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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-64555
AXIA INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 13-3205251
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 TRAVIS STREET - SUITE 1400
Houston, Texas 77002
(Address of principal executive office) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 425-2150
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No _____.
---
(2) Yes X No _____.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
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PART I
ITEM 1. BUSINESS
CAUTIONARY STATEMENTS
This document includes forward-looking statements. Forward-looking statements
can be identified by the use of the future tense or other forward-looking terms
such as "may", "intend", "will", "expect", "anticipate", "plan", "management
believes", "estimate", "continue", "should", "strategy" or "position" or the
negatives of those terms or other variations on them or by comparable
terminology. In particular, statements, express or implied, concerning future
operating results or the ability to generate net sales, income or cash flow to
service debt are forward-looking statements. The Company has based these
forward-looking statements on the Company's current expectations and projections
about future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about the Company, including, among other things:
(i) increased competition; (ii) increased costs; (iii) loss or retirement of key
members of management and (iv) changes in general economic conditions in the
markets in which the company may from time to time compete.
The Company undertakes no obligation to update or revise these forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this document might not occur.
ACQUISITION AND MERGER
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."), a
company organized to effect the acquisition (the "Acquisition") of Axia Holdings
Corp., entered into an Agreement and Plan of Merger (the "Merger Agreement")
with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the "Predecessor
Company" prior to the date of the Transaction) to effect the acquisition for a
purchase price of $155,250,000 (including the repayment of indebtedness),
subject to certain post-closing adjustments. Upon completion of the Transaction
(the "Transaction"): (i) Holdings and AXIA Incorporated (the "Company") became
direct and indirect subsidiaries of AXIA Group Inc. ("Group" or "AXIA Group" the
parent company of Acquisition Co.) and (ii) the Company became the primary
obligor on borrowings made under the credit agreement (the "Bank Credit
Agreement") and Senior Subordinated notes issued on the Transaction Date defined
below.
On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of its
common stock ("Common Stock") and contributed the proceeds thereof to
Acquisition Co. (the "Equity Investment"). Axia Finance Corp., ("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
Company's 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.
GENERAL
AXIA Incorporated. The Company is a leading designer, manufacturer, marketer and
distributor of a diverse range of products in several niche markets including
productivity enhancing construction tools, formed wire products, industrial bag
closing equipment and flexible conveyors. Management believes the Company
possesses strong market leadership positions in its primary markets. The Company
believes that its market leadership position, brand name recognition,
established national and international distribution networks, strong customer
base and manufacturing expertise provide significant opportunities to grow sales
of new and existing products within established markets, as well as expand into
new markets. The Company believes that its diverse base of products and markets
reduces exposure to any particular industry, product market or geographic
region. The Company operates through three business units: Ames, Nestaway and
Fischbein.
Ames. Ames is the leading designer, manufacturer, marketer and distributor of
Automatic Taping And Finishing ("ATF") tools, which are rented or sold to
interior finishing contractors to finish drywall joints prior to painting,
wallpapering or other forms of final treatment. ATF tools, invented by Ames in
1939, enable interior finishing contractors to finish drywall joints
substantially faster than less productive hand finishing methods. The Company is
the leader in ATF tool rentals and sales in the markets in which it serves. The
primary business of Ames is the rental and service of more than 140,000 ATF
tools through its extensive distribution network throughout the U.S. and Canada,
including a network of 68 Company-managed stores (including rental stations and
vans). Ames also sells ATF tools through an established independent network of
dealers in the U.S. and Canada. In addition, Ames sells a variety of other
drywall tools, finishing accessories and supplies through its network of
Company-managed stores. The Company believes it has opportunities to increase
Ames' revenues (i) through its introduction of newly designed and improved ATF
tools; (ii) by expanding the use of ATF tools in the fast growing factory-built
housing market, which is increasingly utilizing finished drywall rather than
other forms of drywall; and (iii) through conversion of interior finishing
contractors from traditional hand finishing methods to ATF tools, particularly
in the eastern
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and midwestern U.S. where the use of ATF tools is less prevalent than in the
western U.S. Ames accounted for 44% of the Company's 1999 revenues, and by
taking advantage of market trends reflecting increased home ownership, second
home ownership and larger homes, all of which increase the demand for drywall
finishing and the need for drywall tools.
Nestaway. Nestaway is a leading manufacturer of formed wire products which are
used for a variety of commercial and consumer product applications. Nestaway is
North America's largest independent manufacturer of coated wire dishwasher racks
and components which are sold to the major U.S. original equipment manufacturers
("OEM's"). Approximately 75% of dishwashers sold in the U.S. are replacements.
Nestaway's primary OEM customers include Maytag, EBS-Bosch and
Whirlpool/KitchenAid. Nestaway has had relationships with all major OEMs for an
average of approximately 19 years. Nestaway also manufactures, on a contract
basis, other close tolerance, welded, non-coated or coated formed wire products
such as dish drainers, sink protectors, shower caddies, dryer racks, golf cart
baskets, bucket bails, medical baskets and small gauge axles. The Company
believes it has significant opportunities to increase Nestaway's revenues
through: (i) increasing sales to existing customers; (ii) expanding its product
offering and customer base by developing new formed wire business; (iii) and
pursuing strategic acquisitions. Nestaway accounted for 33% of the Company's
1999 revenues.
Fischbein. Fischbein is a leading worldwide manufacturer and marketer of
industrial bag closing and handling equipment and systems and a leading
manufacturer and marketer of flexible conveyors and storage racks. Bag closing
and handling systems products include: (i) portable and stationary industrial
sewing heads and sewing systems for paper, textile and woven polypropylene bags;
(ii) industrial heat sealing and bag handling systems for paper and plastic
bags; (iii) consumables, including thread and tape and (iv) service parts.
Fischbein's bag closing products are used across a broad range of industries for
packaging chemicals, minerals, agricultural and food products. In addition to
bag closing products, Fischbein manufactures extendible, flexible, gravity and
motorized conveyors and portable, nestable and stackable warehouse storage
racks. Fischbein's flexible conveyors are used by retailers for loading and
unloading tractor trailers at store sites and distribution centers. Storage
racks are designed for factory and warehouse storage where flexibility in
racking is desired and are sold to customers in various industries, including
retail, distribution, food, chemical, pharmaceutical and textile. The Company
believes it has opportunities to increase Fischbein's revenues by expanding the
product offerings that can be sold through its extensive distribution network
and by making strategic acquisitions. Fischbein accounted for 23% of the
Company's 1999 revenues.
Revenue by business unit, including the results of the Predecessor Company, for
fiscal years 1999, 1998 and 1997 is detailed in the table below:
AXIA INCORPORATED
REVENUE BY PRODUCT GROUP
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ames $ 57,650 44% $ 48,139 41% $ 42,428 40%
Nestaway 43,600 33% 41,441 35% 35,268 34%
Fischbein 30,644 23% 27,535 24% 27,104 26%
-------- --- -------- --- -------- ---
Total Revenues $131,894 100% $117,115 100% $104,800 100%
======== === ======== === ======== ===
</TABLE>
See Note 13 of the Notes to the Consolidated Financial Statements for additional
segment data.
