UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-6365
APOGEE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0919654
(State or other jurisdiction of IRS Employer Identification Number
incorporation or organization)
7900 Xerxes Avenue South - Suite 1800
Minneapolis, Minnesota 55431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 835-1874
--------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.33-1/3 Par Value
Title of Class
--------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant on March 31, 1998 was $343,448,719. The number of shares outstanding
of the Registrant's Common Stock at March 31, 1998 was 27,511,168.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement for
the Annual Meeting of Shareholders to be held June 23, 1998.
APOGEE ENTERPRISES, INC.
FORM 10-K
TABLE OF CONTENTS
For the year ended February 28, 1998
Description Page
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PART I
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Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote
of Security Holders 8
Executive Officers of the Registrant 8
PART II
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Item 5. Market for the Registrant's
Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12
Item 8. Financial Statements and
Supplementary Data 19
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 19
PART III
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Item 10. Directors and Executive Officers
of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain
Beneficial Owners and Management 19
Item 13. Certain Relationships and
Related Transactions 19
PART IV
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Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 19
Index of Financial Statements and Schedules F-1
2
PART I
ITEM 1. BUSINESS
THE COMPANY
Apogee Enterprises, Inc. is a holding company incorporated under the laws of
the State of Minnesota in 1949. The Company, through its operating subsidiaries,
is primarily engaged in the fabrication, distribution and installation of
value-added glass products and window and curtainwall systems. Approximately
sixty percent of the Company's revenues are generated from the architectural and
nonresidential construction markets, with the other forty percent coming from
operations serving the auto glass market. Three business segments comprise
Apogee's operations: Glass Technologies (GT) serves the construction and imaging
and display markets. Auto Glass (AG) serves the automotive glass replacement and
repair market. Building Products & Services (BPS) serves certain sectors of the
commercial and institutional, detention and security building markets. Financial
information about the Company's segments can be found at Note 19 to the
consolidated financial statements of Apogee Enterprises, Inc. contained in a
separate section of this report. See "Index of Financial Statements and
Schedules".
Unless the context otherwise requires, the terms "Company" and "Apogee" as
used herein refer to Apogee Enterprises, Inc. and its subsidiaries.
GLASS TECHNOLOGIES
The businesses of the Glass Technologies segment add value to ordinary glass
through fabrication of high-technology coatings products which provide strength,
energy efficiency in high-rise structures and optical clarity for mirrors, glare
filter screens and picture frame glass. The operating units in this segment
include Viracon, an architectural glass unit, Viratec Thin Films (Viratec), a
producer of coated glass for computer anti-glare screens and other optical
devices and Tru Vue, a picture framing glass unit.
Viracon fabricates finished glass products and provides glass coating
services. The operating unit purchases flat, unprocessed glass in bulk
quantities from which a variety of glass products are fabricated, including
insulated, heat processed and laminated architectural glass; security glass and
laminated industrial glass.
Laminated glass consists of two or more pieces of glass fused with a plastic
interlayer and is used primarily for strength and safety in skylights and in
security applications. Sales of laminated safety glass products have increased
with the adoption of federal and state safety glazing standards. Glass is heated
to its softening point then cooled very quickly to create heat-processed glass.
The heating and cooling strengthen the glass to withstand impact and wind or
snow loads. This process is used in architectural glass. Insulating glass,
comprised of two or more pieces of glass separated by a sealed air space, is
used in architectural and residential applications for thermal control.
Viracon's reflective and low-emissivity coatings reduce energy costs and provide
innovative design features for window and curtainwall systems. Low-emissivity
coatings are an invisible, metallic film deposited on glass which selectively
limits the transfer of heat through the glass. Low-emissivity coated glass
represents a fast-growing segment of both residential and nonresidential glass
markets.
The Viracon unit is able to fabricate all types of architectural glass
(insulating, laminated and combinations of both) at its Owatonna, Minnesota
facility. Combined with its glass coating capabilities, the unit is able to
provide a full range of products from these facilities. In March 1998, Viracon
announced that it will invest $35 million to build a new facility in Statesboro,
Georgia. The new facility, together with the planned expansion at the Owatonna
facility, are expected to add approximately 80 percent of production capacity
over the next few years.
Viracon markets its products nationally and overseas to glass distributors,
contractors (including BPS) and industrial glass fabricators. A substantial
portion of its glass products is delivered to customers by Viracon's fleet of
company-owned trucks, providing "backhaul" capability for its raw materials,
thereby reducing shipping time, transportation costs and breakage expense.
Viratec develops advanced, optical-display and imaging coatings for glass and
other surfaces. These products are used in anti-glare computer screens, high-
quality optical components and high performance mirror products for the imaging
industry. Viratec markets optical display and imaging products to both domestic
and overseas customers. These customers provide further assembly, marketing and
distribution to end users. In February 1998, Viratec's Optium(TM) (formerly
known as CaRT(R)) business, which coats the curved glass surfaces of cathode ray
tubes (CRTs) used inside computer monitors, announced plans to move its
operation near to its customers' facilities and the natural flow of CRTs. By
bringing the coater nearer to its customers, Viratec hopes to maximize the
utility of its Optium operation and reduce two critical cost elements that
hampered demand and profitability -- shipping and logistical cycle time. The new
Optium facility is expected to be operating by the end of calendar 1998.
Tru Vue is one of the largest domestic manufacturers of picture framing glass.
Tru Vue provides its customers with a full array of picture framing glass
products, including clear, reflection control, which diminishes reflection, and
conservation glass, which blocks ultraviolet rays. Tru Vue is also a
manufacturer of conservation picture framing matboard, which complements the
unit's glass product offerings. The products are distributed primarily through
independent distributors which, in turn, supply local picture framing markets.
3
AUTO GLASS
The Auto Glass (AG) segment is engaged in the auto glass replacement and
repair business through its Harmon AutoGlass service centers (retail), Glass
Depot wholesale centers (wholesale) and Curvlite fabrication center.
Harmon AutoGlass operates auto glass service centers in 43 states. The centers
replace and repair auto glass on the premises and also provide mobile
installation service. Primary customers include insurance companies (on behalf
of their insured clients), fleet owners and car owners. The service centers also
carry limited inventories of flat glass, which are sold at retail for such
purposes as home window repair and table tops. Some automotive accessories are
also sold and installed at certain service centers. Quality service is
emphasized in all service centers. The Company believes Harmon AutoGlass is the
second-largest auto glass retailer in the United States. The unit also operates
two call centers (Centers) for handling auto glass claims. The Centers, on
behalf of their insurance company and fleet customers, handle replacement glass
claims made by policyholders or fleet owners. Calls are placed through a
toll-free number and then routed to one of the Centers located in Orlando,
Florida or Eau Claire, Wisconsin. Customer service agents arrange for the prompt
replacement or repair of auto glass by either a Harmon AutoGlass service center
or an affiliated shop member of the Center's network and begin the process of
filing the claim electronically with the applicable insurance company. The
Center subcontracts for replacement and repair services with over 3,300 auto
glass stores nationwide. The unit seeks to maximize the electronic exchange of
information, which reduces claim costs and eliminates errors. This type of
service is an essential requirement to become one of the few choice providers
for insurance companies.
The AG wholesale centers, known as "Glass Depot", supply the Harmon AutoGlass
service centers with auto and flat glass and related products as well as selling
wholesale to other glass installers. Due to the variety of makes and models of
automobiles, auto glass service centers typically stock only windshields for the
most popular models. As a result, there is a demand for distributors to maintain
inventories of auto glass and to provide prompt delivery. Through the segment's
National Distribution Center (NDC), a mega-distribution center offering other
manufacturers' products as well as its own for both domestic and foreign
vehicles, the segment is able to maintain a broad selection of automotive glass.
The NDC also offers AutoGlass Express, a delivery system which allows the unit
to fill customers' orders on an individual basis versus the industry norm of
truckload orders. Purchases of fabricated automotive glass are made from several
primary glass manufacturers and fabricators, including the segment's Curvlite
unit.
Curvlite fabricates replacement windshields for foreign and domestic
automobiles and laminated glass parts for the transportation industry. It
fabricates approximately 800 types of replacement windshields which are marketed
nationally to distributors and glass shops, including the Glass Depot wholesale
centers. Curvlite seeks to offer a broad selection of windshields by promptly
adding new windshields as new models are introduced.
On February 28, 1998, the AG segment had 73 wholesale locations and 340
service centers. The segment evaluates opportunities to expand both its retail
and wholesale auto glass locations, while closely monitoring existing units'
profitability.
Under a franchise agreement with Midas International Corporation, the segment
operates eight Midas Muffler locations in Minnesota, South Dakota, North Dakota
and Wisconsin.
BUILDING PRODUCTS & SERVICES
The Company's Building Products & Services (BPS) segment operates principally
in the design, engineering and installation of custom and standard curtainwall
and window systems for commercial, institutional as well as specialized
detention and security building products and services. BPS' four operating units
are Detention & Security, Full Service, New Construction and Architectural
Products.
BPS competes in the detention and security market through its Norment
operating unit, which is a leader in the design, manufacture and installation of
institutional and governmental security and detention systems in the United
States. The unit's products include complex windows, doors and monitoring
systems for high-security buildings such as prisons, jails, convenience stores,
hospitals, schools and other governmental facilities.
BPS' Full Service group has ten locations operating as Harmon, Inc. located in
major metropolitan areas. The locations offer complete design, engineering,
installation and replacement or glazing services for commercial, institutional
and other buildings. In addition, this unit offers 24-hour replacement service
for storm or vandalism damage. In-house engineering capabilities allow Full
Service to duplicate the original design or create a completely new appearance
for renovated buildings.
BPS' New Construction unit, known as Harmon, Ltd., is one largest designers
and installers of curtainwall and window systems for nonresidential construction
in the United States. During fiscal 1998, the segment made the strategic
decision to exit its European and Asian international curtainwall operations.
The unit has offices in several major metropolitan areas in the United States.
All of the offices typically design, assemble and install a building's exterior
"skin" or curtainwall. Curtainwall is an exterior multi-story wall consisting of
an aluminum framing system anchored to steel or concrete, "glazed" (filled) with
glass in the vision areas and with panels in the nonvision (spandrel) areas.
Panels are
4
usually made from aluminum, precast concrete or natural stone. The segment
procures its materials from a number of independent fabricators, including the
BPS' Architectural Products group and Glass Technology's Viracon unit. Harmon,
Ltd. also sometimes serves as a stone subcontractor, setting stone on both the
exterior and interior of buildings.
The Architectural Products unit of BPS designs and manufactures high-quality,
thermally-efficient aluminum window and curtainwall systems under the "Wausau
Metals" (Wausau) trade name. These products meet high standards of wind load
capacity and resistance to air and moisture seepage. Wausau's aluminum window
frame designs are engineered to be thermally efficient, utilizing high-strength
polyurethane to limit the transfer of heat or cold through the window frame.
Products are marketed through a nationwide network of distributors and a direct
sales staff. Sales are made to building contractors, including BPS' New
Construction unit, and to building owners for retrofitting older buildings.
Wausau maintains design and product engineering staffs to prepare aluminum
window and curtainwall system designs to fit customers' needs and to originate
new product designs. Wausau occasionally joins the New Construction unit in
pursuing certain projects, as many architects and general contractors prefer to
work with an experienced curtainwall subcontractor and manufacturer team.
Operating under the "Linetec" name, the Architectural Products unit also has
two metal coating facilities which provide anodized and fluoropolymer coatings
to metal. Anodizing is the electrolytic process of putting a protective, often
colored, oxide film on light metal, typically aluminum. Fluoropolymer coatings
are high quality paints which are sometimes preferred over anodizing because of
the wide color selection. Coatings are applied to window and curtainwall
components for industrial metal fabricators (including Wausau Metals), as well
as other companies' metal, plastic, wood or glass products.
Harmon, Ltd. and Harmon, Inc. are subject to normal subcontractor's risks,
including material and wage increases, construction and transportation work
stoppages and contractor credit worthiness. In addition, office vacancy rates,
tax laws concerning real estate and interest rates are important factors which
affect nonresidential construction markets.
COMPETITION
The Company's businesses are in industries that are, in general, fairly mature
and highly competitive. The Glass Technologies segment competes with several
large integrated glass manufacturers and numerous smaller specialty fabricators.
Product pricing and service are the primary competitive factors in this market.
The Auto Glass segment competes with other auto glass shops, glass warehouses,
car dealers, body shops and fabrication facilities on the basis of pricing and
customer service. Its competition consists of national and regional chains as
well as significant local competition. The curtainwall subcontractor business is
primarily price competitive, although BPS' New Construction's reputation for
quality engineering and service is an important factor in receiving invitations
to bid on large complex projects. BPS' Architectural Products unit competes
against several major aluminum window manufacturers and primarily serves the
custom portion of the construction market in which the primary competitive
factors are product quality, reliable service and the ability to provide
technical engineering and design services.
5
MARKETS
GT services the architectural glass, computer, optical imaging and picture
framing glass markets in which coated glass is becoming the industry standard.
These markets are very competitive, highly responsive to new products and can be
price sensitive. The Company believes that GT possesses one of the world's
largest coating capacities for glass and is a leading fabricator and global
distributor of high-performance architectural glass. Its fully integrated, glass
fabrication and coating capabilities allow the segment to meet customer needs
and react quickly to market demands while improving margins and developing new
products.
AG services the automotive glass aftermarket, which is influenced by a variety
of factors, including new car sales, speed limits, road conditions, the economy,
weather and average number of miles driven. A transformation of the industry's
pricing structure has intensified competition. In recent years, major purchasers
of auto glass, such as insurance companies, have increasingly requested volume
pricing and insurance claims processing on a national scale. As a result,
margins have narrowed at the retail level and, to a lesser extent, at wholesale
and manufacturing levels.
