<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 33-78922
AXIA Incorporated
(Exact name of registrant as specified in its charter)
Delaware 13-3205251
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West 22nd Street, Suite 134
Lombard, Illinois 60148
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(630) 629-3360
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
11% Series B Subordinated Notes due 2001
Guarantee of 11% Series B Subordinated Notes due 2001
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.
(1) Yes [x] No
----- -----
(2) Yes [x] No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
<PAGE>
PART I
Item 1. BUSINESS
General
AXIA Incorporated, the "Company," is a diversified manufacturer and marketer
of (i) formed and coated wire products, material handling and storage equipment,
(ii) specialized packaging machinery, and (iii) tools and other products for
finishing drywall in new, manufactured, and renovated housing and commercial
construction. Ames Taping Tool Systems, Inc. ("ATTS") and TapeTech Tool Co.,
Inc. ("TapeTech") are wholly-owned subsidiaries of the Company and are
guarantors of the Company's 11% Series B Subordinated Notes ("Notes"). ATTS and
TapeTech are each a Guarantor ("Guarantor"), and collectively, the "Guarantors."
The Company was formed in 1891 as a private partnership to manufacture cold-
drawn steel bars used in agricultural machinery, railroad equipment and the
automotive industry. The Company was later incorporated as Bliss and Laughlin
Steel Co. and in 1932 listed on The New York Stock Exchange. Beginning in 1962,
the Company began a program to acquire smaller industrial companies to diversify
from the steel business, and in 1982 the Company changed its name to AXIA
Incorporated ("AXIA"). In October 1984, AXIA was acquired through a leveraged
buyout by affiliates of Merrill Lynch & Co., Inc., certain members of senior
management, and other investors. As part of the buyout, the new company sold
Bliss and Laughlin Steel Co. Following the buyout, AXIA divested certain
operations and acquired others. AXIA effected a recapitalization in 1989, paying
a substantial dividend to its stockholders and refinancing the Company's capital
structure. In 1992, AXIA sold two of its businesses to The Stanley Works. Today,
AXIA is comprised of three business segments: Metal Products Segment, Packaging
Products Segment and the Construction Tool Segment (see chart on page 8).
On March 15, 1994, AXIA was acquired by Axia Holdings ("Holdings"), a
corporation organized by Cortec Group Fund, L.P. as a result of which it was
completely recapitalized. For convenience, AXIA prior to its recapitalization is
referred to as the "Predecessor Company." On that date, Axia Acquisition Corp.
("Acquisition"), a wholly-owned subsidiary of Holdings, entered into a merger
with AXIA in which AXIA was the surviving corporation (the "Transaction").
Description of the Business Segments
Metal Products Segment. The Metal Products Segment ("MPS") produces dishwasher
racks primarily serving the premium quality dishwasher market, specializes in
the custom design and manufacture of high volume bare and coated wire products,
and manufactures stackable storage racks and telescoping, flexible, gravity-
powered and motorized conveyors for the material handling industry. Revenues
from MPS accounted for 39% of AXIA's 1997 revenues.
MPS has four plants strategically located near major customers: (i) McKenzie,
Tennessee supplying dishracks; (ii) Cleveland, Ohio producing dishdrainers,
shower caddies, storage racks, and conveyors, (iii) Beaver Dam, Kentucky
manufacturing dishracks, dishrack components, and other coated wire products,
and (iv) Clinton, North Carolina producing dishracks.
Production of dishracks, dishdrainers, and other formed wire products requires
specialized forming and assembly equipment and, in many circumstances, high
quality powder coating lines. MPS is an active participant in the dishrack and
component design and supply programs for each of its customers. Dishwasher
marketing groups continuously push for dishracks with identifiable component
features such as adjustable shelves, peg rows and finishing innovations. The
customer demands that the machines be engineered for functional advantage, but
the prime objective is unique enhancements to attract consumer interest and to
provide differentiation of features for price point advantage. MPS manufactures
and supplies coated baskets and other components for major domestic brand
dishwashers including Maytag, Whirlpool/KitchenAid, Bosch, and General Electric.
Dishdrainers and other coated wire products for Rubbermaid have become an
increasingly important revenue source. In 1995, MPS initiated the supply of a
new design dishdrainer and began coating the entire dishdrainer product line.
MPS is working with its customers to provide additional value added services and
product enhancements.
1
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MPS is also a manufacturer of telescoping, flexible, gravity powered and
motorized conveyers (Nestaflex) and portable, stackable storage racks
(Nestainer). Nestaflex products are used by retailers for the loading and
unloading of tractor trailers at store sites and at distribution centers. They
are also used in assembly, packaging and mailing operations. Nestainer rack
systems are sold to a variety of customers within the retail, distribution,
food, chemical, pharmaceutical and electronics industries for storage and
transportation purposes.
Packaging Products Segment. The revenues from the Packaging Products Segment
("PPS") accounted for 21% of AXIA's 1997 revenues. PPS is a manufacturer,
supplier and marketer of handheld and stationary industrial sewing and sealing
units used for bag closing. The bag closing product line includes (i) hand-held
or "portable" sewing machines for sealing multi-wall bags, (ii) stationary
industrial sewing units and accessories for highly automated packaging
facilities, (iii) proprietary devices for closing multi-wall paper bags and (iv)
machines for heat sealing plastic bags. This unique equipment utilizes various
sewing, hot melt adhesive, double fold and poly sealing technologies. PPS also
markets a line of consumable support products such as thread, needles, and tape.
PPS products and technology are widely used for packaging chemicals, minerals,
agricultural commodities, grocery products, and pet foods. PPS continues to
develop other component equipment in a bag filling line, including bag hangers
and presenters. PPS' manufacturing facility is located in Statesville, North
Carolina. PPS markets its products through independent U.S. and foreign
distributors, and four international distribution subsidiaries in Europe and the
Far East. The international subsidiaries are located in Belgium, France, the
United Kingdom and Singapore, and accounted for 52% of PPS' 1997 revenues.
The bag making operations of Mid America Machine Corp. were discontinued in
1995 and MAMCO's assets were sold or licensed. MAMCO accounted for less than 1%
of the Company's revenues in that year.
Construction Tool Segment. The Construction Tool Segment ("CTS"), which includes
subsidiary companies Ames Taping Tools Systems, Inc. ("ATTS"), TapeTech Tool
Co., Inc. ("TapeTech"), and Ames Taping Tools of Canada, Limited, is a producer,
marketer and distributor of automatic drywall taping and finishing ("ATF") tools
which are rented and/or sold to professional interior finishing contractors to
finish drywall joints prior to painting, wallpapering and other forms of final
treatment. The bulk of CTS' business is rental (as opposed to the sale) of ATF
tools. ATTS rents ATF systems through a network of 64 company operated leased
retail stores and 52 outlets operated by franchisees located throughout the U.S.
and Canada and sells other construction tools and related merchandise in its
stores. CTS maintains two repair centers which service ATTS rental tools.
Revenues from the CTS business segment accounted for 40% of AXIA's 1997 revenues
of which 97% was contributed by ATTS and TapeTech.
CTS' end-use customers are local and regional interior finishing contractors.
CTS, through the use of its large mailing lists (approximately 25,000 names, of
whom 8,000 are active customers in any given month), has developed a direct
marketing approach based on telemarketing, direct mail and targeted sales
promotions coupled with the efforts of company operated stores and stores
operated by franchisees. ATF market penetration is heaviest on the west coast,
particularly in California. CTS' goal is to service all of the major housing
markets in the U.S. and Canada and to significantly increase its penetration in
the eastern region. The overall market for CTS' products is tied principally to
new construction, particularly new housing starts. However, CTS' products are
also used in commercial and repair/rehabilitation work. To increase the rental
of ATF tools, CTS has focused on penetrating those markets where hand taping is
predominant and automatic tools have not yet been widely accepted.
TapeTech, acquired by the Company in 1982, sells ATF tools under the
"TapeTech" and "TapeMaster" brand names. TapeTech tools are sold through
approximately 110 independent authorized dealers and distributors, some of which
further distribute through sub-dealers. TapeMaster tools are distributed through
a network of approximately 49 authorized independent dealers, the majority of
which sell the tools to individual customers.
ATTS' 64 company operated stores, though primarily oriented to the rental of
ATF tools, sell a variety of construction hand tools and drywall supplies
including taping knives and finishing tape. The stores also rent and sell larger
pieces of equipment, such as dustless sanders, spray rigs and panel lifts. In
general, stores are leased for a period of three years or less.
2
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Revenue by segment for fiscal years 1997, 1996 and 1995 appears below:
AXIA Incorporated
Revenue by Product Group
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
------- ------- -------
Metal Products Segment
Coated & Formed
Wire Products $35,268 34% $39,655 38% $42,649 41%
Storage Racks &
Conveyors 5,285 5 6,014 6 5,365 5
------- -- ------- -- ------- --
Total MPS 40,553 39 45,669 44 48,014 46
Packaging Products Segment
Bag Closing 21,819 21 21,103 20 21,895 21
Bag Making - - 563 1
------- -- ------- -- ------- --
Total PPS 21,819 21 21,103 20 22,458 22
Construction Tool Segment
Tool Rental 27,382 26 25,016 24 22,412 21
Tool & Store
Merchandise Sales 15,046 14 12,999 12 11,442 11
------- -- ------- -- ------- --
Total CTS 42,428 40 38,015 36 33,854 32
</TABLE>
Total Revenues $104,800 100% $104,787 100% $104,326 100%
======== --- ======== --- ======== ---
The Company's segment data reflects similarity of product lines rather than
divisional organization. Management believes the segment format more
appropriately reflects similarities of manufacturing processes as well as the
shared production facility in Cleveland, Ohio.
See Note 13 of the Notes to the Consolidated Financial Statements for
additional segment data.
Competition
MPS competes directly with the dishwasher manufacturer's in-house
manufacturing capability. General Electric, Frigidaire, and Whirlpool,
dishwasher manufacturers, have dishrack manufacturing capabilities. As MPS is
competing against the self-manufacture of its product by larger companies with
more extensive financial resources, it competes on quality, flexibility and
innovation. Dishrack customers accounted for 23% of the Company's 1997 revenues.
MPS' other bare and coated wire products and conveyor and storage rack
businesses operate in a highly competitive environment. Price, including freight
costs, is very important in the purchase decision process. Competitors have
similar products available (see "Customers").
PPS' products typically serve a specific niche market or a specific geographic
area. As a result, PPS does not compete with any one company in all its product
lines. As PPS offers consumable products that it does not manufacture, such as
thread, there are numerous alternative outlets available for the purchase of
these items by the customer.
3
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CTS' tools are used for the interior finishing of drywall. CTS, therefore,
competes with alternate methods of finishing as well as with other ATF tool
manufacturers and distributors. CTS' most significant competition is from
traditional hand finishing, which CTS believes accounts for 55% of all drywall
taping. CTS' stores also operate in a highly competitive environment with
respect to the sale of merchandise. These products are also available from
contractor supply yards, building material retailers, and other sources.
Materials
Raw materials and products essential to each of the Company's businesses are
available from a number of sources, and the Company is not dependent upon any
single source of supply. Historically, the Company has not been affected
significantly by shortage of raw materials.
Customers
Two of MPS' customers accounted for 30% of the Company's 1997 revenues.
Together, dishrack customers accounted for approximately 23% of the Company's
consolidated revenues for 1997. No material part of any other segment of the
Company's business is dependent upon a single customer or a small group of
customers.
The Company temporarily closed its manufacturing plant in Beaver Dam,
Kentucky, in December 1994. The plant had provided dishwasher racks to the
General Electric Company's (GEC) Louisville, Kentucky plant since 1978. GEC had
advised the Company of its decision not to order dishracks beginning in 1995. In
1996, Whirlpool began to self-manufacture the KitchenAid brand lower racks that
were produced at the Company's Canal Winchester, Ohio, plant resulting in the
closure of that facility. Dishrack component and service rack volumes for
Whirlpool/KitchenAid, serviced by Beaver Dam and Canal Winchester, were
consolidated into the Beaver Dam plant which was then reopened in 1996.
Additionally in 1996, the Company began re-supplying GEC from this location at
revenues substantially lower than levels recorded in 1994.
In 1995, Frigidaire advised the Company of their decision to re-enter the
dishrack manufacturing business. As a result of this customer's decision to
self-manufacture dishracks, the Company's Clinton, North Carolina facility was
temporarily deactivated in 1996. New business has been secured for this facility
and manufacturing operations were reinstituted in 1997. Frigidaire accounted for
4% of the Company's 1996 revenues.
Backlog
The Company believes that its order backlog is not material to an
understanding of its business, since most products are available from inventory
or can be produced in a short period of time. No segment of the Company's
business is seasonal to any material extent.
Research and Development
The Company believes that research and development activities are not material
to its businesses. The Company utilizes a number of trademarks and trade names
which are well-recognized by its customers. The Company believes that the loss
of any one of its patents, trademarks, licenses, franchises and concessions
would not have a material impact on any segment of its business.
Regulations; Environmental Matters
The Company is subject to various federal, state and local laws and
regulations governing the use, discharge and disposal of hazardous materials.
Compliance with current laws and regulations has not had, and is not expected to
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 (the "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. The NYSDEC has determined that the Company,
4
<PAGE>
among others, may be a responsible party through its past ownership of the
property. In the notice letter, the NYSDEC requested that the Company agree to
enter into negotiations with the NYSDEC to execute a consent decree with respect
to the financing by the Company of a remedial investigation, as well as a
feasibility study for remedial action.
A feasibility study, prepared in 1994 by environmental consultants engaged by
the Company, established a range of estimated remediation costs of $.7 million
to $2.9 million, plus or minus 30% of those costs, with the most probable method
of remediation being at the high end of the range. The Company established an
accrual of $3.9 million for the costs of remediation.
In 1997, the Company entered into an agreement with the party responsible for
an adjoining site, who also has been in the process of addressing concerns
raised by NYSDEC, which will transfer responsibility to remediate the formerly-
owned property to the party remediating the adjoining site. The Company paid the
$520,000 payable under the agreement and has an exposure of up to an additional
$120,000 if pond sediment contamination is higher than estimated by the
Company's environmental consultants. In the event the party responsible for the
remediation of the adjoining site is unable to consummate an agreement with
NYSDEC within one year of its agreement with the Company, the Company has the
option of the return of its contribution to the remediation of the sites and
pursuing its own remediation plan. Should NYSDEC not approve the joint
remediation plan for both sites, the agreement can be nullified and funds
returned to the Company. The Company has maintained its accruals pending
finalization of the remediation plan of the adjoining site. The Company is
pursuing contributions from directors and officers of other users of the
previously owned property. No estimate can be given as to possible recovery.
