<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 JUNE 30, 2000 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 ______
<PAGE>
PART I
Item 1. Financial Statements
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- ------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 6,887 $ 7,218
Accounts receivable, net 17,938 17,600
Inventories, net 15,363 11,793
Prepaid income taxes and other current assets 906 1,100
Deferred income tax benefits 3,713 3,489
-------- --------
Total Current Assets $ 44,807 $ 41,200
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ 984
Buildings and improvements 5,290 5,307
Machinery and equipment 20,927 19,903
Equipment leased to others 10,906 10,891
-------- --------
38,107 37,085
Less: Accumulated depreciation 8,037 5,965
-------- --------
Net Plant and Equipment $ 30,070 $ 31,120
OTHER ASSETS:
Goodwill, net $108,622 $108,319
Intangible assets, net 1,026 1,122
Deferred charges, net 16,737 17,027
Other assets 19 20
-------- --------
Total Other Assets $126,404 $126,488
-------- --------
TOTAL ASSETS $201,281 $198,808
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,919 $ 5,464
Accounts payable 4,639 5,011
Payable to parent 703 603
Accrued liabilities 11,629 12,526
Accrued income taxes 38 151
-------- --------
Total Current Liabilities $ 21,928 $ 23,755
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $126,361 $126,618
Other non-current liabilities 7,649 7,913
Deferred income taxes 6,488 6,205
-------- --------
Total Non-Current Liabilities $140,498 $140,736
Commitments and contingencies -- --
Common stock held by ESOP 2,183 2,183
Less: Note receivable from ESOP (1,044) (1,445)
STOCKHOLDER'S EQUITY:
Common stock ($.01) par value; 100 shares
authorized, issued and outstanding $ -- $ --
Additional paid-in capital 26,680 26,680
Retained earnings 11,594 7,086
Accumulated other comprehensive loss (558) (187)
-------- --------
Total Stockholder's Equity $ 37,716 $ 33,579
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $201,281 $198,808
======== ========
The accompanying notes to the unaudited interim consolidated financial statements
are an integral party of these financial statements
</TABLE>
2
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Other Comprehensive Income
--------------------------------------------
Common Additional Minimum Cumulative Accumulated Compre-
Stock Paid-in Retained Pension Translation Other Comprehen- hensive
Par Value Capital Earnings Liability Adjustments sive Income (loss) Income
--------- ---------- -------- ---------- ------------ ------------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ -- $26,511 $ 1,482 $ (1) $ 210 $ 209 $ --
Net income -- -- 2,594 -- -- -- 2,594
Cumulative translation adjustment -- -- -- -- (368) (368) (368)
-------
Comprehensive income $ 2,226
=======
------- ------- ------- ---- ----- -----
BALANCE, JUNE 30, 1999 $ -- $26,511 $ 4,076 $ (1) $(158) $(159)
(Unaudited) ======= ======= ======= ==== ===== =====
BALANCE, DECEMBER 31, 1999 $ -- $26,680 $ 7,086 $ -- $(187) $(187) $ --
Net income -- -- 4,508 -- -- -- 4,508
Cumulative translation adjustment -- -- -- -- (371) (371) (371)
-------
Comprehensive income $ 4,137
=======
---- ------- ------- ---- ----- -----
BALANCE, JUNE 30, 2000 $ -- $26,680 $11,594 $ -- $(558) $(558)
(Unaudited) ==== ======= ======= ==== ===== =====
The accompanying notes ot the unaudited interim consolidated financial statements
are an integral part of these financial statements.
</TABLE>
3
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars in thousands)
(Unaudited)
April 1, 2000 April 1, 1999
to to
June 30, 2000 June 30, 1999
-------------- --------------
Net sales $26,699 $24,138
Net rentals 9,718 8,917
------- -------
Net revenues $36,417 $33,055
Cost of sales $16,268 $14,884
Cost of rentals 2,673 2,604
Selling, general and administrative expenses 7,438 7,244
Depreciation and amortization 1,965 1,845
------- -------
Income from operations $ 8,073 $ 6,478
Interest expense $ 3,577 $ 3,574
Interest income (110) (83)
Other expense (income), net 35 (99)
------- -------
Income before income taxes $ 4,571 $ 3,086
Provision for income taxes 2,091 1,484
------- -------
Net income $ 2,480 $ 1,602
======= =======
The accompanying notes to the unaudited interim consolidated financial
statements are an integral part of these financial statements.
4
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
January 1, 2000 January 1, 1999
to to
June 30, 2000 June 30, 1999
--------------- ---------------
<S> <C> <C>
Net sales $51,850 $46,926
Net rentals 19,131 17,286
------- -------
Net revenues $70,981 $64,212
Cost of sales $31,164 $29,309
Cost of rentals 5,329 4,924
Selling, general and administrative expenses 15,335 14,084
Depreciation and amortization 3,937 3,675
------- -------
Income from operations $15,216 $12,220
Interest expense $ 7,116 $ 7,125
Interest income (178) (147)
Other expense (income), net 62 113
------- -------
Income before income taxes $ 8,216 $ 5,129
Provision for income taxes 3,708 2,535
------- -------
Net income $ 4,508 $ 2,594
======= =======
The accompanying notes to the unaudited interim consolidated financial statements
are an integral part of these financial statements.
