1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
---------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For
the transition period From _________________to ___________________.
Commission file number: 0-25634
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AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 87-0365268
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
755 BOARDMAN-CANFIELD ROAD, BOARDMAN, OHIO 44512
(Address of principal executive offices)
(330) 965-9910
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $.001 par value, 14,322,048 shares outstanding at June 30, 1999
2
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
FORM 10-Q
INDEX
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 1998 and June 30,
1999
Consolidated Statements of Operations - Three and six months
ended June 30, 1998 and 1999
Consolidated Statements of Cash Flows - Six months ended
June 30, 1998 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
3
PART I --FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
American Architectural Products Corporation
Consolidated Balance Sheets
(Unaudited)
December 31 June 30
1998 1999
------------ ------------
Assets
------
Current Assets
Cash $ 88,000 $ 312,000
Accounts receivable 28,501,000 35,609,000
Inventories 32,587,000 34,367,000
Prepaid expenses and other current assets 1,078,000 4,396,000
------------ ------------
Total Current Assets 62,254,000 74,684,000
Other Assets
Property and equipment, net 80,553,000 78,577,000
Cost in excess of net assets acquired, net 31,362,000 31,136,000
Deferred financing costs, net 6,485,000 6,398,000
Deposits and other assets 6,405,000 8,242,000
------------ ------------
Total Noncurrent Assets 124,805,000 124,353,000
Total Assets $187,059,000 $199,037,000
============ ============
Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities
Revolving line-of-credit $ 12,447,000 $ 26,126,000
Accounts payable - trade 17,394,000 21,281,000
Accrued expenses 11,860,000 12,716,000
Current portion of accrued warranty obligations 2,804,000 2,831,000
Current portion of capital lease obligations 822,000 654,000
Current maturities of long-term debt -- 7,500,000
Other current liabilities 1,972,000 2,194,000
------------ ------------
Total Current Liabilities 47,299,000 73,302,000
Long-Term Liabilities
Long-term debt, less current portion 132,500,000 125,000,000
Long-term capital lease obligations, less current portion 833,000 2,483,000
Accrued warranty obligations, less current portion 3,337,000 3,165,000
Other liabilities 4,519,000 2,863,000
------------ ------------
Total Long-Term Liabilities 141,189,000 133,511,000
------------ ------------
Total Liabilities 188,488,000 206,813,000
Stockholders' Deficit:
Common stock, $.001 par, authorized 100,000,000 shares;
outstanding 13,533,004 shares and 14,322,048 shares
at December 31, 1998 and June 30, 1999, respectively 14,000 14,000
Additional paid in capital 8,144,000 9,143,000
Accumulated deficit (9,587,000) (16,933,000)
------------ ------------
Total Stockholders' Deficit (1,429,000) (7,776,000)
Total Liabilities and Stockholders' Deficit $187,059,000 $199,037,000
============ ============
See accompanying notes to consolidated financial statements
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American Architectural Products Corporation
Consolidated Statements of Operations
(Unaudited)
For the Three For the Six
Months Ended June 30 Months Ended June 30
1998 1999 1998 1999
---------------------------------- -------------------------------------
Net sales $61,638,000 $82,169,000 $107,246,000 $154,233,000
Cost of sales 47,050,000 65,997,000 83,544,000 124,995,000
---------------------------------- -------------------------------------
Gross profit 14,588,000 16,172,000 23,702,000 29,238,000
Selling expense 5,532,000 7,068,000 10,016,000 13,869,000
Special - non-cash stock compensation 1,833,000 -- 1,833,000 --
General and administrative expenses 5,289,000 6,452,000 10,207,000 12,475,000
---------------------------------- -------------------------------------
Income from operations 1,934,000 2,652,000 1,646,000 2,894,000
Interest expense, net 3,520,000 5,216,000 6,843,000 9,585,000
Special - financing costs -- 652,000 -- 652,000
Other (income) expense 57,000 (16,000) 149,000 3,000
---------------------------------- -------------------------------------
Loss before income taxes (1,643,000) (3,200,000) (5,346,000) (7,346,000)
Income tax provision 1,094,000 -- -- --
---------------------------------- -------------------------------------
Net loss $(2,737,000) $(3,200,000) $ (5,346,000) $ (7,346,000)
================================== =====================================
Net loss per share, basic and diluted $ (0.20) $ (0.23) $ (0.39) $ (0.53)
================================== =====================================
