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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended March 31, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
GLASSTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 333-34391 13-3440225
- -------- --------- ----------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation or Identification No.)
organization)
Ampoint Industrial Park, 995 Fourth Street, Perrysburg, Ohio 43551
(Address of principal executive offices) (Zip Code)
419-661-9500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Common Stock, $.01 par value - 1,000 shares at May 5, 1998.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein are unaudited
but, in the opinion of management, reflect all adjustments necessary to present
fairly such information for the periods and at the dates indicated. Since the
following condensed unaudited financial statements have been prepared in
accordance with Article 10 of Regulation S-X, they do not contain all
information and footnotes normally contained in annual consolidated financial
statements. Accordingly they should be read in conjunction with the Consolidated
Financial Statements and notes thereto appearing in Amendment No. 2 to the
Company's Registration Statement on Form S-4 as filed with the Securities and
Exchange Commission on October 29, 1997. The interim results of operations are
not necessarily indicative of results for the entire year.
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GLASSTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
MARCH 31, JUNE 30,
1998 1997
---------- --------
(UNAUDITED)
(SEE NOTE 1)
ASSETS
------
Current assets:
Cash and cash equivalents $ 13,638 $ 51,805
Restricted cash - 1,529
Accounts receivable:
Contracts:
Uncompleted, including unbilled amounts of $4,316
($2,188 at June 30, 1997) 4,485 3,652
Completed, less allowance of $101 for doubtful
accounts at June 30, 1997 932 1,676
Trade, less allowance of $40 for doubtful accounts 1,164 1,530
--------- --------
Total accounts receivable 6,581 6,858
Inventory 3,941 4,265
Prepaid expenses 335 481
--------- --------
Total current assets 24,495 64,938
Property, plant and equipment, net 7,374 8,390
Other assets:
Patents, less accumulated amortization of $1,295
($4,317 at June 30, 1997) 16,987 18,283
Goodwill, less accumulated amortization of $1,972 48,977 -
Reorganization value in excess of amounts allocable to
identifiable assets, less accumulated amortization
of $1,599 at June 30, 1997 - 7,583
Deferred financing costs and other 4,639 170
--------- --------
Total other assets 70,603 26,036
--------- --------
$ 102,472 $ 99,364
========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,720 $ 3,413
Billings in excess of costs and estimated earnings on
uncompleted contracts 9,143 10,720
Accrued liabilities 8,768 11,287
--------- --------
Total current liabilities 20,631 25,420
Long-term debt 69,330 42,000
Nonpension postretirement benefit obligation 406 2,712
Shareholder's equity:
Common stock $.01 par value; 1,000 shares authorized and issued (10,000,000
shares authorized and 1,004,119
issued at June 30, 1997) - 10
Additional capital 15,750 20,377
Retained earnings 383 8,845
--------- --------
16,133 29,232
Shareholder's basis reduction (4,028) -
--------- --------
Net shareholder's equity 12,105 29,232
--------- --------
$ 102,472 $ 99,364
========= ========
See accompanying notes.
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GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------- ------- ------- -------
THREE MONTHS THREE MONTHS PERIOD FROM NINE MONTHS
ENDED ENDED JULY 2, 1997 TO ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1998 1997
-------- -------- -------- --------
(SEE NOTE 1)
Net revenue $ 16,739 $ 18,047 $ 48,749 $ 57,866
Cost of goods sold 9,002 11,652 25,332 34,589
-------- -------- -------- --------
Gross profit 7,737 6,395 23,417 23,277
Selling, general and administrative expenses 2,713 3,541 8,153 9,461
Research and development expenses 1,067 1,324 3,073 3,306
Amortization expense 1,088 568 3,267 1,738
-------- -------- -------- --------
Operating profit 2,869 962 8,924 8,772
Interest expense (2,414) (1,050) (7,217) (3,150)
Other income, net 121 538 362 1,640
-------- -------- -------- --------
Income before income taxes 576 450 2,069 7,262
Income taxes not payable in cash (470) (173) (1,686) (2,518)
Federal income taxes - current - (113) - (113)
-------- -------- -------- --------
Net income $ 106 $ 164 $ 383 $ 4,631
======== ======== ======== ========
See accompanying notes.