PRODUCTS
Ames. Ames' ATF tools are used in the construction industry by professional
interior finishing contractors to finish and prepare drywall for painting or
other forms of final treatment. Automatic tapers simultaneously apply joint tape
and compound to drywall joints and automatically dispense a controlled amount of
joint compound for fast, efficient operation. For drywall finishers that prefer
to purchase their ATF tools, Ames sells ATF tools through separate dealer
networks.
Ames also offers its customers a wide variety of other products used in drywall
finishing including corner rollers, flat finishers, corner finishers, nail
spotters, loading pumps and finisher handles. Corner rollers embed joint tape
firmly into an interior corner or ceiling angle, forcing out excess compound and
leaving the angle ready for finishing. Corner finishers remove excess compound,
feathering both sides at once and apply the second coat of compound for inside
corners. Flat finishers are used to apply a final coat of joint compound over
taped joints and generally eliminate the need for sanding. Nail spotters apply
compound to nail or screw head dimples, preparing them for painting or other
final treatment. Loading pumps are used to fill Ames' ATF tools with joint
compound. Finisher
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handles are specifically designed for use with Ames' products and allow the user
to complete most of the taping and finishing work from the floor instead of
using scaffolding or stilts. In addition, Ames' stores provide its customers
with a variety of supplies and other products including hand finishing drywall
tools, drywall finishing accessories, including spray rigs, power sanders,
scaffolds and board handling devices, and drywall supplies, including compound,
paper and mesh joint tape and corner bead.
Nestaway. Nestaway's products consist of formed, coated and non-coated wire
products used for a variety of commercial and consumer product applications.
Nestaway's primary focus is on producing dishwasher racks for OEMs. Nestaway
also manufactures, on a contract basis, other close tolerance, welded, non-
coated or coated formed wire products such as dish drainers, sink protectors,
shower caddies, dryer racks, golf cart baskets, bucket bails, medical baskets
and small gauge axles. Nestaway's engineers frequently work with individual
customers to design new or improved products which are tailored to meet that
customer's specific needs.
Fischbein. Fischbein manufactures a variety of bag closing equipment, flexible
conveyors and storage equipment. Fischbein's bag closing products consist of a
variety of hand-held and stationary industrial sewing and sealing units which
utilize portable sewing machines, industrial sewing heads, sewing systems and
heat sealing and handling systems. Portable sewing machines are hand-held and
lightweight for low and moderate volume applications and are effective in
closing a wide variety of bags, including paper and woven polypropylene.
Industrial sewing heads are designed for continuous use in moderate to high
volume applications and are used to close paper, textile and woven polypropylene
bags. Sewing systems consist of pedestal-mounted sewing heads with integrated
conveying capabilities. These systems can be integrated into new or existing
bagging lines and can be fully automated. Heat sealing and handling systems are
generally used for medium to high speed bag closing and sealing applications.
These systems incorporate programmable logic controllers, pneumatics, airflow
and hot melt adhesive technologies, and are used to close polyethylene bags,
paper bags, heat sealable inner liners, pinch style bags and hot melt adhesive
closures. Fischbein also provides service parts, consumables, accessories,
thread and tape used with Fischbein equipment.
Fischbein also offers flexible conveyors and storage racks marketed under the
Nestaflex(R), Nestainer(R) and Postainer(TM) brand names. Nestaflex(R) products
include a full line of conveyors for a wide variety of material handling
applications where stationary conveyors do not provide adequate flexibility.
These products are used by major retailers for loading and unloading tractor
trailers at store sites, by distribution centers and also in light manufacturing
operations. Nestainer(R) and Postainer(TM) products consist of large, welded
steel racks designed for factory and warehouse storage and transportation
purposes where changes in stored products and quantities make stationary racking
inefficient or impractical. The stackable and nestable features of both systems
maximize vertical storage capacity and their unique design allows for compact
storage when not in use. Nestainer(R) products are also used as containers for
transporting products.
SALES AND MARKETING
The Company markets and sells its broad range of products to a wide variety of
customers through an extensive sales and marketing network which utilizes full
time sales representatives, franchisees and third party distributors. These
sales efforts are enhanced by its product development staff, who works closely
with customers to develop products which are customized to meet their specific
needs.
Ames. Ames' rental tool sales organization conducts sales and marketing
activities throughout North America. Ames' ATF rental tools reach drywall
professionals in North America through over 131 distribution locations including
68 Company-managed stores (including rental stations and vans) and 63 franchised
operations. Ames sells ATF tools through a network of 267 dealers and
distributors.
Ames utilizes franchises, rental stations, field specialists and mobile
operations to support its sales and marketing activities. Franchisees are
typically major drywall and construction material distributors who operate
multiple locations. Under its franchise arrangements which generally are used in
locations where the usage of ATF tools do not support stand-alone Company
managed stores, Ames tools are rented to drywall finishers by a third party
franchisee, typically a drywall distribution yard or other drywall related sales
business. Ames trains franchisee personnel to demonstrate the advantages of
using ATF tools , refurbishes and supplies Ames owned tools to the franchisee
and uses the franchisee's employees to rent Ames tools to interior drywall
finishers. Ames bills the customer, collects the rental revenue and pays the
franchisee a fee for its efforts. Rental stations are like franchises except
that an Ames employee, rather than the franchisee's employee, operates the Ames
rental business at the franchisee's location. Field specialists, who cover
territories in well-marked Ames vans, serve as direct marketers and on-site
trainers, and operate as rental centers for job site customers.
Nestaway. As a result of Nestaway's focus on OEMs, senior executives are
directly involved in sales and marketing efforts. Nestaway's sales and marketing
efforts also include technical, engineering and manufacturing employees who
regularly communicate with their counterparts at the OEM customer.
Fischbein. Fischbein's bag closing products are marketed and sold worldwide
through a combination of Fischbein sales and marketing personnel as well as
independent distributors and dealers and packaging machinery manufacturers.
Fischbein's flexible conveyor and
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storage racks are marketed and sold in the United States through Fischbein sales
and marketing personnel as well as through independent material handling
dealers, primarily throughout the U.S. Fischbein has company managed
distribution operations in Belgium, France, the United Kingdom, and Singapore.
CUSTOMERS
The Company's customers are diversified across each of the Company's business
units. Ames' products are generally used by interior finishing contractors. Ames
currently has over 10,000 active customer accounts with no single rental
customer exceeding 1% of the Company's 1999 net revenues. Ames' typical rental
customer is a sole proprietorship. This, together with industry dynamics,
results in higher levels of credit risk and incidence of bad debt than in the
Company's other businesses. Nestaway's products are sold to dishwasher
manufacturers and other marketers of formed wire products, including major OEMs
such as Maytag, Frigidaire, EBS-Bosch, Whirlpool/KitchenAid and General
Electric. The Company's most significant OEM customer, Maytag, accounted for
approximately 17% of the Company's consolidated revenues in 1999. The Company's
contract with this customer requires cost reduction during its term. The
inability of the Company to achieve manufacturing cost savings would result in
lower gross margins. As with other suppliers to large OEMs, the Company is
constantly exposed to intense competitive pricing pressures which potentially
may result in lack of growth or a decline in profit margins, reductions in
revenue volume, or both. The customers of other formed wire products currently
include among others, manufacturers of golf carts, distributors of healthcare
products and a major consumer products company whose purchases of formed wire
products totaled 10% of the Company's 1999 net revenues. As other supply sources
generally exist for these products, including, in some instances, offshore
manufacturers, the Company's revenue is dependant upon its ability to maintain
competitive prices and satisfy the quality, delivery and other requirements of
its customers. The loss of either of Nestaway's two largest customers or
material concessions on pricing could have a material adverse effect on the
Company.