Weighted average shares of common
stock outstanding, basic and diluted 13,785,767 14,029,866 13,772,199 13,864,197
See accompanying notes to consolidated financial statements
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American Architectural Products Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the Six
Months Ended June 30
1998 1999
-----------------------------------
Cash flows from operating activities:
Net loss $ (5,346,000) $(7,346,000)
Adjustments to reconcile net loss to cash from
operating activities
Depreciation 2,480,000 4,379,000
Amortization 1,062,000 1,911,000
Special - non-cash stock compensation 1,833,000 --
Special - loss on financing costs -- 652,000
Loss on sale of fixed assets -- 29,000
Changes in operating assets and liabilities:
Accounts receivable, net (9,305,000) (7,108,000)
Inventories (1,223,000) (1,780,000)
Prepaid expenses and other current assets (23,000) (2,634,000)
Accounts payable 4,778,000 3,887,000
Accrued expenses 495,000 711,000
Other 253,000 (2,617,000)
-----------------------------------
Cash flows from operating activities (4,996,000) (9,916,000)
-----------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (47,622,000) --
Acquisition related costs (719,000)
Proceeds from sale of property and equipment -- 3,176,000
Sale of business 1,186,000 --
Purchase of property and equipment (3,241,000) (3,825,000)
-----------------------------------
Cash flows from investing activities (49,677,000) (1,368,000)
-----------------------------------
Cash flows from financing activities:
Net borrowings on line-of-credit 19,739,000 13,679,000
Payments on long-term debt (175,000) --
Payments for debt issue costs -- (1,685,000)
Capital lease payments (343,000) (486,000)
Other 34,000 --
-----------------------------------
Cash flows from financing activities 19,255,000 11,508,000
-----------------------------------
Net (decrease) increase in cash and cash equivalents (35,418,000) 224,000
Cash and cash equivalents, beginning balance 40,132,000 88,000
-----------------------------------
Cash and cash equivalents, ending balance $ 4,714,000 $ 312,000
===================================
See accompanying notes to consolidated financial statements
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AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
American Architectural Products Corporation (the "Company") is principally
engaged in the business of manufacturing residential, non-residential and
architectural windows and doors through its wholly owned subsidiaries Eagle &
Taylor Company, Forte, Inc., Western Insulated Glass, Co., Thermetic Glass, Inc.
(Thermetic), Binnings Building Products, Inc., Danvid Window Company (Danvid),
American Glassmith, Inc., Modern Window Corporation, VinylSource, Inc.
(VinylSource), Denver Window Corporation and American Weather-Seal Company
(Weather-Seal).
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of
financial position and results of operations have been made. Operating results
for interim periods are not necessarily indicative of results that may be
expected for the year ended December 31, 1999. The information included in this
Form 10-Q should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto of the Company for the year ended December 31, 1998
included in the annual report on Form 10-K.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
2. Inventories
Inventories consisted of the following:
December 31, 1998 June 30, 1999
----------------- -------------
(in thousands)
Raw materials $17,368 $16,988
Work-in-process 3,495 4,547
Finished goods 11,724 12,832
------- -------
$32,587 $34,367
======= =======
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3. Net Loss Per Share
Basic and diluted loss per common share amounts were computed by dividing net
loss by the weighted average number of common shares outstanding. A summary of
the basic and diluted loss per share amounts for the three and six months ended
June 30 is as follows:
Three months ended June 30, Six months ended June 30,
---------------------------- -------------------------------
1998 1999 1998 1999
---------------------------- -------------------------------
Net loss $(2,737,000) $(3,200,000) $(5,346,000) $(7,346,000)
Shares, basic and diluted 13,785,767 14,029,866 13,772,199 13,864,197
Basic and diluted loss per share $ (0.20) $ (0.23) $ (0.39) $ (0.53)
The weighted average number of common shares outstanding for the three and six
months ended June 30, 1998 included an estimate of 300,000 common shares issued
in January 1999 in connection with the Thermetic acquisition.
For all periods presented, common stock equivalents were excluded from the
computation of diluted net loss per share since their inclusion in the
computation would have an anti-dilutive effect.