BPS serves the domestic nonresidential construction market, which tends to be
cyclical and has been on a slow to moderate recovery, both in terms of dollars
and square feet of new contract awards. This market was hard hit due to
overbuilding in past years, tax law changes, tightening credit standards,
business restructuring and other factors. The resulting contraction in demand
for building materials and construction services has intensified competition,
squeezed profit margins and contributed to some business failures in the market
sectors served by the Company. In response to these circumstances, BPS has
consolidated manufacturing facilities, closed offices and reduced personnel and
discretionary expenses. It has also redirected its marketing focus to sectors
with relative strength, including remodeling, institutional, detention and
security markets.
SOURCES AND AVAILABILITY OF RAW MATERIALS
None of the Company's operating units are significantly dependent upon any one
supplier. The Company believes a majority of its raw materials (bulk flat glass,
aluminum extrusions, automotive glass and related materials) are available from
a variety of domestic sources.
TRADEMARKS AND PATENTS
The Company has several nationally recognized trademarks and trade names which
it believes have significant value in the marketing of its products. Harmon
AutoGlass(R), Harmon Contract(R), Norment(R), Airteq(R), Viratec(R), Tru Vue(R),
and Linetec(R) are registered trademarks and Glass Depot(R) and Optium(R) are
listed trademarks of the Company. Viratec Thin Films has obtained several
patents pertaining to its glass coating methods. However, no single patent is
considered to be materially important to the Company.
FOREIGN OPERATIONS AND EXPORT SALES
During the years ended February 28, 1998, March 1, 1997 and March 2, 1996, the
Company's export sales, principally from GT operations, amounted to
approximately $71,821,000, $61,855,000 and $38,348,000, respectively.
During fiscal 1998, the BPS segment decided to close or exit its European and
Asian international curtainwall operations. Sales for those operations were
approximately $29,834,000, $120,318,000 and $114,305,000 for the years ended
February 28, 1998, March 1, 1997 and March 2, 1996, respectively. Operating
losses for 1998, 1997 and 1996, were $115,709,000, $5,716,000 and $1,983,000,
respectively. At February 28, 1998, March 1, 1997 and March 2, 1996, the
identifiable assets of foreign operations totaled $11,417,000, $86,866,000 and
$58,753,000, respectively. At February 28, 1998, the backlog of work for
Asian projects was approximately $15 million.
EMPLOYEES
The Company employed 6,672 persons at February 28, 1998, of whom 1,010 were
represented by labor unions. The Company is a party to 132 collective bargaining
agreements with several different unions. Approximately 33% of the collective
bargaining agreements will expire during fiscal 1999. The number of collective
bargaining agreements to which the Company is a party will vary with the number
of cities with active nonresidential construction contracts. The Company
considers its employee relations to be very good and has not recently
experienced any significant loss of work days due to strike.
6
BACKLOG
The backlog of orders is significant in the Company's construction-related BPS
segment. At February 28, 1998, the Company's total backlog of orders considered
to be firm was $308,234,000 compared with $358,169,000 at March 1, 1997. This
amount included $114 million related to BPS' curtainwall operations,
approximately $35 million of which is not expected to be reflected as revenue in
fiscal 1999.
ITEM 2. PROPERTIES
The following table lists, by division, the Company's major facilities, the
general use of the facility and whether it is owned or leased by the Company.
Facility Location Owned/Leased Function
- -------- -------- ------------ --------
Glass Technologies
- ------------------
Viracon Owatonna, MN Owned Mfg./Admin.
Viracon - Coatings Bldg Owatonna, MN Owned Mfg.
Viratec Thin Films, Inc. Faribault, MN Owned Mfg./Admin.
Tru Vue Chicago, IL Owned Mfg./Admin.
Auto Glass
- ----------
Curvlite Owatonna, MN Owned Mfg./Admin.
National Distribution Center Owatonna, MN Owned Warehouse/Admin.
Harmon AutoGlass and Glass
Depot headquarters Minneapolis, MN Leased Administrative
Call Center Orlando, FL Owned Administrative
Call Center Eau Claire, WI Leased Administrative
Building Products & Services
- ----------------------------
New Construction headquarters Minneapolis, MN Leased Administrative
Norment Montgomery, AL Owned Mfg./Admin.
Architectural Products Wausau, WI Owned Mfg./Admin.
Architectural Products - Plant II Wausau, WI Owned Mfg.
Architectural Products - Plant III Wausau, WI Owned Mfg.
Linetec (Painting) Wausau, WI Owned Mfg./Admin.
Linetec (Anodizing) Wausau, WI Owned Mfg.
Other
- -----
Apogee Corporate Office Minneapolis, MN Leased Administrative
The Glass Technologies segment has four fabrication facilities located in the
Midwest.
The Automotive Glass segment has 413 retail and distribution locations
nationally and eight Midas Muffler franchises located in the Midwest. The
majority of such locations are leased.
The Building Products & Services segment's New Construction sales offices,
Full Service locations and fabrication facilities are located in the United
States. Except as noted above, all such locations are leased.
The Curvlite plant, an Architectural Products facility, the Linetec paint
facility, and the Call Center in Florida were constructed with the use of
proceeds from industrial revenue bonds issued by those cities. These properties
are considered owned, since at the end of the bond term, title reverts to the
Company.
7
ITEM 3. LEGAL PROCEEDINGS
Apogee has been a party to various legal proceedings incidental to its normal
operating activities. In particular, like others in the construction industry,
its construction business is routinely involved in various disputes and claims
arising out of construction projects, sometimes involving significant monetary
damages. Although it is impossible to predict the outcome of such proceedings,
the Company believes, based on facts currently available to us, that none of
such claims will result in losses that would have a material adverse effect on
its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended February 28, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
NAME AGE POSITION
---- --- --------
Donald W. Goldfus 64 Chairman of the Board of Directors
Russell Huffer 48 President and Chief Executive Officer
James L. Martineau 57 Executive Vice President
Richard Gould 58 Senior Vice President
Robert G. Barbieri 42 Vice President - Finance and
Chief Financial Officer
Michael Bevilacqua 41 Treasurer/Senior Director
Business Development
Martha L. Richards 35 General Counsel and Secretary
Executive officers are elected annually by the Board of Directors and serve
for a one-year period. With the exception of Richard Gould, who has an
employment contract with the Company that covers the period through 2000, no
other officers have employment contracts with the Company. None of the executive
officers or directors of the Company are related.
Messrs. Goldfus, Huffer and Mr. Martineau have been employees of the Company
for more than the last five years. Mr. Gould joined the Company in May 1994.
Prior to joining the Company, Mr. Gould was president of Gould Associates, a
strategic management consulting firm to a wide range of companies. Mr. Barbieri
joined the Company in 1997. Prior to joining the Company, Mr. Barbieri held
several financial management positions at Air Products and Chemicals, Inc. in
Allentown, Pennsylvania. Mr. Bevilacqua joined the Company in April 1998. Prior
to joining the Company, Mr. Bevilacqua held several financial management
positions at Air Products and Chemicals, Inc. in Allentown, Pennsylvania. Ms.
Richards joined the Company in March 1997. Prior to joining the Company, Ms.
Richards was a Partner with the law firm, Jenner & Block, Chicago, Illinois.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Apogee common stock is traded in the NASDAQ National Market System, under the
ticker symbol APOG. Stock price quotations are printed daily in major
newspapers. During the fiscal year ended February 28, 1998, the average trading
volume of Apogee common stock was 4,065,000 shares per month, according to
NASDAQ.
8
As of March 31, 1998, there were 27,511,168 shares of common stock
outstanding, of which about 6.5 percent were owned by officers and directors of
Apogee. At that date, there were approximately 1,992 shareholders of record and
7,300 shareholders for whom securities firms acted as nominees.
The following chart shows the quarterly range and year-end close of the
Company's common stock price per share over the past five fiscal years, as
adjusted to reflect the two-for-one stock split effected in the form of a stock
dividend paid on February 14, 1997 (the February Stock Dividend).
QUARTER QUARTER QUARTER QUARTER YEAR
I II III IV END
----------------------------------------------------------------------
1994 5 1/8-6 1/4 5 3/4-7 1/8 5 5/8-7 1/4 6 3/4-8 7/8 7 1/4
1995 5 3/4-7 5/8 5 7/8-7 7/8 7 3/8-9 1/8 7 3/8-9 1/4 8 5/8
1996 8 1/4-9 7 1/4-9 1/8 7 1/8-7 7/8 6 1/2-9 7/8 9 13/16
1997 9 5/8-14 1/4 13 1/4-18 1/4 15 1/4-22 5/8 17 1/4-23 3/4 19 7/8
1998 14-21 1/4 17 3/4-22 5/8 21 1/8-25 1/4 10 3/8-23 12 15/16
DIVIDENDS
It is Apogee's policy, subject to Board review and approval, to pay quarterly
cash dividends in May, August, November and February. Cash dividends have been
paid each quarter since 1974, and have been increased each year since then. The
chart below shows quarterly cash dividends per share for the past five years, as
adjusted to reflect the February Stock Dividend.
QUARTER QUARTER QUARTER QUARTER
I II III IV YEAR
--------------------------------------------------
1994 0.035 0.035 0.038 0.038 0.140
1995 0.038 0.038 0.040 0.040 0.155
1996 0.040 0.040 0.043 0.043 0.165
1997 0.043 0.043 0.045 0.045 0.175
1998 0.045 0.045 0.050 0.050 0.190
9
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8 - Financial Statements and Supplementary Data.
Dollar amounts in thousands,
except per share data** 1998 1997 1996 1995 1994*
- ------------------------------------------ ------------- -------------- ------------ -------------- --------------
OPERATING RESULTS
Net sales $ 912,831 950,777 871,147 756,549 688,233
Gross profit 179,401 151,801 118,523 105,889 83,895
Operating income (loss) (55,267) 46,496 32,457 24,262 7,058
Net earnings (loss) (51,055) 26,220 17,835 13,050 3,833
Earnings (loss) per share - basic (1.84) 0.96 0.66 0.49 0.14
Earnings (loss) per share - diluted (1.84) 0.93 0.65 0.48 0.14
Effective tax rate - % (19.9) 34.9 36.9 40.2 60.9
OPERATING RATIOS
Gross margin - % 19.7 16.0 13.6 14.0 12.2
Operating margin - % (6.1) 4.9 3.7 3.2 1.0
Net margin - % (5.6) 2.8 2.0 1.7 0.6
Return on
Average shareholders' equity - % (36.2) 16.9 13.5 10.9 3.4
Average invested capital - % (16.7) 9.2 7.6 6.7 2.4
Average total assets - % (10.6) 5.9 4.8 3.9 1.4
FUNDS FLOW DATA
Cash flow before changes in operating
assets and liabilities $35,521 57,997 31,514 27,192 20,470
Depreciation and amortization 23,990 20,458 16,528 15,131 15,724
Capital expenditures 38,214 35,613 22,615 24,957 14,046
Dividends 5,251 4,806 4,453 4,155 3,841
YEAR-END DATA
Total assets 464,121 500,964 386,136 361,928 306,188
Current assets 262,244 305,194 258,559 256,820 221,286
Current liabilities 177,768 176,621 142,477 135,719 140,846
Working capital 84,476 128,573 116,082 121,101 80,440
Current ratio 1.5 1.7 1.8 1.9 1.6
Long-term debt $151,967 127,640 79,102 80,566 35,688
% of invested capita 53.1 39.4 32.5 35.6 21.6
Shareholders' equity $109,601 172,149 138,921 124,629 114,063
% of invested capital 38.3 53.1 57.0 55.1 69.0
Backlog $308,234 358,169 404,737 363,751 405,223
INVESTMENT INFORMATION
Dividends per share 0.190 0.175 0.165 0.155 0.145
Book value per share 3.99 6.17 5.14 4.64 4.28
Price range during year:
High 25 233/4 9 7/8 91/4 8 7/8
Low 10 3/8 9 5/8 6 1/2 53/4 5 1/8
Close 12 15/16 19 7/8 9 13/16 8 5/8 7 1/4
Price/earnings ratio at year-end NM 21 15 18 50
Dividend yield at year-end - % 1.5 0.9 1.7 1.9 2.0
Shares outstanding at year end 27,453,000 27,882,000 27,034,000 26,886,000 26,624,000
Average monthly trading volume 4,065,092 4,795,244 1,775,740 1,613,012 518,900
* Fiscal 1994 figures reflect the cumulative effect of a change in accounting
for income taxes, which increased net earnings by $525,000, or 4 cents per
share.
** Share and per share data have been adjusted for the fiscal 1997 stock
dividend.