</TABLE>
5
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
January 1, 2000 January 1, 1999
to to
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,508 $ 2,594
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,423 4,066
Deferred income tax provision (benefit) 59 (100)
Loss on disposal of fixed assets 242 112
Allocated ESOP shares 401 137
Provision for losses on accounts receivable 1,996 952
Provision for obsolescence of inventories 10 (19)
Gain on pension expense (167) (118)
Changes in operating assets and liabilities:
Accounts receivable (1,672) (2,127)
Inventories (2,579) 507
Accounts payable (250) 855
Accrued liabilities (1,263) 690
Payable to parent 100 215
Other current assets 75 (101)
Income taxes payable 67 (556)
Other non-current assets (84) 303
Other non-current liabilities (264) 332
-------- --------
Net Cash (used in) provided by Operating Activities $ 5,602 $ 7,742
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures $(1,375) $(1,630)
Cash used for acquisitions, (net of cash acquired) (3,709) (5,295)
Proceeds from sale of fixed assets 16 22
-------- --------
Net Cash (used in) provided by Investing Activities $(5,068) $(6,903)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on Acquisition Facility $ 4,000 $ 3,000
Payments of other long-term debt (4,802) (2,408)
-------- --------
Net Cash (used in) provided by Financing Activities $ (802) $ 592
EFFECT OF EXCHANGE RATE CHANGES ON CASH (63) 70
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $ (331) $ 1,501
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 7,218 5,904
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 6,887 $ 7,405
======== =========
The accompanying notes to the unaudited interim consolidated financial statements
are an integral part of these financial statements.
</TABLE>
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 Employee Stock
Ownership Plan ("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, 1999. 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, 1999 and the accompanying notes thereto in the Company's Form 10-K
under the Securities Act of 1934.
NOTE 2 INVENTORIES
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market. The cost elements included in inventories are material, labor and
factory overhead. Inventories, net of reserves of $418,000 and $386,000 as of
June 30, 2000 and December 31, 1999, respectively, consist of the following (in
thousands):
June 30, 2000 December 31, 1999
------------- -----------------
Raw materials $ 5,459 $ 4,651
Work in process 1,165 1,073
Finished goods 8,739 6,069
------- -------
Total inventories $15,363 $11,793
======= =======
In May of 2000, the Company acquired certain assets of Premier Drywall Tool
Company of which approximately $1,186,000 of the purchase price was for
inventory.
7
<PAGE>
NOTE 3 LONG-TERM DEBT
Long-term debt, inclusive of capital lease obligations which are not material,
consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- ------------------
<S> <C> <C>
10.75% Senior Subordinated Notes $100,000 $100,000
Term Loan (8.18% at June 30, 2000) 23,477 28,040
ESOP Term Loan (8.18% at June 30, 2000) 609 862
Acquisition Facility (8.15% at June 30, 2000) 7,000 3,000
Other 194 180
-------- --------
Total Debt $131,280 $132,082
Less Current maturities (4,919) (5,464)
-------- --------
Total Long-Term Debt $126,361 $126,618
======== ========
</TABLE>
On June 30, 2000, the Company made a voluntary principal payment on its Bank
Credit Agreement of $2,000,000.
Current maturities of long-term debt as of June 30, 2000 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Scheduled Payment
Date Amount
----------------- --------
<S> <C> <C>
Term Loan and ESOP Loan September 30, 2000 $1,209
Term Loan and ESOP Loan December 31, 2000 1,209
Term Loan and ESOP Loan March 31, 2001 1,209
Term Loan and ESOP Loan June 30, 2001 1,209
Other Various 83
------
Total Current Maturities $4,919
======
</TABLE>
See also NOTE 7 SUBSEQUENT EVENTS
NOTE 4 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 5 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 material handling systems.
Ames ("Ames") is the designer, manufacturer, distributor and marketer of
automatic taping and finishing tools, which are rented or sold to interior
finishing contractors to finish drywall joints prior to painting, wallpapering
and other forms of final treatment. In addition, Ames sells a variety of other
drywall tools, finishing accessories, and supplies through its network of
Company-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.
8
<PAGE>
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 also manufactures extendable,
flexible, gravity and motorized conveyors and portable, nestable and stackable
warehouse storage racks.
A summary of segment information for the three months ended June 30, 2000 and
June 30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Ames Nestaway Fischbein Corporate Consolidated
------- -------- --------- ---------- ------------
June 30, 2000
<S> <C> <C> <C> <C> <C>
Revenues $16,395 $12,513 $7,509 $ - $36,417
Income from operations 5,163 2,489 1,106 (685) 8,073
Depreciation and amortization 1,032 674 250 250 2,206
Capital expenditures 319 435 86 2 842
June 30, 1999
Revenues $14,270 $10,722 $8,063 $ - $33,055
Income from operations 4,196 2,053 1,175 (946) 6,478
Depreciation and amortization 954 610 276 201 2,041
Capital expenditures 695 127 108 5 935
</TABLE>
A summary of segment information for the six months ended June 30, 2000 and
June 30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Ames Nestaway Fischbein Corporate Consolidated
------- -------- --------- ---------- ------------
June 30, 2000
<S> <C> <C> <C> <C> <C>
Revenues $32,677 $23,770 $14,534 $ - $ 70,981
Income from operations 10,138 4,516 2,001 (1,439) 15,216
Total assets 84,118 57,476 35,725 23,962 201,281
Depreciation and amortization 2,091 1,347 481 504 4,423
Capital expenditures 679 535 148 13 1,375
June 30, 1999
Revenues $27,646 $21,709 $14,857 $ - $ 64,212
Income from operations 7,949 4,043 1,940 (1,712) 12,220
Total assets 80,750 59,871 35,715 23,869 200,205
Depreciation and amortization 1,834 1,302 525 405 4,066
Capital expenditures 1,236 231 158 5 1,630
</TABLE>
9
<PAGE>
NOTE 6 ACQUISITIONS
In May 2000, the Company acquired certain assets of Premier Drywall Tool
Company, a manufacturer and distributor of automatic taping and finishing tools
for approximately $4,100,000, of which $400,000, subject to adjustment pursuant
to the agreement, is payable 90 days after closing. The Company utilized its
Acquisition Facility to finance the acquisition.
