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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number 001-15469
THERMOVIEW INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 61-1325129
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1101 Herr Lane 40222
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(502) 412-5600
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
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,
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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. [X]
Based upon the March 31, 2000 American Stock Exchange closing price of
$3.50 per share, the aggregate market value of the Registrant's outstanding
common stock, $.001 par value, held by non-affiliates was approximately $21.9
million.
As of March 31, 2000, 7,389,592 shares of the Registrant's common stock,
$.001 par value, were issued and outstanding.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We design, manufacture, sell and install custom vinyl replacement windows
for residential and retail commercial customers. We also sell and install
replacement doors, textured coatings, vinyl siding, patio decks, patio
enclosures, cabinet refacings, and bathroom and kitchen remodeling. We
facilitate the financing of a portion of our customers' purchases through Key
Home Credit, our consumer finance subsidiary.
In April 1998, we acquired Thermo-Tilt Window Company, which was
established in 1987. Since that time, we have acquired 12 retail and
manufacturing businesses which have been in operation an average of
approximately 10 years. At December 31, 1999, we had over 1,300 employees and
had facilities in 13 states, primarily in the Midwest and southern California.
For calendar 1999, we generated consolidated revenues of approximately $108
million.
Our initial business plan focused on an aggressive acquisition program to
build a vertically integrated company in the vinyl window business. We intended
to aggressively develop in the manufacturing, retail, and finance segments.
Although the essence of our initial business plan is in place, for
various reasons, we have modified our plan during the first quarter of 2000 to
become more horizontally integrated. Our new plan places greater emphasis on the
retail segment, and less emphasis on the manufacturing and finance segments. Our
new plan also places less reliance on acquisitions and more reliance on opening
new locations, developing new or enhanced products, and expanding the market
areas of our existing retail subsidiaries.
Reasons for a shift in emphasis are:
New Approach Management's Justification
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- - Reduce emphasis on - With our present volume in
manufacturing segment the retail segment, we can
achieve lower product cost
and more consistent product
quality by outsourcing to high
volume unaffiliated window
manufacturers.
- - Reduce emphasis on finance - Expanding the finance
segment segment to provide direct
financing of customers'
purchases would require
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considerable capital. In
the absence of access to cost
effective capital, we are
currently focusing the business
of this segment on making
consumer credit providers
available to our customers in
exchange for broker fees from
third-party consumer finance
companies.
- - Increase emphasis on retail - With good penetration in
segment. regional markets and higher
gross profits in the retail
segment versus the
manufacturing segment, we want
to expand our retail segment.
Our present locations, bases of
business, and subsidiary
management provide an
opportunity to open new branch
locations, to develop new or
enhanced products and to expand
market areas of our existing
retail subsidiaries.
- - Reduce emphasis on - In the absence of cost
acquisitions effective capital, we are
currently focusing on the
opening of new locations and
expanding the market areas of
our existing retail
subsidiaries rather than on
emphasizing acquisitions.
However, we will continue to
pursue high quality acquisition
targets.
THE REPLACEMENT WINDOW INDUSTRY
Sales of replacement windows have experienced substantial growth in
recent years. According to U.S. Census Bureau and industry statistics:
- estimated domestic expenditures in the replacement window industry
were $8.2 billion in 1998, an increase of 32.3% over 1993;
- an estimated 28.4 million replacement windows were sold in 1998, a
38.5% increase over 1992 levels; and
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- of available replacement windows, vinyl replacement windows are
the most popular, comprising 49.6% of total estimated unit sales
in 1998.
Three basic categories of windows comprise the replacement window market:
vinyl, wood and aluminum. We believe that vinyl windows require less maintenance
and are more durable than either wood or aluminum windows and they provide
greater energy efficiency than aluminum windows. Since prices for vinyl windows
have become more competitive with wood window prices and the durability and
energy efficiency of vinyl windows have improved, the demand for vinyl windows
significantly increased from 1993 through 1998. Today, vinyl windows are the
most popular replacement window. We believe that factors driving demand in the
replacement window industry include:
- the aging existing housing stock;
- job and wage growth;
- consumer confidence levels;
- consumer credit conditions;
- interest rates;
- demographic trends;
- population migration between urban and suburban areas; and
- demand for maintenance free products.
GROWTH STRATEGY
Our goal is to become a leader in the replacement window industry by
building a nationwide network of sales and installation subsidiaries through
internal growth and acquisitions.
INTEGRATION STRATEGY
We believe that we can increase our growth through expansion of the
markets of our current and acquired subsidiaries. We believe that our brand
recognition and integrated management enhances the capability of our
subsidiaries to further expand regional market share. In January 2000, we
changed the focus of our expansion strategy to growth of our current
subsidiaries and opening retail enterprises in new locations during the near
future rather than expanding predominantly through acquisitions. However, we
will continue to pursue high quality acquisition targets.
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ACQUISITION STRATEGY
We believe that our acquisition strategy capitalizes on the fragmented
nature of the replacement window industry. We seek acquisition candidates with
the following characteristics:
- experienced, growth-oriented management;
- strong regional market share; and
- financial performance to increase our earnings and cash flow.
EXPERIENCED MANAGEMENT. Our management has substantial experience in the
replacement window and related businesses. We believe this level of experience
provides a solid foundation for growth. We manage our subsidiaries on a
decentralized basis with local management assuming responsibility for the
day-to-day operations, profitability and growth of the business. We believe that
while we actively maintain operating and financial controls, as well as foster
the sharing of information among our subsidiaries to enhance our efficiency, our
decentralized operating structure allows us to retain the entrepreneurial spirit
of each of our subsidiaries. In addition, our decentralized operation allows us
to capitalize on the local and regional market knowledge and customer
relationships of our retail subsidiaries.
REGIONAL MARKET SHARE. Our goal is to become the leading vinyl
replacement window business in each region where we acquire a business. We seek
acquirees that have significant business and a recognizable name in the market
areas where those acquirees engage in business.
FINANCIAL PERFORMANCE. We analyze the financial performance of our
acquisition targets in their markets to determine how they will add to our
earnings and cash flow through our acquisition due diligence. Our internal
investigation seeks to target efficiencies and economies to be derived from the
integration of the target entity. We believe that the combined sales experience
of our subsidiary personnel should assist target entities in improving and
diversifying product sales in the region served by the target.
BENEFITS TO THERMOVIEW
We believe that our integration and acquisition strategy offers a number
of benefits.
EFFICIENT PENETRATION OF NEW MARKETS. We focus on acquisition targets
that have the customer base, employees and infrastructure necessary to be a core
business that we can consolidate with our other service operations. We seek
businesses that are located in
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attractive regional markets, have experience in the industry, and management
willing to participate in our future growth. Our plan is to enter markets by
expansion of existing subsidiaries, opening new retail enterprises and
acquisitions in predominantly metropolitan areas in the Southeast, Midwest and
West if appropriate opportunities present themselves, and we have available cost
effective capital.
OPERATING EFFICIENCIES. We believe our integration strategy affords us
the ability to achieve operating efficiencies and cost savings through volume
discounts on purchases. With our increasing size and product market share, we
expect to form relationships with larger product manufacturers to purchase the
products we sell at a significant price advantage over the small, independent
competitors that largely comprise the vinyl replacement window industry. In
addition, the regional concentration of our sales/installation locations affords
us lower freight costs and the ability to better manage inventory levels between
facilities. Also, we seek to provide centralized accounting software and
administrative functions that we believe should enhance the operating
efficiencies of our subsidiaries.
RELIABLE AND INEXPENSIVE SERVICING. Originally, we believed that through
the introduction of our own custom manufactured vinyl replacement window from
internal and external manufacturers, we would be able to provide our retail
subsidiaries with a common product or products to sell in their markets. By
providing a manufacturing operation that was geographically proximate to our
retail operations, our manufacturers would be able to quickly deliver a
completed window for installation. After an analysis of the manufacturing
operations in early 2000, we determined that with our present volume in the
retail segment, we can achieve lower product cost and more consistent quality by
relying more extensively on unrelated third-party manufacturing with a
significant reduction in our own manufacturing. Consequently, we have begun to
direct a portion of our manufacturing to Great Lakes Window, Inc. in Toledo,
Ohio. The initial results of this change in our strategy appear to have reduced
our manufacturing costs and delivery delays and improved quality control.
ABILITY TO LEVERAGE LOCAL BUSINESS REPUTATIONS. We maintain strong
customer relationships by acquiring sales and installation companies that have
strong and long-standing local reputations, by generally allowing the companies
to continue to operate under their original names. Beginning in 2000, we intend
to introduce private label programs for our new acquirees to diversify the
products of our acquirees and take advantage of the local reputation of our
acquirees in their markets.
INCREASED ABILITY TO OFFER CUSTOMER FINANCING. Initially, we believed
that through Key Home Credit, our consumer finance subsidiary, we could provide
our customers with additional means to finance the purchases of our products. We
believed that this additional source of revenue would be an adjunct to our
primary
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business and should provide a means of assisting in the sales of our various
products. However, because of inadequate capital to grow Key Home Credit to a
level of profitability, we no longer intend to use Key Home Credit to finance
purchases of our products but rather to broker the financing through joint
venture arrangements with third-party lenders. This approach will increase
access to financing sources for our customers, while enhancing the ability of
Key Home Credit to become a profitable entity.
THERMOVIEW ATTRACTION TO ACQUIREES
We believe that potential acquisition candidates will regard us as an
attractive acquirer because of the following:
- our strategy to become a national and integrated vinyl replacement
window business;
- our decentralized operations;
- our increased visibility and access to financial resources as a
result of being a public company;
- our potential for earnings based on the centralization of
administrative functions and enhanced systems capabilities; and
- our potential for the owners of businesses to participate in our
internal and acquisition growth while realizing liquidity from the
sales of their businesses. As an example, we have instituted an
advisory board comprised of managers of a number of our
subsidiaries. These managers communicate directly with corporate
management on the operation of our subsidiaries and also
participate in our long-range planning.
MERCHANDISING
REPLACEMENT WINDOWS. We offer three lines of custom-made replacement
vinyl windows. Each of our lines consists of a broad range of window options
including awning, bay, bow, double hung, garden and slider replacement windows.
We offer the Barricade, Thermal-line and ThermoView lines of windows tailored to
fit remodeling and financial needs of our customers.
BARRICADE WINDOW. This line consists of our most expensive window
products. We design this line of replacement windows for energy performance,
strength, security and low maintenance. The windows offer welded vinyl frames
reinforced with aluminum in both their main frame and sash for added strength,
and with one inch triple insulated glass with low-emissivity, Low-E coatings to
reduce heat radiation through the glass and double steel cam locks
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for security. The Barricade replacement window generally sells for $750 to $900
per unit as installed.
THERMAL-LINE WINDOW. We design this line for high performance at
affordable cost. A component of this line of replacement windows is complast, a
vinyl substitute, which increases strength without the cost of aluminum
reinforcement. The use of complast also permits the use of dark colors in
extreme heat. This line of replacement windows contains double insulated glass
and Low-E coatings. The Thermal-line replacement window generally sells for $500
to $700 per unit as installed.
THERMOVIEW WINDOW. We design this line of replacement windows to provide
customer value with three-quarter double insulated glass, Low-E coatings and
tilt-in sashes for easy cleaning. The ThermoView replacement window generally
sells for $400 to $700 per unit as installed.
Our windows offer the following features:
ENERGY EFFICIENCY. One characteristic of our windows is their insulating
qualities. Double- and triple-pane glass provides the R-values and U-values,
measures of insulation for end-users. With regard to this double- and
triple-pane glass, we incorporate state-of-the-art Low-E coatings. Low-E
coatings allow the passage of light but selectively block infrared radiation. As
a result, less heat escapes on cold days, and less heat enters on warm days. We
further increase the insulation value of our windows by sandwiching a layer of
argon, krypton and sulfur hexafluoride gas mixture between panes of glass.
HIGH QUALITY FRAMES. Our windows incorporate fusion-welded corners, and
our Barricade line includes an internal aluminum support system. This structure
enhances the durability of the windows and prevents warping problems.
CUSTOM DESIGN. We custom manufacture windows in varying dimensions
through either our own manufacturing subsidiaries or more recently, through
unrelated third-party manufacturers, as for example Great Lakes Window, Inc. in
Toledo, Ohio. This process involves the retro-fitting of existing homes with
custom-made, energy efficient, vinyl-clad windows. We expect to depend upon
third-party manufacturing more extensively in the future.
INSTALLATION SERVICE. Some of our subsidiaries only use their employees
for installation of our replacement windows. Others subcontract with crews that
work exclusively for us. Generally, we complete installation within the same or
the second day of commencing installation.
LOW MAINTENANCE PRODUCT. Our windows do not require external maintenance
due to the vinyl materials used. The tilt-in feature of our windows eases their
cleaning.
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COMPETITIVE PRICING. We believe that, with our increased sales volume, we
can reduce manufacturing and materials costs, thereby giving a higher value to
our customers than the small, fragmented remodeler. Through our purchasing and
distribution channels, we further realize cost savings that will benefit the
customer.
REPLACEMENT DOORS. We offer custom-made insulated steel doors with
wood-grain embossed finishes in 36 styles and sliding glass doors in six
variations.
- The steel doors range in price from $750 to $3,000 per door as
installed depending upon the styles, hardware and art-glass
options and wood grain finishings chosen.
- The sliding glass doors range in price from $1,200 to $2,000 per
door as installed.
ENERGY EFFICIENCY, DESIGN, AND INSTALLATION. Our sliding glass doors and
insulated steel doors that contain glass have the same energy efficiency
characteristics as our vinyl replacement windows. We custom design and install
our sliding glass doors and insulated steel doors in a similar fashion to our
vinyl replacement windows.
PRODUCT GUARANTEE. The manufacturer of our insulated steel doors offers a
25-year guarantee against warping, cracking or swelling of the product.
HOME TEXTURED COATINGS. We offer home textured coatings for residential
use, the cost of which ranges approximately from $2,000 to $15,000 per residence
as installed. Home textured coating is a paint and service that usually takes
seven days to complete. The process involves four coats of primer and two finish
coats, together with a trenching operation to prevent ground moisture
penetration and patching and repairs of the surface to be coated.
INSTALLATION SERVICE. Both employee and exclusive subcontractor painters
provide the home textured coatings to our customers.
PRODUCT GUARANTEE. The manufacturer of the product, Textured Coatings of
America, Inc., provides a limited lifetime warranty to the owner of the home
against chipping, flaking and peeling of its product.
VINYL SIDING. We offer vinyl siding in several colors and styles. Our
customers will generally spend in the range of $2,800 to $10,000 as installed
depending upon the size of the residence on which we install the vinyl siding.
The average time for installation is seven days and generally the vinyl siding
is maintenance free.
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CABINET REFACINGS. We offer kitchen cabinet refacings in a number of
designs which range in cost from $3,000 to $10,000 per kitchen as installed and
generally take one day to complete.
KITCHEN AND BATHROOM REMODELING. We offer kitchen and bathroom remodeling
through four of our subsidiaries. We estimate the cost for kitchen remodeling to
our customers to range from $3,000 to $20,000. Generally, remodeling takes one
week to complete. We charge our customers for bathroom remodeling from $3,000 to
$8,000 per residence as installed.
PATIO DECKS AND PATIO ENCLOSURES. We offer patio decks and patio
enclosures with single- or double-pane glass as a less expensive alternative to
room additions. Most sales involve single-pane glass together with a modular
roof. Generally, installation takes three days, and the cost to our customer
ranges from $8,000 to $18,000 as installed depending on the size and options
chosen.
RETAIL BUSINESSES. ThermoView's retail segment consists of the following
businesses:
THERMO-TILT WINDOW COMPANY. Thermo-Tilt, founded in 1987 and
headquartered in Owensboro, Kentucky, designs, sells and installs vinyl
replacement windows in Indiana, Kentucky, Missouri and Tennessee. As of December
31, 1999, Thermo-Tilt had 55 employees. In January 2000, Thermo-Tilt merged
administrative offices with Primax Window Company. The two companies now share
the expense and management of Primax's Louisville business office.
AMERICAN HOME DEVELOPERS CO., INC. American Home Developers Co., Inc.,
founded in 1985 and headquartered in Los Angeles, sells vinyl replacement
windows and textured coating in California. American Home Developers had 39
employees as of December 31, 1999. Alan B. Griefer, a former principal of
American Home Developers for five years, manages its operations under a
three-year employment agreement.
PRIMAX WINDOW CO. Primax Window Co., founded in 1981 and headquartered in
Louisville, Kentucky, sells and installs vinyl replacement windows and doors in
Indiana, Kentucky and Ohio. Primax had 93 employees as of December 31, 1999.
Charles L. Smith, a former principal of Primax for 17 years, manages its
operations under a three-year employment agreement.
THE ROLOX COMPANIES. The Rolox Companies, founded in 1973 and
headquartered in Kansas City, Kansas, sell and install vinyl replacement
windows, steel doors and storm siding in Arkansas, Iowa, Kansas, Missouri,
Nebraska and Oklahoma. Rolox had 92 employees as of December 31, 1999. Robert L.
Cox II, a former principal of Rolox for 17 years, manages its operations under a
three-year employment agreement.
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THERMOVIEW OF CALIFORNIA, INC. ThermoView of California, Inc., formerly
Five Star Builders, Inc., which was founded in 1992 and headquartered in San
Diego, California, sells and installs vinyl replacement windows, vinyl
replacement doors and textured coatings in California. ThermoView of California
had 163 employees as of December 31, 1999. Michael S. Haines and Bradley A.
Smith, former principals of Five Star and its predecessor companies for 11
years, manage its operations under three-year employment agreements. Alan B.
Fishman, former principal of American Home Remodeling, also manages its
operations under a three-year employment agreement. American Home Remodeling
merged into Five Star in December 1998.
THERMOVIEW OF MISSOURI, INC. ThermoView of Missouri, Inc., founded in
1998 and headquartered in St. Louis, Missouri, sells and installs replacement
windows, doors and siding in Illinois and Missouri. ThermoView of Missouri had
87 employees as of December 31, 1999. Douglas E. Miles, a former principal of
NuView Industries, Inc. and its predecessor companies, for 15 years, manages its
operations under a three-year employment agreement. ThermoView acquired the
business assets of NuView Industries, Inc., which was founded in 1995, in August
1998.
LEINGANG SIDING AND WINDOW, INC. Leingang Siding and Window, Inc.,
founded in 1991 and headquartered in Mandan, North Dakota, sells and installs
replacement and new construction windows and doors, vinyl siding and other home
improvement products in North Dakota and South Dakota. Leingang had 71 employees
as of December 31, 1999. Alvin W. Leingang, a former principal of Leingang and
related companies for 24 years, manages its operations under a three-year
employment agreement. Mr. Leingang also manages the operations of Thermal Line
Windows, Inc., another of our subsidiaries.
THOMAS CONSTRUCTION, INC. Thomas Construction, Inc., founded in 1981 and
headquartered in Earth City, Missouri, designs, sells and installs replacement
and new construction windows, siding, patio enclosures and various other home
improvement products in Illinois and Missouri. Thomas had 245 employees as of
December 31, 1999. Rodney H. Thomas, a former principal of Thomas and related
companies for 29 years, manages its operations under a two-year employment
agreement.
THE THERMO-SHIELD COMPANIES. The Thermo-Shield Companies, comprised of
five corporations, founded in 1984 and headquartered in Wheeling, Illinois,
sell, furnish and install replacement windows and siding and also conducts
cabinet refacing in Arizona, Illinois, Michigan and Wisconsin. The Thermo-Shield
Companies' sales personnel operate from sales displays located within national
retail home improvement stores such as Sam's Club, Wal-Mart, Lowe's, and K-Mart.
The Thermo-Shield Companies had 284 employees as of December 31, 1999. Joel S.
Kron, a former principal of Thermo-Shield for 15 years, manages its operations
under a three-year employment agreement.
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MANUFACTURING
Initially and as a result of our acquisitions of TD Windows, Precision
and Thermal Line and our relationships with major manufacturers, our goal was to
vertically integrate our replacement window sales, installation and
manufacturing functions. After an analysis of our manufacturing operations in
early 2000, we determined that because of quality control problems and delays in
delivery of our manufactured products, we should rely more heavily on unrelated
third-party manufacturing with a significant reduction in our own manufacturing.
Consequently, we have begun to direct a portion of our manufacturing to Great
Lakes Window, Inc. in Toledo, Ohio. Unlike many of our competitors who must
purchase window products from third-party vendors exclusively, we have both the
in-house capability to manufacture many of the window products that our retail
subsidiaries sell as well as the market presence to negotiate more favorable
terms with custom manufacturers.
LOW-TECH MANUFACTURING PROCESS. The process of manufacturing custom
replacement windows consists of measuring, cutting and assembling glass and
extruded vinyl "lineal" components to create windows that match customer
specifications. For those windows that we continue to manufacture in our own
facilities, we have invested in sophisticated machinery to create an assembly
line environment designed to further automate the production process. A summary
of the assembly of a vinyl replacement window is as follows:
- we receive orders from the retail subsidiaries and enter the
desired dimensions of the windows into a computer;
- through the use of a proprietary computer program, we map the
dimensions of multiple windows onto a large sheet of glass in the
configuration that will maximize the number of windows to be cut
from each sheet, thereby minimizing waste;
- once the glass is cut, we wash it and coat the edges with an
insulating material that will separate the two or three layers of
glass panes and create the desired air-tight seal around the
window;
- while cutting the glass, another procedure measures and cuts vinyl
"lineals" according to the specifications of the window types and
dimensions required by the order;
- the cut and processed lineals then move to a welding area, where
we weld the four sides together and complete any final fabricating
and attachments;
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- we then send the completed sash to the glass insertion area, where
we insert the window panes into the proper sash units; and
- all of the major components of the window arrive at the final
assembly area concurrently to produce the finished product.
Because our windows are assembled on a made-to-order basis utilizing a
just-in-time inventory system, we do not maintain a large finished goods
inventory at our manufacturing plants. We typically deliver finished products to
one of our retail subsidiaries. Service personnel complete the installation and
servicing of the product at the customer's home. Integration of our sales,
shipping, installation and service operations enables us to provide a complete
window or door installation service for customers. We initially anticipated that
the average time between the execution of a customer sales contract and
completion of installation would be approximately two weeks. With the backlog in
uncompleted orders principally resulting from the relocation of one of our
manufacturing facilities, this average time has increased to three to four
weeks. We believe that with the addition of unrelated third-party manufacturing
of our windows, we can reduce the average time to two weeks.
SUPPLIERS. We currently have two vinyl suppliers, a Mikron Industries,
Inc. subsidiary and Complast, Inc. During 1997, 1998 and 1999, the Mikron
Industries, Inc. subsidiary supplied 63%, 54% and 56% of the vinyl used in our
products and Complast, Inc. supplied 37%, 46% and 44% of the vinyl used in our
products during the same periods. Thermal Line Windows, L.L.P., one of our
manufacturing subsidiaries, has a license with Complast, Inc. to manufacture and
distribute windows owned by Complast, Inc. in an eleven-state territory. The
license expires in January 2001 and automatically renews for successive one-year
periods unless terminated by either party. As of December 31, 1999, vinyl
accounted for 39% of our window material costs and constitutes the largest
portion of our raw materials costs. We primarily purchase glass from AFG
Industries, Inc., Libbey-Owens-Ford Company and Cardinal CG, three window
producers. Glass constitutes 14% of our window content. The third principal
material in our windows is extruded aluminum, accounting for 10% of our window
materials cost. We purchase our extruded aluminum primarily from Loxcreen
Company, Inc. and Cardinal Aluminum Co.
With the increased emphasis on unrelated third-party manufacturing, our
reliance upon the Mikron subsidiary and Complast, in addition to other
suppliers, may lessen depending upon the suppliers of the unrelated third-party
manufacturers. Additionally, unrelated third-party vendors have manufactured our
products except for our replacement windows since our inception. We have relied
on one or two third party vendors for the manufacture of each of our products to
provide us with manufacturing consistency and volume discounts.
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MANUFACTURING BUSINESSES. ThermoView's manufacturing segment consists of
the following businesses:
THERMAL LINE WINDOWS, INC. Thermal Line Windows, Inc., formerly Thermal
Line Windows, L.L.P., founded in 1996 and headquartered in Mandan, North Dakota,
manufactures Complast replacement and new construction windows and doors for
residential and commercial use for sale to retailers in Colorado, Idaho, Iowa,
Kansas, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota,
Wisconsin and Wyoming. Thermal Line Windows, Inc. had 70 employees as of
December 31, 1999. Alvin W. Leingang, a former principal of Thermal Line Windows
for 24 years, manages its operations under a two-year employment agreement. Mr.
Leingang also manages the operations of Leingang Siding and Windows, another of
our subsidiaries.
PRECISION WINDOW MFG., INC. Precision Window Mfg., Inc., founded in 1998
and headquartered in St. Louis, Missouri, manufactures and distributes Barricade
and ThermoView vinyl replacement windows for residential customers in Colorado,
Illinois, Kansas, Kentucky, Missouri, Nevada, Ohio and Tennessee. Precision had
87 employees as of December 31, 1999. Clyde Peffly and Larry Parrella, who was a
former principal of TD Windows and its predecessor companies for 13 years,
manage its operations under three-year employment agreements.
TD WINDOWS, INC. TD Windows, Inc., founded in 1993 and formerly
headquartered in Louisville, Kentucky, designed, manufactured, sold and
installed vinyl replacement windows and doors in California, Indiana and
Kentucky. TD Windows ceased operations as a separate subsidiary in December
1999. We are continuing the business of TD Windows at Precision and have
relocated manufacturing equipment formerly used by TD Windows for use by
Precision.
SALES AND MARKETING
Each one of our subsidiaries has its own sales staff that determines its
sales function. We pay members of our sales staff on a commission basis and on
the profitability of the subsidiary for which they work.
Each subsidiary maintains its own advertising staff. We have created an
advertising committee comprised of three subsidiary managers. Our goal is to
have this committee suggest marketing programs and assist in undertaking new
methods of advertising and marketing. We currently market our products through
several media, including:
- various customer referral programs;
- telemarketing;
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- direct mail solicitation;
- kiosk and discount store promotions;
- television and newspaper advertising;
- product sweepstakes;
- public displays; and
- door-to-door solicitation.
Our marketing approach varies from subsidiary to subsidiary and also
varies based upon the target area.
ADVERTISING. For each retail subsidiary, our goal is to allot
approximately 8% of the subsidiary's sales budget for advertising expenses. We
generally give the individual subsidiary discretion as to the most effective
form of advertising for its geographic market.
We utilize a number of methods to create opportunities for direct contact
with potential customers, including renting space at local fairs and maintaining
kiosks at regional shopping malls. We employ infomercials as another form of our
advertising. In general, we believe that infomercials generate fewer customer
inquiries than direct solicitation but have a much greater probability of
generating a sale. In addition to direct solicitation and infomercials, we also
use various other forms of advertising, including television commercials,
product sweepstakes, direct mailings, newspaper inserts and other printed media.
For one subsidiary, we also contract with a local sports celebrity to endorse
our products.
DISCOUNT STORE LOCATIONS. We are in the process of establishing retail
design centers within a number of major discount stores in Arizona, Michigan,
Illinois and Wisconsin. We currently have retail design centers in Sam's Club
and Lowes located in Arizona, Illinois, Indiana and Michigan. These retail
design centers offer a limited range of vinyl replacement window services,
including the staffing of our trained sales representatives, installation and
product support.
TELEMARKETING. A majority of our retail subsidiaries solicits customers
through an internally managed system. Through the use of a predictive dialing
system - an automated system that calls multiple phone numbers at once and only
directs to the operators those calls that are answered - we have increased the
efficiency while reducing the costs associated with telemarketing.
IN-HOME DEMONSTRATION. When a sales representative receives an expression
of interest from a potential customer, he or she will then generally arrange for
an in-home demonstration at the
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customer's residence. We have developed a ten-step procedure for in-home sales
presentations. Furthermore, in the training of our sales staff, we instruct them
that they have limited discretion to negotiate on price. We pay our sales staff
solely on a commission basis to provide for maximum incentives.
CUSTOMER PAYMENT
As of December 31, 1999, in approximately 50% of our sales, customers pay
in cash upon completion of installation of our products. For the remaining 50%
of sales, customers pay for the products under installment or conditional sales
contracts. In these sales, a customer contracts to pay the retail sales price,
plus a finance charge, in equal installments over a predetermined period of
time. A security interest or chattel mortgage collateralizes the purchased
goods. We currently assign the majority of these contracts to unaffiliated local
and national financial institutions, in return for the cash sales price of the
products involved, upon execution of a certificate of completion by a customer
after completion of installation. We assign a portion of the contracts to our
consumer finance division, Key Home Credit. The annual percentage rate for our
installment contracts varies from a minimum of approximately 9.75% to a maximum
rate in excess of 18% depending upon:
- the amount of the installment contract;
- the length of the repayment period;
- the state in which the contract is executed; and
- the financial institution to which we assign the contract.
Key Home Credit operates our consumer finance division. We formed Key
Home Credit in February 1998 to provide a source of financing for the purchasers
of ThermoView products and services through home equity and installment loans
and credit card financing. Key Home Credit began financing customer sales in
August 1998. Key Home Credit, headquartered in Owensboro, Kentucky, has licenses
to lend in Illinois, Indiana, Kentucky, Missouri, North Dakota, and South
Dakota. Leigh Ann Barney and Larry Clark manage the operations of Key Home
Credit.
It is Key Home Credit's policy to obtain security interests via fixture
filings in the purchased goods for loans less than or equal to $5,000 and to
obtain chattel mortgages in the purchased goods for loans in excess of $5,000.
From inception to December 31, 1999, Key Home Credit had approved loans in the
aggregate in excess of $10 million and funded loans in the aggregate in excess
of $6.35 million. Key Home Credit's revenue for the year ended December 31, 1999
was $237,000, which was comprised of $112,000 in
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fees from the sale of loans and $125,000 from interest on loans held in its
portfolio.
Because of the absence of access to cost effective capital to grow Key
Home Credit, we anticipate the development of a national processing center to
work with Key Home Credit for the financing activities of our retail
subsidiaries. We expect to enter into a relationship with one or more existing
consumer credit providers to operate a centrally located processing center for
our customers' product financing needs nationwide. We believe that this
development will allow Key Home Credit to focus on the expansion of its access
to cost efficient capital and its sources of revenue, which it will primarily
derive from fees related to the brokering of the loans to one or more consumer
credit providers.