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GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
COMPANY COMPANY
--------------- ------------
PERIOD FROM NINE MONTHS
JULY 2, 1997 TO ENDED
MARCH 31, MARCH 31,
1998 1997
---------------- ------------
(SEE NOTE 1)
OPERATING ACTIVITIES:
Net income $ 383 $ 4,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,975 2,918
Income taxes not payable in cash 1,686 2,518
Nonpension postretirement benefit obligation cost in
excess of payments 15 208
Accretion of debt discount 80 -
Other 2 -
Changes in assets and liabilities affecting operations:
Restricted cash 1,529 239
Accounts receivable 548 (2,979)
Inventory 564 (2,080)
Prepaid expenses 101 (316)
Accounts payable (967) (1,590)
Billings in excess of costs and estimated earnings
on uncompleted contracts (1,749) (2,484)
Accrued liabilities 1,468 (39)
-------- --------
Net cash provided by operating activities 8,635 1,026
INVESTING ACTIVITIES:
Net assets purchased (74,828) -
Increase in long-term notes receivables (656) -
Additions to property, plant and equipment (234) (491)
Other 2 13
-------- --------
Net cash used in investing activities (75,716) (478)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and related
warrants 70,000 -
Proceeds from issuance of stock 15,000 -
Deferred financing costs (4,281) -
Issuance of common stock - 82
-------- --------
Net cash provided by financing activities 80,719 82
-------- --------
Increase in cash and cash equivalents 13,638 630
Cash and cash equivalents at beginning of period - 43,815
-------- --------
Cash and cash equivalents at end of period $ 13,638 $ 44,445
======== ========
Supplemental disclosure of cash information:
Cash paid (received) during the
period for the following:
Interest $ 4,438 $ 4,200
======== ========
Income taxes $ (272) $ 372
======== ========
See accompanying notes.
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GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK SHAREHOLDER'S
-------------------- ADDITIONAL RETAINED BASIS
SHARES AMOUNT CAPITAL EARNINGS REDUCTION TOTAL
------ ------ ------- -------- --------- -----
(SEE NOTE 1)
PREDECESSOR COMPANY
- -------------------
Balance, June 30, 1996 1,000 $ 10 $ 20,295 $ 2,347 $ - $ 22,652
Net income 6,498 6,498
Sale of common stock 4 - 82 82
-------- --------- -------- -------- -------- --------
Balance, June 30, 1997 (audited) 1,004 $ 10 $ 20,377 $ 8,845 $ - $ 29,232
======== ========= ======== ======== ======== ========
SUCCESSOR COMPANY
- -----------------
Issuance of common stock 1 - 15,750 15,750
Shareholder's basis reduction (4,028) (4,028)
Net income 383 383
-------- --------- -------- -------- -------- --------
Balance, March 31, 1998 (unaudited) 1 $ - $ 15,750 $ 383 $ (4,028) $ 12,105
======== ========= ======== ======== ======== ========
See accompanying notes.
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GLASSTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Effective July 2, 1997, Glasstech, Inc. (the "Company") was acquired by
Glasstech Holding Co. ("Holding") (the "Transaction"). In connection with
the Transaction, Holding, a holding company formed for the purpose of
completing the Transaction, acquired all of the outstanding stock of the
Company, through a merger of a wholly owned subsidiary into the Company.
The acquisition was accounted for under the purchase method of accounting
for financial reporting purposes and an initial allocation of the purchase
price to the underlying net assets acquired has been made. The Transaction
resulted in the Company having substantial goodwill, increased debt and a
significant reduction in cash.
As a result of the Transaction, the financial position and results of
operations of the Company subsequent to the Transaction are not necessarily
comparable to the financial position and results of operations of the
Company prior to the Transaction. In the accompanying condensed
consolidated financial statements, the Company's financial position and
results of operations prior to the Transaction are indicated as relating to
the "Predecessor Company" while the financial position and results of
operations subsequent to the Transaction are indicated as relating to the
"Successor Company."