This acquisition was accounted for using the purchase method of accounting.
Accordingly, the cost of the acquisition has been allocated to assets acquired
based on their estimated fair market values at the date of the acquisition. The
operating results of this acquisition were included in the consolidated
statements of operations from its acquisition date. Pro forma results of these
acquisitions have not been presented as 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 asset acquired,
the Company preliminarily recorded goodwill from the acquisitions of $1,771,000.
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 revaluation of the goodwill as a result of the acquisition.
NOTE 7 SUBSEQUENT EVENTS
AXIA Group, Inc. and Cortec Group Fund III, L.P. announced on July 21, 2000
that they have signed a definitive agreement for an affiliate of Cortec to
acquire AXIA Group. Terms of the agreement are not being disclosed. Closing of
the sale is expected in late August.
In connection with the transaction, Axia Incorporated, a wholly-owned
subsidiary of AXIA Group, Inc., announced that it would conduct an offer to
purchase and consent solicitation for its outstanding 10 3/4% Senior
Subordinated Notes.
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., FBH Contracting
Services Corporation, 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 JUNE 30, 2000
(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 $ 5,815 $ 646 $ 426 $ - $ 6,887
Accounts receivable, net 8,971 7,533 3,258 (1,824) 17,938
Inventories, net 9,430 3,010 3,452 (529) 15,363
Prepaid income taxes and other current assets 603 205 98 - 906
Deferred income tax benefits 3,713 - - - 3,713
-------- ------- ------ -------- --------
Total Current Assets $ 28,532 $11,394 $7,234 $ (2,353) $ 44,807
-------- ------- ------ -------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ - $ - $ - $ 984
Buildings and improvements 4,225 136 929 - 5,290
Machinery and equipment 19,650 675 602 - 20,927
Equipment leased to others 10,906 - - - 10,906
-------- ------- ------ -------- --------
$ 35,765 $ 811 $1,531 - $ 38,107
Less: Accumulated depreciation 7,006 403 628 - 8,037
-------- ------- ------ -------- --------
Net Plant and Equipment $ 28,759 $ 408 $ 903 $ - $ 30,070
-------- ------- ------ -------- --------
OTHER ASSETS:
Goodwill, net $ 89,589 $17,760 $1,273 $ - $108,622
Intangible assets, net 1,022 4 - - 1,026
Deferred assets, net 15,717 1,019 1 - 16,737
Investment in wholly-owned subsidiaries 23,987 - - (23,987) -
Other assets 19 - - - 19
-------- ------- ------ -------- --------
Total Other Assets $130,334 $18,783 $1,274 $(23,987) $126,404
-------- ------- ------ -------- --------
TOTAL ASSETS $187,625 $30,585 $9,411 $(26,340) $201,281
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,872 $ 47 $ - $ - $ 4,919
Accounts payable 3,480 825 2,158 (1,824) 4,639
Payable to parent 703 - - - 703
Accrued liabilities 10,525 744 360 - 11,629
Accrued income taxes (224) - 262 - 38
Advance accounts (12,104) 11,011 1,093 - -
-------- ------- ------ -------- --------
Total Current Liabilities $ 7,252 $12,627 $3,873 $ (1,824) $ 21,928
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES
Long-term debt, less current maturities $126,294 $ 67 $ _ $ - $126,361
Other non-current liabilities 7,649 - - - 7,649
Deferred income taxes 6,488 - - - 6,488
-------- ------- ------ -------- --------
Total Non-Current Liabilities $140,431 $ 67 $ - $ - $140,498
-------- ------- ------ -------- --------
Common stock held by ESOP $ 2,183 - - - $ 2,183
Less: Note receivable from ESOP (1,044) - - - (1,044)
STOCKHOLDER'S EQUITY:
Common stock and additional paid-in capital $ 26,680 $ 5,098 $1,929 $ (7,027) $ 26,680
Retained earnings 12,123 12,793 4,167 (17,489) 11,594
Accumulated other comprehensive loss - - (558) - (558)
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 38,803 $17,891 $5,538 $(24,516) $ 37,716
-------- ------- ------ -------- --------
TOTAL LIABILITY AND STOCKHOLDER'S EQUITY $187,625 $30,585 $9,411 $(26,340) $201,281
======== ======= ====== ======== ========
</TABLE>
11
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE THREE MONTHS ENDED JUNE 30, 2000
(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 $18,740 $ 6,707 $3,447 $(2,195) $26,699
Net rentals 5,346 9,471 245 (5,344) 9,718
------- ------- ------ ------- -------
Net revenues $24,086 $16,178 $3,692 $(7,539) $36,417
Cost of sales 12,677 3,657 2,047 (2,113) 16,268
Cost of rentals 573 7,288 156 (5,344) 2,673
Selling, general and administrative expenses 3,454 3,111 873 - 7,438
Depreciation and amortization 1,740 191 34 - 1,965
------- ------- ------ ------- -------
Income from operations $ 5,642 $ 1,931 $ 582 $ (82) $ 8,073
Interest expense 3,575 2 - - 3,577
Intercompany interest expense (income) (277) 242 35 - -
Other expense (income), net (1,529) 30 127 1,297 (75)
------- ------- ------ ------- -------
Income (loss) before income taxes $ 3,873 $ 1,657 $ 420 $(1,379) $ 4,571
Provision for income taxes 1,311 679 101 - 2,091
------- ------- ------ ------- -------
Net income (loss) $ 2,562 $ 978 $ 319 $(1,379) $ 2,480
======= ======= ====== ======= =======
</TABLE>
12
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(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 $36,123 $13,607 $6,743 $ (4,623) $51,850
Net rentals 10,523 18,633 496 (10,521) 19,131
------- ------- ------ -------- -------
Net revenues $46,646 $32,240 $7,239 $(15,144) $70,981
Cost of sales $24,194 $ 7,433 $4,119 $ (4,582) 31,164
Cost of rentals 1,166 14,376 308 (10,521) 5,329
Selling, general and administrative expenses 7,386 6,173 1,776 - 15,335
Depreciation and amortization 3,504 380 53 - 3,937
------- ------- ------ -------- -------
Income from operations $10,396 $ 3,878 $ 983 $ (41) $15,216
