<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarter Ended September 30, 1998 Commission File No. 333-64555
---------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
-------------------------
AXIA INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware 13-3205251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West 22nd Street, Suite 134, Lombard, Illinois 60148 (630) 629-3360
--------------------------------------------------------------------------
(Address and telephone number of principal executive offices)
------------------------
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 _______
-------
------------------------
Title of each class of Registered Securities
<PAGE>
PART I
Item 1. Financial Statements
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-------------------
September 30, December 31,
1998 1997
------------------- -------------
ASSETS (Unaudited)
- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,567 $ 1,310
Accounts receivable, net 15,915 12,759
Inventories 10,906 9,155
Prepaid income taxes and other current assets 2,007 436
Deferred income tax benefits 3,001 2,593
-------- -------
Total Current Assets $ 34,396 $26,253
-------- -------
PLANT AND EQUIPMENT, AT COST:
Land $ 508 $ 508
Buildings and improvements 4,792 6,620
Machinery and equipment 15,214 24,741
Equipment leased to others 12,140 7,139
-------- -------
$ 32,654 $39,008
Less: Accumulated depreciation 747 14,938
-------- -------
Net Plant and Equipment $ 31,907 $24,070
-------- -------
OTHER ASSETS:
Goodwill, net $108,939 $33,505
Intangible assets, net 698 703
Deferred charges, net 19,225 12,182
Other assets 29 60
-------- -------
Total Other Assets $128,891 $46,450
-------- -------
TOTAL ASSETS $195,194 $96,773
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,934 $10,925
Accounts payable 5,487 4,021
Accrued liabilities 11,421 7,219
Accrued income taxes 34 264
-------- -------
Total Current Liabilities $ 20,876 $22,429
-------- -------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $132,622 $20,439
Other non-current liabilities 7,954 10,883
Deferred income taxes 6,177 2,955
-------- -------
Total Non-Current Liabilities $146,753 $34,277
-------- -------
Common stock held by ESOP $ 1,500
Less: Note receivable from ESOP (1,432)
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value; 100 shares
authorized, issued and outstanding) $ - $ -
Additional paid-in capital 26,500 16,723
Retained earnings 793 23,818
Accumulated other comprehensive income 204 (474)
-------- -------
Total Stockholder's Equity $ 27,497 $40,067
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $195,194 $96,773
======== =======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these balance sheets.
1
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS OF JULY 23, 1998 TO SEPTEMBER 30, 1998, JULY 1, 1998
TO JULY 22, 1998 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------
July 23, 1998 July 1, 1998 July 1, 1997
to to to
September 30, 1998 July 22, 1998 September 30, 1997
-------------------- -------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales $17,773 $ 4,532 $18,982
Net rentals 5,996 1,835 6,984
------- -------- -------
Net revenues $23,769 $ 6,367 $25,966
Cost of sales 11,750 3,070 12,731
Cost of rentals 2,120 575 2,409
Selling, general and administrative expenses 5,529 2,029 6,140
Transaction expenses (see Note 6) - 11,280 -
------- -------- -------
Income from operations $ 4,370 $(10,587) $ 4,686
Interest expense 2,853 160 884
Interest income (24) (2) (9)
Other expense (income), net - 43 342
------- -------- -------
Income before income taxes and extraordinary item $ 1,541 $(10,788) $ 3,469
Provision for income taxes 748 (4,073) 1,393
------- -------- -------
Income before extraordinary item $ 793 $ (6,715) $ 2,076
Extraordinary item:
Loss on early extinguishment of debt,
net of income taxes of $228,
respectively $ - $ 382 $ -
------- -------- -------
Net income $ 793 $ (7,097) $ 2,076
======= ======== =======
</TABLE>
Supplemental Information
------------------------
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------------
July 23, 1998 July 1, 1998 July 1, 1997
to to to
September 30, 1998 July 22, 1998 September 30, 1997
-------------------- -------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Depreciation and amortization in:
Income from operations $1,276 $288 $1,263
Interest expense 176 13 88
Other expense (income), net 1 - 2
------ ---- ------
Income before income taxes and extraordinary item $1,453 $301 $1,353
====== ==== ======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
2
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS OF JULY 23, 1998 TO SEPTEMBER 30, 1998,
JANUARY 1, 1998 TO JULY 22, 1998 AND THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-------------------------------------
July 23, 1998 January 1, 1998 January 1, 1997
to to to
September 30, 1998 July 22, 1998 September 30, 1997
-------------------- ---------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales $17,773 $46,257 $57,458
Net rentals 5,996 16,310 20,216
------- ------- -------
Net revenues $23,769 $62,567 $77,674
Cost of sales 11,750 29,329 37,416
Cost of rentals 2,120 5,721 7,105
Selling, general and administrative expenses 5,529 15,323 18,983
Transaction expenses (see Note 6) - 11,280 -
------- ------- -------
Income from operations $ 4,370 $ 914 $14,170
Interest expense 2,853 1,553 2,913
Interest income (24) (9) (23)
Other expense (income), net - 214 (53)
------- ------- -------
Income before income taxes and extraordinary item $ 1,541 $ (844) $11,333
Provision for income taxes 748 (119) 4,768
------- ------- -------
Income before extraordinary item $ 793 $ (725) $ 6,565
Extraordinary item:
Loss on early extinguishment of debt,
net of income taxes of $404 and $479,
respectively (see Note 4) - 682 772
------- ------- -------
Net income $ 793 $(1,407) $ 5,793
======= ======= =======
</TABLE>
Supplemental Information
------------------------
<TABLE>
<CAPTION>
Predecessor Company
-------------------------------------
July 23, 1998 January 1, 1998 January 1, 1997
to to to
September 30, 1998 July 22, 1998 September 30, 1997
-------------------- ---------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Depreciation and amortization in:
Income from operations $1,276 $2,659 $3,507
Interest expense 176 164 329
Other expense (income), net 1 1 3
------ ------ ------
Income before extraordinary item $1,453 $2,824 $3,839
====== ====== ======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
3
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE PERIODS ENDED SEPTEMBER 30, 1998, JULY 22, 1998, AND SEPTEMBER 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Other Comprehensive Income
--------------------------------------------------
Common Additional Minimum Cumulative Accumulated Compre-
Stock Paid-in Retained Pension Translation Other Compre- hensive
Par Value Capital Earnings Liability Adjustments hensive Income Income
--------- ---------- -------- --------- ----------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor Company:
BALANCE, DECEMBER 31, 1996 $ - $ 16,723 $ 15,395 $(324) $ 324 $ - $ -
Net income - - 5,793 - - - 5,793
Cumulative translation adjustment - - - - (499) (499) (499)
--------- -------- -------- ----- ----- ----- -------
BALANCE, SEPTEMBER 30, 1997 $ - $ 16,723 $ 21,188 $(324) $(175) $(499) $ 5,294
(unaudited) ========= ======== ======== ===== ===== ===== =======
BALANCE, DECEMBER 31, 1997 $ - $ 16,723 $ 23,818 $(182) $(292) $(474) $ -
Net income - - (1,407) - - - (1,407)
Cumulative translation adjustment - - - - (64) (64) (64)
--------- -------- -------- ----- ----- ----- -------
BALANCE, JULY 22, 1998 $ - $ 16,723 $ 22,411 $(182) $(356) $(538) $(1,471)
(unaudited) ========= ======== ======== ===== ===== ===== =======
AXIA Incorporated:
Acquisition Adjustments:
Eliminate Predecessor $(16,723) $(22,411) $ 182 $ 356 $ 538 $ 1,471
Company Equity
Contribution from Holdings 26,500 - - - - -
Net income - 793 - - - 793
Cumulative translation adjustment - - - 204 204 204
--------- -------- -------- ----- ----- ----- -------
BALANCE SEPTEMBER 30, 1998 $ - 26,500 $ 793 $ - $ 204 $ 204 $ 997
(unaudited) ========= ======== ======== ===== ===== ===== =======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
4
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS OF JULY 23, 1998 TO SEPTEMBER 30, 1998,
JANUARY 1, 1998 TO JULY 22, 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------------
July 23, 1998 January 1, 1998 January 1, 1997
to to to
September 30, 1998 July 22, 1998 September 30, 1997
------------------ --------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 793 $(1,407) $ 5,793
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,453 2,824 3,839
Extraordinary item - writeoff of capitalized financing costs - 843 826
Deferred income tax provision (benefit) (207) (506) 67
Loss (gain) on disposal of fixed assets 2 52 6
Gain on sale of investment - - (559)
Provision for losses on accounts receivable 426 999 1,545
Provision for obsolescence of inventories (10) (80) (79)
Loss (gain) on pension expense - (191) 50
Changes in assets and liabilities:
Accounts receivable (1,823) (2,587) (3,386)
Inventories (262) (1,239) (236)
Accounts payable 96 1,250 731
Accrued liabilities (8,614) 11,199 (1,056)
Other current assets 32 (90) (402)
Income taxes payable 716 (2,458) (10)
Other non-current assets (20) (273) (367)
Other non-current liabilities (20) 226 519
--------- ------- -------
Net Cash Provided by Operating Activities $ (7,438) $ 8,562 $ 7,281
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures $ (749) $(3,468) $(2,837)
Proceeds from sale of fixed assets - 4 8
Proceeds from sale of investment - - 1,459
Acquisition of Predecessor Company (119,315) - -
--------- ------- -------
Net Cash (Used in) Investing Activities $(120,064) $(3,464) $(1,370)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in Revolving Credit Facility $ (2,750) $ - $ -
Payments of other long-term debt (27,890) (3,919) (7,011)
Proceeds from other long-term debt 139,250 - -
Payments of deferred financing costs (7,549) - -
Contribution from parent 26,500 - -
Proceeds from ESOP 68 - -
Other equity transactions (17) (58) (32)
--------- ------- -------
Net Cash Provided by (Used in) Financing Activities $ 127,612 $(3,977) $(7,043)
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ 40 $ (14) $ (36)
--------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ 150 $ 1,107 $(1,168)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,417 1,310 1,716
--------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,567 $ 2,417 $ 548
========= ======= =======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
5
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND PRESENTATION
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition
Co."), a company organized to effect the acquisition (the "Acquisition") of Axia
Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the
"Predecessor Company" prior to the date of the Transaction) to effect the
acquisition for a purchase price of $155,250,000 (including the repayment of
indebtedness), subject to certain post-closing adjustments. Upon completion of
the transaction (the "Transaction"): (i) Holdings and AXIA Incorporated (the
"Company") became direct and indirect subsidiaries of AXIA Group ("Group" the
parent company of Acquisition Co.) and (ii) the Company became the primary
obligor on borrowings made under the bank credit agreement (the "Bank Credit
Agreement") and Senior Subordinated notes issued on the Transaction Date defined
below.
