<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarter Ended March 31, 1999 Commission File No. 333-64555
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
--------------------
AXIA INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware 13-3205251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West 22nd Street, Suite 134, Lombard, Illinois 60148 (630) 629-3360
-------------------------------------------------------------------------
(Address and telephone number of principal executive offices)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
--------------------
<PAGE>
PART I
Item 1. Financial Statements
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,393 $ 5,904
Accounts receivable, net 14,285 14,133
Inventories, net 10,840 11,092
Prepaid income taxes and other current assets 2,128 1,135
Deferred income tax benefits 3,460 3,439
-------- --------
Total Current Assets $ 36,106 $ 35,703
-------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ 984
Buildings and improvements 4,579 4,600
Machinery and equipment 19,082 18,750
Equipment leased to others 10,351 10,113
-------- --------
$ 34,996 $ 34,447
Less: Accumulated depreciation 2,774 1,758
-------- --------
Net Plant and Equipment $ 32,222 $ 32,689
-------- --------
OTHER ASSETS:
Goodwill, net $106,922 $107,633
Intangible assets, net 896 807
Deferred charges, net 17,399 18,097
Other assets 27 28
-------- --------
Total Other Assets $125,244 $126,565
-------- --------
TOTAL ASSETS $193,572 $194,957
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,804 $ 4,655
Accounts payable 4,682 4,334
Payable to parent 215 -
Accrued liabilities 9,075 11,868
Accrued income taxes 214 11
-------- --------
Total Current Liabilities $ 18,990 $ 20,868
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $129,965 $131,020
Other non-current liabilities 8,632 7,970
Deferred income taxes 6,819 6,750
-------- --------
Total Non-Current Liabilities $145,416 $145,740
-------- --------
Commitments and contingencies $ - $ -
Common stock held by ESOP 1,620 1,620
Less: Note receivable from ESOP (1,405) $ (1,473)
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value; 100 shares
authorized, issued and outstanding) $ - $ -
Additional paid-in capital 26,511 26,511
Retained earnings 2,474 1,482
Accumulated other comprehensive income (34) 209
-------- --------
Total Stockholder's Equity $ 28,951 $ 28,202
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $193,572 $194,957
======== ========
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these balance sheets.
1
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-------------------
January 1, 1999 January 1, 1998
to to
March 31, 1999 March 31, 1998
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $22,788 $21,096
Net rentals 8,369 7,049
------- -------
Net revenues $31,157 $28,145
Cost of sales 14,425 12,775
Cost of rentals 2,320 2,210
Selling, general and administrative expenses 6,840 6,185
Depreciation and amortization 1,830 1,170
------- -------
Income from operations $ 5,742 $ 5,805
Interest expense 3,551 733
Interest income (64) (7)
Other expense (income), net 212 69
------- -------
Income before income taxes $ 2,043 $ 5,010
Provision for income taxes 1,051 2,084
------- -------
Net income $ 992 $ 2,926
======= =======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
2
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(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, 1997 $ - $16,723 $23,818 $(182) $(292) $(474) $ -
Net income - - 2,926 - - - 2,926
Cumulative translation adjustment - - - - (48) (48) (48)
--- ------- ------- ----- ----- ----- -------
Comprehensive income $ 2,878
=======
BALANCE, MARCH 31, 1998 (unaudited) $ - $16,723 $26,744 $(182) $(340) $(522)
=== ======= ======= ===== ===== =====
AXIA Incorporated
- -----------------
BALANCE, DECEMBER 31, 1998 $ - $26,511 $ 1,482 $ (1) $ 210 $ 209 $ -
Net income - - 992 - - - 992
Cumulative translation adjustment - - - - (243) (243) (243)
--- ------- ------- ----- ----- ----- -------
Comprehensive income $ 749
=======
BALANCE, MARCH 31, 1999 (unaudited) $ - $26,511 $ 2,474 $ (1) $ (33) $ (34)
=== ======= ======= ===== ===== =====
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated
Financial Statements are an integral part of these statements.
