<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR QUARTER ENDED MARCH 31, 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 MARCH 31, 2000 AND DECEMBER 31, 1999
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,487 $ 7,218
Accounts receivable, net 17,233 17,600
Inventories, net 12,830 11,793
Prepaid income taxes and other current assets 703 1,100
Deferred income tax benefits 3,684 3,489
-------- --------
Total Current Assets $ 39,937 $ 41,200
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ 984
Buildings and improvements 5,299 5,307
Machinery and equipment 20,155 19,903
Equipment leased to others 10,867 10,891
-------- --------
37,305 37,085
Less: Accumulated depreciation 6,999 5,965
-------- --------
Net Plant and Equipment $ 30,306 $ 31,120
OTHER ASSETS:
Goodwill, net $107,576 $108,319
Intangible assets, net 1,069 1,122
Deferred charges, net 16,847 17,027
Other assets 19 20
-------- --------
Total Other Assets $125,511 $126,488
-------- --------
TOTAL ASSETS $195,754 $198,808
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,990 $ 5,464
Accounts payable 4,645 5,011
Payable to parent 603 603
Accrued liabilities 8,699 12,526
Accrued income taxes 1,185 151
-------- --------
Total Current Liabilities $ 20,122 $ 23,755
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities 125,271 126,618
Other non-current liabilities 7,652 7,913
Deferred income taxes 6,439 6,205
-------- --------
Total Non-Current Liabilities $139,362 $140,736
Commitments and contingencies -- --
Common stock held by ESOP 2,183 2,183
Less: Note receivable from ESOP (1,377) (1,445)
STOCKHOLDER'S EQUITY:
Common stock ($.01) par value; 100 shares
authorized, issued and outstanding $ -- $ --
Additional paid-in capital 26,680 26,680
Retained earnings 9,114 7,086
Accumulated other comprehensive (loss) (330) (187)
-------- --------
Total Stockholder's Equity $ 35,464 $ 33,579
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $195,754 $198,808
======== ========
The accompanying notes to the unaudited interim consolidated financial statements
are an integral part of these financial statements.
</TABLE>
2
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
January 1, 2000 January 1, 1999
to to
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net sales $25,151 $22,788
Net rentals 9,413 8,369
------- -------
Net revenues $34,564 $31,157
Cost of sales $14,896 $14,425
Cost of rentals 2,656 2,320
Selling, general and administrative expenses 7,897 6,840
Depreciation and amortization 1,972 1,830
------- -------
Income from operations $ 7,143 $ 5,742
Interest expense 3,539 3,551
Interest income (68) (64)
Other expense (income), net 27 212
------- -------
Income before income taxes $ 3,645 $ 2,043
Provision for income taxes 1,617 1,051
------- -------
Net income $ 2,028 $ 992
======= =======
The accompanying notes to the unaudited interim consolidated financial statements
are an integral part of these financial statements.
</TABLE>
3
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 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>
AXIA Incorporated
BALANCE, DECEMBER 31, 1998 $ - $ 26,511 $ 1,482 $ (1) $ 210 $ 209 $ -
-------- ---------- -------- --------- --------- -------- -------
Net income - - 992 - - - 992
Cumulative translation adjustment - - - - (243) (243) (243)
-------
Comprehensive income $ 749
=======
BALANCE, MARCH 31, 1999 $ - $ 26,511 $ 2,474 $ (1) $ (33) $ (34)
(Unaudited) ======== ========== ======== ========= ========= ========
BALANCE, DECEMBER 31, 1999 $ - $ 26,680 $ 7,086 $ - $ (187) $ (187) $ -
Net income - - 2,028 - - - 2,028
Cumulative translation adjustment - - - - (143) (143) (143)
-------
Comprehensive income $ 1,885
-------- ---------- -------- --------- --------- -------- =======
BALANCE, MARCH 31, 2000 $ - $ 26,680 $ 9,114 $ - $ (330) $ (330)
(Unaudited) ======== ========== ======== ========= ========= ========
The accompanying notes to the unaudited interim consolidated financial statements
are an integral part of these financial statements.