COMPETITION
VINYL REPLACEMENT WINDOWS AND DOORS. The vinyl replacement window and
door industry is highly competitive. The industry is significantly fragmented at
both the manufacturing level and at the retail level. Most of our retail
competitors are smaller than us and to an extent consist of local lumber and
home improvement dealers. We also compete with larger home improvement chain
store operations such as Home Depot, Lowes and Scotty's. These stores, which
usually sell windows with limited warranties and without in-house installation
services, have significantly greater financial and operating resources and
greater name recognition than we have. Additional competitors include Champion
Windows, Pacesetters and the Sears Group.
Brands in the window industry with the highest name recognition include
Andersen Corporation, Pella Corporation and Marvin Windows. These companies
primarily compete in the new construction segment of the window market. While
these companies also produce replacement windows, they currently sell a
relatively small percentage of their products for replacement applications.
Furthermore, these companies generally emphasize wood windows rather than vinyl
and market their products primarily to higher-end homeowners. We also compete
with other window and door manufacturers including Republic, Great Lakes,
Thermal, Inc., Atrium, American Architectural Products Corporation, Thermal
Guard and Winchester Industries.
HOME TEXTURED COATINGS. The competitors for our textured coating products
include small remodelers and painting contractors who use the textured coating
product or other painting products. We are not aware of a significantly large
company that competes with us directly in the installation of textured coating.
VINYL SIDING. We compete in the sale and installation of our vinyl siding
with PaceSetters, Champion Windows and the Sears Group.
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CABINET REFACINGS AND KITCHEN AND BATHROOM REMODELING. Our principal
competitors include PaceSetters and the Sears Group. In addition, smaller
remodelers and contractors in each of the regions in which we engage in the
cabinet refacing and kitchen and bathroom remodeling businesses compete with us.
PATIO DECKS AND PATIO ENCLOSURES. Our competition in the installation of
patio decks and patio enclosures includes PaceSetters and a number of smaller
remodelers and contractors in each of the regions in which we install patio
decks and patio enclosures.
GOVERNMENT REGULATIONS
Our business is subject to various federal, state and local laws,
regulations and ordinances relating to, among other things, in-home sales,
telemarketing, consumer financing, retail installment sales, advertising, the
licensing of home improvement independent contractors, OSHA standards, building
and zoning, consumer protection and environmental protection and regulations
relating to the disposal of other solid wastes. Some jurisdictions require us to
secure a license as a contractor. In addition, some jurisdictions require us to
obtain a building permit for each installation. We are also subject to federal,
state and local laws and regulations, which, among other things, regulate our
advertising, warranties and disclosures to customers. Although we believe that
we are currently in compliance in all material respects with these laws and
regulations, existing or new laws or regulations applicable to our business in
the future may materially adversely affect our results of operations.
The operations of our consumer finance subsidiary, Key Home Credit, are
subject to supervision by state authorities, typically state banking, consumer
credit or insurance authorities, that generally require Key Home Credit to be
licensed to conduct its business. Many states only issue licenses upon a finding
of public convenience, financial responsibility, character and fitness of the
applicant. Key Home Credit is generally subject to state regulations,
examinations and reporting requirements, and licenses are revocable for cause.
Currently, Key Home Credit is licensed and qualified to provide financing in six
states. We are changing the focus of the Key Home Credit business to emphasize
its ability to find a consumer credit provider and charge fees for that service
rather than financing the sales of our products directly.
Various federal statutes governing the consumer finance industry comprise
the Federal Consumer Credit Protection Act. Included within the Consumer
Protection Act are the Truth-in-Lending Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act and the Fair Debt Collection Practices Act. The
Truth-in-Lending Act requires a written statement showing the
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annual percentage rate of finance charges and requires that other information be
presented to debtors when consumer credit contracts are executed. The Fair
Credit Reporting Act requires disclosures to applicants for credit concerning
information that is used as a basis for denial of credit. The Equal Credit
Opportunity Act prohibits discrimination against applicants with respect to any
aspect of a credit transaction on the basis of sex, marital status, race, color,
religion, national origin, age, derivation of income from a public assistance
program, or the good faith exercise of a right under the Consumer Protection
Act. In addition, the Fair Debt Collections Practices Act proscribes various
debt collection practices which it deems unfair, harassing or deceptive.
Key Home Credit is subject to state usury laws. In some states federal
law has preempted state law, although for a period of time individual states
could have enacted legislation superseding federal law. To be eligible for the
federal preemption, the credit application must comply with consumer protection
provisions. A few states have elected to override federal law, but have
established maximum rates that either fluctuate with changes in prevailing rates
or are high enough so that, to date, no state's maximum interest rate has
precluded Key Home Credit from continuing to offer financing in that state.
Although we believe that Key Home Credit is currently in compliance with these
usury laws and regulations, a change in existing laws or regulations or the
creation of new laws and regulations applicable to Key Home Credit's business
may preclude Key Home Credit from providing customer financing or reduce the
profitability of its activities.
INTELLECTUAL PROPERTY
We do not have any material patents related to our products. Two of our
subsidiaries have sales and installation processes that they consider trade
secrets. These subsidiaries protect these trade secrets by requiring their
employees to enter into confidentiality agreements. We have filed for a
trademark with the U.S. Patent and Trademark Office under the name "ThermoView."
EMPLOYEES
As of December 31, 1999, we employed in excess of 1,300 people. With the
exception of employees of Precision Window and Thermal Line Windows, none of our
employees are subject to a collective bargaining agreement. The employees at
Precision Window and Thermal Line are members of the United Steel Workers of
America. The two-year contract with the employees of Precision Window expires on
July 1, 2001. The three-year contract with the employees of Thermal Line Windows
expires on February 1, 2001. We have never experienced a work stoppage, and we
consider our relations with our employees to be satisfactory.
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Our employees typically receive an hourly wage or salary and are
generally eligible for bonuses, except for our sales staff who we pay on a
commission basis. Our compensation system is directly related to profitability
and accordingly compensation expense increases and decreases as sales and
profits fluctuate. We emphasize incentive compensation, including cash bonus
arrangements and various other incentive programs which offer our personnel an
opportunity for additional earnings and benefits.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K constitute forward-looking
statements. These statements involve risks and uncertainties about ThermoView
and its business, including, among other things:
- the successful implementation of our business plan and growth
strategies including access to adequate capital;
- our ability to identify and acquire attractive acquisition
candidates;
- our ability to successfully integrate our past and future
acquisitions; and
- anticipated economic and demographic trends affecting the
replacement window industry generally, and our business in
particular.
Specific factors which could cause our actual results to differ
materially from those expressed or implied by forward-looking statements include
those risk factors listed below.
In some cases, you can identify forward-looking statements by words such
as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms or other comparable language.
Although we believe that the expectations and assumptions reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO
THE OTHER INFORMATION AND FINANCIAL DATA CONTAINED ELSEWHERE IN THIS FORM 10-K.
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RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
WE MAY NOT PAY CASH DIVIDENDS ON THE COMMON STOCK IN THE FORESEEABLE FUTURE
Our line of credit and subordinated debt documents preclude us from
paying dividends on our common stock. Additionally, the terms of our Series C
and Series D preferred stock prevent us from paying dividends on our common
stock as long as the Series C and Series D preferred stock is outstanding. We
anticipate using future earnings for our operations. Accordingly, it is unlikely
that we will pay dividends on the common stock in the foreseeable future.
However, we pay a 9.6% dividend on our Series C preferred stock partially in
cash and the remainder in our common stock. We also owe a 12% dividend on our
Series D preferred stock payable in cash commencing in July 2000 with the prior
approval of our senior lender.
THE SHARES IN THE INITIAL PUBLIC OFFERING MAY HAVE BEEN OFFERED OR SOLD IN
VIOLATION OF THE SECURITIES ACT OF 1933
ThermoView entered into a 90-day listing agreement in October 1999 with
IPO.COM, Inc. under which ThermoView authorized IPO.COM to include its
prospectus on the IPO.COM web site. In addition to hosting ThermoView's
prospectus, IPO.COM provided summary material relating to ThermoView and its
initial public offering on its web site. The IPO.COM web site also provided a
direct link to the ThermoView web site. Although ThermoView did not intend to
create an agency relationship with IPO.COM, and while ThermoView believes that
IPO.COM is not and has not acted as its agent, the listing agreement may have
created an agency relationship. If IPO.COM is deemed ThermoView's agent pursuant
to the listing agreement, the summarized material contained in the IPO.COM web
site relating to ThermoView and the initial public offering and the information
contained in the ThermoView web site could constitute a prospectus that does not
meet the requirements of the Securities Act of 1933. If the summarized materials
relating to ThermoView in the IPO.COM web site or the materials contained in the
ThermoView web site did constitute a violation of the Securities Act of 1933,
investors in the initial public offering would have the right, for a period of
one year from the date of their purchase of common stock from the initial public
offering, to obtain recovery of the consideration they paid for their common
stock or, if these persons had already sold the common stock, to sue ThermoView
for damages resulting from their purchase of common stock. These damages could
total up to approximately $6.9 million, plus interest, based on the initial
public offering price of $5.50 per share for 1,255,000 shares, if these
investors seek recovery or damages after an entire loss of their investment.
ThermoView expects that investors would most likely assert a claim for
rescission or damages if, during the one-year period following the date of their
purchase of common stock from the initial public offering, the trading price of
the common stock falls below the initial public offering price. If
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this rescission were to occur, ThermoView's business, results of operations and
financial condition would be harmed.
RISKS RELATED TO OUR OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY AS A CONSOLIDATED ENTERPRISE RESULTING IN
LIMITED INFORMATION ABOUT US ON WHICH YOU CAN MAKE AN INVESTMENT DECISION
ThermoView was formed in April 1998. We have a limited operating history
as a consolidated enterprise notwithstanding that all of our subsidiaries were
existing businesses prior to their acquisition. Potential investors in our stock
do not have access to the same type of information in assessing us as a
consolidated enterprise as would be available for a company with a longer
history of operations. We may not be profitable and if we become profitable we
may not remain profitable. If we do not obtain profitability, our stockholders
may not recover all or any of their investment.
OUR LOSSES MAY RESULT IN THE BANKRUPTCY OF THERMOVIEW AND THE COMPLETE LOSS IN
THE VALUE OF OUR COMMON STOCK
We incurred a net loss attributable to common stockholders of
approximately $15.7 million for the year ended December 31, 1998, which included
non-cash stock-based compensation expense of approximately $4.2 million net of
tax and an additional non-cash preferred stock dividend of approximately $9.5
million related to a beneficial conversion feature. We incurred a net loss
attributable to common stockholders of approximately $6.2 million for the year
ended December 31, 1999, which included non-cash preferred stock dividends of
approximately $2.5 million. We expect losses attributable to common stockholders
in fiscal year 2000. As of December 31, 1999, we had an accumulated deficit of
approximately $8.1 million.
If we cannot increase our revenues and control our costs, we may not
achieve profitability. If we do achieve profitability, we may be unable to
sustain or increase profitability on a quarterly or annual basis in the future
due to decreased demand for our products, increases in expenses or unprofitable
acquisitions. Our continuing losses and failure to become profitable could
result in the bankruptcy of ThermoView and the complete loss in the value of our
common stock.
CONTINUING AND INCREASED EXPENSES COULD CAUSE LOSSES THAT SLOW OUR GROWTH AND
PERFORMANCE
We expect that our costs and expenses will continue to increase in future
quarters, which could cause us to lose money. These costs and expenses relate
principally to our acquisition program, financing, and corporate overhead. This
may require us to scale back our business plans and result in little or no
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growth. Consequently, ThermoView's common stock price may then fall or not grow.
WE HAVE A SIGNIFICANT AMOUNT OF GOODWILL, THE AMORTIZATION OF WHICH REDUCES OUR
CURRENT AND FUTURE EARNINGS AND THE IMPAIRMENT OF WHICH IN LATER YEARS MAY
REDUCE OUR FUTURE EARNINGS
As a result of our recent acquisitions, goodwill accounted for 78.9% of
our total consolidated assets at December 31, 1999. At December 31, 1999, our
goodwill was approximately $74.2 million, which exceeded our stockholders'
equity of approximately $51.7 million. Goodwill represents the excess of the
aggregate purchase price paid for the acquisition of companies accounted for as
purchases over the fair value of the net tangible assets of the acquired
companies. Goodwill reduces earnings now and in the future as we amortize it
over a 25-year period on a straight-line basis. In later years, our earnings, if
any, would be reduced if our management then determined that any of the
remaining balance of goodwill was impaired caused by insufficient expected
future cash flows to recover the carrying value of the goodwill.
CASH AND NON-CASH DIVIDENDS AND INTEREST RELATED TO RECENT FINANCINGS WILL
INCREASE OUR LOSSES OR REDUCE POTENTIAL NET INCOME
We will suffer losses or reductions in future potential net income as a
result of the 9.6% cash dividends on our Series C preferred stock, the 12% cash
dividends on our Series D preferred stock and the 12% stated interest payments
on our senior subordinated debt. Also, fees and expenses and the amortization
and accretion of the discounts on the Series C preferred stock and the senior
subordinated debt related to detachable stock warrants issued in connection with
the preferred stock and the subordinated debt will contribute to our losses or
lower potential future income.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE A DROP IN OUR STOCK
PRICE
Our operating results are unpredictable and may fluctuate on a quarterly
basis due to the markets for our products or our operating problems. These
fluctuations may cause a decrease in the price of our common stock. You should
not rely on our results of operations during any quarter as an indication of our
results for a full year or any other quarter.
OUR LINE OF CREDIT AND SUBORDINATED DEBT DOCUMENTS IMPOSE RESTRICTIONS ON US AND
LIMIT OUR OPERATIONS
Our line of credit with PNC Bank and subordinated debt owed to GE Capital
require us to comply with affirmative and negative covenants. We must maintain
various financial ratios and these lenders may restrict us from incurring other
debt. We cannot pay
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dividends on our common stock while the line of credit and the subordinated debt
are outstanding. We are also subject to other restrictions, including
restrictions pertaining to significant corporate transactions and management
changes. In the past, we have had both PNC Bank and GE Capital waive our
non-compliance with covenants and, in some instances, adjust the covenants to
avoid future non-compliance. These actions may occur in the future.
If we default under the line of credit, PNC Bank could, among other
items, cease all advances, accelerate all amounts owed to PNC Bank and increase
the interest rate on the line of credit. If we default under the subordinated
debt documents, GE Capital could, among other items, accelerate all amounts owed
to GE Capital, subject to the rights of PNC Bank as our senior lender under the
line of credit. In the event PNC Bank or GE Capital accelerated the amounts owed
to them, ThermoView would be unable to pay the amounts due which could result in
the bankruptcy of ThermoView as an enterprise. Under either the PNC Bank line of
credit or the GE Capital subordinated debt, an event of default could result in
the loss of our subsidiaries because of the pledge of our ownership in all of
our subsidiaries to PNC Bank and on a subordinated basis to GE Capital.
OUR OPERATIONS, DEFERRED ACQUISITION STRATEGY AND FUTURE DIRECTION WILL SUFFER
FROM THE LOSS OF OUR KEY EXECUTIVES
If we were to lose the services of our executive officers Stephen A.
Hoffmann and Nelson E. Clemmens without adequate replacements, we will suffer
from a lack of leadership in our deferred acquisition strategy, financial future
planning and operations management. The departure or death of any of these
individuals in spite of our employment agreements with them and key person life
insurance on their lives will not replace the lost leadership these individuals
provide. This management gap would cause potential revenue reduction and
operating cost increases.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL, DISCOURAGE TAKEOVER BIDS AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO FALL
Provisions of our restated certificate of incorporation and bylaws and
provisions of applicable Delaware law may discourage, delay or prevent a merger
or other change of control that a stockholder may consider favorable. Our Board
of Directors has the authority to issue up to 50,000,000 shares of its preferred
stock and to determine the price and the terms, including preferences and voting
rights, of those shares without stockholder approval. To date, we have issued or
agreed to issue shares of our preferred stock in four series, of which 6,000
shares of Series C preferred stock remain outstanding and an additional
1,439,316 shares of Series D preferred stock will become outstanding upon its
issuance. Our Series A and Series B preferred stock converted into our common
stock in December 1999 after completion of our
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initial public offering. In January 2000, our Board of Directors approved the
reduction of the number of shares of our authorized preferred stock from
50,000,000 shares to 5,000,000 shares, subject to shareholder approval.
Additionally, we have a classified Board of Directors whereby directors serve
staggered three-year terms. Our Certificate of Incorporation requires a
supermajority vote of the common stockholders to remove or modify this staggered
board. Furthermore, we require advance notice for stockholder proposals and
director nominations. These items could:
- have the effect of delaying, deferring or preventing a change of
control of ThermoView;
- discourage bids for our common stock at a premium over the market
price; or
- cause the market price of our common stock to fall.
We are subject to Delaware laws that could delay, deter or prevent a
change of control of ThermoView. One of these laws prohibits us from engaging in
a business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder, unless
conditions are met.
OUR FAILURE TO RAISE SUBSTANTIAL FUNDS FOR ACQUISITIONS ON FAVORABLE TERMS COULD
PREVENT US FROM IMPLEMENTING OUR ACQUISITION STRATEGY WHICH WOULD REDUCE OUR
REVENUES AND POTENTIAL INCOME
We have deferred our acquisition strategy primarily due to a lack of
capital, except for the opportunities where we determine that a high quality
affordable acquisition target is available. We will need sources of financing to
undertake acquisitions and to pay other acquisition related liabilities,
including payment of seller notes and future earned cash to sellers of acquired
companies. In April 2000, we substituted the issuance of our Series D preferred
stock for cash due to sellers of acquired companies because we did not have
sufficient cash to satisfy these obligations. Any required financing may not be
available on terms favorable to us, or at all. If adequate funds are not
available on acceptable terms, we may be unable to fund acquisitions,
successfully promote our products or develop new or enhanced products, any of
which would lower our revenues and net income, if we achieve profitability in
the future. If we raise funds by issuing equity securities, stockholders may
experience dilution of their ownership interest and the newly issued securities
may have rights superior to those of the common stock. If we issue or incur debt
to raise funds, we may be subject to additional limitations on our operations.
IF WE ACQUIRE COMPANIES ON UNFAVORABLE TERMS OR FAIL TO INTEGRATE COMPANIES INTO
OUR OPERATIONS, OUR COSTS WILL INCREASE, LOSSES WILL RESULT AND OUR MANAGEMENT
COULD BECOME DISTRACTED FROM OUR OPERATIONS
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If we acquire companies, we may acquire them on terms that prove to be
unfavorable or dilutive to our earnings per share, if we achieve earnings. We
may also acquire companies whose past results of operations do not prove to be
indicative of future results. Accordingly, our acquisitions may prove to be
unprofitable and this could cause the value of our common stock to decrease.
Additionally, we may compete for acquisition candidates with companies that have
significantly greater financial resources than we do. As a result, we may not be
able to identify and acquire suitable acquisition candidates and we therefore
may not achieve our long-term acquisition strategy.
When we buy companies, we initially rely on their separate accounting and
information systems. We may experience difficulties in integrating a company's
functions and systems. These difficulties could disrupt our ongoing business,
distract our management and employees, increase our expenses and result in
losses or reduced profitability.
WE DEPEND ON TWO VINYL SUPPLIERS FOR THE VINYL USED IN OUR WINDOW PRODUCTION AND
IF WE WERE TO LOSE THESE SUPPLIERS OUR OPERATIONS WOULD BE DISRUPTED AND OUR
REVENUES WOULD FALL
We purchase all of the vinyl used in the manufacture of our windows from
two suppliers, a Mikron Industries, Inc. subsidiary and Complast, Inc. As of
December 31, 1999, vinyl accounted for 39% of our window material costs and
constitutes the largest portion of our raw material costs. If we were to lose
these suppliers and were unable to find alternate suppliers, our window
production would be disrupted and our revenues would fall. Additionally, in the
event we were unable to find alternate suppliers at comparable prices, our
manufacturing costs would increase.
RISKS RELATED TO THE REPLACEMENT WINDOW INDUSTRY
WITH THE GREATER NAME RECOGNITION AND RESOURCES OF SOME OF OUR COMPETITORS, WE
MAY LOSE POTENTIAL REVENUE AND HAVE DECREASED PRESENCE IN THE MARKET UNDER OUR
DEFERRED ACQUISITION PROGRAM
A limited number of our competitors have longer operating histories,
greater name recognition, larger customer bases and greater financial, technical
and marketing resources than we do. These resources may allow them to respond
more quickly than we can to new or emerging technologies and changes in customer
requirements. It may also allow them to devote greater resources than we can to
the development, promotion and sale of their products. Our competitors may also
engage in more extensive research and development, undertake more far-reaching
marketing campaigns and adopt more aggressive pricing policies. Increased
competition in addition to our present lack of capital could reduce our
acquisition opportunities and could also cause a
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decrease in our potential revenue and potential income, and the deterioration in
our financial position and the value of our common stock.
The market for our products is highly competitive and it is very
fragmented at the manufacturing and retail levels. We expect competition to
continue to increase because our markets pose no substantial barriers to entry.
To the extent one of our competitors undertakes a consolidation program, our
competition would increase further.
WE MAY SUFFER LOST POTENTIAL REVENUE FROM OUR INABILITY TO SATISFY CURRENT AND
FUTURE GOVERNMENTAL REGULATIONS
Government regulations related to in-home sales, telemarketing and
consumer financing may prevent us from engaging in business in some
jurisdictions. Consequently, we will lose potential customers and revenue from
these areas.
RISKS RELATED TO LITIGATION
On March 3, 2000, Pro Futures Bridge Capital Fund, L.P. and Bridge
Capital Partners, Inc. Defined Benefit Pension Plan filed an action titled PRO
FUTURES BRIDGE CAPITAL FUND, L.P. V. THERMOVIEW INDUSTRIES, INC., ET AL., Civil
Action No. 00CV0559 (Colo. Dist. Ct., March 3, 2000) against ThermoView, its
directors, certain officers, an employee and a ThermoView shareholder alleging
breach of contract, common law fraud, fraudulent misstatements and omissions in
connection with the sale of securities, negligent misrepresentations and breach
of fiduciary duty. These claims are in connection with the mandatory conversion
of our 10% Series A Convertible preferred stock, held by the two funds, into our
common stock upon completion of our initial public offering in December 1999,
and purchases by the two funds of our common stock from ThermoView stockholders.
The funds are seeking rescission of their purchases of the Series A preferred
stock in the amount of $3,250,000 plus interest and unspecified damages in
connection with their purchases of our common stock. Although we believe that
the claims are without merit and intend to vigorously defend the suit, an
adverse outcome in this action could have a material adverse effect on our
financial position or results of operations.
ITEM 2. PROPERTIES
The following lists our property locations having in excess of 9,000
square feet and our headquarters. We lease all of our facilities. In many cases,
we lease the property, at market rates, from the former owners of the
subsidiaries which operate on the property. We also lease our headquarters, at
market rates, from an affiliated company of Stephen A. Hoffmann, our Chairman
and Chief Executive Officer.
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<TABLE>
<CAPTION>
LEASE
EXPIRATION
THERMOVIEW OR PROPERTY DATE
SUBSIDIARY PROPERTY DESCRIPTION (EXCLUSIVE OF
AS LESSEE ADDRESS AND USE RENEWAL OPTIONS)
--------- ------- ------- ----------------
<S> <C> <C> <C>
ThermoView Industries, Inc. 1101 Herr Lane 7,671 sq. ft. October 2003
Louisville, KY 40222 Executive offices
RETAIL SUBSIDIARIES:
Leingang Siding and Window, Inc. 2601 Twin City Drive 11,850 sq. ft. December 2005
Mandan, ND 58554 Office /Warehouse
Primax Window Co. 5611 Fern Valley Road 15,000 sq. ft. October 2001
Louisville, KY 40228 Headquarters
Rolox, Inc. 4002 Main Street 16,000 sq. ft. April 2002
Grandview, MO 64030 Headquarters /Warehouse
1440 S. Ridge Road 10,000 sq. ft. April 2002
Wichita, KS 67209 Office / Warehouse
Thermo-Tilt Window Company 2800 Warehouse Road 24,000 sq. ft. December 2002
Owensboro, KY 42301 Warehouse plus 9,000
sq. ft. Office
ThermoView of California 8445 Camino Sante Fe 9,000 sq. ft. January 2005
San Diego, CA 92121 Headquarters/ Office
6627 Valjean Avenue 12,600 sq. ft. January 2005
Van Nuys, CA 91406 Office / Warehouse
Thomas Construction, Inc. 13397 Lake Front Dr. 60,000 sq. ft. December 2013
Earth City, MO 63045 Office / Warehouse
Thermo-Shield Company, LLC 661 Glenn Avenue 17,000 sq. ft. October 2007
Wheeling, IL 60090 Office / Warehouse
MANUFACTURING SUBSIDIARIES:
Thermal Line Windows, Inc. 3601 30th Ave., NW 49,500 sq. ft. December 2005
Mandan, ND 58554 Headquarters / Office
/Manufacturing
Precision Window Mfg., Inc. 1200 Andes Boulevard 66,600 sq. ft. June 2002
Creve Coeur, MO 63132 Office /Warehouse
</TABLE>
28
<PAGE>
The leases of our properties provide for monthly rentals ranging from
approximately $500 to $37,500. See footnote 6 to our consolidated financial
statements for the year ended December 31, 1999, which appears on page 72 of
this Form 10-K, for more information regarding our leases.
ITEM 3. LEGAL PROCEEDINGS
On March 3, 2000, Pro Futures Bridge Capital Fund, L.P. and Bridge
Capital Partners, Inc. Defined Benefit Pension Plan filed an action titled PRO
FUTURES BRIDGE CAPITAL FUND, L.P. V. THERMOVIEW INDUSTRIES, INC., ET AL., Civil
Action No. 00CV0559 (Colo. Dist. Ct., March 3, 2000) against ThermoView, its
directors, certain officers, an employee and a stockholder alleging breach of
contract, common law fraud, fraudulent misstatements and omissions in connection
with the sale of securities, negligent misrepresentations and breach of
fiduciary duty. These claims are in connection with the mandatory conversion of
the Company's 10% Series A convertible preferred stock, held by the two funds,
into common stock upon completion of the initial public offering in December
1999, and purchases by the two funds of Company common stock from ThermoView
stockholders. The funds are seeking rescission of their purchases of the Series
A preferred stock in the amount of $3,250,000, plus interest and unspecified
damages in connection with their purchases of the common stock. ThermoView is in
the process of filing a notice to dismiss certain claims and an answer denying
liability in the remainder of the claims. The parties have not conducted
discovery in connection with the allegations, and no hearing or trial is
scheduled. While ThermoView believes that the claims are without merit and
intends to vigorously defend the suit, it is too early in the process to predict
the likely outcome of the matter.
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock has traded on the American Stock Exchange since
December 2, 1999, under the symbol "THV." Prior to December 2, 1999, we traded
our common stock on the OTC Bulletin Board under the symbol "TVIID" after a
1-for-3 reverse stock split of our common stock that occurred on October 5,
1999, and prior thereto under the symbol "TVII." The OTC Bulletin Board is a
regulated quotation service that displays real-time quotes, last-sale prices and
volume information in over-the-counter equity securities. Prior to December 2,
1999, we had not previously
29
<PAGE>
registered our common stock under either the Securities Act of 1933 or the
Securities Exchange Act of 1934, nor had we listed our common stock on any
exchange or had it quoted on The Nasdaq Stock Market. The following table sets
forth, for the quarterly periods indicated, the high and low closing sale prices
per share for the common stock and as adjusted to reflect the 1-for-3 reverse
stock split which occurred on October 5, 1999. Our common stock commenced
trading on the OTC Bulletin Board on April 16, 1998. Prior to that time, no
active trading market existed for the common stock. The American Stock Exchange
and OTC Bulletin Board market quotations reflect inter-dealer prices, without
retail mark up, mark down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
PRICE RANGE
-----------
HIGH LOW
---- ---
<S> <C> <C>
CALENDAR YEAR 1998
Second Quarter (from April 16, 1998) $32.25 $25.50
Third Quarter 27.75 23.25
Fourth Quarter 25.08 15.00
CALENDAR YEAR 1999
First Quarter $28.50 $14.64
Second Quarter 24.75 10.68
Third Quarter 14.81 5.72
Fourth Quarter 9.00 2.38
</TABLE>
On March 31, 2000, the last reported sale price of the common stock on
the American Stock Exchange was $3.50 per share.
As of March 31, 2000, there were 321 holders of record of our stock
consisting of 319 common stockholders and two Series C preferred stockholders.
ThermoView has not declared or paid any cash dividends on its common
stock and does not expect to pay any cash dividends on our common stock in the
foreseeable future. Our agreements with our senior lender and our subordinated
debt holder prohibit us from paying dividends on our common stock. Any future
change in our dividend policy will be made at the discretion of our Board of
Directors and will depend on a number of factors, including:
- our future earnings;
- capital requirements;
- contractual restrictions;
- financial condition; and
- future prospects.
30
<PAGE>
We have paid all dividends owing on our preferred stock to date. We will
continue to pay 70% of the dividends on our 9.6% Series C preferred stock in
cash and the remainder in our common stock until conversion of the Series C
preferred stock. We will owe quarterly dividends in cash on our 12% Series D
preferred stock commencing in July 2000, subject to approval of our senior
lender.
(b) The effective date of the Form S-1 registration statement filed by
ThermoView was December 2, 1999 and the Securities Exchange Commission assigned
File Number 333-84571 to the registration statement. The offering commenced
immediately following the effective time of the registration statement. The
offering terminated upon the sale of all of the securities registered under the
registration statement. The managing underwriters were Joseph Charles & Assoc.,
Inc. and EBI Securities Corporation. ThermoView offered and sold 1,255,000
shares of its $.001 par value common stock at a price of $5.50 per share, or an
aggregate of $6,902,500 for the total offered shares. The following table sets
forth the net proceeds of the offering and the use of proceeds by ThermoView.