On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of
its common stock ("Common Stock") and contributed the proceeds thereof to
Acquisition Co. (the "Equity Investment"). Finance Co., an indirect subsidiary
of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit
Agreement and received approximately $100,000,000 in gross proceeds from the
sale of subordinated notes. Such funds were used: (i) to effect the Acquisition
pursuant to the Merger Agreement; (ii) to fund the ESOP; (iii) to repay existing
indebtedness of the Company and (iv) to pay fees and expenses in connection with
the transaction.
Pursuant to the Merger Agreement, the purchase price for the Acquisition is
subject to adjustment after the closing of the Acquisition based on changes in
working capital and certain tax liabilities. The Merger Agreement contains
indemnification provisions binding on each of the parties to the Merger
Agreement. Pursuant to such provisions each of the parties has agreed to
indemnify each other for breaches of representations, warranties and covenants.
In addition, the selling stockholders, limited to the amount set forth below,
have agreed to indemnify the Company for certain working capital deficiencies,
increases in tax liabilities, and for certain environmental and litigation
matters. In connection with the indemnity provisions, $15,000,000 of the
purchase price has been placed into an escrow account, including $12,000,000 to
cover specified indemnification claims and $3,000,000 to cover purchase price
adjustments.
Accounting policies used in the preparation of the unaudited interim
consolidated financial statements are consistent with the accounting policies
described in the Notes to the Consolidated Financial Statements for the year
ended December 31, 1997. In the opinion of the management, the interim
financial statements reflect all adjustments consisting only of normal recurring
adjustments (except as discussed in Note 2) which are necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the interim periods presented. The results for such interim periods
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the consolidated financial state
ments for the year ended December 31, 1997 and the accompanying notes thereto in
the Company's Registration Statement on Form S-4 under the Securities Act of
1933.
NOTE 2 MERGER AND REFINANCING EFFECTS
Goodwill of the Predecessor Company as of December 31, 1997, primarily
represents the excess purchase price paid over the fair value of the net assets
acquired when a group of investors, including management, purchased the
Predecessor Company in 1994.
Goodwill of the surviving company as of September 30, 1998, represents the
excess purchase price paid over the estimated fair value of the net assets
acquired, excluding Predecessor Company goodwill in the July 22, 1998 merger.
The merger was accounted for as a purchase and resulting goodwill of
$109,448,000 was recorded on the Transaction Date. Although management has used
its best judgment in preliminarily estimating the fair value of those net
assets, various pending studies, analyses and operational decisions may result
in significant changes in the current estimates
6
<PAGE>
and corresponding changes of the goodwill balance within the twelve-month period
commencing on the Transaction Date. Goodwill is stated net of amortization and
is being amortized on a straight-line basis over forty years.
Certain assets and liabilities were revalued upon the July 22, 1998
acquisition to reflect their then-current estimated fair values. The following
table summarizes those revaluations including the goodwill recorded in the
merger (in thousands) subject to changes described in the preceding paragraph:
<TABLE>
<CAPTION>
July 22, 1998
--------------
<S> <C>
Total current assets $ 31,355
Net property plant and equipment 31,892
Total other assets 129,583
Total current liabilities (18,392)
Long-term debt, less current maturities (133,698)
Other non-current liabilities (14,240)
---------
Net assets (liabilities) $ 26,500
=========
</TABLE>
Financing costs paid or accrued by the Company and associated with the debt
issued in the refinancing totaled $7,549,000 and are included above in other
assets. Such costs were deferred and will be amortized over the term of the
issued debt.
The following table illustrates the unaudited pro forma results of
operations of the Company for the three and nine month periods ended September
30, 1998 and September 30, 1997 as if the merger and refinancing occurred on
January 1, 1997 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
September 30, 1998 September 30, 1997
Pro Forma Pro Forma
------------------ ------------------
<S> <C> <C>
Net revenues $30,136 $25,966
Income from operations 4,953 4,232
Income before income taxes 1,377 446
Net income 512 61
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
September 30, 1998 September 30, 1997
Pro Forma Pro Forma
------------------ ------------------
<S> <C> <C>
Net revenues $86,336 $77,674
Income from operations 15,511 12,718
Income before income taxes 4,654 2,066
Net income 2,063 408
</TABLE>
The preceding pro forma balances include the effect of an increase in
goodwill amortization, adjustments to depreciation expense, an increase in
interest expense as a result of the new debt structure, a reduction in the
annual management fee, the addition of an ESOP plan, the elimination of
transaction expenses and debt extinguishment costs, a restructuring of
management, and the income tax effect of these adjustments.
7
<PAGE>
NOTE 3 INVENTORIES
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market. The cost elements included in inventories are material, labor and
factory overhead.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 4,994 $4,146
Work in process 1,098 1,058
Finished goods 4,814 3,951
------- ------
Total inventories $10,906 $9,155
======= ======
</TABLE>
NOTE 4 LONG-TERM DEBT
Long-term debt, inclusive of capital lease obligations which are not
material, consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
10.75% Senior Subordinated Notes $100,000 $ -
11.00% Senior Subordinated Notes - 9,749
Term Loan 35,000 15,732
ESOP Term Loan 1,406 -
Revolving Credit Facility - 4,500
Other 150 1,383
-------- --------
Total Debt $136,556 $ 31,364
Less Current Maturities (3,934) (10,925)
-------- --------
Total Long-Term Debt $132,622 $ 20,439
======== ========
</TABLE>
Current maturities of long-term debt as of September 30, 1998 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Scheduled Payment
Date Amount
----------------- ------
<S> <C> <C>
Term Loan and ESOP Loan December 31, 1998 $ 927
Term Loan and ESOP Loan March 31, 1999 927
Term Loan and ESOP Loan June 30, 1999 927
Term Loan and ESOP Loan September 30, 1999 1,094
Other Various 59
------
Total Current Maturities $3,934
======
</TABLE>
The Company recorded an extraordinary charge for the extinguishment of debt
of $682,000 net of income taxes in 1998 due to the repurchase and extinguishment
of its 11.00% Senior Subordinated Notes ("2001 Notes") and the termination of
its then existing bank credit agreement at the Transaction Date, and $772,000
net of income taxes in 1997 due to the repurchase and extinguishment of a
portion of its 2001 Notes as shown in the accompanying Consolidated Statement of
Income.