Fischbein's customers include companies in a variety of industries including the
food, chemical, agriculture and other industries. In general, Fischbein sells in
the western hemisphere through its distributors, although the Company does sell
directly to OEMs. In Europe, Africa, the Middle East and Far East, Fischbein
sells both directly and through its distributors.
OPERATIONS
Ames. Ames purchases ATF tool components from both domestic and foreign
suppliers and either assembles the parts into finished tools or uses the parts
to refurbish rental tools in the Company's two service centers. These tools are
then rented or sold through Ames' distribution network. In general, Ames cleans
and refurbishes ATF tools at the end of each rental. Ames also sells repair
parts to, and repairs tools for, its customers who purchase tools from the
Company.
Nestaway. Nestaway operates four manufacturing plants which are located near its
major customers. Nestaway's manufacturing operations consist of wire cutting,
preparation and forming, welding, coating and assembly and packaging. Generally,
these manufacturing operations are highly automated and require high tolerance
levels. The Company's processes include the use of robotics, custom designed
manufacturing processes and tooling, the ability to weld up to 412 spots per
unit and complex coating processes.
Fischbein. Fischbein's manufacturing processes include precision machining,
welding, final assembly and the integration of electronic controls. While most
orders are for standard products, Fischbein also designs and builds custom
systems.
RAW MATERIALS AND SUPPLIERS
The Company purchases steel, metal castings, aluminum and other raw materials
from various suppliers. While all such materials are available from numerous
independent suppliers, commodity raw materials are subject to fluctuations in
price. There can be no assurance that severe shortages of such materials will
not occur in the future, which could increase the cost of or delay the shipment
of the Company's products and have a material adverse effect on the Company's
operating results. Because such materials in the aggregate constitute
significant components of the Company's cost of goods sold, fluctuations in
price could have a material adverse effect on the Company's results of
operations. Generally, the Company has been able to pass on increases in prices
of raw materials to its customers. However, there can be no assurance that the
Company will continue to be able to do so in the future.
COMPETITION
Each of the business units operates within competitive industries. The Company
is not aware of any single competitor that competes with the Company along all
three business lines.
Ames products compete with alternative methods of drywall finishing and products
of other ATF tool manufacturers and distributors. Ames' most significant
competition is from traditional hand finishing by individual professional
finishers. Ames stores also operate in a highly competitive environment with
respect to the sale of drywall related merchandise which is generally based on
price and
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convenience. Drywall related merchandise is available from contractor supply
yards, building material retailers and other sources, many of which have greater
resources than Ames.
Though Nestaway has one primary independent competitor selling to dishwasher
OEMs, the majority of dishwasher racks are internally manufactured by OEMs.
There can be no assurance that the Company's existing customers will not
increase or establish in-house rack manufacturing capacity in the future or that
other appliance industry suppliers may not enter this segment of the market. In
1996 and 1994, certain dishwasher rack customers decided to produce dishwasher
racks in-house or to utilize other sources, resulting in a material decline in
the Company's revenues. General Electric, Frigidaire and Whirlpool operate in-
house dishwasher rack manufacturing operations. Competition is generally based
on price, quality, flexibility, product design innovation, and manufacturing
efficiency. Nestaway's other non-coated and coated formed wire products compete
in a highly competitive international environment based on price, quality and
delivery capability and includes the product of many other companies, none of
which compete with Nestaway across all its product lines. In all product lines,
Nestaway is constantly exposed to competitive pricing pressure which may result
in lack of growth or a decline in profit margins and a reduction in revenue
volume. There can be no assurance the Company will continue to innovate its
products offering or continue to reduce manufacturing costs. Such inability to
continue to innovate products or pass on manufacturing cost savings pursuant to
contract terms or otherwise could lead to the loss of certain customers or lower
gross margins. Similarly, since other supply sources exist for Nestaway's
products, including offshore manufacturers, the Company may have to make
concessions on pricing to retain customers, which concessions could adversely
affect profitability.
Fischbein's products typically serve specific niche and geographic market. As a
result, Fischbein does not compete with any one company in all of its product
lines. Fischbein also sells consumable products that it does not manufacture,
such as thread, for which there are numerous alternative sources available to
its customer.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental and employee health and safety matters,
including the handling, the use, discharge and disposal of hazardous materials
and pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
See "Item 3. LEGAL PROCEEDINGS" for further information on environmental
matters.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,054 employees, of which
approximately 125 at one location were represented by a union contract which
expires in 2002. The Company believes that its relations with its employees are
satisfactory.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position held by the directors,
and executive officers of AXIA Group and the Company following the consummation
of the Transaction. Each director is elected for a one-year term or until such
person's successor is duly elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------- --- -------------------------------------------------------------
<S> <C> <C>
Gary L. Rosenthal 50 Chairman of the Board, President and Chief Executive Officer
Lyle J. Feye 46 Vice President-Finance, Treasurer and Chief Financial Officer
David H. Chesney 56 President and General Manager of Nestaway
Ian G. Wilkins 60 President and General Manager of Fischbein
Robert G. Zdravecky 53 President and General Manager of Ames
Susan O. Rheney 40 Director
C. Byron Snyder 51 Director
James D. Woods 68 Director
</TABLE>
Gary L. Rosenthal has served as Chairman of the Board since the transaction and
as Chief Executive Officer and President since January 1999. Mr. Rosenthal is
the President of Heaney Rosenthal, Inc., a private financial organization
specializing in the acquisition of businesses, a position he has held since
1994. From 1990 to 1994, he was Chairman, and in 1994 assumed the additional
titles of Chief Executive Officer and President of Wheatley TXT Corp., a
publicly-traded oil field equipment manufacturer. From 1988 to 1990, he was a
principal of the Sterling Group, ("Sterling"). From 1987 to 1988, he was a
Senior Vice President of Cain Chemical,
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Inc. Mr. Rosenthal will continue to devote a portion of his time to business
activities other than AXIA.
Lyle J. Feye became Vice President-Finance, Treasurer and Chief Financial
Officer of the Company in March 1994. From 1988 to March 1994, Mr. Feye was
Corporate Controller and Assistant Treasurer of the Company. From 1975 to 1988,
Mr. Feye served in various positions with the Continental Group Inc. (formerly
the Continental Can Company), including divisional financial and accounting
management.
David H. Chesney became President and General Manager of Nestaway in 1991. From
1987 to 1991, Mr. Chesney served as General Manager of Lawrence Industries, a
division of Electrolux, an assembler of vacuum cleaners and manufacturer of
vacuum cleaner components, rubber and plastic hoses and electrical cord sets and
harnesses. From 1967 to 1987, Mr. Chesney worked for General Electric Company
where he held a variety of positions, the most recent being Materials Manager &
Quality Assurance Manager with the Major Appliance Business Group.
Ian G. Wilkins became President and General Manager of Fischbein in May 1994.