4. Comprehensive Income
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. For the three
and six months ended June 30, 1999, comprehensive income for the Company did not
differ from net income.
5. Revolving Line-of-Credit
In May 1999, the Company, with the consent of its bondholders, amended its
revolving credit facility to increase the loan commitment from $25 million to
$35 million through August 13, 1999 to assist the Company with seasonal working
capital needs. Fees of approximately $1.0 million were incurred related to the
consent and amendment which were capitalized and are being amortized over the
term of the amendment. At June 30, 1999, the Company had $8.9 million available
under the facility. The weighted average interest rate on borrowings under the
credit facility was 7.61% at June 30, 1999.
6. Capitalization
In June 1999, the Company issued 379,837 shares of common stock to the former
owners of Danvid in connection with the purchase agreement and a stock price
guarantee contained therein.
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7. Special Charges
Included in the three and six month periods ending June 30, 1998 was a special
charge of $1.8 million for non-cash stock compensation expense. This expense
related principally to the extension of certain options and warrants.
Included in the quarter ending June 30, 1999 was a special charge of $0.7
million for costs incurred in connection with an abandoned public debt
financing.
8. Income Taxes
The Company established a full valuation allowance on its income tax benefit for
the three and six months ended June 30, 1999. The provision recorded during the
quarter ended June 30, 1998 reflects establishment of a full valuation allowance
on previously recorded net deferred tax assets due to a change in estimate in
recoverability.
9. Segment Information
Three months ended June 30
---------------------------------------------------------------------------------
1998 1999
-------------------------------------- --------------------------------------
Residential Commercial Extrusion Residential Commercial Extrusion
-------------------------------------- --------------------------------------
(in thousands)
Revenues from external customers $ 54,969 $ 672 $ 5,997 $ 68,587 $ 1,172 $12,410
Intersegment revenues 722 251 -- 1,162 1 595
Operating profit (loss) 5,443 (360) 230 4,740 (376) 476
Total assets 144,357 11,632 29,725 139,419 12,439 40,231
Six months ended June 30
---------------------------------------------------------------------------------
1998 1999
-------------------------------------- --------------------------------------
Residential Commercial Extrusion Residential Commercial Extrusion
-------------------------------------- --------------------------------------
(in thousands)
Revenues from external customers $ 96,617 $ 1,119 $ 9,510 $127,865 $ 1,938 $24,430
Intersegment revenues 1,073 251 -- 2,157 2 983
Operating profit (loss) 7,078 (812) 276 7,392 (911) 756
Total assets 144,357 11,632 29,725 139,419 12,439 40,231
9
A reconciliation of combined operating profit for the residential, commercial
and extrusion segments to consolidated loss before income taxes for the three
and six months ended June 30 is as follows:
Three months ended June 30 Six months ended June 30
------------------------------------- -------------------------------
1998 1999 1998 1999
------------------------------------- -------------------------------
(in thousands)
Total profit from operating segments $ 5,313 $ 4,840 $ 6,542 $ 7,237
Less:
Corporate and eliminations 3,379 2,188 4,896 4,343
Other expenses and special charges 57 636 149 655
Interest expense, net 3,520 5,216 6,843 9,585
------------------------------------ ------------------------------
Loss before income taxes $(1,643) $(3,200) $(5,346) $(7,346)
==================================== ==============================
10. Pending Acquisitions
In 1998, the Company entered into agreements to acquire TSG Industries, Inc.
("TSG"), NuSash of Indianapolis, Inc. and Jarar Window Systems, Inc. (together,
"NuSash"), and RC Aluminum Industries, Inc. ("RC Aluminum"), (collectively, the
"Pending Acquisitions"). TSG is a fabricator and installer of engineered glazing
systems, including glass windows, walls and doors and aluminum curtain walls for
large non-residential construction projects. NuSash distributes Weather-Seal and
other vinyl replacement windows for residential use. RC Aluminum manufactures a
wide range of non-residential fenestration products including windows, sliding
glass doors, railings and curtain walls and specializes in prestigious high-rise
development projects.