10
Dollar amounts in thousands,
except per share data 1993 1992 1991 1990 1989 1988
- --------------------------------------- ------------ -------------- ------------ ----------- ----------- -------------
OPERATING RESULTS
Net sales $ 572,450 596,281 599,525 589,657 433,740 312,051
Gross profit 78,201 101,580 100,097 93,718 72,214 57,350
Operating income (loss) 19,249 33,267 32,033 24,134 20,211
6,369
Net earnings (loss) 4,514 8,505 17,017 14,095 13,421 11,615
Earnings (loss) per share - basic 0.17 0.32 0.63 0.52 0.50 0.43
Earnings (loss) per share - diluted 0.17 0.31 0.62 0.52 0.50 0.43
Effective tax rate - % 42.3 39.6 37.1 37.1 38.2 41.8
OPERATING RATIOS
Gross margin - % 13.7 17.0 16.7 15.9 16.6 18.4
Operating margin - % 1.1 3.2 5.5 5.4 5.6 6.5
Net margin - % 0.8 1.4 2.8 2.4 3.1 3.7
Return on
Average shareholders' equity - % 4.0 7.6 16.6 15.7 17.2 17.3
Average invested capital - % 3.0 5.7 11.5 9.8 11.4 13.2
Average total assets - % 1.8 3.4 6.9 6.2 7.6 9.0
FUNDS FLOW DATA
Cash flow before changes in operating
assets and liabilities $ 19,187 31,256 34,284 31,030 23,145 18,167
Depreciation and amortization 15,110 16,305 13,309 12,141 8,987 6,586
Capital expenditures 9,166 12,974 12,798 16,985 23,680 11,311
Dividends 3,584 3,505 3,248 2,693 2,140 1,807
YEAR-END DATA
Total assets 251,456 249,509 250,343 244,103 207,686 143,487
Current assets 169,029 166,376 162,676 154,845 126,881 86,026
Current liabilities 99,787 101,011 102,492 94,948 68,921 47,652
Working capital 69,242 65,365 60,184 59,897 57,960 38,374
Current ratio 1.7 1.6 1.6 1.6 1.8 1.8
Long-term debt $ 28,419 25,267 29,398 41,366 46,277 17,899
% of invested capital 18.7 17.0 19.9 27.7 33.3 18.7
Shareholders' equity $112,335 113,781 109,050 95,754 83,871 72,062
% of invested capital 74.1 76.6 73.8 64.2 60.4 75.2
Backlog $322,323 231,949 245,000 299,810 333,240 228,532
INVESTMENT INFORMATION
Dividends per share 0.135 0.130 0.120 0.100 0.080 0.068
Book value per share 4.26 4.23 4.05 3.56 3.13 2.70
Price range during year:
High 6 3/8 9 10 1/16 9 3/8 7 1/8 6 1/8
Low 4 1/8 4 3/4 6 5/8 6 1/2 5 33/4
Close 5 13/16 6 1/8 9 7 3/8 6 13/16 51/2
Price/earnings ratio at year-end 34 19 14 14 14 13
Dividend yield at year-end - % 2.3 2.1 1.3 1.4 1.2 1.2
Shares outstanding at year end 26,354,000 26,922,000 26,954,000 26,934,000 26,828,000 26,698,000
Average monthly trading volume 644,294 1,386,058 1,212,682 1,722,972 1,440,082 1,266,986
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In fiscal 1998, we continued our focus on company-wide efforts to improve
margins, productivity, working capital usage and capital allocation. For most of
our businesses, we achieved improved profitability on increased net sales in
fiscal 1998. However, the success of these efforts was significantly
overshadowed by operating losses and nonrecurring charges related to
international curtainwall construction activities. During the year, we made the
strategic decision to close or exit our European and Asian curtainwall
operations and to focus more selectively on higher margin domestic curtainwall
business. Related to these actions, European operations have been
deconsolidated, reflecting our ceding of control over those entities.
Consequently, the net operating results of European operations for fiscal 1998
have been included in our "Consolidated Results of Operations" under the caption
"Unusual items," which also includes two nonrecurring charges related to
international curtainwall operations. The net liability associated with these
businesses was included in accrued expenses in our "Consolidated Balance Sheet"
at February 28, 1998. The closure of these European and Asian curtainwall
operations will permit the Company to focus on other business markets that
management believes will provide opportunity for greater returns on capital
invested. A more detailed description of our results for 1998 and financial
position is provided in this financial review.
PERFORMANCE
FISCAL 1998 COMPARED TO FISCAL 1997
The following table illustrates the relationship between various components of
operations, stated as a percent of net sales, for each of the fiscal years in
the three-year period ended February 28, 1998.
PERCENT OF NET SALES
1996 1997 1998
-------- --------- --------
Net sales 100.0 100.0 100.0
Cost of sales 86.4 84.0 80.3
Gross profit 13.6 16.0 19.7
Selling, general and
Administrative expenses 9.9 11.1 15.2
Unusual items -- -- 10.5
Operating income (loss) 3.7 4.9 (6.1)
Interest and other expense, net 0.7 0.7 0.8
Earnings (loss) before income
taxes and other items 3.1 4.2 (6.9)
Income taxes 1.1 1.5 (1.4)
Equity in net loss (earnings)
of affiliated companies (0.1) -- 0.1
Minority interest (0.1) (0.1) --
Net earnings (loss) 2.0 2.8 (5.6)
Consolidated net sales decreased 4% to $913 million in fiscal 1998. If European
curtainwall net sales were excluded from fiscal 1997 results, comparative net
sales would have grown by 4%. Our Glass Technologies (GT) and Auto Glass (AG)
segments reported net sales gains of 18% and 13%, respectively. GT's net sales
grew primarily due to continued strong demand for its fabricated glass products,
particularly the Viracon unit's high-performance architectural glass. AG
increased net sales by combining nominal retail same-store net sales growth, the
addition of retail and wholesale locations, and the full-year inclusion of
Portland Glass, which the segment acquired in the fourth quarter of fiscal 1997.
Building Products & Services (BPS) net sales dropped 24%, nearly two-thirds
related to the deconsolidation of European curtainwall operations. Domestic and
Asian curtainwall net sales fell 33%, while net sales of BPS noncurtainwall
businesses grew 8%.
On a consolidated basis, cost of sales, as a percentage of net sales, fell to
its lowest figure this decade, dropping 3.7%. The deconsolidation of European
curtainwall results accounted for two-thirds of the margin improvement.
Productivity gains at most of our fabrication operations, most notably Viracon
and Viratec Thin Films (Viratec), and a shift in net sales mix away from
low-margin curtainwall construction business combined to produce the remainder
of this positive variance. BPS reported improved margins for all but its
international operations. These factors were partly offset by higher costs
experienced by the AG segment's Retail and Distribution operations.
Selling, general and administrative (SG&A) expenses grew by $33.2 million, or
32%. As a result, SG&A costs increased as a percent of net sales. The primary
factors were higher salaries, outside services, increased information systems
and marketing costs, particularly at our
12
AG segment. SG&A expenses in fiscal 1998 also included $3.4 million in foreign
currency translation losses in BPS' Asian curtainwall unit, a $3.0 million
write-off of certain information systems assets, primarily in AG, and severance
costs associated with certain management changes.
In fiscal 1998, pre-tax charges of $96.1 million were included in our
"Consolidated Results of Operations" under the caption "Unusual items." The
above amount included nonrecurring charges of $26.0 million and $35.9 million
recorded in the third and fourth quarter, respectively, related to our
international curtainwall operations. In addition, unusual items included
operating losses totaling $34.2 million, representing the net operating results
for European curtainwall operations which were deconsolidated as described in
the above introductory paragraph.
Net interest expense rose nominally in fiscal 1998. Increased interest income
from investments held by the Company's captive insurance subsidiary and lower
interest rates offset nearly all of the effect of higher borrowings under our
revolver and uncommitted credit lines. We expect higher debt levels and interest
expense for fiscal 1999 due to the financing of higher capital investments.
Our income tax benefit amounted to 19.9% of our net loss before income taxes.
The unusually low effective rate was primarily due to foreign operating activity
for which no tax benefit was recognized.
Our share of net losses recorded by various affiliated companies in which we
have a 50% or less equity interest amounted to $879,000 in fiscal 1998 compared
to $337,000 last year.
Apogee's fiscal 1998 net loss was $51.1 million, or $1.84 diluted loss per
share. This compared to net earnings of $26.2 million, or $0.93 diluted earnings
per share, a year ago. The negative return on average shareholders' equity was
36.2% in fiscal 1998 versus a positive return of 16.9% for fiscal 1997.
At February 28, 1998, our consolidated backlog stood at $308 million, down 14%
from a year ago. This reduction was primarily attributable to the closure of our
international curtainwall business. Approximately $35 million of the February
1998 backlog will not be reflected as net sales in fiscal 1999.
SEGMENT ANALYSIS
The following information provides a more detailed look at each of our three
business segments. Also see Note 19-Business Segment Information on page 29 for
a three-year history of each segment's net sales, operating income (loss),
identifiable assets, capital expenditures, and depreciation and amortization.
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1997 1998
------------ ------------ -----------
Glass Technologies
Net sales $ 150,457 $ 192,827 $ 227,203
Operating income 16,431 19,908 27,330
Auto Glass
Net sales 273,133 307,935 347,191
Operating income 18,069 20,149 15,046
Building Products & Services
Net sales 462,102 460,714 348,892
Operating income (loss) (2,073) 5,557 (96,433)
GLASS TECHNOLOGIES (GT) posted record net sales and operating income for the
fifth consecutive year. Net sales rose by 18%, while operating income improved
37% to $27.3 million. The net sales increase reflected improvements by each of
the segment's units.
Most of the segment's earnings improvement came from Viracon, our
high-performance architectural glass fabrication unit. Viracon posted net sales
and operating income growth of 14% and 29%, respectively. The gains were due to
strong demand for its architectural glass products, improved product mix, and
improved productivity. Viracon ran near full capacity during the year, even as
expanded production capacity was added. In response to continued strong demand
for its segment's high-performance architectural glass products, Viracon will
begin construction of a new architectural glass fabrication complex in
Statesboro, Georgia. This facility, expected to be operational in fiscal 2000,
together with enhancements at Viracon's existing facility, will eventually
increase Viracon's capacity by over 80%.
13
Viratec reported improved results in fiscal 1998. Viratec, which applies
optical-grade coatings to glass and other substrates, saw its net sales grow by
33%, while operating earnings nearly quadrupled. Both improvements were
primarily due to Viratec's Optium (TM) cathode ray tube coating operation
(formerly known as CaRT). Optium net sales more than doubled for the year and
the unit reported a small operating profit versus a sizable loss in the prior
year. Viratec's flat glass operations had a double-digit net sales gain, but
industry pricing pressure and production downtime related to an ongoing capacity
expansion caused the operation to report lower earnings. At February 28, 1998,
Viratec's backlog was 43% lower than last year's year-end backlog, primarily due
to the suspension of the Optium business related to its expected relocation.
During fiscal 1999, Viratec's Optium line is expected to be moved to a location
closer to the flow of customers' computer monitor supply chains, reducing
shipping costs and breakage risks.
The segment's Tru Vue unit, our custom picture framing glass and matboard
fabricator, also posted improved net sales and operating earnings for the year.
These results occurred despite somewhat soft industry sales, as the unit again
successfully controlled its production costs. Tru Vue plans to move to a new
facility in fiscal 1999. This should allow for increased capacity and improved
productivity for both its picture-framing glass and matboard operations.
Based on current order rates and industry conditions, GT expects to report
higher net sales and solid operating results in fiscal 1999. However, each of
the segment's operating units will be affected by the start-up costs and
disruptions associated with significant capital projects, making earnings
improvements difficult to project. The extent of earnings gains will be highly
dependent on the ability of its business units to reach operational status for
each project as planned.
AUTO GLASS (AG) operates retail stores under the Harmon AutoGlass (Harmon) name
and distribution centers under the Glass Depot name. Due to an industry merger
in 1997, AG became the second largest company in the auto glass repair and
replacement industry.
AG reported 13% net sales improvement in fiscal 1998 despite lower unit sales
demand in the replacement auto glass industry. Approximately one-third of the
net sales growth was due to the fourth quarter fiscal 1997 acquisition of
Portland Glass. The segment's net sales growth continued to outpace the
industry. Market data indicated that unit demand for replacement auto glass in
the U.S. fell from 1996.
Despite the net sales increase, AG's operating income fell to $15.0 million, a
25% decline. Margin pressures intensified throughout the year due to intense
competition, particularly at the retail level. Lower margins, and higher selling
and administrative costs were the primary factors behind the decline. The
segment also recorded a $2.4 million write-off of certain information systems
assets. Same-location retail net sales rose by 1.5%, while unit net sales
declined 1.2%.
The segment's Curvlite operation fabricates auto glass for the replacement auto
glass aftermarket. Curvlite increased net sales in fiscal 1998 by about 25%. The
unit's National Distribution Center, which offers other manufacturers' products
as well as its own for both domestic and foreign vehicles, and the AutoGlass
Express program, a delivery system to fill customer orders more quickly and
completely, accounted for much of the unit's net sales growth. About 68% of
Curvlite's net sales were made to Glass Depot units in fiscal 1998.
During the year, AG completed four small acquisitions. These acquisitions,
combined with other locations added during the year, increased the number of
locations to 340 Harmon retail locations and 73 Glass Depot distribution
centers. The segment continues to explore opportunities to expand the reach of
its businesses.
The merger of the industry's two largest companies may provide AG with an
enhanced position as insurance companies adjust their allocations of business to
maintain their own flexibility and access to competitive pricing. Insurance
companies, which make up about 50% of the replacement auto glass market, prefer
vendors who can expedite claims processing and other administrative efforts
related to auto glass replacement and repair. The segment has the ability to
offer comprehensive claims processing services to these customers on a
nationwide basis.
Partly due to the aforementioned factors, AG expects to report higher net sales
in fiscal 1999 with unit growth from market penetration and start-up or acquired
locations. Meanwhile, the segment is taking actions to reduce its cost structure
and improve productivity, particularly in its retail operations. However, the
continued uncertainty of industry unit sales and pricing makes it difficult to
project operating earnings for fiscal 1999.
BUILDING PRODUCTS & SERVICES (BPS) posted a $96.4 million operating loss in
fiscal 1998, compared with operating income of $5.6 million a year ago. Other
than the segment's international curtainwall operations, BPS operating units
recorded solid results, with operating income for those units 71% higher than a
year ago.
As expected, segment net sales decreased 24% to $349 million, or 38% of
consolidated net sales, which represented BPS' lowest percentage contribution to
Apogee's total net sales in over 17 years. Two-thirds of the decrease related to
the deconsolidation of European
14
curtainwall operations. Adjusting for this factor, BPS net sales would have
fallen 11%. Domestic and Asian curtainwall net sales fell by 30% and 40%,
respectively, due primarily to our decision to focus more selectively on higher
margin domestic curtainwall business and the closure of our Asian curtainwall
business. Net sales of BPS noncurtainwall businesses grew 8%.