3
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-------------------
January 1, 1999 January 1, 1998
to to
March 31, 1999 March 31, 1998
-------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 992 $ 2,926
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 2,025 1,254
Deferred income tax provision (benefit) 48 72
Loss (gain) on disposal of fixed assets 26 19
Provision for losses on accounts receivable 427 500
Provision for obsolescence of inventories (14) (104)
Credit to pension expense - (95)
Changes in assets and liabilities:
Accounts receivable (768) (1,725)
Inventories 85 (244)
Accounts payable 481 179
Payable to parent 215 -
Accrued liabilities (2,757) (880)
Other current assets (1,334) (170)
Income taxes payable 539 1,311
Other non-current assets 401 (223)
Other non-current liabilities 662 33
Payments on note receivable from ESOP 68 -
------- -------
Net Cash Provided by Operating Activities $ 1,096 $ 2,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures $ (695) $(1,237)
Proceeds from sale of fixed assets 13 -
------- -------
Net Cash Provided by (Used in) Investing Activities $ (682) $(1,237)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit Loan $ - $ (700)
Payments of other long-term debt (906) (1,696)
Other equity transactions 18 27
------- -------
Net Cash (Used in) Financing Activities $ (888) $(2,369)
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ (37) $ (16)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (511) $ (769)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,904 1,310
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,393 $ 541
======= =======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
4
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND PRESENTATION
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."),
a company organized to effect the acquisition (the "Acquisition") of Axia
Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the
"Predecessor Company" prior to the date of the Transaction) to effect the
acquisition for a purchase price of $155,250,000 (including the repayment of
indebtedness), subject to certain post-closing adjustments. Upon completion of
the transaction (the "Transaction"): (i) Holdings and AXIA Incorporated (the
"Company") became direct and indirect subsidiaries, respectively, of AXIA
Group, Inc. ("AXIA 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 the Senior 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. Finance Co. then merged into the Company.
The Merger Agreement contains indemnification provisions binding on each of
the parties to the Merger Agreement. Pursuant to such provisions each of the
parties has agreed to indemnify each other for breaches of representations,
warranties and covenants.
Accounting policies used in the preparation of the unaudited interim
consolidated financial statements are consistent with the accounting policies
described in the Notes to the Consolidated Financial Statements for the year
ended December 31, 1998. In the opinion of the management, the interim
financial statements reflect all adjustments consisting only of normal recurring
adjustments which are necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the interim periods
presented. The results for such interim periods are not necessarily indicative
of results for the full year. These financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 1998 and the accompanying notes thereto in the Company's Form 10-K
under the Securities Act of 1934.
NOTE 2 MERGER AND REFINANCING EFFECTS
Goodwill of the surviving company as of March 31, 1999, represents the excess
purchase price paid over the estimated fair value of the net assets acquired,
excluding Predecessor Company goodwill in the July 22, 1998 merger. The merger
was accounted for as a purchase and resulting goodwill of $108,837,000 was
recorded on the Transaction Date. Goodwill is stated net of amortization and is
being amortized on a straight-line basis over forty years.
5
<PAGE>
The following table illustrates the unaudited results of operations of the
Company for the three month period ended March 31, 1999 and the unaudited pro
forma results of operations of the Company for the three month period ended
March 31, 1998 as if the merger and refinancing occurred on January 1, 1998 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, 1999 March 31, 1998
Actual Pro Forma
-------------- --------------
<S> <C> <C>
Net revenues $31,157 $28,145
Income from operations 5,742 5,240
Income before income taxes 2,043 1,527
Net income 992 651
</TABLE>
The preceding pro forma amounts include the effect of an increase in goodwill
amortization, adjustments to depreciation expense as a result of a 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, and the income tax effect of these adjustments.
NOTE 3 INVENTORIES
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market. The cost elements included in inventories are material, labor and
factory overhead. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials $ 4,659 $ 4,752
Work in process 1,087 1,176
Finished goods 5,094 5,164
------- -------
Total inventories $10,840 $11,092
======= =======
</TABLE>
NOTE 4 LONG-TERM DEBT
Long-term debt, inclusive of capital lease obligations which are not material,
consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------- ------------------
<S> <C> <C>
10.75% Senior Subordinated Notes $100,000 $100,000
Term Loan 33,333 34,167
ESOP Term Loan 1,219 1,313
Revolving Credit Facility - -
Other 217 195
-------- --------
Total Debt $134,769 $135,675
Less Current Maturities (4,804) (4,655)
-------- --------
Total Long-Term Debt $129,965 $131,020
======== ========
Current maturities of long-term debt as of March 31, 1999 consisted of the following
(in thousands):
Scheduled Payment
Date Amount
------------------ --------
Excess Cash Flow Payment April 14, 1999 $ 590
Term Loan and ESOP Loan June 30, 1999 911
Term Loan and ESOP Loan September 30, 1999 1,075
Term Loan and ESOP Loan December 31, 1999 1,075
Term Loan and ESOP Loan March 31, 2000 1,075
Other Various 78
--------
Total Current Maturities $ 4,804
========
</TABLE>
6
<PAGE>
The Bank Credit Agreement requires prepayments for a portion of excess cash
flow, as defined in the agreement. Accordingly, the Company made an excess cash
flow payment of $590,000 from cash on hand on April 14, 1999 which was applied
prorata to the Term Loan ($569,000) and the ESOP Loan ($21,000) in accordance
with the agreement.
