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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, 1998
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 333-64555
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:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(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.[X]
<PAGE>
PART I
Item 1. BUSINESS
Cautionary Statements
This document includes forward-looking statements. Forward-looking
statements can be identified by the use of the future tense or other forward-
looking terms such as "may", "intend", "will", "expect", anticipate", "plan",
"management believes", "estimate", "continue", "should", "strategy" or
"position" or the negatives of those terms or other variations on them or by
comparable terminology. In particular, statements, express or implied,
concerning future operating results or the ability to generate net sales, income
or cash flow to service debt are forward-looking statements. The Company has
based these forward-looking statements on the Company's current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties and assumptions about the Company, including, among other
things: (i) increased competition; (ii) increased costs; (iii) loss or
retirement of key members of management and (iv) changes in general economic
conditions in the markets in which the company may from time to time compete.
The Company undertakes no obligation to update or revise these forward-
looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this document might not occur.
Acquisition and Merger
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition
Co."), a company organized to effect the acquisition (the "Acquisition") of Axia
Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the
"Predecessor Company" prior to the date of the Transaction) to effect the
acquisition for a purchase price of $155,250,000 (including the repayment of
indebtedness), subject to certain post-closing adjustments. Upon completion of
the Transaction (the "Transaction"): (i) Holdings and AXIA Incorporated (the
"Company") became direct and indirect subsidiaries of AXIA Group Inc. ("Group"
or "AXIA Group" the parent company of Acquisition Co.) and (ii) the Company
became the primary obligor on borrowings made under the credit agreement (the
"Bank Credit Agreement") and Senior Subordinated notes issued on the Transaction
Date defined below.
On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of
its common stock ("Common Stock") and contributed the proceeds thereof to
Acquisition Co. (the "Equity Investment"). Axia Finance Corp., an indirect
subsidiary of AXIA Group, borrowed approximately $39,250,000 under the Bank
Credit Agreement and received approximately $100,000,000 in gross proceeds from
the sale of subordinated notes. Such funds were used: (i) to effect the
Acquisition pursuant to the Merger Agreement; (ii) to fund the Company's ESOP;
(iii) to repay existing indebtedness of the Company and (iv) to pay fees and
expenses in connection with the Transaction.
General
AXIA Incorporated. The Company is a leading designer, manufacturer,
marketer and distributor of a diverse range of products in several niche markets
including productivity enhancing construction tools, formed wire products,
industrial bag closing equipment and flexible conveyors. Management believes the
Company possesses strong market leadership positions in its primary markets. The
Company believes that its market leadership position, brand name recognition,
established national and international distribution networks, strong customer
base and manufacturing expertise provide significant opportunities to grow sales
of new and existing products within established markets, as well
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as expand into new markets. The Company believes that its diverse base of
products and markets reduces exposure to any particular industry, product market
or geographic region. The Company operates through three business units: Ames,
Nestaway and Fischbein.
Ames. Ames is the leading designer, manufacturer, marketer and distributor
of Automatic Taping And Finishing ("ATF") tools, which are rented or sold to
interior finishing contractors to finish drywall joints prior to painting,
wallpapering or other forms of final treatment. ATF tools, invented by Ames in
1939, enable interior finishing contractors to finish drywall joints three to
four times faster than less productive hand finishing methods. The Company is
the leader in ATF tool rentals and sales in the markets in which it serves. The
primary business of Ames is the rental and service of more than 140,000 ATF
tools through its extensive distribution network throughout the U.S. and Canada.
Ames also sells ATF tools under the TapeTech(R) and TapeMaster(R) brand names
through an established independent network of dealers in the U.S. and Canada. In
addition, Ames sells a variety of other drywall tools, finishing accessories and
supplies through its network of Company-managed stores. The Company believes it
has opportunities to increase Ames' revenues by expanding the use of ATF tools
in the fast growing factory-built housing market, which is increasingly
utilizing drywall rather than other materials. The Company also believes it has
an opportunity to expand the use of ATF tools by converting interior finishing
contractors from traditional hand finishing methods, particularly in the eastern
and midwestern U.S. where the use of ATF tools is less prevalent than in the
western U.S. Ames accounted for 41% of the Company's 1998 revenues.
Nestaway. Nestaway is a leading manufacturer of formed wire products which
are used for a variety of commercial and consumer product applications. Nestaway
is North America's largest independent manufacturer of coated wire dishwasher
racks and components which are sold to the major U.S. OEMs. Approximately 75% of
dishwashers sold in the U.S. are replacements. Nestaway's primary OEM customers
include Maytag, EBS-Bosch and Whirlpool/KitchenAid. Nestaway has had
relationships with all major OEMs for an average of approximately 19 years.
Nestaway also manufactures, on a contract basis, other close tolerance, welded,
non-coated or coated formed wire products such as dish drainers, sink
protectors, shower caddies, dryer racks, golf cart baskets, bucket bails,
medical baskets and small gauge axles. The Company believes it has significant
opportunities to increase Nestaway's revenues through: (i) increasing sales to
existing customers; (ii) expanding its product offering and customer base by
developing new formed wire business; (iii) expanding production in international
markets and pursuing strategic acquisitions. Nestaway accounted for 35% of the
Company's 1998 revenues.
Fischbein. Fischbein is a leading world wide manufacturer and marketer of
industrial bag closing and handling equipment and systems and a leading
manufacturer and marketer of flexible conveyors and storage racks. Bag closing
and handling systems products include: (i) portable and stationary industrial
sewing heads and sewing systems for paper, textile and woven polypropylene bags;
(ii) industrial heat sealing and bag handling systems for paper and plastic
bags; (iii) consumables, including thread and tape and (iv) service parts.
Service parts, which provide a recurring base of revenue, accounted for
approximately 20% of Fischbein's sales in 1998. Fischbein's bag closing products
are used across a broad range of industries for packaging chemicals, minerals,
agricultural and food products. In addition to bag closing products, Fischbein
manufactures extendible, flexible, gravity and motorized conveyors and portable,
nestable and stackable warehouse storage racks. Fischbein's flexible conveyors
are used by retailers for loading and unloading tractor trailers at store sites
and distribution centers. Storage racks are designed for factory and warehouse
storage where flexibility in racking is desired and are sold to customers in
various industries, including retail, distribution, food, chemical,
pharmaceutical and textile. The Company believes it has opportunities to
increase Fischbein's revenues by expanding the product offerings that can be
sold through its extensive distribution network and by making strategic
acquisitions. Fischbein accounted for 24% of the Company's 1998 revenues.
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Revenue by business unit, including the results of the Predecessor Company, for
fiscal years 1998, 1997 and 1996 appears below:
AXIA Incorporated
Revenue by Product Group
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ames
Tool Rentals $ 30,441 26% $ 27,382 26% $ 25,016 24%
Tool and Store
Merchandise Sales 17,698 15% 15,046 14% 12,999 12%
-------- ---- -------- --- -------- ---
Total $ 48,139 41% $ 42,428 40% $ 38,015 36%
Nestaway $ 41,441 35% $ 35,268 34% $ 39,655 38%
Fischbein $ 27,535 24% $ 27,104 26% $ 27,117 26%
Total Revenues $117,115 100% $104,800 100% $104,787 100%
</TABLE>
See Note 13 of the Notes to the Consolidated Financial Statements for additional
segment data.
Products
Ames. Ames' ATF tools are used in the construction industry by
professional interior finishing contractors to finish and prepare drywall for
painting or other forms of final treatment. ATF tools simultaneously apply joint
tape and compound to all drywall joints and automatically dispense a controlled
amount of joint compound for fast, efficient operation. For drywall finishers
that prefer to purchase their ATF tools, Ames markets ATF tools under the
TapeTech and TapeMaster brand names.
Ames also offers its customers a wide variety of other products used in
drywall finishing including corner rollers, flat finishers, corner finishers,
nail spotters, loading pumps and finisher handles. Corner rollers embed joint
tape firmly into an interior corner or ceiling angle, forcing out excess
compound and leaving the angle ready for finishing. Corner finishers remove
excess compound, feathering both sides at once and apply the second coat of
compound for inside corners. Flat finishers are used to apply a final coat of
joint compound over taped joints which does not require sanding. Nail spotters
apply compound to nail or screw head dimples, preparing them for painting or
other final treatment. Loading pumps are used to fill Ames' ATF tools, with
joint compound. Finisher handles are specifically designed for use with Ames'
products and allow the user to complete most of the taping and finishing work
from the floor instead of using scaffolding or stilts. In addition, Ames'
stores provide its customers with a variety of supplies and other products
including hand finishing drywall tools, drywall finishing accessories, including
spray rigs, power sanders, scaffolds and board handling devices, and drywall
supplies, including compound, paper and mesh joint tape and corner bead.
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Nestaway. Nestaway's products consist of formed, coated and non-coated
wire products used for a variety of commercial and consumer product
applications. Nestaway's primary focus is on producing dishwasher racks for
OEMs. Nestaway also manufactures, on a contract basis, other close tolerance,
welded, non-coated or coated formed wire products such as dish drainers, sink
protectors, shower caddies, dryer racks, golf cart baskets, bucket balls,
medical baskets and small gauge axles. Nestaway's engineers frequently work with
each individual customer to design new or improved products which are tailored
to meet that customer's specific needs.
Fischbein. Fischbein manufactures a variety of bag closing equipment,
flexible conveyors and storage equipment. Fischbein's bag closing products
consist of a variety of hand-held and stationary industrial sewing and sealing
units which utilize portable sewing machines, industrial sewing heads, sewing
systems and heat sealing and handling systems. Portable sewing machines are
hand-held and lightweight for low and moderate volume applications and are
effective in closing a wide variety of bags, including paper and woven
polypropylene. Industrial sewing heads are designed for continuous use in
moderate to high volume applications and are used to close paper, textile and
woven polypropylene bags. Sewing systems consist of pedestal-mounted sewing
heads with integrated conveying capabilities. These systems can be integrated
into new or existing bagging lines and can be fully automated. Heat sealing and
handling systems are generally used for medium to high speed bag closing and
sealing applications. These systems incorporate programmable logic controllers,
pneumatics, airflow and hot melt adhesive technologies, and are used to close
polyethylene bags, paper bags, heat sealable inner liners, pinch style bags and
hot melt adhesive closures. Fischbein also provides service parts, consumables,
accessories, thread and tape used with Fischbein equipment.
Fischbein also offers flexible conveyors and storage racks marketed under
the Nestaflex(R), Nestainer(R) and Postainer(TM) brand names. Nestaflex(R)
products include a full line of conveyors for a wide variety of material
handling applications where stationary conveyors do not provide adequate
flexibility. These products are used by major retailers for loading and
unloading tractor trailers at store sites, by distribution centers and also in
light manufacturing operations. Nestainer(R) and Postainer(TM) products consist
of large, welded steel racks designed for factory and warehouse storage and
transportation purposes where changes in stored products and quantities make
stationary racking inefficient or impractical. The stackable and nestable
features of both systems maximize vertical storage capacity and their unique
design allows for compact storage when not in use. Nestainer(R) products are
also used as containers for transporting products.
Sales and Marketing
The Company markets and sells its broad range of products to a wide variety
of customers through an extensive sales and marketing network which utilizes
full time sales representatives, franchisees and third party distributors. These
sales efforts are enhanced by its product development staff, who work closely
with customers to develop products which are customized to meet their specific
needs.
Ames. Ames' rental tool sales organization consists of over 100
individuals engaged in sales and marketing activities throughout North America.
Ames' ATF rental tools reach drywall professionals in North America through over
135 distribution locations including 66 Company-managed stores and 58 franchised
operations. Ames sells ATF tools under the TapeTech(R) and Tapemaster(R) brand
names through a network of 260 dealers and distributors.
Ames utilizes franchises, rental stations, field specialists and mobile
operations to support its sales and marketing activities. Franchisees are
typically major drywall and construction material distributors who operate
multiple locations. Under its franchise arrangements, Ames trains franchisee
personnel to demonstrate the advantages of using ATF tools, supplies Ames owned
tools to the franchisee and uses the franchisees' employees to rent Ames tools
to interior drywall finishers. Rental stations are used in locations where the
usage of ATF tools cannot support stand-alone Company managed stores. Ames
typically operates its rental stations within a drywall distribution yard owned
by a third party, utilizing an Ames employee. Field specialists, who cover
territories in well marked Ames vans, serve as direct marketers and on-site
trainers, and operate as rental centers for job site customers.
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Nestaway. As a result of Nestaway's focus on OEMs, senior executives are
directly involved in sales and marketing efforts. Nestaway's sales and marketing
efforts also include technical, engineering and manufacturing employees who
regularly communicate with their counterparts of the OEM customer.
Fischbein. Fischbein's bag closing products are marketed and sold worldwide
through a combination of Fischbein sales and marketing personnel as well as
independent distributors and dealers and packaging machinery manufacturers.
Fischbein's flexible conveyor and storage racks are marketed and sold in the
United States through Fischbein sales and marketing personnel as well as through
independent material handling dealers, primarily throughout the U.S. Fischbein
has company managed distribution operations in Belgium, France, The United
Kingdom, and Singapore.
Customers
The Company's customers are diversified across each of the Company's
business units. Ames' products are generally used by interior finishing
contractors and Ames currently has over 10,000 active customer accounts with no
single rental customer exceeding 1% of the Company's 1998 net revenues.
Nestaway's products are sold to dishwasher manufacturers and other marketers of
formed wire products, including major OEMs such as Maytag, Frigidaire, EBS-
Bosch, Whirlpool/KitchenAid and General Electric. The Company's most significant
OEM customer, Maytag, accounted for approximately 19% of the Company's
consolidated revenues in 1998. The Company's contract with this customer
requires cost reduction during its term. The inability of the Company to achieve
manufacturing cost savings could lead to lower gross margins. The customers of
other formed wire products currently include E-Z Go Division of Textron, Inc.,
Melex International, Allegiance Healthcare and a major consumer products
company, whose purchases of dish drainers, shower caddies and other formed wire
products totaled 11% of the Company's 1998 net revenues. The loss of either
customer whose revenues are in excess of 10% of the Company's total net revenues
could have a materially adverse effect on the Company. Fischbein's customers
include companies in a variety of industries including the food, chemical,
agriculture and other industries.
Operations
Ames. Ames purchases proprietary ATF tool components from both domestic
and foreign suppliers and either assembles the parts into finished tools in the
Company's service centers or uses the parts to refurbish rental tools. These
tools are then rented or sold through Ames' national distribution network. In
addition, Ames cleans and refurbishes ATF tools at the end of each rental.
Nestaway. Nestaway operates four manufacturing plants which are located
near its major customers. Nestaway's manufacturing operations consist of wire
preparation and forming, welding, coating and assembly and packaging. These
manufacturing operations are highly automated and require high tolerance levels.
The Company's processes include the use of robotics, custom designed
manufacturing processes and tooling, the ability to weld up to 412 spots per
unit and highly complex coating processes.
Fischbein. Fischbein's manufacturing processes include precision
machining, welding, final assembly and the integration of electronic controls.
While most orders are for standard products, Fischbein also designs and builds
custom systems.
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Raw Materials and Suppliers
The Company purchases steel, metal castings, aluminum and other raw
materials from various suppliers. While all such materials are available from
numerous independent suppliers, commodity raw materials are subject to
fluctuations in price. There can be no assurance that severe shortages of such
materials will not occur in the future, which could increase the cost of or
delay the shipment of the Company's products and have a material adverse effect
on the Company's operating results. Because such materials in the aggregate
constitute significant components of the Company's cost of goods sold,
fluctuations in price could have a material adverse effect on the Company's
results of operations. Historically, the Company has passed on any increases in
prices of raw materials to its customers. However, there can be no assurance
that the Company will continue to be able to do so in the future.
Competition
Each of the business units operates within competitive industries. The
Company is not aware of any single competitor that competes with the Company
along all three business lines.
Ames products compete with alternative methods of drywall finishing and
products of other ATF tool manufacturers and distributors. Ames' most
significant competition is from traditional hand finishing by individual
professional finishers. Ames stores also operate in a highly competitive
environment with respect to the sale of drywall related merchandise which is
generally based on price and convenience. Drywall related merchandise is
available from contractor supply yards, building material retailers and other
sources, many of which have greater resources than Ames.
Nestaway's has one primary competitor selling to dishwasher OEMs. However,
the majority of dishwasher racks are internally manufactured by OEMs. There can
be no assurance that the Company's existing customers will not increase or
establish in-house rack manufacturing capacity in the future. In 1996 and 1994,
certain dishwasher rack customers decided to produce dishwasher racks in-house,
resulting in a material decline in the Company's revenues. General Electric,
Frigidaire and Whirlpool operate in-house dishwasher rack manufacturing
operations. Competition is generally based on quality, flexibility, product
design innovation, manufacturing efficiency and price. Nestaway's other non-
coated and coated formed wire products operate in a highly competitive
environment based on price, quality and delivery capability and includes many
companies, none of which compete with Nestaway across all its product lines.
There can be no assurance the Company will continue to innovate its products
offering or continue to reduce manufacturing costs. Such inability to continue
to innovate products or pass on manufacturing cost savings pursuant to contract
terms or otherwise could lead to the loss of certain customers or lower gross
margins.
Fischbein competes with a variety of manufacturers, but does not compete
with any one company across all its product lines.
Environmental Matters
The Company is subject to various federal, state, local and foreign laws
and regulations governing environmental and employee health and safety matters,
including the handling, the use, discharge and disposal of hazardous materials
and pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and
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Laughlin Steel Company, a predecessor of the Company. NYSDEC determined that the
Company, among others, may be a responsible party through its past ownership of
the property. The site is currently listed on the New York State Registry of
Inactive Hazardous Waste Disposal Sites. Environmental consultants engaged by
the Company established a range of estimated remediation costs of approximately
$1.0 million to $3.0 million, plus or minus 30% of those costs. The Company
established an accrual of $3.9 million for the remediation and associated costs.
In 1997, the Company entered into an agreement with an adjoining landowner,
who is obligated by NYSDEC to address environmental concerns at his property. By
this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance that
NYSDEC will in fact offer its approval. The Company paid the $520,000 payable
under the agreement and has an exposure under the agreement of up to an
additional $120,000 if contamination is more widespread than estimated by the
Company's environmental consultants. In the event NYSDEC does not approve the
remedy envisioned in the agreement with the adjoining landowner, the Company may
terminate the agreement and demand the return of its payment with interest. In
that case, the adjoining landowner would no longer be obligated to undertake the
remediation of the property formerly owned by the Company.
Of the consideration paid pursuant to the Merger Agreement, $5 million was
set aside in a special escrow account to cover environmental costs which may be
incurred by the Company in connection with cleanup of the site and any damages
or other required environmental expenditures relating to the site. The balance
in the account, after payment of such costs, will be released to the former
stockholders upon the first to occur of the approval by NYSDEC of the proposed
remediation action or the confirmation by NYSDEC that remediation at the site
has been completed in accordance with its then applicable decision in the matter
(the" Early Release Date"). If, however, the Early Release Date occurs before
the additional $120,000 is paid under the above-described agreement, the special
escrow account will continue as to that $120,000 until it is paid or it has
become clear that no claim will be made for such funds. In addition, if certain
additional specified cleanup activities are not completed by the Early Release
Date, an additional $80,000 will be withheld in the special escrow account until
such cleanup is completed. If all of the funds in the special escrow account
have not been released by the third anniversary of the Closing Date, the funds
remaining in the special escrow account will be disbursed to the Company to
cover the remaining estimated costs, with the balance to be distributed to the
former stockholders of the Company, in accordance with an agreement to be
reached by the Stockholder Representative and the Company, or upon failure of
such parties to agree, through an arbitration procedure.