From 1988 to May 1994, Mr. Wilkins was Chief Operating Officer and General
Manager of HK Metalcraft Manufacturing, a manufacturer of metal assemblies,
components and other precision products primarily for the auto industry. Mr.
Wilkins' responsibilities included supervision of manufacturing, sales and
customer service. From 1984 to 1988, Mr. Wilkins had responsibility for all
operations of Scott Aviation, a Division of Figgie International, as Vice
President of Manufacturing.
Robert G. Zdravecky became President and General Manager of Ames in 1993. Mr.
Zdravecky first joined the Company in 1986 as General Manager of Sales and
Marketing for Ames. He was promoted to Vice President of the Construction Tool
Group, a position he held until 1992, when his employment with the Company
terminated as a result of the sale of two of the Company's divisions to The
Stanley Works. He rejoined the Company in 1993 in his current position. From
1981 to 1986, Mr. Zdravecky served as Vice President-Marketing and Sales with
Adhesive Engineering Company.
Susan O. Rheney has been a principal of Sterling since February 1992. She worked
as an independent financial consultant from December 1990 to January 1992. Prior
to that time, from June 1987 to November 1990, she was an associate at Sterling.
Ms. Rheney is a director of Texas Petrochemical Holdings, Inc., and a director
of American Plumbing and Mechanical, Inc.
C. Byron Snyder is the President of Sterling City Capital, LLC, a Houston-based
investment company specializing in consolidating privately owned businesses
simultaneously with an initial public offering. Mr. Snyder was the owner and
President of Relco Refrigeration Company, a distributor of refrigeration
equipment, which he acquired in 1992. In February 1998, Relco Refrigeration
Company was merged into Hospitality Companies, Inc. Prior to 1992, Mr. Snyder
was the owner and Chief Executive Officer of Southwestern Graphics
International, Inc., a diversified holding company. Mr. Snyder is the Chairman
of the Board of Directors of Integrated Electrical Services, Inc., a publicly
traded national provider of electrical contracting and maintenance services in
the commercial, industrial and residential markets. He also serves as a director
for Carriage Services, Inc., and American Plumbing and Mechanical, Inc.
James D. Woods retired from Baker Hughes Incorporated and its predecessor, Baker
International, a provider of equipment and services to the petroleum and process
industries in 1997, after 41 years of service. He served as president of
several Baker affiliates until the merger of Baker International and Hughes Tool
Company in 1987. He assumed the Chairmanship of the merged companies in January
1989 and held the positions of Chairman of the Board and Chief Executive Officer
until his 1997 retirement. In addition, Mr. Woods serves on the Board of
Directors of The Kroger Co., Varco International, Inc., Wynn's International
Inc., Howmet International, Inc., OMI Corporation and Kaiser Aluminum & Chemical
Corp. Currently, Mr. Woods serves as an Advisor to SCF Partners.
THE BOARD AND CERTAIN BOARD COMMITTEES
The Company's Board supervises the management of the Company as provided by
Delaware law.
AXIA Group's Board has established the following committees:
The Audit Committee, which recommends independent public accountants to AXIA
Group's Board, reviews the annual audit reports of AXIA Incorporated and
reviews the fees paid to AXIA Group's independent public accountants.
The Compensation Committee has the responsibility for supervising AXIA's
executive compensation policies, administering employee incentive plans,
reviewing officers' salaries, approving significant changes in executive
employee benefits and recommending to the Board such other forms of
remuneration as it deems appropriate.
The AXIA Group Board, acting as a committee of the whole, has the responsibility
for considering nominations for prospective AXIA Group Board members. The AXIA
Group Board will consider nominees recommended by other AXIA directors,
stockholders and management provided that nominations by stockholders are made
in accordance with AXIA Group's by-laws. The AXIA Board may
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also establish other committees.
COMPENSATION OF DIRECTORS
Directors of AXIA Group and the Company who are not employees of the Company
receive an annual retainer of $15,000 and a fee of $500 for each meeting of the
Board or any committee thereof that they attend. Directors who are also
employees of the Company do not receive Director compensation.
The AXIA Group, Inc. Nonqualified Stock Option Plan for Non-Employee Directors
grants each non-employee director of the Company the option to purchase 150
shares of AXIA Group common stock. Currently, options of 450 shares are
outstanding. Under the plan, 1,500 shares of common stock are reserved for
issuances pursuant to the exercise of options granted under the plan.
ITEM 2. PROPERTIES
REAL ESTATE AND FACILITIES
The Company believes it has adequate capacity to meet its current obligations to
its customers. The major properties of the Company are listed below. The Company
also leases 60 Ames stores. Store locations are historically leased on a short-
term basis of one to five years to provide maximum flexibility. The business
conducted at these leased store locations is relocatable and no individual lease
or location is material to the Company.
<TABLE>
<CAPTION>
Size in
Location Sq. Feet Owned/Leased Description
- ---------------------------------------------------------------- -------- ------------ ----------------------------------
<S> <C> <C> <C>
Garfield Heights, Cleveland, Ohio............................... 120,000 Owned Fabrication of dish drainer racks,
wire products and storage racks
and assembly of flexible conveyors
McKenzie, Tennessee............................................. 79,000 Owned Fabrication of dishwasher racks
Beaver Dam, Kentucky............................................ 64,000 Owned Fabrication of dishwasher racks,
dishwasher rack components and
other formed wire products
Clinton, North Carolina......................................... 60,000 Owned Fabrication of dishwasher racks
Commerce, California(1)......................................... 54,500 Owned Subleased
Statesville, North Carolina(2).................................. 50,000 Leased Assembly and manufacture of
industrial sewing and packaging
machines
Livermore, California(3)........................................ 27,600 Leased Office and warehouse space for the
manufacture, distribution, repair and
maintenance of ATF tools
Stone Mountain, Georgia(2)...................................... 18,000 Leased Office and warehouse space for the
manufacture, distribution, repair and
maintenance of ATF tools
Duluth, Georgia(4).............................................. 16,000 Leased General Office
Brussels, Belgium(5)............................................ 11,000 Leased Assembly and warehousing of
packaging machines
assembly of sold ATF tools
Paris, France................................................... 5,200 Owned Assembly and distribution of
packaging machines
London, U.K..................................................... 14,500 Owned Assembly and distribution of
packaging machines
Houston, Texas(5)............................................... 6,400 Leased Corporate office
</TABLE>
(1) Property is 50% owned and leased to an unrelated party.
(2) Lease expires in 2003.
8
<PAGE>
(3) Lease expires in 2008.
(4) Lease expires in 2001.
(5) Lease expires in 2006.
During 1999, the Company consolidated its Union City, California, and Hayward,
California, operations into its Livermore, California, location.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of lawsuits incidental to its business.
Including the environmental matters discussed below and taking into account the
proceeds held in escrow pursuant to the Merger Agreement, the Company believes
that none of these proceedings, individually, or in the aggregate, will have a
material adverse effect on the Company's financial condition or operating
results.
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental and employee health and safety matters,
including the handling, the use, discharge and disposal of hazardous materials
and pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the
Company. NYSDEC determined that the Company, among others, may be a responsible
party through its past ownership of the property. The site is currently listed
on the New York State Registry of Inactive Hazardous Waste Disposal Sites.