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 of 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.
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 March 31, 1999 was
7.29%. At March 31, 1999, the Company had no borrowings outstanding under the
Revolving Credit Loan.
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 due on the
last day each March, June, September and December. Amounts borrowed under the
Acquisition Facility are due on the last day of each September, December, March
and June, from September 2001 to June 2004. The Bank Credit Agreement permits
prepayments with notice, provides for reimbursement for certain costs, and
requires prepayments from a portion of excess cash flow (as defined) as well as
to the extent cash proceeds from certain events exceed amounts determined by
certain formulas.
Borrowings under the Acquisition Facility (which are available until September
2001) are subject to certain conditions precedent, including delivering certain
information to the Lenders about the proposed acquisition, the delivery of
guarantees and security documents as to the proposed acquisition and the
conformance of the acquisition to certain criteria. The Company had no
borrowings outstanding under the Acquisition Facility at March 31, 1999.
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.
7
<PAGE>
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 March 31, 1999.
The indenture under which the Notes were issued contains certain covenants
that, among other things, limit the ability of the Company and/or its Restricted
Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay
dividends or make certain other restricted payments, (iii) make investments,
(iv) enter into transactions with affiliates, (v) make certain asset
dispositions, and (vi) merge or consolidate with, or transfer substantially all
of its assets to, another person. The indenture also limits the ability of the
Company's Restricted Subsidiaries to issue Capital Stock (as defined) and to
create restrictions on the ability of such Restricted Subsidiaries to pay
dividends or make any other distributions. In addition, the Company is
obligated, under certain circumstances, to offer to repurchase Notes at a
purchase price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase, with the net cash proceeds
of certain sales or other dispositions of assets. However, all of these
limitations and prohibitions are subject to a number of important
qualifications.
NOTE 5 STOCKHOLDER'S EQUITY
The Company has 100 shares of common stock, par value $.01 per share,
authorized, issued and outstanding, all of which are owned by the parent
company.
NOTE 6 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.
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,
8
<PAGE>
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-managed stores.
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.
A summary of segment information for the periods ended March 31, 1999 and
March 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Ames Nestaway Fischbein Corporate Consolidated
------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
March 31, 1999
Revenues $13,376 $10,987 $ 6,794 $ - $ 31,157
Income from operations 3,753 1,990 765 (766) 5,742
Total assets 72,027 66,551 31,408 23,586 193,572
Depreciation and amortization 880 692 249 204 2,025
Capital expenditures 541 104 50 - 695
Predecessor Company
- -------------------
Ames Nestaway Fischbein Corporate Consolidated
------- -------- --------- ---------- ------------
March 31, 1998
Revenues $11,248 $10,555 $ 6,342 $ - $ 28,145
Income from operations 3,223 2,408 906 (732) 5,805
Total assets 28,349 40,198 18,383 11,093 98,023
Depreciation and amortization 469 523 169 93 1,254
Capital expenditures 389 817 31 - 1,237
</TABLE>
9
<PAGE>
NOTE 7 SUBSEQUENT EVENT
In April 1999, a subsidiary of the Company completed the acquisition of The
Thames Packaging Equipment Company Limited ("Thames"). The Company borrowed
$3,000,000 of its Acquisition Facility to finance the acquisition. Thames, based
in London, England, is a manufacturer of industrial heat sealing equipment used
for high volume closure of plastic bags. Thames results will be reported within
the Fischbein business unit.
NOTE 8 SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are fully and
unconditionally guaranteed on a joint and several basis (collectively, the
"Subsidiary Guarantees") by Ames Taping Tool Systems, Inc., and TapeTech Tool
Co., Inc., each a wholly-owned subsidiary of the Company and each a "Guarantor."
These subsidiaries, together with the operating divisions of the Company,
represent all of the operations of the Company conducted in the United States.
The remaining subsidiaries of the Company are foreign subsidiaries.
The Company's payment obligations under the Bank Credit Agreement are fully
and unconditionally guaranteed on a joint and several basis by each Guarantor.
The obligations of each Guarantor under its Subsidiary Guarantee are
subordinated to all senior indebtedness of such Guarantor, including the
guarantee by such Guarantor of the Company's borrowings under the Bank Credit
Agreement.