Bank Credit Agreement
On the Transaction Date, the Company and its domestic subsidiaries entered
into a credit agreement (the "Bank Credit Agreement") which included a term loan
("Term Loan") with an original principal amount of $35,000,000, a $1,500,000
term loan for an ESOP (the "ESOP Loan"), an aggregate $25,000,000 in principal
amount available for acquisitions (the "Acquisition Facility"), and a non-
amortizing revolving credit loan ("Revolving Credit Facility") of up to
$15,000,000, including up to $2,000,000 of letters of credit. The Company, at
closing, borrowed $35,000,000 on the Term Loan, $1,500,000 of the ESOP Loan and
$2,750,000 against the Revolving Credit Facility. Borrowings
8
<PAGE>
under the Revolving Credit Facility are subject to a borrowing base as
determined per the agreement and the satisfaction of certain conditions.
The Revolving Credit Facility, Acquisition Facility, Term Loan and ESOP
Term Loan (collectively, the "Loans") bear interest at an alternate base rate,
as defined in the agreement, based in part on a prime rate, or at a LIBOR rate,
in each case plus an applicable margin, which is initially 2.25% for LIBOR rate
advances and 1.00% for alternate base rate advances. The applicable margin may
be adjusted based on the ratio of total debt to EBITDA, as defined, and will
range from 0% to 1.00% for alternate base rate advances and 1.00% to 2.25% for
LIBOR rate advances. The weighted average interest rate at September 30, 1998
was 7.57%.
All principal and interest on the Loans are due in 2004, except the ESOP
Term Loan, which is due in 2002, and are subject to certain mandatory
prepayments and scheduled payments. Accrued interest under the Loans is due
quarterly and/or at the end of the relevant interest period in the case of LIBOR
Rate Advances. The Term Loan matures June 30, 2004 with quarterly amortization
payments commencing December 31, 1998. Amounts borrowed under the Acquisition
Facility are due on the last day of each September, December, March and June,
from September 2001 to June 2004. The Bank Credit Agreement permits prepayments
with notice, provides for reimbursement for certain costs, and requires
prepayments from a portion of excess cash flow (as defined) as well as to the
extent cash proceeds from certain events exceed amounts determined by certain
formulas.
Borrowings under the Acquisition Facility (which are available until
September 2001)are subject to certain conditions precedent, including delivering
certain information to the Lenders about the proposed acquisition, the delivery
of guarantees and security documents as to the proposed acquisition and the
conformance of the acquisition to certain criteria. The Company had no
borrowings outstanding under the Acquisition Facility at September 30, 1998.
10.75% Senior Subordinated Notes
The 10.75% Senior Subordinated Notes (the "Notes") were issued pursuant to
the Transaction and mature on July 15, 2008. Interest is payable January 15 and
July 15 of each year, commencing January 15, 1999. The Notes are unsecured
Senior Subordinated obligations of the Company and, as such, are subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The Notes may be redeemed at the option of the Company, in whole or in
part, at any time on or after July 15, 2003 at the redemption prices set forth
in the indenture plus accrued interest on the date of redemption. Up to an
aggregate of 35% of the principal amount of the Notes may be redeemed from time
to time prior to July 15, 2001 at the option of the Company at the redemption
price set forth in the indenture plus accrued interest to the date of
redemption, with the net proceeds received from one or more public equity
offerings.
Upon a change of control, the Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued interest to the date of repurchase.
The Notes are guaranteed, jointly and severally on a Senior Subordinated
basis, by each of the Company's existing and future direct and indirect
subsidiaries, excluding unrestricted subsidiaries, as defined, and foreign
subsidiaries. The guarantees are general unsecured obligations of the
Guarantors hereinafter referred to. The Guarantors also guarantee all
obligations of the Company under the Bank Credit Agreement. The obligations of
each Guarantor under its Guaranty is subordinated in right of payment to the
prior payment in full of all Guarantor senior indebtedness (as defined),
including such subsidiary's guarantee of indebtedness under the Bank Credit
Agreement, of such Guarantor to substantially the same extent as the Notes are
subordinated to all existing and future senior indebtedness of the Company.
9
<PAGE>
Restrictive Loan Covenants
The Bank Credit Agreement contains restrictive covenants limiting the
ability (subject to certain exceptions) of the Company and its subsidiaries to,
among other things: (i) incur debt or contractual contingent obligations; (ii)
pay certain subordinated debt or amend subordinated debt documents without the
prior consent of the Lenders; (iii) create or allow to exist liens or other
encumbrances; (iv) transfer assets outside the Company except for sales and
other transfers of inventory or surplus, immaterial or obsolete assets in the
ordinary course of business of the Company; (v) enter into mergers,
consolidations and asset dispositions of all or substantially all of its
properties; (vi) make investments; (vii) sell, transfer or otherwise dispose of
any class of stock or the voting rights of any subsidiary of the Company; (viii)
enter into transactions with related parties other than in the ordinary course
of business on an arm's-length basis on terms no less favorable to the Company
than those available from third parties; (ix) amend certain agreements, unless
such amendment is not expected to have a material adverse effect; (x) make any
material change in the general nature of the business conducted by the Company;
(xi) pay cash dividends or redeem shares of capital stock; (xii) make capital
expenditures and (xiii) pay dividends or repurchase stock.
Under the Bank Credit Agreement, the Company is required to satisfy certain
financial covenants, including (i) a fixed charge coverage ratio; (ii) a minimum
net worth test; (iii) a ratio of total debt to EBITDA and (iv) a minimum
interest coverage ratio, all as defined in the agreement. The Company was in
compliance with its loan covenants at September 30, 1998.
The indenture under which the Notes were issued contains certain covenants
that, among other things, limit the ability of the Company and/or its Restricted
Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay
dividends or make certain other restricted payments, (iii) make investments,
(iv) enter into transactions with affiliates, (v) make certain asset
dispositions, and (vi) merge or consolidate with, or transfer substantially all
of its assets to, another person. The indenture also limits the ability of the
Company's Restricted Subsidiaries to issue Capital Stock (as defined) and to
create restrictions on the ability of such Restricted Subsidiaries to pay
dividends or make any other distributions. In addition, the Company is
obligated, under certain circumstances, to offer to repurchase Notes at a
purchase price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase, with the net cash proceeds
of certain sales or other dispositions of assets. However, all of these
limitations and prohibitions are subject to a number of important
qualifications.
NOTE 5 STOCKHOLDER'S EQUITY
The Company has 100 shares of common stock, par value $.01 per share,
authorized, issued and outstanding, all of which are owned by the parent
company.
NOTE 6 TRANSACTION EXPENSES
The Predecessor Company recorded expenses related to the transaction
including compensation and payroll taxes payable on the transaction date from
bonus payments and the exercising of stock options and professional service fees
as a result of the transaction. This amount is identified as transaction expense
in the accompanying Consolidated Statements of Income. The items included in
this amount for the period ended July 22, 1998 are detailed below:
<TABLE>
<CAPTION>
Thousand $
----------
<S> <C>
Compensation and payroll taxes $10,773
Professional service fees 507
-------
Total transaction expenses $11,280
=======
</TABLE>
10
<PAGE>
NOTE 7 SUBSIDIARY GUARANTEES
The Company's payment obligations under the Subordinated Notes are fully
and unconditionally guaranteed on a joint and several basis (collectively, the
"Subsidiary Guarantees") by Ames Taping Tool Systems, Inc., and TapeTech Tool
Co., Inc., each a wholly-owned subsidiary of the Company and each a "Guarantor."
These subsidiaries, together with the operating divisions of the Company,
represent all of the operations of the Company conducted in the United States.
The remaining subsidiaries of the Company are foreign subsidiaries.
The Company's payment obligations under the Bank Credit Agreement are fully
and unconditionally guaranteed on a joint and several basis by each Guarantor.
The obligations of each Guarantor under its Subsidiary Guarantee are
subordinated to all senior indebtedness of such Guarantor, including the
guarantee by such Guarantor of the Company's borrowings under the Bank Credit
Agreement.
The following consolidating condensed financial data illustrates the
condition of the combined Guarantors. Management believes separate complete
financial statements of the respective Guarantors would not provide additional
material information which would be useful in assessing the financial
composition of the Guarantors. No single Guarantor has any significant legal
restrictions on the ability of investors or creditors to obtain access to its
assets in event of default on the Subsidiary Guarantee other than its
subordination to senior indebtedness described above.
