscal year 1996. The Plans cover all employees
meeting minimum age and length of service requirements. Contributions to the
Plans are made at the discretion of each company's Board of Directors. Expense
related to these Plans were $150,000 and $200,000 for the years ended July 28,
1996 and July 27, 1997, respectively.
8. INCOME TAXES
The Company's effective tax rate in 1996 is 41 percent. This differs from
the statutory tax rate of 34 percent due to non-deductible expenses (e.g. meals
and entertainment) and an additional provision for potential income tax
liabilities.
F-103
205
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES: (CONTINUED)
Cumulative temporary differences consist of the following:
JULY 28, JULY 27,
1996 1997
-------- --------
Deferred tax assets:
Accrued warranty expense............................. $175,398 $174,584
Capitalized inventory costs.......................... 8,840 8,840
Allowance for bad debts.............................. 117,324 20,318
-------- --------
Gross deferred tax assets.............................. 301,562 203,742
-------- --------
Deferred tax liabilities:
Machinery and equipment.............................. (8,925) (8,245)
-------- --------
Net deferred tax assets................................ $292,637 $195,497
======== ========
9. SHAREHOLDERS' EQUITY
Danvid Company, Inc. has 100,000 shares of no par common stock authorized,
4,500 shares issued, 4,275 shares outstanding and 225 shares in treasury valued
at cost at July 28, 1996 and July 27, 1997.
Danvid Window Company has 100,000 shares of $1 par common stock authorized,
1,000 shares issued and outstanding at July 28, 1996 and July 27, 1997. In
January 1996 and February 1997, common stock dividends of $5 par share were paid
totaling $5,000.
10. BUY -- SELL AGREEMENT
The Company and its Affiliate have an agreement regarding the disposition
of the Affiliate's sole shareholder's shares of common stock. In accordance with
the agreement, a shareholder of the Company can exercise an option to purchase a
controlling share of the Affiliate's common stock from the Affiliate's sole
shareholder. The purchase price as set forth in the agreement is $1.00 per
share.
11. MAJOR CUSTOMERS
The Company sells its products to homebuilders and distributors primarily
in its regional area. For the years ended July 28, 1996 and July 27, 1997, the
Company and its Affiliate had sales to one major distributor that approximated
12 percent in both years. The concentration in accounts receivable also
approximated 12 percent of the total balance in both years for the same
distributor.
12. SUBSEQUENT EVENT
Subsequent to their fiscal year end, the Company and the Affiliate and
their shareholders entered into a letter of intent with an unrelated company to
sell the net assets of the Company and the Affiliate.
F-104
206
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Danvid Company, Inc. and Danvid Window Company
We were engaged to audit the accompanying combined balance sheet of Danvid
Company, Inc. and Danvid Window Company (a Texas corporation) as of July 31,
1995, and the related combined statement of operations and retained earnings,
and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Danvid Company, Inc.
and Danvid Window Company as of July 31, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
FOX, BYRD & GOLDEN
Dallas, Texas
October 13, 1995
F-105
207
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED BALANCE SHEET
JULY 31, 1995
ASSETS
Current Assets
Cash and cash equivalents................................. $ 114,747
Short-term investments (Note 1G).......................... 43,296
Accounts receivable--trade (Notes 2 and 4)................ 4,030,629
Accounts receivable--other................................ 64,888
Notes receivable--current portion (Note 3)................ 19,613
Due from officer (Note 6)................................. 20,300
Inventory (Notes 1B and 4)................................ 1,219,821
Prepaid expenses.......................................... 71,803
Income taxes receivable................................... 124,343
Deferred income taxes receivable (Notes 1D and 7)......... 49,132
----------
Total Current Assets............................... 5,758,572
----------
Property, Plant and Equipment (Notes 1C and 4)
Transportation equipment.................................. 538,193
Office furniture and equipment............................ 15,194
Machinery and shop equipment.............................. 458,878
Computer equipment........................................ 128,852
----------
1,141,117
Less: Accumulated depreciation............................ 642,861
----------
498,256
----------
Other Assets
Organization costs--net (Note 1H)......................... 327
Deposits.................................................. 30,316
Notes receivable (Note 3)................................. 55,575
Deferred income taxes receivable (Notes 1D and 7)......... 105,426
----------
191,644
----------
$6,448,472
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade................................... $2,928,634
Line-of-credit--bank (Note 4)............................. 350,000
Notes payable--current portion (Note 4)................... 124,836
Accrued payroll and commissions........................... 310,135
Accrued payroll taxes..................................... 80,335
Accrued warranty expense.................................. 97,000
Accrued other expenses.................................... 74,968
----------
Total Current Liabilities.......................... 3,965,908
----------
Long-Term Debt
Notes payable (Notes 4 and 6)............................. 260,240
Less: Current portion..................................... 124,836
----------
135,404
----------
Other Liabilities
Accrued warranty expenses................................. 291,000
----------
Total Liabilities.................................. 4,392,312
----------
Stockholders' Equity
Common stock (Note 8)..................................... 2,000
Retained earnings......................................... 2,184,160
----------
2,186,160
Less: Treasury stock, at cost (Note 8).................... 130,000
----------
2,056,160
----------
$6,448,472
==========
The accompanying notes are an integral part of these financial statements.