The following consolidating condensed financial data illustrates the
condition of the combined Guarantors. Management believes separate complete
financial statements of the respective Guarantors would not provide additional
material information which would be useful in assessing the financial
composition of the Guarantors. No single Guarantor has any significant legal
restrictions on the ability of investors or creditors to obtain access to its
assets in event of default on the Subsidiary Guarantee other than its
subordination to senior indebtedness described above.
Investments in subsidiaries are accounted for by the parent on the equity
method for purposes of the supplemental consolidating presentation. Earnings of
subsidiaries are therefore reflected in the parent's investment accounts and
earnings. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
10
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF MARCH 31, 1999
(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 $ 4,224 $ 594 $ 575 $ - $ 5,393
Accounts receivable, net 6,724 5,959 2,753 (1,151) 14,285
Inventories, net 6,879 2,178 2,354 (571) 10,840
Prepaid income taxes and other current assets 1,881 140 107 - 2,128
Deferred income tax benefits 3,460 - - - 3,460
-------- ------- ------ -------- --------
Total Current Assets $ 23,168 $ 8,871 $5,789 $ (1,722) $ 36,106
-------- ------- ------ -------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ - $ - $ - $ 984
Buildings and improvements 4,469 56 54 - 4,579
Machinery and equipment 18,324 573 185 - 19,082
Equipment leased to others 10,351 - - - 10,351
-------- ------- ------ -------- --------
$ 34,128 $ 629 $ 239 $ - $ 34,996
Less: Accumulated depreciation 2,602 134 38 - 2,774
-------- ------- ------ --------
Net Plant and Equipment $ 31,526 $ 495 $ 201 $ - $ 32,222
-------- ------- ------ -------- --------
OTHER ASSETS:
Goodwill, net $ 92,090 $14,820 $ 12 $ - $106,922
Intangible assets, net 886 10 - - 896
Deferred charges, net 16,486 912 1 - 17,399
Investment in wholly-owned subsidiaries 18,770 - - (18,770) -
Other assets 27 - - - 27
-------- ------- ------ -------- --------
Total Other Assets $128,259 $15,742 $ 13 $(18,770) $125,244
-------- ------- ------ -------- --------
TOTAL ASSETS $182,953 $25,108 $6,003 $(20,492) $193,572
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,768 $ 36 $ - $ - $ 4,804
Accounts payable 3,583 559 1,691 (1,151) 4,682
Payable to parent 215 - - - 215
Accrued liabilities 7,782 748 545 - 9,075
Accrued income taxes 214 - - - 214
Advance account (8,736) 9,590 (854) - -
-------- ------- ------ -------- --------
Total Current Liabilities $ 7,826 $10,933 $1,382 $ (1,151) $ 18,990
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $129,906 $ 59 $ - $ - $129,965
Other non-current liabilities 8,632 - - - 8,632
Deferred income taxes 6,819 - - - 6,819
-------- ------- ------ -------- --------
Total Non-Current Liabilities $145,357 $ 59 $ - $ - $145,416
-------- ------- ------ -------- --------
Common stock held by ESOP $ 1,620 - - - $ 1,620
Less: Note receivable from ESOP (1,405) - - - (1,405)
STOCKHOLDER'S EQUITY:
Common stock and
additional paid-in capital $ 26,511 $ 5,098 $1,176 $ (6,274) $ 26,511
Retained earnings 3,045 9,018 3,478 (13,067) 2,474
Accumulated other comprehensive income (1) - (33) - (34)
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 29,555 $14,116 $4,621 $(19,341) $ 28,951
-------- ------- ------ -------- --------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $182,953 $25,108 $6,003 $(20,492) $193,572
======== ======= ====== ======== ========
</TABLE>
11
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(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 $16,431 $ 4,989 $2,758 $(1,390) $22,788
Net rentals 4,603 8,145 223 (4,602) 8,369
------- ------- ------ ------- -------
Net revenues $21,034 $13,134 $2,981 $(5,992) $31,157
Cost of sales $11,214 $ 2,909 $1,744 $(1,442) $14,425
Cost of rentals 506 6,279 137 (4,602) 2,320
Selling, general and administrative expenses 3,711 2,394 735 - 6,840
Depreciation and amortization 1,658 149 23 - 1,830
------- ------- ------ ------- -------
Income (loss) from operations $ 3,945 $ 1,403 $ 342 $ 52 $ 5,742
Interest expense $ 3,548 $ 2 $ 1 $ - $ 3,551
Intercompany interest expense (income) 43 (43) - - -
Other expense (income), net (967) 15 136 964 148
------- ------- ------ ------- -------
Income (loss) before income taxes $ 1,321 $ 1,429 $ 205 $ (912) $ 2,043
and extraordinary item
Provision for income taxes 381 572 98 - 1,051
------- ------- ------ ------- -------
Income (loss) before extraordinary item $ 940 $ 857 $ 107 $ (912) $ 992
======= ======= ====== ======= =======
</TABLE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (128) $1,182 $ 42 $ - $1,096