Investments in subsidiaries are accounted for by the parent on the equity
method for purposes of the supplemental consolidating presentation. Earnings of
subsidiaries are therefore reflected in the parent's investment accounts and
earnings. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
11
<PAGE>
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,445 $ 670 $ 452 $ - $ 2,567
Accounts receivable, net 8,092 5,809 2,979 (965) 15,915
Inventories, net 6,665 2,358 2,477 (594) 10,906
Prepaid income taxes and other current assets 1,799 138 70 - 2,007
Deferred income tax benefits 3,001 - - - 3,001
-------- ------- ------ -------- --------
Total Current Assets $ 21,002 $ 8,975 $5,978 $ (1,559) $ 34,396
PLANT AND EQUIPMENT, AT COST:
Land $ 508 $ - $ - $ - $ 508
Buildings and improvements 4,593 36 163 - 4,792
Machinery and equipment 14,817 292 105 - 15,214
Equipment leased to others 12,128 - 12 - 12,140
-------- ------- ------ -------- --------
$ 32,046 $ 328 $ 280 $ - $ 32,654
Less: Accumulated depreciation 682 20 45 - 747
-------- ------- ------ -------- --------
Net Plant and Equipment $ 31,364 $ 308 $ 235 $ - $ 31,907
-------- ------- ------ -------- --------
OTHER ASSETS:
Goodwill, net $106,410 $ 2,517 $ 12 $ - $108,939
Intangible assets, net 690 8 - - 698
Deferred charges, net 18,203 1,021 1 - 19,225
Investment in wholly-owned subsidiaries 17,126 - - (17,126) -
Other assets 29 - - - 29
-------- ------- ------ -------- --------
Total Other Assets $142,458 $ 3,546 $ 13 $(17,126) $128,891
-------- ------- ------ -------- --------
TOTAL ASSETS $194,824 $12,829 $6,226 $(18,685) $195,194
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,901 $ 33 $ - $ - $ 3,934
Accounts payable 4,136 768 1,471 (888) 5,487
Accrued liabilities 9,794 759 945 (77) 11,421
Accrued income taxes - - 34 - 34
Advance account 2,331 (1,534) (797) - -
-------- ------- ------ -------- --------
Total Current Liabilities $ 20,162 $ 26 $1,653 $ (965) $ 20,876
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $132,576 $ 46 $ - $ - $132,622
Other non-current liabilities 7,954 - - - 7,954
Deferred income taxes 6,177 - - - 6,177
-------- ------- ------ -------- --------
Total Non-Current Liabilities $146,707 $ 46 $ - $ - $146,753
-------- ------- ------ -------- --------
Common stock held by ESOP $ 1,500 - - - $ 1,500
Less: Note receivable from ESOP (1,432) - - - (1,432)
STOCKHOLDER'S EQUITY:
Common stock and
additional paid-in capital $ 26,500 $ 5,098 $1,176 $ (6,274) $ 26,500
Retained earnings 1,387 7,659 3,193 (11,446) 793
Accumulated other comprehensive income - - 204 - 204
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 27,887 $12,757 $4,573 $(17,720) $ 27,497
-------- ------- ------ -------- --------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $194,824 $12,829 $6,226 $(18,685) $195,194
======== ======= ====== ======== ========
</TABLE>
12
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $34,554 $ 9,595 $6,445 $ (4,337) $46,257
Net rentals 8,973 15,792 512 (8,967) 16,310
------- ------- ------ -------- -------
Net revenues $43,527 $25,387 $6,957 $(13,304) $62,567
Cost of sales $23,439 $ 5,747 $4,341 $ (4,198) $29,329
Cost of rentals 1,817 12,557 314 (8,967) 5,721
Selling, general and administrative expenses 8,778 4,890 1,655 - 15,323
Transaction expenses (see Note 6) 11,280 - - - 11,280
------- ------- ------ -------- -------
Income (loss) from operations $(1,787) $ 2,193 $ 647 $ (139) $ 914
Interest expense $ 1,549 4 $ - $ - $ 1,553
Intercompany interest expense (income) 58 (58) - - -
Other expense (income), net (1,635) 28 225 1,587 205
------- ------- ------ -------- -------
Income (loss) before income taxes
and extraordinary item $(1,759) $ 2,219 $ 422 $ (1,726) $ (844)
Provision for income taxes (1,173) 854 200 - (119)
------- ------- ------ -------- -------
Income (loss) before extraordinary item $ (586) $ 1,365 $ 222 $ (1,726) $ (725)
======= ======= ====== ======== =======
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 7,473 $ (7) $ 1,096 $ - $ 8,562
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,389) (49) (30) - (3,468)
Proceeds from sale of fixed assets 4 - - - 4
------- ------ ------- ----- -------
Net Cash (Used In) Investing Activities $(3,385) $ (49) $ (30) $ - $(3,464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ 4,400 $ - $ - $ - $ 4,400
Payments of other long-term debt (7,987) (8) (324) - (8,319)
Net increase (decrease) in advance account (271) 288 (17) - -
Intercompany dividends 669 - (669) - -
Other equity transactions (6) - (52) - (58)
------- ------ ------- ----- -------
Net Cash (Used In) Financing Activities $(3,195) $ 280 $(1,062) $ - $(3,977)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH $ - $ - $ (14) $ - $ (14)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 893 224 (10) - 1,107
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD (35) 925 420 - 1,310
------- ------ ------- ----- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 858 $1,149 $ 410 $ - $ 2,417
======= ====== ======= ===== =======
</TABLE>
13
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD FROM JULY 23, 1998 TO SEPTEMBER 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $13,985 $3,319 $2,039 $(1,570) $17,773
Net rentals 3,299 5,824 170 (3,297) 5,996
------- ------ ------ ------- -------
Net revenues $17,284 $9,143 $2,209 $(4,867) $23,769
Cost of sales $10,057 $1,970 $1,287 $(1,564) $11,750
Cost of rentals 642 4,671 104 (3,297) 2,120
Selling, general and administrative expenses 3,187 1,836 506 - 5,529
------- ------ ------ ------- -------
Income (loss) from operations $ 3,398 $ 666 $ 312 $ (6) $ 4,370
Interest expense $ 2,852 1 $ - $ - $ 2,853
Intercompany interest expense (income) (26) 26 - - -
Other expense (income), net (588) 16 25 523 (24)
------- ------ ------ ------- -------
Income (loss) before income taxes $ 1,160 $ 623 $ 287 $ (529) $ 1,541
and extraordinary item
Provision for income taxes 361 257 130 - 748
------- ------ ------ ------- -------
Income (loss) before extraordinary item $ 799 $ 366 $ 157 $ (529) $ 793
======= ====== ====== ======= =======
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 23, 1998 TO SEPTEMBER 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (7,834) $ 380 $ 16 $ - $ (7,438)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (749) - - - (749)
Proceeds from sale of fixed assets - - - - -
Acquisition of predecessor company (119,315) - - - (119,315)
--------- ------ ---- ---- ---------
Net Cash (Used In) Investing Activities $(120,064) $ - $ - $ - $(120,064)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ (2,750) $ - $ - $ - $ (2,750)
Payments of other long-term debt (27,916) 26 - - (27,890)
Proceeds from other long-term debt 139,250 - - - 139,250
Net increase (decrease) in advance account 876 (885) 9 - -
Payments of deferred financing costs (7,549) - - - (7,549)
Contribution from parent 26,500 - - - 26,500
Proceeds from ESOP 68 - - - 68
Other equity transactions 6 - (23) - (17)
--------- ------ ---- ---- ---------
Net Cash Provided by (Used In)
Financing Activities $ 128,485 $ (859) $(14) $ - $ 127,612
EFFECT OF EXCHANGE RATE
CHANGES ON CASH $ - $ - $ 40 $ - $ 40
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 587 (479) 42 - 150
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 858 1,149 410 - 2,417
--------- ------ ---- ---- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,445 $ 670 $452 $ - $ 2,567
========= ====== ==== ==== =========
</TABLE>
14
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD FROM JULY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,978 $1,162 $884 $ (492) $ 4,532
Net rentals 1,010 1,779 54 (1,008) 1,835
-------- ------ ---- ------- --------