F-106
208
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED JULY 31, 1995
Sales....................................................... $37,909,147
Cost of Goods Sold.......................................... 33,739,455
-----------
Gross Profit................................................ 4,169,692
-----------
Operating Expenses
Selling expenses.......................................... 1,977,022
General and administrative expenses....................... 2,405,330
-----------
4,382,352
-----------
Net Operating Loss.......................................... (212,660)
-----------
Other Income (Expense)
Interest and dividend income.............................. 13,056
Other income.............................................. 69,994
Interest expense.......................................... (30,782)
Loss on investment........................................ (1,738)
-----------
50,530
-----------
Loss Before Federal Income Tax.............................. (162,130)
-----------
Federal Income Tax Expense (Benefit) (Notes 1D and 7)
Current................................................... (45,251)
Deferred.................................................. (19,578)
-----------
(64,829)
-----------
Net Loss.................................................... (97,301)
Retained Earnings, Beginning of year........................ 2,306,507
Dividends................................................... (25,046)
-----------
Retained Earnings, End of year.............................. $ 2,184,160
===========
The accompanying notes are an integral part of these financial statements.
F-107
209
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1995
Cash Flows from Operating Activities:
Net loss.................................................. $ (97,301)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.......................... 159,045
Loss on sale of investments............................ 1,738
Decrease in accounts receivable........................ 760,118
Decrease in income taxes receivable.................... 6,211
Decrease in inventory.................................. 83,179
Increase in prepaid expenses........................... (10,397)
Decrease in other assets............................... 26,030
Increase in deferred income taxes...................... (19,578)
Decrease in payables................................... (475,425)
Decrease in accrued expenses........................... (419,111)
---------
Net Cash Provided by Operating Activities......... 14,509
---------
Cash Flows from Investing Activities:
Decrease in investments in mutual funds................... (1,032)
Note proceeds............................................. (15,000)
Payments received on notes receivable..................... 13,651
Purchase of property and equipment........................ (405,989)
---------
Net Cash Used in Investing Activities............. (408,370)
---------
Cash Flows from Financing Activities:
Net proceeds from line-of-credit.......................... 350,000
Dividends paid............................................ (25,046)
Note payments............................................. (156,232)
Purchase of treasury stock................................ (10,000)
---------
Net Cash Provided by Financing Activities......... 158,722
---------
Decrease in Cash and Cash Equivalents....................... (235,139)
Cash and Cash Equivalents
Beginning of year......................................... 349,886
---------
End of year............................................... $ 114,747
=========
The accompanying notes are an integral part of these financial statements.
F-108
210
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1995
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Schedule of Noncash Investing and Financing Transactions:
Purchase of automobile.................................... $ (33,475)
Note payable.............................................. 33,475
Purchase of treasury stock................................ (130,000)
Note payable.............................................. 120,000
---------
Cash Paid......................................... $ (10,000)
=========
Cash Payments (Refunds):
Interest.................................................. $ 30,782
Income taxes.............................................. $ (51,462)
The accompanying notes are an integral part of these financial statements.
F-109
211
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS
JULY 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Danvid Company, Inc. (the Company) is a manufacturer of aluminum windows
and doors with its office and facilities located in Carrollton, Texas. The
Company is related to Danvid Window Company (affiliate) and Advantage Discount
Glass through common management and shareholders. The Company's products are
principally sold to Danvid Window Company which sells the products to
wholesalers, retailers and builders. Approximately 94% of the Company's sales
are to Danvid Window Company. These financial statements are the combined
financial statements of Danvid Company, Inc. and Danvid Window Company. All
significant intercompany accounts and transactions have been eliminated. The
more significant accounting policies are as follows:
A. Sales are recognized when the product is shipped. Title actually
passes when the product is delivered, which is usually the same day that it
is shipped and no longer than three days after shipment. There were no
material shipments undelivered at July 31, 1995.