The Company may also make claims against the warranty fund of the escrow
fund for breach of certain representations and warranties in the Merger
Agreement regarding other environmental matters for a period of 24 months after
Closing Date, subject to a specified threshold and deductible.
The Company is aware of other formerly-owned sites at which activities
similar to the operations previously conducted on the Buffalo, New York property
have taken place. However, the Company has received no claims in connection with
those sites, and has no information that would lead it to believe that any such
claim is likely to be made. The Company is also a part-owner and landlord at a
facility in Commerce, California that is leased to and operated by an unrelated
company. The Company has received no claims against it in connection with this
site, but the Company cannot rule out the possibility that it might incur some
liability should a claim actually be made against it as current owner of the
property.
The Buffalo, New York property formerly owned by the Company was at one
time used to mill uranium rods for the Atomic Energy Commission. The U.S.
Department of Energy has since identified residual radioactivity in a building
at the site. In 1996, the government estimated the costs of addressing the
residual radioactivity at $965,000. Given the available data, the Company and
its environmental consultants believe that a more likely total cost is less than
$100,000. To date, no clean up costs have been assessed against the Company.
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In addition, the Company has retained or assumed certain environmental
liabilities and risks of future liabilities associated with businesses
previously operated or acquired by it, including Bliss and Laughlin Steel
Company. The Company does not believe that these retained or assumed liabilities
and risks would be expected to have a material adverse effect on the company's
financial condition or operating results. However, changes in laws or
regulations, liabilities identified or incurred in the future, or other
circumstances, might (individually or in the aggregate) have such an effect.
Employees
As of December 31, 1998, the Company had approximately 1,024 employees, of
which approximately 156 were represented by two unions under contracts which
expire in 2002 for 154 employees and 1999 for 2 employees. The Company believes
that its relations with its employees are satisfactory.
Directors and Executive Officers
The following table sets forth the name, age and position held by the
directors, and executive officers of AXIA Group and the Company following the
consummation of the Transaction. Each director is elected for a one year term or
until such person's successor is duly elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gary L. Rosenthal 49 Chairman of the Board, President and Chief Executive Officer
Lyle J. Feye 45 Vice President--Finance, Treasurer and Chief Financial Officer
David H. Chesney 55 President and General Manager of Nestaway
Ian G. Wilkins 59 President and General Manager of Fischbein
Robert G. Zdravecky 52 President and General Manager of Ames
Susan O. Rheney 39 Director
Dennis W. Sheehan 64 Director
C. Byron Snyder 50 Director
</TABLE>
Gary L. Rosenthal has served as Chairman of the Board since the transaction
and as Chief Executive Officer and President since January 1999. Mr. Rosenthal
is the President of Heaney Rosenthal, Inc., a private financial organization
specializing in the acquisition of businesses, a position he has held since
1994. From 1990 to 1994, he was Chairman, and in 1994 assumed the additional
titles of Chief Executive Officer and President of Wheatley TXT Corp., a
publicly-traded oil field equipment manufacturer. From 1988 to 1990, he was a
principal of the Sterling Group, ("Sterling"). From 1987 to 1988, he was a
Senior Vice President of Cain Chemical, Inc. Mr. Rosenthal will continue to
devote a portion of his time to business activities other than AXIA.
Lyle J. Feye became Vice President-Finance, Treasurer and Chief Financial
Officer of the Company in March 1994. From 1988 to March 1994, Mr. Feye was
Corporate Controller and Assistant Treasurer of the Company. From 1975 to 1988,
Mr. Feye served in various positions with the Continental Group Inc. (formerly
the Continental Can Company), including divisional financial and accounting
management.
David H. Chesney became President and General Manager of Nestaway in 1991.
From 1987 to 1991, 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
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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.
Ian G. Wilkins became President and General Manager of Fischbein in May
1994. From 1988 to May 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 had responsibility for all
operations of Scott Aviation, a Division of Figgie International, as Vice
President of Manufacturing.
Robert G. Zdravecky became President and General Manager of Ames in 1993.
Mr. Zdravecky first joined the Company 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 the Company
terminated as a result of the sale of two of the Company's divisions to The
Stanley Works. He rejoined the Company in 1993 in his current position. From
1981 to 1986, Mr. Zdravecky served as Vice President-Marketing and Sales with
Adhesive Engineering Company.
Susan O. Rheney has been a principal of Sterling since February 1992. She
worked as an independent financial consultant from December 1990 to January
1992. Prior to that time, from June 1987 to November 1990, she was an associate
at Sterling. Ms. Rheney is also a director of Texas Petrochemical Holdings, Inc.
Dennis W. Sheehan retired as President and Chief Executive Officer of the
Company, concurrently with the Transaction, a position he had held since 1984.
He joined the Company in 1977 as Vice President, General Counsel and Secretary.
Mr. Sheehan was Chairman of the Board of Directors of Allied Healthcare
Products, Inc., St. Louis, Missouri, a publicly-traded manufacturer and
distributor of healthcare and related products. Mr. Sheehan passed away in March
1999.
C. Byron Snyder is the President of Sterling City Capital, LLC, a Houston-
based investment company specializing in consolidating privately owned
businesses simultaneously with an initial public offering. Mr. Snyder was the
owner and President of Relco Refrigeration Company, a distributor of
refrigeration equipment, which he acquired in 1992. In February 1998, Relco
Refrigeration Company was merged into Hospitality Companies, Inc. Prior to 1992,
Mr. Snyder was the owner and chief Executive Officer of Southwestern Graphics
International, Inc., a diversified holding company. Mr. Snyder is the Chairman
of the Board of Directors of Integrated Electrical Services, Inc., a publicly
traded national provider of electrical contracting and maintenance services in
the commercial, industrial and residential markets.
The Board and Certain Board Committees
The Company's Board supervises the management of the Company as provided by
Delaware law.
AXIA Group's Board has established the following committees:
The Audit Committee, which recommends independent public accountants
to AXIA Group's Board, reviews the annual audit reports of AXIA Group
and reviews the fees paid to AXIA Group's independent public
accountants.
The Compensation Committee which has the responsibility for
supervising AXIA's executive compensation policies, administering
employee incentive plans, reviewing officers salaries, approving
significant changes in executive employee benefits and recommending to
the Board such other forms of remuneration as it deems appropriate.
9
<PAGE>
The AXIA Group Board, acting as a committee of the whole, has the
responsibility for considering nominations for prospective AXIA Group Board
members. The AXIA Group Board will consider nominees recommended by other AXIA
directors, stockholders and management provided that nominations by stockholders
are made in accordance with AXIA Group's by-laws. AXIA Board may also establish
other committees.
Compensation of Directors
Directors of AXIA Group and the Company who are not employees of the
Company receive an annual retainer of $15,000 and a fee of $500 for each meeting
of the Board or any committee thereof that they attend. Directors who are also
employees of the Company do not receive Director compensation.
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 service centers, a warehouse
and 66 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.
<TABLE>
<CAPTION>
Size in
Location Sq. Feet Owned/Leased Description
-------- -------- ------------ -----------
<S> <C> <C> <C>
Garfield Heights, Cleveland, Ohio....... 120,000 Owned Fabrication of dish drainer racks,
wire products and storage racks
and assembly of flexible conveyors
McKenzie, Tennessee..................... 79,000 Owned Fabrication of dishwasher racks
Beaver Dam, Kentucky.................... 64,000 Owned Fabrication of dishwasher racks,
dishwasher rack components and
other formed wire products
Clinton, North Carolina................. 60,000 Owned Fabrication of dishwasher racks
Commerce, California(1)................. 54,500 Owned Subleased
Statesville, North Carolina(2).......... 50,000 Leased Assembly and manufacture of
industrial sewing and packaging
machines
Livermore, California(3)................ 27,600 Leased Office and warehouse space for the
manufacture, distribution, repair and
maintenance of ATF tools
Stone Mountain, Georgia(2).............. 18,000 Leased Office and warehouse space for the
manufacture, distribution, repair and
maintenance of ATF tools
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Duluth, Georgia(4)...................... 16,000 Leased General Office
Brussels, Belgium(5).................... 11,000 Leased Assembly and warehousing of
packaging machines
Hayward, California(6).................. 8,000 Leased Office, warehouse and parts
distribution
Union City, California(7)............... 5,800 Leased Warehousing, distribution and
assembly of sold ATF tools
Paris, France........................... 5,200 Owned Assembly and distribution of
packaging machines
Lombard, Illinois(6).................... 4,800 Leased General office
</TABLE>
(1) Property is 50% owned and leased to an unrelated party.
(2) Lease expires in 2003.
(3) Lease expires in 2000.
(4) Lease expires in 2001.
(5) Lease expires in 2006.
(6) Lease expires in 1999.
(7) Lease expires in 2000.
11
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of lawsuits incidental to its
business. Including the environmental matters discussed below and taking into
account the proceeds held in escrow pursuant to the Merger Agreement, the
Company believes that none of these proceedings, individually, or in the
aggregate, will have a material adverse effect on the Company's financial
condition or operating results.
The Company is subject to various federal, state, local and foreign laws
and regulations governing environmental and employee health and safety matters,
including the handling, the use, discharge and disposal of hazardous materials
and pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the
Company. NYSDEC determined that the Company, among others, may be a responsible
party through its past ownership of the property. The site is currently listed
on the New York State Registry of Inactive Hazardous Waste Disposal Sites.
Environmental consultants engaged by the Company have established a range of
estimated remediation costs of approximately $1,000,000 to $3,000,000, plus or
minus 30% of those costs. The Company established an accrual of $3,900,000 for
the remediation and associated costs.
In 1997, the Company entered into an agreement with an adjoining landowner,
who is obligated by NYSDEC to address environmental concerns at his property. By
this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance the NYSDEC
will in fact offer its approval. The Company paid the $520,000 payable under the
agreement and has an exposure under the agreement of up to an additional
$120,000 if contamination is more widespread than estimated by the Company's
environmental consultants. In the event NYSDEC does not approve the remedy
envisioned in the agreement with the adjoining landowner, the Company may
terminate the agreement and demand the return of its payment with interest. In
that case, the adjoining landowner would no longer be obligated to undertake the
remediation of the property formerly owned by the Company.
Of the consideration paid pursuant to the Merger Agreement, $5,000,000 was
set aside in a special escrow account to cover environmental costs which may be
incurred by the Company in connection with cleanup of the site and any damages
or other required environmental expenditures relating to the site. The balance
in the account, after payment of such costs, will be released to the former
stockholders upon the first to occur of the approval by NYSDEC of the proposed
remediation action or the confirmation by NYSDEC that remediation at the site
has been completed in accordance with its then applicable decision in the matter
(the "Early Release Date"). If, however, the Early Release Date occurs before
the additional $120,000 is paid under the above-described agreement, the special
escrow account will continue as to that $120,000 until it is paid or it has
become clear that no claim will be made for such funds. In addition, if certain
additional specified cleanup activities are not completed by the Early Release
Date, an additional $80,000 will be withheld in the special escrow account until
such cleanup is completed. If all of the funds in the special escrow account
have not been released by the third anniversary of the Transaction Date, the
funds remaining in the special escrow account will be disbursed to the Company
to cover the remaining estimated costs, with the balance to be
12
<PAGE>
distributed to the former stockholders of the Company, in accordance with an
agreement to be reached by the Company and the Stockholder Representative
identified in the Merger Agreement, or upon failure of such parties to agree,
through an arbitration procedure.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
13
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is wholly-owned by Holdings and Holdings is wholly-owned by
Group. There is no established public trading market for the common equity of
the Company, Holdings, or Group.
Item 6. SELECTED FINANCIAL DATA
AXIA INCORPORATED AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousand $)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------------------
Period Period Year Year Year Period Period
Ended Ended Ended Ended Ended Ended Ended
-------- -------- -------- -------- -------- -------- -------
Mar. 15 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Jul. 22 Dec. 31
Income Statement Data: 1994 1994 1995 1996 1997 1998 1998
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $18,593 $ 81,304 $104,326 $104,787 $104,800 $ 62,567 $ 54,548
Income from operations(3) $ 2,137 $ 11,759 $ 15,316 $ 18,347 $ 19,354 $ 914 $ 9,758
Interest expense 1,500 5,300 6,596 5,123 3,710 1,553 6,515
Other expense (income) (122) (301) 493 18 37 205 71
------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item 759 6,760 8,227 13,206 15,607 (844) $ 3,172
Provision for income taxes 315 3,116 3,338 5,730 6,412 (119) 1,679
------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item 444 3,644 4,889 7,476 9,195 (725) 1,493
Loss on early extinguishment of debt -- -- -- 614 772 682 --
------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 444 $ 3,644 $ 4,889 $ 6 ,862 $ 8,423 $ (1,407) $ 1,493
======= ======== ======== ======== ======== ======== ========
Balance Sheet Data:
- ------------------
Current assets(2) $25,491 $ 25,262 $ 27,012 $ 26,211 $ 26,253 $ 32,966 $ 35,703
Total assets(2) $69,165 $104,397 $103,288 $ 99,331 $ 96,773 $104,241 $194,957
Current liabilities(2) $17,347 $ 17,390 $ 20,262 $ 18,849 $ 22,429 $ 38,679 $ 20,868
Long-term debt, less current maturities(2) $45,956 $ 52,435 $ 43,507 $ 34,548 $ 20,439 $ 13,074 $131,020
Stockholder's equity (deficit)(1)(2) $(7,058) $ 20,796 $ 25,828 $ 32,118 $ 40,067 $ 38,596 $ 28,202
</TABLE>
(1) 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.
(2) Due to a substantial change in controlling interest in the Company, the
Company reflected a complete change in the accounting basis of its assets
and liabilities from historical cost to estimated fair value as of March
15, 1994 and July 22, 1998.
(3) Income from operations for the period ended July 22, 1998, includes
$11,280,000 in Transaction related expense, including $10,773,000 in
compensation related expenses from the sale of stock or options, or both,
and payments pursuant to various employee incentive programs which were
paid from the purchase price proceeds on the Transaction Date.
14
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company is a leading designer, manufacturer, marketer and distributor
of a diverse range of products in several niche markets including productivity
enhancing construction tools, formed wire products, industrial bag closing
equipment and flexible conveyors. The Company operates through three business
units: Ames, Nestaway and Fischbein. Ames is the leading designer, manufacturer,
marketer and distributor of ATF tools, which are rented or sold to interior
finishing contractors to finish drywall joints prior to painting, wallpapering
or other forms of final treatment. Nestaway is a leading manufacturer of formed
wire products which are used for a variety of commercial and consumer product
applications. Fischbein is a leading worldwide manufacturer and marketer of
industrial bag closing and handling equipment and systems and a leading
manufacturer of flexible conveyors and storage racks.
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition
Co."), a company organized to effect the acquisition (the "Acquisition") of Axia
Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the
"Predecessor Company" prior to the date of the Transaction) to effect the
acquisition for a purchase price of $155,250,000 (including the repayment of
indebtedness), subject to certain post-closing adjustments. Upon completion of
the Transaction (the "Transaction"): (i) Holdings, and AXIA Incorporated (the
"Company") became direct and indirect subsidiaries of AXIA Group ("Group" the
parent company of Acquisition Co.) and (ii) the Company became the primary
obligor on borrowings made under the bank credit agreement (the "Bank Credit
Agreement") and Senior Subordinated notes issued on the Transaction Date defined
below.
On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of
its common stock ("Common Stock") and contributed the proceeds thereof to
Acquisition Co. (the "Equity Investment"). Finance Co., an indirect subsidiary
of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit
Agreement and received approximately $100,000,000 in gross proceeds from the
sale of subordinated notes. Such funds were used: (i) to effect the Acquisition
pursuant to the Merger Agreement; (ii) to fund the ESOP; (iii) to repay existing
indebtedness of the Company and (iv) to pay fees and expenses in connection with
the Transaction.
As a result of the Transaction, the Company will incur significantly higher
interest costs and goodwill amortization than in historical periods included
herein.
The Company distributes certain of its products through subsidiaries
located in Belgium, France, the United Kingdom, Singapore and Canada. The
Company accounts for gains and losses resulting from foreign currency
transactions in its consolidated statement of income. Income and expense items
are translated at the average exchange rate for the period. The assets and
liabilities of foreign subsidiaries are translated at the current rate of
exchange at the balance sheet date. Balance sheet translation adjustments have
been excluded from the results of operations and are reported as a separate
component of stockholder's equity. As the Company's foreign revenues accounted
for approximately 12% of the Company's 1998 net revenues, the results of the
Company may be favorably or unfavorably affected to the extent the U.S. dollar
weakens or strengthens versus the applicable corresponding foreign currency. The
Company currently does not enter into hedging programs in an attempt to mitigate
the fluctuations against the U.S. dollar.
15
<PAGE>
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.
In 1997, the Company repurchased and extinguished $9.3 million in principal
of its 11% Senior Subordinated Notes due 2001 (the "2001 Notes"). The Company
recorded a charge of $1.3 million, $0.8 million net of tax, for the redemption
premium, the write-off of unamortized capitalized financing costs associated
with the issuance of the 2001 Notes, the applicable original issue discount, and
the expenses of the Transaction. In May 1998, the Company repurchased and
extinguished the remaining $5.3 million in principal of its 2001 Notes, and
similarly recorded a charge of $0.5 million, $0.3 million net of tax. As a
result of the refinancing of its bank debt in 1996, the Company recorded a debt
extinguishement charge of $1.0 million on a pretax basis, $0.6 million net of
tax, due to the write-off of the unamortized capitalized financing costs related
to the previous bank agreement.
The proforma amounts for the twelve months ended December 31, 1998 include
the applicable results of the Predecessor Company for the period ending July 22,
1998. The amounts for the years ended December 31, 1997 and December 31, 1996
are the results of the Predecessor Company.