Interest expense 7,109 5 2 - 7,116
Intercompany interest expense (income) (544) 474 70 - -
Other expense (income), net (2,722) 60 217 2,329 (116)
------- ------- ------ -------- -------
Income (loss) before income taxes $ 6,553 $ 3,339 $ 694 $ (2,370) $ 8,216
Provision for income taxes 2,004 1,488 216 - 3,708
------- ------- ------ -------- -------
Net income (loss) $ 4,549 $ 1,851 $ 478 $ (2,370) $ 4,508
======= ======= ====== ======== =======
</TABLE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(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 $ 5,710 $(458) $ 350 $ $ 5,602
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (1,260) - (115) - (1,375)
Cash used for acquisitions (3,709) - - - (3,709)
Proceeds from sale of fixed assets 16 - - - 16
------- ----- ----- ----- -------
Net Cash used in Investing Activities $(4,953) $ - $(115) $ $(5,068)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on Acquisition Facility 4,000 - - - 4,000
Payments of other long-term debt (4,817) 15 - - (4,802)
Net increase (decrease) in advance account (374) 662 (288) - -
------- ----- ----- ----- -------
Net Cash (used in) provided by Financing Activities $(1,191) $ 677 $(288) $ $ (802)
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (63) - (63)
------- ----- ----- ----- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (434) 219 (116) - (331)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 6,249 427 542 - 7,218
------- ----- ----- ----- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,815 $ 646 $ 426 $ - $ 6,887
======= ===== ===== ===== =======
</TABLE>
13
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF DECEMBER 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 $ 6,249 $ 427 $ 542 $ - $ 7,218
Accounts receivable, net 7,685 7,123 3,676 (884) 17,600
Inventories, net 6,677 2,461 3,144 (489) 11,793
Prepaid income taxes and other current assets 938 138 24 - 1,100
Deferred income tax benefits 3,489 - - - 3,489
-------- ------- ------ -------- --------
Total Current Assets $ 25,038 $10,149 $7,386 $ (1,373) $ 41,200
-------- ------- ------ -------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ - $ - $ - $ 984
Buildings and improvements 4,223 136 948 - 5,307
Machinery and equipment 18,762 597 544 - 19,903
Equipment leased to others 10,883 - 8 - 10,891
-------- ------- ------ -------- --------
$ 34,852 $ 733 $1,500 - $ 37,085
Less: Accumulated depreciation 5,051 286 628 - 5,965
-------- ------- ------ -------- --------
Net Plant and Equipment $ 29,801 $ 447 $ 872 - $ 31,120
-------- ------- ------ -------- --------
OTHER ASSETS:
Goodwill, net $ 90,362 $16,652 $1,305 $ - $108,319
Intangible assets, net 1,115 7 - - 1,122
Deferred assets, net 16,037 989 1 - 17,027
Investment in wholly-owned subsidiaries 21,913 - - (21,913) -
Interco Payable / Receivable - - - - -
Other assets 20 - - - 20
-------- ------- ------ -------- --------
Total Other Assets $129,447 $17,648 $1,306 $(21,913) $126,488
-------- ------- ------ -------- --------
TOTAL ASSETS $184,286 $28,244 $9,564 $(23,286) $198,808
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,423 $ 41 $ - $ - $ 5,464
Accounts payable 3,094 863 1,938 (884) 5,011
Payable to parent 603 - - - 603
Accrued liabilities 10,972 893 661 - 12,526
Accrued income taxes - - 151 - 151
Advance accounts (11,477) 10,349 1,128 - -
-------- ------- ------ -------- --------
Total Current Liabilities $ 8,615 $12,146 $3,878 $ (884) $ 23,755
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES
Long-term debt, less current maturities $126,560 $ 58 $ - $ - $126,618
Other non-current liabilities 7,913 - - - 7,913
Deferred income taxes 6,205 - - - 6,205
-------- ------- ------ -------- --------
Total Non-Current Liabilities $140,678 $ 58 $ - $ - $140,736
-------- ------- ------ -------- --------
Common stock held by ESOP 2,183 - - - 2,183
Less: Note receivable from ESOP (1,445) - - - (1,445)
STOCKHOLDER'S EQUITY:
Common stock and additional paid-in capital $ 26,680 $ 5,098 $1,929 $ (7,027) $ 26,680
Retained earnings 7,575 10,942 3,944 (15,375) 7,086
Accumulated other comprehensive loss - - (187) - (187)
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 34,255 $16,040 $5,686 $(22,402) $ 33,579
-------- ------- ------ -------- --------
TOTAL LIABILITY AND STOCKHOLDER'S EQUITY $184,286 $28,244 $9,564 $(23,286) $198,808
======== ======= ====== ======== ========
</TABLE>
14
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE THREE MONTHS ENDED JUNE 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 $16,757 $ 5,410 $3,627 $(1,656) $24,138
Net rentals 4,905 8,690 226 (4,904) 8,917
------- ------- ------ ------- -------
Net revenues $21,662 $14,100 $3,853 $(6,560) $33,055
Cost of sales 11,141 3,132 2,287 (1,676) 14,884
Cost of rentals 588 6,783 137 (4,904) 2,604
Selling, general and administrative expenses 3,882 2,511 851 - 7,244
Depreciation and amortization 1,591 227 27 - 1,845
------- ------- ------ ------- -------
Income from operations $ 4,460 $ 1,447 $ 551 $ 20 $ 6,478
Interest expense 3,571 3 - - 3,574
Intercompany interest expense (income) (20) 20 - - -
Other expense (income), net (1,439) 18 102 1,137 (182)
------- ------- ------ ------- -------
Income (loss) before income taxes $ 2,348 $ 1,406 $ 449 $(1,117) $ 3,086
Provision for income taxes 766 554 164 - 1,484
------- ------- ------ ------- -------
Net income (loss) $ 1,582 $ 852 $ 285 $(1,117) $ 1,602
======= ======= ====== ======= =======
</TABLE>
15
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE SIX MONTHS ENDED JUNE 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 $33,188 $10,399 $6,385 $ (3,046) $46,926
Net rentals 9,508 16,835 449 (9,506) 17,286
------- ------- ------ -------- -------
Net revenues $42,696 $27,234 $6,834 $(12,552) $64,212
