<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 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.)
801 Travis Street, Suite 1400, Houston, Texas 77002 (713) 425-2150
---------------------------------------------------------------------
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
----------------------
Title of each class of Registered Securities
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PART 1
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 4,184 $ 5,904
Accounts receivable, net 17,785 14,133
Inventories, net 11,179 11,092
Prepaid income taxes and other current assets 1,395 1,135
Deferred income tax benefits 3,928 3,439
-------- --------
Total Current Assets $ 38,471 $ 35,703
-------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ 984
Buildings and improvements 5,279 4,600
Machinery and equipment 19,614 18,750
Equipment leased to others 11,033 10,113
-------- --------
$ 36,910 $ 34,447
Less: Accumulated depreciation 4,862 1,758
-------- --------
Net Plant and Equipment $ 32,048 $ 32,689
-------- --------
OTHER ASSETS:
Goodwill, net $109,032 $107,633
Intangible assets, net 987 807
Deferred charges, net 17,144 18,097
Other assets 20 28
-------- --------
Total Other Assets $127,183 $126,565
-------- --------
TOTAL ASSETS $197,702 $194,957
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,737 $ 4,655
Accounts payable 4,939 4,334
Payable to parent 312 --
Accrued liabilities 10,164 11,868
Accrued income taxes 99 11
-------- --------
Total Current Liabilities $ 20,251 $ 20,868
-------- --------
NON-CURRENT LIABILITIES
Long-term debt, less current maturities $130,445 $131,020
Other non-current liabilities 8,683 7,970
Deferred income taxes 6,272 6,750
-------- --------
Total Non-Current Liabilities $145,400 $145,740
-------- --------
Commitments and contingencies -- --
Common stock held by ESOP $ 1,620 $ 1,620
Less: Note receivable from ESOP (1,239) (1,473)
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value; 100 shares -- --
authorized, issued and outstanding)
Additional paid-in capital $ 26,548 $ 26,511
Retained earnings 5,181 1,482
Accumulated other comprehensive income (59) 209
-------- --------
Total Stockholder's Equity $ 31,670 $ 28,202
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $197,702 $194,957
======== ========
</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 OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND THE PERIODS FROM
JULY 23, 1998 TO SEPTEMBER 30, 1998 AND JULY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor
Company
--------------
July 1, 1999 July 23, 1998 July 1, 1998
to to to
September 30, 1999 September 30, 1998 July 22, 1998
------------------- ------------------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales $24,139 $17,773 $ 4,532
Net rentals 9,206 5,996 1,835
------- ------- --------
Net revenues $33,345 $23,769 $ 6,367
Cost of sales 14,900 11,366 2,954
Cost of rentals 2,804 1,842 490
Selling, general and administrative
expenses 8,087 4,915 1,942
Depreciation and amortization 1,861 1,276 288
Transaction expenses -- -- 11,280
------- ------- --------
Income (loss) from operations $ 5,693 $ 4,370 $(10,587)
Interest expense 3,718 2,853 160
Interest income (37) (24) (2)
Other expense, net 1 -- 43
------- ------- --------
Income (loss) before income taxes and
extraordinary item $ 2,011 $ 1,541 $(10,788)
Provision for income taxes 906 748 (4,073)
------- ------- --------
Income (loss) before extraordinary item $ 1,105 $ 793 $ (6,715)
Extraordinary item:
Loss on early extinguishments of
debt, net of income tax of $228 -- -- 382
------- ------- --------
Net income (loss) $ 1,105 $ 793 $ (7,097)
======= ======= ========
</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 OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE PERIODS FROM
JULY 23, 1998 TO SEPTEMBER 30, 1998 AND JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor
Company
----------------
January 1, 1999 July 23, 1998 January 1, 1998
to to to
September 30, 1999 September 30, 1998 July 22, 1998
------------------- ------------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales $71,065 $17,773 $46,257
Net rentals 26,492 5,996 16,310
------- ------- -------
Net revenues $97,557 $23,769 $62,567
Cost of sales 44,209 11,366 28,228
Cost of rentals 7,728 1,842 4,979
Selling, general and administrative expenses 22,171 4,915 14,507
Depreciation and amortization 5,536 1,276 2,659
Transaction expenses -- -- 11,280
------- ------- -------
Income from operations $17,913 $ 4,370 $ 914
Interest expense 10,843 2,853 1,553
Interest income (184) (24) (9)
Other expense, net 114 -- 214
------- ------- -------
Income (loss) before income taxes and
extraordinary item $ 7,140 $ 1,541 $ (844)
Provision for income taxes 3,441 748 (119)
------- ------- -------
Income (loss) before extraordinary item $ 3,699 $ 793 $ (725)
Extraordinary item:
Loss on early extinguishments of debt,
net of income tax of $404 -- -- 682
------- ------- -------
Net income (loss) $ 3,699 $ 793 $(1,407)
======= ======= =======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
4
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE PERIODS ENDED SEPTEMBER 30, 1999, SEPTEMBER 30, 1998 AND JULY 22, 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 loss -- -- (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 Co. Equity -- $(16,723) $(22,411) $ 182 $ 356 $ 538
Contribution from Holdings -- 26,500 -- -- -- --
Net income -- -- 793 -- -- -- $ 793
Cumulative translation adjustment -- -- -- -- 204 204 204
Comprehensive Income -- -- -- -- -- -- -------
--------- -------- -------- ----- ----- ----- $ 997
BALANCE, SEPTEMBER 30, 1998 -- $ 26,500 $ 793 $ -- $ 204 $ 204
========= ======== ======== ===== ===== =====
(Unaudited)
BALANCE, DECEMBER 31, 1998 -- $ 26,511 $ 1,482 $ (1) $ 210 $ 209
Net income -- -- 3,699 -- -- -- $ 3,699
Cumulative translation adjustment -- -- -- -- (268) (268) (268)
-------
Comprehensive income -- -- -- -- -- -- $ 3,431
Option Compensation -- 37 -- -- -- --
--------- -------- -------- ----- ----- -----
BALANCE, SEPTEMBER 30, 1999 -- $ 26,548 $ 5,181 $ (1) $ (58) $ (59)
========= ======== ======== ===== ===== =====
(Unaudited)