</TABLE>
4
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
January 1, 2000 January 1, 1999
to to
March 31, 2000 March 31, 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,028 $ 992
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,217 2,025
Deferred income tax provision 39 48
Loss on disposal of fixed assets 129 26
Allocated ESOP shares 68 68
Provision for losses on accounts receivable 964 427
Provision for obsolescence of inventories 3 (14)
Changes in assets and liabilities:
Accounts receivable (694) (768)
Inventories (1,128) 85
Accounts payable (308) 481
Accrued liabilities (3,922) (2,757)
Payable to parent - 215
Other current assets (8) (1,334)
Income taxes payable 1,555 539
Other non-current assets (46) 401
Other non-current liabilities (261) 662
------- -------
Net Cash (used in) provided by Operating Activities $ 636 $ 1,096
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (533) (695)
Proceeds from sale of fixed assets 11 13
------- -------
Net Cash (used in) provided by Investing Activities $ (522) $ (682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other long-term debt (1,821) (906)
Other equity transactions - 18
------- -------
Net Cash (used in) provided by Financing Activities $(1,821) $ (888)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (24) (37)
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $(1,731) $ (511)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 7,218 5,904
------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 5,487 $ 5,393
======= =======
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
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 $398,000 and $386,000 as of
March 31, 2000 and December 31, 1999, respectively, consist of the following (in
thousands):
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials $ 5,444 $ 4,651
Work in process 1,203 1,073
Finished goods 6,183 6,069
------- -------
Total inventories $12,830 $11,793
======= =======
6
<PAGE>
NOTE 3 LONG-TERM DEBT
Long-term debt, inclusive of capital lease obligations which are not
material, consists of the following (in thousands):
March 31, 2000 December 31, 1999
-------------- -----------------
10.75% Senior Subordinated Notes $100,000 $100,000
Term Loan (7.61% at March 31, 2000) 26,314 28,040
ESOP Term Loan (7.78% at March 31, 2000) 747 862
Acquisition Facility (7.69% at March 31, 2000) 3,000 3,000
Other 200 180
-------- --------
Total Debt $130,261 $132,082
Less Current maturities (4,990) (5,464)
-------- --------
Total Long-Term Debt $125,271 $126,618
======== ========
Current maturities of long-term debt as of March 31, 2000 consisted of the
following (in thousands):
Scheduled Payment
Date Amount
----------------- ------
Term Loan and ESOP Loan June 30, 2000 $ 975
Term Loan and ESOP Loan September 30, 2000 1,309
Term Loan and ESOP Loan December 31, 2000 1,309
Term Loan and ESOP Loan March 31, 2001 1,309
Other Various 88
------
Total Current Maturities $4,990
======
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.
7
<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 manufactures extendable, flexible,
gravity and motorized conveyors and portable, nestable and stackable warehouse
storage racks.
A summary of segment information for the periods ended March 31, 2000 and
March 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Ames Nestaway Fischbein Corporate Consolidated
---- -------- --------- --------- ------------
March 31, 2000
<S> <C> <C> <C> <C> <C>
Revenues $16,282 $11,257 $ 7,025 $ - $ 34,564
Income from operations 4,975 2,027 895 (754) 7,143
Total assets 80,576 57,917 35,713 21,548 195,754
Depreciation and amortization 1,059 673 231 254 2,217
Capital expenditures 360 100 62 11 533
March 31, 1999
Revenues $13,376 $10,987 $ 6,794 $ - $ 31,157
Income from operations 3,753 1,990 765 (766) 5,742
Total assets 72,027 66,551 31,408 23,586 193,572
Depreciation and amortization 880 692 249 204 2,025
Capital expenditures 541 104 50 - 695
</TABLE>
NOTE 6 SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are fully and
unconditionally guaranteed on a joint and several basis (collectively, the
"Subsidiary Guarantees") by Ames Taping Tool Systems, Inc., and TapeTech Tool
Co., Inc., each a wholly-owned subsidiary of the Company and each a "Guarantor."
These subsidiaries, together with the operating divisions of the Company,
represent all of the operations of the Company conducted in the United States.
The remaining subsidiaries of the Company are foreign subsidiaries.
The Company's payment obligations under the Bank Credit Agreement are fully
and unconditionally guaranteed on a joint and several basis by each Guarantor.
The obligations of each Guarantor under its Subsidiary Guarantee are
subordinated to all senior indebtedness of such Guarantor, including the
guarantee by such Guarantor of the Company's borrowings under the Bank Credit
Agreement.
The following consolidating condensed financial data illustrates the
condition of the combined Guarantors. Management believes separate complete
financial statements of the respective Guarantors would not provide additional
material information which would be useful in assessing the financial
composition of the Guarantors. No single Guarantor has any significant legal
restrictions on the ability of investors or creditors to obtain access to its
assets in event of default on the Subsidiary Guarantee other than its
subordination to senior indebtedness described above.