(See also Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Liquidity and Capital Resources).
Employees
As of December 31, 1997, the Company had 977 employees, of which 154 were
represented by unions. The Company has two unrelated union contracts which
expire in 1999. Foreign subsidiaries accounted for 49 of the Company's total
employment. The Company believes that its relations with its employees are
satisfactory.
Suppliers
Management believes that it has good relations with its suppliers and that
there are adequate sources of supply for the materials required in the conduct
of the Company's businesses.
Business Combinations and Dispositions
The management of the Company will evaluate its business and organizational
structure on an ongoing basis to determine actions it believes to be in the best
interests of the Company and its stockholders. Management may consider
acquisitions, divestitures or the reorganization of any line of its businesses.
5
<PAGE>
Financial Information About Foreign and Domestic Operations and Export Sales.
See Note 14 to the Company's Consolidated Financial Statements.
Directors and Executive Officers of the Registrant
The following table sets forth the name, age and position held by the
directors, executive officers, and certain significant employees of the Company
and the Guarantors.
<TABLE>
<CAPTION>
On 12/31/97
Name Age Position or Office
- ---- --- ------------------
<S> <C> <C>
Dennis W. Sheehan 63 Director, President and Chief Executive Officer of the Company.
Director and Chairman of ATTS and TapeTech.
Lyle J. Feye 44 Vice President Finance, Chief Financial Officer and Treasurer of the Company.
Vice President and Director of ATTS and TapeTech.
David H. Chesney 54 President and General Manager of the Nestaway division.
Robert G. Zdravecky 51 President and General Manager of the Ames division and President of
ATTS and TapeTech.
Ian G. Wilkins 59 President and General Manager of the Fischbein and Flexible
Material Handling divisions.
T. Richard Fishbein 59 Director of the Company.
</TABLE>
Mr. Sheehan and Mr. Fishbein are the only Directors of the Company.
Mr. Sheehan and Mr. Feye are the only Directors of each of the Guarantors. The
business experience during the last five years and other information relating to
each of the executive officers and directors identified above is set forth
below:
Dennis W. Sheehan
Dennis W. Sheehan is Director, President and Chief Executive Officer of the
Company and has held these positions since 1984. He joined AXIA in 1977 as Vice
President, General Counsel and Secretary. Mr. Sheehan is Director and Chairman
of ATTS and TapeTech. Mr. Sheehan serves on the Board of Directors of the
following publicly traded company: Allied Healthcare Products, Inc. (Chairman),
St. Louis, Missouri, a manufacturer and distributor of healthcare and related
products.
Lyle J. Feye
Lyle J. Feye is Vice President Finance, Chief Financial Officer, and Treasurer
of the Company and a Director and Vice President of ATTS and TapeTech. Prior
to his election to his present positions with the Company in March 1994, Mr.
Feye was Corporate Controller and Assistant Treasurer of the Company for five
years. Before joining AXIA, Mr. Feye served in various positions with the
Continental Group Inc. (formerly the Continental Can Company) from 1975 to 1988,
including division level financial and accounting management.
6
<PAGE>
David H. Chesney
David H. Chesney is President and General Manager of the Nestaway division and
has held these positions since 1991. Prior to joining AXIA, Mr. Chesney served
as General Manager of Lawrence Industries, a division of Electrolux, an
assembler of vacuum cleaners and manufacturer of vacuum cleaner components,
rubber and plastic hoses, and electrical cord sets and harnesses, from 1987 to
1991. From 1967 to 1987, Mr. Chesney worked for General Electric Company where
he held a variety of positions, the most recent being Materials Manager &
Quality Assurance Manager with the Major Appliance Business Group.
Robert G. Zdravecky
Robert G. Zdravecky is President and General Manager of the Ames division and
President of ATTS and TapeTech, positions he has held since 1993. Mr. Zdravecky
first joined AXIA in 1986 as General Manager of Sales and Marketing for Ames. He
was promoted to Vice President of the Construction Tool Group, a position he
held until 1992, when his employment with AXIA terminated as a result of the
sale of two of AXIA's divisions to The Stanley Works. He rejoined AXIA in 1993
in his current position. Prior to joining AXIA in 1986, Mr. Zdravecky served as
Vice President-Marketing and Sales, with Adhesive Engineering Co. from 1981 to
1986.
Ian G. Wilkins
Ian G. Wilkins is the President and General Manager of the Fischbein and the
Flexible Material Handling divisions. Mr. Wilkins joined the Company in May of
1994. Prior to joining the Company, from 1988 to 1994, Mr. Wilkins was Chief
Operating Officer and General Manager of HK Metalcraft Manufacturing, a
manufacturer of metal assemblies, components and other precision products
primarily for the auto industry. Mr. Wilkins' responsibilities included
supervision of manufacturing, sales and customer service. From 1984 to 1988, Mr.
Wilkins, as Vice President of Manufacturing, directed the manufacturing
operations of Scott Aviation, a Division of Figgie International, a producer of
oxygen equipment and health and safety products.
T. Richard Fishbein
Mr. Fishbein has been a partner of the Cortec Group from 1987 to present. He
also serves as a director of Atco Products, Inc. Mr. Fishbein formerly was
Managing Director of Bear, Stearns & Co. Inc. from 1985 to 1987.
7
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- ------------------------------------------------------
| AXIA INCORPORATED |------|
- ------------------------------------------------------ |
|
|
- ------------------------------------------------------ |
| Metal Products Segment | |
| - Nestaway Division | |
| - Flexible Material Handling Division | |
| |------|
| | |
| | |
| | |
- ------------------------------------------------------ |
|
|
- ------------------------------------------------------ |
| Packaging Products Segment | |
| - Fischbein Division | |
| - Subsidiaries | |
| - Compagnie Fischbein, S.A. (Belgium) |------|
| - Fischbein France S.A.R.L. (France) | |
| - Fischbein Packaging Pte Ltd. (Singapore) | |
| - Fischbein Ltd. (United Kingdom) | |
- ------------------------------------------------------ |
|
|
|
- ------------------------------------------------------ |
| Construction Tool Segment | |
| - Ames Division | |
| - Subsidiaries | |
| - Ames Taping Tool Systems, Inc. |______|
| - Ames Taping Tools of Canada Ltd. |
| - TapeTech Tool Co., Inc. |
| |
- ------------------------------------------------------
The chart above details the Company's operation by segment and not by management
reporting organization. All subsidiaries are subsidiaries of the Company.
8
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Item 2. PROPERTIES
Real Estate and Facilities
The Company believes it has adequate capacity to meet the current requirements
of its customers. The major properties of the Company are listed below. The
Company also leases several offices, two repair centers, a warehouse, and 64
stores. These locations are historically leased on a short-term basis of one to
five years to provide maximum flexibility. The business conducted at these
leased locations is relocatable and no individual lease or location is material
to the Company.
AXIA INCORPORATED
-----------------
Real Estate and Facilities
--------------------------
<TABLE>
<CAPTION>
Size in
Location Sq. Feet Principal Products/Type Operation
- -------- -------- ---------------------------------
<S> <C> <C>
Garfield Heights, Cleveland, Ohio... 121,000 Fabrication of dishdrainer racks, wire products,
(Owned) and storage racks and assembly of material
handling conveyers
McKenzie, Tennessee................. 79,000 Fabrication of dishracks
(Owned)
Clinton, North Carolina............. 60,000 Fabrication of dishracks
(Owned)
Statesville, North Carolina......... 50,000 Assembly and manufacture of industrial
(Leased until February 1, 2003) sewing and packaging machines
Beaver Dam, Kentucky................ 64,000 Fabrication of dishracks, dishrack components
(Owned) and other formed wire products
Brussels, Belgium................... 11,000 Assembly and warehousing of packaging
(Leased until December 1, 2006) machines
Paris, France....................... 5,200 Assembly and distribution of packaging
(Owned) machines
</TABLE>
Domestic owned U.S. locations listed above are collateral under the Company's
bank credit agreement.
Item 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of lawsuits incidental to its business.
Including the environmental matter discussed below, 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 (see Item 1. BUSINESS - Regulations; Environmental Matters and Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources for further discussion of
environmental matters).
The Company's operations are subject to various federal, state and local
environmental laws and regulations. The Company believes that it is in
substantial compliance with current laws and regulations. Based on information
available at this time, the Company believes that compliance with current laws
and regulations has not had, and is not expected to have, a material effect on
the Company's financial condition or operating results.
9
<PAGE>
In 1991, the New York State Department of Environmental Conservation (the
"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.
A feasibility study, prepared in 1994 by environmental consultants engaged by
the Company, established a range of estimated remediation costs of $.7 million
to $2.9 million, plus or minus 30% of those costs, with the most probable method
of remediation being at the high end of the range. The Company established an
accrual of $3.9 million for the costs of remediation.
In 1997, the Company entered into an agreement with the party responsible for
an adjoining site, who also has been in the process of addressing concerns
raised by NYSDEC, which will transfer responsibility to remediate the formerly-
owned property to the party remediating the adjoining site. The Company paid
the $520,000 payable under the agreement and has an exposure of up to an
additional $120,000 if pond sediment contamination is higher than estimated by
the Company's environmental consultants. In the event the party responsible for
the remediation of the adjoining site is unable to consummate an agreement with
NYSDEC within one year of its agreement with the Company, the Company has the
option of the return of its contribution to the remediation of the sites and
pursuing its own remediation plan. Should NYSDEC not approve the joint
remediation plan for both sites, the agreement can be nullified and funds
returned to the Company. The Company has maintained its accruals pending
finalization of the remediation plan of the adjoining site. The Company is
pursuing contributions from directors and officers of other users of the
previously owned property. No estimate can be given as to possible recovery.
(See also Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Liquidity and Capital Resources).
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Guarantors are wholly-owned by the Company and the Company is wholly-owned
by Holdings. There is no established public trading market for the common
equity of the Guarantors, the Company, or Holdings.
Item 6. SELECTED FINANCIAL DATA
AXIA INCORPORATED AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Predecessor Company
-------------------
Year Period Period Year Year Year
Ended Ended Ended Ended Ended Ended
-------- ------- -------- -------- -------- --------
Dec. 31 Mar. 15 Dec. 31 Dec. 31 Dec. 31 Dec. 31
Income Statement Data: 1993 1994 1994 1995 1996 1997
- --------------------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $87,767 $18,593 $ 81,304 $104,326 $104,787 $104,800
Cost of revenues 56,594 11,869 51,662 64,829 61,294 60,144
Charges for environmental matter/(1)/ 1,430 - - - - -
Selling, general & administrative expenses 20,728 4,587 17,883 24,181 25,146 25,302
------- ------- -------- -------- -------- --------
Income from operations $ 9,015 $ 2,137 $ 11,759 $ 15,316 $ 18,347 $ 19,354
Interest expense 7,084 1,500 5,300 6,596 5,123 3,710
Other expense (income) (144) (122) (301) 493 18 37
------- ------- -------- -------- -------- --------
Income before income taxes and
extraordinary item 2,075 759 6,760 8,227 13,206 15,607
Provision for income taxes 861 315 3,116 3,338 5,730 6,412
------- ------- -------- -------- -------- --------
Income before extraordinary item 1,214 444 3,644 4,889 7,476 9,195
Loss on early extinguishment of debt - - - - 614 772
------- ------- -------- -------- -------- --------
Net income $ 1,214 $ 444 $ 3,644 $ 4,889 $ 6,862 $ 8,423
======= ======= ======== ======== ======== ========
Balance Sheet Data:
- ------------------
Current assets $23,837 $25,491 $ 25,262 $ 27,012 $ 26,211 $ 26,253
Total assets $67,963 $69,165 $104,397 $103,288 $ 99,331 $ 96,773
Current liabilities $16,717 $17,347 $ 17,390 $ 20,262 $ 18,849 $ 22,429
Long-term debt, less current maturities $45,867 $45,956 $ 52,435 $ 43,507 $ 34,548 $ 20,439
Stockholder's equity (deficit)/(2)/ $(7,408) $(7,058) $ 20,796 $ 25,828 $ 32,118 $ 40,067
</TABLE>
/(1)/ Charges related to involvement in an environmental matter and action at a
property formerly owned by a predecessor of AXIA (see Note 15 of Notes to
the Consolidated Financial Statements).
/(2)/ As part of the recapitalization of the Predecessor Company, which
occurred on December 21, 1989, AXIA paid a $65,695,000 cash dividend on
common stock and recognized a $617,000 premium on the redemption of
previously outstanding shares of preferred stock, resulting in a
stockholders' deficit at the end of 1989 and the succeeding periods until
the acquisition of the Predecessor Company in 1994.
11
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AXIA Incorporated, the "Company," is a diversified manufacturer and marketer
of (i) formed and coated wire products, material handling and storage equipment,
(ii) specialized packaging machinery, and (iii) tools and other products for
finishing drywall. The Company's operations consist of three business segments;
Metal Products Segment ("MPS"), Packaging Products Segment ("PPS"), and the
Construction Tool Segment ("CTS").
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 results presented and management discussion exclude the impact of debt
extinguishment costs. In 1997, the Company repurchased and extinguished
$9,250,000 in principal of its Senior Subordinated Notes. The Company recorded a
charge of $1,251,000, $772,000 net of tax, for the redemption premium, the
writeoff of unamortized capitalized financing costs associated with the issuance
of the Notes, the applicable original issue discount, and the expenses of the
transaction. As a result of the refinancing of its bank debt in 1996, the
Company recorded a debt extinguishment charge of $1,024,000 on a pretax basis,
$614,000 net of tax, due to the writeoff of the unamortized capitalized
financing costs related to the previous bank agreement.