Cost of sales $22,355 $ 6,041 $4,031 $ (3,118) $29,309
Cost of rentals 1,094 13,062 274 (9,506) 4,924
Selling, general and administrative expenses 7,593 4,905 1,586 - 14,084
Depreciation and amortization 3,249 376 50 - 3,675
------- ------- ------ -------- -------
Income from operations $ 8,405 $ 2,850 $ 893 $ 72 $12,220
Interest expense $ 7,119 $ 5 $ 1 $ - $ 7,125
Intercompany interest expense (income) 23 (23) - - -
Other expense (income), net $(2,406) 33 238 2,101 (34)
------- ------- ------ -------- -------
Income (loss) before income taxes $ 3,669 $ 2,835 $ 654 $ (2,029) $ 5,129
Provision for income taxes 1,147 1,126 262 - 2,535
------- ------- ------ -------- -------
Net income (loss) $ 2,522 $ 1,709 $ 392 $ (2,029) $ 2,594
======= ======= ====== ======== =======
</TABLE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE SIX MONTHS ENDED JUNE 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 $ 5,230 $ 2,209 $ 303 $ - $ 7,742
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (1,586) - (44) - (1,630)
Cash used for acquisitions (2,475) - $(2,820) - (5,295)
Proceeds from sale of fixed assets 22 - - - 22
------- ------- ------- ----- -------
Net Cash used in Investing Activities $(4,039) $ - $(2,864) $ - $(6,903)
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 (2,426) 18 - - (2,408)
Net increase (decrease) in advance account (2,000) - 2,000 - -
Intercompany dividends 1,457 (1,346) (111) - -
Other equity transactions (748) - 748 - -
------- ------- ------- ----- -------
Net Cash (used in) provided by Financing Activities $ (717) $(1,328) $ 2,637 $ - $ 592
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - 70 - 70
------- ------- ------- ----- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 474 881 146 - 1,501
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,992 307 605 - 5,904
------- ------- ------- ----- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,466 $ 1,188 $ 751 $ - $ 7,405
======= ======= ======= ===== =======
</TABLE>
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company is a leading 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 material handling systems. The Company operates
through three business units: Ames, Nestaway and Fischbein. Ames is a leading
designer, manufacturer, distributor and marketer 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 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
equipment and systems and a manufacturer of flexible conveyor handling systems
and stackable 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.
The Company distributes certain of its products through subsidiaries
located in Belgium, France, the United Kingdom, Singapore and Canada. The
Company accounts for gains and losses resulting from foreign currency
transactions in its consolidated statement of income. Income and expense items
are translated at the average exchange rate for the period. The assets and
liabilities of foreign subsidiaries are translated at the current rate of
exchange at the balance sheet date. Balance sheet translation adjustments have
been excluded from the results of operations and are reported as a separate
component of stockholder's equity. As the Company's foreign revenues accounted
for approximately 13% of the Company's 1999 net revenues and 11% of the
Company's net revenues for the six months ended June 30, 2000, 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 generally enter into hedging programs
in an attempt to mitigate the fluctuations against the U.S. dollar.
The Company acquired Thames Packaging Equipment Company, Ltd. ("Thames") in
April of 1999, and purchased certain assets of Concorde Tool Corporation
("Concorde") in June of 1999. In May 2000 the Company acquired certain assets of
Premier Drywall Tool Company ("Premier"). The results of the acquired operations
are reflected in the following financial discussion after the dates of their
respective acquisitions in the Fischbein business unit for Thames and in the
Ames business unit for Concorde and Premier.
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.
17
<PAGE>
RESULTS OF OPERATIONS
The table below summarizes the results of operations of the Company for the
three month periods ending on the dates indicated (in thousand $):
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
----------------- -----------------
Net revenues
<S> <C> <C> <C> <C>
Ames net revenues $16,395 45.0% $14,270 43.2%
Nestaway net revenues 12,513 34.4 10,722 32.4
Fischbein net revenues 7,509 20.6 8,063 24.4
------- ----- ------- -----
Total net revenues 36,417 100.0% 33,055 100.0%
Cost of revenues (1) 18,941 52.0% 17,488 52.9%
------- ----- ------- -----
Gross profit (1) 17,476 48.0% 15,567 47.1%
Selling, general, administrative expenses (1) 7,438 20.4% 7,244 21.9%
------- ----- ------- -----
EBITDA before other expense (income) (2) 10,038 27.6% 8,323 25.2%
Depreciation and amortization 1,965 5.4% 1,845 5.6%
------- ----- ------- -----
Income from operations 8,073 22.2% 6,478 19.6%
Interest expense 3,577 9.8 3,574 10.8
Other expense (income) (75) (0.2) (182) (0.5)
------- ----- ------- -----
Income before income taxes 4,571 12.6% 3,086 9.3%
Provision for income taxes 2,091 5.8 1,484 4.5
------- ----- ------- -----
Net income $ 2,480 6.8% $ 1,602 4.8%
======= ===== ======= =====
</TABLE>
(1) Excluding depreciation and amortization
(2) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). EBITDA is defined as operating income plus depreciation and
amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
EBITDA should not be considered as an alternative to income from
operations as determined in accordance with generally accepted accounting
principals as an indicator of the operating performance of the Company or
as an alternative to cash flows as a measure of liquidity.