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (694) - (1) - (695)
Proceeds from sale of fixed assets 13 - - - 13
------ ------ ---- ------------ ------
Net Cash (Used In) Investing Activities $ (681) $ - $ (1) $ - $ (682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit $ - $ - $ - $ - $ -
Net payments of other long-term debt (914) 8 - $ - (906)
Net increase (decrease) in advance account 957 (903) (54) - -
Other equity transactions (2) - 20 - 18
------ ------ ---- ------------ ------
Net Cash (Used In) Financing Activities $ 41 $ (895) $(34) $ - $ (888)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH $ - $ - $(37) $ - $ (37)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (768) 287 (30) - (511)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,992 307 605 - 5,904
------ ------ ---- ------------ ------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $4,224 $ 594 $575 $ - $5,393
====== ====== ==== ============ ======
</TABLE>
12
<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 2,105 8,161 3,371 (12,155) 1,482
Accumulated other comprehensive income (1) - 210 - 209
-------- ------- ------ -------- --------
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>
13
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $16,110 $ 4,174 $2,723 $(1,911) $21,096
Net rentals 3,878 6,808 238 (3,875) 7,049
------- ------- ------ ------- -------
Net revenues $19,988 $10,982 $2,961 $(5,786) $28,145
Cost of sales $10,370 $ 2,439 $1,851 $(1,885) $12,775
Cost of rentals 517 5,423 145 (3,875) 2,210
Selling, general and administrative expenses 3,395 2,088 702 - 6,185
Depreciation and amortization 1,106 47 17 - 1,170
------- ------- ------ ------- -------
Income from operations $ 4,600 $ 985 $ 246 $ (26) $ 5,805
Interest expense $ 728 $ 2 $ 3 $ - $ 733
Intercompany interest expense (income) 20 (20) - - -
Other expense (income), net (746) 18 120 670 62
------- ------- ------ ------- -------
Income before income taxes $ 4,598 $ 985 $ 123 $ (696) $ 5,010
Provision for income taxes 1,646 382 56 - 2,084
------- ------- ------ ------- -------
Net income $ 2,952 $ 603 $ 67 $ (696) $ 2,926
======= ======= ====== ======= =======
</TABLE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 2,578 $ 109 $ 166 $ - $ 2,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (1,173) (49) (15) - (1,237)
Proceeds from sale of fixed assets - - - - -
------- ----- ----- ------------- -------
Net Cash Provided by (Used In) Investing Activities $(1,173) $ (49) $ (15) $ - $(1,237)
------- ----- ----- ------------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit Loan $ (700) $ - $ - $ - $ (700)
Payments of other long-term debt (1,360) (12) (324) - (1,696)
Net increase (decrease) in advance account 316 (306) (10) - -
Other equity transactions - - 27 - 27
------- ----- ----- ------------- -------
Net Cash Provided by (Used In) Financing Activities $(1,744) $(318) $(307) $ - $(2,369)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH - - (16) - (16)
------- ----- ----- ------------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (339) $(258) $(172) $ - $ (769)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD (35) 925 420 - 1,310
------- ----- ----- ------------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ (374) $ 667 $ 248 $ - $ 541
======= ===== ===== ============= =======
</TABLE>
14
<PAGE>
Item 2. 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. Finance Co. then merged into the Company.
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.
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.
15
<PAGE>
Results of Operations
The table below summarizes the results of operations of the Company for the
years indicated (in thousand $):
<TABLE>
<CAPTION>
Predecessor Company
-------------------
March 31, 1999 March 31, 1998
-------------- --------------
Net revenues
<S> <C> <C> <C> <C>
Ames net revenues $13,376 42.9% $11,248 40.0%
Nestaway net revenues 10,987 35.3 10,555 37.5
Fischbein net revenues 6,794 21.8 6,342 22.5
------- ----- ------- -----
Total net revenues $31,157 100.0% $28,145 100.0%
Cost of revenues (1) 16,745 53.7 14,985 53.2
------- ----- ------- -----
Gross profit (1) $14,412 46.3% $13,160 46.8%
Selling, general, administrative expenses (1) 6,840 22.0 6,185 22.0
Depreciation and amortization 1,830 5.9 1,170 4.2
------- ----- ------- -----
Income from operations $ 5,742 18.4% $ 5,805 20.6%
Interest expense 3,551 11.1 733 2.6
Other expense (income) 148 .5 62 .2
------- ----- ------- -----
Income before income taxes
and extraordinary items $ 2,043 6.8% $ 5,010 17.8%
Provision for income taxes 1,051 3.5 2,084 7.4
------- ----- ------- -----
Net income $ 992 3.3% $ 2,926 10.4%
======= ===== ======= =====
</TABLE>
(1) Excluding depreciation and amortization
16
<PAGE>
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998.