The following Table 1 summarizes the Company's Consolidated Statements of
Income for the years ended December 31, 1997, 1996, and 1995 (in thousands):
Table 1
<TABLE>
<CAPTION>
Summary Income Statement
------------------------
Years Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $104,800 $104,787 $104,326
Cost of revenues 60,144 61,294 64,829
Selling, general and administrative expenses 25,302 25,146 24,181
-------- -------- --------
Income from operations 19,354 18,347 15,316
Interest expense 3,710 5,123 6,596
Other expense (income) 37 18 493
-------- -------- --------
Income before income taxes and extraordinary item 15,607 13,206 8,227
Provision for income taxes 6,412 5,730 3,338
-------- -------- --------
Income before extraordinary item $ 9,195 $ 7,476 $ 4,889
======== ======== ========
</TABLE>
12
<PAGE>
The following Table 2 presents, for the periods indicated, certain items in
the Company's Consolidated Statements of Income as a percentage of total net
revenues.
Table 2
<TABLE>
<CAPTION>
Percentage of Total Net Revenues
---------------------------------------------
Years Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0%
Costs and expenses
Cost of revenues 57.4 58.5 62.1
Selling, general and adminis-
trative expenses 24.1 24.0 23.2
Interest expense 3.6 4.9 6.3
Other expense (income) - - .5
Provision for income taxes 6.1 5.5 3.2
----- ----- -----
Income before extraordinary item 8.8% 7.1% 4.7%
===== ===== =====
</TABLE>
Table 3 below summarizes the net revenues and income from operations for the
years ended December 31, 1997, 1996 and 1995 by business segment (in thousands):
Table 3
<TABLE>
<CAPTION>
Business Segment Operating Results
---------------------------------------------
Years Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Revenues
Metal Products Segment $ 40,553 $ 45,669 $ 48,014
Packaging Products Segment 21,819 21,103 22,458
Construction Tool Segment 42,428 38,015 33,854
-------- -------- --------
Total Net Revenues $104,800 $104,787 $104,326
======== ======== ========
Income from Operations
Metal Products Segment $ 7,260 $ 9,081 $ 8,832
Packaging Products Segment 3,153 2,251 2,191
Construction Tool Segment 11,693 10,157 7,569
Corporate and Eliminations (2,752) (3,142) (3,276)
-------- -------- --------
Income from Operations $ 19,354 $ 18,347 $ 15,316
======== ======== ========
</TABLE>
The Company's segment data reflects similarity of product lines rather than
divisional organization. Management believes the segment format more
appropriately reflects similarities of manufacturing processes as well as the
shared production facility in Cleveland, Ohio.
13
<PAGE>
Results of Operations
1997 Operations Compared to 1996
Consolidated net revenues increased to $104,800,000 in 1997 from $104,787,000
in 1996. Excluding the loss of a dishrack customer which accounted for
$4,289,000 in revenues in 1996, consolidated net revenues grew 4.3% over the
prior year period. Revenue growth resulted from the increase in the rental and
sales of automatic taping tools and construction merchandise sales through CTS-
operated stores. As a result of increased marketing activities, bag closing
equipment revenues in Latin America also increased. Currency changes resulted in
a reduction in revenues of $1,660,000 from 1996.
Cost of revenues decreased 1.9% to $60,144,000 in 1997 from $61,294,000 in
1996. Cost of revenues declined at MPS primarily due to cost savings related to
the closure of a leased manufacturing facility. In addition, cost of revenues
improved at PPS due to cost reduction programs partially resultant from new cost
efficient production equipment acquired in 1996. Revenue growth within CTS
contributed to an improvement in the consolidated profit margin.
Consolidated selling, general and administrative expenses (SG&A) increased .6%
to $25,302,000 in 1997 from $25,146,000 in 1996. This was primarily attributable
to a growth in bad debt expense accompanying revenue growth within the
construction tool business.
Interest expense decreased 27.6% to $3,710,000 in 1997 from $5,123,000 in
1996. In addition to lower debt outstanding, the Company's interest rates were
lowered 1.50% on its bank debt as a result of a refinancing which occurred in
June 1996 and the repurchase of a portion of its 11% Subordinated Notes
utilizing a lower cost bank line of credit.
Other expense increased to $37,000 in 1997 compared to $18,000 in 1996. In
1997, the Company recorded a gain on the sale of an investment and interest
income on an income tax refund. This income was offset by expenses related to
efforts to sell one of the Company's divisions, and the loss incurred on
disposal of fixed assets.
Income before taxes (IBT) increased 18.2% to $15,607,000 in 1997 from
$13,206,000 in 1996. As discussed in the preceding paragraphs, this improvement
was principally the result of rental revenue growth and lower interest expense.
Income taxes in 1997 were 41.1% of IBT compared to 43.4% in 1996. The
Company's effective tax rates decreased due to a reduced estimated effective tax
rate for state income taxes and the reduced impact of nondeductible expenses.
Metal Products Segment Net revenues decreased 11.2% to $40,553,000 in 1997
from $45,669,000 in 1996. The decrease was primarily attributable to the
termination of a supply contract with a dishrack customer which resulted in a
decline in revenues of $4,289,000.
Cost of revenues decreased 9.2% to $29,657,000 in 1997 from $32,655,000 in
1996. MPS aggressively reduced its over head cost structure by closing its Canal
Winchester, Ohio, plant and consolidating revenue volumes into its Beaver Dam,
Kentucky, manufacturing facility.
Selling, general and administrative expenses decreased 7.6% to $3,636,000 in
1997 from $3,933,000 in 1996. Overhead costs were managed commensurate to volume
levels.
Income from operations decreased 20.1% to $7,260,000 in 1997 from $9,081,000
in 1996 due to the factors discussed above.
Packaging Products Segment Net revenues increased 3.4% to $21,819,000 in 1997
from $21,103,000 in 1996. Currency changes resulted in a reduction in revenues
of $1,660,000 in 1997. Revenue growth in bag closing equipment occurred in the
U.S., Latin America and Europe. Latin American revenues, in particular, grew
$1,119,000 as a result of new marketing programs targeting that geographic
region.
14
<PAGE>
Cost of revenues increased 0.9% to $13,542,000 in 1997 from $13,423,000 in
1996. The growth was primarily attributable to revenue growth. Profit margins
improved due to cost reductions generated by new production equipment acquired
in 1996.
Selling, general and administrative expenses decreased 5.6% to $5,124,000 in
1997 from $5,429,000 in 1996. PPS recorded lower engineering and marketing costs
for new product introductions. In addition, employee recruitment expenses were
reduced.
As a result of the gross profit margin improvement and reductions in selling,
general and administrative expenses discussed in the preceding paragraphs,
income from operations increased 40.1% to $3,153,000 in 1997 from $2,251,000 in
1996.
Construction Tool Segment Net revenues increased 11.6% to $42,428,000 in 1997
from $38,015,000 in 1996. Revenue growth was attributable to increased tool
rentals, merchandise sales, and the sale of automatic taping tools.
Cost of revenues increased 11.4% to $16,945,000 in 1997 from $15,216,000 in
1996. The growth in cost of revenues was primarily attributable to revenue
growth.
Selling, general and administrative expenses increased 9.1% to $13,790,000 in
1997 from $12,642,000 in 1996. The increase was primarily attributable to added
marketing programs and an increase in bad debt expense in conjunction with
revenue growth.
As a result of the changes discussed in the preceding paragraphs, income from
operations increased 15.1% to $11,693,000 in 1997 from $10,157,000 in 1996.
1996 Operations Compared to 1995
Consolidated net revenues increased .4% to $104,787,000 in 1996 from
$104,326,000 in 1995. Revenue growth was primarily the result of increased
rental revenues of automatic taping tools in the Company's CTS business segment.
Store merchandise sales also improved at CTS. This revenue growth offset the
impact of a termination of a supply contract with a MPS dishrack customer, which
resulted in a revenue decline of $3,459,000 from 1995.
Cost of revenues decreased 5.5% to $61,294,000 in 1996 from $64,829,000 in
1995. The gross profit margin improvement was primarily attributable to changes
in product and customer mix with revenue growth in the higher margin CTS
business segment. Margins also improved at MPS and PPS due to cost reductions as
discussed below.
Consolidated selling, general and administrative expenses (SG&A) increased
4.0% to $25,146,000 in 1996 from $24,181,000 in 1995. This was primarily
attributable to additional marketing programs and bad debt expense incurred to
support revenue growth within the Company's CTS business segment.
Interest expense decreased 22.3% to $5,123,000 in 1996 from $6,596,000 in
1995. In addition to lower debt outstanding, the Company's interest rates were
lowered 1.50% on its bank debt as a result of a refinancing which occurred in
June 1996.
Other expense decreased to $18,000 in 1996 compared to $493,000 in 1995. The
Company recorded income in 1996 of $179,000 as a result of a distribution
relating to past claims received from the liquidation of an insurance company.
In 1995, the Company had recorded unusual charges for the scrapping of taping
tools ($148,000) and the consolidation of two tool repair centers ($158,000).
Income before taxes (IBT) increased 60.5% to $13,206,000 in 1996 from
$8,227,000 in 1995. As discussed in the preceding paragraphs, this improvement
was principally the result of rental revenue growth and lower interest expense.
Income taxes in 1996 were 43.4% of IBT compared to 40.6% in 1995. The
Company's effective tax rates increased for federal, state and foreign taxing
authorities.
15
<PAGE>
Metal Products Segment Net revenues decreased 4.9% to $45,669,000 in 1996 from
$48,014,000 in 1995. The decrease was primarily attributable to the termination
of a supply contract with a dishrack customer which resulted in a decline in
revenues of $3,459,000.
Cost of revenues decreased 7.1% to $32,655,000 in 1996 from $35,150,000 in
1995. The decrease was primarily attributable to the decline in revenues
discussed above. Gross profit margins improved for both coated and formed wire
products and material handling equipment due primarily to product and customer
mix. MPS had incurred nonrecurring expenses in 1995 due to the startup of a new
style dishdrainer and the inception of the coating of all dishdrainers. In 1996,
MPS recorded lower workers' compensation premiums, real estate and personal
property taxes, and post-retirement benefit costs.
Selling, general and administrative expenses decreased 2.5% to $3,933,000 in
1996 from $4,032,000 in 1995. The Company recorded lower professional service
fees in 1996 including the reversal of $100,000 in legal fees accrued in 1995.
As a result of the gross profit margin improvement and reductions in selling,
general and administrative expenses discussed in the preceding paragraphs,
income from operations increased 2.8% to $9,081,000 in 1996 from $8,832,000 in
1995.
Packaging Products Segment Net revenues decreased 6.0% to $21,103,000 in 1996
from $22,458,000 in 1995. In 1995, the Company recorded revenues of $563,000
from the sale of bag making equipment, a product line which was discontinued in
that year. The Company also recorded in 1995 additional revenues of $971,000
from the elimination of a one-month lag in financial reporting by its foreign
subsidiaries. (The impact on operating income was not material.) Additionally,
currency changes resulted in a reduction in revenues of $610,000 in 1996.
Cost of revenues decreased 7.8% to $13,423,000 in 1996 from $14,554,000 in
1995. The decrease was primarily attributable to the decline in revenues. New
equipment acquisitions in 1995 and 1996 permitted PPS to bring in-house to
Statesville, North Carolina, the manufacture of certain components. This and
other cost reduction programs improved gross profit margins.
Selling, general and administrative expenses decreased 5.0% to $5,429,000 in
1996 from $5,713,000 in 1995. PPS had recorded a nonrecurring bad debt charge of
$240,000 in 1995.
As a result of the gross profit margin improvement and reductions in selling,
general and administrative expenses discussed in the preceding paragraphs,
income from operations increased 2.7% to $2,251,000 in 1996 from $2,191,000 in
1995.
Construction Tool Segment Net revenues increased 12.3% to $38,015,000 in 1996
from $33,854,000 in 1995. Revenue growth was attributable to increased tool
rentals, merchandise sales, and the sale of automatic taping tools.
Cost of revenues increased .6% to $15,216,000 in 1996 from $15,125,000 in
1995. The Company recorded improved operating margins due to reduced ongoing
repair expenses for rental tools, including lower parts consumption. This
included a one-time gain of $329,000 recorded in the fourth quarter as a result
of a change in the method of estimating tool repair costs for ATF tools in
repair centers and on rent.
Selling, general and administrative expenses increased 13.3% to $12,642,000 in
1996 from $11,160,000 in 1995. The increase was primarily attributable to added
marketing programs and an increase in bad debt expense in conjunction with
revenue growth.
As a result of the changes discussed in the preceding paragraphs, income from
operations increased 34.2% to $10,157,000 in 1996 from $7,569,000 in 1995.
16
<PAGE>
Liquidity and Capital Resources
The Company entered into a new bank credit agreement on June 27, 1996, which
reduced the interest rate on its variable rate bank loans by 1.25% to 1.50%,
depending on the maintaining of certain ratios and Subordinated Note
repurchases. The new loan agreement originally consisted of a $25,000,000 term
loan and up to $15,000,000 in available funds under a revolving credit loan. The
term loan matures in equal quarterly installments with the final payment due on
December 31, 2000. The Company negotiated an amendment to the agreement in 1997
to increase the revolving credit loan to $20,000,000. The increase in the
revolving credit loan capacity provided the financing for the Company to
repurchase and extinguish $9,250,000 in principal of its Subordinated Notes in
May 1997. The Company had $4,500,000 outstanding on its revolving credit loan at
December 31, 1997. Management believes that this financing provides better
financial flexibility and will be sufficient to meet the Company's current
expectations through the period of the agreement.
The refinancing of the bank credit agreement in 1996 resulted in a writeoff of
the unamortized deferred financing costs from the previous loan agreement. This
amount, $614,000 net of tax, is identified as an extraordinary item in the
Consolidated Statements of Income. The repurchase and extinguishment of the
Subordinated Notes in 1997 resulted in a charge of $772,000, net of tax, also
identified as an extraordinary item in the Consolidated Statements of Income.
The Company has the option of redeeming all or a portion of its Subordinated
Notes after March 15, 1997 with a 4.4% premium. This premium declines to 2.2% on
March 15, 1998. The Company is negotiating with its banks to repurchase and
extinguish an undetermined amount of the Notes in 1998, depending on certain
factors, including pricing, the cost of the transaction, and prevailing interest
rates. The revolving credit loan will be utilized to facilitate the transaction.
At December 31, 1997, the Company had working capital of $3,824,000 compared
to working capital of $7,362,000 at December 31, 1996. This decrease in working
capital is due to a $4,278,000 increase in current maturities of long-term debt.