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
5
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE PERIODS FROM
JULY 23, 1998 TO SEPTEMBER 30, 1998 AND JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor
Company
-------------------
January 1, 1999 July 23, 1998 January 1, 1998
to to to
September 30, 1999 September 30, 1998 July 22, 1998
------------------- ------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 3,699 $ 793 $(1,407)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,257 1,453 2,824
Extraordinary item-write off of capitalized financing costs -- -- 843
Deferred income tax provision (benefit) (967) (207) (506)
Loss (gain) on disposal of fixed assets 214 2 52
Provision for losses on accounts receivable 1,792 426 999
Provision for obsolescence of inventories 72 (10) (80)
Credit to pension expense (197) -- (191)
Changes in assets and liabilities:
Accounts receivable (5,123) (1,823) (2,587)
Inventories 377 (262) (1,239)
Accounts payable 399 96 1,250
Payable to parent 312 -- --
Accrued liabilities (1,649) (8,614) 11,199
Other current assets (151) 32 (90)
Income taxes payable (15) 716 (2,458)
Other non-current assets 284 (20) (273)
Other non-current liabilities 643 (20) 226
Payments on note receivable from ESOP 235 -- --
------- --------- -------
Net Cash Provided by (Used in) Operating Activities $ 6,182 $ (7,438) $ 8,562
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures $(2,206) $ (749) $(3,468)
Cash used for acquisitions (5,342) -- --
Proceeds from sale of fixed assets 31 -- 4
Acquisition of Predecessor Company -- (119,315) --
------- --------- -------
Net Cash Provided by (Used in) Investing Activities $(7,517) $(120,064) $(3,464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit Loan $ -- $ (2,750) $ 4,400
Borrowing on Acquisition Facility 3,000 -- --
Payments of other long-term debt (3,493) (27,890) (8,319)
Proceeds from other long-term debt -- 139,250 --
Payments of deferred financing costs -- (7,549) --
Contributions from parent -- 26,500 --
Proceeds from ESOP -- 68 --
Other equity transactions 37 (17) (58)
------- --------- -------
Net Cash Provided by (Used in) Financing Activities $ (456) $ 127,612 $(3,977)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 71 40 (14)
------- --------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,720) $ 150 $ 1,107
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,904 2,417 1,310
------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,184 $ 2,567 $ 2,417
======= ========= =======
</TABLE>
The accompanying Notes to the Unaudited Interim Consolidated Financial
Statements are an integral part of these statements.
6
<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 an 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 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 Company's Form 10-K. 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 September 30, 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
and the excess purchase price paid over the estimated fair value of the net
assets acquired of two acquisitions made during the quarter ended June 30, 1999.
The Transaction was accounted for as a purchase and resulting goodwill of
$108,837,000 was recorded on the Transaction Date. Subsequent acquisitions were
also accounted for as purchases resulted in additional goodwill of $3,444,000
(see Note 7). Goodwill is stated net of amortization and is being amortized on
a straight-line basis over forty years.
7
<PAGE>
The following table illustrates the unaudited results of operations of the
Company for the three month and nine month periods ended September 30, 1999 and
the unaudited pro forma results of operations of the Company for the three month
and nine month periods ended September 30, 1998, as if the Transaction had
occurred on January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
Three months Ended: September 30, 1999 September 30, 1998
Actual Pro Forma
-------------------------------- -----------------------------
<S> <C> <C>
Net revenues $33,345 $30,136
Income from operations 5,693 4,856
Income before income taxes` 2,011 1,254
Net income 1,105 424
Nine Months Ended: September 30, 1999 September 30, 1998
Actual Pro Forma
-------------------------------- -----------------------------
Net revenues $97,557 $86,336
Income from operations 17,913 15,245
Income before income taxes 7,140 4,319
Net income 3,699 1,918
</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>
September 30, 1999 December 31, 1998
----------------------------- --------------------------
<S> <C> <C>
Raw materials $ 4,820 $ 4,752
Work in process 999 1,176
Finished goods 5,360 5,164
------- -------
Total inventories $11,179 $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>
September 30, 1999 December 31, 1998
------------------------------ ---------------------------
<S> <C> <C>
10.75% Senior Subordinated Notes $100,000 $100,000
Term Loan (7.23% at September 30, 1999) 30,962 34,167
ESOP Term Loan (7.26% at September 30, 1999) 1,014 1,313
Acquisition Facility (7.22% at September 30, 1999) 3,000 --
Other 206 195
-------- --------
Total Debt $135,182 $135,675
Less Current Maturities (4,737) (4,655)
-------- --------
Total Long-Term Debt $130,445 $131,020
======== ========
</TABLE>
8
<PAGE>
Current maturities of long-term debt as of September 30, 1999 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Scheduled Payment
Date AMOUNT
------------------------- ------------------------------
<S> <C> <C>
Term Loan and ESOP Loan December 31, 1999 $1,075
Term Loan and ESOP Loan March 31, 2000 1,075
Term Loan and ESOP Loan June 30, 2000 1,075
Term Loan and ESOP Loan September 30, 2000 1,444
Other Various 68
------
Total Current Maturities $4,737
======
</TABLE>
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, industrial bag closing equipment and
systems, and conveyor handling systems.
Ames ("Ames") is a 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-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, 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 manufactures extendable, flexible,
gravity and motorized conveyors and portable, nestable and stackable warehouse
storage racks.