Investments in subsidiaries are accounted for by the parent on the equity
method for purposes of the supplemental consolidating presentation. Earnings of
subsidiaries are therefore reflected in the parent's investment accounts and
earnings. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
8
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF MARCH 31, 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 $ 3,740 $ 719 $1,028 $ - $ 5,487
Accounts receivable, net 8,276 7,276 3,137 (1,456) 17,233
Inventories, net 7,594 2,533 3,149 (446) 12,830
Prepaid income taxes and other current assets 520 142 41 - 703
Deferred income tax benefits 3,684 - - - 3,684
-------- ------- ------ -------- --------
Total Current Assets $ 23,814 $10,670 $7,355 $ (1,902) $ 39,937
-------- ------- ------ -------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ - $ - $ - $ 984
Buildings and improvements 4,233 136 930 - 5,299
Machinery and equipment 18,961 625 569 - 20,155
Equipment leased to others 10,867 - - - 10,867
-------- ------- ------ -------- --------
35,045 761 1,499 - 37,305
Less: Accumulated depreciation 6,031 345 623 - 6,999
-------- ------- ------ -------- --------
Net Plant and Equipment $ 29,014 $ 416 $ 876 - $ 30,306
-------- ------- ------ -------- --------
OTHER ASSETS:
Goodwill, net $ 89,775 $16,522 $1,279 $ - $107,576
Intangible assets, net 1,063 6 - - 1,069
Deferred assets, net 15,837 1,009 1 - 16,847
Investment in wholly-owned subsidiaries 22,945 - - (22,945) -
Interco Payable / Receivable - - - - -
Other assets 19 - - - 19
-------- ------- ------ -------- --------
Total Other Assets $129,639 $17,537 $1,280 $(22,945) $125,511
-------- ------- ------ -------- --------
TOTAL ASSETS $182,467 $28,623 $9,511 $(24,847) $195,754
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,946 $ 44 $ - $ - $ 4,990
Accounts payable 3,466 678 1,957 (1,456) 4,645
Payable to parent 603 - - - 603
Accrued liabilities 7,344 857 498 - 8,699
Accrued income taxes 969 - 216 - 1,185
Advance accounts (11,206) 10,068 1,138 - -
-------- ------- ------ -------- --------
Total Current Liabilities $ 6,122 $11,647 $3,809 $ (1,456) $ 20,122
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES
Long-term debt, less current maturities $125,208 $ 63 $ - $ - $125,271
Other non-current liabilities 7,652 - - - 7,652
Deferred income taxes 6,439 - - - 6,439
-------- ------- ------ -------- --------
Total Non-Current Liabilities $139,299 $ 63 $ - $ - $139,362
-------- ------- ------ -------- --------
Common stock held by ESOP 2,183 - - - 2,183
Less: Note receivable from ESOP (1,377) - - - (1,377)
STOCKHOLDER'S EQUITY:
Common stock and additional paid-in capital $ 26,680 $ 5,098 $1,929 $ (7,027) $ 26,680
Retained earnings 9,560 11,815 4,103 (16,364) 9,114
Accumulated other comprehensive (loss) - - (330) - (330)
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 36,240 $16,913 $5,702 $(23,391) $ 35,464
-------- ------- ------ -------- --------
TOTAL LIABILITY AND STOCKHOLDER'S EQUITY $182,467 $28,623 $9,511 $(24,847) $195,754
======== ======= ====== ======== ========
</TABLE>
9
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 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 $17,383 $ 6,900 $3,296 $(2,428) $25,151
Net rentals 5,177 9,162 251 (5,177) 9,413
------- ------- ------ ------- -------
Net revenues $22,560 $16,062 $3,547 $(7,605) $34,564
Cost of sales $11,517 $ 3,776 $2,072 $(2,469) $14,896
Cost of rentals 593 7,088 152 (5,177) 2,656
Selling, general and administrative expenses 3,932 3,062 903 - 7,897
Depreciation and amortization 1,764 189 19 - 1,972
------- ------- ------ ------- -------
Income from operations $ 4,754 $ 1,947 $ 401 $ 41 $ 7,143
Interest expense $ 3,534 $ 3 $ 2 $ - $ 3,539
Intercompany interest expense (income) (267) 232 35 - -
Other expense (income), net (1,193) 30 90 1,032 (41)
------- ------- ------ ------- -------
Income (loss) before income taxes $ 2,680 $ 1,682 $ 274 $ (991) $ 3,645
Provision for income taxes 693 809 115 - 1,617
------- ------- ------ ------- -------
Net income (loss) $ 1,987 $ 873 $ 159 $ (991) $ 2,028
======= ======= ====== ======= =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 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 $ (473) $ 565 $ 544 - $ 636
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (489) - (44) - (533)
Proceeds from sale of fixed assets 11 - - - 11
------- ------- ------ ------- -------
Net Cash used in Investing Activities $ (478) - $ (44) - $ (522)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other long-term debt (1,829) 8 - - (1,821)
Net increase (decrease) in advance account 271 (281) 10 - -
------- ------- ------ ------- -------