The total purchase price of the Pending Acquisitions is estimated to be $48.7
million. The cash portion of this purchase price approximates $44.3 million and
is expected to be funded through a financing transaction. The remainder of the
purchase price is expected to be financed through the issuance of stock. The
Pending Acquisitions are subject to various closing conditions, including the
obtaining of acceptable financing and the satisfactory completion of the
Company's due diligence review. There can be no assurance that such conditions
will be satisfied or that any or all of the Pending Acquisitions will be
consummated. If the acquisitions are not completed, certain costs incurred and
capitalized in connection with the acquisitions will be charged to expense.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Results of Operations
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. Net sales for the three months ended June 30, 1999 were $82.2
million, a $20.5 million increase over the three months ended June 30, 1998. Net
sales in the residential segment increased approximately $13.3 million over the
comparable period of the prior year due in part to the inclusion of $8.5 million
in sales for Weather-Seal, acquired June 12, 1998, which was not included in the
prior year. Additionally, sales of residential aluminum, wood and aluminum-clad
wood windows and doors from existing businesses increased 12% over the prior
year period. The growth in this business is the result of higher volumes
generated by stronger customer relationships, new customer additions and an
improved product mix offering. Sales in the commercial segment increased $0.3
million over the comparable period of 1998. Extrusion sales were $13.0 million
for the three months ended June 30, 1999, an increase of approximately $7.0
million over the comparable period of the prior year. Approximately $6.1 million
of this increase can be attributed to the inclusion of sales from Weather-Seal,
acquired June 12, 1998, which was not included in the comparable prior year
period.
Gross Profit. Gross profit increased $1.6 million to $16.2 million for the three
months ended June 30, 1999 from $14.6 million for the three months ended June
30, 1998. The residential segment accounted for $1.1 million of the increase.
Acquisitions represented $1.0 million of the residential increase with the
remaining increase due to higher sales volumes from existing businesses. The
gross profit for the extrusion segment increased $0.4 million, primarily related
to acquisitions. Gross profit for the three months ended June 30, 1999 for the
commercial segment increased $0.1 million over the same period in 1998. The
gross margin for the three months ended June 30, 1999 was 19.7% compared to
23.7% for the three months ended June 30, 1998. The decrease in gross margin
reflects the lower margins associated with the companies acquired in 1998 as
well as an unfavorable shift in product mix and related operating costs for
those products in select residential businesses. Although the Company has
achieved improved margins for the 1998 acquisitions in post-acquisition
operations, their margins have not yet reached the margins of the Company's core
businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1999 were $13.5
million compared to $12.7 million for the comparable period in 1998. Included in
the prior period selling, general and administrative expense is a special charge
of $1.8 million related to non-cash stock compensation which did not recur in
the current period. Excluding the impact of the special charge, selling, general
and administrative expenses increased by $2.6 million during the three months
ended June 30, 1999 as compared to the corresponding period in the prior year.
Increased selling, general and administrative costs in the residential segment
account for approximately $1.8 million of the increase, with $0.8 million
related to acquired companies not included for the comparable period in 1998
while the remainder is related to the increased sales volume at existing
businesses. The extrusion business experienced increased selling, general and
administrative costs of $0.1 million over the prior period, with $0.4 million
related to acquisitions not included for a comparable period in 1998, offset in
part by lower expenses
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in existing extrusion businesses. Selling, general and administrative expenses
for the commercial segment increased $0.1 million. Additionally, approximately
$0.6 million of the increase in selling, general and administrative expenses
relates to increased corporate costs.
Income from Operations. Income from operations for the three months ended June
30, 1999 was $2.7 million, compared to $1.9 million for the three months ended
June 30, 1998. Excluding the special charge of $1.8 million related to non-cash
stock compensation in 1998, income from operations decreased $1.1 million which
reflects a decline in the residential business' profitability from labor costs
and product mix and higher costs at the corporate level, offset in part by
increased income from operations in the extrusion business.
Interest Expense. Net interest expense increased from $3.5 million for the three
months ended June 30, 1998 to $5.2 million for the three months ended June 30,
1999. Included in the three months ended June 30, 1999 is interest related to
increased amounts outstanding under the Company's credit facility and the note
payable to the former owners of Weather-Seal, which were not included for the
comparable period in 1998. Additionally, amortization on deferred financing
costs increased during the second quarter of 1999 to $0.9 million from $0.2
million for the same period in 1998. The increase relates principally to
amortization on fees and expenses incurred in connection with the increase to
the line of credit facility.