16
<PAGE>
Results of Operations
The table below summarizes the results of operations of the Company for the
years indicated (in million $):
<TABLE>
<CAPTION>
Years Ended December 31,
Predecessor Company /(1)/ Proforma /(2)/
--------------------------------- --------------
1996 1997 1998
-------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ % $ % $ %
Net revenues
Ames net revenues $ 38.0 36.2% $ 42.4 40.4% $ 48.1 41.1%
Nestaway net revenues 39.7 37.9 35.3 33.7 41.4 35.4
Fischbein net revenues 27.1 25.9 27.1 25.9 27.6 23.5
------ ----- ------ ----- ------ -----
Total net revenues 104.8 100.0 104.8 100.0 117.1 100.0
------ ----- ------ ----- ------ -----
Cost of revenues /(3)/ 57.0 54.4 56.9 54.3 63.1 53.9
------ ----- ------ ----- ------ -----
Gross profit /(3)/ 47.8 45.6 47.9 45.7 54.0 46.1
Selling, general, administrative
expenses /(3)/ 23.5 22.4 23.8 22.7 26.3 22.4
Depreciation and amortization 6.0 5.7 4.7 4.5 5.7 4.9
------ ----- ------ ----- ------ -----
Income from operations 18.3 17.5 19.4 18.5 22.0 18.8
Interest expense 5.1 4.9 3.7 3.5 8.1 6.9
Other expense (income) 0.0 0.0 0.1 0.1 .2 .2
------ ----- ------ ----- ------ -----
Income before income taxes
and extraordinary items 13.2 12.6 15.6 14.9 13.7 11.7
Provision for income taxes 5.7 5.4 6.4 6.1 5.9 5.0
------ ----- ------ ----- ------ -----
Income before extraordinary items $ 7.5 7.2% $ 9.2 8.8% $ 7.8 6.7%
====== ===== ====== ===== ===== =====
</TABLE>
- ---------------------
/(1)/ Predecessor Company results exclude debt extinguishment costs.
/(2)/ Proforma results are the combined financial results of the Company
including Predecessor Company prior to the Transaction and exclude
transaction related expenses of $11.3 million, $7.0 million net of tax,
and debt extinguishment cost of $.7 million. Transaction expenses include
$10.8 in compensation from the sale of stock or options, or both, and
payments pursuant to various employee incentive programs which were paid
from the purchase price proceeds on the Transaction Date.
/(3)/ Excluding depreciation and amortization.
17
<PAGE>
Year ended December 31, 1998 compared to year ended December 31, 1997.
Net Revenues. Net revenues increased 11.7% to $117.1 million in 1998 from
$104.8 million in 1997. The increase in net revenues was a result of increased
rentals and sales of ATF tools and increased sales of drywall related
merchandise, dishwasher racks, other formed wire products and material handling
equipment.
Ames' net revenues increased 13.4% to $48.1 million in 1998 from $42.4
million in 1997. The increase was primarily the result of an increase in both
price and volume of rented ATF tools. Factory-built housing initiatives also
results in higher ATF rental revenues. In addition Ames' revenues increased due
to higher demand for drywall related merchandise and ATF tool sales. Ames
benefited from the strength of the U.S. housing market.
Nestaway's net revenues increased 17.2% to $41.4 million in 1998 from $35.3
million in 1997. The increase was the result of revenue growth of 11.3% in
dishrack and dishrack component sales to OEM's and a 30.9% growth in revenues of
formed wire products. Dishrack revenues improved primarily as a result of
additional volumes with a new customer, a favorable nonrecurring $.4 million
pricing adjustment, and volume growth with Nestaway's largest customer. Formed
wire product revenues improved with added sales of traditional product lines
such as dish drainers and shower caddies, together with revenues generated by
new products including dryer racks and golf cart baskets.
Fischbein's net revenues increased 1.8% to $27.6 million in 1998 from $27.1
million in 1997. The increase was primarily due to increased sales of flexible
conveyors. Increased revenues from bag closing equipment in the U.S. and Europe
were offset by declines in Asia and Latin America, two regions impacted by
general adverse economic conditions.
Gross Profit Excluding Depreciation and Amortization. Gross profit
excluding depreciation and amortization increased 12.7% to $54.0 million in 1998
from $47.9 million in 1997. The increase in gross profit was primarily
attributable to the net revenue increase discussed above. Gross profit without
depreciation and amortization as a percentage of net revenues improved to 46.1%
from 45.7%.
Ames' gross profit improved with revenues. This improvement was offset by
operating inefficiencies as the Bensenville, Illinois and Tucker, Georgia rental
ATF tool repair operations were consolidated into a new facility in Stone
Mountain, Georgia. Nestaway's gross profit margins improved with revenue growth.
Nestaway also benefited from a one time refund and temporary reduction in
workers' compensation insurance and a nonrecurring favorable pricing adjustment
aggregating $773,000. Fischbein's gross profits improved due to continued cost
reductions from its foreign parts sourcing program and additional machining
centers which improved operating efficiencies and overhead absorption.
Selling, General and Administrative Expenses Excluding Depreciation and
Amortization. Selling, general and administrative expenses excluding
depreciation and amortization increased 10.5% to $26.3 million in 1998 from
$23.8 million in 1997. Selling expenses increased due to additional personnel,
travel and entertainment, and advertising. The Company also incurred an increase
in professional services expense due to additional legal assistance to establish
new benefit plans and assistance in the preparation of multiple federal and
state tax returns.
Depreciation and Amortization. Depreciation and amortization increased
21.2% to $5.7 million from $4.7 million in 1997. This was primarily attributable
to an increase in goodwill amortization from the Transaction.
Interest Expense. Interest expense increased to $8.1 million in 1998 from
$3.7 million in 1997. The increase was the result of the acquisition of the
Company and resultant increase in debt.
Other Expense. Other expense was $0.2 million in 1998 compared to other
expense of $0.1 million in 1997.
18
<PAGE>
Income Taxes and Income before Extraordinary Item. The effective tax rate
for 1998 was 43.1% compared to 41.0% for the prior year comparable period. This
increase in the effective tax rate was primarily due to the impact of non-
deductible amortization expense. Income before an extraordinary item and
excluding transaction related expense decreased 15.2% to $7.8 million from $9.2
million in 1997. The decrease was primarily attributable to an increase in
interest expense as discussed above.
Year ended December 31, 1997 compared to year ended December 31, 1996.
Net Revenues. Net revenues were unchanged at $104.8 million in 1997
compared to 1996. Excluding the loss of an OEM customer in the second quarter of
1996, consolidated net revenues grew 4.3% over the prior year period. The loss
of the OEM customer was offset by the increase in the rental and sale of ATF
tools and drywall related merchandise sales through Company-managed stores. Bag
closing equipment revenues in Latin America also increased. Currency changes
resulted in a reduction in revenues of $1.6 million from 1996.
Ames' net revenues increased 11.6% to $42.4 million in 1997 from $38.0
million in 1996. ATF tool rental sales increased $2.5 million primarily due to
both price and volume increases in rented ATF tools. Drywall related merchandise
sales also improved $0.9 million as product offerings were expanded and
additional marketing programs were developed to improve store sales. ATF tool
sales increased $1.0 million in part due to the addition of new distribution
locations.
Nestaway's net revenues decreased 11.1% to $35.3 million in 1997 from $39.7
million in 1996. The decrease was primarily attributable to the loss of the
aforementioned OEM customer, which resulted in a decline in revenues of $4.3
million. Offsetting this decline were increased sales to a new OEM which
accounted for $0.6 million in revenues in 1997.
Fischbein's net revenues were unchanged at $27.1 million in 1997 compared
to 1996. Fischbein recorded revenue growth in its bag closing product line in
the U.S., Latin America and Europe of $0.7 million. Revenues from Europe,
however, were negatively impacted by foreign currency translation rate changes
which reduced revenues by $1.6 million. Excluding this event, bag closing
revenues would have increased $2.3 million. Specific marketing programs directed
towards Latin American markets improved revenues by $1.1 million. Revenues from
storage racks declined $0.7 million primarily as a result of lower demand.
Gross Profit excluding Depreciation and Amortization. Gross profit
excluding depreciation and amortization increased to $47.9 million in 1997 from
$47.8 million in 1996. The improvement was primarily related to rental revenue
growth within the Ames business unit. Additionally, gross profit as a percentage
of net revenues improved to 45.7% from 45.6%.
Ames' gross profit improved as a result of rental revenue increases
together with a reduction in tool refurbishment costs as a result of foreign
outsourcing of parts and programs to reduce parts consumption. Nestaway's gross
profit declined primarily due to product mix with a higher proportion of sales
in lower margin non-dishwasher rack formed wire products and the impact of the
startup of several new products including shower caddies, golf cart baskets and
dishwasher racks for a new OEM customer offset by the elimination of certain
fixed costs associated with the closure of a leased production facility in 1996.
Fischbein's profit margins continued to improve due to cost reduction programs
and improved operating efficiencies at the Statesville, North Carolina bag
closing production facility. Fischbein also implemented a foreign parts sourcing
program which resulted in lower components costs.
Selling, General and Administrative Expenses Excluding Depreciation and
Amortization. Selling, general and administrative expenses excluding
depreciation and amortization increased 1.2% to $23.8 million in 1997 from $23.5
million in 1996. This was primarily attributable to an increase in bad debt
expense accompanying increased revenue within the Ames business unit. The
Company also recorded an increase in administrative and selling compensation.
These increases were offset by lower insurance, benefits and amortization
expense. Ames also recorded lower facility
19
<PAGE>
rental expenses with the closure of a training center. As a percentage of net
revenues, selling, general and administrative expenses increased slightly to
24.2% in 1997 from 24.0% in 1996.
Depreciation and Amortization. Depreciation and amortization decreased
21.7% to $4.7 million in 1997 from $6.0 million in 1996. The decrease was
primarily due to a reduction in depreciation recorded at Nestaway's Clinton,
North Carolina plant and the permanent closure of a second facility.
Interest Expense. Interest expense decreased to $3.7 million in 1997 from
$5.1 million in 1996. The decrease was the result of a reduction in outstanding
debt, a reduction in the interest rate on its revolving credit agreement as a
result of a bank credit refinancing which occurred in June 1996 and the
repurchase of a portion of the 2001 Notes in May 1997 utilizing a lower cost
bank line of credit.
Other Expense. Other expense was $0.1 million in 1997. In 1997, the
Company recorded a gain on the sale of an investment. 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 Taxes and Income before Extraordinary Item. The effective tax rate
for the year ended 1997 was 41.0% compared to 43.2% in 1996. The decrease was
due to a reduction in the estimate of state and foreign tax liabilities. Income
before an extraordinary item increased 22.7% to $9.2 million in 1997 form $7.5
million in 1996 as a result of the factors discussed above.
Liquidity and Capital Resources
The Company generated cash from operations of $6.9 million in 1998 compared
to $11.7 million in 1997 and had cash on hand of $5.9 million at December 31,
1998. The decline in cash generated from operations was primarily attributable
to Transaction related expenses of $11.3 million, $7.0 million net of tax,
including $10.8 million in compensation from the sale of stock or options, or
both, and payments pursuant to various employee incentive programs. The
compensation payments were deducted from the purchase price discussed in Item I
BUSINESS--Acquisition and Merger prior to distribution of net proceeds to former
shareholders.
At December 31, 1998, the Company had working capital of $14.8 million
compared to working capital of $3.8 million at December 31, 1997. The increase
in working capital was due to an increase in cash, accounts receivable,
inventories and a reduction in the current maturities of long term debt.
Receivables increased 10.8% as a result of revenue growth. Inventory growth was
the result of higher merchandise and parts inventories to support revenue growth
at Ames and increases at Fischbein as a result of slower market growth in Latin
America and temporary inventory accumulation in Europe. Current maturities of
long term debt declined due to the Company's new debt structure after the
Transaction.
During 1998, the Company utilized net cash provided by operations to fund
capital expenditures of $4.4 million primarily for revenue maintenance and
growth. This includes investment to convert a facility to production of
dishwasher racks for a new customer, the purchase of equipment to manufacture
new formed wire products, and to increase rental tools due to revenue growth and
specific requirements of factory built housing customers.
With consummation of the Transaction, interest payments on the Notes and
under the Bank Credit Agreement and amortization of the Term Loan represent
significant obligations of the Company. The Company's remaining liquidity
demands relate to capital expenditures and working capital needs. For the year
ended December 31, 1998, the Company spent $4.4 million on capital projects. The
Company projects capital expenditures of approximately $7.0 million in 1999,
although the amount is subject to change based on numerous factors.
The Company's primary sources of liquidity is cash flows from operations
and borrowings under the Bank Credit Agreement. The Revolving Credit Facility
provides the Company with $15.0 million of borrowings, subject to availability
under the borrowing base. The Acquisition Facility provides the Company with
$25.0 million borrowings, subject to customary conditions. The Company believes
that, based on current and anticipated financial performance, cash flow
20
<PAGE>
from operations and borrowings under the Revolving Credit Facility will be
adequate to meet anticipated requirements for capital expenditures, working
capital and scheduled interest payments. However, the Company's capital
requirements may change, particularly if the Company should complete any
material acquisitions. The ability of the Company to satisfy its capital
requirements will be dependent upon the future financial performance of the
Company, which in turn will be subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control.
Accounting Changes
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Holding Activities" ("SFAS 133").
SFAS 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted Transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the
Company has not entered into derivatives contracts, either to hedge existing
risks or for speculative purposes. Accordingly, management does not expect
implementation of this standard to affect its financial statements.
Other Matters
With the coming of the year 2000, there has been a great deal of publicity
concerning computer information reporting and equipment failure due to
hardware's and software's use of two-digit dates ("Year 2000"). Management is
responsible for identifying the Company's computer systems affected by the Year
2000 issue and developing and executing a compliance plan. Each business unit
has prepared and is in the process of implementing plans to replace current
management information systems due to current hardware and software language
obsolescence and the need to upgrade system capacities to management
requirements. As a result, all business units expect their management
information systems to be Year 2000 compliant in 1999. The Company has spent
approximately $1.1 million and estimates an additional $.2 million in the
aggregate in 1999 to upgrade its management information systems. There is no
guarantee, however, that such systems replacements and modifications will be
completed on time. The failure of the Company's suppliers and customers to
address the Year 2000 issue could significantly impact the Company.
Nestaway and Fischbein expect their information systems projects to be
complete by the end of the second quarter of 1999. Neither business unit has
developed a detailed contingency plan due to the lack of complexity in the
system upgrades, and advanced status of the installation. The Ames information
system, however, is heavily customized and includes accounting applications,
merchandise inventory control, rental tool inventory control and other
applications. Ames' management anticipates completion of the project in the
third quarter of 1999. Should this not be the case, partial installation will
have occurred and contingency plans will be developed for selected applications
on which installation may be delayed.
Management believes that production equipment and engineering CAD systems
will be Y2K compliant by the end of the second quarter of 1999.
As a result of dishwasher rack sourcing decisions made by its customers in
1996, the Company shut down a leased production facility in Canal Winchester,
Ohio, and temporarily idled a second plant in Clinton, North Carolina. The
Clinton facility resumed operations in 1997 when the Company was awarded a
contract by a new dishwasher rack customer. The Beaver Dam, Kentucky plant, shut
down in 1994 due to a customer's decision to utilize an alternative source of
supply, was reopened in 1996 to produce dishwasher rack components, lower volume
dishwasher racks, and
21
<PAGE>
other formed and coated wire products. During 1997 and 1996, the Company charged
$0.6 million and $1.0 million, 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, 1998, and management believes its current manufacturing operations are
properly positioned to service current and future customers.
Risk Factors
Substantial Leverage. In connection with the consummation of the
Transaction, the Company incurred a significant amount of indebtedness
outstanding and has significant debt service requirements. In addition, the
Indenture will permit the Company to incur or guarantee additional indebtedness,
including indebtedness under the Bank Credit Agreement, subject to certain
limitations. The Company has additional borrowing capacity on a revolving credit
basis under the Bank Credit Agreement and on a term basis to fund future
acquisitions under the Acquisition Facility of the Bank Credit Agreement.
The Company's high degree of leverage could have important consequences to
the holders of the Notes, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, debt service requirements, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the Company's cash flow from operations is required to be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
the funds available to the Company for other purposes, including its operations
and future business opportunities; (iii) certain of the Company's borrowings,
including certain borrowings under the Bank Credit Agreement, are at variable
rates of interest, which expose the Company to the risk of increased interest
rates; (iv) the indebtedness outstanding under the Bank Credit Agreement is
secured by substantially all the assets of the Company and will mature prior to
the maturity of the Notes and (v) the Company's leveraged position and the
covenants contained in its debt instruments could limit the Company's
flexibility to adjust to changing market conditions and its ability to withstand
competitive pressures, and the Company may be more vulnerable to a downturn in
general economic conditions or in its business or be unable to carry out capital
spending that is important to its growth and productivity improvement programs.
The Company is required to make scheduled principal payments under the Bank
Credit Agreement. The company's ability to make scheduled payments or to
refinance its obligations with respect to its indebtedness, including the Notes,
depends on its financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors beyond its control, including the strength of the
general economy, interest rates, unscheduled plant shutdowns, increased
operating costs, raw material and product prices, and regulatory developments.
There can be no assurance that the Company will maintain a level of cash flow
from operations sufficient to permit it to pay the principal, premium, if any,
and interest on its indebtedness (including the Notes).
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital
or restructure or refinance its debt (including the Notes). There can be no
assurance that such alternative measures would be successful or would permit the
Company to meet its scheduled debt service obligations. In the absence of such
operating results and resources, the Company could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt service and other obligations. The Bank Credit Agreement and the
Indenture restrict the Company's ability to sell assets and use the proceeds
therefrom. There can be no assurance as to the ability of the Company to
consummate such sales or the proceeds which the Company could realize therefrom
or that such proceeds would be adequate to meet the obligations then due.
Restrictive Financing Covenants; Cross-Default Risks. The Bank Credit
Agreement and the Indenture contain a number of significant covenants that,
among other things, restrict the ability of the Company to dispose of assets or
merge, incur additional indebtedness, incur guarantee obligations, prepay the
Notes or amend the Indenture, pay dividends, create liens on assets, enter into
sale and leaseback transaction, make investments, loans or advances,
22
<PAGE>
make acquisitions, engage in mergers or consolidations, make capital
expenditures or engage in certain transactions with affiliates, and will
otherwise restrict corporate activities. In addition, under the Bank Credit
Agreement, the Company is required to comply with specified financial ratios and
tests.
The Company's ability to comply with the covenants and restrictions
contained in the Bank Credit Agreement and the Indenture may be affected by
events beyond its control, including prevailing economic, financial and industry
conditions. The breach of any such covenants or restrictions could result in a
default under the Bank Credit Agreement or the Indenture which would permit the
lenders under the Bank Credit Agreement or the holders of the Notes, as the case
may be, to declare all amounts outstanding thereunder to be due and payable,
together with accrued and unpaid interest, and the commitments of the lenders
under the Bank Credit Agreement to make further extensions of credit could be
terminated. In addition, in the event of a default under the Bank Credit
Agreement, in certain circumstances the lenders under the Bank Credit Agreement
could prevent the Company from making any payments on the Notes. There can be no
assurance that in the event of any such default the Company will have adequate
resources to repay in full principal, premium, if any, and interest on the
Notes.
Competition. Each of the business units operates within competitive
industries. The Company is not aware of any single competitor that competes with
the Company along all three business lines. (See "Business-Competition")
Reliance on Major Customers. One of Nestaway's dishwasher rack customers
accounted for 19% of the Company's 1998 revenues. Since the contract with this
customer requires cost reductions during its term, the inability of the Company
to achieve manufacturing cost savings could lead to lower gross margins. Another
Nestaway customer who markets dish drainers, shower caddies, and other formed
wire products accounted for 11% of the Company's 1998 revenues. A loss of either
or both of these customers could have a material adverse effect on the Company.