The operating loss was primarily due to international curtainwall operations and
included two nonrecurring pre-tax charges amounting to $61.9 million related to
exit activities and other unusual items. A $26.0 million pre-tax provision for
restructuring and other unusual items was recorded in the third quarter. The
provision also included amounts for the estimated loss associated with certain
disputed construction contract receivables in Europe, including the accrual of
certain penalty amounts, and the accrual of costs associated with the resolution
of legal proceedings related to organizational changes in its European
curtainwall unit. In the fourth quarter, we recorded a $35.9 million pre-tax
provision for exiting all European curtainwall and related operations, including
the completion of certain remaining projects.
In addition to the nonrecurring charges, international curtainwall operations
posted an operating loss of $53.8 million, reflecting significant cost overruns
at certain projects in Europe and Asia. The operations also sustained sizable
foreign currency translation losses on Asian assets, particularly those held in
Malaysia. Despite a decline in net sales, our domestic curtainwall unit produced
sharply higher profits, aided by the completion of the Getty Museum project as
well as by reductions in overhead and operating costs.
BPS noncurtainwall businesses posted another year of solid results. Net sales
for these units rose 8%, while operating profits totaled $9.6 million. The
segment's Full Service business had another solid year, generating slightly
higher net sales. A favorable shift in net sales mix towards higher-margin
service business helped the unit's profitability. The Detention & Security unit
also reported slightly higher net sales. However, operating income fell as
improved earnings from contracting were offset by losses from a start-up
operation. The Wausau Architectural Products unit leveraged higher net sales
into sharply higher profitability as the unit improved its engineering and
fabrication productivity. These businesses enter fiscal 1999 with backlog 46%
higher than a year earlier.
At February 28, 1998, BPS' backlog was $264 million. Of this amount, curtainwall
operations accounted for $114 million. The domestic curtainwall backlog was
essentially unchanged from a year ago, while the Asian backlog fell by 67%.
The absence of significant operating losses from international curtainwall
activities should enable BPS to report favorable earnings comparisons in fiscal
1999. The segment anticipates lower net sales from domestic curtainwall
operations with better overall project margins, but the smaller domestic net
sales base makes it unlikely that operating income for that unit can match
fiscal 1998 levels. Overall, BPS noncurtainwall businesses are expected to post
another year of improved results. Ultimate outcomes will continue to depend on
BPS' ability to control costs, effectively manage projects, maintain margins
inherent in the segment's backlog and book additional contracts.
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated net sales grew 9% to $951 million in fiscal 1997, largely
reflecting gains by our GT and AG segments. GT's net sales grew primarily due to
continued strong demand and firm pricing for its fabricated architectural glass
products and the addition of net sales from the newly acquired Viratec Thin
Films (Viratec) unit. Despite a very challenging industry environment, our AG
segment increased net sales by combining retail same-store net sales growth of
10% with additional retail and wholesale locations and strong net sales growth
at Curvlite. BPS net sales were essentially unchanged from the prior year.
Fiscal 1996 comprised 53 weeks, the additional week accounting for approximately
2% of the consolidated net sales that year, while fiscal 1997 comprised 52
weeks.
Overall, cost of sales, as a percent of net sales, fell 2.4% from the previous
year. Slight productivity gains at most of our operations, sharply lower
insurance costs due to reserve reductions and a significant change in net sales
mix away from the low-margin curtainwall construction activity of BPS' New
Construction unit combined to produce this positive variance.
SG&A expenses grew 22%, reflecting increased information systems and marketing
costs, particularly at our AG segment, and higher profit-sharing and commission
expense related to higher net sales and improved profitability. As a result,
SG&A costs as a percent of net sales rose, despite the moderate net sales gain
and productivity measures undertaken by our operating segments.
Net interest expense rose 22%, primarily due to the impact of interest paid
associated with the settlement of outstanding tax matters.
Our effective tax rate dropped to 34.9% from 36.9% in fiscal 1996. The decrease
was primarily due to the tax benefits related to higher export net sales levels
and the resolution of prior years' tax examinations. These items were partially
offset by foreign operating losses for which no tax benefit was recognized.
As explained below, the inclusion of 100% of the results of Marcon Coatings
(Marcon) and Viratec in our consolidated financial statements means that equity
in net earnings of affiliates in 1997 no longer included a 50% interest in those
units. The $337,000 charge to earnings in fiscal 1997 reflected our share of net
losses recorded by various affiliated companies in which we have a 50% or less
equity stake. Minority interest rose due to a larger loss at Harmon Europe S.A.,
a 70%-owned French subsidiary.
15
Consolidated net earnings advanced 47% in fiscal 1997 to $26.2 million, or $0.93
a share, from $17.8 million, or $0.65 a share, in fiscal 1996. Return on
shareholders' equity rose to 16.9% from 13.5% a year earlier. The aforementioned
per share figures reflect the two-for-one stock split, effected in the form of a
100% stock dividend, paid to shareholders on February 14, 1997.
Apogee ended fiscal 1997 with a $358 million backlog, down 12% from $405 million
at the end of fiscal 1996.
SEGMENT ANALYSIS
The following information provides a more detailed look at each of our three
segments. Also see Note 19-Business Segment Information on page 29 for a
three-year history of each segment's net sales, operating income (loss),
identifiable assets, capital expenditures, and depreciation and amortization.
GLASS TECHNOLOGIES (GT) included Viracon, our architectural glass fabricator,
Tru Vue, our picture framing glass and matboard fabricator, and Viratec, which
applies optical-grade coatings to glass and other substrates. As described
below, Viratec was acquired along with Marcon, which applies coatings to
architectural and residential building glass, and was merged into Viracon's
operations. Beginning in March 1996, Marcon and Viratec were consolidated with
our other majority-owned business units. Through fiscal 1996, our 50% equity in
Marcon's and Viratec's net earnings was included in the Consolidated Results of
Operations under the caption "Equity in net earnings of affiliated companies."
In January 1997, we agreed to pay our 50% joint venture partner (JV Partner) $41
million for its interest in Marcon/Viratec and certain leased assets. This
agreement also included the irrevocable release of both parties from all
outstanding claims related to the litigation as described hereafter. In November
1995, our 50% JV Partner in Marcon/Viratec commenced litigation against us,
alleging claims for damages and seeking to have the Court order us to sell our
50% interest to the JV Partner. We filed counterclaims seeking to have the JV
Partner's 50% interest sold to us. In March 1996, the Court ordered the JV
Partner to sell the shares of stock representing its 50% interest in
Marcon/Viratec to us upon payment by us of fair value for those shares as
determined by the Court after further proceedings. As a result of the Court
order, the JV Partner's rights and status as shareholder and directors were
terminated and Marcon/Viratec was consolidated in our financial statements
beginning in the first quarter of fiscal 1997. The JV Partner's claims against
us for damages were still pending and the Court also was considering a motion
brought by the JV Partner to add a claim for punitive damages until agreement
was reached by the parties in January 1997.
GT improved net sales and earnings for the fifth consecutive year, exceeding
fiscal 1996's record results. Net sales rose 28%, while operating income
improved 21% to $19.9 million. The net sales increase was due to continued
strong demand and firm pricing for its fabricated architectural glass products
and the addition of net sales from the acquired Viratec unit. While the segment
contributed 20% of consolidated net sales, it provided 43% of our consolidated
operating income.
Viracon experienced continued strong demand for its architectural glass
products. This unit ran at or near full capacity for most of the year. Viracon's
operating income grew 21%. Further production capacity was added in 1997 and
additional increases were planned for 1998.
Tru Vue posted marginally improved net sales and operating income in fiscal
1997. These results occurred against a backdrop of soft industry net sales. The
unit was successful in controlling costs and made progress toward integrating
its matboard operations with its picture-framing glass business.
On a pro forma basis, Viratec saw its net sales fall 9%, although year-end
activity reflected high incoming order rates. In fiscal 1997, industry pricing
pressure for its flat glass coated products and the unit's inability to reach
operating profitability for its direct-coat business combined to reduce
operating income when compared to fiscal 1996. At March 1, 1997, Viratec's
backlog of $17 million was more than double the prior year's $8 million year-end
backlog.
AUTO GLASS (AG) reported modestly improved results in fiscal 1997. The segment
net sales grew 13% during the year despite intense competition and lower unit
movement in the replacement auto glass industry. Operating income increased 12%.
This increase resulted mainly from the above-mentioned increase in net sales,
which more than offset the increase in information systems and marketing expense
associated with the segment's drive to expand market coverage and develop new
services to meet customers' needs. AG, which operates retail stores under the
Harmon AutoGlass (Harmon) name and distribution centers under the Glass Depot
name, possessed the third-largest market share in the auto glass repair and
replacement industry during fiscal 1997.
Insurance companies continued to prefer vendors who could expedite claims
processing and other administrative efforts related to auto glass replacement
and repair. The segment's significant investment in information systems provided
Harmon the means to offer comprehensive claims processing and management
services to these customers on a nationwide basis.
16
Curvlite, AG's auto glass fabricator, increased net sales in fiscal 1997 by 32%.
The unit's National Distribution Center, which in fiscal 1996 began to offer
other manufacturers' products as well as its own for both domestic and foreign
vehicles, and AutoGlass Express program, a new delivery system which allowed
Curvlite to fill customer orders more quickly and completely, accounted for much
of the unit's net sales growth. About 63% of Curvlite's net sales were made to
Glass Depot units.
In January 1997, Harmon completed its acquisition of Portland Glass, a
46-location auto glass replacement chain operating in the Northeast U.S. This
acquisition, combined with other locations added during the year, increased the
number of locations to 319 Harmon retail locations and 66 Glass Depot
distribution centers. At March 1, 1997, AG also had 8 Midas Muffler franchises.
BUILDING PRODUCTS & SERVICES (BPS) posted its first operating profit in five
years in fiscal 1997, recording earnings of $5.6 million. Overall net sales were
flat compared to a year earlier. Higher net sales by our Detention & Security,
Full Service and Architectural Products units were offset by lower domestic
curtainwall net sales and the absence of net sales from the Nanik Window
Coverings businesses sold in fiscal 1996. Overseas net sales grew marginally for
the year. Other than the segment's European operations, each of BPS' operating
units recorded solid operating earnings improvement compared to fiscal 1996.
Harmon, Ltd., BPS' domestic and international curtainwall unit, experienced flat
results as the domestic and Asian operations' improved earnings were offset by a
large operating loss in Europe. The European loss reflected high-risk projects
taken and executed at unacceptably low margins. The improvement in operating
earnings by our domestic and Asian curtainwall units was achieved through
overhead and operating cost reductions, and improved management of projects.
The segment's Full Service unit had another solid year, generating 6% higher net
sales and healthy operating income. The Detention & Security unit reported 38%
higher net sales and significantly greater income in fiscal 1997. However, its
fiscal 1997 year-end backlog was down 19% from a year earlier. The Architectural
Products unit leveraged its higher net sales into sharply higher profitability
as the unit improved its engineering and fabrication productivity.
At the end of fiscal 1997, BPS' backlog was $315 million, which represented
almost 88% of the consolidated total.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
NET CASH PROVIDED BY FINANCING ACTIVITIES In May 1998, we obtained a five-year,
committed secured credit facility in the amount of $275 million. This new credit
facility requires us to maintain minimum levels of net worth and certain
financial ratios. This facility replaced a $150 million five-year,
multi-currency committed credit facility which had been obtained in May 1996.
This previous credit facility also required us to maintain minimum levels of net
worth and certain financial ratios. As a result of our losses and exit charges
relating to our international curtainwall businesses in fiscal 1998, we were not
in compliance with certain financial covenants of the previous credit facility.
As we are in compliance with all of the financial covenants of the new credit
facility, all bank borrowings at February 28, 1998 were classified as long-term
debt.
Long-term debt, including current installments of $1.7 million, stood at $153.6
million at February 28, 1998, up $24.3 million from a year earlier. Most of the
Company's long-term debt consisted of bank borrowings. The additional borrowings
were required to finance capital spending and the repurchase of common stock
under the Company's share repurchase program.
For fiscal 1999, we expect outstanding borrowings will increase to fund the
amount by which estimated capital spending and dividend requirements exceed the
anticipated cash flow from operations. We believe efforts to reduce working
capital relative to net sales growth plus our available credit facilities will
enable us to maintain adequate liquidity.
NET CASH PROVIDED BY OPERATING ACTIVITIES Cash provided by operating activities
in fiscal 1998 fell to $34.0 million from $41.6 million in fiscal 1997. The
decrease primarily reflected lower net earnings, which were partly offset by
favorable changes in working capital. Net receivables dropped $28.2 million,
primarily reflecting lower receivables in our remaining curtainwall operations,
after accounting for the effect of removing European curtainwall operations from
Apogee's consolidation. Receivables growth at AG, GT and BPS' noncurtainwall
businesses generally tracked sales growth in the last quarter of the fiscal
year. Most of our $5.8 million increase in inventories was due to GT, reflecting
the segment's higher activity level. The change in costs and earnings in excess
of billings was essentially offset by the change in billings in excess of costs
and earnings on uncompleted contracts. Accounts payable changed nominally after
accounting for the removal of European curtainwall operations from
consolidation. Year-end accrued expenses were $48.6 million higher than a year
earlier, mainly due to accruals associated with the nonrecurring charges
recorded during the year.
NET CASH USED IN INVESTING ACTIVITIES New capital investment in fiscal 1998
totaled $39.0 million, versus $86.2 million and $29.0 million in fiscal 1997 and
1996, respectively. Additions to property, plant and equipment totaled $38.2
million, and consisted primarily of
17
expenditures for manufacturing equipment, facility expansion and upgrading of
information systems throughout the Company. The AG segment completed four small
acquisitions of retail auto glass replacement stores for $0.8 million.