The Company has classified its Revolving Credit Loan as current. The Revolving
Credit Loan balance at December 31, 1997 was $4,500,000. There were no amounts
outstanding on this loan at December 31, 1996 and the increase is due to the
utilization of this line of credit to extinguish $9,250,000 in Subordinated
Notes as discussed above. The Company is not required to pay off this balance
prior to 2000. In addition, the Company received a tax refund of $1,266,000 in
1997 which had been included as a prepaid income tax item at December 31, 1996.
At December 31, 1997, receivables increased $2,072,000 from December 31, 1996.
Inventories also increased $69,000.
In 1991, the New York State Department of Environmental Conservation (the
"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.
A feasibility study, prepared in 1994 by environmental consultants engaged by
the Company, established a range of estimated remediation costs of $.7 million
to $2.9 million, plus or minus 30% of those costs, with the most probable method
of remediation being at the high end of the range. The Company established an
accrual of $3.9 million for the costs of remediation.
In 1997, the Company entered into an agreement with the party responsible for
an adjoining site who also has been in the process of addressing concerns raised
by NYSDEC which will transfer responsibility to remediate the formerly-owned
property to the party remediating the adjoining site. The Company paid the
$520,000 payable under the agreement and has an exposure of up to an additional
$120,000 if pond sediment contamination is higher than estimated by the
Company's environmental consultants. In the event the party responsible for the
remediation of the adjoining site is unable to consummate an agreement with
NYSDEC within one year of its agreement with the Company, the Company has the
option of the return of its contribution to the remediation of the sites and
pursuing its own remediation plan. Should NYSDEC not approve the joint
remediation plan for both sites, the agreement can be nullified and funds
returned to the Company. The Company has maintained its accruals pending
finalization of the remediation plan of the adjoining site. The Company is
pursuing contributions from directors and officers of other users of the
previously owned property. No estimate can be given as to possible recovery.
17
<PAGE>
Liquidity and Capital Resources (cont'd)
As a result of dishrack 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 dishrack 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 dishrack components, lower volume dishracks, 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 facility 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.
Capital expenditures were $3,475,000 for the year ended December 31, 1997
compared to $3,862,000 for the year ended December 31, 1996. Cash provided by
operating activities and credit availability is expected to be sufficient to
cover the financing of anticipated capital requirements in future periods.
While both the Bank Credit Agreement and the Indenture of AXIA Incorporated,
issuer, ("Indenture") governing the Notes, restrict the Company's ability to
incur additional indebtedness, management, based upon the budgets prepared by
its business segments, believes that its cash flow from operations and its
revolving loan capacity will be sufficient to meet its operational requirements,
loan maturities and capital needs for 1998 and 1999.
The Company was in compliance with all terms and restrictive covenants of its
credit agreements as of December 31, 1997.
Other Matters
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.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") establishes standards for reporting and display of
comprehensive income, its components, and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
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 maker in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
With the coming of the year 2000, there has been a great deal of publicity
concerning computer hardware's and software's use of two-digit dates which might
result in information reporting and equipment failure ("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. Operations
within the Metal Products and Construction Tool segments have prepared and/or
are 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.
18
<PAGE>
As a result, both business segments expect to be Year 2000 compliant by the end
of 1998. The operations within the Packaging Products segment have newer
computer hardware and acquired software packages which management expects to
upgrade during 1998. The Company has spent approximately $550,000 in 1997 and
estimates spending an additional $850,000 in the aggregate in 1998 and 1999 to
upgrade its management information systems.
This report contains various forward-looking statements, including financial,
operating and other projections. There are many factors that could cause actual
results to differ materially, such as: adoption of new environmental laws and
regulations and changes in the way such laws and regulations are interpreted and
enforced; general business conditions, such as the level of competition, changes
in demand for the Company's services and the strength of the economy in general.
These and other factors are discussed in this report and other documents the
Company has filed with the Securities and Exchange Commission.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company called for by this Item
8, together with the report thereon of the independent accountants dated
February 25, 1998, are set forth on pages 20 to 45 inclusive. Financial
statement schedules not included in this Report on Form 10-K have been omitted
because they are not applicable or because the information called for is shown
in the consolidated financial statements or notes thereto.
AXIA INCORPORATED
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Pages
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 20
Consolidated Statements of Stockholder's Equity for the periods ended
December 31, 1997, December 31, 1996, and December 31, 1995 21
Consolidated Statements of Income for the periods ended December 31, 1997,
December 31, 1996, and December 31, 1995 22
Consolidated Statements of Cash Flows for the periods ended December 31, 1997,
December 31, 1996, and December 31, 1995 23
Notes to the Consolidated Financial Statements 24-44
Independent Auditors' Report 45
</TABLE>
19
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ --------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,310 $ 1,716
Accounts receivable, net 12,759 10,687
Inventories 9,155 9,086
Prepaid income taxes and other current assets 436 1,695
Deferred income tax assets 2,593 3,027
------- -------
Total Current Assets $26,253 $26,211
------- -------
PLANT AND EQUIPMENT, AT COST:
Land $ 508 $ 521
Buildings and improvements 6,620 6,509
Machinery and equipment 24,741 23,149
Equipment leased to others 7,139 6,040
------- -------
$39,008 $36,219
Less: Accumulated depreciation 14,938 11,346
------- -------
Net Plant and Equipment $24,070 $24,873
------- -------
OTHER ASSETS:
Goodwill, net $33,505 $34,679
Intangible assets, net 703 377
Deferred charges, net 12,182 12,213
Investment in affiliate - 900
Other assets 60 78
------- -------
Total Other Assets $46,450 $48,247
------- -------
TOTAL ASSETS $96,773 $99,331
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $10,925 $ 6,647
Accounts payable 4,021 3,655
Accrued liabilities 7,219 8,547
Accrued income taxes 264 -
------- -------
Total Current Liabilities $22,429 $18,849
------- -------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $20,439 $34,548
Other non-current liabilities 10,883 11,050
Deferred income taxes 2,955 2,766
------- -------
Total Non-Current Liabilities $34,277 $48,364
------- -------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value
100 shares issued and outstanding $ - $ -
Additional paid-in capital 16,723 16,723
Retained earnings 23,818 15,395
Additional minimum pension liability (182) (324)
Cumulative translation adjustment (292) 324
------- -------
Total Stockholder's Equity $40,067 $32,118
------- -------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $96,773 $99,331
======= =======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these balance sheets.
20
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE PERIODS ENDED DEC. 31, 1997, DEC. 31, 1996, AND DEC. 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Minimum
Common Stock Paid-in Retained Pension Translation
Par Capital Earnings Liability Adjustments
------------ ---------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, Dec. 31, 1994 $- $16,848 $ 3,644 $ - $ 304
=== ======= ======= ===== =====
Net income - - - 4,889 -
Stock repurchase - (125) - - -
Cumulative translation adjustment - - - - 322
Other - - - (54) -
--- ------- ------- ----- -----
BALANCE, Dec. 31, 1995 $- $16,723 $ 8,533 $ (54) $ 626
=== ======= ======= ===== =====
Net income - - 6,862 - -
Cumulative translation adjustment - - - - (302)
Other - - - (270) -
--- ------- ------- ----- -----
BALANCE, Dec. 31, 1996 $- $16,723 $15,395 $(324) $ 324
=== ======= ======= ===== =====
Net income - - 8,423 - -
Cumulative translation adjustment - - - - (616)
Other - - - 142 -
--- ------- ------- ----- -----
BALANCE, Dec. 31, 1997 $- $16,723 $23,818 $(182) $(292)
=== ======= ======= ===== =====
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
21
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED DEC. 31, 1997, DEC. 31, 1996, AND DEC. 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 77,418 $ 79,771 $ 81,914
Net rentals 27,382 25,016 22,412
-------- -------- --------
Net revenues $104,800 $104,787 $104,326
Cost of sales 50,518 52,434 55,171
Cost of rentals 9,626 8,860 9,658
Selling, general and
administrative expenses 25,302 25,146 24,181
-------- -------- --------
Income from operations $ 19,354 $ 18,347 $ 15,316
Interest expense 3,710 5,123 6,596
Interest income (367) (39) (44)
Other expense (income), net 404 57 537
-------- -------- --------
Income before income taxes and
extraordinary item $ 15,607 $ 13,206 $ 8,227
Provision for income taxes 6,412 5,730 3,338
-------- -------- --------
Income before extraordinary item $ 9,195 $ 7,476 $ 4,889
Extraordinary item:
Loss on early extinguishment of
debt, net of income taxes of $479
and $410, respectively (see Notes 5 and 7) 772 614 -
-------- -------- --------
Net Income $ 8,423 $ 6,862 $ 4,889
======== ======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
22
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DEC. 31, 1997, DEC. 31, 1996, AND DEC. 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Jan. 1, 1997 Jan. 1, 1996 Jan. 1, 1995
to to to
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,423 $ 6,862 $ 4,889
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 5,099 6,716 6,380
Extraordinary item-write off of deferred financing costs
and original issue discount 826 1,024 -
Deferred income tax provision (benefit) 623 398 753
Loss (gain) on disposal of fixed assets 159 14 184
Gain on sale of investment (559) - -
Provision for losses on accounts receivable 2,169 1,499 1,049
Provision for obsolescence of inventories 79 592 (20)
Credit to pension expense (231) (275) (166)
Changes in assets and liabilities:
Accounts receivable (4,557) (15) (1,291)
Inventories (426) (501) (1,146)
Accounts payable 442 (433) 651
Accrued liabilities (1,244) (437) (308)
Other current assets (14) 270 (706)
Income taxes payable 1,532 (151) 569
Other non-current assets (642) (176) (408)
Other non-current liabilities 51 25 (479)
-------- -------- -------
Net Cash Provided by Operating Activities $ 11,730 $ 15,412 $ 9,951
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,475) (3,862) (3,853)
Proceeds from sale of fixed assets 357 55 281
Proceeds from sale of investment 1,459 - -
-------- -------- -------
Net Cash (Used in) Investing Activities $ (1,659) $ (3,807) $(3,572)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other long-term debt 944 25,411 296
Payments of other long-term debt (15,931) (34,566) (7,374)
Net increase in Revolving Credit Loan 4,500 - -
Payments of deferred financing costs - (426) -
Other equity transactions 37 (301) (166)
-------- -------- -------
Net Cash (Used in) Financing Activities $(10,450) $ (9,882) $(7,244)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (27) (52) 38
-------- -------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (406) $ 1,671 $ (827)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,716 45 872
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,310 $ 1,716 $ 45
======== ======== =======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
23
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1
Nature of Business
AXIA Incorporated, the "Company," is a diversified manufacturer and marketer
of (i) formed and coated wire products, material handling and storage equipment,
(ii) specialized packaging machinery, and (iii) tools and other products for
finishing drywall in new, manufactured, and renovated housing and commercial
construction.
On March 15, 1994, AXIA Incorporated (the "Predecessor Company") was acquired
as part of a merger with a newly-formed company, Axia Acquisition Corp.
("Acquisition"), a Delaware corporation, with the surviving corporation
continuing under the name AXIA Incorporated (the "Company", including reference
to the Predecessor Company where appropriate). The Company is 100% owned by
Axia Holdings Corporation ("Holdings"). Due to the substantial change in
controlling interest in the Company, the Company reflected a complete change in
its accounting basis of its assets and liabilities from Predecessor Company
historical cost to estimated fair value as of March 15, 1994.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Estimates and Assumptions
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 as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation
The Consolidated Financial Statements include AXIA INCORPORATED AND
SUBSIDIARIES (the "Company"). All significant intercompany items are eliminated
in consolidation.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the current
rate of exchange at the balance sheet date. Revenues and expenses are
translated at the average exchange rate for the period. Translation adjustments
have been excluded from the results of operations and are reported as a separate
component of Stockholder's Equity. Gains and losses resulting from foreign
currency transactions, which are not material, are included in the Consolidated
Statements of Income.
Cash and Cash Equivalents
Cash equivalents are carried at cost, which approximates market. The Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market.
24
<PAGE>
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Plant and Equipment
Depreciation is provided over the following useful lives:
Buildings and improvements........ 2-30 years
Machinery and equipment........... 3-12 years
Equipment leased to others........ 5-7 years
Depreciation on plant and equipment is provided on the straight-line method
over the estimated useful lives of the assets for financial reporting purposes.
Accelerated methods and lives are used for income tax purposes. Expenditures
for maintenance and repairs are charged to expense when incurred. Expenditures
for renewals and betterments are capitalized and depreciated over the estimated
remaining useful lives of the assets.
The original cost and related accumulated depreciation of assets sold or
retired are removed from the applicable accounts, with any gain or loss
resulting from the transaction included in income.
Income Taxes
Income tax provisions are made for the estimated amount of income taxes on
reported earnings which are payable currently and in the future.
As required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), the deferred tax provision is
determined using the liability method. Under this method, deferred tax assets
and liabilities are recognized based on differences between the financial
statements and the tax basis of assets and liabilities as determined using
presently enacted tax laws and the appropriate tax rates.
Deferred Charges, Intangible Assets and Goodwill
Amortizable loan costs, organization costs, patents, customer lists, and other
intangible assets and deferred charges are stated in the accompanying
Consolidated Balance Sheets net of amortization and are amortized over their
estimated useful lives, which range from 2 to 16 years.
Goodwill represents the excess purchase price paid over the estimated fair
value of the net assets acquired in the March 15, 1994 merger discussed Note 1.
Goodwill is stated net of amortization and is being amortized on a straight-line
basis for a period of not more than 40 years (see Note 5). Subsequent to its
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life of
goodwill may warrant revision or that the remaining balance of goodwill may not
be recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business
segment's undiscounted operating income (before goodwill amortization) over the
remaining life of the goodwill in measuring whether the goodwill is recoverable.
25
<PAGE>
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
New Accounting Pronouncements
In 1996, the Company adopted Statement of Financial Accounting Standards No.
121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The adoption of SFAS 121 did not have a
material impact on the financial position or results of operations of the
Company.
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.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") establishes standards for reporting and display of
comprehensive income, its components, and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
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 maker in deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
NOTE 3 ACCOUNTS RECEIVABLE
Trade accounts receivable are stated net of allowance for doubtful accounts.