Environmental consultants engaged by the Company have established a range of
estimated remediation costs of approximately $1.0 million to $3.0 million, plus
or minus 30% of those costs. From 1992 to 1994, the Company established an
accrual of $3.9 million for the remediation and associated costs.
In 1997, the Company entered into an agreement with an adjoining landowner, who
is obligated by NYSDEC to address environmental concerns at his property. By
this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance the NYSDEC
will in fact offer its approval. The Company paid the $520,000 payable under the
agreement and has an exposure under the agreement of up to an additional
$120,000 if contamination is more widespread than estimated by the Company's
environmental consultants. In the event NYSDEC does not approve the remedy
envisioned in the agreement with the adjoining landowner, the Company may
terminate the agreement and demand the return of its payment with interest. In
that case, the adjoining landowner would no longer be obligated to undertake the
remediation of the property formerly owned by the Company.
Of the consideration paid pursuant to the Merger Agreement, $5.0 million was
set-aside in a special escrow account to cover environmental costs which may be
incurred by the Company in connection with cleanup of the site and any damages
or other required environmental expenditures relating to the site. The balance
in the account, after payment of such costs, will be released to the former
stockholders upon the first to occur of the approval by NYSDEC of the proposed
remediation action or the confirmation by NYSDEC that remediation at the site
has been completed in accordance with its then applicable decision in the matter
(the "Early Release Date"). If, however, the Early Release Date occurs before
the additional $120,000 is paid under the above-described agreement, the special
escrow account will continue as to that $120,000 until it is paid or it has
become clear that no claim will be made for such funds. In addition, if certain
additional specified cleanup activities are not completed by the Early Release
Date, an additional $80,000 will be withheld in the special escrow account until
such cleanup is completed. If all of the funds in the special escrow account
have not been released by the third anniversary of the Transaction Date, the
funds remaining in the special escrow account will be disbursed to the Company
to cover the remaining estimated costs, with the balance to be distributed to
the former stockholders of the Company, in accordance with an agreement to be
reached by the Company and the Stockholder Representative identified in the
Merger Agreement, or upon failure of such parties to agree, through an
arbitration procedure. Since the escrow account is under the control of the
representative of the former stockholders and the escrow has sufficient funds to
cover the estimated costs to remediate the site, the Company has neither an
asset nor a liability on its Consolidated Balance Sheet related to this matter.
The settlement of this issue is dependant upon agreements by and between parties
unrelated to the Company and therefore the date upon which this matter will be
resolved cannot be estimated.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is wholly owned by Holdings, and Holdings is wholly owned by Group.
There is no established public trading market for the common equity of the
Company, Holdings, or Group.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data with respect
to the Company and should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and accompanying Notes in "Item 8. Financial
Statements and Supplementary Data" included elsewhere in this Form 10-K.
AXIA INCORPORATED AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousand $)
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------
Period Period
Year Year Year Jan. 1, July 23, Year
Ended Ended Ended 1998 to 1998 to Ended
Dec. 31, Dec. 31, Dec. 31, July 22, Dec. 31, Dec. 31,
1995 1996 1997 1998 1998 1999
--------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues $104,326 $104,787 $104,800 $ 62,567 $ 54,548 $131,894
EBITDA (2), (3) 20,246 24,375 24,066 3,573 12,855 33,012
Income from operations (2) 15,316 18,347 19,354 914 9,758 25,440
Interest expense 6,596 5,123 3,710 1,553 6,515 14,475
Other expense (income) 493 18 37 205 71 (9)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item $ 8,227 $ 13,206 $ 15,607 $ (844) $ 3,172 $ 10,974
Provision for income taxes 3,338 5,730 6,412 (119) 1,679 5,147
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item $ 4,889 $ 7,476 $ 9,195 $ (725) $ 1,493 $ 5,827
Loss on early extinguishments of debt -- 614 772 682 -- --
-------- -------- -------- -------- -------- --------
Net income (loss) $ 4,889 $ 6,862 $ 8,423 $ (1,407) $ 1,493 $ 5,827
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Current assets (1) $ 27,012 $ 26,211 $ 26,253 $ 32,966 $ 35,703 $ 41,200
Total assets (1) $103,288 $ 99,331 $ 96,773 $104,241 $194,957 $198,808
Current liabilities (1) $ 20,262 $ 18,849 $ 22,429 $ 38,679 $ 20,868 $ 23,755
Long-term debt, less current maturities (1) $ 43,507 $ 34,548 $ 20,439 $ 13,074 $131,020 $126,618
Stockholder's equity (1) $ 25,828 $ 32,118 $ 40,067 $ 38,596 $ 28,202 $ 33,579
</TABLE>
(1) Due to a substantial change in controlling interest in the Company, the
Company reflected a complete change in the accounting basis of its assets and
liabilities from historical cost to estimated fair value as of July 22, 1998.
(2) Income from operations and EBITDA for the period ended July 22, 1998,
includes $11,280,000 in Transaction related expense, including $10,773,000 in
compensation related expenses from the sale of stock or options, or both, and
payments pursuant to various employee incentive programs, which were paid
from the former stockholders' purchase price proceeds on the Transaction
Date.
(3) 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.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selected
financial data appearing elsewhere in this report. Historical results and
trends which might appear should not be taken as indicative of future
operations.
This report contains certain estimates and forward-looking statements. Actual
results could differ materially from those projected in the estimates and
forward looking statements as a result of any number of factors. Therefore,
undue reliance should not be placed upon such estimates and statements. No
assurance can be given that any of such estimates or statements will be realized
and actual results may differ materially from those contemplated by such forward
looking statements. Factors that may cause such differences include: (i)
increased competition or price erosion: (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.
GENERAL
The Company is a leading designer, manufacturer, marketer and distributor of a
diverse range of products in several niche markets including productivity
enhancing construction tools, formed wire products, industrial bag closing
equipment and flexible conveyors. The Company operates through three business
units: Ames, Nestaway and Fischbein. Ames is the leading designer, manufacturer,
marketer and distributor of ATF tools, which are rented or sold to interior
finishing contractors to finish drywall joints prior to painting, wallpapering
or other forms of final treatment. Nestaway is a leading manufacturer of formed
wire products which are used for a variety of commercial and consumer product
applications. Fischbein is a leading worldwide manufacturer and marketer of
industrial bag closing and handling equipment and systems and a leading
manufacturer of flexible conveyors and storage racks.
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."), a
company organized to effect the acquisition (the "Acquisition") of Axia Holdings
Corp., entered into an Agreement and Plan of Merger (the "Merger Agreement")
with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the "Predecessor
Company" prior to the date of the Transaction) to effect the acquisition for a
purchase price of $155,250,000 (including the repayment of indebtedness),
subject to certain post-closing adjustments. Upon completion of the Transaction
(the "Transaction"): (i) Holdings, and AXIA Incorporated (the "Company") became
direct and indirect subsidiaries of AXIA Group Inc. ("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"). Axia Finance Corp., ("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
Company's 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.
As a result of the Transaction, the Company incurs significantly higher interest
costs and goodwill amortization than in historical periods included herein.
The Company distributes certain 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, the results of the Company may be favorably or
unfavorably affected to the extent the U.S. dollar weakens or strengthens versus
the applicable corresponding foreign currency. The Company currently does not
enter into hedging programs in an attempt to mitigate the fluctuations against
the U.S. dollar.