In connection with accounting for the Transaction, the Company applied the
provisions of Emerging Issues Task Force Issue 88-16 (EITF 88-16), whereby
the carryover equity interests of certain shareholders from the Predecessor
Company to the Successor Company were recorded at their predecessor basis.
As a result, shareholder's equity of the Successor Company has been reduced
by $4.028 million with a corresponding reduction to the assigned values of
the net assets acquired.
The condensed consolidated balance sheet at June 30, 1997 has been derived
from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
2. Notes Payable and Long-Term Debt
In connection with the Transaction, the Company issued $70 million of 12
3/4% Senior Notes due 2004 (the "Old Senior Notes") in a private offering
exempt from registration under the Securities Act of 1933, as amended (the
"1933 Act"), and intended to permit resales under Rule 144 of the 1933 Act.
In connection with the issuance of the Old Senior Notes, the Company issued
warrants to the purchasers of the Old Senior Notes, for the purchase of
approximately 877 shares of common stock of Holding. On December 2, 1997,
the Company consummated an exchange offer (the "Exchange Offer") of its $70
million Series B 12 3/4% Senior Notes Due 2004 (the "New Senior Notes"),
which were registered under the 1933 Act, for the Old Senior Notes. The
terms of the New Senior Notes are identical to the terms of the Old Senior
Notes in all respects, except the New Senior Notes do not contain certain
transfer restrictions and registration rights that were applicable to the
Old Senior Notes. As used herein, the term "Senior Notes" shall mean, for
the periods of time prior to the Exchange Offer, the Old Senior Notes and,
for the periods of time after the Exchange Offer, the New Senior Notes, as
the case may be. Interest on the Senior Notes is payable semi-annually on
each January 1 and July 1 beginning January 1, 1998. The terms of the
Senior Notes do not require any scheduled principal payments prior to
maturity.
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The Company also entered into a $10 million Revolving Credit Facility in
connection with the Transaction. The Revolving Credit Facility expires on
June 30, 2007, and provides for interest on outstanding borrowings at the
LIBOR rate payable semi-annually. The Revolving Credit Facility will be
used to fund working capital requirements as needed and to secure standby
letters of credit, which totaled $2,960 at March 31, 1998. The Company had
no outstanding borrowings under the Revolving Credit Facility at March 31,
1998.
The terms of both the Senior Notes and Revolving Credit Facility provide
for various restrictive covenants including the maintenance of certain
financial ratios and tests and the restriction of certain payments and
business activities. At March 31, 1998, the Company was in compliance with
all material covenants in the Senior Notes and the Revolving Credit
Facility.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement
- --------------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as other sections of this Report, contain certain
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995). This Report should be read in conjunction with
the factors set forth under Item 5 "Other Information" in the Company's
quarterly report on Form 10Q for the quarter ended December 31, 1997.
General Overview
- ----------------
The Company designs and assembles glass bending and tempering (i.e.,
strengthening) systems which are used by glass manufacturers and processors in
the conversion of flat glass into safety glass. Systems are sold worldwide,
primarily to automotive glass manufacturers and processors and, to a lesser
extent, to architectural glass manufacturers and processors. Revenues generated
by the sale of new systems are referred to below as "Original Equipment".
The Company has an installed base of more than 375 systems in 40 countries on
six continents. As a result of its installed base and the relatively long useful
life of a system, the Company also engages in sales of aftermarket products and
services (retrofit of systems with upgrades, tooling used to shape glass parts,
replacement parts and technical services). Revenues generated by these types of
products are designated as "Aftermarket" in the table below.
Revenues
- --------
For financial reporting purposes, the Company includes in income the ratable
portion of profits on uncompleted contracts determined in accordance with the
stage of completion measured by the percentage of costs incurred to estimated
total costs of each contract (generally, Original Equipment, system retrofits
and tooling). For income tax purposes, contracts are accounted for on the
inventory accrual basis whereby income is recognized when the customer accepts
the equipment. Unbilled amounts included in uncompleted contract receivables
represent revenues recognized in excess of amounts billed. Billings in excess of
costs and estimated earnings on uncompleted contracts represent amounts billed
in excess of revenues recognized.