Transactions affecting the allowance for doubtful accounts are shown in the
following table (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of period $ 1,491 $ 1,140 $ 942
Additions, charged to income 2,169 1,499 1,049
Deductions, write-off
of uncollectible accounts,
net of recoveries (1,814) (1,148) (851)
------- ------- ------
Balance, end of period $ 1,846 $ 1,491 $1,140
======= ======= ======
</TABLE>
The Company is a diversified distributor, marketer and manufacturer of a wide
range of high quality products used in the construction industry and
agricultural and durable goods businesses. As such, its customers range from
individual entrepreneurs to large corporations.
26
<PAGE>
NOTE 4 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, net of reserves of $528,000 and $546,000 as of December 31, 1997
and 1996, respectively, consist of (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $4,146 $4,653
Work in process 1,058 854
Finished goods 3,951 3,579
------ ------
Total inventories $9,155 $9,086
====== ======
</TABLE>
NOTE 5 GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGES
Goodwill, intangible assets and deferred charges consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Goodwill $37,072 $37,380
Less amortization 3,567 2,701
------- -------
Goodwill, net $33,505 $34,679
======= =======
Patents $ 496 $ 529
Customer lists 223 223
Computer software 711 310
Other intangibles 340 301
------- -------
Subtotal $ 1,770 $ 1,363
Less amortization 1,067 986
------- -------
Intangible assets, net $ 703 $ 377
======= =======
Prepaid pension costs $ 8,049 $ 7,690
Life insurance deposits 3,467 3,297
Deferred financing costs 1,040 1,632
Other deferred charges 161 147
------- -------
Subtotal $12,717 $12,766
Less amortization 535 553
------- -------
Deferred charges, net $12,182 $12,213
======= =======
</TABLE>
Total amortization expense related to the above assets was $1,236,000,
$1,842,000 and $2,113,000 for the periods ended December 31, 1997, 1996, and
1995, respectively. As a result of the early extinguishment of debt as
discussed in Note 7, the Company wrote off $314,000 and $1,024,000 of
unamortized deferred financing costs in 1997 and 1996, respectively.
27
<PAGE>
NOTE 6 ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Salaries, wages, vacations and
payroll taxes $ 2,588 $ 2,445
Insurance 1,546 1,509
Other current liabilities 3,085 4,593
------- -------
Total accrued liabilities $ 7,219 $ 8,547
======= =======
NOTE 7 LONG-TERM DEBT
Long-term debt, inclusive of capitalized lease obligations which are not
material, is as follows (in thousands):
December 31, December 31,
1997 1996
------------ ------------
11.00% Senior Subordinated Notes $ 9,749 $18,343
Term Loan 15,732 22,222
Revolving Credit Loan 4,500 -
Other 1,383 630
------- -------
Total Debt 31,364 41,195
Less: Current maturities 10,925 6,647
------- -------
Total Long-Term Debt $20,439 $34,548
======= =======
</TABLE>
The Senior Subordinated Notes above are stated net of unamortized discounts of
$501,000 and $1,157,000 as of December 31, 1997 and 1996, respectively. The
carrying amount of the Term Loan approximates its fair value as the term notes
bear interest at floating rates. The fair value of the Senior Subordinated Notes
at December 31, 1997 was $10,701,000 as determined by market quotations. Other
debt consists of a revolving line of credit for the Company's European
operations and capitalized lease financing.
Bank Credit Agreement
On June 27, 1996, 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 $25,000,000 and a non-amortizing
revolving credit loan ("Revolving Credit Loan") of up to $15,000,000, including
up to $1,000,000 of letters of credit. The Company recorded a pre-tax charge of
$1,024,000 representing the writeoff of unamortized deferred loan costs from its
previous bank financing agreement. This charge, net of tax, is reflected as an
extraordinary item in the accompanying Consolidated Statements of Income for the
period ended December 31, 1996. The Bank Credit Agreement was amended in March
1997 to increase the Revolving Credit Loan availability to $20,000,000.
Under the Bank Credit Agreement, the loans may, at the option of the Company,
be either Base Rate borrowings, Eurodollar borrowings or a combination thereof.
Base Rate borrowings bear interest at the prime rate or the Federal Funds rate
plus 1.00%, whichever is higher, and Eurodollar borrowings bear interest at a
rate of LIBOR plus 1.50%. In certain events defined in the agreement, the
Eurodollar borrowing interest rate may be increased to LIBOR plus 1.75%. The
Company pays a fee of .38% per annum on the unused balance of the line of
credit. The Company can repay any borrowings at any time without penalty. The
weighted average interest rates on all amounts outstanding under the Bank
28
<PAGE>
NOTE 7 LONG-TERM DEBT (cont'd)
Credit Agreement as of December 31, 1997 was 7.56%. Substantially all of the
assets of the Company, ATTS, and TapeTech act as collateral under the Bank
Credit Agreement.
Subsequent to a scheduled mandatory Term Loan payment of $210,000 in February
1998 due to an asset sale, the Term Loan will have scheduled maturities of
$1,294,000 quarterly, maturing with a final payment of $1,288,000 on December
31, 2000. The Revolving Credit Loan also terminates on December 31, 2000.
Interest payments are generally due quarterly. The Company is required to prepay
portions of the Term Loan in the event of a major asset sale, as defined in the
Bank Credit Agreement.
11.00% Senior Subordinated Notes
The 11.00% Senior Subordinated Notes were issued pursuant to a trust indenture
(the "Indenture") between the Company, certain guarantors and a trustee bank and
were sold to a group of private investors. Interest on the notes is payable
semi-annually and the notes mature on March 15, 2001. The notes may be redeemed,
at the Company's option, in full or in part, at a decreasing premium rate of
104.4% declining to 102.2% at March 15, 1998. A change of control of the
Company, as defined, would require the Company to offer to redeem all notes at a
101% premium.
In July 1994, the Company filed a Registration Statement with the Securities
and Exchange Commission to register the Senior Subordinated Notes under the
Securities Act of 1933. The Notes are guaranteed by all of the Company's
domestic subsidiaries. See Note 17 for further information regarding these
guarantees.
In May 1997, the Company exercised its option to redeem and extinguish
$9,250,000 of its Senior Subordinated Notes. The Company recorded a pretax
charge of $1,251,000 representing the aforementioned redemption premium, the
writeoff of capitalized financing costs associated with the original issuance of
the notes, the applicable original issue discount, and legal expenses, agent
fees, and other costs of the transaction. The charge, net of tax, is reflected
as an extraordinary item in the accompanying Consolidated Statement of Income
for the period ended December 31, 1997.
Restrictive Loan Covenants
The Bank Credit Agreement and the Indenture contain certain covenants which,
among other things and all as defined in the applicable agreement, require the
Company to maintain a minimum net worth, current ratio, interest coverage ratio,
and fixed charge coverage ratio, and maximum leverage ratio of indebtedness to
net worth. In addition, the Company may not create or incur certain types of
additional debt or liens, declare dividends except as defined, or make capital
expenditures or other restricted payments, as defined, during the term of the
agreements in excess of varying amounts, as defined. The Company was in
compliance with its loan covenants as of December 31, 1997.
Scheduled Principal Payments
Scheduled payments of principal of long-term debt outstanding at December 31,
1997, including capitalized lease obligations, are (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------
Revolving Senior
Term Credit Subordinated
Loan Loan Notes Other
------- --------- ------------ -------
<S> <C> <C> <C> <C>
1998 $ 5,386 $4,500 $ - $1,039
1999 5,176 - - 139
2000 5,170 - - 135
2001 - - 9,749 70
------- ------ ------ ------
Total $15,732 $4,500 $9,749 $1,383
======= ====== ====== ======
</TABLE>
29
<PAGE>
NOTE 7 LONG-TERM DEBT (cont'd)
The scheduled maturities above include a prepayment in 1998 of $210,000
related to the sale of assets as required in the Bank Credit Agreement. The
amounts outstanding under revolving credit agreements are recorded as current
maturities in the accompanying Consolidated Balance Sheets.
The Company made the following interest payments for the periods ended
December 31, 1997, December 31, 1996, and December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest payments $3,551 $4,399 $5,780
</TABLE>
NOTE 8 CAPITAL STOCK
Subsequent to the merger and acquisition on March 15, 1994, the Company has
100 shares of common stock, par value $.01 per share, authorized, issued and
outstanding, all of which are owned by Holdings.
NOTE 9 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities presented in the financial
statements and the amounts used for income tax purposes. Deferred tax assets
and liabilities were composed of the following (in thousands):
<TABLE>
<CAPTION>
Deferred Income Tax Assets December 31, December 31,
Current Assets 1997 1996
- -------------- ------------ ------------
<S> <C> <C>
Inventory valuation $ 601 $ 652
Bad debt reserves 706 570
Insurance accruals 466 464
Rental tool repair 203 168
Environmental accrual 6 209
Facility realignment - 239
Tax accruals 50 76
Other, net 561 649
------- -------
Total deferred tax asset $ 2,593 $ 3,027
======= =======
Deferred Income Tax Assets (Liabilities) December 31, December 31,
Noncurrent Assets (Liabilities) 1997 1996
- ------------------------------- ------------ ------------
Depreciation & amortization $(3,890) $(3,666)
Pension plans (2,879) (2,661)
Insurance accruals 382 420
Tax accruals 212 76
Post-retirement benefits (ex. pensions) 1,548 1,464
Environmental accrual 1,415 1,339
Other, net 257 262
------- -------
Total deferred tax (liability), net $(2,955) $(2,766)
======= =======
</TABLE>
30
<PAGE>
NOTE 9 INCOME TAXES (cont'd)
The components of the income tax provision, excluding the amount attributable
to the extraordinary item, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
U.S. and state taxes payable $5,013 $4,700 $1,899
Foreign taxes payable 776 632 686
------ ------ ------
Taxes currently payable $5,789 $5,332 $2,585
Deferred taxes, net 623 398 753
------ ------ ------
Total provision $6,412 $5,730 $3,338
====== ====== ======
</TABLE>
A reconciliation between the statutory and the effective income tax rates,
excluding the amount attributable to the extraordinary item, is as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Statutory income tax rate 34.0% 34.0% 34.0%
Non-deductible amortization 3.5 3.7 4.0
State income taxes, net
of federal income tax benefit 2.5 3.1 2.2
Other, net 1.1 2.6 .4
----- ----- -----
Effective income tax rate 41.1% 43.4% 40.6%
===== ===== =====
</TABLE>
The Company made the following income tax payments, net of refunds, during the
periods ended December 31, 1997, December 31, 1996, and December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes paid (refunded) $3,795 $4,691 $2,561
</TABLE>
The Company does not record deferred income taxes applicable to undistributed
earnings of foreign subsidiaries. The Company considers these earnings to be
invested for an indefinite period. If such earnings were distributed, the U.S.
income taxes payable would not be material as the resulting liability would be
substantially offset by foreign tax credits.
31
<PAGE>
NOTE 10 PENSION PLANS
The Company's pension plans provide benefits for substantially all employees.
A majority of plan assets are invested in cash, bonds, domestic and
international equities and real estate. Pension costs are funded by the Company
at a rate necessary to maintain the plans on an actuarially sound basis.
The components of pension expense (credits) are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Normal cost $ 1,127 $ 983 $ 799
Interest on beginning of period
projected benefit obligation 1,726 1,679 1,680
Return on fund assets (3,095) (2,944) (2,581)
Net amortization and deferrals 11 7 (4)
Effect of curtailment - - (60)
------- ------- -------
Total credit to pension expense $ (231) $ (275) $ (166)
======= ======= =======
</TABLE>
In 1995, the Company recorded a gain of $60,000 on the curtailment of an
hourly pension plan as a result of the closure of a production facility.
32
<PAGE>
NOTE 10 PENSION PLANS (cont'd.)
A summary of the benefit obligations and plan assets is shown in the table
below (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------------ ------------------
<S> <C> <C> <C> <C>
(A) (B) (A) (B)
Actuarial present value
of benefit obligations:
Vested benefits $ 23,071 $ 3,910 $ 19,380 $ 3,644
Nonvested benefits 917 54 782 22
-------- ------- -------- -------
Accumulated benefit
obligation $ 23,988 $ 3,964 $ 20,162 $ 3,666
Effect of projected
future compensation
levels 1,227 - 1,382 -
-------- ------- -------- -------
Projected benefit
obligation $ 25,215 $ 3,964 $ 21,544 $ 3,666
Less: Plan assets at
fair value (33,460) (3,536) (29,077) (3,067)
-------- ------- -------- -------
Plan assets (in
excess)/less than
projected benefit
obligation $ (8,245) 428 $ (7,533) $ 599
Unrecognized prior service cost - (32) - (35)
Unrecognized net
actuarial (loss) gain 288 (295) (47) (524)
Adjustment required to
recognize minimum
liability - 327 - 559
-------- ------- -------- -------
Net (asset) liability $ (7,957) $ 428 $ (7,580) $ 599
======== ======= ======== =======
</TABLE>
(A) Plans with Assets in excess of Accumulated Benefits
(B) Plans with Accumulated Benefits in excess of Assets
At December 31, 1997, the Company has recorded pension assets of $8,049,000
and liabilities of $520,000 in the Consolidated Balance Sheets. Calculations of
1997, 1996 and 1995 pension expense under the provisions of SFAS No. 87 assumed
a settlement rate of 7.00%, 7.25% and 7.25%, respectively, and a long-term
rate of return on plan assets of 10.0% for all years.
33
<PAGE>
NOTE 11 POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors three defined benefit post-retirement plans. The Company
entered into employment agreements with executive employees which provide for
death benefits to the executive's estate upon the executive's death. A second
plan provides prescription drug benefits to nonsalaried employees at one of its
plants, and the other provides life insurance benefits to selected salaried and
nonsalaried employees. All plans are noncontributory and unfunded. The following
table sets forth the plans' combined status reconciled with the amount shown in
the Company's Consolidated Balance Sheets as of December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $(3,353) $(3,231)
Fully eligible active plan participants (488) (421)
Other active plan participants (262) (233)
------- -------
Total post-retirement benefit obligation $(4,103) $(3,885)
Plan assets at fair value - -
Accumulated post-retirement benefit obligation
in excess of plan assets $(4,103) $(3,885)
------- -------
Accrued post-retirement benefit cost $(4,103) $(3,885)
======= =======
Net periodic post-retirement benefit cost
included the following components:
Service cost - benefits attributed to
service during the period $ 85 $ (104)
Interest cost on accumulated post-retirement
benefit obligation 224 265
------- -------
Net periodic post-retirement benefit cost $ 309 $ 161
======= =======
</TABLE>
The Company entered into Salary Continuation Agreements with certain key
executive employees which provide a death benefit, contingent upon employment or
service as a consultant with the Company until retirement or death. Pursuant to
the agreement with each such executive, upon the executive's death, the Company
will pay to the respective designated beneficiary, annually for a period of ten
years, an amount equal to 40% of the executives current salary or salary at the
date of retirement. The total post-retirement benefit obligation of this benefit
program included in the table above is $3,544,000 and $3,398,000 at December 31,
1997 and 1996, respectively. The Company has purchased life insurance policies
on the lives of the executives, naming the Company as the sole beneficiary. The
amount of such coverage is designed to provide to the Company a source of funds
to satisfy its obligations under the program.