Net Cash (used in) provided by Financing
Activities $(1,558) $ (273) $ 10 - $(1,821)
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (24) - (24)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $(2,509) $ 292 $ 486 - $(1,731)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 6,249 427 542 - 7,218
------- ------- ------ ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,740 $ 719 $1,028 - $ 5,487
======= ======= ====== ======= =======
</TABLE>
10
<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) --
Intercompany 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>
11
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent and its Guarantor Non-Guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
Net sales $16,431 $ 4,989 $2,758 $ (1,390) $22,788
Net rentals 4,603 8,145 223 (4,602) 8,369
------- ------- ------ --------- -------
Net revenues $21,034 $13,134 $2,981 $ (5,992) $31,157
Cost of sales $11,214 $ 2,909 $1,744 $(1,442) $14,425
Cost of rentals 506 6,279 137 (4,602) 2,320
Selling, general and administrative expenses 3,711 2,394 735 - 6,840
Depreciation and amortization 1,658 149 23 - 1,830
------- ------- ------ --------- -------
Income from operations $ 3,945 $ 1,403 $ 342 $ 52 $ 5,742
Interest expense $ 3,548 $ 2 $ 1 $ - $ 3,551
Intercompany interest expense (income) 43 (43) - - -
Other expense (income), net (967) 15 136 964 148
------- ------- ------ --------- -------
Income (loss) before income taxes $ 1,321 $ 1,429 $ 205 $ (912) $ 2,043
Provision for income taxes 381 572 98 - 1,051
------- ------- ------ --------- -------
Net income (loss) $ 940 $ 857 $ 107 $ (912) $ 992
======= ======= ====== ========= =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Parent and its Guarantor Non-Guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------- ------------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (128) $ 1,182 $ 42 - $ 1,096
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (694) - (1) - (695)
Proceeds from sale of fixed assets 13 - - - 13
------- ------- ------ --------- -------
Net Cash used in Investing Activities $ (681) - $ (1) - $ (682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ - $ - $ - - $ -
Payments of other long-term debt (914) 8 - - (906)
Net increase (decrease) in advance account 957 (903) (54) - -
Intercompany dividends
Other equity transactions (2) - 20 - 18
------- ------- ------- --------- -------
Net Cash (used in) provided by Financing
Activities $ 41 $ (895) $ (34) - $ (888)
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ - $ - $ (37) - $ (37)
------- ------- ------ --------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (768) 287 (30) - (511)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,992 307 605 - 5,904
------- ------- ------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,224 $ 594 $ 575 - $5,393
======= ======= ======= ========= =======
</TABLE>
12
<PAGE>
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, and 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 12% of the Company's net revenues for the
quarter ended March 31, 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 the assets of Concorde Tool Corporation
("Concorde") in June of 1999. The results of the acquired operations, included
in the Fischbein and Ames business units respectively, are reflected in the
following financial discussion after the dates of their respective acquisitions.
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.
13
<PAGE>
Results of Operations
The table below summarizes the results of operations of the Company for the
years indicated (in thousand $):
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C> <C> <C>
Net revenues
Ames net revenues $16,282 47.1% $13,376 42.9%
Nestaway net revenues 11,257 32.6 10,987 35.3
Fischbein net revenues 7,025 20.3 6,794 21.8
------- ----- ------- -----
Total net revenues $34,564 100.0% $31,157 100.0%
Cost of revenues (1) 17,552 50.8 16,745 53.7
------- ----- ------- -----
Gross profit (1) $17,012 49.2% $14,412 46.3%
Selling, general, administrative expenses (1) 7,897 22.8 6,840 22.0
------- ----- ------- -----
EBITDA before other expense (income) (2) 9,115 26.4% 7,572 24.3%
Depreciation and amortization 1,972 5.7 1,830 5.9
------- ----- ------- -----
Income from operations $ 7,143 20.7% $ 5,742 18.4%
Interest expense 3,539 10.2 3,551 11.1
Other expense (income) (41) (.1) 148 .5
------- ----- ------- -----
Income before income taxes and extraordinary items $ 3,645 10.6% $ 2,043 6.8%
Provision for income taxes 1,617 4.7 1,051 3.5
------- ----- ------- -----
Net income $ 2,028 5.9% $ 992 3.3%
======= ===== ======= =====
</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.