In each of 1994 and 1996 the Company discontinued operations at certain of
its facilities, in each case as a result of a decision by certain major
dishwasher rack customers to produce dishwasher racks in-house. In each instance
the company's revenues were adversely affected. No assurance can be given that
such actions by the Company's dishwasher rack customers will not recur. Pursuant
to the Company's requirement contracts, a decrease in sales by the company's
customers may cause a decrease in the revenues derived by the Company under such
requirements contracts.
Risks Relating to Acquisition Strategy. The Company's strategy includes
making acquisitions, but there can be no assurance that suitable acquisition
candidates will continue to be available. In addition, acquisitions that the
Company may make will involve risks, including the successful integration and
management of acquired technology, operations and personnel. The integration of
acquired businesses may also lead to the loss of key employees of the acquired
companies and diversion of management attention from ongoing business concerns.
There can be no assurance that any additional acquisitions will be made, that
the Company will be able to obtain additional financing needed for such
transactions and, if any acquisitions are so made, that they will be successful.
Fluctuations in Raw Materials Cost and Supply. The Company purchases
steel, metal castings, aluminum and other raw materials from various suppliers.
There can be no assurance that severe shortages of such materials will not occur
in the future, which could increase the cost or delay the shipment of the
Company's products and have a material adverse effect on the Company's operating
results. Because such materials in the aggregate constitute significant
components of the Company's cost of goods sold, fluctuations in price could have
a material adverse effect on the Company's results of operations. Historically,
the Company has passed on any increases in prices of raw materials to its
customers. However, there can be no assurance that the company will be able to
do so in the future.
General Economic Conditions. The industries in which the Company operates
are affected by changes in general economic conditions, including national,
regional and local slowdowns in home building, remodeling, construction and
other industrial activity, all of which are outside of the Company's control.
There can be no assurance that economic
23
<PAGE>
slowdowns, adverse economic conditions, cyclical trends, increases in interest
rates and other factors will not have a material adverse effect on the Company's
consolidated operating results or financial condition.
Potential Legacy Liabilities. The Company has retained or assumed certain
environmental liabilities and risks of future liabilities associated with
businesses previously operated or acquired by it, including Bliss and Laughlin
Steel Company. The Company does not believe that these retained or assumed
liabilities and risks would be expected to have a material adverse effect on the
Company's financial condition or operating results. However, changes in laws or
regulations, liabilities identified or incurred in the future, or other
circumstances, might (individually or in the aggregate) have such an effect. In
addition, the Company is currently addressing certain legacy liabilities of this
nature.
Foreign Sales and Operations. In 1998 approximately 12% of the Company's
net revenues were derived from foreign sales and operations and export sales. A
portion of these net revenues are derived from sales in countries that have
recently experienced economic downturns. There can be no assurance that the
Company's net revenues will not be affected by these economic downturns in such
countries. In addition, a portion of the Company's anticipated growth is
expected to come from foreign sales and operations. Foreign sales and operations
involve varying degrees of risks and uncertainties inherent in doing business
abroad. Such risks include the possibility of unfavorable circumstances arising
from host country laws or regulations, including unexpected changes of
interpretations thereof. Other risks include partial or total expropriation;
export duties and quotas; currency exchange rate fluctuations; restrictions on
repatriation of funds; the disruption of operations from labor and political
disturbances, insurrection, or war; and the requirements of partial local
ownership of operations in certain countries. Furthermore, customer credit risks
are exacerbated in foreign sales and operations because there often is little
information available about the credit histories of customers in certain
countries.
The value of the Company's foreign sales and earnings may vary with
currency exchange rate fluctuations. To the extent that the Company does not
take steps to mitigate the effects of changes in relative values, changes in
currency exchange rates could have an adverse effect upon the Company's results
of operations, which in turn could adversely affect the ability of the Company
to meet its debt obligations, including payments on the Notes.
Year 2000 Issue. The Company faces "Year 2000" issues. Year 2000 issues
exist when dates are recorded using two digits (rather than four) and are then
used for arithmetic operations, comparisons or sorting. A two-digit recording
may recognize a date using "00" as 1900 rather than 2000, which could cause the
Company's computer systems to perform inaccurate computations. The Company has
undertaken substantial steps to eliminate Year 2000 risk, including determining
which of its systems require replacement or modification, and implementing an
action plan in response thereto, portions of which have been completed to date.
The Company's Year 2000 issues relate not only to its own systems but also those
of its customers and suppliers. It is anticipated that systems replacements and
modifications will resolve the Year 2000 issue with respect to the Company's
internal systems. There is no guarantee, however, that such systems replacements
and modifications will be completed on time, which could significantly impact
the Company. In addition, the failure of the Company's suppliers and customers
to address the Year 2000 issue could also significantly impact the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.
The Company is exposed to some market risk due to the floating interest
rate under its Bank Credit Agreement. As of December 31, 1998, the Bank Credit
Agreement had a principal balance of $35.5 million at an average floating
interet rate of 7.64% per annum. A 1.0% increase in interest rates could result
in a $0.4 million annual increase in interest expense on the existing principal
balance (See also Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Risk Factors).
24
<PAGE>
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
March 9, 1999, are set forth on pages 26 to 59 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, 1998 and 1997 26
Consolidated Statements of Stockholder's Equity and Comprehensive 27
Income for the periods ended December 31, 1998, and July 22, 1998,
and the years ended December 31, 1997, and December 31, 1996
Consolidated Statements of Income for the periods ended December 31, 28
1998, and July 22, 1998, and the years ended December 31, 1997,
and December 31, 1996
Consolidated Statements of Cash Flows for the periods ended 29
December 31, 1998, and July 22, 1998, and the years ended
December 31, 1997, and December 31, 1996
Notes to the Consolidated Financial Statements 30-57
Independent Auditors' Report 58-59
</TABLE>
25
<PAGE>
PART I
Item 1. Financial Statements
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31,
1998 1997
------------ -------------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 5,904 $ 1,310
Accounts receivable, net 14,133 12,759
Inventories 11,092 9,155
Prepaid income taxes and other current assets 1,135 436
Deferred income tax benefits 3,439 2,593
-------- -------
Total Current Assets $ 35,703 $26,253
-------- -------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ 508
Buildings and improvements 4,600 6,620
Machinery and equipment 18,750 24,741
Equipment leased to others 10,113 7,139
-------- -------
$ 34,447 $39,008
Less: Accumulated depreciation 1,758 14,938
-------- -------
Net Plant and Equipment $ 32,689 $24,070
-------- -------
OTHER ASSETS:
Goodwill, net $107,633 $33,505
Intangible assets, net 807 703
Deferred charges, net 18,097 12,182
Other assets 28 60
-------- -------
Total Other Assets $126,565 $46,450
-------- -------
TOTAL ASSETS $194,957 $96,773
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,655 $10,925
Accounts payable 4,334 4,021
Accrued liabilities 11,868 7,219
Accrued income taxes 11 264
-------- -------
Total Current Liabilities $ 20,868 $22,429
-------- -------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $131,020 $20,439
Other non-current liabilities 7,970 10,883
Deferred income taxes 6,750 2,955
-------- -------
Total Non-Current Liabilities $145,740 $34,277
-------- -------
Commitments and contingencies $ - $ -
Common stock held by ESOP $ 1,620 $ -
Less: Note receivable from ESOP (1,473) -
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value; 100 shares
authorized, issued and outstanding) $ - $ -
Additional paid-in capital 26,511 16,723
Retained earnings 1,482 23,818
Accumulated other comprehensive income 209 (474)
-------- -------
Total Stockholder's Equity $ 28,202 $40,067
-------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $194,957 $96,773
======== =======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these balance sheets.
26
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
FOR THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998 AND
JANUARY 1, 1998 TO JULY 22, 1998
AND THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Other Comprehensive Income
---------------------------------------------------
Common Additional Minimum Cumulative Accumulated Compre-
Stock Paid-in Retained Pension Translation Other Compre- hensive
Par Value Capital Earnings Liability Adjustments hensive Income Income
--------- ---------- -------- --------- ----------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor Company:
BALANCE, DECEMBER 31, 1995 $ - $ 16,723 $ 8,533 $ (54) $ 626 $ 572
Net income - - 6,862 - - - $ 6,862
Cumulative translation adjustment - - - - (302) (302) (302)
Other, net of tax of $167 - - - (270) - (270) (270)
-------
Comprehensive income $ 6,290
------- -------- -------- ----- ----- ----- =======
BALANCE, DECEMBER 31, 1996 $ - $ 16,723 $ 15,395 $(324) $ 324 $ -
======= ======== ======== ===== ===== =====
Net income - - 8,423 - - - $ 8,423
Cumulative translation adjustment - - - - (616) (616) (616)
Other, net of tax of $88 - - - 142 - 142 142
-------
Comprehensive income $ 7,949
------- -------- -------- ----- ----- ----- =======
BALANCE, DECEMBER 31, 1997 $ - $ 16,723 $ 23,818 $(182) $(292) $(474)
======= ======== ======== ===== ===== =====
Net income - - (1,407) - - - (1,407)
Cumulative translation adjustment - - - - (64) (64) (64)
-------
Comprehensive income $(1,471)
------- -------- -------- ----- ----- ----- =======
BALANCE, JULY 22, 1998 - $ 16,723 $ 22,411 $(182) $(356) $(538)
======= ======== ======== ===== ===== =====
AXIA Incorporated:
Acquisition Adjustments:
Eliminate Predecessor
Company Equity $ - $(16,723) $(22,411) $182 $ 356 $ 538 $ -
Contribution from Holdings - 26,500 - - - - -
Net income - - 1,493 - - - 1,493
Cumulative translation adjustment - - - - 210 210 210
Other - 11 (11) (1) - (1) (12)
-------
Comprehensive income $ 1,691
------- -------- -------- ----- ----- ----- =======
BALANCE DECEMBER 31, 1998 $ - $ 26,511 $ 1,482 $ (1) $ 210 $ 209
======= ======== ======== ==== ===== =====
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
27
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998 AND
JANUARY 1, 1998 TO JULY 22, 1998
AND THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------
July 23, 1998 January 1, 1998 January 1, 1997 January 1, 1996
to to to to
December 31, 1998 July 22, 1998 December 31, 1997 December 31, 1996
------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $40,417 $46,257 $ 77,418 $ 79,771
Net rentals 14,131 16,310 27,382 25,016
------- ------- -------- --------
Net revenues $54,548 $62,567 $104,800 $104,787
Cost of sales 25,675 28,228 48,526 49,096
Cost of rentals 4,219 4,979 8,422 7,840
Selling, general and administrative expenses 11,799 14,507 23,786 23,476
Depreciation and amortization 3,097 2,659 4,712 6,028
Transaction expenses - 11,280 - -
------- ------- -------- --------
Income from operations $ 9,758 $ 914 $ 19,354 $ 18,347
Interest expense 6,515 1,553 3,710 5,123
Interest income (88) (9) (367) (39)
Other expense (income), net 159 214 404 57
------- ------- -------- --------
Income (loss) before income taxes
and extraordinay item $ 3,172 $ (844) $ 15,607 $ 13,206
Provision for income taxes 1,679 (119) 6,412 5,730
------- ------- -------- --------
Income (loss) before extraordinary item $ 1,493 $ (725) $ 9,195 $ 7,476
Extraordinary item:
Loss on early extinguishment of debt,
net of income taxes of $404, $479, and $410,
respectively - 682 772 614
------- ------- -------- --------
Net income (loss) $ 1,493 $(1,407) $ 8,423 $ 6,862
======= ======= ======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
28
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998, AND
JANUARY 1, 1998 TO JULY 22, 1998
AND THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------
July 23, 1998 January 1, 1998 January 1, 1997 January 1, 1996
to to to to
December 31, 1998 July 22, 1998 December 31, 1997 December 31, 1996
------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------
Net income (loss) $ 1,493 $(1,407) $ 8,423 $ 6,862
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 3,543 2,824 5,099 6,716
Extraordinary item-writeoff of capitalized
financing costs and original issue discount - 843 826 1,024
Deferred income tax provision (benefit) (498) (506) 623 398
Loss (gain) on disposal of fixed assets 20 52 159 14
Gain on sale of investment - - (559) -
Allocated ESOP shares 147 - - -
Provision for losses on accounts receivable 990 999 2,169 1,499
Provision for obsolescence of inventories 86 (80) 79 592
Loss (gain) on pension expense (138) (191) (231) (275)
Changes in assets and liabilities:
Accounts receivable (720) (2,587) (4,557) (15)
Inventories (663) (1,239) (426) (501)
Accounts payable (1,066) 1,250 442 (433)
Accrued liabilities (6,505) 11,199 (1,244) (437)
Other current assets 41 (90) (14) 270
Income taxes payable 1,553 (2,458) 1,532 (151)
Other non-current assets (91) (273) (642) (176)
Other non-current liabilities 130 226 51 25
--------- ------- -------- --------
Net Cash from Operating Activities $ (1,678) $ 8,562 $ 11,730 $ 15,412
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (978) $(3,468) $ (3,475) $ (3,862)
Proceeds from sale of fixed assets 15 4 357 55
Proceeds from sale of investment - - 1,459 -
Acquisition of Predecessor Company
(net of cash acquired) (120,784) - - -
--------- ------- -------- --------
Net Cash from Investing Activities $(121,747) $(3,464) $ (1,659) $ (3,807)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on new Revolving Credit Loan $ (2,750) $ - $ - $ -
Net payments on prior Revolving Credit Loan (8,900) 4,400 4,500 -
Payments of other long-term debt (19,871) (8,319) (15,931) (34,566)
Proceeds from other long-term debt 139,250 - 944 25,411
Payments of deferred financing costs (7,352) - - (426)
Contribution from parent 26,500 - - -
Other equity transactions (9) (58) 37 (301)
--------- ------- -------- --------
Net Cash from Financing Activities $ 126,868 $(3,977) $(10,450) $ (9,882)
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ 44 $ (14) $ (27) $ (52)
--------- ------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $ 3,487 $ 1,107 $ (406) $ 1,671
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,417 1,310 1,716 45
--------- ------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,904 $ 2,417 $ 1,310 $ 1,716
========= ======= ======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
29
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
AXIA Incorporated (the "Company") is a diversified manufacturer and
marketer of (i) formed and coated wire products, (ii) material handling and
storage equipment, (iii) industrial bag closing equipment, and (iv) tools and
other products for finishing drywall in new, manufactured, and renovated housing
and commercial construction. (See Note 13 for further discussion of the
Company's business segments.)
On July 22, 1998, the Company was acquired as part of a merger. (See Note 2.)
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 those of the Company and all
majority owned subsidiaries. All significant intercompany accounts and
transactions have been 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 and Other Comprehensive Income. Gains and
losses resulting from foreign currency transactions, which are not material, are
included in the Consolidated Statements of Income.
Environmental Costs
Environmental costs are expensed unless the expenditures extend the economic
useful life of the assets. Costs that extend the economic life of the assets
are capitalized and depreciated over the remaining life of such assets.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated.
Disclosures About Fair Value of Financial Instruments
In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, accounts payable and certain accrued expenses
because of the short maturities of those instruments. Likewise, the carrying
amount of the Term and ESOP loans approximate their fair values due to the
variable interest rates on these obligations. The fair values of 10.75% Senior
Subordinated Notes are estimated based upon quoted market values. Considerable
judgment is required in developing these estimates and, accordingly, no
assurance can be given that the estimated values presented herein are indicative
of the amounts that would be realized in a free market exchange.
30
<PAGE>
NOTE 1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Inventories have been reduced to reflect the Company's estimate of slow
moving and obsolete inventory.
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 No. 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.
Plant and Equipment
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.
Depreciation is provided over the following useful lives:
Buildings and improvements.........2-26 years
Machinery and equipment............2-10 years
Equipment leased to others..........5-7 years
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.
Plant, property and equipment assets are reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such review indicates that the carrying
amount of plant, property and equipment is not recoverable, the carrying amount
of such assets is reduced to estimated recoverable value.
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.
31
<PAGE>
NOTE 1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill represents the excess purchase price paid over the estimated fair
value of the net assets acquired in the July 22, 1998 merger discussed in
Note 2. Goodwill is stated net of amortization and is being amortized on a
straight-line basis over the estimated period of benefit of 40 years (see Note
6). Goodwill and other intangible assets are reviewed for possible impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable. If such review indicates that the carrying amount
of goodwill and other intangible assets is not recoverable, the carrying amount
of such assets is reduced to estimated recoverable value.
Revenue Recognition
Revenue from product sales are recognized at shipment of products to the
customer. Rental revenues are recorded over the rental term.
New Accounting Pronouncements
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 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 1998, the Company adopted the new disclosure standards discussed below.
Results of operations and financial position were unaffected by implementation
of these new standards.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," 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.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," 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.
SFAS No. 132, "Employer's Disclosures about Pensions and Other Post-
retirement Benefits," standardizes the disclosure requirements for pensions and
other post-retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer considered useful.
It does not change the measurement or recognition of these plans.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is
32
<PAGE>
NOTE 1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Historically,
the Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, management does not expect
implementation of this standard to affect its financial position or the results
of operations.
NOTE 2 ORGANIZATION AND PRESENTATION
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."),
a company organized to effect the acquisition (the "Acquisition") of Axia
Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the
"Predecessor Company" prior to the date of the Acquisition) to effect the
acquisition for a purchase price of $155,250,000 (including the repayment of
specified indebtedness), subject to certain post-closing adjustments. Upon
completion of the transaction (the "Transaction"): (i) Holdings and AXIA
Incorporated (the "Company") became direct and indirect subsidiaries of AXIA
Group ("Group" the parent company of Acquisition Co.) and (ii) the Company
became the primary obligor on borrowings made under the bank credit agreement
(the "Bank Credit Agreement") and Senior Subordinated notes issued on the
Transaction Date defined below.
The Merger Agreement contains indemnification provisions binding each of the
parties to the Merger Agreement. Pursuant to such provisions, each of the
parties has agreed to indemnify each other for breaches of representations,
warranties and covenants. In addition, the selling stockholders, limited to the
amount set forth below, agreed to indemnify the Company for certain working
capital deficiencies, increases in tax liabilities, and for certain
environmental and litigation matters. In connection with the indemnity
provisions, $15,000,000 of the purchase price was placed into an escrow account,
including $12,000,000 to cover specified indemnification claims and $3,000,000
to cover purchase price adjustments. Subsequent to the transaction date, the
selling stockholders received an additional $1,738,000 as a result of increased
working capital on the Transaction Date.
On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of its
common stock ("Common Stock") and contributed the proceeds thereof to
Acquisition Co. (the "Equity Investment"). Finance Co., an indirect subsidiary
of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit
Agreement and received approximately $100,000,000 in gross proceeds from the
sale of subordinated notes. Such funds were used: (i) to effect the Acquisition
pursuant to the Merger Agreement; (ii) to fund the ESOP; (iii) to repay existing
indebtedness of the Company and (iv) to pay fees and expenses in connection with
the transaction.