Income Taxes. The Company established a full valuation allowance on its income
tax benefit recorded for the three months ended June 30, 1999 and 1998. During
the three months ended June 30, 1998, an income tax provision of $1.1 million
was recorded on loss before taxes of $1.6 million to establish a full valuation
allowance on existing net deferred tax assets reflecting a change in estimate of
recoverability.
Net Loss. The Company's net loss increased $0.5 million to $3.2 million in 1999
from $2.7 million in 1998. The increase in net loss is attributable to the
factors cited above.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. Net sales for the six months ended June 30, 1999 were $154.2 million,
a $47.0 million increase over the six months ended June 30, 1998. Net sales in
the residential segment increased approximately $30.5 million over the
comparable period of the prior year due in part to the inclusion of $15.8
million in sales for Weather-Seal, which was not included in the prior year.
Additionally, sales of residential aluminum, wood and aluminum-clad wood windows
and doors from existing businesses increased 20% over the prior year period. The
growth in this business is the result of higher volumes generated by stronger
customer relationships, new customer additions and an improved product mix
offering. Sales in the commercial segment increased $0.6 million over the
comparable period of 1998. Extrusion sales were $25.4 million for the six months
ended June 30, 1999, an increase of approximately $15.9 million over the
comparable period of the prior year. Approximately $12.1 million of this
increase can be attributed to the inclusion of sales from VinylSource, acquired
January 23, 1998, and Weather-Seal, which were not included in the comparable
prior year period, with the remaining increase due to increased sales at the
existing extrusion business.
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Gross Profit. Gross profit increased $5.5 million to $29.2 million for the six
months ended June 30, 1999 from $23.7 million for the six months ended June 30,
1998. The residential segment accounted for $4.2 million of the increase.
Acquisitions represented $1.6 million of the residential segment's increase with
the remaining increase due to higher sales volumes from existing businesses. The
extrusion segment increased $1.1 million, primarily related to acquisitions.
Gross profit for the six months ended June 30, 1999 for the commercial segment
increased $0.2 million from the comparable period in 1998. The gross margin for
the six months ended June 30, 1999 was 19.0% compared to 22.1% for the six
months ended June 30, 1998. The decrease in gross margin reflects the lower
margins associated with the companies acquired in 1998 as well as an unfavorable
shift in product mix and related operating costs for those products in select
residential businesses. Although the Company has achieved improved margins for
the 1998 acquisitions in post-acquisition operations, their margins have not yet
reached the margins of the Company's core businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $26.3
million compared to $22.1 million for the comparable period in 1998. Included in
the prior year period is a special charge of $1.8 million related to non-cash
stock compensation which did not recur in the current period. Excluding the
impact of the special charge, selling, general and administrative expenses
increased by $6.1 million during the six months ended June 30, 1999 as compared
to the corresponding period in the prior year. Increased selling, general and
administrative costs in the residential segment account for approximately $3.9
million of the increase, of which $1.8 million was related to acquired companies
not included for the comparable period in 1998 while the remainder was related
to the increased sales volume at existing businesses. The extrusion business
experienced increased selling, general and administrative costs of $0.7 million
over the prior period, with $0.6 million related to acquisitions not included
for a comparable period in 1998. Selling, general and administrative expenses
for the commercial segment for the six months ended June 30, 1999 increased $0.2
million over the same period in 1998. Additionally, approximately $1.2 million
of the increase in selling, general and administrative expenses relates to
increased corporate costs.
Income from Operations. Income from operations for the six months ended June 30,
1999 was $2.9 million, compared with $1.6 million for the six months ended June
30, 1998. Excluding the special charge of $1.8 million related to non-cash stock
compensation in 1998, income from operations decreased $0.6 million in 1999. The
decrease resulted primarily from increased costs at the corporate level, offset
in part by increased income from operations in the residential and extrusion
businesses.
Interest Expense. Net interest expense increased from $6.8 million for the six
months ended June 30, 1998 to $9.6 million for the six months ended June 30,
1999. Included in the six months ended June 30, 1999 is interest related to
increased amounts outstanding under the Company's credit facility and the note
payable to the former owners of Weather-Seal and increased amortization on
deferred financing costs which were not included for the comparable period in
1998. Amortization of deferred financing costs increased $0.8 million from $0.3
million for the six months ended June 30, 1998 to $1.1 million for the same
period in 1999. The increase relates to amortization on fees and expenses
incurred in connection with the increase to the line of credit facility.