Revenue from sales other than contracts is recognized when the products are
shipped.
Selling Expenses
- ----------------
The Company maintains an in-house sales staff of seven full-time people and uses
the services of commissioned agents around the world for the sale of Original
Equipment and aftermarket products and services. In addition, the Company
maintains a sales and engineering support office in the United Kingdom. The
substantial majority of the Company's Original Equipment is sold directly to the
largest glass manufacturers and processors in the world or to affiliated
companies in which they participate or control.
Research & Development
- ----------------------
The Company believes it is the technological leader in the design and assembly
of glass bending systems. The Company works with customers to identify product
needs and market requirements. Periodically, the Company enters into joint
development agreements with customers. From time to time, the Company allocates
a portion of its research & development resources to complete the transition
from new product development to new product introduction. When the Company does
this, these expenses are charged directly to the contracts relating to the
introduction of new products. The Company considers research and development
expenses and new product introductions a very integral part of its future
success.
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The following table sets forth the amounts and the percentage of total net
revenue for certain revenue and expense items for the periods indicated (dollars
in thousands).
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------- ------- ------- -------
THREE MONTHS THREE MONTHS PERIOD FROM NINE MONTHS
ENDED ENDED JULY 2, 1997 TO ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1997
-------------- -------------- -------------- --------------
Net revenue
Original Equipment $ 12,419 74.2% $ 12,204 67.6% $ 34,059 69.9% $ 36,985 63.9%
Aftermarket 4,320 25.8 5,843 32.4 14,690 30.1 20,881 36.1
--------- ------- --------- ------ --------- ----- -------- -----
Total net revenue 16,739 100.0 18,047 100.0 48,749 100.0 57,866 100.0
Cost of goods sold 9,002 53.8 11,652 64.6 25,332 52.0 34,589 59.8
--------- ------- --------- ------ --------- ----- -------- -----
Gross profit 7,737 46.2 6,395 35.4 23,417 48.0 23,277 40.2
Selling, general and
administrative 2,713 16.2 3,541 19.6 8,153 16.7 9,461 16.3
Research and development expense 1,067 6.4 1,324 7.4 3,073 6.3 3,306 5.7
Amortization expense * 1,088 6.5 568 3.1 3,267 6.7 1,738 3.0
--------- ------- --------- ------ --------- ----- -------- -----
Operating profit $ 2,869 17.1% $ 962 5.3% $ 8,924 18.3% $ 8,772 15.2%
========= ======= ========= ====== ========= ===== ======== =====
Amortization expense * 1,088 6.5 568 3.1 3,267 6.7 1,738 3.0
Depreciation expense 414 2.5 366 2.1 1,239 2.5 1,181 2.0
--------- ------- --------- ------ --------- ----- -------- -----
EBITDA $ 4,371 26.1% $ 1,896 10.5% $ 13,430 27.5% $ 11,691 20.2%
========= ======= ========= ====== ========= ===== ========= =====
<FN>
* Amortization expense excludes the amortization of deferred financing costs
which is included with interest expense.
RESULTS OF OPERATIONS
- ---------------------
THIRD QUARTER FISCAL 1998 COMPARED WITH THIRD QUARTER FISCAL 1997
Net revenue for the third quarter of fiscal 1998 decreased $1,308, or 7.2%, to
$16,739 from $18,047 for the third quarter of fiscal 1997. Original Equipment
revenue increased $215, or 1.8%, to $12,419 for the third quarter of fiscal 1998
compared to $12,204 for the third quarter of fiscal 1997. Aftermarket revenue
decreased $1,523, or 26.1%, to $4,320 for the third quarter of fiscal 1998 from
$5,843 for the third quarter of fiscal 1997. This decrease in aftermarket
revenue was due primarily to a decline in automotive retrofit and tooling
revenue which generally fluctuates based on customer demands and is influenced
by a variety of factors, including economic conditions, the customers' retrofit
schedules and the timing of automotive manufacturers' design changes, which may
impact the release of tooling orders.