During the periods discussed below, except as may be noted, inflation and
changing prices have not had, and are not expected to have a material impact on
the Company's net revenues or its income from operations.
In 1997, the Company repurchased and extinguished $9.3 million in principal of
its 11% Senior Subordinated Notes due 2001 (the "2001 Notes"). The Company
recorded a charge of $1.3 million, $0.8 million net of tax, for the redemption
premium, the write-off of unamortized capitalized financing costs associated
with the issuance of the 2001 Notes, the applicable original issue discount, and
the expenses of the Transaction. In May 1998, the Company repurchased and
extinguished the remaining $5.3 million in principal of its 2001 Notes, and
similarly recorded a charge of $0.5 million, $0.3 million net of tax. Additional
debt extinguishment charges were recorded with the Transaction.
The proforma amounts for the twelve months ended December 31, 1998 include the
applicable results of the Predecessor Company for the period ending July 22,
1998. The amounts for the year ended December 31, 1997, are the results of the
Predecessor Company.
11
<PAGE>
RESULTS OF OPERATIONS
The table below summarizes the results of operations of the Company for the
years indicated (in million $):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
Proforma(2) Predecessor Company (1)
1999 1998 1997
---------------- --------------- ------------------------
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
Ames net revenue $ 57.7 43.7% $ 48.1 41.1% $ 42.4 40.4%
Nestaway net revenue 43.6 33.1 41.4 35.4 35.3 33.7
Fischbein net revenue 30.6 23.2 27.6 23.5 27.1 25.9
------ ----- ------ ----- ------ -----
Total net revenue 131.9 100.0 117.1 100.0 104.8 100.0
------ ----- ------ ----- ------ -----
Cost of revenue (3) 69.4 52.6 63.1 53.9 56.9 54.3
------ ----- ------ ----- ------ -----
Gross Profit (3) 62.5 47.4 54.0 46.1 47.9 45.7
Selling, general, administrative expenses (3) 29.5 22.4 26.3 22.4 23.8 22.7
------ ----- ------ ----- ------ -----
EBITDA (4) 33.0 25.0 27.7 23.7 24.1 23.0
Depreciation and amortization 7.6 5.8 5.7 4.9 4.7 4.5
------ ----- ------ ----- ------ -----
Income from operations 25.4 19.2 22.0 18.8 19.4 18.5
Interest expense 14.5 11.0 8.1 6.9 3.7 3.5
Other expense (income) (0.1) (0.1) 0.2 0.2 0.1 0.1
------ ----- ------ ----- ------ -----
Income before income taxes and extraordinary items 11.0 8.3 13.7 11.7 15.6 14.9
Provision for income taxes 5.2 3.9 5.9 5.0 6.4 6.1
------ ----- ------ ----- ------ -----
Income before extraordinary items $ 5.8 4.4% $ 7.8 6.7% $ 9.2 8.8%
====== ===== ====== ===== ====== =====
</TABLE>
(1) Predecessor Company results exclude debt extinguishment costs.
(2) Proforma results are the combined financial results of the Company including
Predecessor Company prior to the Transaction and exclude transaction related
expenses of $11.3 million, $7.0 million net of tax, and debt extinguishment cost
of $.7 million. Transaction expenses include $10.8 in compensation from the sale
of stock or options, or both, and payments pursuant to various employee
incentive programs, which were paid from the former stockholders' purchase price
proceeds on the Transaction Date.
(3) Excluding operating depreciation and amortization.
(4) 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenues Net revenues increased 12.6% to $131.9 million in 1999 from $117.1
million in 1998. The increase was primarily attributable to the growth in both
sales and rentals of ATF tools, sales of drywall related merchandise and
dishwasher racks, and the impact of acquisitions. Each of the Company's three
business units recorded revenue growth from the prior year as detailed below.
Ames' net revenues increased 20.0% to $57.7 million in 1999 from $48.1 million
in 1998. Revenue growth was primarily the result of increases in both the price
and volume of rented ATF tools and improved sales of drywall related merchandise
and ATF tools. Ames continued to benefit from the strength of the U.S. housing
market. In June 1999, the Company acquired the assets of Concorde Tool
Corporation ("Concorde"), a Canadian manufacturer and distributor of ATF tools.
Revenue from the sale of ATF tools under the Concorde trade name subsequent to
the acquisition was $.4 million.
Nestaway's net revenues increased 5.3% to $43.6 million in 1999 from $41.4
million in 1998. The revenue increase was attributable to growth in sales to
dishwasher OEMs offset in part by a decline in the sale of certain other formed
wire products.
Fischbein's net revenues increased 10.9% to $30.6 million in 1999 from $27.6
million in 1998. The increase was primarily attributable to the acquisition in
April 1999 of the Thames Packaging Equipment Company, Ltd. ("Thames") which
contributed revenues of $2.3 million. Revenues from conveyor sales also improved
over the prior year. Bag closing revenues exclusive of Thames were flat
primarily as a result of adverse economic conditions in Latin America and Asia,
reduced activity in the U.S. agricultural economy and the continued strength of
the dollar against European currencies.
12
<PAGE>
Gross Profit Excluding Depreciation & Amortization. Gross profit excluding
depreciation and amortization increased 15.7% to $62.5 million in 1999 from
$54.0 million in 1998. The increase in gross profit was primarily attributable
to the net revenue increase discussed above. Gross profit as a percentage of net
revenues improved to 47.4% from 46.1% primarily due to business mix including
greater revenue growth occurring within its most profitable business unit, Ames,
and cost reductions in certain areas.
Ames' gross profit improved as a result of revenue growth. Profit margin growth
was also attributable to improved margins on the sale of drywall related
merchandise at Company operated stores and a rental rate increase. Ames also
benefited from consolidating its warehouse and TapeTech manufacturing into its
Livermore, California service center during 1999. Nestaway's gross profit also
improved with revenue growth. Gross profit as a percentage of net revenues
declined primarily due to the benefit recorded in the prior year of a
nonrecurring favorable pricing adjustment of $.4 million. Fischbein's gross
profit growth was also the result of the improvement in revenue discussed above.
Selling, General and Administrative Expenses excluding Depreciation and
Amortization (SG&A). Selling, general, and administrative expenses increased
12.2% to $29.5 million in 1999 from $26.3 million in 1998. SG&A growth was
primarily attributable to increased selling expenses related to Ames' efforts to
take advantage of market opportunities related to strong housing starts and
continued emphasis on expanded marketing programs. Ames also incurred an
additional $.5 million in bad debt expense over the comparable prior year period
primarily as a result of revenue growth and an additional $0.2 million over the
prior year related to implementation of its new Y2K compliant computer software
programs. The Company recorded approximately $.3 million in expenses in 1999 for
severance and other costs associated with the relocation of its corporate
offices to Houston, Texas.
The Company established an Employee Stock Ownership Plan ("ESOP") with the
Transaction in July 1998. As a result of a full year's participation in 1999, an
increase in the appraised valuation of the stock and forgiveness of a portion of
the note receivable from the ESOP retroactive to December 31, 1998, the Company
recorded $0.8 million in expense in 1999 related to the ESOP of which $ 0.6
million was recorded in selling, general and administrative expenses. Total ESOP
expense in 1998 was $0.2 million which was recorded in selling, general and
administrative expense.