The Company, in accordance with a union contract, provides prescription drug
benefits at one of its plants. For measurement purposes, a 7 percent annual rate
of increase in the per capita cost of covered prescription drug benefits was
assumed for 1997 and 1996 and for each year thereafter. The prescription drug
cost trend rate assumption has an effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1 percentage point in
each year would increase the accumulated post-retirement benefit obligation as
of December 31, 1997 by approximately $78,000 and the aggregate of the service
and interest cost components of net periodic post-retirement benefit cost for
the year then ended by approximately $7,900. The discount rate used in
determining the accumulated post-retirement benefit obligation was 8.5% in 1997
and 1996.
34
<PAGE>
NOTE 12 LEASES
Minimum rental commitments of the Company under noncancellable operating
leases (primarily real estate) with initial terms of one year or more are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
1998 $1,983
1999 1,293
2000 891
2001 644
2002 537
Subsequent years 1,185
------
Total $6,533
======
</TABLE>
The Company incurred the following expense for operating leases for the
periods ended December 31, 1997, December 31, 1996, and December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Lease expense $2,369 $2,339 $2,298
</TABLE>
NOTE 13 BUSINESS SEGMENTS
The Company currently conducts its operations through three business segments:
Metal Products Segment ("MPS"), Packaging Products Segment ("PPS") and
Construction Tool Segment ("CTS").
MPS manufactures dishwasher baskets and other formed and coated wire products,
conveyors, and stackable storage racks. PPS produces industrial packaging
equipment and systems, and CTS manufactures, sells or rents a broad line of
construction tools and equipment, and drywall tape and taping tool systems for
finishing gypsum wallboard.
One of the Metal Products Segment's dishrack customers accounted for 20%, 19%
and 20% of the Company's revenues for 1997, 1996 and 1995, respectively.
Dishrack customers, as a group, accounted for 23%, 27% and 32% of the Company's
revenues for 1997, 1996 and 1995, respectively. Another customer of the Metal
Products Segment who purchases dishdrainers and other products accounted for
10%, 11% and 8% of the Company's revenues for 1997, 1996 and 1995, respectively.
The Metal Products Segment competes directly with the dishwasher
manufacturer's in-house manufacturing capability. Frigidaire, General Electric
and Whirlpool, major dishwasher manufacturers, have dishrack manufacturing
capability. Because MPS is competing against the self-manufacture of its product
by larger companies with more extensive financial resources, MPS competes on
quality, flexibility and innovation. As a result of dishrack 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 for dishracks by a new 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 dishrack
components, lower volume dishracks, 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 facility 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.
35
<PAGE>
NOTE 13 BUSINESS SEGMENTS (cont'd)
A summary of segment data for the periods ended December 31, 1997, 1996, and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
Metal Packaging Construction Corporate
Products Products Tool and
Segment Segment Segment Eliminations Consolidated
-------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Period ended December 31, 1997:
Net revenues $40,553 $21,819 $42,428 $ - $104,800
Income from operations 7,260 3,153 11,693 (2,752) 19,354
Identifiable assets 40,960 16,054 27,969 11,790 96,773
Depreciation and amortization 2,179 644 1,860 416 5,099
Capital expenditures 1,394 265 1,813 3 3,475
======= ======= ======= ======= ========
Period ended December 31, 1996:
Net revenues $45,669 $21,103 $38,015 $ - $104,787
Income from operations 9,081 2,251 10,157 (3,142) 18,347
Identifiable assets 41,244 16,024 26,476 15,587 99,331
Depreciation and amortization 3,581 596 1,789 750 6,716
Capital expenditures 255 719 2,807 81 3,862
======= ======= ======= ======= ========
Period ended December 31, 1995:
Net revenues $48,014 $22,458 $33,854 $ - $104,326
Income from operations 8,832 2,191 7,569 (3,276) 15,316
Identifiable assets 46,996 16,371 24,071 15,850 103,288
Depreciation and amortization 3,409 439 1,484 1,048 6,380
Capital expenditures 2,055 500 1,297 1 3,853
======= ======= ======= ======= ========
</TABLE>
36
<PAGE>
NOTE 14 GEOGRAPHICAL DATA
The Company conducts the majority of its business within the United States.
The Packaging Products Segment has operations in various other countries,
primarily in Europe and Singapore. The Construction Tool Segment also conducts
business in Canada. Activity in any single country or area outside of the United
States is not material. Export sales outside of the United States to
unaffiliated customers are less than 10% of sales.
A summary of geographical data for the periods ended December 31, 1997, 1996,
and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
Corporate
and
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Period ended December 31, 1997:
Net revenues $92,265 $12,535 $ - $104,800
Income from operations 20,387 1,719 (2,752) 19,354
Identifiable assets 79,327 5,656 11,790 96,773
Depreciation and amortization 4,610 73 416 5,099
Capital expenditures 3,323 149 $ 3 $ 3,475
======= ======= ======= ========
Period ended December 31, 1996:
Net revenues $91,307 $13,480 $ - $104,787
Income from operations 19,877 1,612 (3,142) 18,347
Identifiable assets 77,775 5,969 15,587 99,331
Depreciation and amortization 5,896 70 750 6,716
Capital expenditures 3,697 84 81 3,862
======= ======= ======= ========
Period ended December 31, 1995:
Net revenues $89,613 $14,713 $ - $104,326
Income from operations 16,458 2,134 (3,276) 15,316
Identifiable assets 81,053 6,385 15,850 103,288
Depreciation and amortization 5,258 74 1,048 6,380
Capital expenditures 3,790 62 1 3,853
======= ======= ======= ========
</TABLE>
37
<PAGE>
NOTE 15 CONTINGENCY
The Company is subject to various federal, state and local laws and
regulations governing the use, discharge and disposal of hazardous materials.
Including the item discussed below, compliance with current laws and regulations
has not had, and is not expected to have, a material adverse effect on the
Company's financial condition or operating results.
In 1991, the New York State Department of Environmental Conservation (the
"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.
A feasibility study, prepared in 1994 by environmental consultants engaged by
the Company, established a range of estimated remediation costs of $.7 million
to $2.9 million, plus or minus 30% of those costs, with the most probable method
of remediation being at the high end of the range. The Company established an
accrual of $3.9 million for the costs of remediation.
In 1997, the Company entered into an agreement with the party responsible for
an adjoining site who also have been in the process of addressing concerns
raised by NYSDEC which will transfer responsibility to remediate the formerly-
owned property to the party remediating the adjoining site. The Company paid the
$520,000 payable under the agreement and has an exposure of up to an additional
$120,000 if pond sediment contamination is higher than estimated by the
Company's environmental consultants. In the event the party responsible for the
remediation of the adjoining site is unable to consummate an agreement with
NYSDEC within one year of its agreement with the Company, the Company has the
option of the return of its contribution to the remediation of the sites and
pursuing its own remediation plan. Should NYSDEC not approve the joint
remediation plan for both sites, the agreement can be nullified and funds
returned to the Company. The Company has maintained its accruals pending
finalization of the remediation plan of the adjoining site. The Company is
pursuing contributions from directors and officers of other users of the
previously owned property. No estimate can be given as to possible recovery.
NOTE 16 RELATED PARTY TRANSACTIONS
The Company is wholly-owned by Holdings. The Company has entered into an
agreement with beneficial owners of Holdings shares as described herein. The
Company believes that the services provided are on terms at least as favorable
to the Company as it could obtain from unaffiliated third parties.
The Company has entered into a Management Agreement (the "Management
Agreement") with Cortec Capital Corporation ("CCC"), a beneficial owner of 59.1%
of Holdings, for certain management and financial services. Pursuant to the
Management Agreement, CCC will provide the Company with professional and
administrative advice in areas relating to the Company's business, including
finance, budgeting, risk management, business planning, manufacturing, sales,
marketing, staffing levels and acquisitions. CCC will receive a quarterly fee of
1% of the Company's net sales, not to exceed $125,000. The Management Agreement
continues until March 31, 2001, and thereafter for successive one year periods
unless terminated by either party. Total fees and reimbursed expenses for these
services were $500,551, $504,959 and $458,662 in 1997, 1996 and 1995,
respectively, and are included in selling, general and administrative expenses
in the Consolidated Statements of Income.
38
<PAGE>
NOTE 17 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 the Company and
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.
With the intent that the Subsidiary Guarantees not constitute fraudulent
transfers or conveyances under applicable state or federal law, the obligation
of each Guarantor under its Subsidiary Guarantee is also limited to the maximum
amount as will, after giving effect to such maximum amount and all other
liabilities (contingent or otherwise) of such Guarantor that are relevant under
such laws, and after giving effect to any rights to contribution of such
Guarantor pursuant to any agreement providing for an equitable contribution
among such Guarantor and other affiliates of the Company of payments made by
guarantees by such parties, result in the obligations of such Guarantor in
respect of such maximum amount not constituting a fraudulent conveyance.
The following consolidating condensed financial data illustrates the
composition 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.
39
<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>
40
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED 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>
Net sales $ 57,366 $14,837 $11,549 $ (6,334) $ 77,418
Net rentals 15,063 26,379 986 (15,046) 27,382
-------- ------- ------- -------- --------
Net revenues $ 72,429 $41,216 $12,535 $(21,380) $104,800
Cost of sales $ 40,916 $ 8,683 $ 7,300 $ (6,381) $ 50,518
Cost of rentals 3,156 20,895 621 (15,046) 9,626
Selling, general and administrative expenses 14,344 8,063 2,895 - 25,302
-------- ------- ------- -------- --------
Income from operations $ 14,013 $ 3,575 $ 1,719 $ 47 $ 19,354
Interest expense 3,695 9 6 - 3,710
Intercompany interest expense (income) (7) 7 - - -
Other expense (income), net (3,381) 205 391 2,822 37
-------- ------- ------- -------- --------
Income before income taxes $ 13,706 $ 3,354 $ 1,322 $ (2,775) $ 15,607
Provision for income taxes 4,558 1,295 559 - 6,412
-------- ------- ------- -------- --------
Income before extraordinary item $ 9,148 $ 2,059 $ 763 $ (2,775) $ 9,195
======== ======= ======= ======== ========
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 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>
CASH FLOWS FROM OPERATING ACTIVITIES $ 9,530 $ 1,899 $ 301 $ - $ 11,730
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,255) (71) (149) - (3,475)
Proceeds from sale of investment 1,459 - - - 1,459
Proceeds from sale of fixed assets 357 - - - 357
-------- ------- ------- -------- --------
Net Cash Used In Investing Activities $ (1,439) $ (71) $ (149) $ - $ (1,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Revolving Credit Loan 4,500 - - - 4,500
Proceeds from other long-term debt 620 - 324 - 944
Payments of other long-term debt (15,907) (24) - - (15,931)
Dividends received from (paid by) subsidiaries 638 - (638) - -
Net increase (decrease) in advance account 1,471 (1,386) (85) - -
Other equity transactions 145 - (108) - 37
-------- ------- ------- -------- --------
Net Cash Used In Financing Activities $ (8,533) $(1,410) $ (507) $ - $(10,450)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH - - (27) - (27)
-------- ------- ------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $ (442) $ 418 $ (382) $ - $ (406)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 407 507 802 - 1,716
-------- ------- ------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ (35) $ 925 $ 420 $ - $ 1,310
======== ======= ======= ======== ========
</TABLE>
41
<PAGE>
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
(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 $ 407 $ 507 $ 802 $ - $ 1,716
Accounts receivable, net 3,681 4,673 2,472 (139) 10,687
Inventories 5,892 1,422 2,268 (496) 9,086
Prepaid income taxes and other current assets 1,513 127 55 - 1,695
Deferred income tax assets 3,027 - - - 3,027
------- ------- ------ -------- -------
Total Current Assets $14,520 $ 6,729 $5,597 $ (635) $26,211
------- ------- ------ -------- -------
PLANT AND EQUIPMENT, AT COST:
Land $ 521 $ - $ - $ - $ 521
Buildings and improvements 6,200 18 291 - 6,509
Machinery and equipment 22,419 500 230 - 23,149
Equipment leased to others 6,026 - 14 - 6,040
------- ------- ------ -------- -------
$35,166 $ 518 $ 535 $ - $36,219
Less: Accumulated depreciation 10,860 305 181 - 11,346
------- ------- ------ -------- -------
Net Plant and Equipment $24,306 $ 213 $ 354 $ - $24,873
------- ------- ------ ------------ -------
OTHER ASSETS:
Goodwill, net $32,037 $ 2,642 $ - $ - $34,679
Intangible assets, net 330 47 - - 377
Deferred charges, net 11,271 924 18 - 12,213
Investment in wholly-owned subsidiaries 13,829 - - (13,829) -
Investment in affiliates 900 - - - 900
Other assets 78 - - - 78
------- ------- ------ -------- -------
Total Other Assets $58,445 $ 3,613 $ 18 $(13,829) $48,247
------- ------- ------ -------- -------
TOTAL ASSETS $97,271 $10,555 $5,969 $(14,464) $99,331
======= ======= ====== ======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,606 $ 41 $ - $ - $ 6,647
Accounts payable 2,610 466 718 (139) 3,655
Accrued liabilities 7,250 588 709 - 8,547
Accrued income taxes (30) - 30 - -
Advance account 255 449 (704) - -
------- ------- ------ -------- -------
Total Current Liabilities $16,691 $ 1,544 $ 753 $ (139) $18,849
------- ------- ------ -------- -------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $34,504 $ 44 $ - $ - $34,548