In fiscal 1999, we intend to invest an estimated $100 million in capital
expenditures, primarily in our GT businesses. GT plans include expenditures for
the construction of an architectural glass fabrication facility in Statesboro,
Georgia, a new Tru Vue facility in Chicago, Illinois and the move of Viratec's
Optium cathode ray tube coating line to a new location.
SHAREHOLDERS' EQUITY
At February 28, 1998, Apogee's shareholders' equity stood at $109.6 million,
down 36% from a year ago. Our net loss, dividends paid, and the repurchase of
common stock primarily accounted for the decrease slightly offset by the effect
of common stock issued in connection with our stock-based compensation plans.
Apogee pays a quarterly dividend of 5.0 cents per share. For the year, the
Company repurchased 933,000 shares of common stock for $13.5 million, while
issuing 504,000 common shares under its stock-based incentive plans. In February
1998, our Board of Directors authorized the repurchase of up to an additional
1,000,000 shares of the Company's common stock.
IMPACT OF INFLATION
Our financial statements are prepared on a historical cost basis, which does not
completely account for the effects of inflation. However, since the cost of many
of our inventories is determined using the last-in, first-out (LIFO) method of
accounting, cost of sales, except for depreciation expense included therein,
generally reflects current costs.
Year-end prices were essentially unchanged from a year ago for the cost of
glass, one of our primary raw materials. We expect the cost of glass to remain
essentially unchanged in fiscal 1999. Aluminum prices at year end were slightly
lower than a year ago. While our construction and supply contracts are at fixed
prices, the material components are usually based on firm quotes obtained from
suppliers. Labor cost increases, including taxes and fringe benefits, rose
moderately in fiscal 1998 and a moderate increase also can be reasonably
anticipated for fiscal 1999. Other costs are managed to minimize the
inflationary pressures that exist in markets for goods and services our business
operations require.
IMPACT OF YEAR 2000
We are reviewing the potential impact of the "Year 2000" date change which
involves the inability of certain software and systems to properly recognize and
process date information relating to the Year 2000. We have assigned a team to
evaluate the nature and extent of the work required to make our systems,
products and infrastructure Year 2000 compliant. A number of existing systems
projects are either underway or under review within our various business units
to incorporate Year 2000 compliance, the cost of which has not been determined.
We continue to evaluate the estimated costs associated with our efforts to
ensure that our systems, products and infrastructure are Year 2000 compliant.
While these on-going efforts will involve additional costs, we believe, based on
available information, that we are and will continue to effectively manage our
Year 2000 transition without any material adverse effect on our business,
results of operations or financial condition.
CAUTIONARY STATEMENT
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. A number of factors should be
considered in conjunction with the report's forward-looking statements,
including changes in economic and market conditions, factors related to
competitive pricing, commercial building market conditions, management of growth
or restructuring of business units, expected cost savings from the restructuring
cannot be fully realized or realized within the expected timeframe, net sales
following the restructuring are lower than expected, costs or difficulties
related to the operation of the businesses or execution of restructuring or exit
activities are greater than expected, the impact of foreign currency markets,
the integration of acquisitions, the realization of expected economies gained
through expansion and information systems technology and other factors as set
forth in the cautionary statements included in Exhibit 99 to our 10-K filed with
the Securities and Exchange Commission.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section of
this report. See "Index of Financial Statements and Schedules".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------
ITEMS 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items, other than the information set forth
in Part I above in "Executive Officers of the Registrant," is included on pages
1 to 5 and 10 to 12 of the Proxy Statement for the Annual Meeting of
Shareholders to be held June 23, 1998, which is incorporated herein by
reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Financial Statement Schedules -
The consolidated financial statements and schedules of the Registrant
listed in the accompanying "Index of Financial Statements and Schedules"
together with the report of KPMG Peat Marwick LLP, independent auditors, are
filed as part of this report.
(b) Reports on Form 8-K
During the quarter ended February 28, 1998, two reports on Form 8-K dated
January 12, 1998 and February 27, 1998 were filed.
(c) Exhibits -
The information called for by this Item is contained in a separate section of
this report. See "Exhibit Index".
19
- SIGNATURES -
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 29, 1998
APOGEE ENTERPRISES, INC.
By: /s/ Donald W. Goldfus
-----------------------------
Donald W. Goldfus
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Donald W. Goldfus Chairman of the Board of Directors 5-29-98
- ---------------------------------
Donald W. Goldfus
/s/ Russell Huffer President and CEO, Director 5-29-98
- ---------------------------------
Russell Huffer
/s/ Harry A. Hammerly Director 5-29-98
- ---------------------------------
Harry A. Hammerly
/s/ Laurence J. Niederhofer Director 5-29-98
- ---------------------------------
Laurence J. Niederhofer
/s/ James L. Martineau Executive Vice President, Director 5-29-98
- ---------------------------------
James L. Martineau
/s/ D. Eugene Nugent Director 5-29-98
- ---------------------------------
D. Eugene Nugent
/s/ Barbara B. Grogan Director 5-29-98
- ---------------------------------
Barbara B. Grogan
20
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen C. Mitchell Director 5-29-98
- ---------------------------------
Stephen C. Mitchell
/s/ Jerome B. Cohen Director 5-29-98
- ---------------------------------
Jerome B. Cohen
/s/ Michael E. Shannon Director 5-29-98
- ---------------------------------
Michael E. Shannon
21
EXHIBIT INDEX
Exhibit (3A) Restated Articles of Incorporation
Incorporated by reference to Exhibit 3A to Registrant's Annual
Report on Form 10-K for year ended February 27, 1988.
Exhibit (3B) Restated By Laws of Apogee Enterprises, Inc., as amended to date.
Incorporated by reference to Exhibit 3C to Registrant's Annual
Report on Form 10-K for year ended February 29, 1992.
Exhibit (4A) Specimen certificate for shares of common stock of Apogee
Enterprises, Inc. Incorporated by reference to Exhibit 4A to
Registrant's Annual Report on Form 10-K for year ended February
29, 1992.
Exhibit (10A) Deferred Incentive Compensation Plan dated February 27, 1986
between Registrant and certain executive officers. Incorporated by
reference to Exhibit 10N to Registrant's Annual Report on Form
10-K for year ended March 1, 1986.
Exhibit (10B) Amended and Restated 1987 Apogee Enterprises, Inc. Partnership
Plan is incorporated by reference to Registrant's S-8 registration
statement (File No. 33-60400)
Exhibit (10C) Rights Agreement between Registrant and American Stock Transfer
Co. dated October 19, 1990. Incorporated by reference to
Registrant's Form 8-A on October 19, 1990.
Exhibit (10D) Consulting Agreement between Registrant and Laurence J.
Niederhofer dated November 1, 1993. Incorporated by reference to
Exhibit 10I to Registrant's Annual Report on Form 10-K for year
ended February 26, 1994.
Exhibit (10E) Employment Agreement between Registrant and Richard Gould dated
May 23, 1994. Incorporated by reference to Exhibit 10I to
Registrant's Annual Report on Form 10-K for year ended February
25, 1995.
Exhibit (10F) 1987 Apogee Enterprises, Inc. Stock Option Plan is incorporated by
reference to Registrant's S-8 registration statement (File No.
33-35944)
Exhibit (10G) $275 million Multi-currency Credit Agreement dated as of May 21,
1998 between Apogee Enterprises, Inc. and banks party to the
agreement, including related security, pledge, contribution and
subsidiary guaranty agreements.
Exhibit (10H) 1997 Omnibus Stock Incentive Plan is incorporated by reference to
Registrant's S-8 registration statement (File No. 333-32437)
Exhibit (21) Subsidiaries of the Registrant
Exhibit (23) Consent of KPMG Peat Marwick LLP
Exhibit (27) Financial Data Schedule (EDGAR filing only)
Exhibit (99) Litigation Reform Act of 1995 - Cautionary Statement
22
Apogee Enterprises, Inc.
Form 10-K
Items 8, 14 (a) and 14 (d)
Index of Financial Statements and Schedules
Financial Statements
Independent Auditors' Report............................................F-2
Consolidated Balance Sheets.............................................F-3
Consolidated Results of Operations......................................F-4
Consolidated Statements of Shareholders' Equity.........................F-5
Consolidated Statements of Cash Flows...................................F-6
Notes to Consolidated Financial Statements..............................F-7
Financial Schedules
Schedule II - Valuation and Qualifying Accounts.........................F-19
All other schedules are omitted because they are not required, or because
the required information is included in the consolidated financial
statements or noted thereto.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Apogee Enterprises, Inc.:
We have audited the consolidated financial statements of Apogee Enterprises,
Inc. and subsidiaries as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 Apogee
Enterprises, Inc. and subsidiaries as of February 28, 1998 and March 1, 1997 and
the results of their operations and their cash flows for each of the years in
the three-year period ended February 28, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 8, 1998, except as to Note 6 which is as of May 22, 1998
F-2
CONSOLIDATED BALANCE SHEETS
February 28, March 1,
(DOLLAR AMOUNTS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------- ---------------- ----------------
ASSETS
Current assets
Cash and cash equivalents $ 7,853 $ 4,065
Receivables, net of allowance for doubtful accounts 145,121 204,259
Inventories 64,183 58,261
Costs and earnings in excess of billings on uncompleted contracts 6,796 25,653
Refundable income taxes 16,533 1,004
Deferred tax assets 14,218 4,486
Other current assets 7,540 7,466
- ----------------------------------------------------------------------- ---------------- ----------------
Total current assets 262,244 305,194
- ----------------------------------------------------------------------- ---------------- ----------------
Property, plant and equipment, net 129,937 118,799
Other assets
Marketable securities available for sale 18,706 19,656
Investments 709 738
Intangible assets, at cost less accumulated
amortization of $12,323 and $9,480, respectively 50,500 52,451
Deferred tax assets -- 1,090
Other 2,025 3,036
- ----------------------------------------------------------------------- ---------------- ----------------
201,877 76,971
- ----------------------------------------------------------------------- ---------------- ----------------
Total assets $464,121 $500,964
======================================================================= ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 44,055 $ 73,325
Accrued expenses 108,893 61,435
Billings in excess of costs and earnings on uncompleted contracts 23,141 40,154
Current installments of long-term debt 1,679 1,707
- ----------------------------------------------------------------------- ---------------- ----------------
Total current liabilities 177,768 176,621
- ----------------------------------------------------------------------- ---------------- ----------------
Long-term debt, less current installments 151,967 127,640
Other long-term liabilities 24,785 24,554
Commitments and contingent liabilities (Notes 6, 14 and 15)
Shareholders' equity
Common stock of $.33-1/3 par value; authorized 50,000,000 shares;
issued and outstanding, 27,453,000 and 27,882,000, respectively 9,151 9,294
Additional paid-in capital 38,983 34,686
Retained earnings 61,899 129,424
Unearned compensation (686) --
Net unrealized gain on marketable securities 254 22
Cumulative translation adjustment -- (1,277)
- ----------------------------------------------------------------------- ---------------- ----------------
Total shareholders' equity 109,601 172,149
- ----------------------------------------------------------------------- ---------------- ----------------
Total liabilities and shareholders' equity $464,121 $ 500,964
======================================================================= ================ ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CONSOLIDATED RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT Year Ended Year Ended Year Ended
PER SHARE DATA) February 28, 1998 March 1, 1997 March 2, 1996
- --------------------------------------- ---------------------- -------------------- ----------------
Net sales $912,831 $950,777 $871,147
Cost of sales 733,430 798,976 752,624
- --------------------------------------- --------------------- --------------------- ----------------
Gross profit 179,401 151,801 118,523
Selling, general and administrative 138,537 105,305 86,066
expenses
Provision for restructuring and other 96,131 -- --
unusual items
- --------------------------------------- --------------------- --------------------- ----------------
Operating income (loss) (55,267) 46,496 32,457
Interest expense, net 7,334 6,964 5,697
Other expense, net -- -- 149
- --------------------------------------- --------------------- --------------------- ----------------
Earnings (loss) before income
taxes and (62,601) 39,532 26,611
Other items below
Income taxes (12,425) 13,802 9,820
Equity in net loss (earnings) of 879 337 (528)
affiliated companies
Minority interest -- (827) (516)
- --------------------------------------- --------------------- --------------------- -----------------
Net earnings (loss) $(51,055) $26,220 $17,835
- --------------------------------------- --------------------- --------------------- -----------------
Earnings (loss) per share - Basic $(1.84) $0.96 $0.66
Earnings (loss) per share - Diluted $(1.84) $0.93 $0.65
- --------------------------------------- ---------------------- -------------------- -----------------
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Additional Cumulative Unrealized
(DOLLAR AMOUNTS IN Shares Common Paid-In Retained Unearned Translation Gain on
THOUSANDS) Outstanding Stock Capital Earnings Compensation Adjustment Investments
- -------------------------- ------------ ------------- ------------- --------- -------------- ------------ ------------
Balance at February 25, 1995 13,443 $ 4,481 $ 19,345 $ 100,803 $ -- $ -- $--
Net earnings -- -- -- 17,835 -- -- --
Common stock issued 88 30 1,120 -- -- -- --
Common stock
repurchased and (14) (215) -- -- --
retired (5) (20)
Cash dividends -- -- -- (4,453) -- -- --
- ---------------------------- --------- --------- --------- --------- --------- -------- ---------
Balance at March 2, 1996 13,517 4,506 20,445 113,970 -- -- --
Net earnings -- -- -- 26,220 -- -- --
Common stock issued 478 159 12,871 -- -- -- --
Tax benefit
associated with -- -- 1,445 -- -- -- --
stock plans
Common stock
repurchased and (1,303) -- -- --
retired (85) (28) (75)
Cash dividends -- -- -- -- -- --
100% stock dividend,
at par 13,972 4,657 -- -- -- --
Translation adjustments -- -- -- -- -- (1,277) --
Net change in unrealized
gains on marketable -- -- -- -- -- -- 22
securities
- ---------------------------- --------- --------- --------- --------- --------- --------- ---------
Balance at March 1, 1997 27,882 9,294 34,686 129,424 -- (1,277) 22
Net loss -- -- -- (51,055) -- -- --
Common stock issued 504 168 4,754 -- -- -- --
Tax benefit
associated with -- -- 1,503 -- -- -- --
stock plans
Common stock
repurchased and (933) (311) (1,960) (11,219) -- -- --
retired
Cash dividends -- -- -- (5,251) -- -- --
Translation adjustments -- -- -- -- -- 1,277 --
Net change in
unrealized gains on
marketable securities -- -- -- -- -- -- 232