Net revenues $ 3,988 $2,941 $938 $(1,500) $ 6,367
Cost of sales $ 2,091 $ 748 $594 $ (363) $ 3,070
Cost of rentals 181 1,369 33 (1,008) 575
Selling, general and administrative expenses 1,275 563 191 - 2,029
Transaction expenses (see Note 6) 11,280 - - - 11,280
-------- ------ ---- ------- --------
Income (loss) from operations $(10,839) $ 261 $120 $ (129) $(10,587)
Interest expense $ 163 $ - $ (3) $ - $ 160
Intercompany interest expense (income) 10 (10) - - -
Other expense (income), net (214) 2 53 200 41
-------- ------ ---- ------- --------
Income (loss) before income taxes
and extraordinary item $(10,798) $ 269 $ 70 $ (329) $(10,788)
Provision for income taxes (4,212) 102 37 - (4,073)
-------- ------ ---- ------- --------
Income (loss) before extraordinary item $ (6,586) $ 167 $ 33 $ (329) $ (6,715)
======== ====== ==== ======= ========
</TABLE>
15
<PAGE>
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ (88) $ 925 $ 420 $ 53 $ 1,310
Accounts receivable, net 5,121 5,018 3,110 (490) 12,759
Inventories 6,175 1,641 1,789 (450) 9,155
Prepaid income taxes and other current assets 208 144 84 - 436
Deferred income tax assets 2,593 - - - 2,593
------- ------- ------ -------- -------
Total Current Assets $14,009 $ 7,728 $5,403 $ (887) $26,253
------- ------- ------ -------- -------
PLANT AND EQUIPMENT, AT COST:
Land $ 508 $ - $ - $ - $ 508
Buildings and improvements 6,293 18 309 - 6,620
Machinery and equipment 23,703 571 467 - 24,741
Equipment leased to others 7,128 - 11 - 7,139
------- ------- ------ -------- -------
$37,632 $ 589 $ 787 $ - $39,008
Less: Accumulated depreciation 13,994 395 549 - 14,938
------- ------- ------ -------- -------
Net Plant and Equipment $23,638 $ 194 $ 238 $ - $24,070
------- ------- ------ -------- -------
OTHER ASSETS:
Goodwill, net $30,922 $ 2,571 $ 12 $ - $33,505
Intangible assets, net 678 25 - - 703
Deferred charges, net 11,187 992 3 - 12,182
Investment in wholly-owned subsidiaries 16,038 - - (16,038) -
Investment in affiliates - - - - -
Other assets 60 - - - 60
------- ------- ------ -------- -------
Total Other Assets $58,885 $ 3,588 $ 15 $(16,038) $46,450
------- ------- ------ -------- -------
TOTAL ASSETS $96,532 $11,510 $5,656 $(16,925) $96,773
======= ======= ====== ======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $10,565 $ 36 $ 324 $ - $10,925
Accounts payable 3,124 410 924 (437) 4,021
Accrued liabilities 5,920 950 349 - 7,219
Accrued income taxes 138 - 126 - 264
Advance account 1,726 (937) (789) - -
------- ------- ------ -------- -------
Total Current Liabilities $21,473 $ 459 $ 934 $ (437) $22,429
------- ------- ------ -------- -------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $20,414 $ 25 $ - $ - $20,439
Other non-current liabilities 10,883 - - - 10,883
Deferred income taxes 2,955 - - - 2,955
------- ------- ------ -------- -------
Total Non-Current Liabilities $34,252 $ 25 $ - $ - $34,277
------- ------- ------ -------- -------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock and
additional paid-in capital $16,723 $ 5,098 $1,770 $ (6,868) $16,723
Retained earnings 24,266 5,928 3,244 (9,620) 23,818
Additional minimum pension liability (182) - - - (182)
Cumulative translation adjustment - - (292) - (292)
------- ------- ------ -------- -------
Total Stockholder's Equity (Deficit) $40,807 $11,026 $4,722 $(16,488) $40,067
------- ------- ------ -------- -------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY (DEFICIT) $96,532 $11,510 $5,656 $(16,925) $96,773
======= ======= ====== ======== =======
</TABLE>
16
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $42,929 $11,203 $8,079 $ (4,753) $57,458
Net rentals 11,127 19,472 726 (11,109) 20,216
------- ------- ------ -------- -------
Net revenues $54,056 $30,675 $8,805 $(15,862) $77,674
Cost of sales $30,474 $ 6,713 $5,063 $ (4,834) $37,416
Cost of rentals 2,185 15,568 461 (11,109) 7,105
Selling, general and administrative expenses 10,887 5,964 2,132 - 18,983
------- ------- ------ -------- -------
Income (loss) from operations $10,510 $ 2,430 $1,149 $ 81 $14,170
Interest expense $ 2,899 $ 7 $ 7 $ - $ 2,913
Intercompany interest expense (income) (17) 17 - - -
Other expense (income), net (2,280) 39 209 1,956 (76)
------- ------- ------ -------- -------
Income (loss) before income taxes
and extraordinary item $ 9,908 $ 2,367 $ 933 $ (1,875) $11,333
Provision for income taxes 3,423 958 387 - 4,768
------- ------- ------ -------- -------
Income (loss) before extraordinary item $ 6,485 $ 1,409 $ 546 $ (1,875) $ 6,565
======= ======= ====== ======== =======
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 6,005 $ 1,425 $(149) $ - $ 7,281
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (2,714) (59) (64) - (2,837)
Proceeds from sale of fixed assets 8 - - - 8
Proceeds from sale of investment 1,459 - - - 1,459
-------- ------- ----- ------ --------
Net Cash Used In Investing Activities $ (1,247) $ (59) $ (64) $ - $ (1,370)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit Loan $ 7,500 $ - $ - $ - $ 7,500
Payments of other long-term debt (14,497) (14) - - (14,511)
Net increase (decrease) in advance account 1,103 (1,037) (66) - -
Intercompany dividends 488 - (488) - -
Other equity transactions - - (32) - (32)
-------- ------- ----- ------ --------
Net Cash Provided by (Used In)
Financing Activities $ (5,406) $(1,051) $(586) $ - $ (7,043)
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ - $ - $ (36) $ - $ (36)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (648) $ 315 $(835) $ - $ (1,168)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 407 $ 507 $ 802 $ - $ 1,716
-------- ------- ----- ------ --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ (241) $ 822 $ (33) - $ 548
======== ======= ===== ====== ========
</TABLE>
17
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $14,395 $ 3,750 $2,508 $(1,671) $18,982
Net rentals 3,844 6,725 254 (3,839) 6,984
------- ------- ------ ------- -------
Net revenues $18,239 $10,475 $2,762 $(5,510) $25,966
Cost of sales $10,531 $ 2,238 $1,642 $(1,680) $12,731
Cost of rentals 707 5,381 160 (3,839) 2,409
Selling, general and administrative expenses 3,514 1,943 683 - 6,140
------- ------- ------ ------- -------
Income (loss) from operations $ 3,487 $ 913 $ 277 $ 9 $ 4,686
Interest expense 881 2 1 - 884
Intercompany interest expense (income) 9 (9) - - -
Other expense (income), net (532) 15 107 743 333
------- ------- ------ ------- -------
Income (loss) before income taxes and
extraordinary item $ 3,129 $ 905 $ 169 $ (734) $ 3,469
Provision for income taxes 1,061 307 25 - 1,393
------- ------- ------ ------- -------
Income (loss) before extraordinary item $ 2,068 $ 598 $ 144 $ (734) $ 2,076
======= ======= ====== ======= =======
</TABLE>
18
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a leading designer, manufacturer, marketer and distributor
of a diverse range of products in several niche markets including productivity
enhancing construction tools, formed wire products, industrial bag closing
equipment and flexible conveyors. The Company operates through three business
units: Ames, Nestaway and Fischbein. Ames is the leading designer, manufacturer,
marketer and distributor of automatic taping and finishing tools ("ATF tools"),
which are rented or sold to interior finishing contractors to finish drywall
joints prior to painting, wallpapering or other forms of final treatment.
Nestaway is a leading manufacturer of formed wire products which are used for a
variety of commercial and consumer product applications. Fischbein is a leading
worldwide manufacturer and marketer of industrial bag closing and handling
equipment and systems and a leading manufacturer of flexible conveyors and
storage racks.