9
<PAGE>
A summary of segment information for the three month period ended September
30, 1999 and the periods from July 23, 1998 to September 30, 1998 and July 1,
1998 to July 22, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
AMES NESTAWAY FISCHBEIN CORPORATE CONSOLIDATED
------- -------- --------- ---------- -------------
Three Month Period
September 30, 1999
<S> <C> <C> <C> <C> <C>
Revenues $14,686 $10,992 $7,667 $ -- $ 33,345
Income from operations 3,648 2,070 952 (977) 5,693
Depreciation and amortization 963 659 237 332 2,191
Capital expenditures 391 89 17 79 576
Period: July 23, 1998 - September 30, 1998
Revenues $ 9,427 $ 8,565 $5,777 $ -- $ 23,769
Income from operations 2,331 1,553 982 (496) 4,370
Depreciation and amortization 565 515 190 183 1,453
Capital expenditures 496 169 84 -- 749
PREDECESSOR COMPANY
Period: July 1, 1998 - July 22, 1998
Revenues $ 2,910 $ 1,883 $1,574 $ -- $ 6,367
Income (loss) from operations 673 348 14 (11,622) (10,587)
Depreciation and amortization 120 124 41 16 301
Capital expenditures 266 179 12 -- 457
</TABLE>
A summary of segment information for the nine month period ended September 30,
1999 and the periods from July 23, 1998 to September 30, 1998 and January 1,
1998 to September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
AMES NESTAWAY FISCHBEIN CORPORATE CONSOLIDATED
-------- -------- --------- ---------- ------------
Nine Month Period
September 30, 1999
<S> <C> <C> <C> <C> <C>
Revenues $42,332 $32,701 $22,524 $ -- $ 97,557
Income from operations 11,597 6,113 2,892 (2,689) 17,913
Total assets 80,675 59,450 36,386 21,191 197,702
Depreciation and amortization 2,797 1,961 762 737 6,257
Capital expenditures 1,627 320 175 84 2,206
Period: July 23, 1998 - September 30, 1998
Revenues $ 9,427 $ 8,565 $ 5,777 $ -- $ 23,769
Income from operations 2,331 1,553 982 (496) 4,370
Total assets 74,769 58,635 33,946 27,844 195,194
Depreciation and amortization 565 515 190 183 1,453
Capital expenditures 496 169 84 -- 749
PREDECESSOR COMPANY
Period: January 1, 1998 - July 22, 1998
Revenues $25,864 $21,945 $14,758 $ -- $ 62,567
Income from operations 7,152 4,876 1,991 (13,105) 914
Total assets 30,843 40,279 19,042 11,772 101,936
Depreciation and amortization 1,083 1,181 374 186 2,824
Capital expenditures 1,735 1,644 88 1 3,468
</TABLE>
10
<PAGE>
NOTE 7 ACQUISITIONS
In April 1999, a foreign subsidiary of the Company completed the acquisition
of The Thames Packaging Equipment Company, Limited ("Thames") for $2,820,000.
The Company utilized 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 are
reported within the Fischbein business unit.
In June 1999, the Company acquired certain assets of Concorde Tool
Corporation, a Canadian manufacturer and distributor of automatic taping and
finishing tools, for approximately $2,522,000. The acquisition was financed
with cash on hand.
These acquisitions were accounted for using the purchase method of accounting.
Accordingly, the cost of each acquisition has been allocated to assets acquired
and liabilities assumed based on their estimated fair market values at the date
of the acquisition. The operating results of these acquisitions are included in
the consolidated statements of operations from their respective acquisition
date. Pro forma results of these acquisitions have not been presented since the
pro forma revenue and net income would not be materially different from the
Company's actual results.
Based on preliminary estimates of the fair value of the net assets acquired,
the Company preliminarily recorded goodwill from the acquisitions of $3,444,000.
Although management has used its best judgment and available information in
estimating the fair values of the net assets acquired, various analyses and
operational decisions may result in changes in the current estimates and
corresponding changes of the goodwill as a result of the acquisitions.
NOTE 8 SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Subordinated Notes are
fully and unconditionally guaranteed on a joint and several basis (collectively,
the "Subsidiary Guarantees") by Ames Taping Tool Systems, Inc., and TapeTech
Tool Co., Inc., each a wholly-owned subsidiary of the Company and each a
"Guarantor." These subsidiaries, together with the operating divisions of the
Company, represent all of the operations of the Company conducted in the United
States. The remaining subsidiaries of the Company are foreign subsidiaries.
The Company's payment obligations under the Bank Credit Agreement are fully
and unconditionally guaranteed on a joint and several basis by each Guarantor.
The obligations of each Guarantor under its Subsidiary Guarantee are
subordinated to all senior indebtedness of such Guarantor, including the
guarantee by such Guarantor of the Company's borrowings under the Bank Credit
Agreement.
The following consolidating condensed financial data illustrates the condition
of the combined Guarantors. Management believes separate complete financial
statements of the respective Guarantors would not provide additional material
information which would be useful in assessing the financial composition of the
Guarantors. No single Guarantor has any significant legal restrictions on the
ability of investors or creditors to obtain access to its assets in event of
default on the Subsidiary Guarantee other than its subordination to senior
indebtedness described above.