Net Revenues. Net revenues increased $3,012,000 or 10.7%, to $31,157,000 in
the three month period ended March 31, 1999 from $28,145,000 in the three month
period ended March 31, 1998. The increase in net revenues was a result of
increased rentals of automatic taping and finishing ("ATF") tools, and sales of
drywall related merchandise, formed wire products and material handling
equipment.
Ames' net revenues increased $2,128,000 or 18.9%, to $13,376,000 in the
three month period ended March 31, 1999 from $11,248,000 in the three month
period ended March 31, 1998. The increase was primarily the result of an
increase in both price and volume of rented ATF tools. In addition Ames'
revenues increased due to higher sales of drywall related merchandise at
Company-managed distribution outlets. Ames benefited from the strength of the
U.S. housing market.
Nestaway's net revenues increased $432,000 or 4.1%, to $10,987,000 in the
three month period ended March 31, 1999 from $10,555,000 in the three month
period ended March 31, 1998. Formed wire product revenues improved with added
sales of traditional product lines such as dish drainers and shower caddies.
Revenues from dishracks and dishrack components declined during the period
primarily due to a non-recurring favorable pricing adjustment of $350,000
recorded in the prior year.
Fischbein's net revenues increased $452,000 or 7.1%, to $6,794,000 in the
three month period ended March 31, 1999 from $6,342,000 in the three month
period ended March 31, 1998. The increase was primarily due to increased sales
of flexible conveyors and storage racks. Revenues from bag closing equipment
declined during the period due to reduced revenues in the United States
primarily attributable to reduced demand from agricultural customers. Though
Latin America and Asia continued to be impacted by adverse economic conditions,
revenues remained comparable to 1998 in these regions.
Gross Profit Excluding Depreciation and Amortization. Gross profit
excluding depreciation and amortization increased $1,252,000 or 9.5%, to
$14,412,000 in the three month period ended March 31, 1999 from $13,160,000 in
the three month period ended March 31, 1998. 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 declined
to 46.3% from 46.8% primarily as a result of the impact of a $350,000 non-
recurring price adjustment recorded at Nestaway in the first quarter of 1998.
Excluding this event, the comparable gross profit as a percentage of net
revenues in the prior year period would have been 46.1%.
Ames' gross profit improved in conjunction with revenue growth. Although
Nestaway's revenues grew over the prior year period, gross profits declined due
to the non-recurring favorable price adjustment of $350,000 recorded in the
three month period ended March 31, 1998. Fischbein's gross profits improved on
an increase in revenues, although gross profit as a percentage of net revenues
declined from the prior year period in part due to product mix.
Selling, General and Administrative Expenses Excluding Depreciation and
Amortization. Selling, general and administrative expenses ("SG&A") excluding
depreciation and amortization increased $655,000 or 10.6%, to $6,840,000 in 1999
from $6,185,000 in the three month period ended March 31, 1998. SG&A growth was
primarily attributable to increased selling expenses related to Ames' efforts to
take advantage of market opportunities related to strong housing starts and
continued emphasis on expanded marketing programs. The Company also incurred
additional consulting services during the period related to computer systems
conversions at one of the Company's business units and for tax assistance.
Depreciation and Amortization. Depreciation and amortization increased
$660,000 or 56.4%, to $1,830,000 from $1,170,000 in 1998. This was primarily
attributable to an increase in goodwill amortization of $486,000 as a result of
the Transaction.
Interest Expense. Interest expense increased $2,818,000 to $3,551,000 in
1999 from $733,000 in 1998. The increase was the result of the acquisition of
the Company and resultant increase in debt.
17
<PAGE>
Other Expense. Other expense was $148,000 in 1999 compared to other
expense of $62,000 in 1998. The increase was attributable to consulting expense
related to potential acquisitions.
Income Taxes and Net Income. The effective tax rate was 51.2% in 1999
compared to 41.6% in 1998. The increase was due to an increase in nondeductible
goodwill amortization. Net income decreased $1,934,000 or 66.1%, to $992,000
for the three month period ended March 31, 1999 from $2,926,000 for the three
month period ended March 31, 1998 primarily due to increased interest expense
and goodwill amortization as discussed in the previous paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operating activities of $1,096,000 in the
three month period ended March 31, 1999 compared to $2,853,000 in the three
month period ended March 31, 1998 and had cash on hand of $5,393,000 at March
31, 1999. The decrease in cash generated was primarily attributable to an
increase in working capital discussed in the following paragraph and a reduction
in net income primarily as a result of increased interest expense.