A significant portion of the Company's net revenue is generated from customers
outside the United States. For the third quarter of fiscal 1998, Original
Equipment revenue from foreign customers was $8,351 (67.2% of total Original
Equipment revenue) as compared to $6,199 (50.8% of total Original Equipment
revenue) for the third quarter of fiscal 1997. The percentage of aftermarket
revenue from foreign customers increased to 75.1% of total aftermarket revenue
for the third quarter of fiscal 1998 compared to 68.7% for the third quarter of
fiscal 1997. The portion of the Company's net revenue generated from customers
outside the United States can fluctuate from time to time depending on location
of contract signings.
Gross profit increased by $1,342 to $7,737 for the third quarter of fiscal 1998
as compared to $6,395 for the third quarter of fiscal 1997 and gross margin
increased to 46.2% from 35.4% as a result of a more favorable product mix for
the third quarter of fiscal 1998. Based upon currently expected product mix and
related percentage of completion in the fourth quarter of fiscal 1998 (which
cannot be predicted with certainty) gross profit as a percentage of revenue
(gross margin) may be lower in the fourth quarter of fiscal 1998 than it was in
the third quarter of fiscal 1998; however, the Company does not expect a
significant change (up or down) in gross profit dollars quarter-to-quarter.
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Selling, general and administrative expenses decreased $828, or 23.4%, to $2,713
for the third quarter of fiscal 1998 from $3,541 for the third quarter of fiscal
1997. The decrease is primarily the result of decreases in directors' fees and
expenses.
Research and development expenses decreased $257, or 19.4%, to $1,067 for the
third quarter of fiscal 1998 from $1,324 for the third quarter of fiscal 1997.
For the third quarter of fiscal 1998, certain developmental engineering
resources were dedicated to the completion of certain Original Equipment
contracts, thereby causing a reduction in research and development expenses.
Amortization expense increased $520, or 91.5%, to $1,088 for the third quarter
of fiscal 1998 from $568 for the third quarter of fiscal 1997. The increase in
amortization expense resulted from the amortization of goodwill arising from the
Transaction.
Operating profit increased $1,907 to $2,869 for the third quarter of fiscal 1998
from $962 for the third quarter of fiscal 1997. The increase in operating profit
was primarily the result of an increase in gross profit.
Interest expense increased $1,364 to $2,414 for the third quarter of fiscal 1998
from $1,050 for the third quarter of fiscal 1997 as a result of the increased
debt and a higher interest rate beginning July 2, 1997. Other income, net, which
is comprised primarily of interest income, decreased $417 to $121 for the third
quarter of fiscal 1998 from $538 from the third quarter of fiscal 1997 due to
reduced cash balances subsequent to July 2, 1997.
The Company's effective tax rate for the third quarters of fiscal 1998 and 1997
was 81.6% and 63.6%, respectively. These amounts differ from the Company's
statutory tax rate due to the effects of certain amounts not deductible for
income tax purposes, consisting primarily of goodwill amortization. As a result
of the Transaction, amortization expense related to goodwill has increased
significantly, resulting in the increased effective tax rate in the current
period. However, due to the Company's current tax position, including available
net operating loss carryforwards, income taxes currently payable in cash will
not be significant in fiscal 1998.
Net income decreased $58, or 35.4%, to $106 for the third quarter of fiscal 1998
compared to $164 for the third quarter of fiscal 1997. This decrease was due to
increased interest expense and the increase in the effective tax rate.
EBITDA, which is defined as operating profit plus depreciation and amortization,
increased $2,475, or 130.5%, to $4,371 for the third quarter of fiscal 1998 from
$1,896 for the third quarter of fiscal 1997. The increase in EBITDA was the
result of an increase in gross profit and decreases in selling, general and
administrative expenses and research and development expenses.
PERIOD FROM JULY 2, 1997 TO MARCH 31, 1998 COMPARED WITH THE NINE MONTHS ENDED
MARCH 31, 1997
Net revenue for the period ended March 31, 1998 decreased $9,117, or 15.8%, to
$48,749 from $57,866 for the nine months ended March 31, 1997. Original
Equipment revenue decreased $2,926, or 7.9%, to $34,059 for the period ended
March 31, 1998 compared to $36,985 for the nine months ended March 31, 1997,
resulting primarily from a decrease in automotive Original Equipment revenue.