Investments in subsidiaries are accounted for by the parent using the equity
method for purposes of the supplemental consolidating presentation. Earnings of
subsidiaries are therefore reflected in the parent's investment accounts and
earnings. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
11
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF SEPTEMBER 30, 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>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,372 $ 1,130 $ 682 $ -- $ 4,184
Accounts receivable, net 8,090 6,876 4,025 (1,206) 17,785
Inventories, net 6,631 2,577 2,522 (551) 11,179
Prepaid income taxes and other current assets 1,117 183 95 -- 1,395
Deferred income tax benefits 3,928 -- -- -- 3,928
-------- ------- ------ -------- --------
Total Current Assets $ 22,138 $10,766 $7,324 $ (1,757) $ 38,471
-------- ------- ------ -------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ -- $ -- $ -- $ 984
Buildings and improvements 4,223 84 972 -- 5,279
Machinery and equipment 18,491 597 526 -- 19,614
Equipment leased to others 11,024 -- 9 -- 11,033
-------- ------- ------ -------- --------
$ 34,722 $ 681 $1,507 -- $ 36,910
Less: Accumulated depreciation 4,034 230 598 -- 4,862
-------- ------- ------ -------- --------
Net Plant and Equipment $ 30,688 $ 451 $ 909 -- $ 32,048
-------- ------- ------ -------- --------
OTHER ASSETS:
Goodwill, net $ 91,038 $16,760 $1,234 $ -- $109,032
Intangible assets, net 979 8 -- -- 987
Deferred charges, net 16,173 970 1 -- 17,144
Investment in whollyowned subsidiaries 21,268 -- -- (21,268) --
Other assets 20 -- -- -- 20
-------- ------- ------ -------- --------
Total Other Assets $129,478 $17,738 $1,235 $(21,268) $127,183
-------- ------- ------ -------- --------
TOTAL ASSETS $182,304 $28,955 $9,468 $(23,025) $197,702
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,693 $ 44 $ -- $ -- $ 4,737
Accounts payable 3,580 924 1,641 (1,206) 4,939
Payable to parent 312 -- -- -- 312
Accrued liabilities 8,360 850 954 -- 10,164
Accrued income taxes -- -- 99 -- 99
Advance account (12,636) 11,449 1,187 -- --
-------- ------- ------ -------- --------
Total Current liabilities $ 4,309 $13,267 $3,881 $ (1,206) $ 20,251
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $130,378 $ 67 -- -- $130,445
Other non-current liabilities 8,683 -- -- -- 8,683
Deferred income taxes 6,272 -- -- -- 6,272
-------- ------- ------ -------- --------
Total Non-Current Liabilities $145,333 $ 67 -- -- $145,400
-------- ------- ------ -------- --------
Common stock held by ESOP 1,620 -- -- -- 1,620
Less: Note receivable from ESOP (1,239) -- -- -- (1,239)
STOCKHOLDER'S EQUITY:
Common stock and additional paid-in capital 26,548 5,098 1,924 (7,022) 26,548
Retained earnings 5,732 10,523 3,723 (14,797) 5,181
Accumulated other comprehensive income 1 -- (60) -- (59)
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 32,281 $15,621 $5,587 $(21,819) $ 31,670
-------- ------- ------ -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $182,304 $28,955 $9,468 $(23,025) $197,702
======== ======= ====== ======== ========
</TABLE>
12
<PAGE>
AXIA INCORPORATED
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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>
Net sales $17,071 $ 5,511 $3,406 $(1,849) $24,139
Net rentals 5,064 8,970 235 (5,063) 9,206
------- ------- ------ ------- -------
Net revenues $22,135 $14,481 $3,641 $(6,912) $33,345
Cost of sales 11,434 3,083 2,232 (1,849) 14,900
Cost of rentals 567 7,158 142 (5,063) 2,804
Selling, general and administrative expenses 4,270 2,891 926 -- 8,087
Depreciation and amortization 1,756 86 19 -- 1,861
------- ------- ------ ------- -------
Income from operations $ 4,108 $ 1,263 $ 322 $ -- $ 5,693
Interest expense 3,712 3 3 -- 3,718
Intercompany interest expense (income) (127) 127 -- -- --
Other expense (income), net (937) 30 51 820 (36)
------- ------- ------ ------- -------
Income before income taxes
and extraordinary item $ 1,460 $ 1,103 $ 268 $ (820) $ 2,011
Provision for income taxes 355 450 101 -- 906
------- ------- ------ ------- -------
Income before extraordinary item $ 1,105 $ 653 $ 167 $ (820) $ 1,105
======= ======= ====== ======= =======
</TABLE>
13
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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>
Net sales $50,259 $15,910 $ 9,791 $ (4,895) $71,065
Net rentals 14,572 25,805 684 (14,569) 26,492
------- ------- ------- -------- -------
Net revenues $64,831 $41,715 $10,475 $(19,464) $97,557
Cost of sales 33,789 9,124 6,263 $ (4,967) 44,209
Cost of rentals 1,661 20,220 416 (14,569) 7,728
Selling, general and administrative expenses 11,863 7,796 2,512 -- 22,171
Depreciation and amortization 5,005 462 69 -- 5,536
------- ------- ------- -------- -------
Income from operations $12,513 $ 4,113 $ 1,215 $ 72 $17,913
Interest expense 10,831 8 4 -- 10,843
Intercompany interest expense (income) (104) 104 -- -- --
Other expense (income), net (3,343) 63 289 2,921 (70)
------- ------- ------- -------- -------
Income before income taxes
and extraordinary item $ 5,129 $ 3,938 $ 922 $ (2,849) $ 7,140
Provision for income taxes 1,502 1,576 363 -- 3,441
------- ------- ------- -------- -------
Income before extraordinary item $ 3,627 $ 2,362 $ 559 $ (2,849) $ 3,699
======= ======= ======= ======== =======
</TABLE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 $ 6,022 $ (157) $ 317 $ -- $ 6,182
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used for capital expenditures (2,188) -- (18) -- (2,206)
Cash used for acquisitions (2,522) -- (2,820) -- (5,342)
Proceeds from sale of fixed assets 31 -- -- -- 31
------- ------ ------- ------- -------
Net Cash Provided by (Used In) Investing Activities $(4,679) -- $(2,838) -- $(7,517)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit $ -- $ -- $ -- $ -- $ --
Borrowing on acquisition facility 3,000 -- -- -- 3,000
Payments of other long-term debt (3,517) 24 -- -- (3,493)
Intercompany dividends 207 -- (207) -- --
Intercompany loan (2,000) -- 2,000 -- --
Net increase (decrease) in advance account (942) 956 (14) -- --
Equity contribution to subsidiary (748) -- 748 -- --
Other Equity transactions 37 -- -- -- 37
------- ------ ------- ------- -------
Net Cash Provided by (Used In) Financing Activities $(3,963) $ 980 $ 2,527 -- $ (456)
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- 71 -- 71
------- ------ ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $(2,620) $ 823 $ 77 -- $(1,720)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,992 307 605 -- 5,904
------- ------ ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,372 $1,130 $ 682 -- $ 4,184
======= ====== ======= ======= =======
</TABLE>
14
<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>
15
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FOR THE PERIOD FROM JULY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,978 $ 1,162 $ 884 $ (492) $ 4,532