NOTE 3 MERGER AND REFINANCING EFFECTS
Goodwill of the Predecessor Company as of December 31, 1997, primarily
represents the excess purchase price paid over the fair value of the net assets
acquired when a group of investors, including management, purchased the
Predecessor Company in 1994.
Goodwill of the surviving company as of December 31, 1998, represents the
excess purchase price paid over the estimated fair value of the net assets
acquired, excluding Predecessor Company goodwill, in the July 22, 1998 merger.
The merger was accounted for under the purchase method of accounting and
resulted in goodwill of $108,837,000 recorded on the Transaction Date. Goodwill
is stated net of amortization and is being amortized on a straight-line basis
over forty years. (See Note 6.)
The Predecessor Company recorded expenses related to the transaction including
compensation related expenses of $10,773,000 from the sale of stock or option
payments, or both, and payments pursuant to various employee incentive programs
as a result of the transaction which were paid from purchase price proceeds on
the Transaction Date. This amount is included as "Transaction expense" in the
accompanying Consolidated Statements of Income.
33
<PAGE>
NOTE 3 MERGER AND REFINANCING EFFECTS (continued)
Certain assets and liabilities were revalued upon the July 22, 1998
acquisition to reflect their then-current estimated fair values. The following
table summarizes those revaluations including the goodwill recorded in the
merger (in thousands).
<TABLE>
<CAPTION>
July 22, 1998
--------------
<S> <C>
Subsequent
to merger
Total current assets $ 29,336
Net property plant and equipment 33,581
Total other assets 128,022
Total current liabilities (16,061)
Long-term debt, less current maturities (133,698)
Other non-current liabilities (14,680)
---------
Net assets (liabilities) $ 26,500
=========
</TABLE>
Financing costs paid or accrued by the Company and associated with the debt
issued in the refinancing totaled $7,352,000 and are included above in other
assets. Such costs were deferred and will be amortized over the term of the
issued debt.
The following table illustrates the unaudited pro forma results of
operations of the Company for the periods ended December 31, 1997 and December
31, 1998 as if the merger and refinancing occurred on January 1, 1997 (in
thousands):
<TABLE>
<CAPTION>
Periods Ended
------------------------------------
December 31, 1997 December 31, 1998
Pro Forma Pro Forma
----------------- -----------------
<S> <C> <C>
Net revenues $104,800 $117,115
Income from operations 17,167 20,726
Income before income taxes 2,962 6,286
Net income 866 3,301
</TABLE>
The preceding pro forma balances include the effect of an increase in
goodwill amortization, adjustments to depreciation expense as a result of the
revaluation of fixed assets, an increase in interest expense as a result of the
new debt structure, a reduction in the annual management fee, the addition of an
ESOP plan, the elimination of transaction related expenses and debt
extinguishment costs, and the income tax effect of these adjustments. The
results are not necessarily indicative of the results which would actually have
occurred if the merger and refinancing had taken place on January 1, 1997.
34
<PAGE>
NOTE 4 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>
Predecessor Company
--------------------------------------
December 31, July 22, December 31, December 31,
1998 1998 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ - $1,846 $ 1,491 $ 1,140
Additions, charged to income 990 999 2,169 1,499
Deductions, write-off
of uncollectible accounts,
net of recoveries (116) (647) (1,814) (1,148)
----- ------ ------- -------
Balance, end of period $ 874 $2,198 $ 1,846 $ 1,491
===== ====== ======= =======
</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. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral
for accounts receivable.
NOTE 5 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 $531,000 and $528,000 as of December 31,
1998 and 1997, respectively, consist of (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 4,752 $4,146
Work in process 1,176 1,058
Finished goods 5,164 3,951
------- ------
Total inventories $11,092 $9,155
======= ======
</TABLE>
35
<PAGE>
NOTE 6 GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGES
Goodwill, intangible assets and deferred charges consist of the following
(in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Goodwill $108,837 $37,072
Less amortization 1,204 3,567
-------- -------
Goodwill, net $107,633 $33,505
======== =======
Patents $ 187 $ 496
Computer software 646 711
Other intangibles 18 563
-------- -------
Subtotal $ 851 $ 1,770
Less amortization 44 1,067
-------- -------
Intangible assets, net $ 807 $ 703
======== =======
Prepaid pension costs $ 7,400 $ 8,049
Life insurance deposits 3,638 3,467
Deferred financing costs 7,352 1,040
Other deferred charges 152 161
-------- -------
Subtotal $ 18,542 $12,717
Less amortization 445 535
-------- -------
Deferred charges, net $ 18,097 $12,182
======== =======
</TABLE>
Total amortization expense related to the above assets was $1,693,000 for
the period ended December 31, 1998, $664,000 for the period ended July 22, 1998,
and $1,236,000 and $1,842,000 for the years ended December 31, 1997 and 1996,
respectively. As a result of the early extinguishment of debt, the Predecessor
Company wrote off $410,000, $314,000 and $1,024,000 of unamortized financing
costs for the period ended July 22, 1998, and the years ended December 31, 1997
and December 31, 1996, respectively.
NOTE 7 ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Salaries, wages, vacations and
payroll taxes $ 2,660 $2,588
Insurance 1,057 1,546
Interest 4,785 483
Other current liabilities 3,366 2,602
------- ------
Total accrued liabilities $11,868 $7,219
======= ======
</TABLE>
36
<PAGE>
NOTE 8 LONG-TERM DEBT
Long-term debt, inclusive of capitalized lease obligations which are not
material, is as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31,
1998 1997
------------ -----------
<S> <C> <C>
10.75% Senior Subordinated Notes $100,000 $ -
11.00% Senior Subordinated Notes - 9,749
Term Loan 34,167 15,732
ESOP Loan 1,313 -
Revolving Credit Loan - 4,500
Other 195 1,383
-------- -------
Total Debt $135,675 $31,364
Less: Current Maturities 4,655 10,925
-------- -------
Total Long-Term Debt $131,020 $20,439
======== =======
</TABLE>
The 11.00% Senior Subordinated Notes above are stated net of unamortized
discount of $501,000 as of December 31, 1997. The carrying amount of the Term
Loan and ESOP Loan approximates their fair value as the interest rates are
variable. The fair value of the 10.75% Senior Subordinated Notes at December 31,
1998 was $100,500,000 as determined by market quotations.
Scheduled Principal Payments
Scheduled principal payments of long-term debt outstanding at December 31,
1998, including capitalized lease obligations, are (in thousands):
<TABLE>
<CAPTION>
Senior
Term ESOP Subordinated
Loan Loan Notes Other
------- ------- ------------ -----
<S> <C> <C> <C> <C>
1999 $ 4,188 $ 391 $ - $ 76
2000 4,669 369 - 52
2001 6,021 369 - 39
2002 7,003 184 - 24
2003 7,986 - - 4
Subsequent years 4,300 - 100,000 -
------- ------ -------- ----
Total $34,167 $1,313 $100,000 $195
======= ====== ======== ====
</TABLE>
The scheduled maturities above include an estimated prepayment in 1999
related to an excess cash flow payment required under 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, 1998, and July 22, 1998, and the years ended December 31, 1997, and
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------
December 31, July 22, December 31, December 31,
1998 1998 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
Interest payments $1,281 $1,871 $3,551 $4,399
</TABLE>
37
<PAGE>
NOTE 8 LONG-TERM DEBT (continued)
Bank Credit Agreement
On the Transaction Date, the Company and its domestic subsidiaries entered
into a credit agreement (the "Bank Credit Agreement") which included a term loan
("Term Loan") with an original principal amount of $35,000,000, a $1,500,000
term loan for an ESOP (the "ESOP Loan"), an aggregate $25,000,000 in principal
amount available for acquisitions (the "Acquisition Facility"), and a non-
amortizing revolving credit loan ("Revolving Credit Facility") of up to
$15,000,000, including up to $2,000,000 of letters of credit. The Company, at
closing, borrowed $35,000,000 on the Term Loan, $1,500,000 of the ESOP Loan and
$2,750,000 against the Revolving Credit Facility. Borrowings under the Revolving
Credit Facility are subject to a borrowing base as determined per the agreement
and the satisfaction of certain conditions. At December 31, 1998, there were no
borrowings under the Revolving Credit Facility.
The Revolving Credit Facility, Acquisition Facility, Term Loan and ESOP
Term Loan (collectively, the "Loans") bear interest at an alternate base rate,
as defined in the agreement, based in part on a prime rate, or at a LIBOR rate,
in each case plus an applicable margin, which is initially 2.25% for LIBOR rate
advances and 1.00% for alternate base rate advances. The applicable margin may
be adjusted based on the ratio of total debt to EBITDA, as defined, and will
range from 0% to 1.00% for alternate base rate advances and 1.00% to 2.25% for
LIBOR rate advances. The weighted average interest rate at December 31, 1998 was
7.64%.
All principal and interest on the Loans are due in 2004, except the ESOP
Term Loan, which is due in 2002, and are subject to certain mandatory
prepayments and scheduled payments. Accrued interest under the Loans is due
quarterly and/or at the end of the relevant interest period in the case of LIBOR
rate advances. The Term Loan matures June 30, 2004 with quarterly amortization
payments commencing December 31, 1998. Amounts borrowed under the Acquisition
Facility are due on the last day of each September, December, March and June,
from September 2001 to June 2004. The Bank Credit Agreement permits prepayments
with notice, provides for reimbursement for certain costs, and requires
prepayments from a portion of excess cash flow (as defined) as well as to the
extent cash proceeds from certain events exceed amounts determined by certain
formulas.
Borrowings under the Acquisition Facility (which are available until
September 2001) are subject to certain conditions precedent, including
delivering certain information to the Lenders about the proposed acquisition,
the delivery of guarantees and security documents as to the proposed acquisition
and the conformance of the acquisition to certain criteria.
10.75% Senior Subordinated Notes
The 10.75% Senior Subordinated Notes (the "Notes") were issued pursuant to
the Transaction and mature on July 15, 2008. Interest is payable January 15 and
July 15 of each year, commencing January 15, 1999. The Notes are unsecured
Senior Subordinated obligations of the Company and, as such, are subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The Notes may be redeemed at the option of the Company, in whole or in
part, at any time on or after July 15, 2003 at the redemption prices set forth
in the indenture plus accrued interest on the date of redemption. Up to an
aggregate of 35% of the principal amount of the Notes may be redeemed from time
to time prior to July 15, 2001 at the option of the Company at the redemption
price set forth in the indenture plus accrued interest to the date of
redemption, with the net proceeds received from one or more public equity
offerings.
Upon a change of control, the Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued interest to the date of repurchase.
38
<PAGE>
NOTE 8 LONG-TERM DEBT (continued)
The Notes are guaranteed, jointly and severally on a Senior Subordinated
basis, by each of the Company's existing and future direct and indirect
subsidiaries, excluding unrestricted subsidiaries, as defined, and foreign
subsidiaries. The guarantees are general unsecured obligations of the Guarantors
hereinafter referred to. The Guarantors also guarantee all obligations of the
Company under the Bank Credit Agreement. The obligations of each Guarantor under
its Guaranty is subordinated in right of payment to the prior payment in full of
all Guarantor senior indebtedness (as defined), including such subsidiary's
guarantee of indebtedness under the Bank Credit Agreement, of such Guarantor to
substantially the same extent as the Notes are subordinated to all existing and
future senior indebtedness of the Company.
Restrictive Loan Covenants
The Bank Credit Agreement contains restrictive covenants limiting the
ability (subject to certain exceptions) of the Company and its subsidiaries to,
among other things: (i) incur debt or contractual contingent obligations; (ii)
pay certain subordinated debt or amend subordinated debt documents without the
prior consent of the Lenders; (iii) create or allow to exist liens or other
encumbrances; (iv) transfer assets outside the Company except for sales and
other transfers of inventory or surplus, immaterial or obsolete assets in the
ordinary course of business of the Company; (v) enter into mergers,
consolidations and asset dispositions of all or substantially all of its
properties; (vi) make investments; (vii) sell, transfer or otherwise dispose of
any class of stock or the voting rights of any subsidiary of the Company; (viii)
enter into transactions with related parties other than in the ordinary course
of business on an arm's-length basis on terms no less favorable to the Company
than those available from third parties; (ix) amend certain agreements, unless
such amendment is not expected to have a material adverse effect; (x) make any
material change in the general nature of the business conducted by the Company;
(xi) pay cash dividends or redeem shares of capital stock; (xii) make capital
expenditures and (xiii) pay dividends or repurchase stock.
Under the Bank Credit Agreement, the Company is required to satisfy certain
financial covenants, including (i) a fixed charge coverage ratio; (ii) a minimum
net worth test; (iii) a ratio of total debt to EBITDA and (iv) a minimum
interest coverage ratio, all as defined in the agreement. The Company was in
compliance with its loan covenants at December 31, 1998.
The indenture under which the Notes were issued contains certain covenants
that, among other things, limit the ability of the Company and/or its Restricted
Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay
dividends or make certain other restricted payments, (iii) make investments,
(iv) enter into transactions with affiliates, (v) make certain asset
dispositions, and (vi) merge or consolidate with, or transfer substantially all
of its assets to, another person. The indenture also limits the ability of the
Company's Restricted Subsidiaries to issue Capital Stock (as defined) and to
create restrictions on the ability of such Restricted Subsidiaries to pay
dividends or make any other distributions. In addition, the Company is
obligated, under certain circumstances, to offer to repurchase Notes at a
purchase price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase, with the net cash proceeds
of certain sales or other dispositions of assets. However, all of these
limitations and prohibitions are subject to a number of important
qualifications.
NOTE 9 CAPITAL STOCK
At December 31, 1998, the Company had 100 shares of common stock, par value
$.01 per share, authorized, issued and outstanding, all of which are owned by
Holdings which is 100% owned by Group.
39
<PAGE>
NOTE 10 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>
Predecessor Company
-------------------
Deferred Income Tax Assets December 31, December 31,
Current Assets 1998 1997
-------------- ------------ ------------
<S> <C> <C>
Inventory valuation $ 778 $ 601
Bad debt reserves 893 706
Professional services 344 163
Insurance accruals 312 466
Rental tool repair 203 203
Environmental costs 199 6
Other, net 710 448
------- -------
Total deferred tax asset $ 3,439 $ 2,593
======= =======
Deferred Income Tax Assets (Liabilities) December 31, December 31,
Noncurrent Assets (Liabilities) 1998 1997
------------------------------- ------------ ------------
Depreciation & amortization $(6,888) $(3,890)
Pension plans (2,630) (2,879)
Insurance accruals 383 382
Tax accruals 135 212
Post-retirement benefits (except pensions) 1,789 1,548
Environmental costs 191 1,415
Other, net 270 257
------- -------
Total deferred tax (liability), net $(6,750) $(2,955)
======= =======
</TABLE>
The components of the income tax provision, excluding the amount
attributable to the extraordinary item, are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------
December 31, July 22, December 31, December 31,
1998 1998 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. and state taxes payable $1,940 $ 187 $5,013 $4,700
Foreign taxes payable 237 200 776 632
------ ----- ------ ------
Taxes currently payable $2,177 $ 387 $5,789 $5,332
Deferred taxes, net (498) (506) 623 398
------ ----- ------ ------
Total provision $1,679 $(119) $6,412 $5,730
====== ===== ====== ======
</TABLE>
Income (loss) before income taxes and extraordinary items of the Company's
domestic and foreign operations are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------
December 31, July 22, December 31, December 31,
1998 1998 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
Domestic $2,600 $(1,266) $14,285 $11,832
Foreign 572 422 1,322 1,374
------ ------- ------- -------
Total $3,172 $ (844) $15,607 $13,206
====== ======= ======= =======
</TABLE>
40
<PAGE>
NOTE 10 INCOME TAXES (continued)
A reconciliation between the statutory and the effective income tax rates,
excluding the amount attributable to the extraordinary item, is as follows:
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------------
December 31, July 22, December 31, December 31,
1998 1998 1997 1996
------------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Statutory income tax rate 34.0% (34.0)% 34.0% 34.0%
Non-deductible expenses including
amortization 14.4% 26.3 % 3.5% 3.7%
State income taxes, net
of federal income
tax benefit 3.4% (.5)% 2.5% 3.1%
Other, net 1.1% (5.8)% 1.1% 2.6%
----- ------ ----- -----
Effective income tax rate 52.9% (14.0)% 41.1% 43.4%
===== ====== ===== =====
</TABLE>
The Company made the following income tax payments, net of refunds, during
the periods ended December 31, 1998, and July 22, 1998, and the years ended
December 31, 1997, and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------
December 31, July 22, December 31, December 31,
1998 1998 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
Income taxes paid $ 453 $2,313 $3,795 $4,691
</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.
41
<PAGE>
NOTE 11 EMPLOYEE BENEFITS
Retirement Benefit 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.
Reconciliation of the benefit obligations, plan assets at fair value and the
funded status of the plans are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
--------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Benefit obligation at beginning of year $29,179 $25,209
Service cost 1,258 1,127
Interest cost 1,991 1,726
Actuarial loss 1,266 3,144
Benefit payments (2,204) (2,027)
------- -------
Benefit obligation at end of year 31,490 29,179
Fair value of plan assets at beginning of year 36,996 32,144
Actual return on plan assets 3,228 6,879
Benefit payments (2,204) (2,027)
------- -------
Fair value of plan assets at end of year 38,020 36,996
Plan assets at fair value less benefit obligation (6,530) (7,817)
Unrecognized prior service cost - (31)
Unrecognized gain (loss) (346) (8)
------- -------
Net amount recognized $(6,876) $(7,856)
======= =======
Amounts recognized in the Consolidated Balance Sheet:
Prepaid benefit cost $ 7,400 $ 8,049
Accrued benefit liability (525) (520)
Accumulated other comprehensive income 1 327
------- -------
Net asset amount recognized $ 6,876 $ 7,856
======= =======
</TABLE>
The components of net periodic pension cost (credit) are as follows (in
thousands):
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------
December 31, July 22,
1998 1998 1997 1996
------------- --------- -------- --------
<S> <C> <C> <C> <C>
Service cost $ 524 $ 734 $ 1,127 $ 983
Interest cost 829 1,162 1,726 1,679
Expected return on plan assets (1,491) (2,089) (3,095) (2,944)
Prior service cost - 2 4 3
Actuarial gain/(loss) - - 7 4
------- ------- ------- -------
Total $ (138) $ (191) $ (231) $ (275)
======= ======= ======= =======
</TABLE>
42
<PAGE>
NOTE 11 EMPLOYEE BENEFITS (continued)
Assumptions used to develop periodic expense and the actuarial present value of
the benefit obligations were:
<TABLE>
<CAPTION>
Predecessor Company
-------------------------
December 31, July 22,
1998 1998 1997 1996
----------- --------- ------ ------
<S> <C> <C> <C> <C>
Weighted average discount rate 6.75% 7.00% 7.00% 7.25%
Expected long-term rate of return
on plan assets 10.00% 10.00% 10.00% 10.00%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50%
</TABLE>
The Company also has contracts with certain former officers of the Company
which provide for benefits in excess of the accrual benefit from its defined
benefit pension plan. The supplemental retirement plan is not funded. The
Company has liabilities under the Plan of $468,000 in its Consolidated Balance
Sheets at December 31, 1998 and recorded expenses of $29,000 and $32,000 for the
periods ended December 31, 1998 and July 22, 1998, respectively. For the years
ended December 31, 1997 and 1996, the Company recorded expenses of $50,000 and
$72,000, respectively, for these benefits.