At March 31, 1999, the Company had working capital of $17,116,000 compared
to working capital of $14,835,000 at December 31, 1998. The increase in working
capital was primarily due to a reduction in accrued liabilities as a result of a
semi-annual interest payment on the Subordinated Notes and a receivable from an
insurance company. In 1980 the Company had entered into salary continuation
agreements with executives of the Company which provide for death benefits to
the executive's estate upon the executive's death. The Company purchased life
insurance policies on the former executives, naming the Company as the sole
beneficiary. A former executive covered under this program passed away in March
1999. Accordingly, the Company has recognized a receivable of approximately
$1,300,000. This amount is included within other current assets in the
Company's Consolidated Balance Sheets. The corresponding liability to the
executive's estate has also been recognized.
With the 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
quarter ended March 31, 1999, the Company spent $695,000 on capital projects.
The Company projects capital expenditures of approximately $6,700,000 in 1999,
although this amount is subject to change based on numerous factors.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Bank Credit Agreement. The Revolving Credit Facility
provides the Company with $15,000,000 of borrowings, subject to availability
under the borrowing base. The Acquisition Facility provides the Company with
$25,000,000 of borrowings, subject to customary conditions. At March 31, 1999,
there were no borrowings outstanding under the Revolving Credit and Acquisition
Facility. The Company believes that, based on current and anticipated financial
performance, cash flow from operations and borrowings under the Revolving Credit
Facility will be adequate to meet anticipated requirements for capital
expenditures, working capital and scheduled interest payments. However, the
Company's capital requirements may change, particularly if the Company should
complete any material acquisitions. 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 earning 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.
18
<PAGE>
Other Matters
With the coming of the year 2000, there has been a great deal of publicity
concerning computer information reporting and equipment failure due to
hardware's and software's use of two-digit dates ("Year 2000"). Management is
responsible for identifying the Company's computer systems affected by the Year
2000 issue and developing and executing a compliance plan. Each business unit
has prepared and is in the process of implementing plans to replace current
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 $1,200,000 and estimates an additional $200,000 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,
invoicing, 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.
Private Securities Litigation Reform Act Disclosure
This report contains certain estimates and forward looking statements.
Actual results could differ materially from those projected in the estimates and
forward looking statement as a result of any number of factors. Therefore,
undue reliance should not be placed upon such estimates and statements. No
assurance can be given that any of such estimates or statements will be realized
and actual results may differ materially from those contemplated by such forward
looking statements. Factors that may cause such differences include: (i)
increased competition; (ii) increased costs; (iii) loss or retirement of key
members of management and (iv) changes in general economic conditions in the
markets in which the Company may from time to time compete. Many of such
factors will be beyond the control of the Company and its management.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various federal, state, local and foreign laws
and regulations governing environmental and employee health and safety matters,
including the handling, the use, discharge and disposal of hazardous materials
and pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the
Company. NYSDEC determined that the Company, among others, may be a responsible
party through its past ownership of the property. The site is currently listed
on the New York State Registry of Inactive Hazardous Waste Disposal Sites.
Environmental consultants engaged by the Company have established a range of
estimated remediation costs of approximately $1,000,000 to $3,000,000, plus or
minus 30% of those costs. The Company established an accrual of $3,900,000 for
the remediation and associated costs.
In 1997, the Company entered into an agreement with an adjoining landowner,
who is obligated by NYSDEC to address environmental concerns at his property.
By this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance that
NYSDEC will in fact offer its approval. The Company paid the $520,000 payable
under the agreement and has an exposure under the agreement of up to an
additional $120,000 if contamination is more widespread than estimated by the
Company's environmental consultants. In the event NYSDEC does not approve the
remedy envisioned in the agreement with the adjoining landowner, the Company may
terminate the agreement and demand the return of its payment with interest. In
that case, the adjoining landowner would no longer be obligated to undertake the
remediation of the property formerly owned by the Company.