14
<PAGE>
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999.
NET REVENUES. Net revenues increased $3,407,000 or 10.9%, to $34,564,000 in
the three-month period ended March 31, 2000 from $31,157,000 in the three-month
period ended March 31, 1999. The increase in net revenues was a result of
increased rentals and sales of automatic taping and finishing ("ATF") tools,
sales of dishwasher racks and rack components, and the impact of acquisitions
completed after the first quarter of 1999.
Ames' net revenues increased $2,906,000 or 21.7%, to $16,282,000 in the
three-month period ended March 31, 2000 from $13,376,000 in the three-month
period ended March 31, 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 an acquisition. Ames benefited from the strength of the U.S. housing market.
Nestaway's net revenues increased $270,000 or 2.5%, to $11,257,000 in the
three-month period ended March 31, 2000 from $10,987,000 in the three-month
period ended March 31, 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. Sales of these formed wire products to this customer represented
approximately $10 million in revenue in 1999 and approximately $1.9 million in
the first quarter 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 in such sales will equal those received from
this customer, nor as to when any such revenues will be generated.
Fischbein's net revenues increased $231,000 or 3.4%, to $7,025,000 in the
three-month period ended March 31, 2000 from $6,794,000 in the three-month
period ended March 31, 1999. An acquisition in April 1999 contributed revenue
growth of $698,000 over the prior year quarter.
GROSS PROFIT EXCLUDING DEPRECIATION AND AMORTIZATION. Gross profit excluding
depreciation and amortization increased $2,600,000 or 18.0%, to $17,012,000 in
the three-month period ended March 31, 2000 from $14,412,000 in the three-month
period ended March 31, 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 49.2%
from 46.3%. 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. Nestaway's profit margins
increased with revenues with gross profit as a percentage of revenues
approximating that of the prior year. Fischbein's profit margins also improved
with revenue growth as did the gross profit as a percentage of revenues due to
the contribution of an acquisition whose product lines generate higher margins
and improved service parts revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES EXCLUDING DEPRECIATION AND
AMORTIZATION. Selling, general and administrative expenses ("SG&A") excluding
depreciation and amortization increased $1,057,000 or 15.5%, to $7,897,000 in
the three-month period ended March 31, 2000 from $6,840,000 in the three-month
period ended March 31, 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 are included in
revenues; and advertising and promotional expenses. The Company's SG&A expenses
also increased as a result of an acquisition.
EBITDA. Earnings before interest, taxes, depreciation, and amortization
("EBITDA") increased $1,543,000 or 20.4% to $9,115,000 for the three month
period ending March 31, 2000 from $7,572,000 for the three month period ending
March 31, 1999. The increase was primarily attributable to the revenue and gross
profit margin growth discussed in the preceding paragraphs.
15
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$142,000 or 7.8%, to $1,972,000 in the three-month period ended March 31, 2000
from $1,830,000 in the three-month period ended March 31, 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 $12,000 to $3,539,000 in the
three-month period ended March 31, 2000 from $3,551,000 in the three-month
period ended March 31, 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 $41,000 in the three-month period ended March
31, 2000 compared to other expense of $148,000 in the three-month period ended
March 31, 1999. The Company recorded a gain in the current year quarter 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.
INCOME TAXES AND NET INCOME. The effective tax rate was 44.4% in the three-
month period ended March 31, 2000 compared to 51.4% in the three-month period
ended March 31, 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
$1,036,000 or 104.4% to $2,028,000 in 2000 from $992,000 in the three month
period ended March 31, 1999 as a result of the items discussed in the preceding
paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operating activities of $636,000 in the three
month period ended March 31, 2000 compared to $1,096,000 in the three month
period ended March 31, 1999 and had cash on hand of $5,487,000 at March 31,
2000. The reduction in cash from operating activities was in part due to a
negotiated lump sum distribution of $780,000 to the beneficiary of a former
executive pursuant to an employment agreement entered into in 1980. Under the
agreement, the Company 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 March 31, 2000, the Company had working capital of $19,815,000 compared to
working capital of $17,045,000 at December 31, 1999. The increase in working
capital was primarily due to a reduction in accrued liabilities as a result of a
semi-annual interest payment on the Subordinated Notes and the distribution to a
former executive 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 at Fischbein due to order
activity and product mix. These increases were partially offset by a reduction
in cash and an increase in the Company's tax accrual in advance of its April 15,
2000, federal tax installment payment.