Income Taxes. The Company established a full valuation allowance on its income
tax benefit recorded for the six months ended June 30, 1999 and 1998.
13
Net Loss. The Company's net loss increased $2.0 million to $7.3 million in 1999
from $5.3 million in 1998. The increase in net loss is attributable to the
factors cited above.
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended June 30, 1999 was
$9.9 million compared to $5.0 million for the six months ended June 30, 1998.
The increase over the prior period is primarily the result of increases in
accounts receivable and inventories to support the higher sales volume during
the first half of 1999.
Net cash used in investing activities amounted to $1.4 million for the six
months ended June 30, 1999. During the quarter ended June 30, 1999, the Company
realized $3.1 million of proceeds on the sales of certain real estate, which
included $2.4 million from the sale and leaseback of its Ottawa manufacturing
facility. In addition, cash used in connection with Pending Acquisitions and for
fixed asset additions totaled $0.7 million and $3.8 million, respectively. Net
cash used in investing activities for the six months ended June 30, 1998 was
$49.7 million of which approximately $47.6 million related to the acquisition of
a business and $3.2 million for capital expenditures, offset by $1.2 million in
proceeds from the sale of a business.
Cash flows from financing activities for the six months ended June 30, 1999 were
$11.5 million and consisted primarily of $13.7 million in net borrowings on the
Company's line-of-credit for capital expenditures and working capital needs.
This was partially offset by payments on capital leases and deferred financing
costs of $0.5 million and $1.7 million, respectively. Cash provided by financing
activities for the six months ended June 30, 1998 was $19.3 million and was
comprised of $19.7 million in borrowings on the line of credit offset by
payments on long-term debt and capital leases of approximately $0.5 million.
Credit Availability
During the second quarter, the Company's revolving credit facility was amended
to increase the revolving loan commitment from $25 million to $35 million for a
period of 90 days to assist with seasonal working capital needs. Additionally,
terms regarding certain restrictive covenants were amended to adjust minimum
availability, permitted investments and sale/leaseback transactions. Costs
associated with this increase included consent fees paid to bondholders and
amendment fees. These financing costs are being amortized over the life of the
amendment.
The Company believes that cash flow from operations, availability under the
revolving credit facility, proceeds from the sales of certain non-strategic
assets and other financing arrangements will be sufficient to meet its
anticipated requirements for working capital, capital expenditures and debt
service requirements.
The Company intends to improve the overall capital structure through a
combination of improved operating performance and access to capital markets to
allow the Company to consummate acquisitions. Future acquisitions are expected
to continue to play a strategic role in the Company's future to increase our
competitiveness, enhance revenue and earnings growth and increase the total
product capability.
14
The Company is currently reviewing its operating cost structure with the goal of
continued cost reduction and overall profitability enhancement. Plans are being
formulated which may include the consolidation of certain facilities, personnel
reductions and the sale of certain non-strategic businesses and assets. While no
formal decisions relating to the plans have been finalized, the Company may
incur certain charges against future earnings as a result of any such plans. The
costs of any such actions will be accrued when the decisions are formalized and
can be reasonably estimated.
Subject to restrictions in the Company's debt agreements, the Company intends to
use the net proceeds of any potential dispositions of non-core assets to fund
current operations, reduce the Company's overall indebtedness and enhance
liquidity.
Seasonality
The Company's business is seasonal since a large portion of its revenues are
driven by residential construction. Inclement weather during the winter months,
particularly in the northeast and midwest regions in 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 demand for fenestration products. Traditionally, the Company's lower sales
levels occur in the first and fourth quarters, which is generally consistent
with the seasonality of the building products industry. Because a high
percentage of manufacturing overhead and operating expenses are relatively fixed
throughout the year, operating income has historically been lower in quarters
with lower sales.
Year 2000
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without considering the impact of the
upcoming century change. Moreover, these programs often process financial and
other data that, based on the programs' inability to distinguish between the
Year 2000 and other century-end dates, could misreport or misinterpret and
report significant errors. If not corrected, many computer applications could
fail when processing data related to the Year 2000.