<TABLE>
<S> <C>
Net proceeds of offering:
Gross proceeds of offering $6,902,500
Underwriting discounts (655,738)
Underwriting expenses (203,585)
----------
6,043,177
Offering expenses:
Accounting (975,725)
Legal (583,338)
Printing (826,075)
Other (151,190)
----------
Total net proceeds of offering $3,506,849
==========
Use of proceeds of offering:
Repayment of debt $3,025,000
Working capital 481,849
----------
Total use of proceeds of offering $3,506,849
==========
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical and pro forma statement
of operations and balance sheet financial data for
31
<PAGE>
ThermoView. On April 15, 1998, ThermoView acquired all of the outstanding stock
of Thermo-Tilt Window Company. Prior to that date, ThermoView was a development
stage corporation and had no business operations since its incorporation. For
accounting and financial statement presentation purposes, Thermo-Tilt is deemed
to be the acquirer. The statement of operations data for the period January 1,
1998 through April 15, 1998 and the financial data as of and for each of the
years ended December 31, 1995 through 1997 reflect only the operations of
Thermo-Tilt. Since April 15, 1998, we have acquired 12 retail and manufacturing
businesses. These acquisitions have been accounted for as purchase transactions
and, accordingly, the results of operations of the acquired businesses are
included in the historical financial data since their respective acquisition
dates.
The selected financial data for ThermoView as of December 31, 1996, 1997,
1998 and 1999 and for each of the four years in the period ended December 31,
1999, have been derived from the audited financial statements of ThermoView. The
selected financial data as of December 31, 1995 and for the year then ended has
been derived from unaudited financial statements. The unaudited information has
been prepared on the same basis as the audited financial statements and, in the
opinion of ThermoView, reflects all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of such data.
The following unaudited pro forma statement of operations data with
respect to the years ended December 31, 1998 and 1999, give effect to each of
our acquisitions, as if all transactions had occurred on January 1, 1998. We
have presented this pro forma data for informational purposes only, in order to
provide you with some indication of what our business might have looked like if
we had owned all of the acquired companies since January 1, 1998. These
companies may have performed differently if they had actually been combined with
our operations. You should not rely on the unaudited pro forma information as
necessarily being indicative of the historical results that we would have had or
the results that we will experience in the future.
The following data should be read in conjunction with:
- the information set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations;" and
- our consolidated financial statements and the related notes
thereto included elsewhere in this Form 10-K.
32
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 5,870 $ 6,641 $ 5,629 $ 37,376 $ 108,198 $ 102,115 $ 110,700
Cost of revenues earned 2,126 3,571 2,889 16,748 48,727 48,092 49,460
--------- --------- --------- --------- --------- --------- ---------
Gross profit 3,744 3,070 2,740 20,628 59,471 54,023 61,240
Selling, general and
administrative expenses 3,316 2,634 3,293 20,233 53,478 49,427 55,030
Stock-based compensation
expense -- -- 1 5,509 71 5,509 71
Depreciation expense 74 68 69 297 966 667 994
Amortization expense -- -- -- 972 3,393 2,718 3,444
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations 354 368 (623) (6,383) 1,563 (4,298) 1,701
Interest expense (16) (57) (90) (439) (2,962) (2,394) (3,047)
Other income (expense) (8) (47) (19) 69 112 465 112
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes 330 264 (732) (6,753) (1,287) (6,227) (1,234)
Income tax expense (benefit) -- -- (266) (1,148) 370 (594) 395
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 330 $ 264 (466) (5,605) (1,657) (5,633) (1,629)
========= =========
33
<PAGE>
Less amount attributable to
sole proprietor 398 -- -- --
Less preferred stock dividends:
Cash -- 585 2,005 785 2,005
Non-cash -- 9,540 2,492 9,540 2,492
----------- ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders $ (864) $ (15,730) $ (6,154) $ (15,958) $ (6,126)
=========== =========== =========== =========== ===========
Basic and diluted loss per
common share (see note below) $ (3.96) $ (1.19) $ (3.28) $ (1.18)
=========== =========== =========== ===========
Weighted average shares outstanding 3,975,235 5,164,497 4,858,134 5,192,705
=========== =========== =========== ===========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 567 $ 859 $ 1,503 $54,094 $93,971
Long-term debt including current
maturities 224 322 527 9,206 21,759
Total liabilities 908 1,089 1,326 15,796 37,647
Mandatorily redeemable convertible
preferred stock -- -- -- -- 4,649
Stockholders' equity (deficit) (341) (230) 177 38,298 51,675
</TABLE>
- --------------------
Note: We have described the method used to calculate loss per common share in
footnote 2 to our consolidated financial statements for the year ended
December 31, 1999, which appears on page 66 of this Form 10-K.
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE INFORMATION SET FORTH UNDER "SELECTED FINANCIAL DATA" AND OUR FINANCIAL
STATEMENTS AND THE ACCOMPANYING NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM
10-K. THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS,
EXPECTATIONS AND PLANS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
UNDER "RISK FACTORS."
OVERVIEW
We design, manufacture, sell and install custom vinyl replacement windows
for residential and retail commercial customers. We also sell and install
replacement doors, home textured coatings, vinyl siding, patio decks, patio
enclosures, cabinet refacings and kitchen and bathroom remodeling products. We
have financed a portion of our customers' purchases through Key Home Credit, our
consumer finance subsidiary. As more fully discussed under "Business" set forth
elsewhere in this Form 10-K, we anticipate a greater reliance on strategic
relationships with unaffiliated companies to improve our operations in the
manufacturing and financial services business segments.
On April 15, 1998, we acquired all of the outstanding stock of
Thermo-Tilt Window Company in exchange for 3,120,000 shares of our common stock,
which represented 90% of ThermoView's then outstanding common stock. Thermo-Tilt
is deemed to be the acquirer for accounting purposes.
BUSINESS SEGMENTS
Our subsidiaries have separate management teams and infrastructures and
operate in three reportable operating segments: retail, manufacturing and
financial services.
RETAIL. Our retail segment consists of our subsidiaries that design, sell
and install custom vinyl replacement windows, doors and related home improvement
products to commercial and retail customers. Our retail segment derives its
revenues from the sale and installation of thermal replacement windows, storm
windows and doors, patio decks, patio enclosures, vinyl siding and other home
improvement products. Our retail segment recognizes revenues on the completed
contract method. A contract is considered complete when the home improvement
product has been installed. Gross profit in the retail segment represents
revenues after deducting product and installation labor costs.
36
<PAGE>
MANUFACTURING. Our manufacturing segment consists of our subsidiaries
that manufacture and sell vinyl replacement windows to our retail segment and to
unaffiliated customers. Sales from the manufacturing segment to our retail
segment have been a larger percentage of our manufacturing revenues in recent
years, however, we do not expect this trend to continue as we anticipate more of
our retail subsidiaries will obtain windows manufactured from unaffiliated
vendors. We believe that with our present retail volume, we can achieve lower
product cost and more consistent product quality by outsourcing to high volume
window manufacturers rather than to expand our internal manufacturing. Our
manufacturing segment recognizes revenues when products are shipped. Gross
profit in the manufacturing segment represents revenues after deducting product
costs (primarily glass, vinyl and hardware), window fabrication labor and other
manufacturing expenses.
Consistent with our shift to outsourced manufacturing, our Board of
Directors in January 2000 authorized us to seek buyers for our two manufacturing
subsidiaries. We do not intend to dispose of these subsidiaries if the
transaction would result in a loss to ThermoView.
FINANCIAL SERVICES. Our financial services segment facilitates the credit
sales of our retail segment. We are currently focusing the business of this
segment on making consumer credit providers available to our customers in
exchange for broker fees from third-party consumer finance companies.
You should refer to footnote 15 to our financial statements for the year
ended December 31, 1999, which appears on page 87 of this Form 10-K for
additional financial information about each of our business segments.
OUR ACQUISITIONS
Since April 15, 1998, we have acquired 12 retail and manufacturing
businesses. The following table presents information regarding the consideration
paid for each acquired company:
37
<PAGE>
<TABLE>
<CAPTION>
COST OF ACQUIRED COMPANY
-------------------------------------------------------
STOCK ISSUED
(COMMON STOCK
CASH EXCEPT AS NOTED IN
AND DUE (1) BELOW)
DATE OF TO ---------------------- TOTAL
ACQUIRED COMPANY ACQUISITION SELLERS SHARES VALUE COST
----------- ------- ------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RETAIL SEGMENT:
American Home Developers Co., Inc. April 1998 $ 1,202 259,058 $ 6,379 $ 7,581
Primax Window Co. April 1998 1,584 180,725 4,057 5,641
The Rolox Companies April 1998 3,820 374,058 8,706 12,526
American Home Remodeling July 1998 3,193 122,415 3,044 6,237
Five Star Builders, Inc. July 1998 2,666 116,667 2,659 5,325
NuView Industries, Inc. July 1998 1,190 725 16 1,206
Leingang Siding and Window, Inc. August 1998 2,908 29,255 452 3,360
Thomas Construction, Inc.(1) January 1999 17,562 500,475 3,800 21,362
The Thermo-Shield Companies March 1999 4,597 185,006 3,150 7,747
---------- ---------- ---------- ----------
Total of retail segment 38,722 1,768,384 32,263 70,985
MANUFACTURING SEGMENT:
TD Windows, Inc. May 1998 311 -- -- 311
Thermal Line Windows, L.L.P.(2) August 1998 5,155 203,682 1,257 6,412
Precision Window Mfg., Inc. January 1999 3,075 37,351 540 3,615
---------- ---------- ---------- ----------
Total of manufacturing segment 8,541 241,033 1,797 10,338
---------- ---------- ---------- ----------
Total $ 47,263 2,009,417 $ 34,060 $ 81,323
========== ========== ========== ==========
</TABLE>
38
<PAGE>
- ---------------
(1) Stock issued in connection with the acquisition of Thomas Construction,
Inc. includes 400,000 shares of Series B preferred stock valued at
$2,000,000, which on December 31, 1999, converted into common stock. All
other shares and values represent common stock.
(2) Includes the acquisition of North Country Thermal Line, Inc. in November
1998 for $277,926 cash and 20,973 shares of common stock valued at
$324,000.
We have accounted for our acquisitions as purchase transactions and,
accordingly, the results of operations of the acquired businesses have been
included in the consolidated historical financial statements since the
respective acquisition dates. As a result of our recent acquisitions, goodwill
accounts for 79% of our total consolidated assets at December 31, 1999. At
December 31, 1999, our goodwill was approximately $74 million. Goodwill
represents the excess of the aggregate purchase price paid for the acquisition
of companies accounted for as purchases over the fair value of the net tangible
assets of the acquired companies. Goodwill reduces earnings now and in the
future as we amortize it over a 25-year period on a straight-line basis.
The terms of nine of our acquisition agreements provide for additional
consideration to be paid if the acquired entities' results of operations exceed
targeted levels, generally for a period of three years subsequent to the
acquisition dates. Targeted levels are generally set at the annual earnings of
the acquired entities before interest and taxes, allowing for the add back of
salaries and other costs that will not be incurred on a post-acquisition basis.
The additional consideration is paid in cash and with shares of our common
stock, and is recorded when earned as additional purchase price. Goodwill is
increased for any additional purchase price.
HISTORICAL RESULTS OF OPERATIONS
The following historical results of operations for the year ended
December 31, 1997 represents the operations of Thermo-Tilt. The financial
information for the years ended December 31, 1998 and 1999 include Thermo-Tilt
plus the results of operations of the companies acquired by us after April 15,
1998 from their respective dates of acquisition.
Due to the significant impact of the acquisitions on our operations, the
historical results of operations and period-to-period comparisons may not be
meaningful or indicative of future operating results. The addition of revenues,
expenses and other components of operations associated with the acquisitions are
the
39
<PAGE>
principal reasons for the significant differences when comparing results of
operations between periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues $ 5,629 $ 37,376 $108,198
Cost of revenues earned 2,889 16,748 48,727
------- -------- --------
Gross profit 2,740 20,628 59,471
Selling, general and
administrative expenses 31,293 20,233 53,478
Stock-based compensation expense 1 5,509 71
Depreciation expense 69 297 966
Amortization expense - 972 3,393
------- -------- --------
Income (loss) from operations (623) (6,383) 1,563
Interest expense (90) (439) (2,962)
Other income (expense) (19) 69 112
------- -------- --------
Loss before income taxes (732) (6,753) (1,287)
Income tax expense (benefit) (266) (1,148) 370
------- -------- --------
Net loss (466) (5,605) (1,657)
Less amount attributable to sole
proprietor 398 - -
Less preferred stock dividends:
Cash - 585 2,005
Non-cash - 9,540 2,492
------- -------- --------
Net loss attributable to common
stockholders $ (864) $(15,730) $ (6,154)
======= ======== ========
</TABLE>
1997 COMPARED TO 1998
REVENUES. Revenues increased from $5.6 million in 1997 to $37.4 million
in 1998 from acquisitions made subsequent to April 15, 1998.
GROSS PROFIT. Gross profit, which represents revenues less cost of
revenues earned, increased from $2.7 million in 1997 to $20.6 million in 1998
from acquisitions made subsequent to April 15, 1998. Cost of revenues earned
includes the cost of
40
<PAGE>
glass, vinyl, hardware, fabrication labor and manufacturing overhead for the
manufacturing segment. For the retail segment cost of revenues earned includes
the cost of vinyl windows, doors, textured coating, vinyl siding, and other home
improvement products purchased plus installation costs and other indirect
materials and labor.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $3.3 million in 1997 to $20.2 million in
1998. This increase results from acquisitions made subsequent to April 15, 1998,
and the commencement of corporate activities which added $2.1 million to
selling, general and administrative expenses for 1998. Selling, general and
administrative expenses include sales commissions, advertising expenses, rent
expense and other general and administrative expense. Expenses related to
corporate operating activities which commenced on April 15, 1998 are included
primarily in general and administrative expenses.
STOCK-BASED COMPENSATION EXPENSE. In 1998, we recorded total stock-based
compensation expense of approximately $5.5 million. We do not expect to record
significant additional compensation expense for these items in future years.
DEPRECIATION EXPENSE. Depreciation expense of $297,000 for 1998
represents primarily depreciation on acquisitions made after April 15, 1998.
AMORTIZATION EXPENSE. Amortization of $1.0 million for 1998 represents
amortization on acquisitions made after April 15, 1998.
INTEREST EXPENSE. Interest expense of $439,000 for 1998 represents
primarily interest cost on additional borrowings to finance the acquisitions
made after April 15, 1998.
INCOME TAX BENEFIT. The loss before income taxes in 1998 includes $2.3
million of non-deductible stock-based compensation expense, $853,000 of
non-deductible goodwill and $272,000 of non-deductible merger and acquisition
costs. Accordingly, the $1.1 million of 1998 income tax benefit is lower than
what would be expected by applying the statutory rate to the $6.8 million of
loss before income taxes.
PREFERRED STOCK DIVIDENDS. The cash dividends of $585,000 in 1998
represent dividends paid on our Series A preferred stock. We also recorded
non-cash dividends of approximately $9.5 million associated with the issuance of
our Series A preferred stock. Our Series A preferred stock was convertible into
shares of our common stock effective at a price which we determined to be below
the fair market value of the common stock on the date of issuance. The Series A
preferred stock converted into shares of our common stock effective December 31,
1999.
41
<PAGE>
1998 COMPARED TO 1999
REVENUES. Revenues increased from $37.4 million in 1998 to $108.2 million
in 1999. This increase represents revenues from acquisitions made subsequent to
April 15, 1998.
GROSS PROFIT. Gross profit increased from $20.6 million in 1998 to $59.5
million in 1999 from acquisitions made subsequent to April 15, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $20.2 million in 1998 to $53.5 million in
1999. This increase results from acquisitions made subsequent to April 15, 1998
and expenses relating to corporate activities which were incurred for all of
1999 but only since April 15, 1998 for 1998. Selling, general and administrative
expenses have decreased, however, as a percentage of total revenues from 54.1%
in 1998 to 49.4% in 1999. Expenses related to corporate operating activities
have also decreased as a percentage of total revenues from 5.6% in 1998 to 3.9%
in 1999. These decreases are largely due to the fixed nature of many of these
costs.
DEPRECIATION EXPENSE. Depreciation expense increased from $297,000 in
1998 to $1.0 million in 1999. This increase represents primarily depreciation on
acquisitions made subsequent to April 15, 1998.
AMORTIZATION EXPENSE. Amortization expense increased from $1.0 million in
1998 to $3.4 million in 1999. This increase represents amortization of goodwill
on acquisitions made subsequent to April 15, 1998.
INTEREST EXPENSE. Interest expense of $3.0 million for 1999 represents
primarily interest cost on additional borrowings to finance the acquisitions
made after April 15, 1998. Included in interest expense for 1999 is $.8 million
of non-cash debt discount accretion.
INCOME TAX EXPENSE (BENEFIT). The benefit for income taxes for 1998 and
the expense for income taxes in 1999 differs from the amount computed by
applying the statutory U.S. Federal income tax rate to loss before income taxes
primarily as a result of state taxes and non-deductible goodwill amortization.
In addition, the tax benefit for 1998 is less than expected because of
non-deductible stock-based compensation expense.
As of December 31, 1999, we had deferred income tax assets of $1.7
million. To realize a deferred tax asset of $1.7 million, we would need to have
future taxable income of about $5.0 million. The Company had taxable income of
approximately $175,000 in 1999. Taxable income would need to increase to about
$300,000 per year to enable us to realize the deferred tax asset during the
carryforward period. Because of cost reductions, lower product
42
<PAGE>
costs expected because of outsourcing manufacturing, the introduction of new
products and various other performance improvements, we believe it is more
likely than not that our future taxable income will be sufficient to enable us
to realize these deferred income tax assets.
CASH DIVIDENDS. The cash dividends of $585,000 for 1998 represent
dividends paid on our Series A preferred stock. The cash dividends of $2.0
million for 1999 relate to dividends on shares of our Series A and Series B
preferred stock, which were converted into shares of our common stock effective
December 31, 1999, as well as on our mandatorily redeemable Series C convertible
preferred stock.
NON-CASH DIVIDENDS. We recorded non-cash dividends of approximately $9.5
million associated with the issuance of our Series A preferred stock for 1998.
Our Series A preferred stock was convertible into shares of our common stock at
a price which we determined to be below the fair market value of common stock on
the date of issuance. Non-cash dividends of $2.5 million for 1999 relate
primarily to a beneficial conversion feature of the mandatorily redeemable
Series C convertible preferred stock issued in April 1999 and accretion of the
discount on the mandatorily redeemable preferred stock related to the value of
the detachable stock purchase warrants issued to the Series C preferred
stockholders.
PRO FORMA REVENUES AND GROSS PROFIT
We have presented pro forma revenues and gross profit on a combined
historical basis for the years ended December 31, 1997, 1998, and 1999. We have
not presented any pro forma financial information below the gross profit line,
since much of the pre-acquisition financial data below gross profit is
significantly impacted by compensation packages of the former owners of these
companies. We negotiate and, in many cases, significantly revise compensation
packages in connection with our acquisitions of these businesses.
Our pro forma results for any period are not necessarily indicative of
future results because, among other things, the acquired companies were not
under common control or management prior to their acquisition. The timing and
magnitude of acquisitions, assimilation costs and seasonal nature of the
industry may cause an increase or decrease in our revenues and expenses.
PRO FORMA REVENUES FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The following table presents revenues for each of our acquired companies
and total pro forma revenues for the years ended December 31, 1997, 1998 and
1999.
43
<PAGE>
<TABLE>
<CAPTION>
ACQUIRED COMPANY YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
RETAIL SEGMENT:
Thermo-Tilt Window Company $ 5,629 $ 5,124 $ 4,226
American Home Developers Co., Inc. 4,883 4,715 4,402
Primax Window Co. 7,132 6,527 7,007
The Rolox Companies 10,354 11,276 11,927
American Home Remodeling(1) 6,326 7,357 -
Five Star Builders, Inc.(1) 8,279 8,032 16,989
NuView Industries, Inc.(2) 4,690 4,602 5,506
Leingang Siding and Window, Inc. 5,457 6,012 5,683
Thomas Construction, Inc. 26,493 25,554 27,884
The Thermo-Shield Companies 12,395 14,906 19,066
------- -------- --------
Total pro forma revenues of
retail segment 91,638 94,105 102,690
MANUFACTURING SEGMENT:
T. D. Windows, Inc. 1,312 1,140 1,544
Thermal Line Windows, L.L.P.(3) 6,088 7,179 7,905
Precision Window Mfg., Inc. 6,432 6,548 7,607
------- -------- --------
Total pro forma revenues of
manufacturing segment 13,832 14,867 17,056
Intersegment eliminations and other (5,846) (6,857) (9,046)
------- -------- --------
Total pro forma revenues $99,624 $102,115 $110,700
======= ======== ========
</TABLE>
- ---------------
(1) American Home Remodeling merged into Five Star Builders, Inc., effective
December 31, 1998. Five Star Builders, Inc. changed its name to
ThermoView of California, Inc.
(2) ThermoView of Missouri, Inc. acquired the assets of NuView Industries,
Inc., which commenced its window business on February 1, 1997.
(3) Thermal Line Windows, L.L.P. is now Thermal Line Windows, Inc.
1997 PRO FORMA REVENUES COMPARED TO 1998 PRO FORMA REVENUES
Total pro forma revenues increased from $99.6 million in 1997 to $102.1
million in 1998.
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<PAGE>
RETAIL SEGMENT. Retail segment revenues increased a net $2.5 million,
with the following companies reporting the most significant fluctuations:
- The Rolox Companies' revenue increased $922,000, reflecting an
increase in its vinyl siding revenues.
- American Home Remodeling's revenue increased $1.0 million
primarily as a result of adding a textured coating business.
- Thermo-Shield's revenue increased $2.5 million related to growth
of its Michigan and Arizona additional branches opened in 1997 and
an Indiana branch opened in 1998.
- Thomas Construction reported a decrease in revenue of $939,000 due
to reduced sales generated through an unaffiliated home
improvement chain.
MANUFACTURING SEGMENT. In the manufacturing segment, Thermal Line
Windows experienced revenue growth of $1.1 million as it expanded its sales
to third-party customers in the Colorado market. Inclement weather adversely
affected sales to third-party customers in 1997.
1998 PRO FORMA REVENUES COMPARED TO 1999 PRO FORMA REVENUES
Total pro forma revenues increased from $102.1 million in 1998 to $110.7
million in 1999.
RETAIL SEGMENT. Pro forma revenues in our retail segment increased $8.6
million, with the following companies reporting the most significant
fluctuations:
- American Home Remodeling and Five Star Builders together accounted
for a $1.6 million increase in revenues. This resulted from
increases in window contracts adding to their textured coating
business, as well as price increases.
- Thomas Construction's revenue increased $2.3 million due
principally to favorable weather conditions in the fourth quarter
of 1999 and a concentrated sales effort in that quarter.
- Thermo-Shield's revenue increased $4.2 million principally due to
a contract with a major home improvement chain to provide sales
leads that resulted in significant growth in window contracts.
MANUFACTURING SEGMENT. Pro forma revenues in our manufacturing segment
increased $2.2 million, principally due to the following:
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<PAGE>
- Precision Window reported a $1.1 million increase in revenue in
1999, with higher intercompany sales to Primax, Rolox and NuView
Industries.
- Thermal Line Windows reported a $.7 million increase in revenues
in 1999 due to increased sales to a major customer.
PRO FORMA GROSS PROFIT FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND
1999
The following table presents gross profit for each of our acquired
companies and total pro forma gross profit for the years ended December 31,
1997, 1998 and 1999.
46
<PAGE>
<TABLE>
<CAPTION>
ACQUIRED COMPANY YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1998 1999
-------------------- ------------------- ------------------
PERCENT PERCENT PERCENT
GROSS OF GROSS OF GROSS OF
PROFIT REVENUES PROFIT REVENUES PROFIT REVENUES
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
RETAIL SEGMENT:
Thermo-Tilt Window Company $ 2,739 48.7% $ 2,726 53.2% $ 2,134 50.5%
American Home Developers Co., Inc. 2,193 44.9 2,249 47.7 1,978 44.9
Primax Window Co. 3,824 53.6 3,717 56.9 4,073 58.1
The Rolox Companies 6,268 60.5 6,379 56.6 7,043 59.1
American Home Remodeling(1) 3,297 52.1 4,658 63.3 -- --
Five Star Builders, Inc.(1) 5,945 71.8 5,730 71.3 11,856 69.8
NuView Industries, Inc.(2) 2,329 49.7 2,577 56.0 2,831 51.4
Leingang Siding and Window, Inc. 1,865 34.2 2,081 34.6 2,170 38.2
Thomas Construction, Inc. 12,454 47.0 12,277 48.0 13,835 49.6
The Thermo-Shield Companies 6,686 53.9 8,236 55.3 10,763 56.5
------- ---- ------- ---- ------- ----
Total pro forma gross profit of
retail segment 47,600 51.9 50,630 53.8 56,683 55.2
MANUFACTURING SEGMENT:
T. D. Windows, Inc. 274 20.9 285 25.0 201 13.0
Thermal Line Windows, L.L.P.(3) 2,015 33.1 2,337 32.6 2,669 33.8
Precision Window Mfg., Inc. 693 10.8 1,048 16.0 1,687 22.2
------- ---- ------- ---- ------- ----
Total pro forma gross profit of
manufacturing segment 2,982 20.9 3,670 24.7 4,557 26.7
------- ---- ------- ---- ------- ----
Total pro forma gross profit $50,582 50.8% $54,300 53.2% $61,240 55.3%
======= ==== ======= ==== ======= ====
</TABLE>
47
<PAGE>
- ----------------
(1) American Home Remodeling merged into Five Star Builders, Inc., effective
December 31, 1998. Five Star Builders, Inc. changed its name to
ThermoView of California, Inc.
(2) ThermoView of Missouri, Inc. acquired the assets of NuView Industries,
Inc., which commenced its window business on February 1, 1997.
(3) Thermal Line Windows, L.L.P. is now Thermal Line Windows, Inc.
1997 PRO FORMA GROSS PROFIT COMPARED TO 1998 PRO FORMA GROSS PROFIT
Total pro forma gross profit percentages improved from 50.8% in 1997 to
53.2% in 1998.
RETAIL SEGMENT. Gross profit improved in the retail segment as our retail
companies enhanced purchasing power through growth and as competition increased
among supply vendors.
- The Rolox Companies' product mix accounted for the decrease in
gross profit percentage, where it reported higher sales of vinyl
siding in 1998 which has a lower gross profit than replacement
windows.
- American Home Remodeling's gross profit improved in 1998 as it
shifted its business from general contracting to replacement
windows.
MANUFACTURING SEGMENT. In the manufacturing segment, Precision negotiated
cost reductions on vinyl and glass. Additionally, Precision implemented a 2.0%
price increase and TD Windows a 5.0% price increase, effective in 1998, related
to their manufacturing segment sales.
1998 PRO FORMA GROSS PROFIT COMPARED TO 1999 PRO FORMA GROSS PROFIT
Total pro forma gross profit percentages improved from 53.2% for 1998 as
compared to 55.3% for 1999.
RETAIL SEGMENT. The more significant gross profit fluctuations in the
retail segment were:
- American Home Remodeling and Five Star Builders together had a
2.3% improvement in gross profit due to price increases.
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<PAGE>
- Thomas Construction had a 1.6% improvement in gross profit due to
labor efficiencies achieved at higher sales volumes.
MANUFACTURING SEGMENT. In the manufacturing segment, Precision's gross
profit improved from 16.0% for 1998 to 22.2% for 1999 due in part to higher
sales volumes and negotiated cost reductions on vinyl and glass.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash and cash equivalents of $3.3
million, working capital of $4.0 million, $21.4 million of long-term debt, net
of current maturities, $7.1 million of noncurrent amounts due to sellers of
acquired businesses, and $4.7 million of mandatorily redeemable preferred stock.
Our operating activities for 1999 provided $2.8 million of cash. We used $.1
million in our operating activities during 1998.
The use of cash for investing activities relates primarily to acquisition
activity which accounts for the use of $22.3 million in 1999. Investing activity
also included investments in property and equipment of $873,000 and a net
investment in finance receivables of $669,000 in 1999. During 1998, we used
$15.6 million for acquisitions, and invested $861,000 in property and equipment
and $578,000 in finance receivables.
The major sources of cash provided by financing activities in 1999 were
borrowings of $9.7 million under our PNC Bank credit facility, net proceeds of
$9.4 million on borrowings from GE Capital, net proceeds of $5.4 million from
issuance of mandatorily redeemable Series C convertible preferred stock and
detachable stock purchase warrants and net proceeds of $3.5 million from the
issuance of common stock in our public offering. These sources were offset by
the repayment of $2.4 million of debt, exclusive of refinanced debt, the payment
of $2.0 million of preferred dividends, and deferred financing costs of
$855,000. During 1998, we received $14.5 million of net proceeds from our Series
A preferred stock offering, $614,000 of net proceeds from an offering of common
stock, $5.3 million from our PNC Bank credit facility, and $1.5 million from
related-party borrowings. These sources were offset by a use of cash of $2.1
million to repurchase 91,284 shares of our common stock.
In August 1998, we established a $15.0 million line of credit with PNC
Bank. Borrowings under the line of credit bear interest at a Euro-Rate based
variable rate. Interest on the line of credit is payable quarterly and principal
is payable in full at maturity. In November 1999, PNC Bank extended the maturity
date of the line of credit from August 31, 2000 to January 1, 2001, and on April
14, 2000, PNC Bank further extended the maturity date to May 1, 2001. On or
before May 1, 2001, we anticipate either extending the term of the credit
facility or refinancing it. Pursuant to the
49
<PAGE>
terms of the line of credit, at any one time, the aggregate unpaid principal
amount of advances under the line of credit shall not exceed the lesser of $15.0
million, or our earnings before interest, income taxes, depreciation and
amortization, as defined in the loan documents, for the immediately preceding
four fiscal quarters from our most recent financial statements multiplied by 4.6
as of March 31, 2000, 4.5 as of June 30, 2000 and 3.5 as of September 30, 2000
and thereafter.
The line of credit is secured by substantially all of our personal
property and by a pledge to PNC Bank of all of our ownership interests in our
subsidiaries. Additionally, the line of credit obligates us to pay a quarterly
unused loan fee and certain other fees and expenses. Four of our stockholders
(two of whom are also our executive officers and directors) also agreed to
guarantee $3,000,000 of the credit facility for fees equal to an annual rate of
5% from April 2000 through June 2000 and 10% thereafter subject to Board of
Director approval.
As of the date of this Form 10-K, we have borrowed the entire amount
available to us under the line of credit. The line of credit requires that any
company acquired by us must become a borrower under the line of credit.
Additionally, we have pledged all of our ownership in acquired companies to PNC
Bank.