18
<PAGE>
RESULTS OF OPERATIONS
The table below summarizes the results of operations of the Company for the
six month periods ending on the dates indicated (in thousand $):
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
----------------- -----------------
Net revenues
<S> <C> <C> <C> <C>
Ames net revenues $32,677 46.0% $27,646 43.1%
Nestaway net revenues 23,770 33.5 21,709 33.8
Fischbein net revenues 14,534 20.5 14,857 23.1
------- ----- ------- -----
Total net revenues 70,981 100.0% 64,212 100.0%
Cost of revenues (1) 36,493 51.4% 34,233 53.3%
------- ----- ------- -----
Gross profit (1) 34,488 48.6% 29,979 46.7%
Selling, general, administrative expenses (1) 15,335 21.6% 14,084 21.9%
------- ----- ------- -----
EBITDA before other expense (income) (2) 19,153 27.0% 15,895 24.8%
Depreciation and amortization 3,937 5.5% 3,675 5.7%
------- ----- ------- -----
Income from operations 15,216 21.5% 12,220 19.1%
Interest expense 7,116 10.0 7,125 11.1
Other expense (income) (116) (.1) (34) 0.0
------- ----- ------- -----
Income before income taxes 8,216 11.6% 5,129 8.0%
Provision for income taxes 3,708 5.2 2,535 4.0
------- ----- ------- -----
Net income $ 4,508 6.4% $ 2,594 4.0%
======= ===== ======= =====
</TABLE>
(1) Excluding depreciation and amortization
(2) Earnings before interest, taxes, depreciation and amortization ("EBITDA").
EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to incur and service debt. EBITDA should not be
considered as an alternative to income from operations as determined in
accordance with generally accepted accounting principals as an indicator
of the operating performance of the Company or as an alternative to cash
flows as a measure of liquidity.
19
<PAGE>
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999.
NET REVENUES. Net revenues increased $3,362,000, or 10.2%, to $36,417,000 in
the three month period ended June 30, 2000 from $33,055,000 in the three month
period ended June 30, 1999. Net revenues improved primarily due to increased
rentals of ATF tools and sales of drywall related merchandise and dishwasher
racks which were partially offset by a decrease in sales of bag closing
equipment.
Ames' net revenues increased $2,125,000, or 14.9%, to $16,395,000 in the
three month period ended June 30, 2000 from $14,270,000 in the three month
period ended June 30, 1999. The increase was primarily the result of increased
rental revenues due to both an increase in the number of tools on rent and a
rental price increase and sales of drywall related merchandise at company-
managed distribution outlets. Revenues generated from the sale of ATF tools also
improved in part due to the acquisition of Concorde Tool Corporation in June
1999.
Nestaway's net revenues increased $1,791,000, or 16.7%, to $12,513,000 in
the three month period ended June 30, 2000 from $10,722,000 in the three month
period ended June 30, 1999. Revenue growth was primarily attributable to
increased sales of dishwasher racks to OEMs. (See also managements discussion
for the six months ended June 30, 2000.)
Fischbein's net revenues decreased $554,000, or 6.8%, to $7,509,000 in the
three month period ended June 30, 2000 from $8,063,000 in the three month period
ended June 30, 1999. The decrease was primarily due to a decline in domestic bag
closing equipment revenues due to economic conditions impacting certain market
segments, particularly agricultural. Material handling equipment revenues
increased over the prior year by 23.2% due to strong conveyor sales.
GROSS PROFIT EXCLUDING DEPRECIATION AND AMORTIZATION. Gross profit excluding
depreciation and amortization increased $1,909,000, or 12.3%, to $17,476,000 in
the three month period ended June 30, 2000, from $15,567,000 in the three month
period ended June 30, 1999. 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 increased .9% to
48.0% from 47.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES EXCLUDING DEPRECIATION AND
AMORTIZATION. Selling, general and administrative expenses ("SG&A") excluding
depreciation and amortization increased $194,000, or 2.7%, to $7,438,000 in the
three month period ended June 30, 2000 from $7,244,000 in the three month period
ended June 30, 1999. 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 $509,000
over the prior year. The increase was offset in part, by decreases in
professional services, and in 1999 the Company recorded a nonrecurring charge
related to the relocation of its corporate office to Houston of $220,000.
EBITDA. Earnings before interest, taxes, depreciation and amortization
("EBITDA") increased $1,715,000, or 20.6%, to $10,038,000 for the three month
period ending June 30, 2000 from $8,323,000 for the three month period ending
June 30, 1999. The increase was primarily attributable to the revenue and gross
profit margin growth discussed in the preceding paragraphs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$120,000, or 6.5%, to $1,965,000 in the three month period ended June 30, 2000
from $1,845,000 in the three month period ended June 30, 1999 due primarily to
the impact of acquisitions and capital expenditures.
INTEREST EXPENSE. Interest expense increased $3,000 to $3,577,000 in the
three month period ended June 30, 2000 from $3,574,000 in the three month period
ended June 30, 1999. The increase is attributable to higher interest rates on
the Company's variable rate debt and increased amortization of capitalized
financing costs which offset the impact of lower debt levels.