The Company distributes certain of its products through subsidiaries
located in Belgium, France, the United Kingdom, Singapore and Canada. The
Company accounts for gains and losses resulting from foreign currency
transactions in its consolidated statement of income. Income and expense items
are translated at the average exchange rate for the period. The assets and
liabilities of foreign subsidiaries are translated at the current rate of
exchange at the balance sheet date. Balance sheet translation adjustments have
been excluded from the results of operations and are reported as a separate
component of stockholder's equity. As the Company's foreign revenues accounted
for approximately 13% of the Company's year to date net revenues for the nine
month period ended September 30, 1998, the results of the Company may be
favorably or unfavorably affected to the extent the U.S. dollar weakens or
strengthens versus the applicable corresponding foreign currency. The Company
currently does not enter into hedging programs in an attempt to mitigate the
fluctuations against the U.S. dollar.
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition
Co."), a company organized to effect the acquisition (the "Acquisition") of Axia
Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the
"Predecessor Company" prior to the date of the Transaction) to effect the
acquisition for a purchase price of $155,250,000 (including the repayment of
indebtedness), subject to certain post-closing adjustments. Upon completion of
the transaction (the "Transaction"): (i) Holdings and AXIA Incorporated (the
"Company") became direct and indirect subsidiaries of AXIA Group ("Group" the
parent company of Acquisition Co.) and (ii) the Company became the primary
obligor on borrowings made under the bank credit agreement (the "Bank Credit
Agreement") and Senior Subordinated notes issued on the Transaction Date defined
below.
On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of
its common stock ("Common Stock") and contributed the proceeds thereof to
Acquisition Co. (the "Equity Investment"). Finance Co., an indirect subsidiary
of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit
Agreement and received approximately $100,000,000 in gross proceeds from the
sale of subordinated notes. Such funds were used: (i) to effect the Acquisition
pursuant to the Merger Agreement; (ii) to fund the ESOP; (iii) to repay existing
indebtedness of the Company and (iv) to pay fees and expenses in connection with
the transaction.
As a result of the Transaction, the Company will incur significantly higher
interest costs and goodwill amortization than in historical periods included
herein. Accordingly, supplemental information has been provided in Table 1.
During the periods discussed below, except as may be noted, inflation and
changing prices have not had, and are not expected to have, a material impact on
the Company's net revenues or its income from operations.
The amounts for the three and nine month periods ended September 30, 1998
include the applicable results of the Predecessor Company. The amounts for the
three and nine month periods ended September 30, 1997 are the results of the
Predecessor Company.
19
<PAGE>
Operating results in the tables below and management's discussion do not
include the impact of transaction expenses recorded by the Predecessor Company
for the period ended July 22, 1998, or extraordinary items related to the early
extinguishment of debt.
The following Table 1 summarizes the Company's Consolidated Statements of
Income, excluding extraordinary items related to the early extinguishment of
debt as discussed in Note 4 and transaction expenses discussed in Note 6 in the
accompanying financial statements, for the three and nine month periods ended
September 30, 1998 and September 30, 1997 (in thousands):
Table 1
<TABLE>
<CAPTION>
Summary of Income Statement
--------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenues
Ames $12,337 $10,872 $35,291 $31,578
Nestaway 10,448 8,513 30,510 26,471
Fischbein 7,351 6,581 20,535 19,625
------- ------- ------- -------
Consolidated net revenues $30,136 $25,966 $86,336 $77,674
Cost of revenues 17,515 15,140 48,920 44,521
Gross profit $12,621 $10,826 $37,416 $33,153
Selling, general and administrative
expenses 7,558 6,140 20,852 18,983
------- ------- ------- -------
Income from operations $ 5,063 $ 4,686 $16,564 $14,170
Interest expense 3,013 884 4,406 2,913
Other expense (income), net 17 333 181 (76)
------- ------- ------- -------
Income before income taxes and
extraordinary item $ 2,033 $ 3,469 $11,977 $11,333
Provision for income taxes 990 1,393 4,944 4,768
------- ------- ------- -------
Income before extraordinary item $ 1,043 $ 2,076 $ 7,033 $ 6,565
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Supplemental Information
--------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Depreciation and amortization
included in:
Income from operations $ 1,564 $ 1,263 $ 3,935 $ 3,507
Interest expense 189 88 340 329
Other expense (income), net 1 2 2 3
------- ------- ------- -------
Income before income taxes and
extraordinary item $ 1,754 $ 1,353 $ 4,277 $ 3,839
======= ======= ======= =======
</TABLE>
20
<PAGE>
The following Table 2 presents, for the periods indicated, certain items in
the Company's Consolidated Statements of Income, excluding extraordinary charges
for the early extinguishment of debt and transaction expenses, as a percentage
of total net revenues for the three and nine month periods ended September 30,
1998 and September 30, 1997:
Table 2
<TABLE>
<CAPTION>
Percentage of Total Net Revenues
---------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept 30, 1998 Sept 30, 1997 Sept 30, 1998 Sept 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Revenues...................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 58.1 58.3 56.7 57.3
Gross Profit...................... 41.9% 41.7% 43.3% 42.7%
Selling, general and
administrative expenses.......... 25.1 23.6 24.2 24.4
Operating income.................. 16.8% 18.1% 19.1% 18.3%
Interest expense.................. 10.0 3.4 5.1 3.8
Other expense (income), net....... .1 1.3 .2 (.1)
Provision for income taxes........ 3.2 5.4 5.7 6.1
----- ----- ----- -----
Income before extraordinary item.. 3.5% 8.0% 8.1% 8.5%
</TABLE>
<TABLE>
<CAPTION>
Supplemental Information
------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating income without
depreciation and amortization 22.0% 22.9% 23.7% 22.8%
</TABLE>
Results of Operations - Year-to-Date September 30, 1998
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
Net Revenues. Net revenues for the nine month period ended September 30,
1998 increased 11.2% to $86,336,000 from $77,674,000 in the comparable period in
1997. The increase in net revenues was primarily a result of increased rentals
and sales of ATF tools and increased sales of drywall related merchandise,
dishwasher racks and other formed wire products, and bag closing equipment and
flexible material handling products.
Benefitting from the continued strength of the housing market, Ames' net
revenues increased 11.8% to $35,291,000 in the nine month period ended September
30, 1998 from $31,578,000 in the comparable period in 1997. The increase was
primarily the result of an increase in both price and volume of rented ATF
tools. Factory-built housing initiatives also resulted in higher ATF rental
revenues. In addition, Ames' revenues increased due to higher sales for drywall
related merchandise and sold ATF tools.
Nestaway's net revenues increased 15.3% to $30,510,000 in the nine month
period ended September 30, 1998 from $26,471,000 in the comparable period in
1997. The increase was due to growth in formed wire products
21
<PAGE>
including dishdrainers and shower caddies, and several recent product additions,
as well as from increased sales of dishwasher racks, including sales to a new
OEM customer.
Fischbein's net revenues increased 4.6% to $20,535,000 in the nine month
period ended September 30, 1998 from $19,625,000 in the comparable period in
1997. The increase was primarily due to increased bag closing equipment sales in
the U.S. and in Europe, partially offset by reduced sales in Asian markets, and
improvements in revenues from flexible material handling products.
Gross Profit. Consolidated gross profit for the nine month period ended
September 30, 1998 increased 12.9% to $37,416,000 from $33,153,000 in the
comparable period in 1997. Gross profit as a percentage of net revenues improved
to 43.3% from 42.7%. The increase in gross profit was primarily due to the net
revenue increase discussed above.
Ames gross profit improved with revenues. This improvement was negatively
impacted by temporary operating inefficiencies in rental ATF tool servicing
operations as Ames consolidated certain service centers. In addition to
increased profit margins as a result of revenue growth, Nestaway benefitted due
to a one-time refund and temporary reduction in workers' compensation insurance
rates and a non-recurring favorable pricing adjustment aggregating approximately
$770,000. Fischbein's gross profit also improved primarily due to revenue
growth.
Selling, General and Administrative Expense ("SG&A"). Consolidated selling,
general and administrative expenses ("SG&A") for the nine month period ended
September 30, 1998, increased 9.8% to $20,852,000 from $18,983,000 in the
comparable period in 1997. SG&A increased due to additional selling salaries,
incentive compensation, travel and entertainment and advertising in support of
revenue growth. The Company also recorded an additional $326,000 in goodwill
amortization as a result of the transaction.
Interest Expense. Interest expense for the nine month period ended
September 30, 1998, increased 51.3% to $4,406,000 from $2,913,000 in the
comparable period in 1997. The increase was the result of increased debt from
the Transaction.
Other Expense. Other expense was $181,000 for the nine month period ended
September 30, 1998, compared to other income of $76,000 in the comparable period
in 1997. The Company recorded a non-recurring gain on the sale of an investment
in 1997.