In July 1999, we received $10.0 million in senior subordinated financing
from GE Capital Equity Investments, Inc. Interest under the note is payable
quarterly in arrears at 12% per annum, subject to substantial increases as
described in the financing. Principal under the note is payable in full in July
2002 but we may prepay the note at a premium prior to its maturity. Among its
covenants, the note requires us to refrain from entering into acquisitions
priced above a pre-defined earnings multiple unless GE Capital consents. The
note, which is subordinate to our line of credit with PNC Bank, is secured by a
lien on substantially all of our assets, a guarantee executed by our
subsidiaries and a pledge of our ownership in our current and future
subsidiaries. In conjunction with the issuance of the note, we issued to GE
Capital warrants to purchase 555,343 shares of our common stock at $0.03 per
share which expire during July 2007. We have accounted for the portion of the
proceeds from this loan equal to approximately $4.8 million allocable to the
warrant as paid-in capital with the resulting discount amortized as additional
interest over the term of the loan. The stated 12% interest on the note amounts
to $1.2 million per annum. The discount related to the warrants deemed as
interest on the note and the amortization of debt issuance costs together amount
to approximately $1.7 million per annum. These amounts will continue to reduce
our earnings until we retire the note. We used the proceeds from this financing
primarily to repay related-party indebtedness and outstanding acquisition
indebtedness. We also used a portion of the proceeds to fund obligations to
former shareholders of acquired businesses for satisfying post-
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<PAGE>
acquisition performance standards as set forth in the acquisition agreements.
In October 1999, we amended our line of credit with PNC Bank to provide
for additional borrowings under a multiple advance term note whereby we could
borrow up to an additional $2.5 million. The note bore interest at prime plus
one percent per annum and interest was payable monthly. Principal under the note
was payable in full at maturity on the earlier of January 14, 2000 or the
closing of our public offering. ThermoView borrowed approximately $2.1 million
under the note for working capital purposes. In December 1999, we repaid the
note in full with proceeds from our public offering.
Our line of credit with PNC Bank and subordinated debt owed to GE Capital
require us to comply with affirmative and negative covenants. We must maintain
various financial ratios and these lenders may restrict us from incurring other
debt. We may not pay dividends on the common stock while the line of credit and
the subordinated debt are outstanding. We are also subject to other
restrictions, including restrictions pertaining to significant corporate
transactions and management changes.
If we default under the line of credit, PNC Bank could, among other
items, cease all advances, accelerate all amounts owed to PNC Bank and increase
the interest rate on the line of credit. If we default under the subordinated
debt documents, GE Capital could, among other items, accelerate all amounts owed
to GE Capital, subject to the rights of PNC Bank as our senior lender under the
line of credit. Under either the PNC Bank line of credit or the GE Capital
subordinated debt, an event of default could result in the loss of our
subsidiaries because of the pledge of our ownership in all of our subsidiaries
to PNC Bank and on a subordinated basis to GE Capital.
We have violated PNC Bank and GE Capital covenants at December 31, 1999,
and through March 30, 2000. The covenant violations resulted largely from losses
during the twelve-month period prior to covenant measurement dates. Because of
losses, we currently have no excess cash available for unanticipated working
capital purposes. PNC Bank and GE Capital have waived these covenant violations
as of December 31, 1999 and through March 30, 2000, and have reset financial
covenants to accommodate compliance at March 31, 2000, and in the future.
In April 1999, we issued an aggregate of 6,000 shares of Series C
preferred stock to two institutional accredited investors, Brown Simpson Growth
Fund, L.P., a New York limited partnership, and Brown Simpson Growth Fund, Ltd.,
a Grand Cayman, Cayman Islands limited partnership, at a per share purchase
price of $1,000, for a total investment of $6.0 million. In conjunction with the
issuance of the Series C preferred stock, we issued to the two funds warrants to
purchase up to a total of 400,000 shares of common stock at $21.00 per share,
the number of shares and
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<PAGE>
exercise price being subject to adjustment, which expire in April 2004. We have
accounted for the portion of the proceeds equal to an estimated $2.0 million
from this Series C preferred stock allocable to the warrants as paid-in capital.
We will amortize the resulting discount as additional preferred stock dividends
from the issuance date to October 2000, the earliest redemption date. Since the
conversion price of the Series C preferred stock at the issuance date was less
than the market price of our common stock, preferred dividends include
approximately $1.2 million in the second quarter of 1999. The stated 9.6%
dividend on the Series C preferred stock comprised of 70% cash and 30% of our
common stock amounts to $576,000 per annum based on the currently outstanding
number of shares of our Series C preferred stock. The stated dividend will
reduce our earnings for so long as the Series C preferred stock remains
outstanding. The additional dividends related to the warrants and the accretion
of preferred stock issuance costs will reduce our earnings in 2000 by
approximately $1,300,000 through October 2000. In August 1999, we amended the
exercise price of the warrant to $18.00 per share in exchange for a commitment
of the holders to refrain from selling any of our securities from the closing of
the offering to January 31, 2000. We are accounting for the estimated increase
in fair value of the warrants as the result of the exercise price change in an
aggregate amount of approximately $180,000 as additional dividends on the Series
C preferred stock from August 1999 through January 2000. We used the proceeds
from this financing primarily to repay outstanding acquisition indebtedness.
As of December 31, 1999, we owed $8,085,000 to previous owners of our
subsidiaries for additional consideration under terms of our acquisition
agreements. In February 2000, we paid $1,000,000 cash towards these
obligations. In April 2000, we negotiated agreements with the previous owners
for the issuance of 1,417,000 shares of our 12% Series D cumulative preferred
stock with a liquidation value of $5.00 per share in lieu of the remaining
$7,085,000 obligation due to them. We also agreed to issue an additional
22,316 shares of our Series D preferred stock to compensate the previous
owners for interest earned in an amount equal to $111,580 prior to settlement
of the obligations. Our Series D preferred stock will pay cumulative
dividends at the rate of $.60 per share annually, subject to the availability
of such funds and the consent of PNC Bank.
We incurred significant operating losses in the first quarter of 2000
resulting largely from a significant decline in production during the relocation
of our Precision manufacturing plant in St. Louis, Missouri. The Precision
problems also caused losses at a number of our retail operations due to
Precision's inability to deliver windows. We restored production to normal
levels early in the second quarter of 2000. The reduced pace of installing
windows by our retail operations in the first quarter did contribute to a higher
revenue backlog for our second quarter.
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<PAGE>
In spite of these losses, we believe that our cash flow from operations
will allow us to meet our anticipated needs during at least the next 12 months
for:
- payment of the interest on our line of credit and subordinated
debt;
- payment of dividends due on our Series C and Series D preferred
stock;
- working capital requirements; and
- planned property and equipment capital expenditures.
Originally, we intended to continue our acquisition program with a
combination of cash, common stock and seller debt used to finance the primary
portion of consideration and we anticipated the cash needed for acquisitions to
come principally from an expanded bank line and future common stock offerings.
Currently, we do not have an expanded bank line nor do we anticipate a common
stock offering in the near term to fund acquisitions or unanticipated operating
needs. For the near term, we have decided to focus on improving the
profitability of our existing operations, opening new locations and expanding
the market areas of our existing retail subsidiaries while pursuing high quality
acquisition targets.
We may need additional sources of financing to open new locations and
expand the market areas of our existing retail subsidiaries. Any required
additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available on acceptable terms, we may be unable to
fund additional acquisitions, successfully promote our products, open new
locations, or develop new or enhanced products, any of which could lower our
revenues and net income, if we achieve profitability in the future. If we raise
additional funds by issuing equity securities, stockholders may experience
dilution of their ownership interest and the newly issued securities may have
rights superior to those of the common stock. If we issue or incur debt to raise
funds, we may be subject to limitations on our operations.
Preferred stock cash dividends were 10% on $16.9 million of Series A and
B preferred stock. We converted the Series A and B preferred stock to common
stock on December 31, 1999, and, accordingly, the $1.7 million for annual cash
dividends on Series A and Series B preferred stock are no longer required
following the conversion. We will continue to pay dividends on the Series C and
Series D preferred stock, subject to the consent of PNC Bank in connection with
the Series D preferred stock, until the shares are redeemed or converted.
PENDING LITIGATION
ThermoView does not anticipate any significant adverse effect on our
results of operations or cash flow through December 2000
53
<PAGE>
because of the Pro Futures litigation described in Item 3, Legal Proceedings.
Although ThermoView believes the claims in this litigation are without merit and
intends to vigorously defend the suit, an adverse outcome, thereafter, in this
action could have a material adverse effect on our results of operations and
cash flow.
THE SHARES IN THE INITIAL PUBLIC OFFERING MAY HAVE BEEN OFFERED OR SOLD IN
VIOLATION OF THE SECURITIES ACT OF 1933
ThermoView entered into a 90-day listing agreement in October 1999 with
IPO.COM, Inc. under which ThermoView authorized IPO.COM to include its
prospectus on the IPO.COM web site. In addition to hosting ThermoView's
prospectus, IPO.COM provided summary material relating to ThermoView and its
initial public offering on its web site. The IPO.COM web site also provided a
direct link to the ThermoView web site. Although ThermoView did not intend to
create an agency relationship with IPO.COM, and while ThermoView believes that
IPO.COM is not and has not acted as its agent, the listing agreement may have
created an agency relationship. If IPO.COM is deemed ThermoView's agent pursuant
to the listing agreement, the summarized material contained in the IPO.COM web
site relating to ThermoView and the initial public offering and the information
contained in the ThermoView web site could constitute a prospectus that does not
meet the requirements of the Securities Act of 1933. If the summarized materials
relating to ThermoView in the IPO.COM web site or the materials contained in the
ThermoView web site did constitute a violation of the Securities Act of 1933,
investors in the initial public offering would have the right, for a period of
one year from the date of their purchase of common stock, to obtain recovery of
the consideration they paid for their common stock or, if these persons had
already sold the common stock, to sue ThermoView for damages resulting from
their purchase of common stock. These damages could total up to approximately
$6.9 million, plus interest, based on the initial public offering price of $5.50
per share for 1,255,000 shares, if these investors seek recovery or damages
after an entire loss of their investment. Any recovery or damages could
adversely impact ThermoView's liquidity during the period in which a refund is
paid. Although ThermoView cannot be certain as to the ultimate disposition of
this matter, it is the opinion of ThermoView's management, based upon the
information available to it, that the expected outcome of this matter will not
significantly affect the results of operations and financial condition of
ThermoView.
YEAR 2000
During 1999, management completed the process of preparing for the Year
2000 date change. This process involved identifying and remediating date
recognition problems in computer systems, software and other operating
equipment, working with third parties to address their Year 2000 issues, and
developing contingency plans to address potential risks in the event of Year
2000
54
<PAGE>
failures. To date, ThermoView has successfully managed the transition.
Although considered unlikely, unanticipated problems in ThermoView's core
business processes, including problems associated with non-compliant third
parties and disruptions to the economy in general, could still occur despite
efforts to date to remediate affected systems and develop contingency plans.
Management will continue to monitor all business processes, including
interaction with ThermoView's customers, vendors and other third parties,
throughout 2000 to address any issues and ensure all processes continue to
function properly.
The costs to us for compliance with year 2000 issues consisted of our fee
to our outside consultant for the development and management of the assessment
program, and the costs associated with the purchase of software upgrades and
replacement equipment. To date, we have paid $101,500 to our outside consultant
and $158,800 for the upgrade and replacement of software and equipment. We
anticipate minimal future costs for the upgrade and replacement of software and
equipment. These costs do not include wages and benefits paid to our personnel
that utilize their time for the assessment program. We are funding costs of
remediation from operations. We are charging the costs associated with
remediation as current expenses with the exception of the costs of replacing
software and equipment which are capitalized.
INFLATION
Due to relatively low levels of inflation experienced during the years
ended December 31, 1997, 1998 and 1999, inflation did not cause a significant
increase in our costs.
SEASONALITY
Historically, our results of operations have fluctuated on a seasonal
basis. We have experienced lower levels of sales and profitability during the
period from mid-November to mid-March, impacting the first and fourth quarters
of each year. Inclement weather conditions in the winter and spring months in
our markets located in the north central United States, which limit our ability
to install exterior home improvement products, reduces demand for windows,
doors, vinyl siding and related products. Our intention is to expand our
southern California markets and to enter other markets in the Southwest and
southern United States to reduce the impact of seasonality if we have the
available capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates expose us to market risk. As of December 31,
1999, approximately 60% of our debt portfolio consisted of variable-rate debt
and approximately 40% consisted of
55
<PAGE>
fixed-rate debt. With respect to the variable-rate debt, a hypothetical 100
basis point increase in interest rates would increase our annual interest
expense by approximately $150,000 as of December 31, 1999.
Interest rate changes would result in gains or losses in the market value
of our fixed-rate debt due to the differences between the current market
interest rates and the rates governing these instruments. With respect to our
fixed-rate debt outstanding at December 31, 1999, a 10% change in interest rates
would not have resulted in a significant change in the fair value of our
fixed-rate debt.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
THERMOVIEW INDUSTRIES, INC.
Report of Independent Auditors ................................... 58
Report of Independent Certified Public Accountants ............... 59
Consolidated Balance Sheets as of December 31,
1998 and 1999 ............................................... 60
Consolidated Statements of Operations for the years
ended December 31, 1997, 1998 and 1999 ...................... 62
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1998
and 1999 .................................................... 63
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1998 and 1999 ................ 64
Notes to Consolidated Financial Statements ....................... 65
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ThermoView Industries, Inc.
We have audited the consolidated balance sheets of ThermoView Industries,
Inc. (see Note 1) as of December 31, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ThermoView Industries, Inc. at December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles in the United States.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
April 14, 2000
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<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
ThermoView Industries, Inc.
We have audited the accompanying statements of operations, stockholders'
equity, and cash flows of ThermoView Industries, Inc. (formerly Thermo-Tilt
Window Company as discussed in Note 1) for the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted audited
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
ThermoView Industries, Inc. for the year ended December 31, 1997 in conformity
with generally accepted accounting principles in the United States.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 8, 1998
59
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THERMOVIEW INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,302,797 $ 3,331,721
Receivables:
Trade, net of allowance for doubtful
accounts of $237,000 in 1998 and
$276,000 in 1999 3,155,435 5,062,127
Finance, net of unearned interest of
$70,500 in 1998 and $149,000 in 1999 31,000 60,000
Related party 410,720 55,554
Other 326,079 337,482
Costs in excess of billings on
uncompleted contracts 604,550 1,274,073
Inventories 1,313,318 2,300,643
Prepaid expenses and other current assets 169,584 342,978
Deferred income taxes 546,000 322,000
------------ ------------
Total current assets 7,859,483 13,086,578
Property and equipment, net 2,680,895 3,679,179
Other assets:
Goodwill, net of accumulated amortization
of $936,725 in 1998 and 3,645,468 in 1999 40,926,977 74,162,341
Deferred income taxes 1,242,000 1,406,000
Finance receivables, net of unearned
interest of $276,201 in 1998 and
$1,092,411 in 1999 and allowances of
$200,000 in 1999 546,643 932,411
Other assets 837,624 704,675
------------ ------------
43,553,244 77,205,427
------------ ------------
Total assets $ 54,093,622 $ 93,971,184
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (including related party
vendor payables of $341,894 in 1998 and
$221,749 in 1999) $ 2,052,937 $ 3,444,402
Due to sellers of acquired businesses 1,000,481 1,000,000
Accrued expenses 2,775,439 3,278,924
Billings in excess of costs on
uncompleted contracts 566,702 930,732
Income taxes payable 150,837 116,784
Current portion of long-term debt 595,754 358,920
------------ ------------
Total current liabilities 7,142,150 9,129,762
Long-term debt (including related party
note payable of $1,500,000 in 1998) 8,610,069 21,399,874
Due to sellers of acquired businesses -- 7,085,000
Other long-term liabilities 43,545 32,542
Mandatorily redeemable Series C convertible
preferred stock, $.001 par value (aggregate
60
<PAGE>
redemption amount and liquidation preference
of $6,000,000); 25,000 shares authorized;
6,000 shares issued and outstanding -- 4,648,550
Stockholders' equity:
Preferred stock, 50,000,000 shares
authorized:
Series A, $.001 par value; 2,980,000
shares issued and outstanding in
1998 and none in 1999 2,980 --
Series B, $.001 par value; none issued -- --
Common stock, $.001 par value; 100,000,000
shares authorized; 4,490,228 shares
issued and outstanding in 1998 and
7,389,592 shares issued and outstanding
in 1999 4,490 7,390
Paid-in capital 44,759,981 59,794,361
Accumulated deficit (6,469,593) (8,126,295)
------------ ------------
Total stockholders' equity 38,297,858 51,675,456
------------ ------------
Total liabilities and stockholders' equity $ 54,093,622 $ 93,971,184
============ ============
</TABLE>
See accompanying notes.
61
<PAGE>
THERMOVIEW INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 5,628,726 $ 37,376,355 $ 108,198,535
Cost of revenues earned 2,889,444 16,747,734 48,727,358
------------- ------------- -------------
Gross profit 2,739,282 20,628,621 59,471,177
Selling, general and
administrative expenses 3,292,548 20,233,163 53,477,839
Stock-based compensation expense 1,050 5,508,700 71,400
Depreciation expense 69,274 297,808 965,916
Amortization expense -- 971,972 3,393,330
------------- ------------- -------------
Income (loss) from operations (623,590) (6,383,022) 1,562,692
Interest expense (90,031) (439,131) (2,962,260)
Other income (expense) (18,607) 69,057 112,866
------------- ------------- -------------
Loss before income taxes (732,228) (6,753,096) (1,286,702)
Income tax expense (benefit) (266,000) (1,148,000) 370,000
------------- ------------- -------------
Net loss (466,228) (5,605,096) (1,656,702)
Less amount attributable to
sole proprietor 398,269 -- --
Less preferred stock dividends:
Cash -- 585,105 2,005,549
Non-cash -- 9,539,678 2,491,640
------------- ------------- -------------
-- 10,124,783 4,497,189
------------- ------------- -------------
Net loss attributable to common
stockholders $ (864,497) $ (15,729,879) $ (6,153,891)
============= ============= =============
Basic and diluted loss per common
share $ (3.96) $ (1.19)
============= =============
Weighted average shares outstanding 3,975,235 5,164,497
============= =============
</TABLE>
See accompanying notes.
62
<PAGE>
THERMOVIEW INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B
----------------------- ------------------------
SHARES PAR VALUE SHARES PAR VALUE
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 ............................................... -- $ -- -- $ --
Owner's draw and closing of proprietorship ................................ -- -- -- --
Net income for the last six months ended June 30, 1997 .................... -- -- -- --
------------ ------------ ------------ ------------
Balances at June 30, 1997 ................................................. -- -- -- --
Initial capitalization of corporation ..................................... -- -- -- --
Issuance of common stock in private placement ............................. -- -- -- --
Stock-based compensation expense .......................................... -- -- -- --
Net loss for the six-months ended December 31, 1997 ....................... -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1997 ............................................. -- -- -- --
Acquisition of the Company-issuance of common stock in reverse merger ..... -- -- -- --
Common stock issued for cash .............................................. -- -- -- --
Common stock issued for acquisitions ...................................... -- -- -- --
Preferred stock issued for cash ........................................... 2,980,000 2,980 -- --
Purchase and retirement of common stock ................................... -- -- -- --
Portion of proceeds from issuance of Series A preferred stock attributable
to beneficial conversion feature at the date of issue ................... -- -- -- --
Additional dividend on Series A preferred stock attributable to beneficial
conversion feature at date of issue ..................................... -- -- -- --
Preferred stock dividend payments ......................................... -- -- -- --
Stock-based compensation expense .......................................... -- -- -- --
Net loss .................................................................. -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1998 ............................................. 2,980,000 2,980 -- --
Common stock issued for cash .............................................. -- -- -- --
Common stock issued for acquisitions ...................................... -- -- -- --
Common stock issued as preferred stock dividend ........................... -- -- -- --
Preferred stock issued for acquisition .................................... -- -- 400,000 400
Preferred stock Series C dividends paid in common stock ................... -- -- -- --
Conversion of Series A and B preferred stock into common stock ............ (2,980,000) (2,980) (400,000 (400)
Value of warrants to purchase 125,500 common shares issued to the
underwriters in connection with the public offering ..................... -- -- --
Value of warrant to purchase 555,343 common shares related to the 12%
senior subordinated note ................................................ -- -- -- --
Value of warrants to purchase 400,000 common shares related to the Series C
preferred stock ......................................................... -- -- -- --
Portion of proceeds from issuance of Series C preferred stock attributable
to beneficial conversion feature at date of issue ....................... -- -- -- --
Additional dividend on Series C preferred stock:
Attributable to beneficial conversion feature at date of issue .......... -- -- -- --
Amortization of discount related to common stock purchase warrants ...... -- -- -- --
Preferred stock dividend payments ......................................... -- -- -- --
Stock-based compensation expense .......................................... -- -- -- --
Net loss .................................................................. -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1999 ............................................. -- $ -- -- $ --
============ ============ ============ ============
<CAPTION>
COMMON STOCK PROPRIETOR'S
-------------------- DEFICIT/
PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 .......................................... -- $ -- $ -- $ (230,377) $ (230,377)
Owner's draw and closing of proprietorship ........................... -- -- -- (167,892) (167,892)
Net income for the last six months ended June 30, 1997 ............... -- -- -- 398,269 398,269
---------- --------- ----------- ------------ ------------
Balances at June 30, 1997 ............................................ -- -- -- -- --
Initial capitalization of corporation ................................ 2,621,967 2,622 140,636 -- 143,258
Issuance of common stock in private placement ........................ 316,562 317 896,958 -- 897,275
Stock-based compensation expense ..................................... -- -- 1,050 -- 1,050
Net loss for the six-months ended December 31, 1997 .................. -- -- -- (864,497) (864,497)
---------- --------- ----------- ------------ ------------
Balances at December 31, 1997 ........................................ 2,938,529 2,939 1,038,644 (864,497) 177,086
Acquisition of the Company-issuance of common stock in reverse merger 346,665 346 (346) -- --
Common stock issued for cash ......................................... 181,472 181 613,469 -- 613,650
Common stock issued for acquisitions ................................. 1,114,906 1,115 25,813,855 -- 25,814,970
Preferred stock issued for cash ...................................... -- -- 14,510,603 -- 14,513,583
Purchase and retirement of common stock .............................. (91,284) (91) (2,139,839) -- (2,139,930)
Portion of proceeds from issuance of Series A preferred stock
attributable to beneficial conversion feature at the date of issue .. -- -- 9,539,678 -- 9,539,678
Additional dividend on Series A preferred stock attributable
to beneficial conversion feature at date of issue .................. -- -- (9,539,678) -- (9,539,678)
Preferred stock dividend payments .................................... -- -- (585,105) -- (585,105)
Stock-based compensation expense ..................................... -- -- 5,508,700 -- 5,508,700
Net loss ............................................................. -- -- -- (5,605,096) (5,605,096)
---------- --------- ----------- ------------ ------------
Balances at December 31, 1998 ........................................ 4,490,288 4,490 44,759,981 (6,469,593) 38,297,858
Common stock issued for cash ......................................... 1,258,334 1,258 3,248,591 -- 3,249,849
Common stock issued for acquisitions ................................. 494,511 495 6,244,048 -- 6,244,542
Common stock issued as preferred stock dividend ...................... 19,792 20 84,460 -- 84,480
Preferred stock issued for acquisition ............................... -- -- 1,999,600 -- 2,000,000
Preferred stock Series C dividends paid in common stock .............. -- -- (84,480) -- (84,480)
Conversion of Series A and B preferred stock into common stock ....... 1,126,667 1,127 2,253 -- --
Value of warrants to purchase 125,500 common shares issued to the
underwriters in connection with the public offering ................ -- -- 257,000 -- 257,000
Value of warrant to purchase 555,343 common shares related to the 12%
senior subordinated note ........................................... -- -- 4,460,548 -- 4,460,548
Value of warrants to purchase 400,000 common shares related to the
Series C preferred stock ........................................... -- -- 1,963,670 -- 1,963,670
Portion of proceeds from issuance of Series C preferred stock
attributable to beneficial conversion feature at date of issue ..... -- -- 1,200,000 -- 1,200,000
Additional dividend on Series C preferred stock:
Attributable to beneficial conversion feature at date of issue ..... -- -- (1,200,000) -- (1,200,000)
Amortization of discount related to common stock purchase warrants . -- -- (1,207,160) -- (1,207,160)
Preferred stock dividend payments .................................... -- -- (2,005,549) -- (2,005,549)
Stock-based compensation expense ..................................... -- -- 71,400 -- 71,4000
Net loss ............................................................. -- -- -- (1,656,702) (1,656,702)
---------- --------- ----------- ------------ ------------
Balances at December 31, 1999 ........................................ 7,389,592 $ 7,390 $59,794,361 $ (8,126,295) $ 51,675,456
========== ========= =========== ============ ============
</TABLE>
See accompanying notes
63
<PAGE>
THERMOVIEW INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................................ $ (466,228) $ (5,605,096) $ (1,656,702)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization ..................................... 69,274 1,269,780 4,359,246
Deferred income taxes ............................................. (266,000) (1,295,000) 60,000
Stock-based compensation .......................................... 1,050 5,508,700 71,400
Accretion of discount related to senior subordinated debt ......... -- -- 799,998
Allowances on finance receivables ................................. -- -- 200,000
Other ............................................................. 27,342 (22,400) 54,396
Changes in operating assets and liabilities:
Trade receivables ............................................. (12,970) (1,385,707) (470,571)
Related party and other receivables ........................... (20,375) 205,159 563,385
Costs in excess of billings on uncompleted contracts .......... (28,165) 115,906 (19,071)
Inventories ................................................... 12,000 109,757 (372,686)
Prepaid expenses and other current assets ..................... (7,637) (18,944) 48,301
Accounts payable .............................................. (394,096) (67,369) 106,007
Accrued expenses .............................................. 371,735 896,640 (840,707)
Billings in excess of costs on uncompleted contracts .......... -- 51,239 42,814
Income taxes payable .......................................... -- 131,305 (159,150)
------------ ------------ ------------
Net cash provided by (used in) operating activities ................. (714,070) (106,030) 2,786,660
INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired .................... -- (15,613,913) (22,310,424)
Payments for purchase of property and equipment ..................... (315,819) (860,897) (873,313)
Proceeds from sale of property and equipment ........................ 526,305 195,000 --
Finance receivables originated ...................................... -- (649,913) (5,529,770)
Finance receivables collected ....................................... -- 72,270 355,327
Finance receivables sold ............................................ -- -- 4,505,279
Other ............................................................... 112,820 (602,667) 313,960
------------ ------------ ------------
Net cash provided by (used in) investing activities ................. 323,306 (17,460,120) (23,538,941)
FINANCING ACTIVITIES
Increase in long-term debt .......................................... -- 16,915,876 20,838,774
Payments of long-term debt .......................................... (305,709) (10,518,184) (8,569,923)
Proceeds from issuance of mandatorily redeemable preferred
stock ............................................................ -- -- 3,441,390
Proceeds from issuance of detachable stock purchase
warrants, net of fees, related to:
Senior subordinated debt ......................................... -- -- 4,460,548
Mandatorily redeemable preferred stock ........................... -- -- 1,963,670
Deferred financing costs ............................................ -- -- (854,554)
Proceeds from issuance of preferred stock ........................... -- 14,513,583 --
Preferred stock dividend payments ................................... -- (585,105) (2,005,549)
Proceeds from issuance of common stock, net of fees ................. 897,275 613,650 3,506,849
Purchase and retirement of common stock ............................. -- (2,139,930) --
Distributions to proprietor ......................................... (167,892) -- --
Cash received on initial capitalization of corporation .............. 34,253 -- --
------------ ------------ ------------
Net cash provided by financing activities ........................... 457,927 18,799,890 22,781,205
------------ ------------ ------------
Net increase in cash and equivalents ................................ 67,163 1,233,740 2,028,924
Cash and equivalents at beginning of year ........................... 1,894 69,057 1,302,797
------------ ------------ ------------
Cash and equivalents at end of year ................................. $ 69,057 $ 1,302,797 $ 3,331,721
============ ============ ============
</TABLE>
See accompanying notes
64
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND NATURE OF OPERATIONS
ThermoView Industries, Inc. ("ThermoView") is a Delaware corporation, and
was traded on the OTC Bulletin Board pursuant to Rule 15c2-11(a)(5) under the
Securities Exchange Act of 1934, as amended, from April 16, 1998 until December
2, 1999, when it began trading on the American Stock Exchange. Prior to April
15, 1998, ThermoView was a development stage corporation, and had no business
operations since its incorporation.
On April 15, 1998, ThermoView acquired all of the outstanding stock of
Thermo-Tilt Window Company ("Thermo-Tilt"), a Delaware corporation, in exchange
for 3,120,000 shares of ThermoView's authorized, but unissued, common stock
which represented 90% of ThermoView's then outstanding common stock. Such shares
were issued to the former stockholders of Thermo-Tilt. The stock exchange
between Thermo-Tilt and ThermoView was accounted for as a capital transaction
similar to a reverse acquisition except that no goodwill was recorded. As a
result, Thermo-Tilt is deemed to be the acquirer for accounting purposes and is
the accounting survivor and reporting successor. Also, there was a change in
control of ThermoView, whereby all of ThermoView's officers and directors
resigned, and new officers and directors selected by Thermo-Tilt were elected.
The historical results of operations for the year ended December 31, 1997 and
for the period January 1, 1998 through April 15, 1998 reflect the activities of
Thermo-Tilt, using Thermo-Tilt's historical cost basis. Pro forma information is
not presented since the transaction is not a business combination. Because of
the nature of this merger, "Company" as used in subsequent footnotes refers
interchangeably to ThermoView or Thermo-Tilt. All common share and per share
data has been retroactively restated in the accompanying consolidated financial
statements and notes thereto to reflect the number of shares received from
ThermoView, the Thermo-Tilt two-for-one stock split on September 29, 1997 and
the one-for-three reverse stock split discussed in Note 11.
Thermo-Tilt commenced operations in 1987 as a Kentucky sole
proprietorship engaged in the business of designing, installing, and selling
state of the art vinyl replacement thermal paned windows for the existing home
market. On May 9, 1997, Thermo-Tilt was incorporated with the initial issuance
of Thermo-Tilt common stock for the assets of the sole proprietorship occurring
on July 1, 1997.
65
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
CASH AND EQUIVALENTS
The Company considers all short-term, highly liquid investments with
original maturities of three months or less to be cash equivalents.