Unearned compensation -- -- -- -- (686) -- --
- ---------------------------- --------- --------- --------- --------- --------- --------- ---------
Balance at February 28, 1998 $27,453 $ 9,151 $ 38,983 $ 61,899 $ (686) $ -- $ 254
============================ ========= ========= ========= ========= ========== ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
(DOLLAR AMOUNTS IN THOUSANDS) February 28, 1998 March 1, 1997 March 2, 1996
- ------------------------------------------------------------------- ------------------ -------------- ---------------
OPERATING ACTIVITIES
Net earnings (loss) $(51,055) $26,220 $17,835
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 23,990 20,458 16,528
Provision for losses on accounts receivable 1,428 2,917 1,983
Deferred income tax (benefit) expense (7,849) 9,452 1,807
Gain on sale of Nanik Window Coverings -- -- (4,166)
Provision for restructuring and other unusual items 61,887 -- --
Foreign currency translation loss 3,422 -- --
Equity in net loss (earnings) of affiliated companies 879 337 (528)
Minority interest -- (827) (516)
Other, net 2,819 (560) (1,429)
- ------------------------------------------------------------------- ------------------ -------------- ---------------
Cash flow before changes in operating assets and 35,521 57,997 31,514
liabilities
Changes in operating assets and liabilities, net of effect of -- -- --
acquisitions:
Receivables 25,364 (46,461) 2,134
Inventories (5,795) 55 (3,286)
Cost and earnings in excess of billings on uncompleted 15,859 (202) (6,670)
contracts
Other current assets (60) (960) (1,220)
Accounts payable and accrued expenses (5,472) 16,606 14,494
Billings in excess of costs and earnings on uncompleted (17,013) 20,684 1,753
contracts
Refundable income taxes and accrued income taxes (12,338) (7,061) (2,820)
Other long-term liabilities (2,061) 959 4,593
- ------------------------------------------------------------------- ------------------ -------------- ---------------
Net cash provided by operating activities 34,005 41,617 40,492
- ------------------------------------------------------------------- ------------------ -------------- ---------------
INVESTING ACTIVITIES
Capital expenditures (38,214) (35,613) (22,615)
Acquisition of Marcon Coatings, net of cash acquired -- (40,161) --
Acquisition of businesses, net of cash acquired (810) (1,365) (3,793)
Decrease (increase) in marketable securities 1,306 (7,555) (12,231)
Investment in and advances to affiliated companies (850) (464) (889)
Proceeds from sales of property, plant and equipment 874 3,146 301
Proceeds from sale of Nanik Window Coverings -- -- 17,550
Other, net (506) (277) (1,991)
- ------------------------------------------------------------------- ------------------ -------------- ---------------
Net cash used in investing activities (38,200) (82,289) (23,668)
- ------------------------------------------------------------------- ------------------ -------------- ---------------
FINANCING ACTIVITIES
Payments on notes payable -- (5,350) (7,065)
Payments on long-term debt (1,704) (6,120) (5,576)
Proceeds from issuance of long-term debt 26,003 51,100 3,855
Proceeds from issuance of common stock 4,922 3,930 1,150
Repurchase and retirement of common stock (13,490) (1,406) (240)
Dividends paid (5,251) (4,806) (4,453)
- ------------------------------------------------------------------- ------------------ -------------- ---------------
Net cash provided by (used in) financing activities 10,480 37,348 (12,329)
- ------------------------------------------------------------------- ------------------ -------------- ---------------
(Increase) decrease in cash and cash equivalents before effect of
exchange rate changes on cash 6,285 (3,324) 4,495
Effect of exchange rate changes on cash (2,497) -- --
- ------------------------------------------------------------------- ------------------ -------------- ---------------
(Increase) decrease in cash and cash equivalents 3,788 (3,324) 4,495
Cash and cash equivalents at beginning of year 4,065 7,389 2,894
- ------------------------------------------------------------------- ------------------ -------------- ---------------
Cash and cash equivalents at end of year $ 7,853 $ 4,065 $ 7,389
=================================================================== ================== ============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Common stock issued in acquisition of business $ -- $ 9,100 $ --
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
PRINCIPLES OF CONSOLIDATION Our consolidated financial statements include the
accounts of Apogee and all majority-owned subsidiaries except, for fiscal 1998
only, for our formerly 70%-owned European operations. In March 1998, in
accordance with a February 26, 1998 resolution of our Board of Directors, five
operating companies comprising our European curtainwall operations filed for
bankruptcy or commercial liquidation, effectively relinquishing our control over
those entities. Accordingly, such entities were deconsolidated and net operating
results were included as a single component in our 1998 Consolidated Results of
Operations under the caption "Unusual items" and the net liability was included
in accrued expenses in our Consolidated Balance Sheet. We use the equity method
to account for 50%-owned joint ventures. Intercompany transactions have been
eliminated. Certain amounts from prior-years' financial statements have been
reclassified to conform with this year's presentation.
CASH AND CASH EQUIVALENTS Investments with an original maturity of three months
or less are included in cash and cash equivalents.
INVENTORIES Inventories, which consist primarily of purchased glass and
aluminum, are valued at the lower of cost or market. Approximately 47% of the
inventories are valued by use of the last-in, first-out (LIFO) method, which
does not exceed market. If the first-in, first-out (FIFO) method had been used
for all inventories, our inventories would have been $3,000,000 and $2,615,000
higher than reported at February 28, 1998 and March 1, 1997, respectively.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost.
Significant improvements and renewals are capitalized. Repairs and maintenance
are charged to expense as incurred. Depreciation is computed on a straight-line
basis, based on estimated useful lives of 20 to 40 years for buildings and 2 to
15 years for equipment.
INTANGIBLE ASSETS AND AMORTIZATION Intangible assets consist principally of the
excess of cost over the fair value of net assets acquired (goodwill) and are
amortized on a straight-line basis, primarily over 40 years. The carrying value
of intangible assets is reviewed when circumstances suggest that it has been
impaired. If this review indicates that intangible assets will not be
recoverable based on the estimated undiscounted cash flows over the remaining
amortization period, the carrying value of intangible assets must be reduced to
estimated fair value. Amortization expense amounted to $2,011,000, $1,503,000
and $665,000 in 1998, 1997 and 1996, respectively.
INSURANCE SUBSIDIARY We established a wholly-owned insurance subsidiary, Prism
Assurance, Inc. (Prism), in 1996 to insure our workers' compensation, general
liability and automobile liability risks. Prism invests in fixed maturity
investments which we classify as "available-for-sale" and are carried at market
value as prescribed by Statement of Financial Accounting Standards (SFAS) No.
115. Reserve requirements are established based on actuarial projections of
ultimate losses. Apogee also has accruals for losses incurred prior to Prism's
formation. Losses estimated to be paid within twelve months are classified as
accrued expenses, while losses expected to be payable in later periods are
included in other long-term liabilities.
NET SALES RECOGNITION We recognize net sales from construction contracts on a
percentage-of-completion basis, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Contract costs include
materials, labor, project management and other direct costs related to contract
performance. We establish provisions for estimated losses, if any, on
uncompleted contracts in the period in which such losses are determined. Amounts
representing contract change orders, claims or other items are included in net
sales only when they have been approved by our customers. Net sales from the
sale of products and the related cost of sales are recorded upon shipment.
INCOME TAXES We account for income taxes as prescribed by SFAS No. 109, which
requires use of the asset and liability method. This method recognizes deferred
tax assets and liabilities based upon the future tax consequences of temporary
differences between financial and tax reporting.
EARNINGS PER SHARE We compute basic and diluted earnings per share as prescribed
by SFAS No. 128 as described below under the caption NEW ACCOUNTING STANDARDS.
Share figures reflect the two-for-one stock split effective February 1997.
FOREIGN OPERATIONS The financial statements of foreign operations have been
translated to U.S. dollars, using the rules of SFAS No. 52. Balance sheet
accounts are stated in U.S. dollars, generally at the year-end exchange rate.
Results of operations are translated at average exchange rates for the
respective period.
F-7
We periodically enter into forward currency exchange contracts to manage
specific foreign currency exposures related to foreign construction contracts,
receivables, and bank borrowings denominated in foreign currencies. As of
February 28, 1998, we had forward contracts maturing in 1999 with a value of
approximately $25.6 million. Gains and losses on forward contracts related to
receivables are recognized currently, while gains and losses related to
construction projects are deferred and accounted for as a part of the related
transaction.
ACCOUNTING PERIOD Our fiscal year ends on the Saturday closest to February 28.
Fiscal year 1998 and 1997 consisted of fifty-two weeks and 1996 was fifty-three
weeks.
ACCOUNTING ESTIMATES The preparation of our consolidated 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 consolidated financial statements and the reported amounts of net sales and
expenses during the reporting period. Amounts subject to significant estimates
and assumptions include, but are not limited to, insurance reserves and net
sales recognition for construction contracts, including the status of
outstanding disputes and claims. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, EARNINGS PER SHARE, which simplifies the
standards for computing earnings per share. SFAS No. 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share, which excludes dilution. SFAS No. 128 also requires dual presentation
of basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures, and requires a reconciliation.
Diluted earnings per share is computed similarly to fully diluted earnings per
share pursuant to APB No. 15. SFAS No. 128 was required for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application was not permitted. Accordingly, we adopted SFAS No. 128 in
the fourth quarter of 1998. SFAS No. 128 requires restatement of all
prior-period earnings-per-share data presented. The adoption of SFAS No. 128 did
not have a material impact on the Company's financial statement disclosures.
In February 1997, the FASB issued SFAS No. 129, DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURES, which was adopted by us in the fourth quarter of 1998.
SFAS No. 129 requires companies to disclose certain information about their
capital structure. SFAS No. 129 did not have a material impact on our financial
statement disclosures.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive income
and its components (net sales, expenses, gains, and losses) in a full set of
general-purpose financial statements. We will adopt SFAS No. 130 in 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports net sales. Management has not yet
evaluated the effects of this change on its reporting of segment information. We
will adopt SFAS No. 131 in 1999.
2. RECEIVABLES
(In thousands) 1998 1997
- -------------------------------------- ------------ -----------
Trade accounts $ 89,924 $ 78,991
Construction contracts 35,244 86,709
Contract retainage 25,271 32,609
Other receivables 1,633 13,247
- -------------------------------------- ------------ -----------
Total receivables 152,072 211,556
Less allowance for doubtful accounts
(6,951) (7,297)
- -------------------------------------- ------------ -----------
Net receivables $145,121 $ 204,259
====================================== ============ ===========
F-8
We provide products and services to the commercial and institutional new
construction and remodeling markets, the automotive replacement glass market and
selected consumer markets. We do not believe a concentration of credit risk
exists, due to the diversity of our markets and channels of distribution, and
the geographic location of our customers. Allowances are maintained for
potential credit losses and such losses have been within management's
expectations. The provision for bad debt expense was $1,428,000, $2,917,000 and
$1,983,000 in 1998, 1997 and 1996, respectively.
3. INVENTORIES
(In thousands) 1998 1997
- -------------------------------------- ------------ ----------
Raw materials $20,017 $14,760
Work-in process 4,749 3,863
Finished 39,417 39,638
- -------------------------------------- ------------ ----------
Total inventories $64,183 $58,261
====================================== ============ ==========
4. PROPERTY, PLANT AND EQUIPMENT
(In thousands) 1998 1997
- -------------------------------------- ------------ ----------
Land $ 2,686 $ 2,488
Buildings and improvements 66,274 58,358
Machinery and equipment 130,938 115,026
Office equipment and furniture 54,720 44,431
Construction in progress 9,506 22,975
- -------------------------------------- ------------ ----------
Total property, plant and 264,124 243,278
equipment
Less accumulated depreciation (134,187) (124,479)
- -------------------------------------- ------------ ----------
Net property, plant and $129,937 $118,799
equipment
====================================== ============ ==========
Depreciation expense was $21,979,000, $18,955,000 and $15,863,000 in 1998,
1997 and 1996, respectively.
5. ACCRUED EXPENSES
(In thousands) 1998 1997
- -------------------------------------- ---------- ------------
Payroll and related benefits $22,088 $25,263
Insurance 13,677 10,956
Taxes, other than income taxes 4,612 8,643
Pension 5,377 4,192
Interest 1,205 2,091
Costs and expenses related to exit
from 47,163 --
European curtainwall operations
Other 14,771 10,290
- -------------------------------------- ---------- ------------
Total accrued expenses $108,893 $61,435
====================================== ========== ============
6. LONG-TERM DEBT
(In thousands) 1998 1997
- -------------------------------------- ------------ ------------
Borrowings under revolving credit
and other bank agreements,
interest ranging from 3.77% to $150,503 $124,500
8.50%
Other 3,143 4,847
- -------------------------------------- ------------ ------------
Total long-term debt 153,646 129,347
Less current installments (1,679)
(1,707)
- -------------------------------------- ------------ ------------
Net long-term debt $151,967 $127,640
====================================== ============ ============
F-9
Long-term debt maturities are as follows:
FISCAL YEAR (In thousands)
- ------------------------------- --------------------
1999 $ 1,679
2000 1,082
2001 182
2002 100
2003 150,603
Thereafter --
- ------------------------------- --------------------
Total
$153,646
=============================== ====================
In May 1998, we obtained a five-year, committed secured credit facility in the
amount of $275 million. This new credit facility requires us to maintain minimum
levels of net worth and certain financial ratios. This facility replaced a $150
million five-year, multi-currency committed credit facility which had been
obtained in May 1996. This previous credit facility also required us to maintain
minimum levels of net worth and certain financial ratios. As a result our losses
and exit charges relating to our international curtainwall businesses in fiscal
1998, we were not in compliance with certain financial covenants of the previous
credit facility. As we are in compliance with all of the financial covenants of
the new credit facility, all bank borrowings under the revolving credit
agreement at February 28, 1998 were classified as long-term debt.