Of the consideration paid pursuant to the Merger Agreement, $5,000,000 was
set aside in a special escrow account to cover environmental costs which may be
incurred by the Company in connection with cleanup of the site and any damages
or other required environmental expenditures relating to the site. The balance
in the account, after payment of such costs, will be released to the former
stockholders upon the first to occur of the approval by NYSDEC of the proposed
remediation action or the confirmation by NYSDEC that remediation at the site
has been completed in accordance with its then applicable decision in the matter
(the "Early Release Date"). If, however, the Early Release Date occurs before
the additional $120,000 is paid under the above-described agreement, the special
escrow account will continue as to that $120,000 until it is paid or it has
become clear that no claim will be made for such funds. In addition, if certain
additional specified cleanup activities are not completed by the Early Release
Date, an additional $80,000 will be withheld in the special escrow account until
such cleanup is completed. If all of the funds in the special escrow account
have not been released by the third anniversary of the Transaction Date, the
funds remaining in the special escrow account will be disbursed to the Company
to cover the remaining estimated costs, with the balance to be distributed to
the former stockholders of the Company, in accordance with an agreement to be
reached by the Company and the Stockholder Representative identified in the
Merger Agreement, or upon failure of such parties to agree, through an
arbitration procedure.
The Company may also make claims against the warranty fund of the escrow
fund for breach of certain representations and warranties in the Merger
Agreement regarding other environmental matters for a period of 24 months after
Transaction Date, subject to a specified threshold and deductible.
20
<PAGE>
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.
The Buffalo, New York property formerly owned by the Company was at one
time used to mill uranium rods for the Atomic Energy Commission. The U.S.
Department of Energy has since identified residual radioactivity in a building
at the site. In 1996, the government estimated the costs of addressing the
residual radioactivity at $965,000. Given the available data, the Company and
its environmental consultants believe that a more likely total cost is less than
$100,000. To date, no cleanup costs have been assessed against the Company.
In addition, the Company has retained or assumed certain environmental
liabilities and risks of future liabilities associated with businesses
previously operated or acquired by it, including Bliss and Laughlin Steel
Company. The Company does not believe that these retained or assumed liabilities
and risks would be expected to have a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations, liabilities identified or incurred in the future, or other
circumstances, might (individually or in the aggregate) have such an effect.
The Company is a defendant in a number of lawsuits incidental to its
business. Including the environmental matters discussed above and taking into
account the proceeds held in escrow pursuant to the Merger Agreement, the
Company believes that none of these proceedings, individually, or in the
aggregate, will have a material adverse effect on the Company's financial
condition or operating results.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended March
31, 1999.
21
<PAGE>
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. Employees Stock Ownership Plan and 401(k) Plan to be
renamed AXIA Incorporated Employee Stock Ownership and 401(k) Plan
10.3* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan Trust
Agreement to be renamed AXIA Incorporated Employee Stock Ownership and
401(k) Plan Trust Agreement
10.8* Credit Agreement dated as of July 22, 1998 among Axia Finance Corp., AXIA
Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc. and
Paribas
10.9* Security Agreement dated as of July 22, 1998 by and between Axia Finance
Corp., AXIA Incorporated, Paribas and the Lenders named therein
10.10* Pledge Agreement dated as of July 22, 1998 by and between AXIA
Incorporated, Paribas and the Lenders named therein
10.11* Letter Agreement dated June 23, 1998 by and among The Sterling Group,
Inc., Axia Group, Inc., Axia Acquisition Corp. and each of their
subsidiaries
10.12* Form of Indemnity Agreement Between AXIA Incorporated and each of its
officers and directors
10.13* Form of Tax Sharing Agreement among Axia Group, Inc., Axia Holdings
Corp., AXIA Incorporated, Ames Taping Tool Systems, Inc. and TapeTech
Tool Co., Inc.
* Filed as an exhibit to the Company's S-4 under the exhibit number identical
to that described herein and incorporated herein by this reference.
22
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXIA INCORPORATED
Date: May 13, 1999 /s/ Lyle J. Feye
----------------------------------
Lyle J. Feye
Vice President Finance, Treasurer,
Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,393
<SECURITIES> 0
<RECEIVABLES> 14,285
<ALLOWANCES> 0
<INVENTORY> 10,840
<CURRENT-ASSETS> 36,106
<PP&E> 34,996
<DEPRECIATION> 2,774
<TOTAL-ASSETS> 193,572
<CURRENT-LIABILITIES> 18,990
<BONDS> 100,000
0
0
<COMMON> 26,511
<OTHER-SE> 2,440
<TOTAL-LIABILITY-AND-EQUITY> 193,572
<SALES> 22,788
<TOTAL-REVENUES> 31,157
<CGS> 14,425
<TOTAL-COSTS> 25,415
<OTHER-EXPENSES> 212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,551
<INCOME-PRETAX> 2,043
<INCOME-TAX> 1,051
<INCOME-CONTINUING> 992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 992
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