TRADE RECEIVABLES
Trade receivables consist of amounts due from customers. These are
uncollateralized, short-term receivables. The Company periodically reviews its
trade receivables and provides allowances as deemed necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments including cash,
receivables, accounts payable, and other accrued liabilities, the carrying
amounts approximate fair value due to their short maturities. The Company also
estimates the fair value of long-term debt to be approximately the same as the
recorded value at each balance sheet date.
INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out basis)
or market. Inventories consist principally of components for the manufacturing
of windows such as glass, vinyl and other composites.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for major
renewals and improvements which increase the useful lives of assets are
capitalized. Maintenance, repairs and minor renewals are expensed as incurred.
Assets are depreciated on a straight-line or accelerated method over their
estimated useful lives which generally range from 3 to 7 years.
66
<PAGE>
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by
the Company in acquisitions accounted for as purchases over the fair value of
the net tangible assets acquired. Goodwill is amortized on a straight-line basis
over 25 years.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its goodwill and other long-term assets for
impairment and assesses their recoverability based upon anticipated future cash
flows. If facts and circumstances lead the Company's management to believe that
the cost of one of its assets may be impaired, the Company will (a) evaluate the
extent to which that cost is recoverable by comparing the future undiscounted
cash flows estimated to be associated with that asset to the asset's carrying
amount and (b) write-down that carrying amount to market value or discounted
cash flow value to the extent necessary.
WARRANTIES
The Company provides its customers with various warranty programs on its
products and services. The Company provides an accrual for future warranty costs
based upon the relationship of prior years' revenues to actual warranty costs.
It is the Company's practice to classify the entire warranty accrual as a
current liability.
REVENUE AND COST RECOGNITION
The Company recognizes revenues from fixed-price contracts on the
completed-contract method since the contracts are of a short duration. A
contract is considered complete when the home improvement product has been
installed.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor and
supplies. General and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Costs in excess of amounts billed are classified under current assets as
costs in excess of billings on uncompleted contracts. Billings in excess of
costs are classified under current liabilities as billings in excess of costs on
uncompleted contracts.
67
<PAGE>
The Company recognizes revenues generated from unaffiliated customers in
the manufacturing segment as product is shipped and title passes.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense
was $64,421 in 1997, $1,578,685 in 1998, and $4,271,594 in 1999.
INCOME TAXES
Prior to July 1, 1997, the Company was taxed as a sole proprietorship
whereby taxable income or loss was passed on to the proprietor. At July 1, 1997,
under the provisions of the Internal Revenue Code, the Company was incorporated
and elected to be taxed as a "C" corporation. The Company filed a consolidated
return for federal income tax purposes for its first tax year-end as of May 31,
1998. The Company changed its tax reporting year-end to a calendar year basis
effective December 31, 1998. Income taxes are provided for under the liability
method, which takes into account differences between financial statement
treatment and tax treatment of certain transactions.
LOSS PER COMMON SHARE
Loss per common share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "EARNINGS PER SHARE." The
Company calculates basic earnings per common share using the weighted average
number of shares outstanding for the period. The weighted average number of
shares outstanding for the year ended December 31, 1999, includes shares related
to a stock purchase warrant that can be exercised for nominal cash consideration
(see Note 8). Diluted earnings per common share include both the weighted
average number of shares and any common share equivalents such as options or
warrants in the calculation. As the Company recorded losses in 1998 and 1999,
common share equivalents outstanding would be anti-dilutive, and as such, have
not been included in weighted average shares outstanding. Basic and diluted loss
per common share for the year ended December 31, 1997, is not presented as this
information is not meaningful since the Company operated as a sole
proprietorship until July 1, 1997.
STOCK OPTIONS
These financial statements include the disclosure requirements of SFAS
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." With respect to accounting
for stock options, as permitted under SFAS No. 123, the Company has retained the
68
<PAGE>
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
(APB 25), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related
interpretations.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME." SFAS 130 requires all non-owner changes in equity that are excluded
from net earnings under existing FASB standards be included as comprehensive
income. The Company has not had any transactions that directly affect equity
other than those transactions with owners in their capacity as owners.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in the consolidated
financial statements to conform with 1999 classifications.
3. BUSINESS COMBINATIONS
During 1998 and 1999, the Company acquired twelve companies. Information
about these transactions is summarized as follows which includes the additional
consideration discussed below:
<TABLE>
<CAPTION>
COST OF ACQUIRED COMPANY
-----------------------------------------------------------
STOCK ISSUED (COMMON
STOCK EXCEPT AS NOTED
CASH IN (b) BELOW)
DATE OF AND DUE ------------------------
ACQUIRED COMPANY ACQUISITION TO SELLERS SHARES VALUE TOTAL COST
---------------- ----------- ---------- ------ ----- ----------
<S> <C> <C> <C> <C> <C>
American Home Developers Co., Inc. 04/25/98 $ 1,201,861 259,058 $ 6,379,044 $ 7,580,905
Primax Window Co. ................ 04/30/98 1,584,080 180,725 4,057,254 5,641,334
The Rolox Companies .............. 04/30/98 3,819,812 374,058 8,705,826 12,525,638
TD Windows, Inc. ................. 05/15/98 311,031 -- -- 311,031
American Home Remodeling ......... 07/10/98 3,192,824 122,415 3,044,165 6,236,989
Five Star Builders, Inc. ......... 07/12/98 2,666,245 116,667 2,658,600 5,324,845
NuView Industries, Inc. .......... 07/21/98 1,190,484 725 15,653 1,206,137
Leingang Siding and Window, Inc. . 08/14/98 2,907,971 29,255 451,949 3,359,920
Thermal Line Windows, LLP (a) .... 08/14/98 5,155,442 203,682 1,257,069 6,412,511
69
<PAGE>
Thomas Construction, Inc. (b) .... 01/04/99 17,562,349 500,475 3,800,000 21,362,349
Precision Window Mfg., Inc. ...... 01/05/99 3,074,862 37,351 540,000 3,614,862
The Thermo-Shield Companies ...... 03/01/99 4,596,898 185,006 3,149,952 7,746,850
----------- ----------- ----------- -----------
$47,263,859 2,009,417 $34,059,512 $81,323,371
=========== =========== =========== ===========
</TABLE>
(a) Includes the acquisition of North Country Thermal Line, Inc. in
November 1998 for $277,926 cash and 20,973 shares of common stock
valued at $324,000.
(b) Stock issued in connection with the acquisition of Thomas
Construction, Inc. includes 400,000 shares of Series B preferred
stock valued at $2,000,000. (These shares were converted into
133,334 shares of common stock following the closing of the public
offering discussed in Note 11.) All other shares and values
represent common stock.
The above acquisitions have been accounted for as purchase transactions
and, accordingly, the results of operations of the acquired businesses have been
included in the consolidated financial statements since the respective
acquisition dates. These companies are engaged primarily in the businesses of
manufacturing replacement windows or selling and installing them in the
residential retail market. The accompanying consolidated balance sheets as of
December 31, 1998 and 1999 include allocations of the respective purchase prices
to the assets acquired and liabilities assumed based on estimates of fair value
with the excess of cost over the fair value of net assets acquired recorded as
goodwill.
The terms of certain of the Company's acquisition agreements provide for
additional consideration to be paid if the acquired entities' results of
operations exceed certain targeted levels, generally for a period of three years
subsequent to the acquisition dates. Targeted levels are generally set at the
annual earnings of the acquired entities before interest and taxes, allowing for
the add back of certain salaries and other costs that will not be incurred on a
post-acquisition basis. Such additional consideration is paid in cash and with
shares of the Company's common stock, and is recorded when earned as additional
purchase price. Goodwill is increased for any additional purchase price.
During 1998, additional consideration was paid in cash totaling $150,000.
Also, $1,000,481 was recorded as a liability as of December 31, 1998 for future
cash payments, and 79,258 additional common shares (valued at $1,224,430) were
reported as issued and outstanding to satisfy obligations for additional earned
consideration.
70
<PAGE>
During 1999, additional consideration was paid in cash totaling
$2,500,481 and 18,000 common shares (valued at $270,000). Also, $8,085,000 was
recorded as a liability as of December 31, 1999 ($1,000,000 was paid in February
2000 and the remaining $7,085,000 has been classified as noncurrent since this
portion of the liability was satisfied by issuing 1,417,000 shares of 12% Series
D cumulative preferred stock as discussed in Note 16), and 153,679 additional
common shares (valued at $484,590) were reported as issued and outstanding to
satisfy obligations for additional earned consideration.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisitions of the twelve purchased companies had occurred
on January 1, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
(UNAUDITED) 1998 1999
------------------ --------------------
<S> <C> <C>
Net revenues ......................................................... $102,115,345 $110,700,351
Net loss ......................................................... (5,632,834) (1,628,742)
Net loss applicable to common stockholders............................... (15,957,617) (6,125,931)
Basic and diluted loss per common share.................................. (3.28) (1.18)
</TABLE>
The pro forma consolidated results of operations include adjustments to
give effect to amortization of goodwill, interest expense, preferred stock
dividends, and certain other adjustments, together with related income tax
effects. The pro forma consolidated results of operations do not reflect any
corporate expenses prior to April 15, 1998, since corporate activities did not
commence until then. The unaudited pro forma information is not necessarily
indicative of the results of operations that would have occurred had the
acquisitions occurred on January 1, 1998 or of the future results of the
combined operations.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C>
Building improvements.................................................... $ 469,107 $ 639,550
Manufacturing equipment.................................................. 705,632 1,103,546
Furniture, fixtures and equipment........................................ 368,311 736,705
Computer equipment and software.......................................... 649,722 1,299,783
Autos and trucks......................................................... 804,003 1,069,199
------------------ ------------------
2,996,775 4,848,783
Less accumulated depreciation............................................ (315,880) (1,169,604)
------------------ ------------------
$ 2,680,895 $ 3,679,179
================== ==================
</TABLE>
71
<PAGE>
During the fiscal year 1999, $673,458 of additions to property and equipment
were financed.
5. UNCOMPLETED CONTRACTS
Costs and billings on uncompleted contracts at December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------------
<S> <C> <C>
Costs incurred on uncompleted contracts...................................... $ 846,051 $ 2,022,432
Billings to date............................................................. 808,203 1,679,091
---------------- ------------------
$ 37,848 $ 343,341
================ ==================
</TABLE>
These amounts are included in the accompanying consolidated balance
sheets under the following captions:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------------
<S> <C> <C>
Costs in excess of billings on uncompleted contracts......................... $ 604,550 $ 1,274,073
Billings in excess of costs on uncompleted contracts......................... (566,702) (930,732)
================ ==================
$ 37,848 $ 343,341
================ ==================
</TABLE>
6. LEASES
The Company and its subsidiaries are lessees under various operating
lease agreements for office space, manufacturing facilities, warehouses,
equipment and other properties. The Company in general is responsible for all
taxes, insurance and utility expenses associated with these leases. Lease
renewal options are present in many of the lease arrangements, and range in
renewal periods from one to five years. Future minimum rental commitments at
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
RELATED PARTY OTHER
YEAR LEASES LEASES TOTAL
--------------------------------------------
<S> <C> <C> <C>
2000 .......... $ 1,168,319 $ 1,342,230 $ 2,510,549
2001 .......... 1,034,088 797,601 1,831,689
2002 .......... 830,928 655,473 1,486,401
2003 .......... 683,142 616,903 1,300,045
2004 .......... 573,300 515,712 1,089,012
Thereafter..... 3,228,500 38,613 3,267,113
=========== =========== ===========
Total ......... $ 7,518,277 $ 3,966,532 $11,484,809
=========== =========== ===========
</TABLE>
Rent expense was $88,053, $722,465 and $2,122,111 for the years ended
December 31, 1997, 1998 and 1999, respectively. Of these amounts, related party
rent expense was $6,500 in 1997, $296,123 in 1998 and $1,164,116 in 1999.
The Company has a $750,000 equipment lease line with a bank of which
$151,000 is available at March 31, 2000. The lease line is being used for
computer hardware, software and manufacturing equipment.
72
<PAGE>
7. ACCRUED EXPENSES
Accrued expenses as of December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1999
---------------- -----------------
<S> <C> <C>
Payroll and related......................... $1,249,963 $1,661,028
Warranties.................................. 209,655 431,481
Professional fees........................... 619,830 330,000
Other....................................... 695,991 856,415
---------------- -----------------
$2,775,439 $3,278,924
================ =================
</TABLE>
8. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Bank revolving line of credit ................................... $ 5,250,000 $14,969,991
Senior subordinated promissory note ............................. -- 5,999,998
Related party note payable ...................................... 1,500,000 --
Note payable to seller of business acquired by Company, with an
interest rate of 5.5% ....................................... 1,500,000 --
Note payable to bank, with an interest rate of 9%, maturing in
March 2004, with monthly payments of principal and interest
totaling $4,424 ............................................. 227,580 188,169
Note payable to bank, with an interest rate of 7.23%, maturing in
March 2002, with monthly payments of principal and interest
totaling $11,494 ............................................ -- 275,841
Note payable to bank, with an interest rate of 9.25% ............ 253,822 --
Other ........................................................... 474,421 324,795
----------- -----------
9,205,823 21,758,794
Less current portion ............................................ 595,754 358,920
----------- -----------
Long-term portion ............................................... $ 8,610,069 $21,399,874
=========== ===========
</TABLE>
The following is a schedule by years of future maturities of long-term
debt as of December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 358,920
2001 15,227,494
2002 6,096,354
2003 61,180
2004 14,846
-----------
Total $21,758,794
===========
</TABLE>
On April 20, 1998, the Company entered into an agreement with a venture
capital firm for a $5,000,000 revolving line of credit expiring on April 20,
2003, with interest at prime plus 1%. The line required an origination fee of
$25,000. A stockholder, who
73
<PAGE>
also is an officer and director of the Company, and a stockholder/director of
the Company have an ownership interest in the venture capital firm. There was no
balance outstanding on this line at December 31, 1998, and in September 1999 the
venture capital firm terminated the commitment to provide the revolving line of
credit.
On August 31, 1998, the Company entered into a loan agreement with PNC
Bank, N.A., for a $15,000,000 revolving credit facility. The interest rate is a
LIBOR-based variable rate which was 7.84% at December 31, 1998 and 8.69% at
December 31, 1999. Interest on the line of credit is payable quarterly and
principal is payable in full at maturity. On April 14, 2000, the maturity date
of the credit facility was extended from January 1, 2001 to May 1, 2001. Four
stockholders of the Company (two of whom are also officers and directors of the
Company) also agreed to guarantee a total of $3,000,000 of the credit facility
for fees equal to an annual rate of 5% from April 2000 through June 2000 and 10%
thereafter subject to Board of Director approval.
On December 18, 1998, the Company executed a $5,500,000 short-term
unsecured subordinated promissory note in favor of four stockholders of the
Company. Three of the four stockholders are also officers and directors of the
Company. The principal amount outstanding under the note at December 31, 1998,
was $1,500,000. The interest rate was a LIBOR-based variable rate which was
9.59% at December 31, 1998. As of December 31, 1998, the lenders were also due a
loan origination fee of $250,000 which was amortized over the term of the note.
On July 8, 1999, the Company entered into a senior subordinated
promissory note agreement with GE Capital Equity Investments, Inc. (GE) for
$10,000,000. Terms of the agreement require 12% interest, payable quarterly. The
agreement provides for redemption in whole or in part at the Company's option at
a 103% premium the first year, 102% the second year and 101% the third year. The
Company must redeem $10,000,000 (or such lesser amount as then may be
outstanding) without premium on the maturity date in July 2002. Upon a change in
control of the Company, GE has the option to require the Company to redeem all
or a portion of the note with a premium due as set forth above.
In connection with the loan agreement, GE was issued a warrant with the
right to purchase 555,343 shares of common stock at any time at $.03 per share
(the number of shares being subject to adjustment in certain circumstances)
until July 2007. The portion of the proceeds from this loan allocable to the
detachable stock purchase warrant amounting to $4,800,000 has been accounted for
as paid-in capital (less a prorata share of issue costs of $339,452) with the
resulting discount, as well as a prorata share of issue costs of $360,303 to be
accounted for as additional interest over the term of the loan. GE has certain
74
<PAGE>
demand and piggy-back registration rights with respect to common stock
underlying the warrant.
A portion of the proceeds of the loan was used to retire the $5,500,000
related-party loan discussed above and a portion of the $1,500,000 seller note
which was outstanding at December 31, 1998.
Both the related party note and the note payable to seller were
classified as long-term at December 31, 1998, since the Company had the ability
and the intent to refinance these obligations on a long-term basis.
On October 14, 1999, the Company secured a $2,500,000 line of credit from
PNC Bank, N.A., with interest at prime plus 1%. In accordance with its terms,
the $2,125,000 that had been drawn on the line was repaid from proceeds of the
Company's public common stock offering discussed in Note 11. The line was
guaranteed by four of the Company's stockholders for fees of $100,000. Three of
the four stockholders are also directors of the Company.
Under the Company's financing arrangements, substantially all of the
Company's assets are pledged as collateral. The Company is required to maintain
certain financial ratios and to comply with various other covenants and
restrictions under the terms of the financing agreements, including restriction
as to the payment of dividends, other than preferred stock dividends, and the
incurrence of additional indebtedness. The Company has violated covenants at
December 31, 1999 and through March 30, 2000. PNC Bank, N.A., and GE have waived
these covenant violations and have reset financial covenants to accommodate
compliance at March 31, 2000, and in the future.
Cash paid for interest was $90,032, $383,244 and $3,024,338 for 1997,
1998 and 1999, respectively.
Interest expense on related party debt was $93,611 and $170,824 for 1998
and 1999, respectively.
9. MANDATORILY REDEEMABLE SERIES C CONVERTIBLE PREFERRED STOCK
On April 19, 1999, the Board of Directors authorized the Company to issue
up to 25,000 shares of Series C preferred stock.
On April 23, 1999, Brown Simpson Growth Fund, L.P., a New York limited
partnership, and Brown Simpson Growth Fund, Ltd., a Grand Cayman, Cayman Islands
limited partnership (the Funds), pursuant to a securities purchase agreement,
purchased 6,000 shares of Series C preferred stock at $1,000 per share for a
total investment of $6,000,000.
75
<PAGE>
The Series C preferred stock has a liquidation preference of and is
redeemable at $1,000 per share, with certain other preferences, rights, voting
powers, restrictions and limitations as to dividends, qualifications and terms
and conditions of redemption. Dividend payments (9.6% per annum) are to be 70%
cash and 30% Company common stock. The Series C preferred stock is convertible
at any time, in whole, or in part, at the option of the holder into shares of
common stock, at a conversion price (initially equivalent to a conversion rate
of approximately 67 shares of common stock for each share of Series C preferred
stock). Additionally, the Series C preferred stock is redeemable at the option
of the holder: (i) on October 23, 2000, or (ii) on April 23, 2002, and (iii)
immediately upon the occurrence of certain events of redemption, but only in the
event such redemption would not violate the Company's senior debt agreements
then in effect. The Company has no right to require redemption or conversion of
the Series C preferred stock.
In conjunction with the issuance of the Series C preferred stock, the
Company issued to the Funds warrants to purchase up to a total of 400,000 shares
of common stock at $21.00 per share (the number of shares and exercise price
being subject to adjustment in certain circumstances) at any time until April
22, 2004. Additionally, the Company and the Funds entered into a registration
rights agreement whereby the Company agreed to register 150% of the shares of
common stock issuable upon conversion of the Series C preferred stock and
exercise of the warrants. The Company filed a registration statement on Form S-1
with the Securities and Exchange Commission (SEC) in December 1999 registering
the aforementioned shares. The Company has agreed to keep the registration
statement effective for four years after the date the SEC declared the
registration statement effective unless the Funds have sold all of the common
stock covered by the registration statement or unless the Funds may sell the
common stock without volume restrictions pursuant to Rule 144 under the
Securities Act of 1933, as amended. For every month in which (i) the Company has
failed to keep the registration statement effective as required, or (ii) the
common stock is not listed or quoted on a national securities exchange, the
Funds have the right to require the Company to pay them a cash penalty equal to
2% of the product of the number of shares of Series C preferred stock then
outstanding and $1,000. The registration rights agreement also grants the Funds
certain other demand and piggy-back registration rights.
The portion of the proceeds from this mandatorily redeemable preferred
stock issue equal to the estimated fair value of the detachable stock purchase
warrants amounting to $1,980,000 has been allocated to paid-in capital (less a
prorata share of issue costs of $196,330) with the resulting discount, as well
as a prorata share of issue costs of $398,610, being accounted for as
76
<PAGE>
additional dividends to the preferred stockholders from the date of issue to the
earliest redemption date (October 23, 2000). In addition, since the Series C
preferred stock has a beneficial conversion feature at the date of issue,
$1,200,000 is included in non-cash preferred dividends in the accompanying
consolidated statement of operations for the year ended December 31, 1999.
In August 1999, the Company amended the exercise price of the
aforementioned warrants to $18.00 per share in exchange for a commitment of the
holders to refrain from selling any securities of the Company until January 31,
2000. The estimated increase in fair value of the warrants amounting to $180,000
as the result of the change in the exercise price is being accounted for as
additional dividends to the preferred stockholders from August 1999 through
January 2000.
10. INCOME TAXES
Significant components of income tax expense (benefit) for the years
ended December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal ................. $ -- $ -- $ --
State ................... -- 147,000 310,000
----------- ----------- -----------
-- 147,000 310,000
Deferred:
Federal ................. (211,000) (1,112,000) 58,000
State ................... (55,000) (183,000) 2,000
----------- ----------- -----------
(266,000) (1,295,000) 60,000
----------- ----------- -----------
Income tax expense (benefit) $ (266,000) $(1,148,000) $ 370,000
=========== =========== ===========
</TABLE>
77
<PAGE>
A reconciliation of income tax expense (benefit) with the expected amount
computed by applying the federal statutory income tax rate to loss before income
taxes for the years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------------
<S> <C> <C> <C>
Income tax benefit computed at federal statutory tax rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit ..................... (4.8) (.4) 15.9
Nondeductible expense related to sales of common stock
to employees ......................................... -- 11.7 --
Nondeductible merger and acquisition costs .............. 21.2 1.4 --
Nondeductible goodwill amortization ..................... -- 4.3 43.2
Effect of sole proprietor's income taxed on proprietor's
individual return ..................................... (18.5) -- --
Other ................................................... (.2) -- 3.7
----------------------------------
Total .............................................. (36.3)% (17.0)% 28.8%
=================================
</TABLE>
Significant components of deferred income taxes as of December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1999
----------------------------------
<S> <C> <C>
Net operating loss carryforwards.................... $278,000 $502,000
Allowance for doubtful accounts..................... 94,000 190,000
Compensation expense related to stock options....... 1,270,000 1,270,000
Warranties.......................................... 84,000 172,000
Amortization of goodwill............................ (18,000) (500,000)
Other............................................... 80,000 94,000
----------------------------------
Net deferred tax assets............................. $1,788,000 $1,728,000
==================================
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $1,256,000 for federal income tax purposes. These net operating
losses expire in 2017 and 2018. The Company believes it is more likely than not
that future earnings will be sufficient to ensure the realization of its
deferred tax assets.
No income taxes were paid in 1997. Cash paid for income taxes was $17,614
in 1998 and $342,362 in 1999.
11. STOCKHOLDERS' EQUITY
On January 20, 2000, the Company's Board of Directors approved reducing
the amount of authorized shares of common stock to 25 million shares and
preferred stock to 5 million shares. The reduction in authorized shares is
subject to stockholder approval at the next annual stockholder meeting.
SERIES A AND B PREFERRED STOCK
On June 12, 1998, the Company commenced a Series A preferred stock
offering for the sale of a maximum of 4,000,000 shares of
78
<PAGE>
its 10% Cumulative Convertible Series A preferred stock (the "Series A preferred
stock") at $5.00 per share. On October 15, 1998, the date the preferred stock
offering terminated, 2,980,000 shares of Series A preferred stock had been sold
and the Company collected $14,513,583 in proceeds, after issuance costs.
In October 1998, the Company's Board of Directors authorized the Company
to issue up to 4,000,000 shares of 10% Cumulative Series B preferred stock (the
"Series B preferred stock") to be used as consideration in certain acquisitions.
The Series B preferred stock had terms substantially identical to the Series A
preferred stock described above. As mentioned in Note 3, 400,000 shares of
Series B preferred stock were issued as partial consideration for a January 1999
acquisition.
At December 31, 1999, following the closing of the public offering of
common stock discussed below, all of the shares of Series A and Series B
preferred stock were converted into 1,126,667 shares of common stock pursuant to
the terms of the preferred stock.
Dividends on the shares of Series A and Series B preferred stock at an
annual rate of 50 cents per share were cumulative from the date of original
issuance and were payable quarterly in arrears. Because of the beneficial
conversion feature of the Series A preferred stock relative to the OTC Bulletin
Board price of common stock at the date of issue, the Company has included
$9,539,678 of dividends in addition to cash dividends paid as an amount
attributable to preferred stockholders in the accompanying consolidated
statement of operations for the year ended December 31, 1998.
COMMON STOCK
On July 1, 1997, in connection with the Company's initial capitalization,
the Company issued 1,859,245 shares of common stock to the President of the
Company, at that time, and his family members in exchange for assets and
liabilities having a net book deficiency of $290,867 at historical cost. The
Company also issued 762,722 shares of the Company's common stock to various
outside investors in exchange for assets having a fair value of $434,125.
In the last quarter of 1997, the Company issued 316,562 shares of common
stock in two private placements for net proceeds of $897,275. During the first
quarter of 1998, the Company completed these private placements by issuing an
additional 181,472 shares for net proceeds of $613,650.
79
<PAGE>
As more fully described in Note 1, on April 15, 1998, the Company
acquired all of the outstanding common stock of Thermo-Tilt in a reverse merger.
During 1998, the Company issued 1,114,906 shares of common stock having a
fair value of $25,814,970 in connection with the acquisition of nine companies
and retired 91,284 shares of its common stock which were purchased for
$2,139,930.
During 1999, the Company issued 322,832 shares of common stock having a
fair value of $5,489,952 in connection with the acquisition of three companies.
Also, 171,679 shares of common stock having a fair value of $754,590 were issued
as additional consideration for prior acquisitions.
On September 9, 1999, the Board of Directors declared a one-for-three
reverse common stock split which became effective on October 6, 1999. The
reverse stock split was voted on and approved by stockholders on September 23,
1999.
On December 2, 1999, the Company closed a public offering and sold
1,255,000 shares of common stock at $5.50 per share. The proceeds of this
offering amounted to $3,249,849 net of expenses. Expenses of the offering
included $257,000 assigned to the value of warrants issued to the underwriters
to purchase 125,500 shares of common stock at an exercise price of $7.98 per
share. The warrants become exercisable one year after the effective date of the
offering and expire five years after the effective date.
EMPLOYEE STOCK OPTIONS
In October 1997, the Company issued an option to purchase 492,802 shares
of common stock to a company owned by immediate family members of an employee of
the Company. The option was granted at $.87 per share, vested one year after the
grant date and expires five years after grant date. The exercise price of the
option exceeded the estimated fair value of the Company's common stock at the
date of grant.
Prior to April 15, 1998, the Company had no formal employee stock option
plan. As such, all options granted to employees prior to April 15, 1998, were
non-qualified stock options. The exercise price and terms of any non-qualified
options granted are determined at the date of grant.
During 1998, the Company issued non-qualified, non-plan options to
purchase 315,597 shares of common stock to key employees. The options were
granted at $3.45 per share which, except for an option to purchase 41,667 shares
granted to a key employee, equaled or exceeded the estimated fair value of the
80
<PAGE>
common stock at the date of grant. All of these options were fully vested at
December 31, 1998 and expire five years from the date of grant. The Company
recognized expense of $1,098,750 in 1998 in connection with the option for
41,667 shares.
On April 15, 1998, the Company adopted the 1998 Employee Stock Option
Plan (the "1998 Plan"). Under the 1998 Plan, qualified or non-qualified stock
options for up to 500,000 shares may be granted to key employees. The exercise
price and terms of any options granted are determined at the date of grant.
During 1998, the Company issued options to purchase 376,667 shares of
common stock under the 1998 Plan. The options were granted at exercise prices
ranging from $3.45 to $6.90 per share which, except for options to purchase
110,000 shares, equaled or exceeded the estimated fair value of the common stock
at the date of grant. The Company recognized expense of $2,076,000 in 1998 in
connection with the options for 110,000 shares. All of these options were fully
vested at December 31, 1998, and expire five to ten years from the date of
grant.
In December 1998, the Company's Board of Directors adopted the 1999 Stock
Option Plan (the "1999 Plan") under which qualified or non-qualified options for
up to 833,334 shares may be granted to key employees and directors. On January
1, 1999, options for 240,041 shares of common stock were granted to 227
employees of the Company under the 1999 Plan at an exercise price of $15.93 per
share. These options vest over a three-year period and expire on July 1, 2003.
In January 1999, options for 116,667 shares of common stock were granted
under the 1998 Plan to certain employees of a business acquired by the Company
in January 1999. These options have the same terms as the options granted under
the 1999 Plan noted above. The remaining shares available for grant under the
1998 Plan (6,667 shares) were then considered shares reserved under the 1999
Plan.
In March 1999, the Company granted options for 33,334 shares of common
stock under the provisions of the 1999 Plan to an employee of a business
acquired in March 1999. The exercise price of the options is $25.86 per share.
The options vest equally in March 2004 and March 2005 and expire on March 23,
2009.
In April 1999, the Company granted options for 16,000 shares of common
stock under the provisions of the 1999 Plan to certain employees of a business
acquired in January 1999. The exercise price of the options is $19.38 per share.
The options vest over a three-year period and expire on April 16, 2009.
81
<PAGE>
The Company granted qualified options for 7,500 shares of common stock
with an exercise price of $11.64 to three non-employee directors in May 1999
under the 1999 Plan. The options vest over a three-year period and expire on May
10, 2009.
In July 1999, options for 161,667 shares of common stock were granted
under the Company's 1999 Stock Option Plan. The exercise price of the options is
$11.43 per share. Vesting of 124,167 shares occurred on July 29, 1999, and the
remaining 37,500 shares vest on July 29, 2000.