We also had access to short-term credit on an uncommitted basis with several
major banks. At February 28, 1998 and March 1, 1997, respectively, $24.9 million
and $10.0 million in bank borrowings were outstanding under these agreements. We
may refinance these short-term borrowings on a long-term basis under the
revolving credit agreements discussed above. Accordingly, our short-term bank
borrowings, which were not expected to be paid within one year, were classified
as long-term debt. The interest rate on the year-end bank borrowings under
uncommitted credit facilities was 6.0%.
Selected information related to bank borrowings is as follows:
(Dollar amounts in thousands) 1998 1997
- ----------------------------------------- ----------- ------------
Average daily borrowings during the year $133,158 $ 79,420
Maximum borrowings outstanding during 158,294 126,400
the year
Weighted average interest rate during 5.6% 6.1%
the year
========================================= =========== ============
In 1998 and 1996, we entered into interest rate swap agreements that
effectively converted a portion of our variable rate borrowings into fixed rate
obligations. Under these agreements, which expire in 2001, we receive payments
at variable rates while we make payments at fixed rates ranging from 5.7% to
6.3%. The net interest paid or received is included in interest expense. The
amount of borrowings effectively converted at February 28, 1998 and March 1,
1997 was $70 million and $20 million, respectively.
In 1992, we entered into three interest rate swap agreements that effectively
converted $25 million of our fixed rate, long-term borrowings into variable rate
obligations. During 1993, we sold two of the swap agreements at net gains. The
gains were recognized as reductions in interest expense through 1997. The third
agreement expired in 1995.
The net book value of property and plant pledged as collateral under
industrial development bonds was approximately $1.1 million at February 28,
1998.
7. INTEREST AND OTHER EXPENSE, NET
(In thousands) 1998 1997 1996
- ------------------------------ ---------- ---------- ---------
Interest on debt $ 8,986 $ 6,713 $ 6,747
Other interest expense 460 1,367 273
- ------------------------------ ---------- ---------- ---------
Total interest expense 9,446 8,080 7,020
Less interest income (2,112)
(1,116) (1,323)
- ------------------------------ ---------- ---------- ---------
Interest expense, net $ 7,334 $ 6,964 $ 5,697
============================== ========== ========== =========
Interest payments were $ 8,223,000, $6,180,000 and $7,095,000 in 1998, 1997
and 1996, respectively.
F-10
In 1996, other expense, net, consisted of charges totaling $4.3 million
primarily related to write-off of a minority investment in a research and
development venture and an adjustment to our insurance reserves, offset by the
$4.2 million gain from the sale of the Nanik Window Coverings unit discussed in
Note 12.
8. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
During 1997, the Board of Directors approved a two-for-one stock split, in the
form of a 100% stock dividend, payable to shareholders in February 1997. All
share and per share data have been restated accordingly.
A class of 200,000 shares of junior preferred stock with a par value of $1.00
is authorized, but unissued.
We have a Shareholders' Rights Plan, under which each share of our outstanding
common stock has an associated preferred share purchase right. The rights are
exercisable only under certain circumstances, including the acquisition by a
person or group of 10% of the outstanding shares of the Company's common stock.
Upon exercise, the rights would allow holders of such rights to purchase common
stock of Apogee or an acquiring company at a discounted price, which generally
would be 50% of the respective stock's current fair market value.
The 1997 Stock Option Plan and 1987 Stock Option Plan (the "Plans") each
provide for the issuance of up to 2,500,000 options to purchase Company stock.
Options awarded under these Plans, either in the form of incentive stock options
or nonstatutory options, are exercisable at an option price equal to the fair
market value at the date of award. The 1987 Plan has expired and no new grants
of stock options may be made under this Plan.
The 1987 Partnership Plan, a Plan designed to increase the ownership of Apogee
stock by key employees, allows participants selected by the Compensation
Committee of the Board of Directors to use earned incentive compensation to
purchase Apogee common stock. The purchased stock is then matched by an equal
award of restricted stock, which vests over a predetermined period. 2,200,000
common shares are authorized for issuance under the Plan. As of February 28,
1998, 1,937,000 shares have been issued under the Plan. We expensed $1,141,000,
$2,145,000 and $666,000 in conjunction with the Partnership Plan in1998, 1997
and 1996, respectively.
A summary of option transactions under the Plans for 1998, 1997 and 1996
follows:
OPTIONS OUTSTANDING
NUMBER OF AVERAGE OPTION PRICE
SHARES EXERCISE PRICE RANGE
- ----------------------------- ------------ -- ---------------- -- --------------
Balances, February 25, 1995 1,156,000 $ 6.00 $ 4.48- 9.46
Options granted 490,000 8.64 7.25- 8.80
Options exercised (174,000) 6.52 5.38- 8.13
Options canceled (68,000) 5.94 5.38- 7.94
- ----------------------------- ------------ -- ---------------- -- --------------
Balances, March 2, 1996 1,404,000 6.87 4.48- 9.46
Options granted 587,000 15.08 10.50-17.75
Options exercised (368,000) 5.83 5.38- 8.69
Options canceled (22,000) 7.53 5.38-15.06
- ----------------------------- ------------ -- ---------------- -- --------------
Balances, March 1, 1997 1,601,000 10.11 4.48-17.75
Options granted 485,000 16.09 11.31-25.00
Options exercised (372,000) 6.86 5.38-16.50
Options canceled (230,000) 12.38 5.38-16.75
- ----------------------------- ------------ -- ---------------- -- --------------
Balances, February 28, 1998 1,484,000 $12.53 4.48-25.00
- ----------------------------- ------------ -- ---------------- -- --------------
F-11
The following table summarizes information about stock options outstanding and
exercisable at February 28, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------------
RANGE OF REMAINING
EXERCISE PRICES NUMBER CONTRACTUAL WEIGHTED-AVG NUMBER WEIGHTED-AVG
OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ------------- -------------- ----------------- -------------- ---------------
$4.48 - $10.00 553,000 2.4 years $7.36 401,000 $ 7.14
10.01 - 16.00 512,000 6.8 years 14.43 126,000 14.88
16.01 - 25.00 419,000 8.5 years 17.01 37,000 19.25
- ---------------- ------------- -------------- ----------------- -------------- ---------------
1,484,000 5.7 years $12.53 564,000 $ 9.66
================ ============= ============== ================= ============== ===============
We have adopted the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Accordingly, no compensation cost has been recognized
with respect to our 1987 Stock Option Plan. Had compensation cost for the Plan
been determined based on the fair value methodology prescribed by SFAS 123, our
net earnings (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated below:
(In thousands, except per 1998 1997 1996
share data)
- -------------------------------- --------- --------- ---------
Net earnings (loss) - as ($51,055) $26,220 $17,835
reported
Net earnings (loss) - pro forma (53,001) 25,221 17,493
Earnings (loss) per share
diluted (1.84) 0.93 0.65
- as reported
Earnings (loss) per share
diluted (1.91) 0.90 0.64
- pro forma
================================ ========= ========= =========
The above pro forma amounts may not be representative of the effects on
reported net earnings (loss) for future years. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1998,
1997 and 1996:
1998 1997 1996
- -------------------------------- --------- ---------- ----------
Dividend yield 1.2% 1.1% 1.5%
Expected volatility 60.0% 60% 60%
Risk-free interest rate 7.0% 7.0% 6.0%
Expected lives 10 years 7.5 years 5 years
================================ ========= ========== ==========
9. UNUSUAL ITEMS
During 1998, we recorded a pre-tax charges of $96.1 for unusual items in our
Building Products & Services segment. This is presented separately as a
component of income from operations in the Consolidated Results of Operations.
The amount included nonrecurring charges of $26.0 million and $35.9 million
recorded in the third and fourth quarter, respectively, related to our
international curtainwall operations. In addition, unusual items included
operating losses totaling $34.2 million, representing the net operating results
for European curtainwall operations which were deconsolidated as described in
Principles of Consolidation in Note 1. A summary of the items included is as
follows:
- ------------------------------ -------------
Net operating loss of
European $34,243
curtainwall operations
Estimated costs associated
with exit
from European
curtainwall, 34,858
including completion of
certain
projects
Estimated loss on
construction 13,972
contract, including
penalties
Estimated costs related to
resolution of legal 7,372
proceedings
Restructuring activities and 5,686
other
- ------------------------------ -------------
Total $96,131
============================== =============
F-12
The $26.0 million charge included amounts for the estimated loss on a disputed
construction contracts in Europe, including the accrual of certain penalty
amounts, and a provision for the accrual of legal and related costs associated
with the resolution of legal proceedings related to organizational changes in
its majority-owned European curtainwall unit. In June 1997, the Company
reorganized its European management team and, subsequently, several lawsuits
were initiated between Apogee and the minority shareholder based on, among other
items, allegations of breach of contract and fiduciary duty, and
misrepresentation. Restructuring activities involved the closing of the
segment's Asian offices and the rationalization of its project management,
engineering and European manufacturing capacity. The charge for restructuring
included amounts for severance and termination benefits for employees in France,
Asia and the US. , the write-down of property and equipment and other long-term
assets to their estimated net salable value and other items such as lease
termination costs. We reduced manufacturing capacity in France and reduced
project management and engineering costs in France and the US.
The $35.9 million charges reflected the estimated costs associated with
exiting our European operations, including the completion of certain remaining
projects. In March 1998, in accordance with a February 26, 1998 resolution of
our Board of Directors, the five operating companies comprising our European
curtainwall operations filed for bankruptcy or commenced liquidation,
effectively relinquishing control over those entities. Accordingly, the net
operating results for European curtainwall operations are included as a single
figure as indicated above.
At February 1998, accruals totaling $47.2 million represented the estimated
future cash outflows associated with the exit from our European curtainwall
operations. These cash expenditures are expected to be made within the next one
to two years. The primary component of the accrual relates to the completion of
certain remaining projects. Other costs included in the above figure are
provisions for severance and termination benefits, and legal and related costs
associated with the proceedings noted above.
10. INCOME TAXES
The components of income tax expense (benefit) for each of the last three
fiscal years are as follows:
(In thousands) 1998 1997 1996
- ------------------------------ ---------- ---------- ---------
Current:
Federal $ $ 1,866 $ 6,559
(4,164)
State and local (412) 955 910
Foreign -- 1,529 544
- ------------------------------ ---------- ---------- ---------
Total current (4,576) 4,350 8,013
- ------------------------------ ---------- ---------- ---------
Deferred:
Federal (8,233) 8,547 1,503
State and local (316) 1,605 304
Foreign 700 (700) --
- ------------------------------ ---------- ---------- ---------
Total deferred (7,849) 9,452 1,807
- ------------------------------ ---------- ---------- ---------
Total income tax
expense $(12,425) $ 13,802 $ 9,820
============================== ========== ========== =========
Income tax payments, net of refunds, were $12,000,000, $11,520,000 and
$10,878,000 in 1998, 1997 and 1996, respectively.
The differences between statutory federal tax rates and our consolidated
effective tax rates are as follows:
1998 1997 1996
- -------------------------------- ------------ ----------- -----------
Statutory federal tax rate (35.0%) 35.0% 35.0%
State and local income taxes,
net of federal tax benefit (2.2) 5.1 3.0
Tax credits (1.5) (2.2) (0.5)
Foreign items with no tax 1.8 8.3 0.8
benefit
Valuation allowance 18.1 -- (0.6)
Resolution of Revenue Agent -- (10.8) --
Exams
Other, net (1.1) (0.5) (0.8)
- -------------------------------- ------------ ----------- -----------
Consolidated effective tax rate (19.9%) 34.9% 36.9%
================================ ============ =========== ===========
F-13
Tax benefits for deductions associated with the 1987 Stock Option Plan and the
1987 Partnership Plan were $1,503,000 and $1,445,000 in 1998 and 1997,
respectively. These benefits were added directly to additional paid-in capital
and were not reflected in the determination of income tax expense.
Deferred tax assets and deferred tax liabilities at February 28, 1998 and
March 1, 1997 are as follows:
1998 1997
-------------------------- --------------------------
(In thousands) CURRENT NONCURRENT CURRENT NONCURRENT
- ------------------------- ------------ ------------- ------------- ------------
Accounts receivable $2,393 $ -- $2,660 $ --
Accrued insurance -- 3,715 -- 2,991
Deferred compensation (140) 4,071 191 4,447
Restructuring reserve 22,982 6 -- 26
Inventory 1,383 128 1,505 320
Depreciation 143 (6,235) 147 (6,522)
Employee benefit plans (1,451) -- (1,451) --
Other 1,108 (3,291) 1,434 3,700
- ------------------------- ------------ ------------- ------------- ------------
26,418 (1,606) 4,486 4,962
Less valuation allowance (12,200) -- -- (3,872)
- ------------------------- ------------ ------------- ------------- ------------
Deferred tax assets
(liability) $14,218 $(1,606) $4,486 $1,090
========================= ============ ============= ============= ============
Our valuation allowance increased by $8,328,000 in 1998 and related primarily
to a capital loss carryforward. The valuation allowances at February 28, 1998
and March 1, 1997 reflect amounts for foreign tax credits, general business tax
credits, net operating loss carryforwards and capital loss carryforwards.