This decrease is due to the type and timing of units manufactured in the period
ended March 31, 1998 compared to the nine months ended March 31, 1997.
Aftermarket revenue decreased $6,191, or 29.6%, to $14,690 for the period ended
March 31, 1998 from $20,881 for the nine months ended March 31, 1997. The
decrease in aftermarket revenue was due primarily to a decline in automotive
retrofit and tooling revenue which generally fluctuates based on customer
demands and is influenced by a variety of
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factors, including economic conditions, the customers' retrofit schedules and
the timing of automotive manufacturers' design changes, which may impact the
release of tooling orders.
For the period ended March 31, 1998, Original Equipment revenue from foreign
customers was $23,989 (70.4% of total Original Equipment revenue) as compared to
$25,986 (70.3% of total Original Equipment revenue) for the nine months ended
March 31, 1997. The percentage of aftermarket revenue from foreign customers
increased to 69.6% of total aftermarket revenue for the period ended March 31,
1998 compared to 68.7% for the nine months ended March 31, 1997. The portion of
the Company's net revenue generated from customers outside the United States can
fluctuate from time to time depending on location of contract signings.
Gross profit increased $140 to $23,417 for the period ended March 31, 1998 as
compared to $23,277 for the nine months ended March 31, 1997 and gross margin
increased to 48.0% from 40.2% as a result of a more favorable product mix for
the period ended March 31, 1998.
Selling, general and administrative expenses decreased $1,308, or 13.8%, to
$8,153 for the period ended March 31, 1998 from $9,461 for the nine months ended
March 31, 1997. The decrease is primarily the result of decreases in directors'
fees and expenses, personnel recruitment fees and professional fees.
Research and development expenses decreased $233, or 7.0%, to $3,073 for the
period ended March 31, 1998 from $3,306 for the nine months ended March 31,
1997. For the period ended March 31, 1998, certain developmental engineering
resources were dedicated to the completion of certain Original Equipment
contracts, thereby causing a reduction in research and development expenses.
Amortization expense increased $1,529, or 88.0%, to $3,267 for the period ended
March 31, 1998 from $1,738 for the nine months ended March 31, 1997. The
increase in amortization expense resulted from the amortization of goodwill
arising from the Transaction.
Operating profit increased $152, or 1.7%, to $8,924 for the period ended March
31, 1998 from $8,772 for the nine months ended March 31, 1997.
Interest expense increased $4,067 to $7,217 for the period ended March 31, 1998
from $3,150 for the nine months ended March 31, 1997 as a result of the
increased debt and a higher interest rate beginning July 2, 1997. Other income,
net, which is comprised primarily of interest income, decreased $1,278 to $362
for the period ended March 31, 1998 from $1,640 for the nine months ended March
31, 1997 due to reduced cash balances subsequent to July 2, 1997.
The Company's effective tax rate for the period ended March 31, 1998 and the
nine months ended March 31, 1997 was 81.5% and 36.2%, respectively. The
effective tax rate for fiscal 1998 differs from the Company's statutory tax rate
due to the effects of certain amounts not deductible for income tax purposes,
consisting primarily of goodwill amortization. As a result of the Transaction,
amortization expense related to goodwill has increased significantly, resulting
in the increased effective tax rate in the current period. However, due to the
Company's current tax position, including available net operating loss
carryforwards, income taxes currently payable in cash will not be significant in
fiscal 1998.
Net income decreased $4,248, or 91.7%, to $383 for the period ended March 31,
1998 compared to $4,631 for the nine months ended March 31, 1997. This decrease
was due to increased interest expense and the increase in the effective tax
rate.
EBITDA, which is defined as operating profit plus depreciation and amortization,
increased $1,739, or 14.9%, to $13,430 for the period ended March 31, 1998 from
$11,691 for the nine months ended March 31, 1997. The
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increase in EBITDA was primarily the result of decreases in selling, general and
administrative expenses and research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity and capital resources were significantly impacted by the
Transaction. The Company's primary sources of liquidity are funds provided by
operations and amounts available under its Revolving Credit Facility. The Senior
Notes do not require any principal payments prior to maturity. The Revolving
Credit Facility will be used to fund working capital requirements as needed and
to secure standby letters of credit, which totaled $2,960 at March 31, 1998. At
March 31, 1998, the Company was in compliance with all material covenants in the
Revolving Credit Facility and the Senior Notes.