Pursuant to SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," the
Company has elected to account for its employee stock options under APB No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Accordingly, no compensation cost
has been recognized for employee options except as noted above. Had compensation
cost for employee options been determined based on the fair value at the grant
date consistent with SFAS No. 123, the Company's net loss and loss per share
would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported .................................... $ (466,228) $ (5,605,096) $ (1,656,702)
Pro forma ...................................... (491,730) (6,395,335) (2,614,269)
Net loss attributable to common stockholders:
As reported .................................... (864,497) (15,729,879) (6,153,891)
Pro forma ...................................... (889,999) (16,520,118) (7,111,458)
Basic and diluted loss per common share:
As reported .................................... (3.96) (1.19)
Pro forma ...................................... (4.16) (1.38)
</TABLE>
The fair value of each option grant to employees was estimated on the
date of grant using the Black Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Interest rate ................ 5.00% 5.02%
Dividends .................... -- --
Expected volatility .......... 2.21 .753
Expected life in years ....... 3 5
</TABLE>
82
<PAGE>
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding, January 1 ................. -- 492,802 1,185,065
Granted ................................ 492,802 692,263 575,209
Exercised .............................. -- -- --
Canceled ............................... -- -- (85,615)
------------ ------------ ------------
Outstanding, December 31 ............... 492,802 1,185,065 1,674,659
============ ============ ============
Exercisable ............................ -- 1,185,065 1,399,710
Available for grant .................... -- 123,334 467,073
Average price per share:
Outstanding, January 1 ............... $ -- $ .87 $ 2.67
Granted .............................. .87 3.96 15.28
Exercised ............................ -- -- --
Outstanding, December 31 ............. .87 2.67 6.32
Exercisable, December 31 ............. -- 2.67 4.30
Weighted average grant date fair
value of options ..................... $ .27 $ 3.75 $ 7.81
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED-AVERAGE
NUMBER OUTSTANDING EXERCISE PRICE REMAINING CONTRACTUAL LIFE
- ---------------------------------------- ------------------------------------- --------------------------------------
<S> <C> <C>
492,802 $0.87 33 months
582,263 3.45 67
43,334 6.15 102
66,666 6.90 106
271,427 15.93 108
33,334 25.86 111
15,666 19.38 112
7,500 11.64 113
161,667 11.43 115
</TABLE>
NON-EMPLOYEE STOCK OPTIONS AND PURCHASE WARRANTS
On October 22, 1997, the Company issued options to purchase 43,483 shares
of common stock to several consultants for services. The options were granted at
$0.87 per share, vested one year after the grant date and expire five years
after grant date. Options for 3,334 shares were exercised in 1999. In March
1998, the Company issued options to purchase 43,483 shares of common stock to
consultants for services. The options were granted at $3.45 per share and vested
immediately. The Company recognized expense of $1,050 and $11,950 for 1997 and
1998, respectively, for all of
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these options granted to consultants based on an estimate of the fair value of
the options granted.
On November 1, 1998, the Company issued stock warrants to purchase 41,667
shares of common stock at $30 per share to a consultant. The warrants vested
immediately and expire five years from the date of issue. No expense was
recognized due to the insignificance of the estimated fair value of the
warrants.
COMMON STOCK SOLD TO EMPLOYEES BY SIGNIFICANT STOCKHOLDER
During 1998, a significant stockholder who is a former officer and
director of the Company sold 107,828 shares of his Company common stock to
certain employees or their children at prices below the OTC Bulletin Board price
at the date of sale. The Company recognized expense of $2,322,000 in 1998 in
connection with these sales.
COMMON SHARES RESERVED
The following table summarizes the number of shares of common stock
reserved for future issuance as of December 31, 1999:
<TABLE>
<S> <C>
Employee stock options:
Options granted.......................................................... 1,674,659
Shares reserved for future grants under 1999 Plan........................ 467,073
Series C convertible preferred stock.......................................... 400,000
Stock purchase warrants issued in connection with:
Series C convertible preferred stock..................................... 400,000
GE senior subordinated promissory note................................... 555,343
Other stock options and stock purchase warrants............................... 128,633
-----------------
3,625,708
=================
</TABLE>
12. EMPLOYEE BENEFIT PLANS
Effective January 1, 1999, the Company established a defined contribution
401(k) profit sharing plan and trust for the benefit of all its employees,
subject to certain age and service requirements. Plan participants may make
salary reduction contributions to the plan which are subject to Internal Revenue
Service contribution limitations. The Company makes matching employer
contributions of twenty-five percent of the first six percent of the employees'
contributions. Employee contributions vest immediately. Employer contributions
vest over a six-year period. The Company contributed $105,328 to this plan in
1999.
Thermo-Tilt had a 401(k) profit sharing plan established to cover
substantially all of its eligible employees. Employee contributions to the plan
were elective, and matching
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contributions by the employer were optional. Thermo-Tilt incurred $14,721 and
$13,971 in contribution expense for the years ended December 31, 1997 and 1998,
respectively. This plan was merged into the Company's plan in 1999.
Five of the Company's acquired businesses had existing 401(k) profit
sharing plans. The Company has merged these plans into its own plan during 1999
and 2000. These plans had various eligibility requirements and vesting
provisions. All of the plans provided for either a predetermined or
discretionary employer match. Contribution expense for these plans aggregated
$30,081 for the periods since acquisition during 1998 and $86,331 during 1999
until merger with the Company's plan.
13. RELATED PARTY TRANSACTIONS
On December 20, 1997, in connection with a building sale-leaseback
transaction, the Company began leasing its place of business in Owensboro,
Kentucky, from a stockholder. In connection with the sale, the buyer assumed and
satisfied debts of the Company in the amount of $620,223. The lease expires
December 20, 2002. Future minimum aggregate lease payments required as of
December 31, 1999, approximate $234,000. The gain of $55,008 on the transaction
has been deferred and is being amortized over the term of the lease.
Amortization of the gain on the sale for the years ended December 31, 1997, 1998
and 1999 was $458, $11,005 and $11,003, respectively. Lease expense and the
related lease commitment are included in related party amounts disclosed in Note
6.
During the years ended December 31, 1997 and 1998, the Company had notes
receivable at an interest rate of 8% from a company controlled by a relative of
a stockholder, who is also an officer and director of the Company. Amounts owed
the Company were approximately $181,000 at December 31, 1998. The $181,000 was
repaid in January 1999.
At December 31, 1998 and 1999, the Company had receivables due from a
stockholder, who is also an officer and director of the Company, amounting to
$19,006 and $11,331, respectively.
During 1998, the Company purchased $4,106,375 of windows from a supplier
owned by a stockholder, who is also a director and officer of the Company. The
net amount owed this supplier at December 31, 1998, was approximately $225,393.
The Company purchased $1,487,090, $779,518 and $16,279 of windows in
1997, 1998 and 1999, respectively, from a company that is owned by a stockholder
of the Company.
14. CONTINGENCIES
The Company entered into a 90-day listing agreement in October 1999 with
IPO.COM, Inc. under which the Company authorized
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IPO.COM to include its prospectus on the IPO.COM web site. In addition to
hosting the Company's prospectus, IPO.COM provided summary material relating to
the Company and its initial public offering on its web site. The IPO.COM web
site also provided a direct link to the Company's web site. Although the Company
did not intend to create an agency relationship with IPO.COM, and while the
Company believes that IPO.COM is not and has not acted as its agent, the listing
agreement may have created an agency relationship. If IPO.COM is deemed the
Company's agent pursuant to the listing agreement, the summarized material
contained in the IPO.COM web site relating to the Company and its initial public
offering and the information contained in the Company's web site could
constitute a prospectus that does not meet the requirements of the Securities
Act of 1933. If the summarized materials relating to the Company in the IPO.COM
web site or the materials contained in the Company's web site did constitute a
violation of the Securities Act of 1933, investors in the initial public
offering would have the right, for a period of one year from the date of their
purchase of common stock, to obtain recovery of the consideration they paid for
their common stock or, if these persons had already sold the common stock, to
sue the Company for damages resulting from their purchase of common stock. These
damages could total up to approximately $6.9 million, plus interest, if these
investors seek recovery or damages after an entire loss of their investment. Any
recovery or damages could adversely impact the Company's liquidity during the
period in which a refund is paid. Although the Company cannot be certain as to
the ultimate disposition of this matter, it is the opinion of the Company's
management, based upon the information available to it, that the likelihood of
an assertion of an unasserted possible claim for violation of the Securities Act
of 1933 related to the IPO.COM web site or the materials contained in the
Company's web site based upon the agency theory referred to above, the
likelihood of a recovery is remote. Consequently, the Company's management
believes the expected outcome of this matter will not significantly affect the
results of operations and financial condition of the Company.
On March 3, 2000, Pro Futures Bridge Capital Fund, L.P. and Bridge
Capital Partners, Inc. Defined Benefit Pension Plan filed an action titled PRO
FUTURES BRIDGE CAPITAL FUND, L.P. V. THERMOVIEW INDUSTRIES, INC., ET AL., Civil
Action No. 00CV0559 (Colo. Dist. Ct., March 3, 2000) against ThermoView, its
directors, certain officers, an employee and a stockholder alleging breach of
contract, common law fraud, fraudulent misstatements and omissions in connection
with the sale of securities, negligent misrepresentations and breach of
fiduciary duty. These claims are in connection with the mandatory conversion of
the Company's 10% Series A convertible preferred stock, held by the two funds,
into common stock upon completion of the initial public offering in December
1999, and purchases by the two funds of Company common stock from ThermoView
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stockholders. The funds are seeking rescission of their purchases of the Series
A preferred stock in the amount of $3,250,000, plus interest and unspecified
damages in connection with their purchases of the common stock. ThermoView is in
the process of filing a notice to dismiss certain claims and an answer denying
liability in the remainder of the claims. The parties have not conducted
discovery in connection with the allegations, and no hearing or trial is
scheduled. While ThermoView believes that the claims are without merit and
intends to vigorously defend the suit, it is too early in the process to predict
the likely outcome of the matter.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance as to the ultimate disposition
of these matters, it is the opinion of the Company's management, based upon the
information available at this time, that the expected outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on the
results of operations and financial condition of the Company.
15. SEGMENT INFORMATION
In 1997, the Company was comprised of only one business unit that
operated exclusively in the retail segment designing, selling, and installing
vinyl replacement windows. Since dates of acquisition or start up in 1998 and
1999, the Company's thirteen business units had separate management teams and
infrastructures that operated primarily in the vinyl replacement windows, doors
and related home improvement products industry in various states in the Midwest
and in Southern California. The business units have been aggregated into three
reportable operating segments: manufacturing, retail and financial services.
MANUFACTURING
The manufacturing segment includes the businesses that manufacture and
sell vinyl replacement windows to the Company's retail segment and to
unaffiliated customers.
RETAIL
The retail segment includes the businesses that design, sell and install
vinyl replacement windows, doors and related home improvement products to
commercial and retail customers.
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FINANCIAL SERVICES
The financial services segment finances credit sales of the retail
segment.
The accounting policies of the segments are the same as those described
in Note 2. Intersegment sales prices are comparable to sales prices charged to
unaffiliated customers. The Company evaluates performance based on income from
operations of the respective businesses.
Segment information for 1998 was as follows:
<TABLE>
<CAPTION>
FINANCIAL
MANUFACTURING RETAIL SERVICES CORPORATE CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers ............ $ 3,365,808 $ 34,010,547 $ -- $ -- $ 37,376,355
Intersegment revenues ....................... 909,019 -- -- -- 909,019
Interest income ............................. 10,935 32,050 11,651 14,421 69,057
Interest expense ............................ 11,009 131,033 -- 297,089 439,131
Income (loss) from operations ............... 298,156 (779,613) (188,920) (5,712,645) (6,383,022)
Depreciation and amortization ............... 100,799 1,108,192 7,895 52,894 1,269,780
Total assets ................................ 6,894,849 43,553,191 662,234 2,983,348 54,093,622
Additions to long-lived assets:
Property and equipment ................... 1,081,564 1,372,935 76,409 158,832 2,689,740
Goodwill ................................. 3,585,855 38,277,847 -- -- 41,863,702
</TABLE>
Segment information for 1999 was as follows:
<TABLE>
<CAPTION>
FINANCIAL
MANUFACTURING RETAIL SERVICES CORPORATE CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers ........... $ 7,750,935 $ 100,208,541 $ 237,364 $ 1,695 $ 108,198,535
Intersegment revenues ...................... 9,305,021 -- -- -- 9,305,021
Interest income ............................ 41,896 24,586 11,109 35,275 112,866
Interest expense ........................... 61,930 140,165 -- 2,760,165 2,962,260
Income (loss) from operations .............. 865,256 6,443,942 (545,628) (5,200,878) 1,562,692
Depreciation and amortization .............. 539,051 2,959,678 21,275 839,242 4,359,246
Total assets ............................... 11,968,541 76,181,934 1,743,867 4,076,842 93,971,184
Additions to long-lived assets:
Property and equipment .................. 560,426 960,771 4,786 555,427 2,081,410
Goodwill ................................ 4,241,817 31,702,290 -- -- 35,944,107
</TABLE>
16. SUBSEQUENT EVENTS
In March 2000, we entered into a license agreement with Research
Frontiers Incorporated (Research Frontiers), a Delaware corporation with
headquarters located in Woodbury, New York, for the non-exclusive rights to
market windows which utilize variable light transmission technology developed by
Research Frontiers. The agreement provides for the payment of a royalty of 5% of
the net selling price of the licensed products as defined in the agreement to
Research Frontiers for products sold by us that
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incorporate such technology. Additionally, we have agreed to pay to Research
Frontiers a minimum royalty annually for each year of the period of the
agreement. The initial term of the license period terminates on December 31,
2003, unless sooner terminated or extended pursuant to the terms of the
agreement. The minimum royalty is $50,000 for 2000, $75,000 for 2001 and 2002,
and $100,000 for 2003, and is payable in cash or shares of the Company's
common stock at the Company's option.
In April 2000, the Company completed negotiations to satisfy its
obligations under certain earn-out provisions with previous owners of the
Company's subsidiaries. As a result of the negotiations, the Board of Directors
authorized 1,500,000 shares of 12% Series D cumulative preferred stock ($.001
par value and $5.00 stated value), and the Company then issued 1,417,000 shares
to the previous owners in lieu of cash to satisfy $7,085,000 of obligations to
them. This amount has been classified as a noncurrent amount due to sellers of
acquired businesses in the accompanying consolidated balance sheet, since it has
been refinanced with preferred stock. An additional 22,316 shares of Series D
preferred stock will be issued to compensate the previous owners for interest
earned amounting to $111,580 prior to settlement of the obligations. The Series
D preferred stock is senior to the common stock of the Company and is on parity
with the Series C preferred stock. The Series D preferred stock will pay
cumulative dividends at the rate of $.60 per share annually, or an annual rate
of 12%, subject to the availability of such funds and the consent of the senior
lender of the Company. The Series D preferred stock has an aggregate liquidation
preference of $7,196,580 plus accumulated and unpaid dividends. The shares of
Series D preferred stock are redeemable by the Company at its option, in whole
or in part, for cash or common stock that equals the liquidation value of the
shares redeemed. The shares of Series D preferred stock are not convertible into
common stock, have no voting rights and contain no registration rights. A
venture capital firm loaned one of the previous owners $1,500,000 at 12%
interest, and collateralized the loan with the previous owner's 1,113,500 shares
of 12% Series D cumulative preferred stock. A stockholder, who also is an
officer and director of the Company, and a stockholder/director of the Company
have an ownership interest in the venture capital firm.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 10, 1998, our Board of Directors approved the engagement of
Ernst & Young LLP, and the dismissal of Singer, Lewak, Greenbaum & Goldstein,
LLP, as our independent auditors in preparation for our initial public offering.
During the year ended December 31, 1997, and the subsequent interim period
preceding the dismissal of Singer, Lewak, Greenbaum & Goldstein, LLP in November
1998, there were no disagreements between them and us on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, and no reportable events relating to the relationship
between Singer, Lewak, Greenbaum & Goldstein and us.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the name, age, and position within
ThermoView of each director and executive officer and the key employees of
ThermoView:
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen A. Hoffmann 54 Chairman of the Board and Chief Executive Officer
Nelson E. Clemmens 50 President and Director
John H. Cole 57 Chief Financial Officer
Robin C. Edwardsen 51 Vice President of Human Resources
Leigh Ann Barney 32 Treasurer and President of Key Home Credit
J. Sherman Henderson, III 57 Director
Delores P. Kesler 59 Director
Ronald L. Carmicle 51 Director(1)
Robert C. Pearson 64 Director(1)
Raymond C. Dauenhauer, Jr. 56 Director(1)
Richard E. Bowlds 56 Former Vice Chairman of the Board and Executive
Vice President of Acquisitions
Charles L. Smith 46 Former Chief Operating Officer and Director
Robert E. Anderson 63 Former Director
Michael A. Toal 43 Former Director
</TABLE>
KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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Larry Clark 38 Vice President of Key Home Credit
Michael S. Haines 53 Vice President of Five Star Builders, Inc.(2)
Joel S. Kron 40 Vice President of The Thermo-Shield Companies
Alvin W. Leingang 42 Vice President of Leingang Siding and Window, Inc.
and Thermal Line Windows, Inc.
Rodney H. Thomas 46 Vice President of Thomas Construction, Inc.
</TABLE>
- --------------------
(1) Nominated by the Board of Directors for approval by the shareholders at
the 2000 Annual Meeting of Shareholders to serve as Class I directors of
ThermoView.
(2) Five Star Builders, Inc. has recently changed its name to ThermoView of
California, Inc.
STEPHEN A. HOFFMANN. Mr. Hoffmann has served as Chairman of the Board and
Chief Executive Officer of ThermoView since April 1998 and as President from
April 1998 to November 1998. From May 1992 to February 1997, Mr. Hoffmann, a
co-founder of AccuStaff Incorporated, served in various positions with AccuStaff
including Vice Chairman and Vice President of Acquisitions. AccuStaff is now
known as Modis Professional Services, Inc., a New York Stock Exchange listed
temporary staffing company based in Jacksonville, Florida, with annual revenues
of approximately $2.5 billion as of August 1998. The principal growth of
AccuStaff revenues has been through an aggressive consolidation strategy in the
temporary staffing industry. Mr. Hoffmann was also a co-founder of MetroTech,
Inc., a predecessor entity to AccuStaff. Additionally, Mr. Hoffmann has been a
member of The Founders Group LLC, a Louisville, Kentucky based venture capital
firm, since 1997. Mr. Hoffmann received a B.S. in Commerce with a minor in
Accounting from the University of Louisville in 1972.
NELSON E. CLEMMENS. Mr. Clemmens has served as a director of ThermoView
since April 1998 and as President of ThermoView since November 1998. Mr.
Clemmens formerly served as Vice President-Finance and Administration and
Secretary of ThermoView from April 1998 to November 1998. Mr. Clemmens has been
Managing Director of Pine South Capital, a private investment banking firm,
since its founding in April 1986. Mr. Clemmens has also been active as owner,
principal or investor in seven operating companies during the same period,
including a multi-service home health company consolidation. From February 1999
to August 1999, Mr. Clemmens was the majority owner of HCP, Inc., a regional
health care services company. Since August 1999, he has served as managing
member of Viscount III, LLC, the majority owner of HCP, Inc. From November 1997
until July 1999, Mr. Clemmens was Chairman of WBC, Inc., a railroad equipment
distribution company. From May 1989 until May 1990, Mr. Clemmens was also a
co-owner of
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Courier Graphics, Inc., a specialized printer, and from May 1987 until December
1989 President and co-owner of Transue & Williams Stamping Co., a parts
fabrication company. From August 1983 until April 1986, Mr. Clemmens served as
Vice President of Finance/Administration with Olicon/Raytel, a health care
venture. From January 1982 until August 1983, Mr. Clemmens served as Senior Vice
President of Stratford Leasing Company. From June 1977 until January 1982, Mr.
Clemmens served in several corporate finance management positions with General
Electric Capital Corporation. Mr. Clemmens holds a B.A. degree from Stetson
University and an M.B.A. from Western Kentucky University.
JOHN H. COLE. Mr. Cole has served as the Chief Financial Officer of
ThermoView since July 1999 and as its Senior Vice President of Acquisitions from
November 1998 to July 1999. From November 1966 to September 1998, Mr. Cole was
with PriceWaterhouse Coopers LLP, most recently as a Senior Audit Partner, where
he was involved with publicly reporting entities, SEC filings, mergers and
acquisitions, due diligence procedures and internal control functions. Mr. Cole,
a Certified Public Accountant, was a national coordinator of PriceWaterhouse
Cooper's quality control review program. In 1997 Mr. Cole led an international
quality control team inspecting the China offices of PriceWaterhouseCoopers LLP.
Mr. Cole holds a B.A. in Accountancy from the University of Kentucky and is a
University of Kentucky Fellow.
ROBIN C. EDWARDSEN. Mr. Edwardsen has served as ThermoView's Vice
President of Human Resources since March 1999. From January 1996 through
February 1999, Mr. Edwardsen served Humana, Inc. as Director of Human Resources
where he designed, managed and implemented company-wide strategic human
resources initiatives. From August 1981 until December 1995, Mr. Edwardsen
served as Senior Vice President and founding partner of Physician Services of
America, a consulting, publishing and physician staffing company. Mr. Edwardsen
holds a B.A. from Hanover College and an M.A. from the University of
Missouri-Kansas City.
LEIGH ANN BARNEY. Ms. Barney has served as ThermoView's Treasurer since
July 1998 and as President of Key Home Credit since November 1998. From April
1996 to May 1998, Ms. Barney served as Operations Controller for HomeCare and
Hospital Management, Inc., a diversified home health care and durable medical
equipment and supplies company. From May 1992 through March 1996, Ms. Barney
held various positions with Transitional Health Services including Senior
Financial Analyst and Treasury Manager. Ms. Barney holds B.S. and M.B.A. degrees
from the University of Louisville.
J. SHERMAN HENDERSON, III. Mr. Henderson has served as a director of
ThermoView since August 1998. Mr. Henderson has served as President and Chief
Executive Officer of UniDial Communications, a telecommunications company, since
August 1993. Mr. Henderson is also a founder, President and Chief Executive
Officer of UniDial Direct, which sells commercial
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telecommunication products. Mr. Henderson has served as the Chairman of the
Telecom Resellers Association, a national trade organization, since May 1994.
Mr. Henderson received a B.S. in Business Management from Florida State
University in 1965.
DELORES P. KESLER. Ms. Kesler has served as a director of ThermoView
since August 1998. Ms. Kesler was a co-founder of AccuStaff and from August 1991
to September 1998 served as Chairperson and Chief Executive Officer of
AccuStaff. Ms. Kesler has been a member of The Founders Group since 1997. Since
1993, Ms. Kesler has been a director of PSS/World Medical, Incorporated, a
distributor of medical supply equipment and pharmaceuticals to office-based
physicians. Ms. Kesler also serves as a director of various private and
charitable organizations.
RONALD L. CARMICLE. Mr. Carmicle has served as a director of ThermoView
since February 2000. Mr. Carmicle has served as the President of River City
Development Corporation, a construction company, since February 1975. Mr.
Carmicle has also served as the Managing Member of Tates Builders Supply Co.
since September 1994. Mr. Carmicle served as President and a National Director
of the Associated Builders and Contractors, Inc., a national trade association
from 1997 to 1978 and is currently Chairman of the Construction Training
Institute. Mr. Carmicle also serves as a director of various private and
charitable organizations. Mr. Carmicle received a B.S. degree from Western
Kentucky University.
ROBERT C. PEARSON. Mr. Pearson has served as a Director of the Company
since March 1, 2000. Mr. Pearson has been Senior Vice-President of Corporate
Finance for Renaissance Capital Group, Inc., which manages funds investing in
emerging growth companies, since September 1997. Mr. Pearson served as a
professional management and financial consultant from May 1994 to May 1997. Mr.
Pearson formerly served as Executive Vice President and Chief Financial Officer
for the Thomas Group, Inc. from May to March 1994, and was Vice President of
Finance and Controller for Supercollider Laboratory, a division of Texas
Instruments Incorporated prior to 1990. Mr. Pearson was an Associate Director
for the Supercollider Laboratory and is currently a Director of four publicly
held companies, as well as an advisor to the Board for three other firms. Mr.
Pearson holds an M.B.A. from the University of Michigan and a B.S. degree from
the University of Maryland.
RAYMOND C. DAUENHAUER, JR. Mr. Dauenhauer has served as Director of the
Company since March 1, 2000. Mr. Dauenhauer served as Chief Executive Officer of
Dauenhauer & Son Plumbing and Piping, Inc., a Louisville, Kentucky based
plumbing operation from July 1997 to September 1999. Mr. Dauenhauer currently
serves as a Director of First Bank of Louisville, Kentucky and is a life member
of the Board of Directors for the Louisville Association of Home Builders.
Additionally, Mr. Dauenhauer serves as President and Director of the Cerebral
Palsy Kids Center. Mr. Dauenhauer has held numerous offices in state and
national
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associations of the plumbing heating and cooling industry, and is a recipient of
the "Distinguished Citizen" award from the City of Louisville.
KEY EMPLOYEES
LARRY CLARK. Mr. Clark has served as Vice President of Key Home Credit
since August 1998. From May 1998 until August 1998, Mr. Clark served in other
capacities with ThermoView. From June 1996 through May 1998, Mr. Clark was a
commercial loan officer with National City Bank of Kentucky. From August 1995 to
May 1998, Mr. Clark served as a branch manager for the consumer finance division
of National City Bank. From June 1990 to August 1995, he served as branch
manager with Commercial Credit Corporation, a consumer finance company. Mr.
Clark holds a B.S. degree from Murray State University.
MICHAEL S. HAINES. Mr. Haines has served as Vice President of Five Star
Builders since its acquisition by ThermoView in July 1998. Mr. Haines co-founded
in 1989 and served as president of Five Star Builders from 1989 until July 1998.
JOEL S. KRON. Mr. Kron has served as Vice President of The Thermo-Shield
Companies since its acquisition by ThermoView in March 1999. Mr. Kron founded in
1984 and served as president of The Thermo-Shield Companies from 1984 until
March 1999.
ALVIN W. LEINGANG. Mr. Leingang has served as Vice President of Leingang
Siding and Window and Thermal Line Windows since their acquisition by ThermoView
in August 1998. Mr. Leingang founded in 1977 Leingang Century Siding and Windows
and served as its president from 1977 until August 1998. Mr. Leingang founded
Thermal Line Windows in 1984 and served as its president from 1984 until August
1998.
RODNEY H. THOMAS. Mr. Thomas has served as Vice President of Thomas
Construction since its acquisition by ThermoView in January 1999. Mr. Thomas
founded in 1982 and served as president of Thomas Construction from 1982 until
January 1999.
FORMER DIRECTORS AND OFFICERS
RICHARD E. BOWLDS. Mr. Bowlds served as Executive Vice
President-Acquisitions of ThermoView from July 1999 through January 2000, as
Vice Chairman of the Board from June 1999 through March 2000, as a director from
April 1998 through March 2000 and as Chief Operating Officer from April 1998 to
June 1999. Mr. Bowlds is the founder and is currently a director of Thermo-Tilt.
Prior to founding Thermo-Tilt in 1987, Mr. Bowlds worked in the home improvement
industry from 1977. Mr. Bowlds is the father-in-law of Charlton C. Hundley,
ThermoView's current Corporate Counsel and Secretary.
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CHARLES L. SMITH. Mr. Smith served as a director of ThermoView from May
1998 through February 2000 and was its Chief Operating Officer from June 1999
through January 2000. Mr. Smith served as Vice President of Manufacturing
Operations from November 1998 to June 1999. Mr. Smith founded in 1982 and was
the President of Primax Window Co. until its acquisition by ThermoView, at which
time he became Primax's Vice President. Mr. Smith is also the founder and
President of Bee Line Courier Service, a courier service based in Louisville,
Kentucky. Additionally, Mr. Smith has been an officer of Precision Window Mfg.,
Inc. since April 1992. Mr. Smith was the President of Achievers Association, a
window association of manufacturers, dealers and retailers, from 1990 to 1995.
MICHAEL A. TOAL. Mr. Toal served as a director of ThermoView from August
1998 through March 2000. Mr. Toal formerly served as the President of CompAir
LeROI, a compressor manufacturing division of Siebe PLC, an international
conglomerate holding company, from April 1994 to December 1998. Mr. Toal also
served as a director of LeROI International, Inc., a subsidiary of Siebe, from
October 1991 to December 1998. Additionally, Mr. Toal has served as Vice
President of T3 Management Group, a financial lender and acquisition consultant
in the capital equipment industry, since 1994 and a director of T3 Management
Group since 1998. Mr. Toal received a B.A. in History from Harvard University in
1978.
ROBERT E. ANDERSON. Mr. Anderson served as a director of the Company from
March 1, 2000 until March 27, 2000. Mr. Anderson, the founder in 1979, serves as
President of Sun Windows, a manufacturer of new and replacement windows located
in Owensboro, Kentucky. Mr. Anderson is affiliated with numerous commercial real
estate developments. Mr. Anderson was a former director of three banks located
in Owensboro, Kentucky and is currently a director for South Central Bank. Mr.
Anderson holds a B.S. degree from Bowling Green Business University.
BOARD OF DIRECTORS
The Board of Directors manages our business. We currently have seven
directors. Our certificate of incorporation provides that the Board of Directors
shall be divided into three classes. The members of each class of directors
serve for staggered three-year terms. The members of the Class I Directors,
whose terms are subject to the approval of the shareholders at our annual
meeting, are Messrs. Carmicle, Pearson and Dauenhauer; the members of the Class
II Directors are Ms. Kesler and Mr. Henderson; and the members of the Class III
Directors are Messrs. Hoffmann and Clemmens. The initial terms of office of the
Class I Directors, Class II Directors and Class III Directors will expire upon
the election and qualification of directors at the annual meetings of
stockholders held following the fiscal years ending December 31, 2000, 2001 and
2002, respectively. At each subsequent annual
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meeting of stockholders, stockholders will elect or re-elect directors for a
full term of three years to succeed those directors whose terms are expiring.
Any alteration, amendment or repeal of the staggered board requirement in the
certificate of incorporation would require the affirmative vote of stockholders
owning at least 66 2/3% of the total shares outstanding and entitled to vote
generally in the election of directors, voting together as a single class. The
Board of Directors has an audit committee and a compensation committee, but does
not have a nominating committee. Members of the Board of Directors make
recommendations to the full Board for future nominations for membership to the
Board of Directors.
MEETINGS OF THE BOARD
The Board of Directors meets on a quarterly basis and at other times from
time to time. The Board of Directors also undertakes action by unanimous written
consent as permitted by Delaware law. In 1999, the Board of Directors met eight
(8) times. All directors attended at least 75% of the meetings of the Board of
Directors and of the committees on which they served during the period in which
they held office.