11. INVESTMENT IN AFFILIATED COMPANIES
We were party to a 1985 joint venture agreement with our 50% partner (JV
Partner), forming Marcon Coatings, Inc. and its subsidiary, Viratec Thin Films,
Inc. (Marcon/Viratec). The joint venture operated glass coating facilities. In
November 1995, the JV Partner commenced litigation against us alleging claims
for damages and seeking to have the Court order us to sell our 50% interest in
the joint venture to the JV Partner. We filed counterclaims seeking to have the
JV Partner's 50% interest sold to us. In March 1996, the Court ordered the JV
Partner to sell the shares of stock representing its 50% interest in
Marcon/Viratec to us upon payment of fair value for the shares as determined by
the Court, or as agreed to by us and the JV Partner. In January 1997, we agreed
to a comprehensive settlement of all claims and completed our purchase of the
joint venture businesses from the JV Partner. We paid $41 million to the JV
Partner for its 50% interest in the businesses and certain leased assets. Both
parties agreed to irrevocably release each other from all outstanding claims
related to the litigation, other than certain trade accounts payable in the
ordinary course of business.
Reflecting the March 1996 Court order, Marcon/Viratec's assets, liabilities
and results of operations were included in Apogee's consolidated financial
statements beginning in 1997. Through 1996, our 50% ownership investment in
Marcon/Viratec was accounted for using the equity method. Our equity in
Marcon/Viratec's net earnings for 1996 is included in the accompanying
Consolidated Results of Operations. A summary of assets, liabilities and results
of operations for Marcon/Viratec for 1996 is presented below:
(In thousands) 1996
- ----------------------------- ------------
Current assets $ 11,950
Noncurrent assets 23,444
Current liabilities 19,098
Noncurrent liabilities 8,602
Net sales 46,297
Gross profit 8,981
Net earnings 1,183
- ----------------------------- ------------
F-14
12. EMPLOYEE BENEFIT PLANS
We maintain a qualified defined contribution pension plan that covers
substantially all full-time, non-union employees. Contributions to the Plan are
based on a percentage of employees' base earnings. We deposit pension costs with
the trustee annually. All pension costs were fully funded or accrued as of year
end. Contributions to the Plan were $4,344,000, $4,023,000 and $3,687,000 in
1998, 1997 and 1996, respectively.
We also maintain a 401(k) savings plan, which allows employees to contribute
1% to 13% of their compensation. Apogee matches 30% of the first 6% of the
employee contributions. Our contributions to the Plan were $1,958,000,
$1,805,000 and $1,495,000 in 1998, 1997 and 1996, respectively.
13. ACQUISITIONS AND DIVESTITURES
In 1998, our AutoGlass Segment purchased the assets of 10 retail auto glass
stores in four separate transactions. The aggregate purchase price of the
acquisitions was $0.8 million, including $0.2 million recorded as goodwill.
In 1997, as indicated in Note 11, we purchased our joint venture partner's 50%
interest in Marcon Coatings, Inc. and its subsidiary, Viratec Thin Films, Inc.
and certain leased assets. The aggregate purchase price, net of cash acquired,
was $40.2 million. Liabilities of $11.8 million were assumed. The purchase price
exceeded the fair value of net assets acquired by $34.5 million, which was
recorded as goodwill and is being amortized over 40 years.
In 1997, our Auto Glass segment purchased the common stock of a 46-location
retail auto glass replacement and repair company. The aggregate purchase price,
net of cash acquired, was $10.4 million, consisting of $1.3 million in
acquisition related expenditures and 215,000 shares of common stock valued at
$9.1 million. Liabilities of $5.9 million were assumed. The purchase price
exceeded the fair value of net assets acquired by $9.4 million, which was
recorded as goodwill. The Auto Glass segment also made two smaller acquisitions
of retail auto glass stores in 1997, purchasing assets for $0.1 million.
In 1996, our Auto Glass segment purchased the assets of 12 retail auto glass
stores and one distribution center in five separate transactions. The aggregate
purchase price of the acquisitions was $3.8 million, including $0.7 million
recorded as goodwill. Promissory notes of $0.5 million were issued in connection
with the transactions.
No liabilities were assumed in the 1996 transaction. All of the above
transactions were accounted for by the purchase method. Accordingly, our
consolidated financial statements include the net assets and results of
operations from the dates of acquisition.
In 1996, we sold selected assets and liabilities of the Nanik Window Coverings
unit (Nanik) for $17.6 million, realizing a $4.2 million gain included in "Other
expense, net" in the accompanying Consolidated Results of Operations. Nanik
accounted for less than 4% of consolidated net sales in 1996.
14. LEASES
As of February 28, 1998, we were obligated under noncancelable operating
leases for buildings and equipment. Certain leases provide for increased rentals
based upon increases in real estate taxes or operating costs. Future minimum
rental payments under noncancelable operating leases are:
FISCAL YEAR (In thousands)
- ------------------------------------ ----------------
1999 $ 12,593
2000 9,950
2001 6,696
2002 4,688
2003 3,489
Thereafter 5,142
- ------------------------------------ ----------------
Total minimum payments $ 42,558
==================================== ================
Total rental expense was $27,484,000, $23,551,000 and $22,155,000 in 1998,
1997 and 1996, respectively.
F-15
15. COMMITMENTS AND CONTINGENT LIABILITIES
We have ongoing letters of credit related to our risk management programs,
construction contracts and certain industrial development bonds. The total value
of letters of credit under which we are obligated as of February 28, 1998 was
approximately $ 16,328,000. We have entered into a number of noncompete
agreements. As of February 28, 1998, we were committed to make future payments
of $3,613,000 under such agreements.
We have been a party to various legal proceedings incidental to our normal
operating activities. In particular, like others in the construction industry,
our construction business is routinely involved in various disputes and claims
arising out of construction projects, sometimes involving significant monetary
damages. Although it is impossible to predict the outcome of such proceedings,
we believe, based on facts currently available to us, that none of such claims
will result in losses that would have a material adverse effect on our financial
condition.
16. FAIR VALUE DISCLOSURES
Estimated fair values of our financial instruments at February 28, 1998 and
March 1, 1997 are as follows:
CARRYING AMOUNT ESTIMATED FAIR VALUE
(In thousands) 1998 1997 1998 1997
- ------------------------------ ---------- --------- ---------- ----------
Long-term debt including
current installments $153,646 $129,347 $153,629 $129,305
Interest rate swap
agreements in a net -- -- 648 93
payable position
============================== ========== ========= ========== ==========
Estimated fair value amounts have been determined using available market
information and appropriate valuation methodologies. However, judgment is
required in developing the estimates of fair value. Accordingly, these estimates
are not necessarily indicative of the amounts that could be realized in a
current market exchange.
For cash and cash equivalents, receivables, marketable securities and accounts
payable, carrying value is a reasonable estimate of fair value. The carrying
value of long-term debt that has variable interest rates is a reasonable
estimate of fair value. For long-term debt with fixed interest rates, fair value
is based on discounted projected cash flows using the rate at which similar
borrowings could currently be made. The fair value of interest rate swaps is the
difference between the present value of our future interest obligation at a
fixed rate and the counterparty's obligation at a floating rate.
17. EARNINGS PER SHARE
The following table presents a reconciliation of the denominators used in the
computation of basic and diluted earnings per share.
(In thousands) 1998 1997 1996
- -------------------------------- ----------- ----------- -----------
Basic earnings per share -
weighted common
shares 27,795 27,384 26,975
outstanding
Weighted common shares
assumed -- 673 283
upon exercise of stock
option
- -------------------------------- ----------- ----------- -----------
Diluted earnings per share -
weighted common shares
and
common shares equivalent 27,795 28,057 27,258
outstanding
================================ =========== =========== ===========
F-16
18. QUARTERLY DATA (UNAUDITED)
(Dollar amounts in thousands, except per share data)
NET SALES
QUARTER 1998 1997 1996
- ------------------------------ ---------- ----------- ----------
First $223,851 $228,608 $219,032
Second 246,015 253,154 222,186
Third 235,021 228,781 215,487
Fourth 207,944 240,234 214,442
- ------------------------------ ---------- ----------- ----------
Total $912,831 $950,777 $871,147
- ------------------------------ ---------- ----------- ----------
GROSS PROFIT
QUARTER 1998 1997 1996
- ------------------------------ ---------- ----------- ----------
First $ 46,889 $ 36,387 $ 31,925
Second 60,435 42,316 31,824
Third 51,638 40,117 28,264
Fourth 20,439 32,981 26,510
- ------------------------------ ---------- ----------- ----------
Total $179,401 $151,801 $118,523
- ------------------------------ ---------- ----------- ----------
NET EARNINGS (LOSS)
QUARTER 1998 1997 1996
- ------------------------------ ---------- ----------- ----------
First $ 6,774 $ 4,976 $ 3,481
Second 9,657 7,980 5,646
Third (10,435) 7,602 5,172
Fourth (57,051) 5,662 3,536
- ------------------------------ ---------- ----------- ----------
Total $ (51,055) $ 26,220 $ 17,835
- ------------------------------ ---------- ----------- ----------
EARNINGS (LOSS) PER SHARE
BASIC*
QUARTER 1998 1997 1996
- ------------------------------ ---------- ----------- ----------
First $ 0.24 $ 0.18 $ 0.13
Second 0.35 0.29 0.21
Third (0.37) 0.28 0.19
Fourth (2.06) 0.20 0.13
- ------------------------------ ---------- ----------- ----------
Total $ (1.84) $ 0.96 $ 0.66
- ------------------------------ ---------- ----------- ----------
EARNINGS (LOSS) PER SHARE
DILUTED*
QUARTER 1998 1997 1996
- ------------------------------ ---------- ----------- ----------
First $ 0.24 $ 0.18 $ 0.13
Second 0.34 0.28 0.21
Third (0.37) 0.27 0.19
Fourth (2.06) 0.20 0.13
- ------------------------------ ---------- ----------- ----------
Total $ (1.84) $ 0.93 $ 0.65
- ------------------------------ ---------- ----------- ----------
*Per share data adjusted to reflect the fiscal 1997 stock dividend.
F-17
19. BUSINESS SEGMENTS DATA
(In thousands)
NET SALES 1998 1997 1996
- -------------------------------------------------------------------------
Glass technologies $227,203 $192,827 $150,457
Auto glass 347,191 307,935 273,133
Building products & services 348,892 460,714 462,102
Intersegment elimination
(10,455) (10,699) (14,545)
- -------------------------------------------------------------------------
Net sales $912,831 $950,777 $871,147
- -------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1998 1997 1996
- -------------------------------------------------------------------------
Glass technologies $ 27,330 $ 19,908 $ 16,431
Auto glass 15,046 20,149 18,069
Building products & services (96,433) 5,557
(2,073)
Corporate and other (1,210) 882 30
- -------------------------------------------------------------------------
Operating income (loss) $(55,267) $46,496 $32,457
- -------------------------------------------------------------------------
IDENTIFIABLE ASSETS 1998 1997 1996
- -------------------------------------------------------------------------
Glass technologies $150,044 $132,005 $ 67,606
Auto glass 127,950 123,804 108,342
Building products & services 110,468 199,050 172,019
Corporate and other 75,659 46,105 38,169
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Total $464,121 $500,964 $386,136
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CAPITAL EXPENDITURES 1998 1997 1996
- -------------------------------------------------------------------------
Glass technologies $19,737 $16,972 $ 4,171
Auto glass 11,955 15,340 12,954
Building products & services 4,770 3,194 5,096
Corporate and other 1,752 107 394
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Total $38,214 $35,613 $22,615
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DEPRECIATION & AMORTIZATION 1998 1997 1996
- -------------------------------------------------------------------------
Glass technologies $ 10,581 $ 7,810 $ 3,700
Auto glass 9,038 7,036 6,522
Building products & services 4,121 5,406 6,146
Corporate and other 250 206 160
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Total $23,990 $20,458 $16,528
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Apogee's Building Products & Services segment has subsidiaries in Europe and
Asia. During 1998, 1997 and 1996, these foreign operations had net sales of
$29,834,000, $120,318,000 and $114,305,000, respectively. Foreign operating
losses for 1998, 1997 and 1996 were $115,709,000, $5,716,000 and $1,983,000,
respectively. At February 28, 1998, March 1, 1997 and March 2, 1996,
identifiable assets of the foreign subsidiaries totaled $11,417,000, $86,866,000
and $58,753,000, respectively. Foreign currency transaction gains or losses
included in net earnings for 1997 and 1996 were immaterial. Foreign currency
transaction losses for fiscal 1998 were $3.4 million.
Apogee's export net sales are less than 10% of consolidated net sales. No
single customer, including government agencies, accounts for 10% or more of
consolidated net sales. Segment operating income (loss) is net sales less cost
of sales and operating expenses. Operating income does not include provision for
interest expense or income taxes. "Corporate and other" includes miscellaneous
corporate activity not allocable to business segments.
F-18
SCHEDULE II
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
Valuation and Quantifying Accounts
(In thousands)
Balance at Charged to Deductions Balance at
beginning of costs and from reserves end of
period expenses (1) period
--------------- -------------- --------------- -------------
For the year ended February 28, 1998:
Allowance for
Doubtful receivables $7,297 $1,428 $1,774 $6,951
=============== ============== =============== =============
For the year ended March 1, 1997:
Allowance for
Doubtful receivables $6,772 $2,917 $2,392 $7,297
=============== ============== =============== =============
For the year ended March 2, 1996:
Allowance for
Doubtful receivables $8,658 $1,983 $3,869 $6,772
=============== ============== =============== =============
(1) Net of recoveries
F-19