Employee Stock Ownership and 401(k) Plan
All U.S. salaried and non-bargaining hourly employees, who have provided
service to the Company for one-half of a year and are at least age 21, may
participate in the AXIA Incorporated 401(k) Plan ("401(k) Plan"). The 401(k)
Plan is designed to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"). Each such employee has the option to defer
taxation of a portion of his or her earnings by directing AXIA Incorporated to
contribute a percentage of earnings to the 401(k) Plan ("Deferral
Contributions"). A participant may defer up to 15% of eligible earnings to the
401(k) Plan, subject to certain limitations set forth in the 401(k) Plan. A
participant is always 100% vested in his or her Deferral Contributions. A
participant's Deferral Contributions become distributable upon the termination
of his or her employment for any reason.
In connection with the Transaction the Company established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full time
employees, including executive officers, of the Company, who satisfy the
requirements described below. As of December 31, 1998, the 401(k) Plan was
merged into the ESOP, and an employee satisfying the eligibility requirements
under the 401(k) Plan is able to make Deferral Contributions to the Employee
Stock Ownership and 401(k) Plan as was allowed under the 401(k) Plan. The ESOP
borrowed $1.5 million from Finance Co. (the "Company ESOP Loan") to purchase
15,000 shares of Common Stock at the Closing. Finance Co. funded the Company
ESOP Loan from the ESOP Term Loan. The 15,000 shares of Common Stock purchased
by the ESOP are pledged (the "ESOP Pledge") as security for the Company ESOP
Loan, and such shares will be released and allocated to ESOP participants'
accounts as the Company ESOP Loan is discharged. The Company makes ESOP
contributions in amounts sufficient to enable the ESOP to discharge its
indebtedness under the Company ESOP Loan. A percentage of the shares released
under the ESOP Pledge will be allocated to each participant based on a
percentage of such participant's Deferral Contributions ("Matching
Contributions"), and (ii) the remaining percentage of such shares released are
allocated to each participant based on such participant's compensation relative
to total compensation for all ESOP participants ("Discretionary Contributions").
Until the Company ESOP Loan is paid in full, ESOP Contributions will be used to
pay the outstanding principal and interest on the Company ESOP Loan.
Participation begins the earlier to occur of (i) for all employees hired prior
to July 21, 1998 and are age 21, the later of (x) July 22, 1998 or (y) their
date of hire or (ii) the date an employee satisfies the eligibility requirements
to make Deferral Contributions.
A participant's ESOP account, which is such participant's allocation of
shares based on Matching and/or Discretionary Contributions, vests at the rate
of 20% per year. Distributions from the participant's ESOP account are made in
cash or Common Stock upon a participant's retirement, death, disability or
termination of employment. In the event of retirement, death or disability, the
entire balance of a participant's ESOP account will be come distributable
without regard to the ordinary vesting schedule. In the event of termination of
employment for any other reason, the vested portion of a participant's ESOP
account will become distributable and the remaining portion, if any, will be
forfeited. If Common Stock is distributed to a
43
<PAGE>
NOTE 11 EMPLOYEE BENEFITS (continued)
participant, the participant may, within two 60-day periods, require the Company
to purchase all or a portion of such Common Stock at the fair market value of
the Common Stock as determined under the ESOP (the "Put Options"). The first 60-
day period commences on the date the participant receives a distribution of
Common Stock and the second 60-day period commences a year from such date. If a
participant fails to exercise either of the two Put Options, the participant may
transfer the shares of Common Stock only upon receipt of a bona fide third party
offer and only after first offering the shares to the ESOP and then to the
Company. Employees of the Company own approximately 5.3% of the outstanding
Common Stock through the ESOP.
1998 Stock Awards Plan
In connection with the closing of the Transactions, the Board of Directors
and the Company's stockholders approved the Company's 1998 Stock Awards Plan
(the "1998 Stock Awards Plan"). The 1998 Stock Awards Plan provides for the
granting of options (either incentive stock options within the meaning of Code
Section 422(b), or options that do not constitute incentive stock options ("non-
qualified stock options"), restricted stock awards, stock appreciation rights,
performance awards and phantom stock awards, or any combination thereof. The
number of shares of Common Stock that may be subject to outstanding awards is
31,111 shares of Common Stock. Shares of Common Stock which are attributable to
awards which have expired, terminated, or been canceled or forfeited are
available for issuance or use in connection with future awards.
The 1998 Stock Awards Plan will be administered by the Compensation
Committee of AXIA Group. The Compensation Committee will have the power to
determine which employees, consultants and other service providers will receive
an award, the time or times when such award will be made, the type of the award
and the number of shares of Common Stock to be issued under the award or the
value of the award. Only persons who at the time of the award are employees of
or service providers to AXIA Group or of any subsidiary of AXIA Group will be
eligible to receive awards under the 1998 Stock Awards Plan. A director of AXIA
Group is not eligible to receive an award under the 1998 Stock Awards Plan
unless such director is an employee of AXIA Group or any of its subsidiaries. No
options were outstanding at December 31, 1998.
Post-retirement Benefits Other Than Pensions
The Company sponsors three defined benefit post-retirement plans exclusive
of pension 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 third provides post-
retirement 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, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31,
1998 1997
------------ -------------------
<S> <C> <C>
Benefit obligation at beginning of year $ 4,103 $ 3,885
Service cost 46 85
Interest cost 261 224
Actuarial (gain)/loss 419 -
Benefits paid (78) (91)
------- -------
Benefit obligation at end of year 4,751 4,103
Fair value of plan assets at end of year - -
------- -------
Funded status (4,751) (4,103)
Net amount recognized $(4,751) $(4,103)
======= =======
</TABLE>
44
<PAGE>
NOTE 11 EMPLOYEE BENEFITS (continued)
Components of post-retirement benefits (other than pension) expense (in
thousands):
<TABLE>
<CAPTION>
Predecessor Company
----------------------
December 31, July 22,
1998 1998 1997 1996
------------ -------- ----- -----
<S> <C> <C> <C> <C>
Service cost $ 18 $ 28 $ 85 $(104)
Interest cost 161 100 224 265
----- ----- ----- -----
Net periodic benefit cost $ 179 $ 128 $ 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 $4,136,000 and $3,544,000 at
December 31, 1998 and 1997, 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. All
plan participants have retired from the Company.
The Company, in accordance with a union contract, provides prescription
drug benefits at one of its plants. For measurement purposes, a 6.75% annual
rate of increase in the per capita cost of covered prescription drug benefits
was assumed for 1998 and 7.00% rate for 1997. 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, 1998 by approximately $70,000 and the aggregate of the service and interest
cost components of net periodic post-retirement benefit cost for the year then
ended by approximately $3,000. The discount rate used in determining the
accumulated post-retirement benefit obligation was 6.75% in 1998 and 8.5% in
1997.
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,
1998
------------
<S> <C>
1999 $2,103
2000 1,421
2001 1,005
2002 798
2003 576
Subsequent years 1,973
------
Total $7,876
======
</TABLE>
The Company incurred the following expense for operating leases for the
periods ended December 31, 1998, and July 22, 1998, and for the years ended
December 31, 1997, and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------
December 31, July 22, December 31, December 31,
1998 1998 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
Lease expense $ 1,136 $ 1,307 $ 2,369 $ 2,339
</TABLE>
45
<PAGE>
NOTE 13 BUSINESS SEGMENTS
The Company is a designer, manufacturer, distributor and marketer of a
diverse range of products in several niche markets including productivity
enhancing construction tools, formed wire products and industrial bag closing
equipment and systems, and conveyor handling systems. In 1998, the Company
adopted SFAS No. 131 "Disclosure About Segments of an Enterprise and Related
Information." The aggregation methodology under SFAS No. 131 does differ
materially from the prior disclosures under SFAS No. 14.
Nestaway ("Nestaway") is a manufacturer of formed wire products which are
used for a variety of commercial and consumer product applications. Nestaway
manufactures coated wire dishwasher racks and components which are sold to
dishwasher appliance manufacturers. Nestaway also manufactures, on a contract
basis, other close tolerance, formed, welded and coated formed wire products
such as dish drainers, sink protectors, shower caddies, dryer racks, golf cart
baskets, bucket bails, medical baskets and small gauge axles.
Fischbein ("Fischbein") is a worldwide manufacturer of industrial bag
closing equipment and systems, and a manufacturer of flexible conveyor handling
systems and stackable storage equipment. Bag closing equipment and systems
include: (i) portable and stationary industrial sewing heads and sewing systems
for paper, textile and woven polypropylene bags; (ii) industrial heat sealing
and bag handling systems for paper and plastic bags and (iii) consumables,
including thread, tape and service parts. Fischbein manufacturers extendable,
flexible, gravity and motorized conveyors and portable, nestable and stackable
warehouse storage racks.
Ames ("Ames") is the designer, manufacturer, distributor and marketer of
automatic taping and finishing tools, which are rented or sold to interior
finishing contractors to finish drywall joints prior to painting, wallpapering
and other forms of final treatment. In addition, Ames sells a variety of other
drywall tools, finishing accessories, and supplies through its network of
Company-owned stores.
One of Nestaway's dishrack customers accounted for 19%, 20% and 19% of the
Company's revenues for 1998, 1997 and 1996, respectively. Another customer of
Nestaway who purchases dishdrainers, shower caddies, and other formed wire
products accounted for 11%, 10% and 11% of the Company's revenues for 1998, 1997
and 1996, respectively.
Nestaway competes directly with the dishwasher manufacturer's in-house
manufacturing capability. Frigidaire, General Electric and Whirlpool, major
dishwasher manufacturers, have dishrack manufacturing capability. As a result
of dishrack sourcing decisions made by its customers, in 1996 Nestaway 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. Nestaway's Beaver Dam, Kentucky plant, shut down in 1994 due to a
customer's decision to utilize an alternative source of supply and was reopened
in 1996 to produce dishrack components, lower volume dishracks, and other formed
and coated wire products. During 1997 and 1996, Nestaway charged $624,000 and
$980,000, respectively, of the costs incurred against a facility realignment
reserve established in prior periods. Nestaway has no further reserves for the
realignment of its production capacities as of December 31, 1998, and management
believes its current manufacturing operations are properly positioned to service
current and future customers.
46
<PAGE>
NOTE 13 BUSINESS SEGMENTS (Continued)
A summary of segment data for the periods ended December 31, 1998, and July
22, 1998, and the years ended December 31, 1997, and 1996, is as follows (in
thousands):
<TABLE>
<CAPTION>
Nestaway Fischbein Ames Corporate Consolidated
-------- --------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Period July 23 to December 31, 1998:
Net revenues $19,496 $12,777 $22,275 $ - $ 54,548
Income from operations 3,773 1,880 5,635 (1,530) 9,758
Total assets 59,672 33,108 77,952 24,225 194,957
Depreciation and amortization 1,073 476 1,532 462 3,543
Capital expenditures 39 284 652 3 978
Predecessor Company
- -------------------
Period January 1 to July 22, 1998:
(prior to acquisition)
Net revenues $21,945 $14,758 $25,864 $ - $ 62,567
Income from operations 4,876 1,991 7,152 (13,105) 914
Total assets 40,279 19,042 30,843 11,772 101,936
Depreciation and amortization 1,181 374 1,083 186 2,824
Capital expenditures 1,644 88 1,735 1 3,468
Year ended December 31, 1997:
Net revenues $35,268 $27,104 $42,428 $ - $104,800
Income from operations 6,575 3,838 11,693 (2,752) 19,354
Total assets 38,873 18,141 27,969 11,790 96,773
Depreciation and amortization 2,077 746 1,860 416 5,099
Capital expenditures 1,340 319 1,813 3 3,475
Year ended December 31, 1996:
Net revenues $39,655 $27,117 $38,015 $ - $104,787
Income from operations 8,069 3,263 10,157 (3,142) 18,347
Total assets 38,986 18,282 26,476 15,587 99,331
Depreciation and amortization 3,484 693 1,789 750 6,716
Capital expenditures 250 724 2,807 81 3,862
</TABLE>
The period ended July 22, 1998 includes $11,280,000 in nonrecurring
transaction related expenses at Corporate. This includes $10,773,000 in
compensation related expenses from the sale of stock or options, or both, and
payments pursuant to various employee incentive programs which were paid from
purchase price proceeds at the Transaction Date.
47
<PAGE>
NOTE 13 BUSINESS SEGMENTS (Continued)
The Company conducts the majority of its business within the United States.
Fischbein has operations in various other countries, primarily in Europe and
Singapore. Ames also conducts business in Canada. Activity in any single country
or area outside of the United States is not material. Foreign revenues which
represent 12% of the Company's 1998 net revenues are derived from approximately
75 foreign countries, none of which was in excess of 4% of the Company's 1998
net revenues.
A summary of geographical data for the periods ended December 31, 1998, and
July 22, 1998, and the years ended December 31, 1997, and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------
December 31, July 22, December 31, December 31,
Net Revenue 1998 1998 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
United States $48,361 $54,317 $ 89,132 $ 89,182
Foreign 6,187 8,250 15,668 15,605
------- ------- -------- --------
Total $54,548 $62,567 $104,800 $104,787
======= ======= ======== ========
Predecessor Company
--------------------
December 31, December 31,
Net Plant, Property and Equipment 1998 1997
------------ ------------
<S> <C> <C>
United States $32,450 $ 23,832
Foreign 239 238
------- --------
Total $32,689 $ 24,070
======= ========
</TABLE>
NOTE 14 CONTINGENCY
The Company is subject to various federal, state, local and foreign laws
and regulations governing environmental and employee health and safety matters,
including the handling, use, discharge and disposal of hazardous materials and
pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the
Company. NYSDEC determined that the Company, among others, may be a responsible
party through its past ownership of the property. The site is currently listed
on the New York State Registry of Inactive Hazardous Waste Disposal Sites.
Environmental consultants engaged by the Company established a range of
estimated remediation costs of approximately $1.0 million to $3.0 million, plus
or minus 30% of those costs. The Company established an accrual of $3.9
million for the remediation and associated costs.
48
<PAGE>
NOTE 14 CONTINGENCY (continued)
In 1997, the Company entered into an agreement with an adjoining landowner,
who is obligated by NYSDEC to address environmental concerns at his property. By
this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance that
NYSDEC will in fact offer its approval. The Company paid the $520,000 payable
under the agreement and has further exposure under the agreement of up to an
additional $120,000 if contamination is more widespread than estimated by the
Company's environmental consultants. In the event NYSDEC does not approve the
remedy envisioned in the agreement with the adjoining landowner, the Company may
terminate the agreement and demand the return of its payment with interest. In
that case, the adjoining landowner would no longer be obligated to undertake the
remediation of the property formerly owned by the Company.
Of the consideration paid pursuant to the Merger Agreement, $5 million was
set aside in a special escrow account to cover environmental costs which may be
incurred by the Company in connection with cleanup of the site and any damages
or other required environmental expenditures relating to the site. The balance
in the account, after payment of such costs, will be released to the former
stockholders upon the first to occur of the approval by NYSDEC of the proposed
remediation action or the confirmation by NYSDEC that remediation at the site
has been completed in accordance with its then applicable decision in the matter
(the "Early Release Date"). If, however, the Early Release Date occurs before
the additional $120,000 is paid under the above-described agreement, the special
escrow account will continue as to that $120,000 until it is paid or it has
become clear that no claim will be made for such funds. In addition, if certain
additional specified cleanup activities are not completed by the Early Release
Date, an additional $80,000 will be withheld in the special escrow account until
such cleanup is completed. If all of the funds in the special escrow account
have not been released by the third anniversary of the Closing Date, the funds
remaining in the special escrow account will be disbursed to the Company to
cover the remaining estimated costs, with the balance to be distributed to the
former stockholders of the Company, in accordance with an agreement to be
reached by the Stockholder Representative and the Company, or upon failure of
such parties to agree, through an arbitration procedure.
The Company may also make claims against the warranty fund of the escrow
fund for breach of certain representatives and warranties in the Merger
Agreement regarding other environmental matters for a period of 24 months after
Closing Date, subject to a specified threshold and deductible.
The Buffalo, New York property formerly owned by the Company was at one
time used to mill uranium rods for the Atomic Energy Commission. The U.S.
Department of Energy has since identified residual radioactivity in a building
at the site. In 1996, the government estimated the costs of addressing the
residual radioactivity at $965,000. Given the available data, the Company and
its environmental consultants believe that a more likely total cost is less than
$100,000. To date, no cleanup costs have been assessed against the Company.
The Company is aware of other formerly-owned sites at which activities
similar to the operations previously conducted on the Buffalo, New York property
have taken place. However, the Company has received no claims in connection with
those sites, and has no information that would lead it to believe that any such
claim is likely to be made. The Company is also a part-owner and landlord at a
stainless steel and aluminum facility in Commerce, California that is leased to
and operated by an unrelated company. The Company has received no claims against
it in connection with this site, but the Company cannot rule out the possibility
that it might incur some liability should a claim actually be made against it as
current owner of the property.
In addition, the Company has retained or assumed certain environmental
liabilities and risks of future liabilities associated with businesses
previously operated or acquired by it, including Bliss and Laughlin Steel
Company. The Company does not believe that these retained or assumed liabilities
and risks would be expected to have a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations, liabilities identified or incurred in the future, or other
circumstances, might (individually or in the aggregate) have such an effect.
49
<PAGE>
NOTE 15 RELATED TRANSACTIONS
The equity portion of the financing for the Transaction was provided by an
investor group led by the Sterling Group, Inc. ("Sterling"). Sterling is a
private financial organization engaged in the acquisition and ownership of
operating businesses.
Sterling entered into an agreement with AXIA Group and the Company pursuant
to which Sterling is to provide consulting and advisory services concerning
employee benefit and compensation arrangements and other matters. The agreement
also provides that AXIA Group and the Company, jointly and severally, will
indemnify Sterling against liabilities related to its services. At the Closing,
the Company paid Sterling a one-time transaction fee of $2,500,000 for these
services and reimbursed Sterling for its expenses of $109,000. In addition,
through 2008, AXIA Group will pay Sterling an annual management fee of $100,000
in cash and annually grant Sterling AXIA Group Common Stock having a value of
$100,000 calculated based upon the latest ESOP valuation price. In addition,
each of AXIA Group and the Company has agreed that if any one or more of them or
any of their subsidiaries determines within ten years of the date of the closing
of the Acquisition to dispose of or acquire any assets or business having a
value of $1,000,000 or more (a "Future Corporate Transaction") or to offer its
securities for sale publicly or privately to raise any debt or equity financing
(a "Future Securities Transaction"), either AXIA Group or the relevant
subsidiary will retain Sterling as a consultant with respect to the transaction,
provided a principal, officer or director of Sterling or any of their respective
affiliates or family members owns any equity securities of AXIA Group or any of
its successors. For any Future Corporate Transactions, Sterling is entitled to
receive a fee in the amount of 1% of the aggregate consideration paid or
received plus the aggregate amount of any liabilities assumed in connection with
an acquisition or disposition and any expenses or fees incurred by Sterling in
connection therewith. For any Future Securities Transactions, Sterling is
entitled to receive a fee in the amount of 0.5% of the aggregate gross selling
price of such securities and, regardless of whether such Future Securities
Transaction is consummated, Sterling is entitled to receive reimbursements of
any expenses or fees incurred by Sterling in connection therewith. The agreement
is automatically renewable for successive one-year periods, subject to notice of
termination by either Sterling or AXIA Group. From its transaction fee received
at Closing, Sterling paid Gary Rosenthal a fee of $250,000 for consulting
services rendered in connection with the Transaction. Mr. Rosenthal became
Chairman and President subsequent to the Transaction.