With the consummation of the Transaction, interest payments on the Notes and
under the Bank Credit Agreement and amortization of the Term Loan represent
significant obligations of the Company. The Company's remaining liquidity
demands relate to capital expenditures and working capital needs. For the
quarter ended March 31, 2000, the Company spent $533,000 on capital projects.
The Company projects capital expenditures of approximately $7.5 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 March 31, 2000. The Acquisition
Facility provides the Company with $25,000,000 of borrowings, subject to
customary conditions, of which $22,000,000 was available at March 31, 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,
16
<PAGE>
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. The acquisition of these assets was funded through a borrowing
from the Company's Acquisition Facility of $4.0 million.
ACCOUNTING CHANGES
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Holding Activities" which requires
companies to recognize all derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earning effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 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.
OTHER MATTERS
Based on reviews of mission critical and non-mission critical software and
hardware, the Company concluded prior to the end of 1999 that its systems were
Year 2000 compliant. No significant problems related to the Year 2000 were
experienced or are expected in the future. Major customers, suppliers and
utility companies have represented to the Company that they are Year 2000
compliant. While the Company has not been affected by any Year 2000 issues,
there is no guarantee that the Company's systems and those of its customers and
suppliers will continue to operate as intended.
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.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental and employee health and safety matters,
including the handling, the use, discharge and disposal of hazardous materials
and pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the
Company. NYSDEC determined that the Company, among others, may be a responsible
party through its past ownership of the property. The site is currently listed
on the New York State Registry of Inactive Hazardous Waste Disposal Sites.
Environmental consultants engaged by the Company have established a range of
estimated remediation costs of approximately $1,000,000 to $3,000,000, plus or
minus 30% of those costs. The Company established an accrual of $3,900,000 for
the remediation and associated costs.
In 1997, the Company entered into an agreement with an adjoining landowner,
who is obligated by NYSDEC to address environmental concerns at his property. By
this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance that
NYSDEC will in fact offer its approval. The Company paid the $520,000 payable
under the agreement and has an exposure under the agreement of up to an
additional $120,000 if contamination is more widespread than estimated by the
Company's environmental consultants. In the event NYSDEC does not approve the
remedy envisioned in the agreement with the adjoining land owner, 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 for a period of 24 months after
Transaction Date, subject to a specified threshold and deductible.
18
<PAGE>
The Company is aware of other formerly-owned sites at which activities
similar to the operations previously conducted on the Buffalo, New York property
have taken place. However, the Company has received no claims in connection with
those sites, and has no information that would lead it to believe that any such
claim is likely to be made. The Company is also a part owner and landlord at a
stainless steel and aluminum facility in Commerce, California that is leased to
and operated by an unrelated company. The Company has received no claims against
it in connection with this site, but the Company cannot rule out the possibility
that it might incur some liability should a claim actually be made against it as
current owner of the property.
The Buffalo, New York property formerly owned by the Company was at one time
used to mill uranium rods for the Atomic Energy Commission. The U.S. Department
of Energy has since identified residual radioactivity in a building at the site.
In 1996, the government estimated the costs of addressing the residual
radioactivity at $965,000. Given the available data, the Company and its
environmental consultants believe that a more likely total cost is less than
$100,000. To date, no cleanup costs have been assessed against the Company.
In addition, the Company has retained or assumed certain environmental
liabilities and risks of future liabilities associated with businesses
previously operated or acquired by it, including Bliss and Laughlin Steel
Company. The Company does not believe that these retained or assumed liabilities
and risks would be expected to have a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations, liabilities identified or incurred in the future, or other
circumstances, might (individually or in the aggregate) have such an effect.
The Company is a defendant in a number of lawsuits incidental to its
business. Including the environmental matters discussed above and taking into
account the proceeds held in escrow pursuant to the Merger Agreement, the
Company believes that none of these proceedings, individually, or in the
aggregate, will have a material adverse effect on the Company's financial
condition or operating results.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
March 31, 2000.
19
<PAGE>
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.
20
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXIA INCORPORATED
Date: May 11, 2000 /s/ Lyle J. Feye
-------------------------
Lyle J. Feye
Vice President Finance, Treasurer,
Chief Financial Officer
21
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