Net cash provided by operating activities can vary significantly from quarter to
quarter or year to year due to the number of new system signings, the amount and
timing of new system payments, and revenue recognition on these systems. In most
instances, progress payments on new system orders are invoiced or received in
advance of revenue recognition. When progress payments are invoiced or received
in advance of such revenue recognition, the Company increases current
liabilities represented by its billings in excess of costs and estimated
earnings on uncompleted contracts. When the revenue is earned, the Company
recognizes the revenue and reduces the billings in excess of costs and estimated
earnings on uncompleted contract balances. Due to the timing of receipt of cash
progress payments, the revenue recognized on previous system signings and the
release of $1,529 of cash previously used to collateralize standby letters of
credit, net cash provided by operating activities for the period ended March 31,
1998 was $8,635 compared to $1,026 for the nine months ended March 31, 1997.
The Company has a backlog (on a percentage of completion basis) at March 31,
1998 of approximately $37,513 as compared to $30,307 at June 30, 1997. The
Company expects to complete a substantial majority of this backlog within the
next twelve months.
Capital expenditures, including demonstration furnaces classified as fixed
assets, were $234 for the period ended March 31, 1998 compared to $491 for the
nine months ended March 31, 1997. While capital expenditures for all of fiscal
1998 are expected to approximate $600, future capital expenditures, excluding
demonstration furnaces, used to replace or improve operating equipment and
facilities are estimated to approximate $1,500 per year. In addition, the
Company intends to make periodic replacements and improvements on demonstration
furnaces, which are used for customer demonstrations and research and
development purposes. Demonstration furnaces that outlive their usefulness for
customer demonstrations or research and development purposes, or both, may be
refurbished and sold or put to other applicable uses.
As of June 30, 1997, the Company had net operating loss ("NOL") carryforwards
for regular and alternative minimum tax purposes of approximately $21,020 and
$17,413, respectively, which expire in the years 2009 and 2011. These NOL's are
subject to annual usage limitations.
Although the Company's ability to generate cash will be affected by the
increased interest costs resulting from the Transaction, management believes
that internally generated funds, together with amounts available under the
Revolving Credit Facility, will be sufficient to satisfy the Company's operating
cash requirements and capital expenditure requirements, make required payments
under the Revolving Credit Facility and make scheduled interest payments on the
Senior Notes. However, the ability of the Company to satisfy its obligations
will ultimately be dependent upon the Company's future operating and financial
performance and upon its ability to renew or refinance borrowings or to raise
additional equity capital as necessary. The
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Company's business is subject to rapid fluctuations due to changes in the world
markets for the end products produced by its equipment (largely in the cyclical
markets of automobiles and construction), currency fluctuations, the local
economies of those countries where users and potential users of the Company's
equipment are located, geopolitical events and other macroeconomic forces
largely beyond the ability of the Company to predict or control. Except as
discussed below, management is not currently aware of any trends, demands,
commitments or uncertainties which will or which are reasonably likely to result
in a material change in the Company's liquidity.
During fiscal 1996, 1997 and the first nine months of fiscal 1998, approximately
36.7%, 59.2% and 46.2% of the Company's net revenues were derived from sales of
products located in the Asia Pacific region (Australia, China, Indonesia, Japan,
Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea,
Taiwan, and Thailand). Given the significant economic uncertainties facing this
region, and the impact of those uncertainties on customers' capital expenditure
plans and local demand for the products manufactured by the Company's customers
in that region, the Company cannot predict with any degree of certainty what
final impact the economic issues facing the Asia Pacific region will ultimately
have on the Company's future contract signings.
Recently, expected signings of several equipment purchase contracts from
customers in the Asia Pacific region have been deferred. Management believes the
current economic uncertainties in the Asia Pacific region indicate that the
timing of orders for the Company's products will likely be adversely affected.