Income Taxes. The effective tax rate for the nine month period ended
September 30, 1998, was 41.3% compared to 42.1% in the comparable period in
1997.
Income Before Extraordinary Item. As a result of the above, income before
extraordinary items and excluding transaction expenses for the nine month period
ended September 30, 1998, increased 7.1% to $7,033,000 from $6,565,000 in the
comparable period in 1997.
Results of Operations - Quarter Ended September 30, 1998
Three months ended September 30, 1998 compared to three months ended September
30, 1997.
Net Revenues. Net revenues for the three month period ended September 30,
1998 increased 16.1% to $30,136,000 from $25,966,000 in the comparable period in
1997. The increase in net revenues was primarily a result of increased rentals
and sales of ATF tools and increased sales of drywall related merchandise,
dishwasher racks and other formed wire products, and flexible material handling
products.
Benefitting from the continued strength of the housing market, Ames' net
revenues increased 13.5% to $12,337,000 in the three month period ended
September 30, 1998 from $10,872,000 in the comparable period in 1997. The
increase was primarily the result of an increase in both price and volume of
rented ATF tools. In addition, Ames' revenues increased due to higher sales for
drywall related merchandise.
Nestaway's net revenues increased 22.7% to $10,448,000 in the three month
period ended September 30, 1998 from $8,513,000 in the comparable period in
1997. The increase was due to growth in formed wire products including
22
<PAGE>
dishdrainers and shower caddies and several new product additions as well as
increased sales of dishwasher racks including sales to a new OEM customer.
Fischbein's net revenues increased 11.7% to $7,351,000 in the three month
period ended September 30, 1998 from $6,581,000 in the comparable period in
1997. The increase was primarily due to increased bag closing equipment sales in
Europe and increased revenues from flexible material handling products. These
improvements were partially offset by declines in revenues of bag closing
equipment in Asia and the U.S.
Gross Profit. Gross profit for the three month period ended September 30,
1998 increased 16.6% to $12,621,000 from $10,826,000 in the comparable period in
1997. The increase in gross profit was primarily attributable to the net revenue
increase discussed above. Gross profit as a percentage of net revenues improved
to 41.9% from 41.7%.
Ames' gross profit improved with revenues. Nestaway's gross profit growth
was primarily due to volume growth and the leveraging of fixed costs due to
improved equipment utilization. Fischbein's gross profit also improved due to
revenue growth.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three month period ended September 30, 1998
increased 23.1% to $7,558,000 from $6,140,000 in the comparable period in 1997.
SG&A growth was due to increased selling salaries, incentive compensation and
advertising to support revenue growth and an increase in goodwill amortization
of $326,000 as a result of the Transaction.
Interest Expense. Interest expense for the three month period ended
September 30, 1998 increased to $3,013,000 from $884,000 in the comparable
period in 1997. The increase was the result of debt from the Transaction.
Other Expense. Other expense was $17,000 for the three month period ended
September 30, 1998 compared to other expense of $333,000 in 1997. The decrease
was primarily due to non-recurring costs incurred in 1997 due to a potential
sale of a division.
Income Taxes. The effective tax rate for the three month period ended
September 30, 1998 was 48.7% compared to 40.2% for the prior year comparable
period. This increase in the effective tax rate was due to the impact of non-
deductible goodwill amortization expense from the Transaction.
Income Before Extraordinary Item. As a result of the above, principally
increased interest expense and goodwill amortization as a result of the
Transaction, income before extraordinary item and excluding transaction expenses
for the three month period ended September 30, 1998 decreased 49.8% to
$1,043,000 from $2,076,000 in the comparable period in 1997.
Liquidity and Capital Resources
The Company generated cash from operations of $1,124,000 for the nine month
period ended September 30, 1998, compared to $7,281,000 for the nine month
period ended September 30, 1997, and had cash on hand of $2,567,000 at September
30, 1998. For the period of July 23, 1998 to September 30, 1998, cash generated
from operations includes payment of $10,773,000 for transaction related
compensation including sale bonuses to management and the exercising of stock
options. (See note 6 of the consolidated financial statements.)
At September 30, 1998, the Company had working capital of $13,520,000
compared to working capital of $3,824,000 at December 31, 1997. The growth in
working capital was primarily attributable to increases in cash, accounts
receivable, inventories and a reduction in current maturities of long-term debt
which were partially offset by increases in accounts payable and accrued
liabilities. As the Company has no amounts outstanding on its revolving line of
credit, the Company's cash and cash equivalents have temporarily accumulated
pending payment of scheduled maturities of long-term debt and interest.
Receivables and inventories have increased $3,156,000 and $1,751,000,
respectively, as a result of revenue growth. The reduction in the current
maturities of long-term debt is attributable to the Transaction. Accounts
payable increased $1,466,000 with business activity and accrued liabilities grew
$4,202,000 in part due to a $1,504,000 accrual for additional purchase price to
be paid seller and a $1,615,000 increase in interest accruals due to the new
debt structure.
During the nine month period ended September 30, 1998, the Company utilized
net cash provided by operations to fund capital expenditures of $4,217,000
primarily for revenue maintenance and growth. Nestaway invested
23
<PAGE>
$1,405,000 as it continued to convert the production capacity of its Clinton,
North Carolina facility to produce dishwasher racks for a new customer and
purchased equipment to manufacture new formed wire products. Ames expended
$1,856,000 on new ATF tools and related products for the rental market.
Interest payments on the Notes and under the Bank Credit Agreement and
amortization of the Term Loan represent significant obligations of the Company.
The Company's remaining liquidity demands relate to capital expenditures and
working capital needs. For the year ended December 31, 1997, the Company spent
$3,475,000 on capital projects. The Company anticipates capital expenditures of
approximately $5,200,000 in 1998.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Bank Credit Agreement. The Revolving Credit Facility
provides the Company with $15,000,000 of borrowings, subject to availability
under the borrowing base, amounts outstanding in letters of credit, and
compliance with certain conditions. The borrowing base at September 30, 1998
exceeded $15,000,000. No borrowings were outstanding as of September 30, 1998.
The Acquisition Facility provides the Company with $25,000,000 of borrowings,
subject to customary conditions. The Company believes that, based on current and
anticipated financial performance, cash flow from operations and borrowings
under the Revolving Credit Facility will be adequate to meet anticipated
requirements for capital expenditures, working capital and scheduled interest
payments. However, the Company's capital requirements may change, particularly
if the Company should complete any material acquisitions or the Company
undertakes an expansion of its production capacity as a result of new or
increased requirements by a dishwasher manufacturer or other formed wire product
customer. The ability of the Company to satisfy its capital requirements will be
dependent upon its future financial performance and other factors, including
factors beyond the Company's control.
Accounting Changes
In 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which requires companies
to report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial statement for
the period in which they are recognized. The Company has chosen to disclose
comprehensive income, which encompasses net income, minimum pension liability
and foreign currency translation adjustments, in the consolidated statements of
stockholder's equity. Prior periods have been restated to conform with SFAS 130
requirements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas, and major customers. SFAS No.
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision makers in deciding how to allocate resources and in
assessing performance. Due to the recent issuance of this standard, management
has been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosure.
24
<PAGE>
Other Matters
With the coming of the year 2000, there has been a great deal of publicity
concerning computer information reporting and equipment failure due to
hardware's and software's use of two-digit dates ("Year 2000"). Management is
responsible for identifying the Company's computer systems affected by the Year
2000 issue and developing and executing a compliance plan. Each business unit
has prepared and is in the process of implementing plans to replace current
management information systems due to current hardware and software language
obsolescence and the need to upgrade system capacities to management
requirements. As a result, all business units expect their management
information systems to be Year 2000 compliant prior to the end of 1999. The
Company has spent approximately $960,000 for hardware, software and outside
consultants and upgrading its systems since January 1, 1997 and estimates
spending an additional $350,000 in the aggregate in 1998 and 1999. There is no
guarantee, however, that such system replacements and modifications will be
completed on time. The failure of the Company's suppliers and customers to
address the Year 2000 issue could significantly impact the Company.
As a result of dishwasher rack sourcing decisions made by its customers in
1996, the Company shut down a leased production facility in Canal Winchester,
Ohio, and temporarily idled a second plant in Clinton, North Carolina. The
Clinton facility resumed operations in 1997 when the Company was awarded a
contract by a new dishwasher rack customer. The Beaver Dam, Kentucky plant, shut
down in 1994 due to a customer's decision to utilize an alternative source of
supply, was reopened in 1996 to produce dishwasher rack components, lower volume
dishwasher racks, and other formed and coated wire products. During 1997 and
1996, the Company charged $624,000 and $980,000, respectively, of the costs
incurred against a realignment reserve established in prior periods. The Company
has no further reserves for the realignment of its production capacities as of
December 31, 1997, and management believes its current manufacturing operations
are properly positioned to service current and future customers.