OTHER INCOME AND EXPENSE. Other income was $75,000 in the three month period
ended June 30, 2000 compared to other income of $182,000 in the three month
period ended June 30, 1999. Other income in 1999 included a gain recognized on
the life insurance policies insuring a former executive of the Company. The
Company recorded higher interest income in 2000 due to increased cash balances
and interest rates.
20
<PAGE>
INCOME TAXES AND NET INCOME. The effective tax rate was 45.7% in the three
month period ended June 30, 2000 compared to 48.1% in the three month period
ended June 30, 1999. Net income increased $878,000, or 54.8%, to $2,480,000 for
the three month period ended June 30, 2000, from $1,602,000 for the three month
period ended June 30, 1999.
SIX MONTH ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
NET REVENUES. Net revenues increased $6,769,000, or 10.5%, to $70,981,000 in
the six-month period ended June 30, 2000 from $64,212,000 in the six month
period ended June 30, 1999. The increase in net revenues was a result of
increased rentals and sales of ATF tools, increased sales of dishwasher racks
and rack components, and the impact of acquisitions.
Ames' net revenues increased $5,031,000, or 18.2%, to $32,677,000 in the six
month period ended June 30, 2000 from $27,646,000 in the six month period ended
June 30, 1999. The increase was primarily the result of an increase in both
price and volume of rented ATF tools and an increase in sales of ATF tools
partially due to an order backlog from the fourth quarter of 1999 and the
acquisition of Concorde. Ames benefited from the strength of the U.S. housing
market.
Nestaway's net revenues increased $2,061,000, or 9.5%, to $23,770,000 in the
six month period ended June 30, 2000 from $21,709,000 in the six month period
ended June 30, 1999. The revenue increase was primarily attributable to sales of
dishwasher racks and rack components which offset reduced revenues from other
formed wire products.
A non-dishwasher rack customer of Nestaway's recently terminated its
obligation to purchase certain formed wire products from the Company after July
2000. Revenues will likely continue through a portion of the third quarter
though at diminishing volumes. Sales of these formed wire products to this
customer represented approximately $10.1 million in revenue in 1999 and
approximately $4.3 million in the first half of 2000. The Company is undertaking
efforts to replace the revenues represented by this customer, though there can
be no assurance that revenues or profitability achieved will equal those
received from this customer, nor as to when any such revenues will be generated.
Fischbein's net revenues decreased $323,000, or 2.2%, to $14,534,000 in the
six month period ended June 30, 2000 from $14,857,000 in the six month period
ended June 30, 1999. Bag closing equipment revenues declined 3.9% primarily due
to reduced revenues domestically as a result of economic conditions impacting
certain market segments, particularly agricultural. Bag closing revenues
improved in Europe with revenue growth from Thames acquired in April 1999.
Flexible material handling sales grew 3.5%.
GROSS PROFIT EXCLUDING DEPRECIATION AND AMORTIZATION. Gross profit excluding
depreciation and amortization increased $4,509,000, or 15.0%, to $34,488,000 in
the six month period ended June 30, 2000 from $29,979,000 in the six month
period ended June 30, 1999. 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 48.6%
from 46.7%. This was the combined result of improved business mix with continued
revenue growth occurring at the Company's most profitable business unit, cost
improvements and product mix.
Ames' profit margins grew at a rate in excess of the revenue growth rate
with gross profits as a percentage of revenues improving due to growth occurring
in higher margin revenue components, ATF rentals and sales, and efficiency
improvements in the service center operations. Fischbein's profit margins also
improved primarily due to the contribution of an acquisition whose product line
generates higher margins as well as cost reductions from production
efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES EXCLUDING DEPRECIATION AND
AMORTIZATION. Selling, general and administrative expenses ("SG&A") excluding
depreciation and amortization increased $1,251,000, or 8.9%, to $15,335,000 in
the six month period ended June 30, 2000 from $14,084,000 in the six month
period ended June 30, 1999. 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 is the most marketing intensive of the
Company's three business units; consequently revenue growth is expected to be
accompanied with higher levels of SG&A expense. Among those expenses which
increased at Ames were higher levels of bad debt, in part due to reserves for
potential future losses for billings of tools not returned which billings are
included in revenues, and advertising and promotional expenses. The Company's
SG&A expenses also increased as a result of the acquisition of Thames.
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EBITDA. Earnings before interest, taxes, depreciation, and amortization
("EBITDA") increased $3,258,000, or 20.5% to $19,153,000 for the six month
period ending June 30, 2000 from $15,895,000 for the six month period ending
June 30, 1999. The increase was primarily attributable to the revenue and gross
profit margin growth discussed in the preceding paragraphs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$262,000 or 7.1%, to $3,937,000 in the six month period ended June 30, 2000 from
$3,675,000 in the six month period ended June 30, 1999. This was primarily
attributable to an increase in goodwill amortization and depreciation as a
result of acquisitions and capital expenditures.
INTEREST EXPENSE. Interest expense decreased $9,000 to $7,116,000 in the six
month period ended June 30, 2000 from $7,125,000 in the six month period ended
June 30, 1999. The decrease was the result of reduced levels of debt which was
partially offset by higher interest rates on the Company's variable rate debt
and additional amortization of deferred financing costs.
OTHER EXPENSE. Other income was $116,000 in the six month period ended June
30, 2000 compared to other income of $34,000 in the six month period ended June
30, 1999. The Company recorded a gain in the current year as a result of a
negotiated lump sum distribution of deferred compensation benefits to the
beneficiary of a former executive of the Company. The original agreement
executed in 1980 had provided for benefits to be paid upon the death of the
former executive over a ten-year period. The Company also noted an improvement
in interest income.