NOTE 16 SUPPLEMENTAL GUARANTOR INFORMATION
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.
50
<PAGE>
NOTE 16 SUPPLEMENTAL GUARANTOR INFORMATION (continued)
The following supplemental, 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.
51
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF DECEMBER 31, 1998
(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 $ 4,992 $ 307 $ 605 $ - $ 5,904
Accounts receivable, net 6,601 6,049 2,716 (1,233) 14,133
Inventories, net 6,742 2,422 2,551 (623) 11,092
Prepaid income taxes and other current assets 894 140 101 - 1,135
Deferred income tax benefits 3,439 - - - 3,439
-------- ------- ------ -------- --------
Total Current Assets $ 22,668 $ 8,918 $5,973 $ (1,856) $ 35,703
-------- ------- ------ -------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ - $ - $ - $ 984
Buildings and improvements 4,371 51 178 - 4,600
Machinery and equipment 18,099 528 123 - 18,750
Equipment leased to others 10,101 - 12 - 10,113
-------- ------- ------ -------- --------
$ 33,555 $ 579 $ 313 $ - $ 34,447
Less: Accumulated depreciation 1,603 81 74 - 1,758
-------- ------- ------ -------- --------
Net Plant and Equipment $ 31,952 $ 498 $ 239 $ - $ 32,689
-------- ------- ------ -------- --------
OTHER ASSETS:
Goodwill, net $ 92,706 $14,915 $ 12 $ - $107,633
Intangible assets, net 796 11 - - 807
Deferred charges, net 17,184 912 1 - 18,097
Investment in wholly-owned subsidiaries 17,806 - - (17,806) -
Other assets 28 - - - 28
-------- ------- ------ -------- --------
Total Other Assets $128,520 $15,838 $ 13 $(17,806) $126,565
-------- ------- ------ -------- --------
TOTAL ASSETS $183,140 $25,254 $6,225 $(19,662) $194,957
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,621 $ 34 $ - $ - $ 4,655
Accounts payable 3,197 620 1,750 (1,233) 4,334
Accrued liabilities 10,566 795 507 - 11,868
Accrued income taxes - - 11 - 11
Advance account (9,693) 10,493 (800) - -
-------- ------- ------ -------- --------
Total Current Liabilities $ 8,691 $11,942 $1,468 $ (1,233) $ 20,868
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $130,967 $ 53 $ - $ - $131,020
Other non-current liabilities 7,970 - - - 7,970
Deferred income taxes 6,750 - - - 6,750
-------- ------- ------ -------- --------
Total Non-Current Liabilities $145,687 $ 53 $ - $ - $145,740
-------- ------- ------ -------- --------
Common stock held by ESOP $ 1,620 $ - $ - $ - $ 1,620
Less: Note receivable from ESOP (1,473) - - - (1,473)
STOCKHOLDER'S EQUITY:
Common stock and
additional paid-in capital $ 26,511 $ 5,098 $1,176 $ (6,274) $ 26,511
Retained earnings 2,104 8,161 3,371 (12,155) 1,481
Accumulated other comprehensive income - - 210 - 210
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 28,615 $13,259 $4,757 $(18,429) $ 28,202
-------- ------- ------ -------- --------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $183,140 $25,254 $6,225 $(19,662) $194,957
======== ======= ====== ======== ========
</TABLE>
52
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE PERIOD FROM JULY 23, 1998 TO DECEMBER 31, 1998
(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 $30,643 $ 7,993 $4,982 $ (3,201) $40,417
Net rentals 7,773 13,734 396 (7,772) 14,131
------- ------- ------ -------- -------
Net revenues $38,416 $21,727 $5,378 $(10,973) $54,548
Cost of sales $20,931 $ 4,767 $3,143 $ (3,166) $25,675
Cost of rentals 855 10,893 243 (7,772) 4,219
Selling, general and administrative expenses 6,191 4,336 1,272 - 11,799
Depreciation and amortization 2,876 182 39 - 3,097
------- ------- ------ -------- -------
Income (loss) from operations $ 7,563 $ 1,549 $ 681 $ (35) $ 9,758
Interest expense $ 6,511 $ 4 $ - $ - $ 6,515
Intercompany interest expense (income) 5 (5) - - -
Other expense (income), net (1,286) 45 109 1,203 71
------- ------- ------ -------- -------
Income (loss) before income taxes $ 2,333 $ 1,505 $ 572 $ (1,238) $ 3,172
Provision for income taxes 805 637 237 - 1,679
------- ------- ------ -------- -------
Net income (loss) $ 1,528 $ 868 $ 335 $ (1,238) $ 1,493
======= ======= ====== ======== =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE PERIOD FROM JULY 23, 1998 TO DECEMBER 31, 1998
(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 $ (2,175) $ 321 $176 $ - $ (1,678)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (826) (130) (22) - (978)
Proceeds from sale of fixed assets 15 - - - 15
Acquisition of predecessor company (120,784) - - - (120,784)
--------- ------- ---- -------- ---------
Net Cash from Investing Activities $(121,595) $ (130) $(22) $ - $(121,747)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ (2,750) $ - $ - $ - $ (2,750)
Net payments on prior Revolving Credit (8,900) - - - (8,900)
Payments of other long-term debt (19,905) 34 - - (19,871)
Proceeds from other long-term debt 139,250 - - - 139,250
Net increase (decrease) in advance account 1,061 (1,067) 6 - -
Payments of deferred financing costs (7,352) - - - (7,352)
Contribution from parent 26,500 - - - 26,500
Other equity transactions - - (9) - (9)
--------- ------- ---- -------- ---------
Net Cash from Financing Activities $ 127,904 $(1,033) $ (3) $ - $ 126,868
EFFECT OF EXCHANGE RATE
CHANGES ON CASH $ - $ - $ 44 $ - $ 44
--------- ------- ---- -------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 4,134 $ (842) $195 $ - $ 3,487
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 858 1,149 410 - 2,417
--------- ------- ---- -------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,992 $ 307 $605 $ - $ 5,904
========= ======= ==== ======== =========
</TABLE>
53
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $34,554 $ 9,595 $6,445 $ (4,337) $46,257
Net rentals 8,973 15,792 512 (8,967) 16,310
------- ------- ------ -------- -------
Net revenues $43,527 $25,387 $6,957 $(13,304) $62,567
Cost of sales $22,372 $ 5,747 $4,307 $ (4,198) $28,228
Cost of rentals 1,093 12,539 314 (8,967) 4,979
Selling, general and administrative expenses 8,057 4,801 1,649 - 14,507
Depreciation and amortization 2,512 107 40 - 2,659
Transaction expenses (see Note 6) 11,280 - - - 11,280
------- ------- ------ -------- -------
Income (loss) from operations $(1,787) $ 2,193 $ 647 $ (139) $ 914
Interest expense $ 1,549 $ 4 $ - $ - $ 1,553
Intercompany interest expense (income) 58 (58) - - -
Other expense (income), net (1,635) 28 225 1,587 205
------- ------- ------ -------- -------
Income (loss) before income taxes $(1,759) $ 2,219 $ 422 $ (1,726) $ (844)
and extraordinary item
Provision for income taxes (1,173) 854 200 - (119)
------- ------- ------ -------- -------
Income (loss) before extraordinary item $ (586) $ 1,365 $ 222 $ (1,726) $ (725)
======= ======= ====== ======== =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 7,473 $ (7) $ 1,096 $ - $ 8,562
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,389) (49) (30) - (3,468)
Proceeds from sale of fixed assets 4 - - - 4
------- ------ ------- ------------ -------
Net Cash from Investing Activities $(3,385) $ (49) $ (30) $ - $(3,464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ 4,400 $ - $ - $ - $ 4,400
Payments of other long-term debt (7,987) (8) (324) - (8,319)
Net increase (decrease) in advance account (271) 288 (17) - -
Intercompany dividends 669 - (669) - -
Other equity transactions (6) - (52) - (58)
------- ------ ------- ------------ -------
Net Cash from Financing Activities $(3,195) $ 280 $(1,062) $ - $(3,977)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH $ - $ - $ (14) $ - $ (14)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 893 224 (10) - 1,107
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD (35) 925 420 - 1,310
------- ------ ------- ------------ -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 858 $1,149 $ 410 $ - $ 2,417
======= ====== ======= ============ =======
</TABLE>
54
<PAGE>
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------------------------------------------------
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>
55
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------------------
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 $38,944 $ 8,683 $ 7,280 $ (6,381) $ 48,526
Cost of rentals 1,975 20,872 621 (15,046) 8,422
Selling, general and administrative expenses 13,041 7,903 2,842 - 23,786
Depreciation and amortization 4,456 183 73 - 4,712
------- ------- ------- -------- --------
Income (loss) 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 (loss) before income taxes and
extraordinary income $13,706 $ 3,354 $ 1,322 $ (2,775) $ 15,607
Provision for income taxes 4,558 1,295 559 - 6,412
------- ------- ------- -------- --------
Income (loss) before extraordinary item $ 9,148 $ 2,059 $ 763 $ (2,775) $ 9,195
======= ======= ======= ======== ========
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------------------------------------
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 from 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 from 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>
56
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------------------
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 $40,243 $ 7,860 $ 7,708 $ (6,715) $ 49,096
Cost of rentals 1,638 19,335 613 (13,746) 7,840
Selling, general and administrative expenses 13,197 6,806 3,473 - 23,476
Depreciation and amortization 5,673 281 74 - 6,028
------- ------- ------- -------- --------
Income (loss) 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 (loss) before income taxes $11,626 $ 2,620 $ 1,374 $ (2,414) $ 13,206
Provision for income taxes 3,955 1,210 565 - 5,730
------- ------- ------- -------- --------
Net income (loss) $ 7,671 $ 1,410 $ 809 $ (2,414) $ 7,476
======= ======= ======= ======== ========
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------------------------------------
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 from 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 from 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>
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of AXIA Incorporated
We have audited the accompanying consolidated balance sheet of AXIA Incorporated
and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of income, stockholder's equity and comprehensive
income, and cash flows for the period from July 23, 1998 to December 31, 1998
and for the period from January 1, 1998 to July 22, 1998. 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. The financial statements of the Company for the years ended December
31, 1997 and 1996 were audited by other auditors whose report, dated February
25, 1998, expressed an unqualified opinion on those statements.
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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998, and the results of its operations and its cash flows for the periods ended
December 31, 1998 and July 22, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 9, 1998
58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of
Directors of AXIA Incorporated:
We have audited the accompanying consolidated balance sheet of AXIA INCORPORATED
(a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997, and the
related consolidated statements of income, stockholder's equity and cash flows
for the years ended December 31, 1997 and 1996. 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 our 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 the results of their operations and
their cash flows for the years ended December 31, 1997 and 1996, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 25, 1998
59
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 9, 1998, the Board of Directors of AXIA Incorporated
approved management's recommendation on July 23, 1998 to engage the independent
certified public accounting firm of Deloitte & Touche LLP ("D&T") to audit the
consolidated financial statements of the Company for the year ending December
31, 1988. Prior to the sale of the predecessor company on July 22, 1998, the
predecessor company's independent auditor was Arthur Andersen LLP.
See Form 8-K filed on December 15, 1998 for change in accountants.
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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
Executive Compensation
The following table sets forth the total value of compensation received by
the Chairman and President and the four most highly compensated executive
officers, other than the Chairman and President, who served as executive
officers of the Company as of December 31, 1998 (the "Named Executive Officers")
for services rendered in all capacities to the company for the years ended
December 31, 1998, 1997 and 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Incentive Other Annual
Name and Principal Position (1) Year Salary Compensation (2) Compensation (3) (4)
- -------------------------------------------------- ---- ------ ---------------- --------------------
<S> <C> <C> <C> <C>
Gary L. Rosenthal 1998 $121,323 $ 50,000 --
Chairman and President
Dennis W. Sheehan (5) 1998 $283,386 -- $13,725
Chairman, President and Chief Executive Officer 1997 $336,000 $ 200,000 $19,837
1996 $336,000 $ 200,000 $19,626
Lyle J. Feye 1998 $150,667 $ 57,500 $10,725
Vice President--Finance, Treasurer and 1997 $140,500 $ 45,000 $10,210
Chief Financial Officer 1996 $134,208 $ 45,000 $10,183
Robert G. Zdravecky 1998 $179,983 $ 75,594 $11,889
President and General Manager of Ames 1997 $171,500 62,640 $11,766
1996 $163,333 $ 67,500 $11,664
David H. Chesney 1998 $174,525 $ 112,952 $10,660
President and General Manager of Nestaway 1997 $166,900 $ 25,000 $ 9,317
1996 $158,875 $ 114,000 $ 9,202
Ian G. Wilkins 1998 $170,084 $ 17,000 $12,212
President and General Manager of Fischbein 1997 $163,083 $ 48,000 $ 8,611
1996 $155,250 $ 52,000 $ 9,339
</TABLE>
- --------------------
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(1) These individuals have not received any restricted stock awards or options
for the periods indicated. None of the executive officers has received
perquisites, the value of which exceeded the lesser of $50,000 or 10% of
the salary and bonus of such executive officer.
(2) The company provides a management incentive plan with payments to be made
in cash.
(3) Includes payments for life insurance and automobile allowance.
(4) In connection with the closing of the Transaction, Mr. Sheehan, Mr. Feye,
Mr. Zdravecky, Mr.Chesney and Mr. Wilkins received compensation as a result
of the sale of stock, the exercising of options, or both, and payments
pursuant to various employee incentive bonus programs. Compensation
recognized as a result of the Transaction for these individuals was $1.2
million, $2.1 million, $2.3 million, $2.1 million and $2.1 million,
respectively. Mr. Rosenthal received a fee of $250,000 from Sterling for
consulting services rendered prior to and in connection with the
Transaction.
(5) Dennis W. Sheehan retired concurrently with the Transaction.
Employee Stock Ownership and 401(k) Plan
All U.S. salaried and non-bargaining hourly employees, who have provided
service to AXIA Incorporated for one-half of a year and are at least age 21, may
participate in the AXIA Incorporated 401(k) Plan ("401(k) Plan"). The 401(k)
Plan is designed to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"). Each such employee has the option to defer
taxation of a portion of his or her earnings by directing AXIA Incorporated to
contribute a percentage of earnings to the 401(k) Plan ("Deferral
Contributions"). A participant may defer up to 15% of eligible earnings to the
401(k) Plan, subject to certain limitations set forth in the 401(k) Plan. A
participant is always 100% vested in his or her Deferral Contributions. A
participant's Deferral Contributions become distributable upon the termination
of his or her employment for any reason.
In connection with the Transaction the Company established an Employee
Stock Ownership Plan (the "ESOP"), covering substantially all full time
employees, including executive officers of the Company who satisfy the
requirements described below. As of December 31, 1998, the 401(k) Plan was
merged into the ESOP, and an employee satisfying the eligibility requirements
under the 401(k) Plan is able to make Deferral Contributions to the Employee
Stock Ownership and 401(k) Plan as was allowed under the 401(k) Plan. The ESOP
borrowed $1.5 million from Finance Co. (the "Company ESOP Loan") to purchase
15,000 shares of Common Stock at the Closing. Finance Co. funded the Company
ESOP Loan from the ESOP Term Loan. The Company ESOP Loan matures on December 31,
2003 and bears interest at interest rates based on the Alternative Base Rate (as
defined) or the LIBOR Rate (as defined). The outstanding principal of the
Company ESOP Loan is payable in 22 equal quarterly installments of $68,182
during the period beginning September 30, 1998. The 15,000 shares of Common
Stock purchased by the ESOP are pledged (the "ESOP Pledge") as security for the
Company ESOP Loan, and such shares will be released and allocated to ESOP
participants' accounts as the Company ESOP Loan is discharged. The Company will
make ESOP contributions in amounts sufficient to enable the ESOP to discharge
its indebtedness under the Company ESOP Loan. A percentage of the shares
released under the ESOP Pledge will be allocated to each participant based on a
percentage of such participant's Deferral Contributions (Matching
Contributions"), and (ii) the remaining percentage of such shares released are
allocated to each participant based on such participant's compensation relative
to total compensation for all ESOP participants ("Discretionary Contributions").
Until the Company ESOP Loan is paid in full, ESOP Contributions will be used to
pay the outstanding principal and interest on the Company ESOP Loan.
Participation begins the earlier to occur of (i) for all employees hired prior
to July 31, 1998 and are age 21, the later of (x) July 22, 1998 or (y) their
date of hire or (ii) the date an employee satisfies the eligibility requirements
to make Deferral Contributions.
A participant's ESOP account, which is such participant's allocation of
shares based on Matching and/or Discretionary Contributions, vests at the rate
of 20% per year. Distributions from the participant's ESOP account are made in
cash or Common Stock upon a participant's retirement, death, disability or
termination of employment. In the event of retirement, death or disability, the
entire balance of a participant's ESOP account will become distributable without
regard to the ordinary vesting schedule. In the event of termination of
employment for any other reason, the vested portion of a participant's ESOP
account will become distributable and the remaining portion, if any, will be
forfeited. If Common Stock is distributed to a participant, the participant may,
within two 60-day periods, require the Company to purchase all or a portion of
such Common Stock at the fair market value of the Common Stock as
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determined under the ESOP (the "Put Options"). The first 60-day period commences
on the date the participant receives a distribution of Common Stock and the
second 60-day period commences a year from such date. If a participant fails to
exercise either of the two Put Options, the participant may transfer the shares
of Common Stock only upon receipt of a bona fide third party offer and only
after first offering the shares to the ESOP and then to the Company. Employees
of the Company own approximately 5.3% of the outstanding Common Stock through
the ESOP.
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, 1998, the number of years of Credited Service for the
indicated persons are: Mr. Rosenthal, 0 years; Mr. Feye, 9.33 years; Mr.
Zdravecky, 10.08 years; Mr. Chesney, 6.83 years; and Mr. Wilkins, 3.58 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.
Years of Service
<TABLE>
<CAPTION>
Annual Earnings 10 15 20 25 30
- --------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Average
$120,000 $21,382 $32,073 $42,764 $53,455 $64,146
$140,000 $25,382 $38,073 $50,764 $63,455 $76,146
$160,000* $29,382 $44,073 $58,764 $73,455 $88,146
</TABLE>
* The Internal Revenue Code limits the amount of compensation that can be
taken into account in 1998 to $160,000.
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 $8,140 for 1998.