Private Securities Litigation Reform Act Disclosure
This report contains certain estimates and forward looking statements.
Actual results could differ materially from those projected in the estimates and
forward looking statement as a result of any number of factors. Therefore, undue
reliance should not be placed upon such estimates and statements. No assurance
can be given that any of such estimates or statements will be realized and
actual results may differ materially from those contemplated by such forward
looking statements. Factors that may cause such differences include: (i)
increased competition; (ii) increased costs; (iii) loss or retirement of key
members of management and (iv) changes in general economic conditions in the
markets in which the Company may from time to time compete. Many of such factors
will be beyond the control of the Company and its management.
25
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various federal, state, local and foreign laws
and regulations governing environmental and employee health and safety matters,
including the handling, the use, discharge and disposal of hazardous materials
and pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the
Company. NYSDEC determined that the Company, among others, may be a responsible
party through its past ownership of the property. The site is currently listed
on the New York State Registry of Inactive Hazardous Waste Disposal Sites.
Environmental consultants engaged by the Company have established a range of
estimated remediation costs of approximately $1,000,000 to $3,000,000, plus or
minus 30% of those costs. The Company established an accrual of $3,900,000 for
the remediation and associated costs.
In 1997, the Company entered into an agreement with an adjoining landowner,
who is obligated by NYSDEC to address environmental concerns at his property. By
this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance that
NYSDEC will in fact offer its approval. The Company paid the $520,000 payable
under the agreement and has an exposure under the agreement of up to an
additional $120,000 if contamination is more widespread than estimated by the
Company's environmental consultants. In the event NYSDEC does not approve the
remedy envisioned in the agreement with the adjoining landowner, the Company may
terminate the agreement and demand the return of its payment with interest. In
that case, the adjoining landowner would no longer be obligated to undertake the
remediation of the property formerly owned by the Company.
Of the consideration paid pursuant to the Merger Agreement, $5,000,000 was
set aside in a special escrow account to cover environmental costs which may be
incurred by the Company in connection with cleanup of the site and any damages
or other required environmental expenditures relating to the site. The balance
in the account, after payment of such costs, will be released to the former
stockholders upon the first to occur of the approval by NYSDEC of the proposed
remediation action or the confirmation by NYSDEC that remediation at the site
has been completed in accordance with its then applicable decision in the matter
(the "Early Release Date"). If, however, the Early Release Date occurs before
the additional $120,000 is paid under the above-described agreement, the special
escrow account will continue as to that $120,000 until it is paid or it has
become clear that no claim will be made for such funds. In addition, if certain
additional specified cleanup activities are not completed by the Early Release
Date, an additional $80,000 will be withheld in the special escrow account until
such cleanup is completed. If all of the funds in the special escrow account
have not been released by the third anniversary of the Transaction Date, the
funds remaining in the special escrow account will be disbursed to the Company
to cover the remaining estimated costs, with the balance to be distributed to
the former stockholders of the Company, in accordance with an agreement to be
reached by the Company and the Stockholder Representative identified in the
Merger Agreement, or upon failure of such parties to agree, through an
arbitration procedure.
The Company may also make claims against the warranty fund of the escrow
fund for breach of certain representations and warranties in the Merger
Agreement regarding other environmental matters for a period of 24 months after
Transaction Date, subject to a specified threshold and deductible.
The Company is aware of other formerly-owned sites at which activities
similar to the operations previously conducted on the Buffalo, New York property
have taken place. However, the Company has received no claims in
26
<PAGE>
connection with those sites, and has no information that would lead it to
believe that any such claim is likely to be made. The Company is also a part-
owner and landlord at a stainless steel and aluminum facility in Commerce,
California that is leased to and operated by an unrelated company. The Company
has received no claims against it in connection with this site, but the Company
cannot rule out the possibility that it might incur some liability should a
claim actually be made against it as current owner of the property.
The Buffalo, New York property formerly owned by the Company was at one
time used to mill uranium rods for the Atomic Energy Commission. The U.S.
Department of Energy has since identified residual radioactivity in a building
at the site. In 1996, the government estimated the costs of addressing the
residual radioactivity at $965,000. Given the available data, the Company and
its environmental consultants believe that a more likely total cost is less than
$100,000. To date, no cleanup costs have been assessed against the Company.
In addition, the Company has retained or assumed certain environmental
liabilities and risks of future liabilities associated with businesses
previously operated or acquired by it, including Bliss and Laughlin Steel
Company. The Company does not believe that these retained or assumed liabilities
and risks would be expected to have a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations, liabilities identified or incurred in the future, or other
circumstances, might (individually or in the aggregate) have such an effect.
The Company is a defendant in a number of lawsuits incidental to its
business. Including the environmental matters discussed above and taking into
account the proceeds held in escrow pursuant to the Merger Agreement, the
Company believes that none of these proceedings, individually, or in the
aggregate, will have a material adverse effect on the Company's financial
condition or operating results.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
27
<PAGE>
(a) Exhibits
Exhibit
No. Description
- ------- -----------
3.1* Certificate of Incorporation of the Company, as amended
3.2* Bylaws of the Company
4.1* Indenture, as supplemented, dated as of July 22, 1998 by and between
the Company and State Street Bank & Trust Company National Bank, as
Trustee, with respect to the 10.75% Senior Subordinated Notes due
2008, including the form of the Note
10.1* Axia Group, Inc. 1998 Stock Awards Plan
10.2* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan to be
renamed AXIA Incorporated Employee Stock Ownership and 401(k) Plan
10.3* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan Trust
Agreement to be renamed AXIA Incorporated Employee Stock Ownership and
401(k) Plan Trust Agreement
10.8* Credit Agreement dated as of July 22, 1998 among Axia Finance Corp.,
AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co.,
Inc. and Paribas
10.9* Security Agreement dated as of July 22, 1998 by and between Axia
Finance Corp., AXIA Incorporated, Paribas and the Lenders named
therein
10.10* Pledge Agreement dated as of July 22, 1998 by and between AXIA
Incorporated, Paribas and the Lenders named therein
10.11* Letter Agreement dated June 23, 1998 by and among The Sterling Group,
Inc., Axia Group, Inc., Axia Acquisition Corp. and each of their
subsidiaries
10.12* Form of Indemnity Agreement between AXIA Incorporated and each of its
officers and directors
10.13* Form of Tax Sharing Agreement among Axia Group, Inc., Axia Holdings
Corp., AXIA Incorporated, Ames Taping Tool Systems, Inc. and TapeTech
Tool Co., Inc.
* Filed as an exhibit to the Company's Form S-4 (Registration No. 333-64555)
under an exhibit number identical to that described herein and incorporated
herein by this reference
(b) Reports on Form 8-K
Form 8-K filed on July 6, 1998
28
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXIA INCORPORATED
Date: November 13, 1998 /s/ Lyle J. Feye
----------------------------------
Lyle J. Feye
Vice President Finance, Treasurer,
Chief Financial Officer
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER OTHER
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-23-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 JUL-22-1998
<CASH> 2,567 0
<SECURITIES> 0 0
<RECEIVABLES> 15,915 0
<ALLOWANCES> 0 0
<INVENTORY> 10,906 0
<CURRENT-ASSETS> 34,396 0
<PP&E> 32,654 0
<DEPRECIATION> 747 0
<TOTAL-ASSETS> 195,194 0
<CURRENT-LIABILITIES> 20,876 0
<BONDS> 100,000 0
0 0
0 0
<COMMON> 26,500 0
<OTHER-SE> 997 0
<TOTAL-LIABILITY-AND-EQUITY> 195,194 0
<SALES> 17,773 46,257
<TOTAL-REVENUES> 23,769 62,567
<CGS> 11,750 29,329
<TOTAL-COSTS> 19,399 61,653
<OTHER-EXPENSES> 0 214
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,853 1,553
<INCOME-PRETAX> 1,541 (844)
<INCOME-TAX> 748 (119)
<INCOME-CONTINUING> 793 (725)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 682
<CHANGES> 0 0
<NET-INCOME> 793 (1,407)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN> Due to acquisition of Company, Income Statement results are divided into
preacquisition (to 7/22) and post acquisition.
</TABLE>