INCOME TAXES AND NET INCOME. The effective tax rate was 45.1% in the six
month period ended June 30, 2000 compared to 49.4% in the six month period ended
June 30, 1999. The lower effective rate resulted from the lessened impact of
nondeductible expenses, primarily the amortization of goodwill from the 1998
acquisition of the Company on the effective tax rate. Net income increased
$1,914,000, or 73.8% to $4,508,000 in 2000 from $2,594,000 in the six month
period ended June 30, 1999 as a result of the items discussed in the preceding
paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operating activities of $5,602,000 in the
six month period ended June 30, 2000 compared to $7,742,000 in the six month
period ended June 30, 1999 and had cash on hand of $6,887,000 at June 30, 2000.
The reduction in cash from operating activities was in part due to a negotiated
lump sum distribution settlement of $780,000 to the beneficiary of a former
executive pursuant to an employment agreement entered into in 1980. Under the
employment agreement, the Company, had it not negotiated the lump sum payment,
was required to pay the designee of the former executive an annual payment equal
to 40% of his final salary, as defined in the agreement, for a 10-year period
upon the former executive's death. The Company had previously purchased life
insurance policies on this and other former executives with similar agreements
and received proceeds from the related policies in May 1999 upon the death of
the former executive. The Company also experienced an increase in working
capital as discussed below.
At June 30, 2000, the Company had working capital of $23,279,000 compared to
working capital of $17,445,000 at December 31, 1999. The increase in working
capital was primarily due to a reduction in accrued liabilities partially due to
the distribution settlement discussed above, and an increase in inventory. The
inventory increase was primarily attributable to an increase in parts at Ames'
service centers in response to increased ATF rentals and the Premier
acquisition, and due to order activity and product mix at Fischbein. These
increases were partially offset by a reduction in cash.
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 six months ended June 30, 2000, the Company spent
$1,375,000 on capital projects. The Company projects capital expenditures of
approximately $7.0 million in 2000, 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. As a result of outstanding letters of credit, the
Company had $14,815,000 in availability. The Company had no borrowings
outstanding on its Revolving Credit Facility at June 30, 2000. The Acquisition
Facility provides the Company with $25,000,000 of borrowings, subject to
customary conditions, of which $18,000,000 was available at June 30,
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2000. 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 be required to install additional capacity
to meet the requirements of current and new customers. The management of the
Company continues to evaluate its business and organizational structure on an
ongoing basis to determine actions it believes to be in the best interests of
the Company and its stockholders. This includes the frequent consideration of
acquisitions which may or may not be synergistic with the Company. Financing
such acquisitions may require advances from the Company's Acquisition Facility.
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.
In May 2000, the Company acquired certain assets of Premier Drywall Tool
Company, Inc. for approximately $4.1 million of which $.4 million, subject to
adjustment pursuant to the agreement, is payable 90 days after closing. The
acquisition of these assets was funded through a borrowing from the Company's
Acquisition Facility of $4.0 million.
ACCOUNTING CHANGES
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement addresses
a limited number of issues causing implementation difficulties for entities
applying SFAS No. 133. SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets of liabilities in the balance sheet and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (i) a hedge of the exposure to
changes in the fair value of a recognized asset of liability or an unrecognized
firm commitment, (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (iii) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This statement 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.
Accordingly, management does not expect implementation of this standard to
affect its financial position or results of operations.
SUBSEQUENT EVENT
AXIA Group, Inc. and Cortec Group Fund III, L.P. announced on July 21, 2000
that they have signed a definitive agreement for an affiliate of Cortec to
acquire AXIA Group. Terms of the agreement are not being disclosed. Closing of
the sale is expected in late August.
In connection with the transaction, AXIA Incorporated, a wholly-owned
subsidiary of AXIA Group, Inc., announced that it would conduct an offer to
purchase and consent solicitation for its outstanding 10 3/4% Senior
Subordinated Notes.
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.
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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. 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 or a liability on its Consolidated Balance Sheet related to this matter.
The settlement of this issue is dependent 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 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, subject to a specified
threshold and deductible.
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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.
The Company filed a report on form 8-K on July 24, 2000 announcing the
purchase agreement between Cortec Group Fund III and AXIA Group, Inc., as
discussed in Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, Subsequent Event.
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a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1* Certificate of Incorporation of the Company, as amended
3.2* Bylaws of the Company
4.1* Indenture, as supplemented, dated as of July 22, 1998, by and
between the Company and State Street Bank & Trust Company
National Bank, as Trustee, with respect to the 10.75% Senior
Subordinated Notes due 2008, including the form of the Note.
4.2** First Supplemental Indenture, dated as of January 1, 2000
10.1* Axia Group, Inc. 1998 Stock Awards Plan
10.2* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan
to be renamed AXIA Incorporated Employee Stock Ownership and
401(k) Plan
10.3* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan
Trust Agreement to be renamed AXIA Incorporated Employee Stock
Ownership and 401(k) Plan Trust Agreement
10.8* Credit Agreement dated as of July 22, 1998 among Axia Finance
Corp., AXIA Incorporated, Ames Taping Tool Systems, Inc.,
TapeTech Tool Co., Inc. and Paribas
10.9* Security Agreement dated as of July 22, 1998 by and between AXIA
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.
10.14** Amendment to Credit Agreement dated as of December 27, 1999, by
and among AXIA Incorporated, Ames Taping Tool Systems, Inc.,
TapeTech Tool Co. Inc., and Paribas
* Filed as an exhibit to the Company's Form S-4 (Registration No. 333-64555)
under an exhibit number identical to that described herein and incorporated
herein by this reference.
** Filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1999 under an exhibit number identical to that described herein
and incorporated herein by this reference.
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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: August 11, 2000 /s/ Lyle J. Feye
----------------
Lyle J. Feye
Vice President Finance, Treasurer,
Chief Financial Officer
27