B. Inventory is carried at the lower of cost or market determined on a
first-in, first-out basis.
C. Property, plant and equipment, stated at cost, are depreciated
using an accelerated method over the estimated useful lives of the assets.
Depreciation expense was $158,527 for the year ended July 31, 1995.
ASSETS ESTIMATED USEFUL LIFE
------ ---------------------
Transportation equipment.................................. 5 years
Office furniture and equipment............................ 7 - 10 years
Machinery and shop equipment.............................. 7 - 10 years
Computer equipment........................................ 5 years
D. The Company has adopted Statement of Financial Accounting Standards
Board No. 109 for accounting for income taxes. For all significant items
where there is a timing difference between financial and income tax
reporting, deferred taxes are provided. Deferred taxes are classified as
current or noncurrent, depending on the classification of the assets and
liabilities to which they related.
E. Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and trade
receivables. The Company sells its principal products to customers related
to the home building and remodeling industries. To reduce credit risk, the
Company performs on-going credit evaluations of its customers' financial
conditions and does not generally require collateral.
In the normal course of business, the Company may have bank account
balances in excess of federally insured limits.
F. For purposes of the statement of cash flows, cash equivalents
include time deposits, certificates of deposit, and all highly liquid debt
instruments with original maturities of three months or less.
G. Short-term investments are stated at the lower of cost or market
and include investments in equity and bond mutual funds.
H. Organization costs are being amortized over 5 years. Amortization
expense was $518 for 1995.
I. The Company provides a 10-year warranty on its products. The
Company has established an estimated accrual for these anticipated future
warranty costs.
F-110
212
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1995
NOTE 2--ACCOUNTS RECEIVABLE--TRADE
Accounts receivable--trade of the Company and its affiliate are pledged as
collateral on the Comerica Bank note and stated net of an allowance for doubtful
accounts of $232,358 at July 31, 1995. An aged analysis of accounts receivable
at July 31, 1995, is as follows:
AMOUNT %
---------- ---
Current......................................... $3,138,427 74
30 days......................................... 937,150 22
60 days......................................... 187,410 4
---------- ---
$4,262,987 100
========== ===
NOTE 3--NOTES RECEIVABLE
The Company has an undivided interest in a note receivable secured by land
payable in quarterly installments of principal and interest at 8% per annum
which matures February 1, 2004, and has an unsecured note being repaid in
monthly installments of $692, including interest at 10% per annum.
Total notes receivable..................................... $75,188
Less: Current portion...................................... 19,613
-------
Long-term notes receivable................................. $55,575
=======
NOTE 4--NOTES PAYABLE
The Company has a line-of-credit with Comerica Bank in the amount of
$800,000 at prime plus 1% secured by eligible accounts receivable and inventory.
The line-of-credit is a demand note payable. At July 31, 1995, there was
$350,000 drawn against the line-of-credit.
A summary of long-term debt at July 31, 1995 is as follows:
General Motors Acceptance Corporation
Installment note payable monthly in the amount of $717
including interest at 13.65% with balloon balance due May
30, 1998, secured by an automobile........................ $ 32,663
Individual (Ex-stockholder) (Note 6)
Promissory note payable monthly in the amount of $1,000
with no interest, secured by company stock................ 119,000
Officer
Promissory note payable monthly in the amount of $8,484
plus interest at 10%, matures February 28, 1997, unsecured
(subsequent payments through September 30, 1995 totaled
$82,865).................................................. 108,577
--------
Total Indebtedness................................ 260,240
Less: Current Portion............................. 124,836
--------
Long-Term Debt.................................... $135,404
========
F-111
213
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1995
NOTE 4--NOTES PAYABLE (CONTINUED)
The following are maturities of long-term debt at July 31, 1995:
FISCAL
YEAR ENDED
JULY 31, AMOUNT
---------- --------
1996............................................ $124,836
1997............................................ 17,033
1998............................................ 35,371
1999............................................ 12,000
2000............................................ 12,000
Thereafter........................................ 59,000
--------
$260,240
========
NOTE 5--COMMITMENTS AND CONTINGENT LIABILITIES
A. At July 31, 1995, the Company was committed to various operating leases
of its office and production facility and equipment. Rent expense for the year
ended July 31, 1995, was $481,649. Future estimated minimum lease payments under
noncancellable leases are:
YEAR ENDED JULY 31, AMOUNT
------------------- --------
1996........................................................ $514,200
1997........................................................ 225,400
1998........................................................ 23,800
1999........................................................ 21,800
--------
$785,200
========
B. Employees of the Company are entitled to paid vacation, paid sick days
and personal days off, depending on job classification, length of service, and
other factors. It is impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been recorded in the
accompanying financial statements. The Company's policy is to recognize the
costs of compensated absences when actually paid to employees.