Net rentals 1,010 1,779 54 (1,008) 1,835
-------- ------- ----- ------- --------
Net revenues $ 3,988 $ 2,941 $ 938 $(1,500) $ 6,367
Cost of sales $ 1,966 $ 765 $ 586 $ (363) $ 2,954
Cost of rentals 114 1,351 33 (1,008) 490
Selling, general and administrative expenses 1,190 559 193 -- 1,942
Depreciation and amortization 277 5 6 -- 288
Transaction expenses 11,280 -- -- -- 11,280
-------- ------- ----- ------- --------
Income (loss) from operations $(10,839) $ 261 $ 120 $ (129) $(10,587)
Interest expense $ 163 $ -- $ (3) $ -- $ 160
Intercompany interest expense (income) 10 (10) -- -- --
Other expense (income), net (214) 2 53 200 41
-------- ------- ----- ------- --------
Income (loss) before income taxes
and extraordinary item $(10,798) $ 269 $ 70 $ (329) $(10,788)
Provision for income taxes (4,212) 102 37 -- (4,073)
-------- ------- ----- ------- --------
Income (loss) before extraordinary item $ (6,586) $ 167 $ 33 $ (329) $ (6,715)
======== ======= ===== ======= ========
</TABLE>
16
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $34,554 $ 9,595 $ 6,445 $ (4,337) $46,257
Net rentals 8,973 15,792 512 (8,967) 16,310
------- ------- ------ -------- -------
Net revenues $43,527 $25,387 $ 6,957 $(13,304) $62,567
Cost of sales $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 11,280 -- -- -- 11,280
------- ------- ------- -------- -------
Income (loss) from operations $(1,787) $ 2,193 $ 647 $ (139) $ 914
Interest expense $ 1,549 $ 4 $ -- $ -- $ 1,553
Intercompany interest expense (income) 58 (58) -- -- --
Other expense (income), net (1,635) 28 225 1,587 205
------- ------- ------- -------- -------
Income (loss) before income taxes
and extraordinary item $(1,759) $ 2,219 $ 422 $ (1,726) $ (844)
Provision for income taxes (1,173) 854 200 -- (119)
------- ------- ------- -------- -------
Income (loss) before extraordinary item $ (586) $ 1,365 $ 222 $ (1,726) $ (725)
======= ======= ======= ======== =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------------------------
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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 Provided by (Used In) Investing Activities $(3,385) $ (49) $ (30) $ -- $(3,464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ 4,400 $ -- $ -- $ -- $ 4,400
Payments of other long-term debt (7,987) (8) (324) -- (8,319)
Net increase (decrease) in advance account (271) 288 (17) -- --
Intercompany Dividends 669 -- (669) -- --
Other equity transactions (6) -- (52) -- (58)
------- ------ ------- ------ -------
Net Cash Provided by (Used In) Financing Activities $(3,195) $ 280 $(1,062) $ -- $(3,977)
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ -- $ -- $ (14) $ -- $ (14)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 893 224 (10) -- 1,107
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD (35) 925 420 -- 1,310
------- ------ ------- ------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 858 $1,149 $ 410 $ -- $ 2,417
======= ====== ======= ====== =======
</TABLE>
17
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FOR THE PERIOD FROM JULY 23, 1998 TO SEPTEMBER 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $13,985 $ 3,319 $ 2,039 $(1,570) $17,773
Net rentals 3,299 5,824 170 (3,297) 5,996
------- ------ ------ ------- -------
Net revenues $17,284 $ 9,143 $ 2,209 $(4,867) $23,769
Cost of sales $ 9,683 $ 1,970 $ 1,277 $(1,564) $11,366
Cost of rentals 368 4,667 104 (3,297) 1,842
Selling, general and administrative expenses 2,606 1,804 505 -- 4,915
Depreciation and amortization 1,229 36 11 -- 1,276
------- ------- ------- ------- -------
Income (loss) from operations $ 3,398 $ 666 $ 312 $ (6) $ 4,370
Interest expense $ 2,852 $ 1 $ -- $ -- $ 2,853
Intercompany interest expense (income) (26) 26 -- -- --
Other expense (income), net (588) 16 25 523 (24)
------- ------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item $ 1,160 $ 623 $ 287 $ (529) $ 1,541
Provision for income taxes 361 257 130 -- 748
------- ------- ------- ------- -------
Income (loss) before extraordinary item $ 799 $ 366 $ 157 $ (529) $ 793
======= ======= ======= ======= =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE PERIOD FROM JULY 23, 1998 TO SEPTEMBER 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent
and its Guarantor Non-guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
---------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (7,834) $ 380 $ 16 $ -- $ (7,438)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used for capital expenditures (749) -- -- -- (749)
Acquisition of predecessor company (119,315) -- -- -- (119,315)
--------- ------- ---- ------ ---------
Net Cash (Used In) Investing Activities $(120,064) $ -- $ -- $ -- $(120,064)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in Revolving Credit Loan $ (2,750) $ -- $ -- $ -- $ (2,750)
Payments of other long-term debt (27,916) 26 -- -- (27,890)
Proceeds from other long-term debt 139,250 -- -- -- 139,250
Net increase (decrease) in advance account 876 (885) 9 -- --
Payment of deferred financing costs (7,549) -- -- -- (7,549)
Contribution from parent 26,500 -- -- -- 26,500
Proceeds from ESOP 68 -- -- -- 68
Other equity transactions 6 -- (23) -- (17)
--------- ------- ---- ------ ---------
Net Cash Provided by (Used In) Financing $ 128,485 $ (859) $(14) $ -- $ 127,612
Activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ -- $ -- $ 40 $ -- $ 40
--------- ------- ---- ------ ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 587 (479) 42 -- 150
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 858 1,149 410 -- 2,417
--------- ------- ---- ------ ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,445 $ 670 $452 $ -- $ 2,567
========= ======= ==== ====== =========
</TABLE>
18
<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 a 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. Nestaway is
a manufacturer of formed wire products which are used for a variety of
commercial and consumer product applications. Fischbein is a worldwide
manufacturer and marketer of industrial bag closing and handling equipment and
systems and a 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, 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 subordinated notes. Such funds were used: (i) to effect the Acquisition
pursuant to the Merger Agreement, (ii) to fund an 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 prior to the
Transaction included herein.
The Company manufactures and distributes certain of its products through
subsidiaries located in Belgium, France, the United Kingdom, Singapore and
Canada. The Company also sells directly from the United States to other
geographic regions, including Latin America. The Company accounts for gains and
losses resulting from foreign currency transactions in its consolidated
statements 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.