EBITDA. EBITDA increased 19.1% to $33.0 million in 1999 from $27.7 million in
1998 primarily as a result of the matters discussed above.
Depreciation and Amortization. Depreciation and amortization increased 33.3% to
$7.6 million in 1999 from $5.7 million in 1998. This increase was primarily the
result of $1.5 million in additional goodwill amortization from the Transaction
and subsequent acquisitions.
Interest Expense. Interest expense increased 79.0% to $14.5 million in 1999 from
$8.1 million in 1998. The increase was the result of the acquisition of the
Company and resultant increase in debt.
Other Income and Expense. The Company recorded other income of $.1 million in
1999 compared to other expense of $.2 million in 1998 due to increased interest
income and a gain in life insurance policies insuring a former executive of the
Company who passed away in 1999. The gain represents the excess of the proceeds
of the insurance over the present value of the liability of the Company to the
former executive's estate.
Income Taxes and Income before Extraordinary Item. The effective income tax rate
for 1999 was 46.9% in 1999 compared to 43.1% in 1998. The increase was primarily
due to the impact of an increase in nondeductible goodwill amortization
discussed above. Income before an extraordinary item declined 24.4% to $5.8
million in 1999 from $7.8 million in 1998. The reduction was primarily due to
additional goodwill amortization and interest expense from the Transaction as
discussed in the preceding paragraph.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Net Revenues. Net revenues increased 11.7% to $117.1 million in 1998 from $104.8
million in 1997. The increase in net revenues was a result of increased rentals
and sales of ATF tools and increased sales of drywall related merchandise,
dishwasher racks, other formed wire products and material handling equipment.
Ames' net revenues increased 13.4% to $48.1 million in 1998 from $42.4 million
in 1997. The increase was primarily the result of an increase in both price and
volume of rented ATF tools. Factory-built housing initiatives also results in
higher ATF rental revenues. In addition Ames' revenues increased due to higher
demand for drywall related merchandise and ATF tool sales. Ames benefited from
the strength of the U.S. housing market.
Nestaway's net revenues increased 17.2% to $41.4 million in 1998 from $35.3
million in 1997. The increase was the result of revenue growth of 11.3% in dish
rack and dish rack component sales to OEM's and a 30.9% growth in revenues of
formed wire products. Dish rack revenues improved primarily as a result of
additional volumes with a new customer, a favorable nonrecurring $.4 million
pricing
13
<PAGE>
adjustment, and volume growth with Nestaway's largest customer. Formed wire
product revenues improved with added sales of traditional product lines such as
dish drainers and shower caddies, together with revenues generated by new
products including dryer racks and golf cart baskets.
Fischbein's net revenues increased 1.8% to $27.6 million in 1998 from $27.1
million in 1997. The increase was primarily due to increased sales of flexible
conveyors. Increased revenues from bag closing equipment in the U.S. and Europe
were offset by declines in Asia and Latin America, two regions impacted by
general adverse economic conditions.
Gross Profit Excluding Depreciation and Amortization. Gross profit excluding
depreciation and amortization increased 12.7% to $54.0 million in 1998 from
$47.9 million in 1997. The increase in gross profit was primarily attributable
to the net revenue increase discussed above. Gross profit without depreciation
and amortization as a percentage of net revenues improved to 46.1% from 45.7%.
Ames' gross profit improved with revenues. This improvement was offset by
operating inefficiencies as the Bensenville, Illinois and Tucker, Georgia rental
ATF tool repair operations were consolidated into a new facility in Stone
Mountain, Georgia. Nestaway's gross profit margins improved with revenue growth.
Nestaway also benefited from a one time refund and temporary reduction in
workers' compensation insurance and a nonrecurring favorable pricing adjustment
aggregating $.8 million recorded in 1998. Fischbein's gross profits improved due
to continued cost reductions from its foreign parts sourcing program and
additional machining centers which improved operating efficiencies and overhead
absorption.
Selling, General and Administrative Expenses Excluding Depreciation and
Amortization. Selling, general and administrative expenses excluding
depreciation and amortization increased 10.5% to $26.3 million in 1998 from
$23.8 million in 1997. Selling expenses increased due to additional personnel,
travel and entertainment, and advertising. The Company also incurred an increase
in professional services expense due to additional legal assistance to establish
new benefit plans and assistance in the preparation of multiple federal and
state tax returns.
EBITDA. EBITDA increased 14.9% to $27.7 million in 1998 from $24.1 million in
1997 primarily as a result of the matters discussed above.
Depreciation and Amortization. Depreciation and amortization increased 21.2% to
$5.7 million from $4.7 million in 1997. This was primarily attributable to an
increase in goodwill amortization from the Transaction.
Interest Expense. Interest expense increased to $8.1 million in 1998 from $3.7
million in 1997. The increase was the result of the acquisition of the Company
and resultant increase in debt.
Other Expense. Other expense was $0.2 million in 1998 compared to other expense
of $0.1 million in 1997.
Income Taxes and Income before Extraordinary Item. The effective tax rate for
1998 was 43.1% compared to 41.1% for the prior year comparable period. This
increase in the effective tax rate was primarily due to the impact of non-
deductible amortization expense. Income before an extraordinary item and
excluding transaction related expense decreased 15.2% to $7.8 million from $9.2
million in 1997. The decrease was primarily attributable to an increase in
interest expense as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $12.8 million in 1999 compared to
$6.9 million in 1998 and had cash and cash equivalents of $7.2 million at
December 31, 1999. The increase in cash generated from operations was primarily
attributable to non-recurring Transaction related expenses recorded in 1998 of
$11.3 million, $7.0 million net of tax, including $10.8 million in compensation
from the sale of stock or options, or both, and payments pursuant to various
employee incentive programs recorded in the prior year period. The compensation
payments were deducted from the purchase price, discussed in Item I BUSINESS--
Acquisition and Merger, prior to distribution of net proceeds to former
stockholders.
At December 31, 1999, the Company had working capital of $17.4 million compared
to working capital of $14.8 million at December 31, 1998. The increase in
working capital was due to an increase in cash, accounts receivable, and
inventories. Receivables increased 24.5% as a result of revenue growth and due
to increases in the days' sales in accounts receivable at two of the divisions.
Inventories increased 6.3% as a result of higher merchandise and parts
inventories to support revenue growth at Ames.
During 1999, the Company utilized net cash provided by operations to fund
capital expenditures of $2.7 million primarily for revenue maintenance and
growth. The majority of capital spending was for new ATF tools for Ames to
replace scrapped or lost tools and support revenue growth. The Company acquired
the assets of Concorde and the assets of Thames for an aggregate cost of $5.5
million, of which $2.5 million was funded from operations and $3.0 million was
funded from the Company's acquisition line of credit.
14
<PAGE>
With consummation of the Transaction, interest payments on the Notes and under
the Bank Credit Agreement and amortization of the Term Loan represent
significant obligations of the Company. The Company's remaining liquidity
demands relate to capital expenditures and working capital needs. For the year
ended December 31, 1999, the Company spent $2.7 million on capital projects. The
Company projects capital expenditures of approximately $6.0 million in 2000,
although the amount is subject to change based on numerous factors including but
not limited to the Company's success in obtaining certain new business.