C. A workmen's compensation claim for approximately $40,000 has been filed
against Danvid Window Company. Management's opinion is that their insurance
company will cover the majority of any ultimate settlement and any payment by
the Company will not materially affect the Company's results of operations or
financial position.
NOTE 6--RELATED PARTY TRANSACTIONS
The following are related party transactions and balances for the year
ended July 31, 1995:
Note payable--officer....................................... $108,577
Accounts receivable--officer................................ $ 20,300
Interest expense--officers.................................. $ 20,220
Note payable--Mary Crawford................................. $119,000
F-112
214
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1995
NOTE 7--INCOME TAXES
The Company's effective tax rate is higher than what would be expected if
the federal statutory rate was applied to net income because of expenses
deducted for financial reporting purposes that are not deductible for federal
income tax purposes. These permanent timing differences for calculation of
income tax include amounts related to meals and entertainment and officers life
insurance. Cumulative temporary timing differences consist of the following at
July 31, 1995:
Excess of depreciation for tax purposes over the amount
taken for book purposes................................... $ 6,427
Accrued warranty expense recognized for book purposes
only...................................................... (388,000)
Additional costs related to inventory, capitalized for tax
purposes only............................................. (47,506)
---------
$(429,079)
=========
The Company has the following capital loss carryforwards for regular
federal income tax purposes at July 31, 1995:
YEAR OF EXPIRATION AMOUNT
------------------ -------
1997........................................................ $23,687
1999........................................................ 76
2000........................................................ 1,739
-------
$25,502
=======
NOTE 8--SHAREHOLDERS' EQUITY
Danvid Company, Inc. has 100,000 shares of no par common stock authorized,
4,500 shares issued, 4,275 shares outstanding and 225 shares in treasury at July
31, 1995. In June 1995, the Company purchased 225 shares of its stock in full
redemption of a stockholder's interest for $130,000. In July 1995, common stock
dividends of $2.35 per share were paid totaling $10,046.
Danvid Window Company has 100,000 shares of $1 par common stock authorized,
1,000 shares issued and outstanding at July 31, 1995. In January 1995, common
stock dividends of $15 per share were paid totaling $15,000.
F-113
215
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
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TABLE OF CONTENTS
PAGE
----
Available Information.................... 4
Forward-Looking Statements............... 4
Industry Data and Certain Defined
Terms.................................. 5
Trademarks............................... 5
Prospectus Summary....................... 6
Summary Financial Data................... 16
Risk Factors............................. 17
Use of Proceeds.......................... 23
Capitalization........................... 23
Unaudited Pro Forma Consolidated
Financial Statement.................... 24
Selected Financial Data.................. 28
Management's Discussion and Analysis of
Financial Condition and Results of
Combined Operations.................... 32
Business................................. 39
Management............................... 52
Certain Relationships and Related
Transactions........................... 56
Principal Stockholders................... 58
Shares Eligible for Future Sale.......... 59
Description of Capital Stock............. 59
Description of Exchange Notes............ 61
Description of Outstanding Notes......... 86
The Exchange Offer....................... 87
Certain U.S. Federal Income Tax
Consequences........................... 96
Plan of Distribution..................... 100
Legal Matters............................ 101
Experts.................................. 101
Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................. 101
Index to Financial Statements............ F-1
======================================================
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$125,000,000
EXCHANGE OFFER
[AMERICAN ARCH. LOGO]
AMERICAN ARCHITECTURAL
PRODUCTS CORPORATION
11 3/4% SENIOR NOTES
DUE 2007
------------------------
PROSPECTUS
------------------------
APRIL 30, 1998
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