Since the Company's foreign revenues accounted for approximately 12% of the
Company's 1998 and 1999 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 income from operations.
19
<PAGE>
RESULTS OF OPERATIONS
The financial results for 1998 discussed below include those of the
Predecessor Company for the periods prior to the Transaction Date.
The table below summarizes the results of operations of the Company for the
three month periods indicated (in thousands):
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS
----------------------------------------------------------------------------
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
Net revenues
Ames net revenues $14,686 44.0% $12,337 40.9%
Nestaway net revenues 10,992 33.0 10,448 34.7
Fischbein net revenues 7,667 23.0 7,351 24.4
------- ----- ------- ------
Total net revenues $33,345 100.0% $30,136 100.0%
Cost of revenues 17,704 53.1 16,652 55.3
------- ----- ------- ------
Gross profit $15,641 46.9% $13,484 44.7%
Selling, general, and administrative expenses 8,087 24.2 6,857 22.8
Depreciation and amortization 1,861 5.6 1,564 5.2
Transaction expense -- -- 11,280 37.4
------- ----- ------- ------
Income (loss) from operations $ 5,693 17.1% $(6,217) (20.7)%
Interest expense 3,718 11.2 3,013 10.0
Other expense (income) (36) (.1) 17 .1
------- ----- ------- ------
Income (loss) before income taxes and
extraordinary items $ 2,011 6.0% $(9,247) (30.6)%
Provision for income taxes 906 2.7 (3,325) (11.0)
------- ----- ------- ------
Income (loss) before extraordinary item $ 1,105 3.3% $(5,922) (196)%
Extraordinary item:
Loss on early extinguishments of debt,
net of income tax of $228 -- -- 382 1.3
------- ----- ------- ------
Net income (loss) $ 1,105 3.3% $(6,304) (20.9)%
======= ===== ======= ======
</TABLE>
20
<PAGE>
The table below summarizes the results of operations of the Company for the nine
month periods indicated (in thousands):
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS
-------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Net revenues
Ames net revenues $42,332 43.4% $35,291 40.9%
Nestaway net revenues 32,701 33.5 30,510 35.3
Fischbein net revenues 22,524 23.1 20,535 23.8
------- ----- ------- -----
Total net revenues $97,557 100.0% $86,336 100.0%
Cost of revenues 51,937 53.2 46,415 53.8
------- ----- ------- -----
Gross profit $45,620 46.8% $39,921 46.2%
Selling, general, and administrative expenses 22,171 22.7 19,422 22.5
Depreciation and amortization 5,536 5.7 3,935 4.5
Transaction expense -- -- 11,280 13.1
------- ----- ------- -----
Income from operations $17,913 18.4% $ 5,284 6.1%
Interest expense 10,843 11.1 4,406 5.1
Other expense (income) (70) -- 181 .2
------- ----- ------- -----
Income before income taxes and extraordinary items $ 7,140 7.3% $ 697 .8%
Provision for income taxes 3,441 3.5 629 .7
------- ----- ------- -----
Income before extraordinary item $ 3,699 3.8% $ 68 .1%
Extraordinary item:
Loss on early extinguishments of debt, net of income tax
of $404 -- -- 682 .8
------- ----- ------- -----
Net income (loss) $ 3,699 3.8% $ (614) (.7)%
======= ===== ======= =====
</TABLE>
21
<PAGE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
NET REVENUES. Net revenues increased $3,209,000 or 10.6%, to $33,345,000 in
the three month period ended September 30, 1999 from $30,136,000 in the three
month period ended September 30, 1998. Net revenues improved primarily due to
increased rentals of ATF tools and sales of ATF tools, drywall-related
merchandise and dishwasher racks, and the revenue contribution of an acquisition
in the bag-closing industry.
Ames' net revenues increased $2,349,000 or 19.0%, to $14,686,000 in the three
month period ended September 30, 1999 from $12,337,000 in the three month period
ended September 30, 1998. The increase was primarily the result of increased
rental revenues of $1,375,000 due to an increase in the number of tools on rent
and a rental price increase and $974,000 from the sales of drywall related
merchandise at company-managed distribution outlets and of ATF tools. Ames
benefited from the strength of the U.S. housing market.
Nestaway's net revenues increased $544,000 or 5.2%, to $10,992,000 in the
three month period ended September 30, 1999 from $10,448,000 in the three month
period ended September 30, 1998. Revenue growth was attributable to sales of
dishwasher racks.
Fischbein's net revenues increased $316,000 or 4.3%, to $7,667,000 in the
three month period ended September 30, 1999 from $7,351,000 in the three month
period ended September 30, 1998. The increase was primarily due to increased
revenues generated by the acquisition of The Thames Packaging Equipment Company,
Limited ("Thames") which contributed $739,000 in revenues for the quarter,
offset by declines in other bag-closing equipment sales, primarily in Latin
American markets, and material-handling equipment revenues.
GROSS PROFIT. Gross profit excluding depreciation and amortization increased
$2,157,000 or 16.0%, to $15,641,000 in the three month period ended
September 30, 1999 from $13,484,000 in the three month period ended September
30, 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 improved to 46.9% from 44.7%.
The gross margin growth at Ames was in excess of revenues due to gross profit
margin improvement in rentals, sales of ATF tools and drywall related
merchandise. Nestaway and Fischbein's dollar margins improved comparable to the
revenue increase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") excluding depreciation and amortization
increased $1,230,000 or 17.9%, to $8,087,000 in the three month period ended
September 30, 1999 from $6,857,000 in the three month period ended September 30,
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.
Bad debt expense, incurred principally at Ames, increased $262,000 over the
prior year primarily due to revenue growth, though there was a deterioration in
the aging of receivables at Ames from the prior quarter. Ames also recorded an
additional $253,000 in the aggregate primarily for consulting and professional
service expenses related to the development of new products and consulting
assistance for management information systems. The Company also recorded an
additional $98,000 in expense as a discretionary contribution to its ESOP in the
form of forgiveness of a portion of the note receivable from the ESOP.