COMMITTEES OF THE BOARD
AUDIT COMMITTEE. The Board of Directors established its audit committee
in December 1998. This committee reviews, acts on and reports to the Board of
Directors with respect to various auditing and accounting matters, including the
recommendation of ThermoView's independent auditors, the scope of the annual
audits, fees that ThermoView agrees to pay to the independent auditors, the
performance of ThermoView's independent auditors and the accounting practices of
ThermoView. The members of the audit committee are Messrs. Henderson and
Dauenhauer and Ms. Kesler. The members of the audit committee are independent
for purposes of the listing standards of the American Stock Exchange.
COMPENSATION COMMITTEE. The Board of Directors established the
compensation committee in December 1998. This committee determines the salaries
and benefits, including stock option grants, for ThermoView's employees,
consultants, directors and other individuals. The compensation committee also
administers ThermoView's compensation plans. The members of the compensation
committee are Messrs. Henderson, Dauenhauer and Carmicle.
STRATEGIC OPERATIONS COMMITTEE
We have a strategic operations committee comprised of five managers of
our subsidiaries, each of whom has substantial experience in the replacement
window and related product businesses. The members of the Strategic Operations
Committee are Messrs. Clark, Haines, Kron, Leingang and Thomas. This committee
serves as a formal advisory, problem-solving and communications
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<PAGE>
forum for us. The committee evaluates and advises our subsidiaries related to:
- our product mix and lines;
- our product design and features;
- our manufacturing facility locations, processes, quality controls
and expansions;
- our delivery and installation services;
- our purchasing programs;
- our marketing, sales and advertising programs; and
- industry trends and issues.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of the Board of
Directors is an officer or employee of ThermoView. No executive officer of
ThermoView serves as a member of the Board of Directors or compensation
committee of any entity that has one or more executive officers serving on
ThermoView's compensation committee.
COMPENSATION OF DIRECTORS
We currently pay our directors a fee of $10,000 per annum plus
reimbursement for expenses incurred in connection with their services performed
as directors. Outside directors also receive $500 per meeting for attendance by
person or by phone conference. Additionally, we have committed to grant to each
outside director an option to purchase 2,500 shares of common stock at the
market price of the Common Stock on the date of grant with a vesting over three
years as compensation for service as a director. In May 1999, the compensation
committee granted to Messrs. Henderson and Toal and Ms. Kesler, ThermoView's
three outside directors at that time, non-qualified stock options to purchase,
in the aggregate, 7,500 shares of common stock under the 1999 stock option plan
as compensation for services rendered as directors. These options are
exercisable in whole or in part and one-third of these options vest in each of
May 2000, 2001 and 2002. These options expire in May 2009.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to ThermoView's Chief Executive Officer and the four other highest
compensated executive officers and officers no longer serving as of December 31,
1999 whose annual salary and
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bonus exceeded $100,000 in 1999 for services rendered in all capacities to
ThermoView during 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG -TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS/SARS (# SHARES) COMPENSATION
- --------------------------- ---- ------ ------------ ----------------------- ------------
<S> <C> <C> <C> <C> <C>
Stephen A. Hoffmann................ 1999 $150,000 $20,414(1)(2)(3) - $87,500(4)
Chief Executive Officer......... 1998 106,250 10,100(1)(2) 426,104 -
Nelson E. Clemmens................. 1999 154,167 13,564(1)(5) - 87,500(4)
President....................... 1998 89,583(6) 6,631(1)(5) 110,149 -
Richard E. Bowlds (7).............. 1999 145,000 25,341(1)(8) - 87,500(4)
Vice Chairman................... 1998 167,507(9) 22,409(1)(8) - -
Chief Operating Officer
James J. TerBeest(10).............. 1999 158,000 12,089(11) 41,667
Senior Vice President........... 1998 100,000 7,303(11) 41,667
Former Chief Financial Officer
Charles L. Smith................... 1999 185,000(12) 23,411(1)(13) 834
Chief Operating Officer......... 1998 152,933(12) 23,396(1)(13) -
Vice President/Manufacturing
Operations
John H. Cole....................... 1999 120,833 4,316(14) 33,334
Chief Financial Officer......... 1998 16,667 643(14) 100,000
</TABLE>
- -----------
(1) Includes $10,000 in director fees for 1999 and $5,000 for 1998.
(2) Includes $7,200 in automobile benefits for 1999 and $5,100 in 1998.
(3) Includes $3,214 in insurance benefits.
(4) Represents loan origination fees in connection with a $5.5 million loan
and a $2.5 million loan made to ThermoView by a group of individuals.
(5) Includes $3,564 in insurance benefits for 1999 and $1,631 in 1998.
(6) Includes $6,250 in consulting fees received from Thermo-Tilt in April
1998.
(7) Resigned as Chief Operating Officer in July 1999 and Vice Chairman in
March 2000.
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(8) Includes $9,000 in automobile benefits and $6,341 in insurance benefits
for 1999, and $12,652 in automobile benefits and $4,757 in insurance
benefits in 1998.
(9) Represents $58,174 in salary paid by Thermo-Tilt from January 1998 to May
1998 and $109,333 in salary paid by ThermoView from April 1998 to
December 1998.
(10) Mr. TerBeest resigned as Chief Financial Officer in July 1999.
(11) Includes $6,000 in automobile benefits and $6,089 in insurance benefits
for 1999 and $4,000 in automobile benefits and $3,303 in insurance
benefits in 1998.
(12) Represents $125,000 in salary paid by Primax Window Co. and $65,000 in
salary paid by Precision Window for 1999 and $137,308 in salary paid by
Primax from January to November 1998 and $15,625 in salary paid by
ThermoView from November 1998 to December 1998.
(13) Includes $9,360 in automobile benefits and $4,051 in insurance benefits
for 1999 and $9,598 in automobile benefits and $8,798 in insurance
benefits for 1998.
(14) Represents insurance benefits.
STOCK OPTION GRANTS
The following table sets forth information regarding options granted by
ThermoView to the named executive officers during the year ended December 31,
1999. Each option represents the right to purchase one share of common stock.
ThermoView has not granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES PERCENTAGE PER OF STOCK PRICE APPRECIATION
UNDERLYING OF TOTAL SHARE FOR OPTION TERM
OPTIONS GRANTED OPTIONS EXERCISE EXPIRATION ---------------------------
NAME (# SHARES) GRANTED PRICE DATE 5% 10%
- ---- --------------- ---------- -------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C>
John H. Cole 33,334 5.8% $11.43 7/29/09 $239,614 $607,228
Charles L. Smith 834 .1 15.93 1/1/09 8,355 21,174
James J. TerBeest 41,667 7.2 11.43 7/29/09 299,513 759,026
</TABLE>
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OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the number and
value of unexercised options held by each of the named executive officers at
December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED YEAR END (# SHARES) AT FISCAL YEAR END(1)
ON EXERCISE VALUE ------------------------------- ----------------------------
NAME (# SHARES) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Hoffmann..... 3,334 $34,607 422,770 0 $208,473 0
Nelson E. Clemmens...... 0 0 110,149 0 55,874 0
James J. TerBeest....... 0 0 62,501 20,834 17,708 0
Charles L. Smith........ 0 0 278 556 0 0
John H. Cole........... 0 0 116,667 16,667 42,500 0
</TABLE>
- -------------------
(1) The value of the in-the-money options is based on the $3.875 per share
closing price of our common stock on the American Stock Exchange on
December 31, 1999.
1998 EMPLOYEE STOCK OPTION PLAN
The 1998 employee stock option plan became effective as of April 15,
1998. In December 1998, the Board of Directors declared that, effective January
1, 1999, it would not grant any additional options under the 1998 employee stock
option plan due to the implementation of the 1999 stock option plan. The purpose
of the 1998 employee stock option plan was to promote the interests of
ThermoView by attracting key employees, providing its key employees with an
additional incentive to work to increase the value of the common stock and
providing key employees with a stake in the future of ThermoView which
corresponds to the stake of the stockholders. The Board of Directors granted
options to purchase 493,334 shares under the 1998 employee stock option plan at
prices ranging from $3.45 to $15.93. On January 1, 1999, the Board of Directors
authorized the transfer of the remaining 6,667 authorized but unissued shares
reserved for the 1998 employee stock option plan to the 1999 stock option plan.
The 1998 employee stock option plan provided for the granting to key employees
of either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 or non-qualified stock options under the Internal
Revenue Code.
1999 STOCK OPTION PLAN
The 1999 stock option plan became effective as of January 1, 1999. The
purpose of the 1999 stock option plan is to promote the
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interests of ThermoView by attracting key employees and directors, providing
each of its key employees and directors with an additional incentive to work to
increase the value of the common stock and providing key employees and directors
with a stake in the future of ThermoView which corresponds to the stake of the
stockholders. ThermoView authorized for issuance a total of 833,334 shares of
common stock under the 1999 stock option plan. As of December 31, 1999, the
Board of Directors had granted options to purchase 458,541 shares of common
stock at prices ranging from $11.43 to $25.86.
STOCK OPTIONS. Each stock option granted under the 1999 stock option
plan entitles the holder to purchase the number of shares of common stock
specified in the grant at the purchase price specified. The 1999 stock option
plan authorizes the Compensation Committee to grant:
- incentive stock options within the meaning of Section 422 of the
Internal Revenue Code to key employees, and
- non-qualified stock options under the Internal Revenue Code to key
employees or non-employee directors.
If an option granted under the 1999 employee stock option plan expires,
is canceled or is exchanged for a new option before a holder exercises the
option in full, the shares reserved for the unexercised portion of the option
will become available again for use under the 1999 stock option plan. Shares
underlying an option that a holder surrenders and shares used to satisfy an
option price or withholding obligation will not become available for use under
the 1999 stock option plan.
401(K) PLAN
In January 1999, our Board of Directors created a 401(k) profit sharing
plan for its employees. Participants may elect to make contributions pursuant to
salary withholding not to exceed $10,000 per annum. We intend to make matching
contributions on the first 25% of the first 6% of a participant's annual
compensation that a participant contributes.
EMPLOYMENT AGREEMENTS
Thermo-Tilt and Mr. Hoffmann were parties to an employment agreement, as
amended, governing his employment with Thermo-Tilt. The agreement expired in
January 2000.
ThermoView and Mr. Hoffmann are parties to an employment agreement, as
amended, governing his employment with ThermoView. The agreement expired in
April 2000. The agreement provided that Mr. Hoffmann receive a base salary of
$150,000 per annum and be
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eligible to receive an annual bonus equal to two percent of ThermoView's pre-tax
income.
Thermo-Tilt and Mr. Clemmens were parties to an employment agreement, as
amended, governing his employment with Thermo-Tilt. The agreement expired in
January 2000.
ThermoView and Mr. Clemmens are parties to an employment agreement, as
amended, governing his employment with ThermoView. The agreement expired in
April 2000. The agreement provided that Mr. Clemmens will receive a base salary
of $150,000 per annum.
ThermoView and Mr. Bowlds were parties to an employment agreement
governing his employment with ThermoView. The agreement expired in January 2000.
The agreement provided that Mr. Bowlds receive a base salary of $145,000 per
annum.
ThermoView and Mr. TerBeest are parties to an employment agreement
governing his employment with ThermoView as its Senior Vice President-Finance
and Accounting. The agreement expires in May 2001. The agreement provides that
Mr. TerBeest will receive a base salary of $158,000 per annum.
ThermoView and Mr. Smith are parties to an employment agreement governing
his employment with Primax Window Co. The agreement expires in April 2001. The
agreement provides that Mr. Smith will receive a base salary of $125,000 per
annum. ThermoView and Mr. Smith are also parties to an employment agreement
governing his employment with Precision Window Mfg., Inc. The agreement expires
in January 2002. The agreement provides that Mr. Smith will receive a base
salary of $60,000 per annum.
ThermoView and Mr. Cole are parties to an employment agreement governing
his employment with ThermoView. The agreement expires in October 2000. The
agreement provides that Mr. Cole will receive a base salary of $150,000 per
annum.
Each of the employment agreements summarized above provides that the
executive retains his salary and benefits until the expiration of the employment
agreement if we terminate the executive without cause.
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<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The compensation committee of the Board of Directors is comprised
entirely of independent outside directors, none of whom is a current or former
employee of ThermoView or its subsidiaries.
The employment agreements for our Chief Executive Officer and the four
other highest compensated executive officers and those officers no longer
serving as of December 31, 1999, whose annual salary and bonus exceeded $100,000
in 1999, stipulated the compensation awarded to, earned by or paid to such
executives in 1999. All such employment agreements are disclosed in this report.
The Board of Directors approved all of the employment agreements, which were
executed prior to the formation of the compensation committee in December 1998.
As these employment agreements expire, we shall assist the Board of
Directors in monitoring the compensation arrangements with our senior
executives. We will consider the following factors, among others, in determining
appropriate compensation arrangements with our senior executives:
- Our desire to attract and retain the best qualified and most
talented executives available in our business to lead ThermoView
in the creation of shareholder value,
- Our desire to motivate and reward annual and long-term results
achieved by the executives for our shareholders based upon
corporate and individual performance, and
- Our desire to pay competitively as measured against other
companies in our industry.
At least annually, we will meet and review performance evaluations of the
senior executives.
During 1999, ThermoView did not pay any bonuses to its senior executives.
COMPENSATION COMMITTEE:
Raymond C. Dauenhauer, Jr.
J. Sherman Henderson, III
Ronald L. Carmicle
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PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return
(assuming reinvestment of dividends) to the shareholders during the 20-month
period ended December 31, 1999, as well as an overall stock market index, the
Russell 2000, and ThermoView's peer group index utilized for a comparable period
which we have selected on an industry basis. The component companies utilized in
the Peer Group are Comfort Systems USA, Inc., Integrated Electrical Services,
Nortek, Inc., and Royal Group Technologies, LTD. The market capitalization of
each peer group company is weighted in the performance graph set forth below.
COMPARATIVE ANNUAL TOTAL RETURN
THERMOVIEW INDUSTRIES, INC., RUSSELL 2000 INDEX AND PEER GROUP
(Performance Results Through 12/31/99)*
<TABLE>
<CAPTION>
Name 4/15/98 12/31/98 12/31/99
- ---- ------- -------- --------
<S> <C> <C> <C>
ThermoView Industries, Inc. $100.00 $61.59 $ 19.47
Russell 2000 Index 100.00 88.01 103.71
Peer Group 100.00 79.97 59.18
</TABLE>
*Assumes $100 invested at the close of trading April 15,1998 in ThermoView
Industries, Inc. Common Stock, Russell 2000 Index and Peer Group and
reinvestment of all dividends.
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ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of our common stock as of March 1, 2000 for (i) each officer and
director of ThermoView, (ii) each person known by us to own of record or
beneficially more than 5% of the outstanding shares of our common stock, and
(iii) all officers and directors of ThermoView as a group. In accordance with
the SEC's rules, the following table gives effect to the shares of common stock
that could be issued upon (A) the exercise of outstanding options and warrants
and (B) the conversion of Series C preferred stock, each within 60 days of March
1, 2000. Unless otherwise indicated, each of the persons named in the following
table has sole voting, conversion and investment power with respect to the
shares they own.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF
BENEFICIAL OWNER OWNED CLASS(1)
- ---------------- ----- --------
<S> <C> <C>
Brown Simpson Strategic Growth Fund,
Ltd. and Brown Simpson Strategic
Growth Fund, L.P.(2) 819,792 10.0%
Stephen A. Hoffmann(3) 568,650 7.3
GE Capital Equity Investments, Inc.(4) 555,343 7.0
LD Capital, Inc.(5) 492,802 6.3
Robert E. Anderson(6) 433,548 5.9
Charles L. Smith(7) 206,615 2.8
Robert C. Pearson(8) 158,335 *
Nelson E. Clemmens(9) 143,483 1.9
Delores P. Kesler(10) 132,323 1.8
John H. Cole(11) 161,162 2.1
Raymond C. Dauenhauer, Jr.(12) 104,352 1.4
James J. TerBeest(13) 65,833 *
Ronald L. Carmicle(14) 16,667 *
Michael A. Toal(15) 16,667 *
J. Sherman Henderson III 8,334 *
Richard E. Bowlds(16) 7,363 2.1
All directors and executive officers
as a group (13 persons)(17) 1,923,332
</TABLE>
- -----------------
* Less than 1% of total.
(1) Based on 7,389,592 shares of common stock outstanding, plus, for each
individual or entity, the number of shares of common stock that each
individual or entity may acquire upon the exercise of stock options or
warrants or conversion of convertible securities within 60 days of March
1, 2000.
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<PAGE>
(2) Includes 400,000 shares issuable upon conversion of shares of Series C
preferred stock, 19,792 shares of common stock issued as dividends on the
Series C preferred stock and 400,000 shares issuable upon exercise of
outstanding warrants. Brown Simpson Strategic Growth Fund, Ltd. and Brown
Simpson Strategic Growth Fund, L.P. are controlled by their general and
managing partner, Brown Simpson Asset Management, LLC. The principal
address for Brown Simpson Strategic Growth Fund, Ltd. and Brown Simpson
Strategic Growth Fund, L.P. is 152 West 57th Street, 40th Floor, New
York, New York 10019.
(3) Includes 11,596 shares deemed beneficially owned by Mr. Hoffmann as
trustee of two trusts, as to which Mr. Hoffmann disclaims beneficial
ownership. Includes 422,770 shares issuable upon exercise of outstanding
stock options granted to Mr. Hoffmann. Includes 100,000 shares owned by
Founders Group, LLC, a limited liability company in which Mr. Hoffmann
owns one-third of the outstanding ownership interest. Includes 33,334
shares beneficially owned by Mr. Hoffmann as trustee of two trusts, as to
which Mr. Hoffmann disclaims beneficial ownership. Mr. Hoffmann's address
is ThermoView Industries, Inc., 1101 Herr Lane, Louisville, Kentucky
40222.
(4) Represents shares issuable upon exercise of outstanding warrants. GE
Capital Equity Investments, Inc. is a subsidiary of General Electric
Company. GE Capital Equity Investments, Inc.'s address is 120 Long Run
Road, Stamford, Connecticut 06927.
(5) Represents shares issuable upon exercise of outstanding stock options
granted to LD Capital, Inc. Substantially all of the outstanding stock of
LD Capital, Inc. is held by Lindsey Maxwell, the spouse of Mr. Maxwell,
our Corporate Development Manager, as custodian for their minor children.
Mr. Clemmens is also a minority shareholder and the President, Secretary,
Treasurer and sole director of LD Capital, Inc. The address for LD
Capital, Inc. is 133 South Third Street, Suite 402, Louisville, Kentucky
40202.
(6) Includes 433,548 shares owned by the Robert E. Anderson Trust UA DTD
4/15/98 for which Mr. Anderson is the trustee and beneficiary. Mr.
Anderson's address is 2645 Pleasant Valley Road, Owensboro, Kentucky
42303.
(7) Mr. Smith resigned as a director of ThermoView effective February 2000.
Includes 278 shares issuable upon exercise of outstanding stock options
granted to Mr. Smith.
(8) Includes 158,335 shares held by funds managed by Renaissance Capital
Group, Inc., of which Mr. Pearson is the Senior Vice President of
Corporate Finance.
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<PAGE>
(9) Includes 110,149 shares issuable upon exercise of outstanding stock
options granted to Mr. Clemmens.
(10) Includes 3,334 shares beneficially owned by the spouse of Ms. Kesler, as
to which Ms. Kesler disclaims beneficial ownership. Includes 100,000
shares owned by Founders Group, LLC, a limited liability company in which
Ms. Kesler owns one-third of the outstanding ownership interest.
(11) Includes 116,667 shares issuable upon exercise of outstanding stock
options granted to Mr. Cole.
(12) Mr. Dauenhauer became a director of ThermoView effective March 1, 2000.
(13) Includes 62,500 shares issuable upon exercise of outstanding stock
options granted to Mr. TerBeest.
(14) Mr. Carmicle became a director of ThermoView effective February 14, 2000.
Represents shares held by Lyncar Enterprises, Inc., of which Mr. Carmicle
owns 100% with his spouse.
(15) Represents 16,667 shares owned by the Michael A. Toal Revocable Living
Trust DTD 6/14/96 for which Mr. Toal is the trustee and beneficiary. Mr.
Toal resigned as a director of ThermoView in March 2000.
(16) Mr. Bowlds resigned as a director of ThermoView effective March 1, 2000.
Excludes 20,834 shares sold by Mr. Bowlds to Renaissance Capital Growth &
Income Fund III, Inc. and Renaissance US Growth & Income Trust, PLC but
subject to a put option pursuant to a stock purchase agreement, dated as
of December 10, 1998, by and among Mr. Bowlds, Renaissance and Douglas I.
Maxwell, III. Mr. Bowlds disclaims beneficial ownership of these shares.
Includes 6,945 shares deposited in escrow pursuant to an escrow
agreement, dated as of December 17, 1998, by and among Mr. Bowlds,
Renaissance, Mr. Maxwell and Bank One, Texas, NA and subject to delivery
to Renaissance pursuant to the Renaissance stock purchase agreement.
Robert Pearson, Senior Vice President of Renaissance, is a director of
ThermoView.
(17) Includes 712,364 shares issuable upon exercise of outstanding stock
options and warrants owned by all directors and officers as a group which
vest within 60 days of March 1, 2000. Includes only 100,000 shares owned
by Founders Group, LLC, but which shares are included in the individual
totals for both Mr. Hoffmann and Ms. Kesler.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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SALES OF STOCK TO INSIDERS
Since July 1997, we have issued and sold securities to the following
persons or entities who are our executive officers, directors or principal
stockholders. These figures reflect activity through March 31, 2000.
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<PAGE>
<TABLE>
<CAPTION>
PER SHARE
TYPE OF NUMBER OF PURCHASE OR
INVESTOR SECURITY SHARES DATE ISSUED EXERCISE PRICE
- -------- ------- ------ ----------- --------------
<S> <C> <C> <C> <C>
Brown Simpson Strategic Growth Fund, Preferred 6,000 April 1999 $1,000
Ltd. and Brown Simpson Strategic (Series C)
Growth Fund, L.P. Warrant 400,000 April 1999 18.00
Common 6,246 October 1999 (1)
Common 13,546 January 2000 (1)
Richard E. Bowlds Common 1,627,286 July 1997 (2)
GE Capital Equity Investments, Inc. Warrant 555,343 July 1999 0.03
Stephen A. Hoffmann Common 2,899 March 1998 3.45
Options 7,248 October 1997 0.87
Options 105,083 January 1998 3.45
Options 266,667 April 1998 3.45
Robert E. Anderson Common 231,907 November 1997 3.09
Common 57,977 March 1998 3.45
LD Capital, Inc. Common 35,189 July 1997 0.57
Options 492,802 October 1997 0.87
Evangel Christian Life Center Common 339,024 July 1997 0.57
Charles L. Smith Common 153,000 April 1998 (3)
Nelson E. Clemmens Options 14,495 October 1997 0.87
Options 28,988 January 1998 3.45
Options 66,667 November 1998 6.90
Delores P. Kesler Common 14,495 March 1998 3.45
Options 2,500 May 1999 11.64
John H. Cole Options 100,000 April 1998 3.45
Options 33,334 July 1999 11.43
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<PAGE>
Michael A. Toal Preferred(4) 50,000 July 1998 5.00
(Series A)
Options 2,500 May 1999 11.64
J. Sherman Henderson III Options 2,500 May 1999 11.64
Robin C. Edwardsen Options 66,667 July 1999 11.43
</TABLE>
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<PAGE>
- ---------------
(1) Represents dividends on the Series C preferred stock.
(2) Thermo-Tilt issued these shares to Mr. Bowlds in connection with the
conversion of his sole proprietorship into a corporation. No value was
assigned to these shares for accounting purposes since the business
exchanged for the shares had no basis for accounting purposes.
(3) Issued in connection with an acquisition.
(4) Converted to 16,667 shares of common stock in December 1999.
SERIES C PREFERRED STOCK AND WARRANTS
In April 1999, we issued an aggregate of 6,000 shares of Series C
preferred stock to two institutional accredited investors, Brown Simpson Growth
Fund, L.P., a New York limited partnership, and Brown Simpson Growth Fund, Ltd.,
a Grand Cayman, Cayman Islands limited partnership, at a per share purchase
price of $1,000, for a total investment of $6.0 million. Each share of the
Series C preferred stock converts into 66 2/3 shares of our common stock,
subject to adjustment. In conjunction with the issuance of the Series C
preferred stock, we issued to the two funds warrants to purchase up to a
total of 400,000 shares of common stock at $21.00 per share, subject to
adjustment, which expire in April 2004. In August 1999 we amended the
exercise price of the warrants to $18.00 per share in exchange for a
commitment of the two funds to refrain from selling any of our securities
from the closing of our initial public offering to January 31, 2000. We also
granted registration rights to the two funds and pursuant to those rights we
filed a registration statement on Form S-1 to register 1,200,000 shares of
our common stock to be offered for sale by the two funds. The shares subject
to the registration statement represent 150% of the shares of our common
stock issuable upon conversion of the Series C preferred stock and exercise
of the warrants.
SERIES D PREFERRED STOCK
In April 2000, we agreed to issue an aggregate of 1,439,316 shares of 12%
Cumulative Series D preferred stock with a liquidation value of $5.00 per share
to Michael Haines, Alvin W. Leingang and Rodney H. Thomas, three of our key
employees and two other individuals, all of whom were prior principals of
companies we acquired. We agreed to issued these shares as full payment of post
closing earn-out incentives owed to these key employees and principals that were
due and payable in cash and common stock and full payment of interest earned by
these individuals prior to settlement of the earn-out incentives. The Series D
preferred stock is senior to our common stock and is on parity with the
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Series C preferred stock. The Series D preferred stock will pay cumulative
dividends at the rate of $.60 per share annually, subject to the legal
availability to pay the dividends and the consent of our senior lender. The
shares of Series D preferred stock are redeemable by ThermoView for cash [OR
COMMON STOCK] that equals the liquidation value of the shares redeemed, plus
cumulative unpaid dividends. The shares of Series D preferred stock are not
convertible into common stock, have no voting rights and contain no registration
rights.
SENIOR SUBORDINATED NOTE AND WARRANTS
In July 1999, we received $10.0 million in senior subordinated financing
from GE Capital Equity Investments, Inc. Interest under the note is payable
quarterly in arrears at 12% per annum, subject to substantial increases in
certain circumstances. Principal under the note is payable in full in July 2002.
We may prepay the note at a premium prior to its maturity. The note requires us
to comply with certain affirmative and negative covenants. The note, which is
subordinate to our line of credit with PNC Bank, is secured by a lien on
substantially all of our assets, a guarantee executed by our subsidiaries and a
pledge of our ownership in our current and future subsidiaries. In conjunction
with the issuance of the note, we issued to GE Capital warrants to purchase
555,343 shares of our common stock at $0.03 per share which expire during July
2007. We have also granted to GE Capital two demand registration rights and
unlimited piggyback registration rights for the shares of common stock issuable
upon exercise of the warrants.
ThermoView is contractually obligated to use its best efforts to cause a
designee of GE Capital to be elected to its Board of Directors for so long as GE
Capital holds any portion of its note or warrant. Additionally, while no
designee of GE Capital is serving on the Board of Directors, GE Capital has the
right to designate an individual observer to attend all meetings of the Board of
Directors and any committees of the Board of Directors in a non-voting observer
capacity. GE Capital negotiated these rights as part of its financing
arrangements with ThermoView.
TERM NOTE
In October 1999, we amended our line of credit with PNC Bank to provide
for additional short-term borrowings under a multiple advance term note up to
$2.5 million. The note bore interest at prime plus one percent per annum and
interest was payable monthly. We paid the principal and interest of this note in
December 1999 from the proceeds of our initial public offering. Stephen A.
Hoffmann, Richard E. Bowlds, Nelson E. Clemmens and Douglas I. Maxwell, III
guaranteed the note for an aggregate in fees of $100,000. Messrs. Hoffmann and
Clemmens are officers and directors of ThermoView, Mr. Bowlds is a former
director and officer of ThermoView and Mr. Maxwell is an employee of ThermoView.
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RELATED-PARTY LEASES
ThermoView leases its headquarters from Glenn Lyon Lease Development,
Inc., a corporation controlled by Mr. Hoffmann, for $111,000 annually. Primax
leases its headquarters from Mr. Smith for $82,000 annually. Additionally, on
December 20, 1997, Thermo-Tilt entered into a sale-leaseback transaction on its
headquarters with Industrial Leasing of Florida, Inc., a Florida corporation
controlled by Robert E. Anderson, a stockholder of ThermoView. Industrial
Leasing of Florida purchased Thermo-Tilt's headquarters for $620,000 and
Thermo-Tilt deferred the $55,000 gain on the sale, which is being amortized to
income over the term of the lease. Thermo-Tilt leases its headquarters from
Industrial Leasing of Florida for $78,000 annually.
RELATED-PARTY NOTES AND LOAN GUARANTEES
During 2000, we amended our line of credit with PNC Bank. In connection
with the amendment, Stephen A. Hoffmann, Richard E. Bowlds, Nelson E. Clemmens
and Douglas I. Maxwell, III guaranteed $3,000,000 of our line of credit for fees
equal to an annual rate of 5% from April 2000 through June 2000 and 10%
thereafter, subject to Board of Director approval.
During 1998 and 1999, ThermoView had a $5.5 million note payable to
Stephen A. Hoffmann, Nelson E. Clemmens, Richard E. Bowlds and Douglas I.
Maxwell, III. Messrs. Hoffmann and Clemmens are officers and directors of
ThermoView, Mr. Bowlds is a former director and officer of ThermoView, and Mr.
Maxwell is an employee of ThermoView. The note, which evidenced a loan from
these individuals to ThermoView, bore interest at a Euro-Rate based variable
rate until we repaid it in July 1999. ThermoView paid a $250,000 fee to these
individuals in connection with the note.
During 1999, ThermoView had a $750,000 note payable to Stephen A.
Hoffmann, ThermoView's Chairman of the Board and Chief Executive Officer. The
note, which evidenced a loan from Mr. Hoffmann to ThermoView, bore interest at
12% per annum until we repaid it in April 1999.
During 1999, ThermoView had a $150,000 note payable to Richard E. Bowlds,
ThermoView's former Vice Chairman of the Board and former Executive Vice
President- Acquisitions. The note, which evidenced a loan from Mr. Bowlds to
ThermoView, bore interest at 12% per annum until we repaid it in April 1999.