The Company's analysis of the Year 2000 implications includes (i) the Company's
information technology (IT) systems such as software, hardware, operating
systems, voice and data communication, (ii) the Company's non-information
technology (non-IT) systems or embedded technology such as microprocessors
contained in various equipment, safety systems, facilities and utilities, and
(iii) the readiness of key third party suppliers.
The Company is continually assessing the impact of the Year 2000 issue and has
or intends to modify portions of its hardware and software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company has reviewed, and will continue to review, each
operating unit for the appropriate information system enhancement, with respect
to both the Year 2000 issue as well as strategic system upgrades. For acquired
businesses, this assessment begins during the acquisition process as part of the
Company's due diligence analysis.
15
The Company's Year 2000 program is being implemented in four phases:
(1) Inventory - Identification and validation of all systems, both IT and
non-IT, that contain microprocessors and could be affected by the Year
2000. This process was completed in the first quarter of 1999, however,
the Company continually assesses the impact of the Year 2000 issue.
(2) Evaluation - This phase consists of determining what systems are "mission
critical" and have the potential for business disruption if lost, and what
systems are Year 2000 compliant. This phase also consists of key customer
and supplier contact. Survey letters and Year 2000 strategy requests are
being distributed to "mission critical" suppliers with over 60% of the
Company's purchasing base targeted for contact. Once all of the survey
responses are returned, assessments will be made as to which suppliers are
potentially at risk. This information will be used during the development
of a contingency plan for each business unit and is expected to be
completed during the third quarter of 1999.
(3) Remediation, Implementation and Testing - The Company is making
modifications to those systems which have a Year 2000 issue. The
remediation for these select systems is not significant to the overall
operations of the Company. Some of these systems have been remediated and
will be utilized on a go forward basis. The cost of this modification is
not significant to the operations of the Company and is expected to be
approximately $110,000, with $100,000 incurred through June 30, 1999. In
addition to the Year 2000 compliance issue, and to allow the Company to
achieve its overall operating strategy, management intends to enhance
information technology by implementing an enterprise resource planning
(ERP) system for those operating units that require significant upgrades.
Each operating unit that is targeted for this strategic upgrade was
prioritized for implementation. This prioritized list of operating units
was then segregated into multiple installation phases, with each
implementation phase having a specific implementation timeline. The
Company believes that the first phase of implementation, including Year
2000 remediation and testing, will be finished by November 1999. To date,
the Company has incurred $1.6 million of costs related to the ERP system
and estimates costs to complete to be $0.9 million. In addition to
addressing the Year 2000 issue, this management information system is
expected to provide additional benefits well beyond Year 2000 compliance
including the enhancement of the Company's overall information technology
capabilities. As a result of the new ERP installation, certain modules of
the present systems are being modified as a component of the installation.
(4) Contingency planning - The Company has received the majority of the
surveys and Year 2000 strategy requests that were sent to its business
partners. These are being reviewed and assessed to develop applicable
contingency plans. These plans may include, but are not limited to,
increases in inventory of finished goods, raw material or both, backup
regional suppliers and secondary trucking companies. The Company will
undertake reasonable efforts to determine the readiness of its business
partners; however, no assurance can be given to the validity or
reliability of the information obtained.
16
The Company believes the worst case scenario for suppliers would be that of some
localized disruption of services which could affect certain operating units for
a short period. While the Company's contingency plan is still being formulated,
management believes that the response will be flexible, real-time and responsive
to specific problems as they arise.
The total incremental spending by the Company relating to the Year 2000 issue is
not expected to be material to operations, liquidity or capital resources. To
date, the Company has incurred approximately $120,000 of costs and expects to
incur an additional $40,000 during the remainder of 1999 for the Year 2000
issues. The Company did not incur any expenditures related to the Year 2000
issue before 1998. This amount is exclusive of the Company's expenditures
related to the aforementioned ERP system. These costs are also exclusive of any
costs associated with any contingency plans. Implementation of the Company's
Year 2000 program is an ongoing process. Consequently, the costs estimated above
and completion dates for the various components of the plan are subject to
change.