The impact of this situation on fiscal 1998 financial performance has been
somewhat mitigated by offsetting equipment sales to customers in other regions
of the world. Given the inherent difficulty in predicting with certainty the
timing of contract signings and geographic areas into which equipment will be
delivered in fiscal 1999, the ultimate severity of the impact of this situation
on the Company's financial performance in fiscal 1999 and beyond is impossible
to predict. The Company will continue to monitor the situation in the Asia
Pacific region. Notwithstanding the current economic conditions in the Asian
Pacific region, the Company believes that given world demographics and long term
economic trends, the Asia Pacific region will continue to represent a
significant market for the Company's products and it intends to continue its
presence in this area.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 14, 1998 the Company filed suit in U.S. District Court,
Northern District of Ohio ("the Court"), against TGL Tempering Systems
Inc., Tamglass, Inc., and Tamglass Ltd. Oy ("the Tamglass Companies")
alleging misappropriation by the Tamglass Companies of the Company's
trade secrets as a result of the Tamglass Companies unauthorized
acquisition of a Glasstech Architectural Glass Bending and Tempering
System. The Court entered an Order which restrains the Tamglass
Companies from destroying, moving or disassembling the Glasstech
Architectural Bender, destroying or moving any other evidence relating
to the Tamglass Companies' acquisition or use of the Company's
equipment, and preventing defendants from using or selling any trade
secrets pending completion of expedited discovery. Defendants have not
yet filed an answer to the Company's Complaint and the litigation is
just at its inception. A hearing on the Company's request for a
Preliminary Injunction is scheduled for August 12, 1998.
The Company is subject to legal proceedings and claims that arise in
the ordinary course of business. In the opinion of management, the
amount of any ultimate liability with respect to these actions will not
materially affect the financial statements of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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2.1* Agreement and Plan of Merger
2.2* Amendment to Agreement and Plan of Merger
3.1* Restated Certificate of Incorporation of the Registrant
3.2* By-laws of the Registrant
4.1* Indenture (including form of Note)
4.2* First Supplemental Indenture
10.1* Financing and Security Agreement between NationsBank, N.A. and the Registrant
10.2* Plant and Office Lease
10.3* Warehouse Lease
10.4* Advisory Agreement between the Registrant and Key Equity Capital Corporation
10.5* Form of Exchange Agent Agreement between United States Trust Company of New York and the Registrant
10.6* Employment Agreement among Glasstech Holding Co., the Registrant and John S. Baxter
10.7* Employment Agreement among Glasstech Holding Co., the Registrant and Mark D. Christman
10.8* Employment Agreement among Glasstech Holding Co., the Registrant and Larry E. Elliott
10.9* Employment Agreement among Glasstech Holding Co., the Registrant and Ronald A. McMaster
10.10* Employment Agreement among Glasstech Holding Co., the Registrant and James P. Schnabel, Jr.
10.11* Employment Agreement among Glasstech Holding Co., the Registrant and Diane S. Tymiak
10.12* Employment Agreement among Glasstech Holding Co., the Registrant and Kenneth H. Wetmore
10.13* Securities Purchase Agreement between the Registrant, as successor to Glasstech Sub Co., and CIBC Wood Gundy
Securities Corp.
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10.14* Registration Rights Agreement between the Registrant, as successor to Glasstech Sub Co., and CIBC Wood Gundy
Securities Corp.
25.1* Statement of Eligibility and Qualification on Form T-1 Under the Trust Indenture Act of 1939 of United States
Trust Company of New York, as Trustee Under the Indenture
27.1** Financial Data Schedule
<FN>
*Incorporated by reference from the Company's Registration Statement on Form S-4
(Registration No. 333-34391) (the "Form S-4") filed on August 26, 1997. Each of
the above exhibits has the same exhibit number in the Form S-4.
**Filed herewith.
(b) No reports on Form 8-K were filed during the third quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLASSTECH, INC.
Date: May 6, 1998 By: /s/ Diane S. Tymiak
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Diane S. Tymiak
Vice President and Chief Financial Officer
(Principal Accounting Officer)
By: /s/ Mark D. Christman
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Mark D. Christman
President
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