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Salary Continuation
In order to attract and encourage key executives to remain with the
Company, the Company instituted a salary continuation 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% of the executive's current
annual salary or salary at date of retirement. 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 1998 with respect to Mr. Sheehan, were approximately $51,135;
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 was the last active executive covered by this
program.
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
The Predecessor Company had granted to certain employees stock options
providing them the option to purchase restricted shares of common stock of the
Parent aggregating approximately 4% of the common stock on a fully diluted
basis. All stock options were exercised prior to the closing of the Transaction
and the new stock awards plan described below was adopted.
1998 Stock Awards Plan
In connection with the closing of the Transaction, the Board of Directors
and the Company's stockholders approved the Company's 1998 Stock Awards Plan
(the "1998 Stock Awards Plan"). The 1998 Stock Awards Plan is intended to
provide employees, consultants and other service providers with an opportunity
to acquire a proprietary interest in AXIA Group and additional incentive and
reward opportunities based on the growth in the Common Stock price of AXIA
Group. The 1998 Stock Awards Plan provides for the granting of options (either
incentive stock options within the meaning of Code Section 422(b), or options
that do not constitute incentive stock options ("non-qualified stock options"),
restricted stock awards, stock appreciation rights, performance awards and
phantom stock awards, or any combination thereof. The number of shares of Common
Stock that may be subject to outstanding awards is 31,111 shares of Common
Stock. Shares of Common Stock which are attributable to awards which have
expired, terminated or been canceled or forfeited are available for issuance or
use in connection with future awards.
Administration. The 1998 Stock Awards Plan will be administered by the
Compensation Committee of AXIA Group. The Compensation Committee will have the
power to determine which employees, consultants and other service providers will
receive an award, the time or times when such award will be made, the type of
the award and the number of shares of Common Stock to be issued under the award
or the value of the award. Only persons who at the time of the award are
employees of or service providers to AXIA Group or of any subsidiary of AXIA
Group will be eligible to
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<PAGE>
receive awards under the 1998 Stock Awards Plan. A director of AXIA Group is not
eligible to receive an award under the 1998 Stock Awards Plan unless such
director is an employee of AXIA Group or any of its subsidiaries.
Options. The 1998 Stock Awards Plan provides for two types of options:
incentive stock options and non-qualified stock options. The Compensation
Committee will designate the persons to receive the options, the number of
shares subject to the options and the terms and conditions of each option
granted under the 1998 Stock Awards Plan. The term of any option granted under
the 1998 Stock Awards Plan shall be determined by the Compensation Committee;
provided, however, that an incentive stock option may only be awarded to an
employee and that the term of any incentive stock option cannot exceed ten years
from the date of the grant and any incentive stock option granted to an employee
who possesses more than 10.0% of the total combined voting power of all classes
of shares of AXIA Group or of its subsidiary within the meaning of Section
422(b)(6) of the Code must not be exercisable after the expiration of five years
from the date of grant. The exercise price of options granted under the 1998
Stock Awards Plan will be determined by the Compensation Committee; provided,
however, that an incentive stock option exercise price cannot be less than the
fair market value of a share of Common Stock on the date such option is granted
(subject to certain adjustments provided under the 1998 Stock Awards Plan).
Further, the exercise price of any incentive stock option granted to an employee
who possesses more than 10.0% of the total combined voting power of all classes
of shares of AXIA Group or of its subsidiaries within the meaning of Section
422(b)(6) of the Code must be at least 110% of the fair market value of the
Common Stock on the date such option is granted. The exercise price of options
granted under the 1998 Stock Awards Plan will be paid in full in a manner
prescribed by the Compensation Committee.
Restricted Stock Awards. Pursuant to a restricted stock award, Common Stock
will be granted to an eligible person at the time the award is made without any
cash payment to AXIA Group, except to the extent otherwise provided by the
Compensation Committee or required by law; provided, however, that such shares
will be subject to certain restrictions on the disposition thereof and certain
obligations to forfeit such shares to the Company as may be determined in the
discretion of the Compensation Committee. The restrictions on disposition may
lapse based upon (a) AXIA Group's attainment of specific performance targets
established by the Compensation Committee that are based on: (i) the fair market
value of a share of Common Stock; (ii) AXIA Group earnings per share; (iii) the
Company's revenue; (iv) the revenue of a business unit of AXIA Group designated
by the Compensation Committee; (v) the return on stockholders' equity achieved
by AXIA Group or (vi) AXIA Group's pre-tax cash flow from operation (b) the
grantee's tenure with AXIA Group, or (c) a combination of factors. AXIA Group
will retain custody of the Common Stock issued pursuant to a restricted stock
award until the disposition restrictions lapse. A grantee may not sell,
transfer, pledge, exchange, hypothecate, or otherwise dispose of such shares
until the expiration of the restriction period. However, upon the issuance to
the grantee of Common Stock pursuant to a restricted stock award, except for the
foregoing restrictions, such grantee will have all the rights of a stockholder
of the Company with respect to such shares, including the right to vote such
shares and to receive all dividends and other distributions paid with respect to
such shares.
Stock Appreciation Rights. A stock appreciation right permits the holder
thereof to receive an amount in cash, Common Stock, or a combination thereof (as
determined by the Compensation Committee), equal in value to the number of stock
appreciation rights exercised by the holder multiplied by the excess of the fair
market value of Common Stock on the exercise date over the stock appreciation
rights' exercise price. Stock appreciation rights may or may not be granted in
connection with the grant of an option and no stock appreciation right may be
exercised earlier than six months from the date of grant. A stock appreciation
right may be exercised in whole or in installments and at such time as
determined by the Compensation Committee.
Performance and Phantom Stock Awards. The 1998 Stock Awards Plan permits
grants of performance awards and phantom stock awards, which may be paid in
cash, Common Stock, or a combination thereof as determined by the Compensation
Committee. Performance awards granted under the 1998 Stock Awards Plan will have
a maximum value established by the Compensation Committee at the time of the
grant. A grantee's receipt of such amount will be contingent upon satisfaction
by AXIA Group, or any subsidiary, division or department thereof, of performance
conditions established by the Compensation Committee prior to the beginning of
the performance period. Future performance conditions may be based on: (i) the
price of a share of Common Stock; (ii) AXIA Group's earnings per
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share; (iii) the Company's revenue; (iv) the revenue of a business unit of AXIA
Group designated by the Compensation Committee; (v) the return on stockholder's
equity achieved by AXIA Group; (vi) AXIA Group or business unit's pre-tax cash
flow from operations or (vii) a combination of such factors. Such performance
awards, however, may be subject to later revisions as the Compensation Committee
deems appropriate to reflect significant unforeseen events or changes. A
performance award will terminate if the grantee's employment or service with the
Company terminates during the applicable performance period except as otherwise
provided by the Compensation Committee at the time of grant. Phantom stock
awards granted under the 1998 Stock Awards Plan are awards of Common Stock or
rights to receive amounts equal to stock appreciation over a specific period of
time. Such awards vest over a period of time or upon the occurrence of a
specific event(s) established by the Compensation Committee, without payment of
any amounts by the holder thereof (except to the extent required by law) or
satisfaction of any performance criteria or objectives. Future performance
conditions may be based on (i) the price of a share of Common Stock; (ii) AXIA
Group's earnings per share; (iii) AXIA Group's revenue; (iv) the revenue of a
business unit of AXIA Group designated by the Compensation Committee; (v) the
return on stockholder's equity achieved by AXIA Group; (vi) AXIA Group or
business unit's pre-tax cash flow from operations or (vii) a combination of such
factors. A phantom stock award will terminate if the grantee's employment or
service with the Company terminates during the applicable vesting period or, if
applicable, the occurrence of a specific event(s), except as otherwise provided
by the Compensation Committee at the time of grant. In determining the value of
performance awards or phantom stock awards, the Compensation Committee must take
into account a grantee's responsibility level, performance, potential, other
awards under the 1998 Stock Awards Plan and such other considerations as it
deems appropriate. Such payment may be made in a lump sum or in installments as
prescribed by the Compensation Committee. Any payment made in Common Stock will
be based upon the fair market value of the Common Stock on the payment date.
Income Tax Considerations. Upon the exercise of a nonqualified option, the
optionee will recognize ordinary taxable income on the amount by which the fair
market value of the Common Stock purchased exceeds the price paid for such
Common Stock under the option. The Company shall be able to deduct the same
amount for federal income tax purposes. The exercise of an incentive stock
option has no tax consequence to an optionee or the Company. At the time the
restrictions lapse on a restricted stock award, the holder of such award will
recognize ordinary taxable income in an amount equal to the fair market value of
the shares of Common Stock on which the restrictions lapse. The amount of
ordinary taxable income recognized by such holder of a restricted stock award is
deductible by the Company. Upon the exercise of a stock appreciation right, the
holder of such right must include in ordinary taxable income the amount of cash
or the fair market value of the shares of Common Stock received. The amount of
ordinary taxable income recognized by such holder of the stock appreciation
right is deductible by the Company. A holder of a performance award or a phantom
stock award will include in his or her ordinary taxable income the fair market
value of the shares of Common Stock related to such award when the holder's
rights in such award first becomes transferable or is no longer subject to a
substantial risk of forfeiture. The amount of ordinary taxable income recognized
by the holder of either award is deductible by the Company.
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Item 12. SECURITY OWNERSHIP
Beneficial Ownership
The Company is wholly owned by Holdings, a wholly-owned subsidiary of AXIA
Group, Inc.
The following table sets forth as of December 31, 1998, the number and
percentage of the outstanding shares of AXIA Group's Common Stock beneficially
owned by the ESOP, the Named Executive Officers, each director of AXIA Group and
the Company, all directors and officers as a group and each person who is the
beneficial owner of more than 5% of the outstanding Common Stock.
<TABLE>
<CAPTION>
Amount and Nature % of
of Beneficial Ownership Outstanding
Name and Address of Beneficial Owner of Common Stock Common Stock
- ---------------------------------------------------------------------------------- -------------------------- -------------
<S> <C> <C>
David H. Chesney.................................................................. 3,750 1.3%
9501 Granger Rd.
Cleveland, Ohio 44125
Lyle J. Feye...................................................................... 3,000 1.1%
100 West 22nd Street, Suite 134
Lombard, Illinois 60148
Susan O. Rheney................................................................... 5,000 1.8%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Gary L. Rosenthal................................................................. 4,925(1) 1.8%
Eight Greenway Plaza, Suite 714
Houston, Texas 77046
Dennis W. Sheehan................................................................. 4,000 1.4%
100 West 22nd Street, Suite 134
Lombard, Illinois 60148
Ian G. Wilkins.................................................................... 2,500 0.9%
151 Walker Road
Statesville, North Carolina 28625
Robert G. Zdravecky............................................................... 3,500 1.2%
3305 Breckinridge Blvd., Suite 122
Duluth, Georgia 30096
All directors and Named Executive Officers........................................ 26,675 9.5%
as a group (7 persons)
The CIT Group/Equity Investments, Inc............................................. 25,000 8.9%
650 CIT Drive
Livingston, New Jersey 07039
Fayez Sarofim Investment Partnership No. 7, L.P.................................. 25,000 8.9%
Two Houston Center, Suite 2907
Houston, Texas 77010
Frank J. Hevrdejs................................................................. 25,000 8.9%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
Paribas North America............................................................. 25,000 8.9%
787 Seventh Avenue
New York, New York 10019
Gordon A. Cain.................................................................... 17,500 6.2%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
AXIA Incorporated Employee Stock Ownership Plan................................... 15,000 5.3%
</TABLE>
(1) Does not include 3,000 shares held in trust for Mr. Rosenthal's
descendants. Mr. Rosenthal disclaims beneficial ownership of such shares.
Any shares of Common Stock acquired by the ESOP in the Equity Investment will be
voted by the trustee of the ESOP (the "ESOP Trustee") pursuant to the direction
of the Board of Directors or by a committee to be designated by the Board of
Directors, except that participants will be entitled to direct the ESOP Trustee
to vote the shares of Common
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Stock allocated to their accounts with respect to the approval or disapproval of
any corporate merger or consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets of a trade or
business or such similar transactions as may be prescribed in regulations under
the Code.
Item 13. CERTAIN RELATIONSHIPS
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.
Related Transactions
Sterling entered into an agreement with AXIA Group and Acquisition Co.
pursuant to which Sterling is to provide consulting and advisory services with
respect to the organization of AXIA Group, Acquisition Co. and Finance Co., the
structuring of the Transaction, employee benefit and compensation arrangements
and other matters. The agreement also provides that AXIA Group and Acquisition
Co., jointly and severally, will indemnify Sterling against liabilities relating
to its services. At the Closing, the Company paid Sterling a one-time
transaction fee of $2.5 million for these services, and reimbursed Sterling for
its expenses. From the transaction fee received at Closing, Sterling paid Gary
Rosenthal a fee of $250,000 for consulting services rendered in connection with
the Transaction, and AXIA Group and the Company will indemnify Mr. Rosenthal
against liabilities related to his services. In addition, through 2008 AXIA
Group will pay Sterling an annual management fee of $100,000 in cash and
annually grant Sterling AXIA Group Common Stock having a value of $100,000
calculated based upon the latest ESOP valuation price. In addition, each of AXIA
Group, and Acquisition Co. has agreed that if any one or more of them or any of
their subsidiaries determines within ten years of the date of the closing of the
Acquisition to dispose of or acquire any assets or business having a value of $1
million or more (a "Future Corporate Transaction") or to offer its securities
for sale publicly or privately to raise any debt or equity financing (a "Future
Securities Transaction"), either AXIA Group, Acquisition Co., or the relevant
subsidiary will retain Sterling as a consultant with respect to the Transaction,
provided a principal, officer or director of Sterling or any of their respective
affiliates or family members owns any equity securities of AXIA Group or any of
its successors. For any Future Corporate Transaction, Sterling is entitled to
receive a fee in the amount of 1% of the aggregate consideration paid or
received plus the aggregate amount of any liabilities assumed in connection with
an acquisition or disposition and reimbursement of any expenses or fees incurred
by Sterling in connection therewith. For any Future Securities Transaction,
Sterling is entitled to receive a fee in the amount of 0.5% of the aggregate
gross selling price of such securities and, regardless of whether such Future
Securities Transaction is consummated, Sterling is entitled to receive
reimbursements of any expenses or fees incurred by Sterling in connection
therewith. The agreement is automatically renewable for successive one-year
periods, subject to notice of termination by either Sterling or AXIA Group.
AXIA Group, Acquisition Co. and Finance Co. were organized by Sterling for
the purpose of effecting the Acquisition. Ms. Susan Rheney, a principal of
Sterling, is a director of AXIA Group, Acquisition Co. and the Company. See
"Management." At the Transaction Date Ms. Rheney, Mr. Hevrdejs and Mr. Oehmig,
all associated with Sterling, purchased 5,000 shares, 25,000 shares and 16,500
shares, respectively, of AXIA Group Common Stock as part of the Equity
investment. Additionally, Messrs. Chesney, Feye, Sheehan, Wilkins, Zdravecky and
Rosenthal (or a trust for his descendants) purchased 3,750 shares, 3,000 shares,
4,000 shares, 2,500 shares, 3,500 shares and 10,000 shares, respectively, of
AXIA Group Common Stock as part of the Equity Investment. All such purchases of
Common Stock were made at a price of $100 per share.
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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 25 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* Certificate of Incorporation of the Company, as amended
3.2* Bylaws of the Company
4.1* Indenture, as supplemented, dated as of July 22, 1998 by and between
the Company and State Street Bank & Trust Company National Bank, as
Trustee, with respect to the 10.75% Senior Subordinated Notes due
2008, including the form of the Note.
10.1* Axia Group, Inc. 1998 Stock Awards Plan
10.2* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan to be
renamed AXIA Incorporated Employee Stock Ownership and 401(k) Plan
10.3* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan Trust
Agreement to be renamed AXIA Incorporated Employee Stock Ownership and
401(k) Plan Trust Agreement
10.8* Credit Agreement dated as of July 22, 1998 among Axia Finance Corp.,
AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co.,
Inc. and Paribas
10.9* Security Agreement dated as of July 22, 1998 by and between Axia
Finance Corp., AXIA Incorporated, Paribas and the Lenders named
therein
10.10* Pledge Agreement dated as of July 22, 1998 by and between AXIA
Incorporated, Paribas and the Lenders named therein
10.11* Letter Agreement dated June 23, 1998 by and among The Sterling Group,
Inc., Axia Group, Inc., Axia Acquisition Corp. and each of their
subsidiaries
10.12* Form of Indemnity Agreement between AXIA Incorporated and each of its
officers and directors.
10.13* Form of Tax Sharing Agreement among Axia Group, Inc., Axia Holdings
Corp., AXIA Incorporated, Ames Taping Tool Systems, Inc. and TapeTech
Tool Co., Inc.
23.4* Consent of Arthur Andersen LLP
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* Filed as an exhibit to the Company's Form S-4 (Registration No. 333-64555)
under an exhibit number identical to that described herein and incorporated
herein by this reference.
(b) Reports on Form 8-K: Form 8-K filed on December 15, 1998
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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
---------------------------
Lyle J. Feye
Vice President, Treasurer, Chief Financial Officer
Date: March 30, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ----
<S> <C> <C>
/s/ Gary L. Rosenthal Chairman, President and Director March 30, 1999
- ----------------------------
Gary L. Rosenthal
/s/ Lyle J. Feye Vice President Finance, March 30, 1999
- --------------------------- Principal Financial Officer,
Lyle J. Feye and
Principal Accounting Officer
/s/ Susan O. Rheney Director March 30, 1999
- ---------------------------
Susan O. Rheney
/s/ C. Byron Snyder Director March 30, 1999
- ---------------------------
C. Byron Snyder
</TABLE>
71
<PAGE>
Exhibit 23.4
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. 333-64555).
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-23-1998 JAN-01-1998
<PERIOD-END> DEC-31-1998 JUL-22-1998
<CASH> 5,904 0
<SECURITIES> 0 0
<RECEIVABLES> 14,133 0
<ALLOWANCES> 0 0
<INVENTORY> 11,092 0
<CURRENT-ASSETS> 35,703 0
<PP&E> 34,447 0
<DEPRECIATION> 1,758 0
<TOTAL-ASSETS> 194,957 0
<CURRENT-LIABILITIES> 20,868 0
<BONDS> 100,000 0
0 0
0 0
<COMMON> 26,511 0
<OTHER-SE> 1,691 0
<TOTAL-LIABILITY-AND-EQUITY> 194,957 0
<SALES> 40,417 46,257
<TOTAL-REVENUES> 54,548 62,567
<CGS> 25,675 28,228
<TOTAL-COSTS> 44,790 61,653
<OTHER-EXPENSES> 159 214
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,515 1,553
<INCOME-PRETAX> 3,172 (844)
<INCOME-TAX> 1,679 (119)
<INCOME-CONTINUING> 1,493 (725)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 682
<CHANGES> 0 0
<NET-INCOME> 1,493 (1,407)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
Due to acquisition of Company, Income Statement results are divided into pre
acquisition (to 7/22/98) and post acquisition.
</FN>
</TABLE>