Developments may occur that could affect the Company's estimates of the amount
of time and costs necessary to modify and test its systems for Year 2000
compliance. These developments include, but are not limited to, (i) the
availability and cost of personnel trained in this area, (ii) the ability to
locate and correct all relevant computer codes and equipment and (iii) the Year
2000 compliance success of key suppliers.
While the Company believes its planning efforts are adequate to address its Year
2000 concerns, there is still the uncertainty about the broader scope of the
Year 2000 issue as it may affect the Company and third parties that are critical
to its operations. For example, the lack of readiness by electrical and water
utilities, financial institutions, government agencies or other providers of
general infrastructure could in some geographic areas pose impediments to our
ability to carry on normal operations in the area or areas so affected.
The Company believes that its on-going review is adequate to address its Year
2000 concerns and that the cost of its Year 2000 initiatives has not had and is
not expected to have, a material adverse effect on the Company's operating
results or financial condition. However, there can be no assurance that the
Company's systems, nor the systems of other companies with whom the Company
conducts business, will be Year 2000 compliant prior to December 31, 1999 or
that failure of any such system will not have a material adverse effect on the
Company's business, operating results and financial condition.
Forward-Looking Information
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipate," "intend," and "believe"
and similar words or expressions are intended to identify forward-looking
statements. These statements speak only as of the date of this report. The
statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors, including changes in economic conditions in the markets served
by the Company, increasing competition,
17
fluctuations in raw materials and energy prices, and other unanticipated events
and conditions. It is not possible to forsee or identify all such factors. The
Company makes no commitment to update any forward-looking statement or to
disclose any facts, events or circumstances after the date hereof that may
affect the accuracy of any forward-looking statement.
18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are affected by changes in short term interest rates
related to its line of credit facility and a promissory note to the former
parent of an acquired company. If the market rates for short term borrowings
increased by 1%, the impact would be an interest expense increase of $170,000,
with a corresponding increase in loss before taxes of the same amount, for the
six months ended June 30, 1999. The amount was determined by considering the
impact of hypothetical interest rates on the Company's borrowing cost and debt
balances at June 30, 1999 by category.
19
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.12f AMENDMENT NO. 6 TO CREDIT AGREEMENT dated as of May 31, 1999,
among American Architectural Products Corporation, a Delaware
corporation, Eagle & Taylor Company, a Delaware corporation,
Forte, Inc. an Ohio corporation, Western Insulated Glass, Co., an
Arizona corporation, Thermetic Glass, Inc., a Delaware
corporation, Binnings Buildings Products, Inc., a Delaware
corporation, Danvid Window Company, a Delaware corporation, Modern
Window Corporation, a Delaware corporation, American Glassmith,
Inc., a Delaware corporation, VinylSource, Inc., a Delaware
corporation, American Weather-Seal Company, a Delaware
corporation, Eagle Window & Door Center, Inc., a Delaware
corporation, Denver Window Company, a Delaware corporation, AAPC
One Acquisition Corporation, a Delaware corporation, AAPC Two
Acquisition Corporation, a Delaware corporation, the institutions
party to the Credit Agreement, and BankBoston, N.A. as agent.
10.12g AMENDMENT NO. 7 TO CREDIT AGREEMENT dated as of June 29, 1999,
among American Architectural Products Corporation, a Delaware
corporation, Eagle & Taylor Company, a Delaware corporation,
Forte, Inc. an Ohio corporation, Western Insulated Glass, Co., an
Arizona corporation, Thermetic Glass, Inc., a Delaware
corporation, Binnings Buildings Products, Inc., a Delaware
corporation, Danvid Window Company, a Delaware corporation, Modern
Window Corporation, a Delaware corporation, American Glassmith,
Inc., a Delaware corporation, VinylSource, Inc., a Delaware
corporation, American Weather-Seal Company, a Delaware
corporation, Eagle Window & Door Center, Inc., a Delaware
corporation, Denver Window Company, a Delaware corporation, AAPC
One Acquisition Corporation, a Delaware corporation, AAPC Two
Acquisition Corporation, a Delaware corporation, the institutions
party to the Credit Agreement, and BankBoston, N.A. as agent.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the period.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
Date: August 15, 1999 /s/ FRANK J. AMEDIA
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Frank J. Amedia
President & Chief Executive Officer
/s/ RICHARD L. KOVACH
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Richard L. Kovach
Chief Financial Officer