During 1999, ThermoView had a note payable in the original principal
amount of $600,000 to Charles L. Smith, our former Chief Operating Officer and a
former director. The note, which was issued as partial consideration in our
acquisition of Precision Window Mfg., Inc., bore interest at 5.0% per annum. The
note
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matured concurrently with the effectiveness of our initial public offering. We
used a portion of the proceeds of our initial public offering to retire the
remaining principal balance of $450,000 under the note.
During 1999, Thermo-Tilt had a note receivable from Bluegrass Water
Treatment, Inc., a Kentucky corporation. James A. Bowlds, the son of Richard E.
Bowlds, our former Vice Chairman of the Board and former Executive Vice
President-Acquisitions, controls Bluegrass Water Treatment, Inc. In January
1999, Mr. James Bowlds repaid the $181,000 note. The note bore interest at 8%
per annum.
RELATED-PARTY LINE OF CREDIT COMMITMENT
In April 1998, the Founders Group, LLC, a venture capital firm controlled
by Stephen A. Hoffmann and Delores P. Kesler, committed to provide ThermoView a
$5.0 million revolving line of credit. The line of credit was never used and in
September 1999 the Founders Group terminated the commitment to provide the
revolving line of credit.
RELATED-PARTY RECEIVABLES
During 1998 and 1999, Thermo-Tilt had receivables due from Richard E.
Bowlds, our former Vice Chairman of the Board and former Executive Vice
President-Acquisitions, in an amount which never exceeded $201,000. The
receivables represented short-term non-interest bearing loans from Thermo-Tilt
to Mr. Bowlds for a variety of personal expenditures made by Mr. Bowlds. Mr.
Bowlds repaid the receivables in January 1999.
PRIVATE STOCK SALES
During December 1998 and January 1999, Richard E. Bowlds, former Vice
Chairman of the Board and former Executive Vice President of ThermoView sold
4,958 shares of common stock to Raymond C. Dauenhauer, Jr., in two private
transactions at $12 per share. During October 1999 and November 1999, Mr. Bowlds
sold 496,011 shares of common stock in private transactions to 27 individuals or
entities at $3.00 per share. Charles L. Smith, former Chief Operating Officer
and a former director of ThermoView, purchased 53,334 shares from Mr. Bowlds.
John H. Cole, Chief Financial Officer of ThermoView, purchased 28,334 shares,
respectively, from Mr. Bowlds. Joel S. Kron, Rodney H. Thomas and Robert L. Cox,
II, who are all Vice Presidents of ThermoView, purchased 33,334, 55,000 and
55,000 shares from Mr. Bowlds. Mr. Bowlds, who formerly beneficially owned in
excess of 10% of ThermoView's common stock, currently beneficially owns less
than 1% of the common stock.
COMPANY POLICY
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Our Board of Directors has reviewed the lease transactions summarized
above and believes that those transactions were made on terms no less favorable
than terms we could have obtained from unaffiliated third parties. Our Board of
Directors has not made a determination as to whether the other related-party
transactions described above were made on terms no less favorable than terms we
could have obtained from unaffiliated third parties. The Board of Directors has
adopted a policy that any future transactions between ThermoView and its
officers, directors or principal stockholders will be approved by a majority of
the disinterested directors and will be on terms no less favorable than we could
obtain from an unaffiliated third party.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. INDEX TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
The Index to the Consolidated Financial Statements of ThermoView
Industries, Inc. is included on page 57 of this Form 10-K and is
incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES:
The schedules are inapplicable or the required information is
included in ThermoView Industries, Inc. Consolidated Financial
Statements or the Notes thereto.
B. REPORTS ON FORM 8-K
None.
C. EXHIBITS
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 118), which index is incorporated herein
by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Louisville, Commonwealth of Kentucky, on the 14th day of April, 2000.
ThermoView Industries, Inc.
By: /s/ Stephen A. Hoffmann
------------------------------
Stephen A. Hoffmann,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Stephen A. Hoffmann Chairman of the Board April 14, 2000
- ----------------------------- and Chief Executive Officer
Stephen A. Hoffmann (principal executive officer)
/s/ Nelson E. Clemmens President and Director April 14, 2000
- -----------------------------
Nelson E. Clemmens
/s/ John H. Cole Chief Financial Officer April 14, 2000
- ----------------------------- (principal financial and
John H. Cole accounting officer)
/s/ Ronald L. Carmicle Director April 14, 2000
- ----------------------------
Ronald L. Carmicle
/s/ Raymond C. Dauenhauer, Jr. Director April 14, 2000
- -----------------------------
Raymond C. Dauenhauer, Jr.
/s/ J. Sherman Henderson, III Director April 14, 2000
- -----------------------------
J. Sherman Henderson, III
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/s/ Delores P. Kesler Director April 14, 2000
- ---------------------------
Delores P. Kesler
/s/ Robert C. Pearson Director April 14, 2000
- ---------------------------
Robert C. Pearson
</TABLE>
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------- -----------------------
<S> <C> <C>
3.1* -- Restated Certificate of Incorporation of the registrant
3.1(a)* -- Certificate of Amendment of Restated Certificate of Incorporation of the registrant
3.1(b)* -- Second Certificate of Amendment of Restated Certificate of Incorporation of the
registrant
3.2* -- Certificate of Designation of the registrant (9.6% Cumulative Convertible Series C
Preferred Stock)
3.2(a)* -- Certificate of Amendment of Certificate of Designation of the registrant (9.6%
Cumulative Convertible Series C Preferred Stock)
3.2(b) -- Certificate of Designation of the registrant (12% Cumulative Series D Preferred Stock)
3.3* -- Amended and Restated By-Laws of the registrant
4.1* -- Specimen common stock certificate
10.1* -- ThermoView Industries, Inc. 1998 Employee Stock Option Plan
10.2* -- ThermoView Industries, Inc. 1999 Stock Option Plan
10.3* -- Stock Option Agreement, dated as of October 22, 1997, by and between Thermo-Tilt
Window Company and LD Capital, Inc.
10.4* -- Stock Option Agreement, effective as of October 22, 1997, by and between the
registrant and Stephen A. Hoffmann
10.5* -- Stock Option Agreement, dated as of October 22, 1997, by and between Thermo-Tilt
Window Company and Nelson E. Clemmens
10.6* -- Employment and Noncompetition Agreement, dated as of January 13, 1998, by and between
Thermo-Tilt Window Company and Stephen A. Hoffmann
10.7* -- First Amendment to Employment and Noncompetition Agreement, dated as of April 15,
1998, by and between Thermo-Tilt Window Company and Stephen A. Hoffmann
10.8* -- Executive Employment Agreement, dated as of April 15, 1998, by and between the
registrant and Stephen A. Hoffmann
10.9* -- Amended and Restated Stock Option Agreement, dated as of January 13, 1998, by and
between the registrant and Stephen A. Hoffmann
10.10* -- Option Certificate, dated as of April 15, 1998, by and between the registrant and
Stephen A. Hoffmann
10.11* -- Employment and Noncompetition Agreement, dated as of January 19, 1998, by and between
Thermo-Tilt Window Company and Nelson E. Clemmens
10.12* -- Stock Option Agreement, dated as of January 19, 1998, by and between Thermo-Tilt
Window Company and Nelson E. Clemmens
10.13* -- First Amendment to Employment and Noncompetition Agreement, dated as of April 15,
1998, by and between Thermo-Tilt Window Company and Nelson E. Clemmens
10.14* -- Amended and Restated Employment and Noncompetition Agreement, dated as of April 15,
1998, by and between the registrant and Nelson E. Clemmens
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<PAGE>
10.15* -- First Amendment to Amended and Restated Employment and Noncompetition Agreement, dated
as of November 1, 1998, by and between the registrant and Nelson E. Clemmens
10.16* -- Option Certificate, dated as of November 1, 1998, by and between the registrant and
Nelson E. Clemmens
10.17* -- Amended and Restated Employment and Noncompetition Agreement, dated as of June 26,
1999, by and between the registrant and Richard E. Bowlds
10.18* -- Amended and Restated Employment and Noncompetition Agreement, dated as of July 28,
1999, by and between the registrant and John H. Cole
10.19* -- Stock Option Agreement, dated as of April 15, 1998, by and between the registrant and
John H. Cole
10.20* -- Stock Option Agreement, dated as of July 29, 1999, by and between the registrant and
John H. Cole
10.21* -- Amended and Restated Employment and Noncompetition Agreement, dated as of July 28,
1999 by and between the registrant and James J. TerBeest
10.22* -- Stock Option Agreement, dated as of April 20, 1998, by and between the registrant and
James J. TerBeest
10.23* -- Stock Option Agreement dated as of July 29, 1999, by and between the registrant and
James J. TerBeest
10.24* -- Employment Agreement, dated as of April 29, 1998, by and between ThermoView Merger
Corp. and Charles L. Smith
10.25* -- Employment Agreement, dated as of January 5, 1999, by and between Precision Window
Mfg., Inc. and Charles L. Smith
10.26* -- Lease, dated as of November 1, 1998, by and between the registrant and Glenn Lyon
Development Corporation
10.27* -- Warrant, dated as of November 1, 1998, by and between the registrant and EBI
Securities Corporation
10.28* -- Loan Agreement, dated as of August 31, 1998, by and among the registrant,
then-existing subsidiaries of the registrant (collectively, "Borrowers") and PNC Bank,
National Association ("PNC")
10.29* -- Joinder to Loan Documents and Amendment to Loan Documents (Thomas Construction, Inc.),
dated as of January 1, 1999, by and among Borrowers and PNC
10.30* -- Joinder to Loan Documents and Amendment to Loan Documents (Precision Window Mfg.,
Inc.), dated as of January 5, 1999, by and among Borrowers and PNC
10.31* -- Joinder to Loan Documents and Amendment to Loan Documents (Thermo- Shield), dated as
of July 8, 1999, by and among Borrowers and PNC
10.32* -- Securities Purchase Agreement, dated as of April 23, 1999, by and among the
registrant, Brown Simpson Strategic Growth Fund, Ltd ("Brown Ltd."). and Brown Simpson
Strategic Growth Fund, L.P. ("Brown L.P.", which together with Brown Ltd., "Brown
Simpson")
10.33* -- Registration Rights Agreement, dated as of April 23, 1999, by and among the registrant
and Brown Simpson
10.34* -- Stock Purchase Warrant by and between the registrant and Brown L.P.
10.35* -- Amendments to Stock Purchase Warrant, by and between the registrant and Brown L.P.
119
<PAGE>
10.36* -- Stock Purchase Warrant by and between the registrant and Brown Ltd.
10.37* -- Amendments to Stock Purchase Warrant, by and between the registrant and Brown Ltd.
10.38* -- Securities Purchase Agreement, dated as of July 8, 1999, between the registrant and GE
Capital Equity Investments, Inc.
10.39* -- Stock Purchase Warrant, by and between the registrant and GE Capital Equity
Investments, Inc.
10.40* -- Form of Management Indemnification Agreement
10.41* -- Agreement and Plan of Merger, dated as of April 23, 1998, by and among the registrant,
ThermoView Merger Corp., American Home Developers Co., Inc. and the Shareholders of
American Home Developers Co., Inc.
10.42* -- Agreement and Plan of Merger, dated as of April 29, 1998, by and among the registrant,
ThermoView Merger Corp., Primax Window Co. and the Shareholders of Primax Window Co.
10.43* -- Lease, dated April 29, 1998, between Charles L. Smith and Primax Window Co.
10.44* -- Agreement and Plan of Merger, dated as of April 29, 1998, by and among the registrant,
ThermoView Merger Corp., Rolox of Wichita, Inc. and the Shareholders of Rolox of
Wichita, Inc.
10.45* -- Lease, dated April 29, 1998, by and between Robert L. Cox and Rolox, Inc.
10.46* -- Lease, dated April 29, 1998, by and between Robert L. Cox, Robert L. Cox II and Rolox,
Inc.
10.47* -- Lease, dated April 29, 1998, by and between L & D Partnership and Rolox, Inc.
10.48* -- Lease, dated April 29, 1998, by and between LBD, L.L.C. and Rolox, Inc.
10.49* -- Asset Purchase Agreement, dated May 27, 1998, by and between TD Windows, Inc. and
Allhom Eagles W indows & Doors, Inc.
10.50* -- Agreement and Plan of Merger, dated as of July 9, 1998, by and among the registrant,
ThermoView/AHR Merger Corp., American Home Remodeling, Pacific Exteriors, Incorporated
and the Shareholders of American Home Remodeling and Pacific Exteriors, Incorporated.
10.51* -- Agreement and Plan of Merger, dated as of July 9, 1998, by and among the registrant,
ThermoView/FSB Merger Corp., Five Star Builders, Inc. and the Shareholders of Five
Star Builders, Inc.
10.52* -- Asset Purchase Agreement, dated July 21, 1998, by and among the registrant, NuView
Industries, Inc. and Douglas E. Miles
10.53* -- Stock Purchase Agreement, dated August 14, 1998, by and between Alvin W. Leingang and
the registrant
10.54* -- Net Lease, dated January 1, 1997, between Al Leingang and Leingang Siding and Window,
Inc.
10.55* -- First Amendment to Lease, dated as of August 14, 1998, by and between Al Leingang and
Leingang Siding and Window, Inc.
10.56* -- Lease, dated August 16, 1995, between Wayne Kluck and Leingang Siding and Window, Inc.
10.57* -- First Amendment to Lease, dated as of August 14, 1998, by and between Alvin W.
Leingang and Leingang Siding and Windows, Inc.
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<PAGE>
10.58* -- Stock Purchase Agreement, dated August 14, 1998, by and among Alvin W. Leingang,
Steven B. Hoyt and the registrant
10.59* -- Standard Commercial Lease, dated January 2, 1996, by and between Alvin W. Leingang and
Thermal Line Windows, L.L.P.
10.60* -- First Amendment to Lease, dated as of August 14, 1998, by and between Alvin W.
Leingang and Thermal Line Windows, L.L.P.
10.61* -- Equipment Lease, dated as of January 2, 1996, by and between North Country Thermal
Line, Inc. and Thermal Line Windows, L.L.P.
10.62* -- First Amendment to Equipment Lease, dated as of August 14, 1998, by and between North
Country Thermal Line, Inc. and Thermal Line Windows, L.L.P.
10.63* -- Equipment Lease, dated as of January 2, 1996, by and between North Country Thermal
Line, Inc. and Thermal Line Windows, L.L.P.
10.64* -- First Amendment to Equipment Lease, dated as of August 14, 1998, by and between North
Country Thermal Line, Inc. and Thermal Line Windows, L.L.P.
10.65* -- Equipment Lease, dated as of January 2, 1996, by and between Alvin W. Leingang and
Thermal Line Windows, L.L.P.
10.66* -- Amendment to Equipment Lease, dated as of January 2, 1997, by and between Alvin W.
Leingang and Thermal Line Windows, L.L.P.
10.67* -- Second Amendment to Equipment Lease, dated as of August 14, 1998, by and between Alvin
W. Leingang and Thermal Line Windows, L.L.P.
10.68* -- Asset Purchase Agreement, dated November 18, 1998, by and between Thermal Line
Windows, L.L.P. and North Country Thermal Line, Inc.
10.69* -- Stock Purchase Agreement, dated January 5, 1999, by and among Charles L. Smith, Robert
L. Cox, Richard Ahrendts and the registrant
10.70* -- Non-Negotiable Promissory Note, dated January 5, 1999, from the registrant to and in
favor of Charles L. Smith
10.71* -- Non-Negotiable Promissory Note, dated January 5, 1999, from the registrant to and in
favor of Robert L. Cox
10.72* -- Stock Purchase Agreement, dated December 22, 1998, by and between Rodney H. Thomas and
the registrant
10.73* -- Furniture and Fixture Lease, dated as of January 1, 1999, by and between Investors
Property Holding I, LLC and Thomas Construction, Inc.
10.74* -- Lease, dated December 30, 1996, by and among Rodney H. Thomas, Dawn S. Thomas and the
registrant
10.75* -- Stock Purchase Agreement, dated March 23, 1999, by and among Joel S. Kron, Jonathan D.
Kron and the registrant
10.76* -- Asset Purchase Agreement, dated March 23, 1999, by and between Thermo-Shield Company,
Inc., Thermo-Shield of America (Wisconsin), Inc. and the registrant
10.77* -- Lease, dated November 3, 1997, by and between JSK Properties, L.L.C. and the registrant
10.78* -- First Amendment to Loan Agreement, dated as of July 30, 1999, by and among Borrowers
and PNC
10.79* -- Second Amendment to Loan Agreement, dated as of October 14, 1999, by and among
Borrowers and PNC
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10.80* -- Third Amendment to Loan Agreement, dated as of November 5, 1999, by and among
Borrowers and PNC
10.81* -- Amendment No. 1 to Securities Purchase Agreement, dated as of November 4, 1999, by and
between the registrant and GE Capital Equity Investments, Inc. ("GE Capital")
10.82* -- License Agreement, dated as of January 2, 1996, by and between Thermal Line Windows,
L.L.P. and Complast, Inc.
10.83* -- Fourth Amendment to Loan Agreement and Amendment to Note and Term Note, dated as of
November 10, 1999, by and among Borrowers and PNC
16.1* -- Letter from Singer, Lewak, Greenbaum & Goldstein, LLP regarding change in independent
accountants
21.1* -- Subsidiaries of the registrant
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Previously filed as an exhibit to ThermoView Industries, Inc.'s
Registration Statement on Form S-1 (No. 333-84571) filed on August 5, 1999,
and incorporated herein by reference.
122
P:\<PAGE>
Exhibit 3.2(b)
CERTIFICATE OF DESIGNATION
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF 12% SERIES D CUMULATIVE
PREFERRED STOCK
OF
THERMOVIEW INDUSTRIES, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Pursuant to Section 141(f) of the General Corporation Law of the State
of Delaware (the "DGCL"), the Board of Directors of ThermoView Industries, Inc.,
a Delaware corporation (the "Company"), hereby unanimously consents to, adopts
and ratifies the following resolution:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Company by the provisions of
Section 4.2 of Article IV of the Restated Certificate of Incorporation
of the Company (the "Restated Certificate of Incorporation"), and
Section 151(g) of the DGCL, such Board of Directors hereby creates,
from the 50,000,000 authorized shares of Preferred Stock, par value
$.001 per share (the "Preferred Stock"), of the Company authorized to
be issued pursuant to the Restated Certificate of Incorporation, a
series of Preferred Stock, and hereby fixes by this certificate of
designation (this "Certificate of Designation") the voting powers,
designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions
thereof, of the shares of such series as follows:
The series of Preferred Stock hereby established shall consist
of 1,500,000 shares designated as "12% Cumulative Series D
Preferred Stock" (hereinafter called the "Series D Preferred
Stock"), which shall have a stated value of $5.00 per share.
The relative rights, preferences and limitations of such
series shall be as follows:
1
<PAGE>
12% CUMULATIVE SERIES D PREFERRED STOCK
(1) Ranking. The Series D Preferred Stock will, with respect to payment
of dividends and amounts upon liquidation, dissolution or winding up, rank (i)
senior to the Common Stock of the Company, $.001 par value (the "Common Stock")
and to shares of all other series of Preferred Stock issued by the Company the
terms of which specifically provide that the capital stock of such series rank
junior to such Series D Preferred Stock with respect to dividend rights or
distributions upon dissolution of the Company ("Junior Stock"); (ii) on a parity
with (a) all shares of the Company's 6.6% Cumulative Convertible Series C
Preferred Stock and (b) the shares of all capital stock issued by the Company
whether or not the dividend rates, dividend payment dates, or redemption or
liquidation prices per share thereof shall be different from those of the Series
D Preferred Stock, if the holders of stock of such class or series shall be
entitled by the terms thereof to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in proportion to their respective dividend rates or liquidation prices, without
preference or priority of one over the other as between the holders of such
stock and the holders of shares of Series D Preferred Stock (collectively (a)
and (b) being "Parity Stock"); and (iii) junior to all capital stock issued by
the Company the terms of which specifically provide that the shares rank senior
to the Series D Preferred Stock with respect to dividends and distributions upon
dissolution of the Company ("Senior Stock").
(2) DIVIDENDS.
(a) Holders of shares of Series D Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company and only with the consent of PNC Bank, N.A. or any successor lender
thereto, out of funds of the Company legally available for payment, subject to
the prior and superior rights of Senior Stock, but pari passu with Parity Stock,
and in preference to Junior Stock, cumulative cash dividends at the rate per
annum of $0.60 per share of Series D Preferred Stock. Dividends on the Series D
Preferred Stock will be payable quarterly in arrears on the last calendar day of
April, July, October and January of each year, commencing July 31, 2000 (and in
the case of any accumulated and unpaid dividends not paid on the corresponding
dividend payment date, at such additional times and for such interim periods, if
any, as determined by the Board of Directors). Each such dividend will be
payable to holders of record as they appear on the stock records of the Company
at the close of business on such record dates, not more than 60 days nor less
than 10 days preceding the payment dates thereof, as shall be fixed by the Board
of Directors of the Company. Dividends will accrue from the date of the original
issuance of the Series D Preferred Stock. Dividends will be cumulative from such
date, whether or not in any dividend period or periods there shall be funds of
the Company legally available for the payment of such dividends. Accumulations
of dividends on shares of Series D Preferred Stock will not bear interest.
Dividends payable on the Series D Preferred Stock for any period greater or less
than a full dividend period will be computed on the basis of actual days.
Dividends payable on the Series D Preferred Stock for each full dividend period
will be computed by dividing the annual dividend rate by four.
(b) Except as provided in the next sentence, no dividend will
be declared or paid on any Parity Stock unless full cumulative dividends have
been declared and paid or are
2
<PAGE>
contemporaneously declared and funds sufficient for payment set aside on the
Series D Preferred Stock for all prior dividend periods. If accrued dividends on
the Series D Preferred Stock for all prior periods have not been paid in full,
then any dividends declared on the Series D Preferred Stock for any dividend
period and on any Parity Stock will be declared ratably in proportion to
accumulated and unpaid dividends on the Series D Preferred Stock and such Parity
Stock.
(c) So long as the shares of the Series D Preferred Stock
shall be outstanding, unless (i) full cumulative dividends shall have been paid
or declared and set apart for payment on all outstanding shares of the Series D
Preferred Stock and any Parity Stock, (ii) sufficient funds have been paid or
set apart for the payment of the dividend for the current dividend period with
respect to the Series D Preferred Stock and any Parity Stock and (iii) the
Company is not in default or in arrears with respect to the mandatory or
optional redemption or mandatory repurchase or other mandatory retirement of, or
with respect to any sinking or other analogous fund for, the Series D Preferred
Stock or any Parity Stock, the Company may not declare any dividends on any
Junior Stock, or make any payment on account of, or set apart money for, the
purchase, redemption or other retirement of, or for a sinking or other analogous
fund for, any shares of Junior Stock or make any distribution in respect
thereof, whether in cash or property or in obligations or stock of the Company,
other than (x) Junior Stock which is neither convertible into, nor exchangeable
or exercisable for, any securities of the Company other than Junior Stock, or
(y) Common Stock acquired in connection with the cashless exercise of options
under employee incentive or benefit plans of the Company or any subsidiary or
any other redemption or purchase or other acquisition of Common Stock made in
the ordinary course of business, which has been approved by the Board of
Directors of the Company, for the purpose of any employee incentive or benefit
plan of the Company. The limitations in this paragraph do not restrict the
Company's ability to take the actions in this paragraph with respect to any
Parity Stock. As used in this subparagraph (c), the term "dividend" with respect
to Junior Stock does not include dividends payable solely in shares of Junior
Stock on Junior Stock, or in options, warrants on rights to holders of Junior
Stock to subscribe for or purchase any Junior Stock.
(3) REDEMPTION.
(a) The shares of Series D Preferred Stock will be redeemable
at the option of the Company in whole or in part, for cash or for such number of
shares of Common Stock as equals the Liquidation Preference (defined hereinafter
in paragraph (4)) of the Series D Preferred Stock to be redeemed (without regard
to accumulated and unpaid dividends) as of the opening of business on the date
set for such redemption. In order to exercise its redemption option, the Company
must notify the holders of record of its Series D Preferred Stock in writing
(the "Conditions Satisfaction Notice") prior to the opening of business on the
second trading day after the conditions in the preceding sentences have, from
time to time, been satisfied.
(b) Notice of redemption (the "Redemption Notice") will be
given by mail to the holders of the Series D Preferred Stock not less than 30
nor more than 60 days prior to the date selected by the Company to redeem the
Series D Preferred Stock. The Redemption Notice shall be deemed to have been
given when deposited in the United States mail, first-class mail, postage
prepaid, whether or not such notice is actually received. The Company's right to
3
<PAGE>
exercise its redemption option will not be affected by changes in the closing
price of the Common Stock following such 30-day period. If fewer than all of the
shares of Series D Preferred Stock are to be redeemed, the shares to be redeemed
shall be selected by lot or pro rata or in some other equitable manner
determined by the Board of Directors of the Company; provided, however, that the
Company shall not be required to effect the redemption in any manner that
results in additional fractional shares being outstanding. If full cumulative
dividends on the outstanding shares of Series D Preferred Stock shall not have
been paid or declared and set apart for payment for all regular dividend payment
dates to and including the last dividend payment date prior to the date fixed
for redemption, the Corporation shall not call for redemption any shares of
Series D Preferred Stock unless all such shares then outstanding are called for
simultaneous redemption.
(c) On the redemption date, the Company must pay, in cash, on
each share of Series D Preferred Stock to be redeemed any accumulated and unpaid
dividends through the redemption date. In the case of a redemption date falling
after a dividend payment record date and prior to the related payment date, the
holders of the Series D Preferred Stock at the close of business on such record
date will be entitled to receive the dividend payable on such shares on the
corresponding dividend payment date, notwithstanding the redemption of such
shares following such dividend payment record date. Except as provided for in
the preceding sentence, no payment or allowance will be made for accumulated and
unpaid dividends on any shares of Series D Preferred Stock called for redemption
or on the shares of Common Stock issuable upon such redemption.
(d) On and after the date fixed for redemption, provided that
the Company has made available at the office of its registrar and transfer agent
a sufficient number of shares of Common Stock and an amount of cash to effect
the redemption, dividends will cease to accrue on the Series D Preferred Stock
called for redemption (except that, in the case of a redemption date after a
dividend payment record date and prior to the related dividend payment date,
holders of Series D Preferred Stock on the dividend payment record date will be
entitled on such dividend payment date to receive the dividend payable on such
shares), such shares shall be cancelled and shall no longer be deemed to be
outstanding and all rights of the holders of such shares of Series D Preferred
Stock shall cease except the right to receive the shares of Common Stock upon
such redemption and any cash payable upon such redemption, without interest from
the date of such redemption. Such cancelled shares shall be restored to the
status of authorized but unissued shares of Preferred Stock, without designation
as to series, and may thereafter be issued but not as shares of Series D
Preferred Stock. At the close of business on the redemption date upon surrender
in accordance with such notice of the certificates representing any such shares
(properly endorsed or assigned for transfer, if the Board of Directors of the
Company shall so require and the notice shall so state), each holder of Series D
Preferred Stock (unless the Company defaults in the delivery of the shares of
Common Stock or cash) will be, without any further action, deemed a holder of
the number of shares of Common Stock for which such Series D Preferred Stock is
redeemable.
(e) Fractional shares of Common Stock are not to be issued
upon redemption of the Series D Preferred Stock, but, in lieu thereof, the
Company will pay a cash adjustment based on the current market price of the
Common Stock on the day prior to the redemption date.
4
<PAGE>
If fewer than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares of Series D
Preferred Stock without cost to the holder thereof.
(f) Any shares or cash set aside by the Company pursuant to
subparagraph (e) and unclaimed at the end of three years from the date fixed for
redemption shall revert to the Company.
(g) Subject to applicable law and the limitation on purchases
when dividends on the Series D Preferred Stock are in arrears, the Company may,
at any time and from time to time, purchase any shares of the Series D Preferred
Stock by tender or by private agreement.
(4) LIQUIDATION PREFERENCE.
(a) The holders of shares of Series D Preferred Stock will be
entitled to receive in the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, $5.00 per share of Series D
Preferred Stock (the "Liquidation Preference"), plus an amount per share of
Series D Preferred Stock equal to all dividends (whether or not earned or
declared) accumulated and unpaid thereon to the date of final distribution to
such holders, and no more. If, upon any liquidation, dissolution or winding up
of the Company, the assets of the Company, or proceeds thereof, distributable
among the holders of the Series D Preferred Stock are insufficient to pay in
full the liquidation preference with respect to the Series D Preferred Stock and
any other Parity Stock, then such assets, or the proceeds thereof, will be
distributed among the holders of Series D Preferred Stock and any such Parity
Stock ratably in accordance with the respective amounts which would be payable
on such Series D Preferred Stock and any such Parity Stock if all amounts
payable thereon were paid in full.
(b) Neither a consolidation or merger of the Company with or
into another corporation, nor a sale, lease or transfer of all or substantially
all of the Company's assets will be considered a liquidation, dissolution or
winding up, voluntary or involuntary, of the Company.
(5) VOTING RIGHTS. Except as may be required by applicable law from
time to time, the holders of shares of Series D Preferred Stock will have no
voting rights.
(6) SINKING FUND. The Series D Preferred Stock shall not be entitled to
any mandatory redemption or prepayment (except on liquidation, dissolution or
winding up of the affairs of the Company) or to the benefit of any sinking fund.
WITNESS THE SIGNATURE of the undersigned who is the Chairman of the
Board and Chief Executive Officer of ThermoView Industries, Inc. as of this
14th day of April, 2000.
/s/ Stephen A. Hoffmann
---------------------------------
Stephen A. Hoffmann
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES ____ AND ____ FOR THE YEAR 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,331,721
<SECURITIES> 0
<RECEIVABLES> 5,338,127
<ALLOWANCES> 276,000
<INVENTORY> 2,300,643
<CURRENT-ASSETS> 13,086,578
<PP&E> 4,848,783
<DEPRECIATION> 1,169,604
<TOTAL-ASSETS> 93,971,184
<CURRENT-LIABILITIES> 9,129,762
<BONDS> 28,484,874
4,648,550
0
<COMMON> 7,390
<OTHER-SE> 51,668,066
<TOTAL-LIABILITY-AND-EQUITY> 93,971,184
<SALES> 0
<TOTAL-REVENUES> 108,198,535
<CGS> 0
<TOTAL-COSTS> 48,727,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,962,260
<INCOME-PRETAX> (1,286,702)
<INCOME-TAX> 370,000
<INCOME-CONTINUING> (1,656,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,656,702)
<EPS-BASIC> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