Other non-current liabilities 11,050 - - - 11,050
Deferred income taxes 2,766 - - - 2,766
------- ------- ------ -------- -------
Total Non-Current Liabilities $48,320 $ 44 $ - $ - $48,364
------- ------- ------ ------------ -------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock and
additional paid-in capital $16,723 $ 5,098 $2,000 $ (7,098) $16,723
Retained earnings 15,861 3,869 2,892 (7,227) 15,395
Additional minimum pension liability (324) - - - (324)
Cumulative translation adjustment - - 324 - 324
------- ------- ------ -------- -------
Total Stockholder's Equity (Deficit) $32,260 $ 8,967 $5,216 $(14,325) $32,118
------- ------- ------ -------- -------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY (DEFICIT) $97,271 $10,555 $5,969 $(14,464) $99,331
======= ======= ====== ======== =======
</TABLE>
42
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $61,031 $12,995 $12,523 $ (6,778) $ 79,771
Net rentals 13,768 24,037 957 (13,746) 25,016
------- ------- ------- -------- --------
Net revenues $74,799 $37,032 $13,480 $(20,524) $104,787
Cost of sales $43,560 $ 7,860 $ 7,729 $ (6,715) $ 52,434
Cost of rentals 2,589 19,404 613 (13,746) 8,860
Selling, general and administrative expenses 14,602 7,018 3,526 - 25,146
------- ------- ------- -------- --------
Income from operations $14,048 $ 2,750 $ 1,612 $ (63) $ 18,347
Interest expense 5,100 9 14 - 5,123
Intercompany interest expense (income) (80) 80 - - -
Other expense (income), net (2,598) 41 224 2,351 18
------- ------- ------- -------- --------
Income before income taxes $11,626 $ 2,620 $ 1,374 $ (2,414) $ 13,206
Provision for income taxes 3,955 1,210 565 - 5,730
------- ------- ------- -------- --------
Income before extraordinary item $ 7,671 $ 1,410 $ 809 $ (2,414) $ 7,476
======= ======= ======= ======== ========
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands)
<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 $ 14,036 $1,034 $ 342 $ - $ 15,412
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,675) (103) (84) - (3,862)
Proceeds from sale of fixed assets 55 - - - 55
-------- ------ ----- ------------- --------
Net Cash Used In Investing Activities $ (3,620) $ (103) $ (84) $ - $ (3,807)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in Revolving Credit Loan - - - - -
Proceeds from other long-term debt 25,375 36 - - 25,411
Payments of other long-term debt (34,532) (34) - - (34,566)
Dividends received from (paid by) subsidiaries 191 - (191) - -
Payments of deferred financing costs (426) - - - (426)
Net increase (decrease) in advance account 673 (680) 7 - -
Other equity transactions (300) - (1) - (301)
-------- ------ ----- ------------- --------
Net Cash Used In Financing Activities $ (9,019) $ (678) $(185) $ - $ (9,882)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH - - (52) - (52)
-------- ------ ----- ------------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $ 1,397 $ 253 $ 21 $ - $ 1,671
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR (990) 254 781 - 45
-------- ------ ----- ------------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 407 $ 507 $ 802 $ - $ 1,716
======== ====== ===== ============= ========
</TABLE>
43
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $62,211 $11,840 $13,736 $ (5,873) $ 81,914
Net rentals 12,179 21,394 977 (12,138) 22,412
------- ------- ------- -------- --------
Net revenues $74,390 $33,234 $14,713 $(18,011) $104,326
Cost of sales $45,780 $ 6,985 $ 8,395 $ (5,989) $ 55,171
Cost of rentals 3,488 17,843 465 (12,138) 9,658
Selling, general and administrative expenses 14,410 6,052 3,719 -- 24,181
------- ------- ------- -------- --------
Income from operations $10,712 $ 2,354 $ 2,134 $ 116 $ 15,316
Interest expense 6,556 9 31 -- 6,596
Intercompany interest expense (income) (145) 145 -- -- --
Other expense (income), net (2,149) 182 394 2,066 493
------- ------- ------- -------- --------
Income before income taxes $ 6,450 $ 2,018 $ 1,709 $ (1,950) $ 8,227
Provision for income taxes 1,677 975 686 -- 3,338
------- ------- ------- -------- --------
Net income $ 4,773 $ 1,043 $ 1,023 $ (1,950) $ 4,889
======= ======= ======= ======== ========
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Dollars in thousands)
<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 $ 7,741 $ 546 $ 1,664 $ -- $ 9,951
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,560) (234) (59) -- (3,853)
Proceeds from sale of fixed assets 243 38 -- -- 281
------- ------- ------- -------- --------
Net Cash Used In Investing Activities $(3,317) $ (196) $ (59) $ -- $ (3,572)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in Revolving Credit Loan -- -- -- -- --
Proceeds from other long-term debt 213 83 -- -- 296
Payments of other long-term debt (7,374) -- -- -- (7,374)
Dividends received from (paid by) subsidiaries 4,195 (3,171) (1,024) -- --
Net increase (decrease) in advance account (2,316) 2,488 (172) -- --
Other equity transactions (201) 23 12 -- (166)
------- ------- ------- -------- --------
Net Cash Used In Financing Activities $(5,483) $ (577) $(1,184) $ -- $ (7,244)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH -- -- 38 -- 38
------- ------- ------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $(1,059) $ (227) $ 459 $ -- $ (827)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 69 481 322 -- 872
------- ------- ------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ (990) $ 254 $ 781 $ -- $ 45
======= ======= ======= ======== ========
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of
Directors of AXIA Incorporated:
We have audited the accompanying consolidated balance sheets of AXIA
INCORPORATED (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the three years in the period 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXIA INCORPORATED AND
SUBSIDIARIES as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 25, 1998
45
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information is set forth under the heading "Directors and Executive
Officers of the Registrant" in Part I, Item 1 of this Annual Report on Form
10-K.
Item 11. EXECUTIVE COMPENSATION
The following table provides certain summary information with respect to
compensation paid to or accrued by the Company on behalf of the Company's Chief
Executive Officer and the four other most highly compensated executive officers
of the Company for the year ended December 31, 1997:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
<S> <C> <C> <C>
Other Annual
Name and Position Held (1) Salary Bonus (2) Compensation (3)
- -------------------------- -------- -------- ----------------
Dennis W. Sheehan 1997 $336,000 $200,000 $19,837
President/CEO 1996 $336,000 $200,000 $19,626
1995 $336,000 $100,000 $20,143
Lyle J. Feye 1997 $140,500 $ 45,000 $10,210
Vice President Finance 1996 $134,208 $ 45,000 $10,183
& Treasurer 1995 $127,709 $ 28,000 $10,150
Robert G. Zdravecky 1997 $171,500 $ 62,640 $11,766
President & General Manager, 1996 $163,333 $ 67,500 $11,664
Ames division, ATTS 1995 $154,165 $ 22,100 $10,767
& TapeTech
David H. Chesney 1997 $166,900 $ 25,000 $ 9,317
President & General Manager, 1996 $158,875 $114,000 $ 9,202
Nestaway division 1995 $152,502 $ 67,900 $ 8,731
Ian G. Wilkins 1997 $163,083 $ 48,000 $ 8,611
President & General Manager, 1996 $155,250 $ 52,000 $ 9,339
Fischbein & Flexible Material 1995 $145,835 $ 22,100 $ 9,145
Handling divisions
</TABLE>
- ---------------------------
(1) Since 1994, these individuals did not receive any restricted stock awards
or options.
(2) The Company provides a bonus plan with bonus payments to be made in cash.
(3) Includes payments for life insurance and automobile allowance.
There are no independent directors of the Company and therefore no directors
receive remuneration for their services in that capacity.
46
<PAGE>
Retirement Plan
Substantially all salaried and non-bargaining hourly employees participate in
the AXIA Incorporated Salaried Employees' Retirement Plan. Under the terms of
the Plan, each eligible employee receives a retirement benefit based on the
number of years of credited service with the Company and average total earnings
for the five consecutive years of highest earnings during the fifteen years
preceding termination of employment.
As of December 31, 1997, the number of years of credited service for the
indicated persons are: Mr. Sheehan, 19.08 years; Mr. Feye, 8.33 years; Mr.
Zdravecky, 9.08 years, Mr. Chesney, 5.83 years and Mr. Wilkins, 2.58 years.
The amounts shown in the following table are estimated annual retirement
benefits (payable as a straight life annuity) for the respective compensation
levels and years of service, after deduction of an offset of anticipated Social
Security benefits as provided under the terms of the Plan:
Pension Table
<TABLE>
<CAPTION>
Years of Service
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Remuneration 10 15 20 25 30
------------ ------- ------- ------- -------- --------
$125,000 $22,568 $33,852 $45,136 $ 56,420 $ 67,704
$150,000 27,568 41,352 55,136 68,920 82,704
$175,000 32,568 48,852 65,136 81,420 97,704
$200,000 37,568 56,352 75,136 93,920 112,704
$225,000 42,568 63,852 85,136 106,420 127,704
</TABLE>
Medical Insurance
Certain Company officers participate in a medical insurance plan covering up
to $100,000 per participant in annual medical expenses. The aggregate benefit
amount paid for such participants totaled $6,287 for 1997.
Salary Continuation (Death Benefit)
In order to attract and encourage key executives to remain with the Company,
the Company instituted a salary continuation (death benefit) program which
provides certain key executives with a death benefit, contingent upon employment
or service as a consultant with the Company until retirement or death. Upon the
executive's death, the Company will pay to his designated beneficiary, annually
for a period of ten years, an amount equal to 40 percent of the executive's
current annual salary or salary at date of retirement. The Company may
terminate the death benefit program and the agreement with any executive at any
time prior to the executive's death, disability or retirement, except that,
during the three year period following certain events involving a "change of
control" of the Company, only a portion of those benefits may be terminated.
The Company has purchased life insurance policies on the lives of the
executives, naming the Company as the sole beneficiary. The amount of such
coverage is designed to provide to the Company a source of funds to satisfy its
obligations under the program. Annual premiums paid in 1997 with respect to Mr.
Sheehan, was approximately $53,839; however, if current assumptions as to
mortality experience, policy dividends and other factors are realized, the
Company will recover, through tax deductions over the life of the program, all
of its payments to the insurance company and the executives. Mr. Sheehan is the
only active executive covered by this program.
47
<PAGE>
Termination of Employment and Change in Control Agreements
The Company has an employment agreement with Mr. Sheehan. Mr. Sheehan's
agreement is for a five-year term commencing June 15, 1993. The agreement
provides for an annual base salary that is subject to annual upward adjustment
at the discretion of the Company. Such salary for 1997 is reflected in the
Summary Compensation Table. Unless the employee is terminated for cause, or the
employee voluntarily terminates his employment, upon termination of employment,
the Company is obligated to make severance payments. For Mr. Sheehan, such
severance payments shall be equal to his base salary for the duration of the
agreement, or twelve months, whichever is longer.
Management Incentive Compensation Plan
The Company has adopted an incentive plan which provides to certain employees,
including the executives listed above, an annual performance bonus. These
bonuses are calculated on the basis of the employee's base annual salary and
percentage eligibility as defined in the plan. Bonuses are paid in the first
quarter of the following year, assuming the Company meets a targeted earnings
improvement, revenues, gross margin, cash flow, and/or such other measures as
may be determined annually by the Company's directors.
Stock Options
Holdings has granted stock options to certain employees who have the option to
purchase restricted shares of common stock of Holdings in the aggregate of
approximately 4% of the common stock on a fully diluted basis.
Bonus Agreement
The Company has entered into a bonus agreement with certain executive officers
which provides for a cash bonus in the event that a defined internal rate of
return is achieved on the original investments made on the date of the
Transaction. The bonus is payable upon the sale of all or substantially all of
the shares of common stock of Holdings and for the assets of Holdings. The bonus
amount for each executive is equal to 1% of the aggregate cash purchase price
paid for the shares or the amount distributed to shareholders as a liquidation
dividend upon the sale of the assets of Holdings, net of all related transaction
expenses.
48
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Guarantors are wholly-owned by the Company and the Company is wholly-owned
by Holdings. The following sets forth the beneficial ownership of the common
stock of Holdings as of December 31, 1997, by (a) each person who is known by
Holdings to beneficially own more than 5% of such common stock, (b) each of the
Company's and the Guarantors' directors and executive officers, and (c) all
directors and executive officers of the Company and the Guarantors as a group.
<TABLE>
<CAPTION>
Title of Class Number of Shares Percent of
of Common Stock Beneficial Owner Beneficially Owned Total Shares (1)
- --------------- ----------------------------------- ------------------ ----------------
<S> <C> <C> <C>
A Cortec Group Fund, L.P. (2) 354,483 59.1%
200 Park Avenue
New York, New York 10028
A Donaldson, Lufkin and Jenrette (3) 77,987 13.0%
Securities Corporation
140 Broadway
New York, New York 10005
A Dennis W. Sheehan (4) 50,859 8.5%
c/o AXIA Incorporated
100 West 22nd Street, Suite 134
Lombard, Illinois 60148
A Lyle J. Feye (6) 2,659 .4%
c/o AXIA Incorporated
100 West 22nd Street, Suite 134
Lombard, Illinois 60148
A Robert G. Zdravecky (7) 1,912 .3%
c/o AXIA Incorporated
100 West 22nd Street, Suite 134
Lombard, Illinois 60148
A T. Richard Fishbein (5) 13,293 2.2%
c/o Cortec Group Inc.
200 Park Avenue
New York, New York 10028
All officers and directors 68,723 11.5%
as a group (4 persons)
</TABLE>
(1) Gives effect to the conversion of outstanding Class B Common Stock into
Class A Common Stock. Prior to such conversion, Cortec Group Fund, L.P.
("Cortec"), Donaldson, Lufkin & Jenrette Securities Corporation, Dennis W.