TRANSACTION EXPENSE. The Predecessor Company recorded $11,280,000 in the
three month period ended September 30, 1998 in nonrecurring expenses primarily
for compensation recognized from bonus payments, the exercising of stock options
and the sale of stock recognized as a result of the Transaction payments of
which were deducted from sale proceeds paid to the prior stockholders.
OPERATING DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $297,000 or 19.0%, to $1,861,000 from $1,564,000 in 1998. This was
primarily attributable to an increase in goodwill amortization of $138,000 and
depreciation on new equipment.
INTEREST EXPENSE. Interest expense increased $705,000 or 23.4% to $3,718,000
in 1999 from $3,013,000 in 1998. The increase was the result of the acquisition
of the Company and resultant increase in debt and an additional $141,000 in
interest amortization of deferred financing costs.
OTHER INCOME AND EXPENSE. Other income was $36,000 in 1999 compared to other
expense of $17,000 in 1998. The Company recorded additional interest income in
1999.
INCOME TAXES AND NET INCOME (LOSS). The effective tax rate was 45.1% in 1999
compared to 48.7% in 1998 excluding the impact of the Transaction. Net income
increased $7,409,000 to $1,105,000 for the three month period ended September
30, 1999 from a loss of $6,304,000 for the three month period ended September
30, 1998 primarily due to impact of improved revenues and the elimination of
nonrecurring Transaction related expenses recorded in 1998.
22
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
NET REVENUES. Net revenues increased $11,221,000 or 13.0%, to $97,557,000 in
the nine month period ended September 30, 1999 from $86,336,000 in the nine
month period ended September 30, 1998. The increase in net revenues was
primarily a result of increased sales and rentals of automatic taping and
finishing ("ATF") tools and sales of drywall related merchandise, formed wire
products, dishwasher racks, and material handling equipment The Company
benefited from the acquisition of Thames in April, which contributed $1,429,000
in additional revenue.
Ames' net revenues increased $7,041,000 or 20.0%, to $42,332,000 in the nine
month period ended September 30, 1999 from $35,291,000 in the nine month period
ended September 30, 1998. The increase was primarily the result of increased
rental revenues of $4,186,000 due to both an increase in the number of tools on
rent and a rental price increase. Sales of ATF tools and drywall related
merchandise at Company-managed distribution outlets also improved $2,855,000
over the prior year period. Ames benefited from the strength of the U.S.
housing market.
Nestaway's net revenues increased $2,191,000 or 7.2%, to $32,701,000 in the
nine month period ended September 30, 1999 from $30,510,000 in the nine month
period ended September 30, 1998. Revenue growth occurred both in sales of
dishwasher racks and formed wire products.
Fischbein's net revenues increased $1,989,000 or 9.7%, to $22,524,000 in the
nine month period ended September 30, 1999 from $20,535,000 in the nine month
period ended September 30, 1998. The increase was primarily due to increased
sales of flexible conveyors and storage racks and the impact of the Thames
acquisition discussed above. Bag-closing product revenues, exclusive of the
acquisition, improved in the domestic market but were impacted by a reduction in
sales to Latin America which continues to be adversely affected by general
economic conditions in that region.
GROSS PROFIT. Gross profit excluding depreciation and amortization increased
$5,699,000 or 14.3%, to $45,620,000 in the nine month period ended September 30,
1999 from $39,921,000 in the nine month period ended September 30, 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 improved to 46.8% from 46.2% primarily as a result of
profit margin improvement at Ames.
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 impact of a nonrecurring favorable pricing adjustment of $350,000
recorded in the first quarter of 1998 and the benefit of a refund of $276,000 in
workers' compensation premiums received in the second quarter of 1998. Nestaway
also received a temporary reduction in its Ohio workers' compensation premiums
of $147,000 in 1998. The Company recorded a premium reduction of approximately
$100,000 in 1999. Fischbein's gross profits improved through 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 and the Thames acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses excluding
depreciation and amortization increased $2,749,000 or 14.2%, to $22,171,000 in
1999 from $19,422,000 in the nine month period ended September 30, 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. Ames has recorded
additional consulting and professional services expenses related to new product
development and for assistance in the conversion and upgrade of their
management information systems aggregating $377,000. Ames has also incurred
additional bad debt of $311,000 over the comparable prior year primarily as a
result of revenue growth. The Company recorded approximately $281,000 of
expense for severance and other relocation costs associated with the transfer of
its corporate offices to Houston, Texas.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$1,601,000 or 40.7%, to $5,536,000 from $3,935,000 in 1998. This was primarily
attributable to an increase in goodwill amortization of $1,037,000 as a result
of the Transaction and subsequent acquisitions and increased depreciation.
TRANSACTION EXPENSE. The Predecessor Company recorded $11,280,000 in the nine
month period ended September 30, 1998 in non-recurring expenses primarily for
compensation recognized from bonus payments, the exercising of stock options,
and the sale of stock recognized as a result of the Transaction payments of
which were deducted from sale proceeds paid to the prior stockholder.
INTEREST EXPENSE. Interest expense increased $6,437,000 to $10,843,000 in
1999 from $4,406,000 in 1998. The increase was the result of the acquisition of
the Company and resultant increase in debt.
OTHER EXPENSE. Other income was $70,000 in 1999 compared to other expense of
$181,000 in 1998. The Company recognized a gain on life insurance policies
insuring a former executive of the Company who recently passed away. The gain
represents the excess of the proceeds from the insurance over the present value
of the liability of the Company to the executive's estate. The Company has also
recorded an additional $151,000 in interest income.
INCOME TAXES AND NET INCOME (LOSS). The effective tax rate was 48.2% in 1999
compared to 41.3% in 1998 excluding the impact of the Transaction. The increase
was due to an increase in nondeductible goodwill amortization. Net income
23
<PAGE>
increased $4,313,000 to $3,699,000 for the nine month period ended September 30,
1999 from a loss of $614,000 for the nine month period ended September 30, 1998
primarily due to improved revenues and the elimination of nonrecurring
Transaction related expenses recorded in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operating activities of $6,182,000 in the
nine month period ended September 30, 1999 compared to $1,124,000 in the nine
month period ended September 30, 1998 and had cash on hand of $4,184,000 at
September 30, 1999. Cash generated from operations in 1998 was negatively
impacted by Transaction related expenses discussed previously.