Sheehan and all directors and officers as a group own beneficially 64.9%,
14.3%, 9.3%, and 12.6%, respectively, of the outstanding Class A Common
Stock consisting of 546,400 shares. All of the 53,173 shares of Class B
Common Stock are owned by Indosuez Axia Holding, Partners. Class B Common
Stock is non-voting stock, and, subject to limitations described in this
note, is fully convertible at any time at the option of the holder into an
equal number of shares of Class A Common Stock. Upon a conversion of all of
the Class B Common Stock, such shares would constitute 8.9% of the total
Class A Common Stock. Paragraph C(ii) of Holdings' certificate of
incorporation provides that no holder of non-voting common stock may convert
any such shares into voting common stock to the extent that, as a result of
such conversion, such holder and its affiliates, directly or indirectly,
would own, control or have the power to vote a greater number of shares of
voting common stock than such holder and its affiliates are permitted to
own, control or have the power to vote under any law, rule,
49
<PAGE>
regulation or other requirement of any governmental authority applicable to
such holder or its affiliates. Indosuez Axia Holding, Partners has advised
Holdings that it is subject to the provisions of Regulation Y of the Board
of Governors of the Federal Reserve System, which restricts it from owning
more than 5% of any class of voting securities. An affiliate of Indosuez
Axia Holding, Partners is the Agent for the Bank Facilities.
(2) Includes the 311,946 shares of Common Stock owned by Cortec and the 42,537
shares beneficially owned by certain officers and employees of Cortec
Capital Corp., the general partner of Cortec, including persons who serve
as directors of Holdings. See "Stockholders Agreements" below. Cortec
Capital Corp., the general partner of Cortec disclaims beneficial ownership
of Cortec's shares, except to the extent of its percentage ownership of the
partnership.
(3) Includes shares held by DLJ First ESC L.L.C., DLJ Capital Corporation and
employees of DLJ or its affiliates.
(4) Mr. Sheehan is Chairman, President and Chief Executive Officer of the
Company.
(5) Mr. Fishbein is a Director of the Company and a partner in Cortec. The
number of shares presented includes 886 shares owned by Mr. Fishbein's
daughter, but does not include the 311,946 shares owned by the Cortec Group
Fund or 29,244 shares beneficially owned by certain officers and employees
of Cortec Capital Corp., or its affiliates.
(6) Mr. Feye is Vice President, Chief Financial Officer, and Treasurer of the
Company.
(7) Mr. Zdravecky is President and General Manager of the Ames division and
President of ATTS and TapeTech.
Stockholders Agreements
Holdings and the holders of the common stock of Holdings ("Holdings Common
Stock") have entered into various stockholders agreements for the purpose of
regulating certain aspects of the relationships of such stockholders. In
general, the stockholders agreements have provisions which relate to certain
registration rights, "tag-along" obligations and "drag-along" rights.
Pursuant to the stockholders agreements, Cortec Group Fund, L.P. ("Cortec")
has granted all stockholders except those stockholders whose Holdings Common
Stock is beneficially owned by Cortec, "tag-along" rights pursuant to which such
holders will have the option of participating in a sale by Cortec (other than
sales to affiliates of Cortec) of Holdings Common Stock on terms and conditions
substantially similar to the terms and conditions agreed to by Cortec. With
respect to certain employee stockholders (including the director of the
Company), the "tag-along" provision is applicable in connection with a sale of
any or all of the Holdings Common Stock owned by Cortec. With respect to the
other stockholders, the provision is applicable only upon a sale by Cortec of
20% or more of its Holdings Common Stock.
The stockholders agreements also provide that if Cortec desires to sell all of
its Holdings Common Stock, Cortec can require the other stockholders to sell
their Holdings Common Stock simultaneously with and, on the same terms as, the
sale by Cortec.
The stockholders agreements for holders whose Holdings Common Stock is
beneficially owned by Cortec provides that, until March 15, 2004, each such
holder will vote its shares in the same manner that Cortec votes its shares.
Certain officers of Cortec have been appointed as proxy to vote such stock in
accordance with the terms of the agreement.
The stockholders agreements with certain employees (including the director of
the Company) also contain provisions (i) restricting the transfer of Holdings
Common Stock, (ii) granting a right of first offer to Holdings to purchase its
Common Stock, and (iii) granting certain "piggy-back" registration rights.
50
<PAGE>
Finally, the stockholders agreements entered into with certain stockholders
(other than the employees and the stockholders whose Holdings Common Stock is
beneficially owned by Cortec) grants certain registration rights under the
Securities Act. Certain stockholders are granted the right to demand
registration of the sale of their Holdings Common Stock after the earlier of (i)
March 15, 1999 and (ii) 270 days after the completion of an initial public
offering of the Holdings Common Stock subject to a specified minimum percentage
of the outstanding Holdings Common Stock being included in such demand
registration. Each stockholder may participate ("piggy-back") in registrations
initiated by Holdings or other stockholders, subject to potential volume
limitations.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is information concerning certain transactions between the
Company and certain affiliates. The Company believes that these transactions
are on terms at least as favorable to the Company as it could obtain from
unaffiliated third parties. These transactions were not approved by a majority
of the disinterested members of the Board of Directors.
Transaction Fees
In connection with the Transaction, the Company and Holdings paid Cortec
Capital Corp. ("CCC") a transaction fee of $784,525 and reimbursed it for out-
of-pocket expenses of $235,282 incurred in connection with the Transaction.
Services performed by CCC included negotiations of the terms of the Agreement
and Plan of Merger, dated as of January 31, 1994, between Acquisition and the
Company, arranging for and negotiating the terms of the Senior Debt financing
and performing all of the due diligence associated with the merger, including
environmental and tax due diligence. Donaldson, Lufkin & Jenrette Securities
Corporation, a beneficial owner of 13.0% of Holdings, and Bank Indosuez, a
beneficial owner of 8.9% of Holdings, also received transaction fees of $840,000
and $1,590,000, respectively, and reimbursement of expenses of $40,000 and
$9,011, respectively.
Management Agreement
The Company has entered into a Management Agreement (the "Management
Agreement") with CCC for certain management and financial services. Pursuant
to the Management Agreement, CCC will provide the Company with professional and
administrative advice in areas relating to the Company's business, including
finance, budgeting, risk management, business planning, manufacturing, sales,
marketing, staffing levels and acquisitions. CCC is the general partner of
Cortec, which is the beneficial owner of 59.1% of Holdings. CCC will receive a
quarterly fee of 1% of the Company's net sales, not to exceed $125,000. The
Management Agreement continues until March 31, 2001, and thereafter for
successive one year periods unless terminated by either party. Subsequent to
the Transaction, the Company paid or accrued $458,662, $504,959 and $500,551 for
1995, 1996 and 1997, respectively, for fees and reimbursed expenses under the
Management Agreement.
51
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report or
incorporated herein by reference.
(1) The Consolidated Financial Statements and Financial Statement
Schedules of AXIA Incorporated are listed on the Index, page 19,
of this Form 10-K.
(2) Exhibits required to be filed by Item 601 of Regulation S-K are
listed under the caption "Exhibits" below:
EXHIBITS
Exhibit
No. Description
- ------- -----------
3.1 Restated Certificate of Incorporation of AXIA Incorporated./(1)/
3.2 By-Laws of AXIA Incorporated./(1)/
3.3 Certificate of Incorporation of Ames Taping Tool Systems, Inc./(1)/
3.4 By-Laws of Ames Taping Tool Systems, Inc./(1)/
3.7 Certificate of Incorporation of TapeTech Tool Co., Inc./(1)/
3.8 By-Laws of TapeTech Tool Co., Inc./(1)/
4.1 AXIA Incorporated, Issuer, Ames Taping Tool Systems Inc., TapeTech
Tool Co., Inc., Mid America Machine Corp., Guarantors, Series A and
Series B 11% Series Subordinated Notes Due 2001, Indenture, dated as
of March 15, 1994./(1)/
4.2 Purchase Agreement 21,000 Units Consisting of $21,000,000 Principal
Amount of 11% Subordinated Notes due 2001 of AXIA Incorporated and
63,000 Shares of Class A Common Stock of Axia Holdings Corp., March
15, 1994./(1)/
4.3 A/B Exchange Registration Rights Agreement, dated as of March 15, 1994
by, and among, AXIA Incorporated, Ames Taping Tool Systems, Inc.,
TapeTech Tool Co., Inc., Mid America Machine Corp., and Each of the
Purchasers Listed on the Signature Pages of the Purchasers
Agreement./(1)/
4.5 Specimen Certificate of 11% Series B Senior Notes due 2001 (the
Exchange Notes)./(1)/
4.7 Guarantee of Exchange Notes./(1)/
4.7.1 Release of Guarantee Mid America Machine Corp./(4)/
10.1 AXIA Management Agreement, dated as of March 15, 1994 by, and among,
AXIA Incorporated and Cortec Capital Corporation./(2)/
10.4 Lease Agreement between G.L. Building Company and AXIA
Incorporated executed as of January 8, 1993./(2)/
10.5 Form of Employee Bonus Agreement./(2)/
10.6 Form of Stock Option Agreement./(2)/
52
<PAGE>
10.7 Form of the Stock Purchase Agreement./(2)/
10.8 Form of Employment and Non-competition Agreement./(2)/
10.10 Exec-U-Care Medical Reimbursement Insurance./(2)/
10.11 Key Employee Posthumous Salary Continuation Plan./(2)/
10.12 AXIA Incorporated Management Incentive Compensation Plan./(2)/
10.15 Purchasing Partnering Agreement between Maytag-Jackson Dishwash
Products and Nestaway, Division of AXIA Incorporated, dated November
15, 1995./(4)/
10.15.1 First Amendment to the Purchasing Partnering Agreement dated September
11, 1997.
10.16 Loan Agreement dated as of June 27, 1996, among AXIA Incorporated, Ames
Taping Tool Systems, Inc., TapeTech Tool Co., Inc., as Borrowers, and
the Lenders named herein as Lenders, and American National Bank & Trust
Co. of Chicago, as Agent and Lender./(5)/
10.17 First Amendment to Loan Agreement dated as of March 10, 1997 among AXIA
Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc.,
and the Lenders named in the Loan Agreement./(6)/
10.18 Second Amendment to Loan Agreement dated September 11, 1997, among AXIA
Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc.,
and the Lenders named in the Loan Agreement./(7)/
21.1 Subsidiaries of the Registrant./(1)/
23.1 Consent of Kaye, Scholer, Fierman, Hays & Handler (included in Exhibit
5.1)./(3)/
23.3 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99.1 Form of Letter of Transmittal./(2)/
99.2 Form of Notice of Guaranteed Delivery./(2)/
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1997.
/(1)/ Previously filed as an exhibit to Registration Statement No. 33-78922
filed with the Securities and Exchange Commission on May 13, 1994.
/(2)/ Previously filed as an exhibit to Amendment No. 1 to Registration
Statement No. 33-78922 filed with the Securities and Exchange
Commission on May 24, 1994.
/(3)/ Previously filed as an exhibit to Amendment No. 2 to Registration
Statement No. 33-78922 filed with the Securities and Exchange
Commission on June 30, 1994.
/(4)/ Previously filed as an exhibit to the Company's Form 10-K for the
period ended December 31, 1995 filed with the Securities and Exchange
Commission on March 29, 1996.
/(5)/ Previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1996 filed with the Securities and Exchange
Commission on August 12, 1996.
53
<PAGE>
/(6)/ Previously filed as an exhibit to the Company's Form 10-Q for the
period ended June 30, 1997 filed with the Securities and Exchange
Commission on August 11, 1997.
/(7)/ Previously filed as an exhibit to the Company's Form 10-Q for the
period ended September 30, 1997 filed with the Securities and Exchange
Commission on November 10, 1997.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AXIA INCORPORATED
By /s/
--------------------------------------------------
Lyle J. Feye
Vice President, Treasurer, Chief Financial Officer
Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Chairman, President and Chief March 16, 1998
- ------------------- Executive Officer and Director
Dennis W. Sheehan
/s/ Vice President Finance, March 16, 1998
- ------------------- Principal Financial Officer,
Lyle J. Feye and
Principal Accounting Officer
/s/ Director March 16, 1998
- -------------------
T. Richard Fishbein
55
<PAGE>
Exhibit 10.15.1
FIRST AMENDMENT TO AGREEMENT
NESTAWAY DIVISION OF AXIA INCORPORATED ("Seller") and MAYTAG CORPORATION
("Buyer") mutually desire their Purchasing Partnering Agreement (the
"Agreement" effective January 1, 1996) concerning dishwasher racks be amended as
follows (hereinafter the "Amendment"). This Amendment shall be effective as of
the date of signing (the "Effective Date").
Page 2, Section III of the Agreement is amended to strike the following:
"In the event, during any 12 month period beginning January 1, 1998 (the
"second period") Purchaser's orders with Seller are less than the
Purchasing Goal, Seller may continue the relationship on the terms stated
herein, or terminate this Agreement with six (6) months written notice. The
preceding sentence states the sole recourse of Seller for any inability by
Purchaser to meet the stated Purchasing Goal."
Page 2, Section IV of the Agreement is deleted in its entirety and the following
shall be inserted in its place:
"The Agreement, as amended from time to time, shall expire as of the close
of business on December 31, 2003 unless earlier terminated as provided in
the Agreement."
Page 3, Section VII (l) of the Agreement is changed to read as follows:
"Nestaway will change the dishrack selling prices to Maytag from the prices
in effect on Sept. 8, 1997 as follows:
A. Reduces selling prices by as of the Effective date.
B. Nestaway will reduce its selling prices thru providing cost
reductions each year beginning in 1998. A minimum annual
reduction in selling price is guaranteed.
Page 4, Section IX of the Agreement is changed by deleting the existing language
in its entirety and replacing it with the following:
"For each year during the time of this Agreement, or any extension thereof,
Seller will pay Purchaser a volume rebate on the annual net shipment of
Racks to Maytag Jackson Dishwashing Products for its McKenzie, TN plant. A
rebate in the amount of per Rack will be paid on all Racks shipped
above an annual volume based on per day
<PAGE>
for days, or racks. Payment of the earned discount will
be made prior to March first of the following year."
Signed this 11th day of September, 1997.
NESTAWAY DIVISION AXIA INCORPORATED
By /s/ David H. Chesney 9/17/97
--------------------------------
David H. Chesney
President & General Manager
MAYTAG CORPORATION
By /s/ B.C. Fowler
--------------------------------
B.C. Fowler
Vice President & General Manager
Jackson Dishwashing Products
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
Report dated February 25, 1998, included in this Form 10-K into the Company's
previously filed Registration Statement on Form S-4 (File No. 33-78922).
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 16, 1998
56
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