At September 30, 1999, the Company had working capital of $18,220,000 compared
to working capital of $14,835,000 at December 31, 1998. The increase in working
capital was primarily due to an increase in accounts receivable due to increased
revenues.
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 nine
months ended September 30, 1999, the Company spent $2,206,000 on capital
projects. The Company projects capital expenditures of approximately $3,300,000
for all of 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 various
conditions including availability under the borrowing base. The Acquisition
Facility provides the Company with $25,000,000 of borrowings, subject to
customary conditions. At September 30, 1999, there were no borrowings
outstanding under the Revolving Credit Facility and $3,000,000 outstanding under
the 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 or major capacity
additions. Certain revenue opportunities may require significant additional
capital expenditures. 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 ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires
companies to recognize all derivates 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. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," which provides that SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts, either to
hedge existing risks or for speculative purposes.
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 ("Y2K"). Management is
responsible for identifying the Company's computer systems affected by the Y2K
issue and developing and executing a compliance plan. Specifically, management
has identified within its organization management information systems,
engineering and design systems, and production equipment which might be
susceptible to problems associated with Y2K. Where failure to be Y2K compliant
would have a material impact on the Company, management surveyed key suppliers,
customers and service providers to assess their anticipated level of
compliance.
Each of the Company's three business units operates different management
information systems. Each business unit has completed or is in the process of
implementing plans to replace obsolete equipment both to address the Y2K issue
and the need to upgrade system capacities to management requirements. As a
result, all business units either are compliant or expect their management
information systems to be Y2K compliant in 1999 as discussed below. The Company
has spent approximately $1,200,000 in 1998 and $300,000 in 1999 to upgrade its
management information systems. No significant additional spending is
anticipated. Production equipment and design and engineering systems
identified as being possibly susceptible to Y2K problems, have been either
determined to be Y2K compliant or upgraded without significant additional
investment. A discussion of each individual business unit's status appears in
the following paragraphs.
The Ames management information system is heavily customized and includes
accounting, invoicing, merchandising, inventory control, rental tool inventory
control, and other critical applications. Ames' management began a project in
24
<PAGE>
1998 to replace obsolete software and upgrade the system's capabilities. The
new system has been activated at all locations except for the Company's TapeTech
Tool Co., Inc. subsidiary ("TapeTech"). Installation at TapeTech will occur in
November. With 12,000 or more active customers, none of which account for more
than 1.5% of Ames' revenues, management has not inquired of its customers as to
their level of Y2K compliance. Since a majority of the customer base is not
computer reliant and due to the lack of dependency on any one customer, Ames
management does not believe the effects of Y2K on its customers will have a
material impact on the Company.
Nestaway's management believes its management information systems, design and
engineering systems and production equipment to be Y2K compliant. Management
has contacted suppliers and utilities who have affirmatively indicated they
would be Y2K compliant by yearend. A major foreign supplier has indicted that
in addition to being compliant, sufficient inventories will be maintained in the
United States to assure short-term supply. Nestaway's customers also expect to
be Y2K compliant by yearend.
Fischbein's management believes it management information systems, design and
engineering systems and production equipment are Y2K compliant with the
exception of its Singapore operation which expects to be compliant by yearend.
(The Singapore operation accounts for less than 1% of the Company's 1999
revenues.) Management's inquiries of vendors indicate that major vendors are
compliant or will be compliant by yearend.
There is no guarantee management has identified, evaluated and remediated all
systems, internal or external to the Company, which may be significantly
impacted by Y2K. In addition, the Company is dependent on compliance activity
of others and failure of the Company's suppliers, customers and service
providers to sufficiently address the Y2K issue could significantly impact the
Company.
Based on recent quoted notes on the Company's LIBOR based bank borrowings, the
interest rates on the Company's variable rate bank debt with borrowing periods
including December 31 may be higher at yearend than current rates solely due to
Y2K concerns. The Company anticipates this condition to be temporary.
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 statements 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.
EURO CONVERSION
A single European currency ("Euro") was introduced on January 1, 1999, at
which time the conversion rates between the old, or legacy, currencies and the
Euro were set for 11 participating member countries. However, the legacy
currencies in those countries will continue to be used as legal tender through
January 1, 2002. Thereafter, the legacy currencies will be canceled, and Euro
bills and coins will be used in the 11 participating countries. The Company's
customers may require billing in one or more currencies. The Company has the
capability of billing in the Euro or other prescribed currency. The Company
does not believe that this conversion will materially affect its contracts. The
Company does not presently have any interest rate or currency swaps that are
denominated in Euro legacy currencies. The Company continues to assess the
impact of the Euro on its operations and financial, accounting and operational
systems. The Company does not presently anticipate that the transition to the
Euro will have a significant impact on its results of operations, financial
position or cash flows.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental and employee health and safety matters,
including the handling, 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. From 1992 to 1994, 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 and charged against
its accrual the $250,000 payable under the agreement and has an exposure under
the agreement of up to an additional $120,000 if contamination is more
widespread that 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. Since the escrow account is under the control of the
representative of the former stockholders and the escrow has sufficient funds to
cover the estimated costs to remediate the site, the Company has neither an
asset nor a liability recorded on its Consolidated Balance Sheet related to this
matter. The settlement of this issue is dependant upon agreements by and
between parties unrelated to the Company and therefore the date upon which this
matter will be resolved cannot be estimated.
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 the 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 cost of addressing 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. The
Company has an accrual of $100,000 for this matter. To date, no cleanup costs
have been assessed against the Company.
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 the
Transaction Date, subject to a specified threshold and deductible.
26
<PAGE>
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 and insurance
coverages, where appropriate, 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.
27
<PAGE>
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
September 30, 1999.
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
10.11* Letter Agreement dated as of July 22, 1998 by and among The
Sterling Group, 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.
28
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXIA INCORPORATED
Date: November 12, 1999 /s/ Lyle J. Feye
_________________________________
Lyle J. Feye
Vice President Finance, Treasurer
29
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<INCOME-TAX> 3,441
<INCOME-CONTINUING> 3,699
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,699
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