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 $15.0 million of borrowings, subject to availability
under the borrowing base which was $14.8 million at December 31, 1999. The
Acquisition Facility provides the Company with $25.0 million borrowings, subject
to customary conditions, of which $22.0 million was available at December 31,
1999. The Company believes that, based on current and anticipated financial
performance, cash flow from operations and available 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 needs 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 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. 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's current businesses.
ACCOUNTING CHANGES
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging 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
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2001. Historically, the Company has not
entered into derivatives contracts 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.
As a result of dishwasher rack sourcing decisions made by its customers in 1996,
the Company shut down a leased production facility in Canal Winchester, Ohio,
and temporarily idled a second plant in Clinton, North Carolina. The Clinton
facility resumed operations in 1997 when the Company was awarded a contract by a
new dishwasher rack customer. The Beaver Dam, Kentucky plant, shut down in 1994
due to a customer's decision to utilize an alternative source of supply, was
reopened in 1996 to produce dishwasher rack components, lower volume dishwasher
racks, and other formed and coated wire products. During 1997 and 1996, the
Company charged $0.6 million and $1.0 million, respectively, of the costs
incurred against a facility realignment reserve established in prior periods.
The Company has no further reserves for the realignment of its production
capacities as of December 31, 1999, and management believes its current
manufacturing operations are properly positioned to service its current customer
requirements.
RISK FACTORS
Substantial Leverage. In connection with the consummation of the Transaction,
the Company incurred a significant amount of indebtedness and has significant
debt service requirements. In addition, the Indenture will permit the Company to
incur or guarantee additional indebtedness, including indebtedness under the
Bank Credit Agreement, subject to certain limitations. The Company has
additional borrowing capacity on a revolving credit basis under the Bank Credit
Agreement and on a term basis to fund future acquisitions under the Acquisition
Facility of the Bank Credit Agreement.
The Company's high degree of leverage could have important consequences to the
holders of the Notes, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, debt service requirements, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the
15
<PAGE>
Company's cash flow from operations is required to be dedicated to the payment
of principal and interest on its indebtedness, thereby reducing the funds
available to the Company for other purposes, including its operations and future
business opportunities; (iii) certain of the Company's borrowings, including
certain borrowings under the Bank Credit Agreement, are at variable rates of
interest, which expose the Company to the risk of increased interest rates; (iv)
the indebtedness outstanding under the Bank Credit Agreement is secured by
substantially all the assets of the Company and will mature prior to the
maturity of the Notes and (v) the Company's leveraged position and the covenants
contained in its debt instruments could limit the Company's flexibility to
adjust to changing market conditions and its ability to withstand competitive
pressures, and the Company may be more vulnerable to a downturn in general
economic conditions or in its business or be unable to carry out capital
spending that is important to its growth and productivity improvement programs.
The Company is required to make scheduled principal payments under the Bank
Credit Agreement. The company's ability to make scheduled payments or to
refinance its obligations with respect to its indebtedness, including the Notes,
depends on its financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors beyond its control, including the strength of the
general economy, interest rates, unscheduled plant shutdowns, increased
operating costs, raw material and product prices, and regulatory developments.
There can be no assurance that the Company will maintain a level of cash flow
from operations sufficient to permit it to pay the principal, premium, if any,
and interest on its indebtedness (including the Notes).
If the Company's cash flow and capital resources are insufficient to fund its
debt service obligations, the Company may be forced to reduce or delay capital
expenditures, sell assets, or seek to obtain additional equity capital or
restructure or refinance its debt (including the Notes). There can be no
assurance that such alternative measures would be successful or would permit the
Company to meet its scheduled debt service obligations. In the absence of such
operating results and resources, the Company could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt service and other obligations. The Bank Credit Agreement and the
Indenture restrict the Company's ability to sell assets and use the proceeds
therefrom. There can be no assurance as to the ability of the Company to
consummate such sales or the proceeds which the Company could realize therefrom
or that such proceeds would be adequate to meet the obligations then due.
Restrictive Financing Covenants; Cross-Default Risks. The Bank Credit Agreement
and the Indenture contain a number of significant covenants that, among other
things, restrict the ability of the Company to dispose of assets or merge, incur
additional indebtedness, incur guarantee obligations, prepay the Notes or amend
the Indenture, pay dividends, create liens on assets, enter into sale and
leaseback transaction, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, make capital expenditures or engage in
certain transactions with affiliates, and will otherwise restrict corporate
activities. In addition, under the Bank Credit Agreement, the Company is
required to comply with specified financial ratios and tests.
The Company's ability to comply with the covenants and restrictions contained in
the Bank Credit Agreement and the Indenture may be affected by events beyond its
control, including prevailing economic, financial and industry conditions. The
breach of any such covenants or restrictions could result in a default under the
Bank Credit Agreement or the Indenture which would permit the lenders under the
Bank Credit Agreement or the holders of the Notes, as the case may be, to
declare all amounts outstanding thereunder to be due and payable, together with
accrued and unpaid interest, and the commitments of the lenders under the Bank
Credit Agreement to make further extensions of credit could be terminated. In
addition, in the event of a default under the Bank Credit Agreement, in certain
circumstances the lenders under the Bank Credit Agreement could prevent the
Company from making any payments on the Notes. There can be no assurance that in
the event of any such default the Company will have adequate resources to repay
in full principal, premium, if any, and interest on the Notes.
Competition. Each of the business units operates within competitive industries.
The Company is not aware of any single competitor that competes with the Company
along all three business lines. (See "Business-Competition")
Reliance on Major Customers. One of Nestaway's dishwasher rack customers
accounted for 17% of the Company's 1999 revenues. Since the contract with this
customer requires cost reductions during its term, the inability of the Company
to achieve manufacturing cost savings could lead to lower gross margins. Another
Nestaway customer who markets dish drainers, shower caddies, and other formed
wire products accounted for 10% of the Company's 1999 revenues. A loss of either
or both of these customers could have a material adverse effect on the Company.
Certain of Nestaway's contracts require it to maintain competitive prices and
satisfy quality, delivery and other requirements. Failure to do so could result
in a material loss of revenue and margin.
In each of 1994 and 1996 the Company discontinued operations at certain of its
facilities, in each case as a result of a decision by certain major dishwasher
rack customers to produce dishwasher racks in-house or purchase from an
alternate source. In each instance the company's revenues were adversely
affected. No assurance can be given that such actions by the Company's
dishwasher rack customers will not recur. Pursuant to the Company's requirement
contracts, a decrease in sales by the company's customers may cause a decrease
in the revenues derived by the Company under such requirements contracts.
16
<PAGE>
Risks Relating to Acquisition Strategy. The Company's strategy includes making
acquisitions, but there can be no assurance that suitable acquisition candidates
will continue to be available. In addition, acquisitions that the Company may
make will involve risks, including the successful integration and management of
acquired technology, operations and personnel. The integration of acquired
businesses may also lead to the loss of key employees of the acquired companies
and diversion of management attention from ongoing business concerns. There can
be no assurance that any additional acquisitions will be made, that the Company
will be able to obtain additional financing needed for such transactions and, if
any acquisitions are so made, that they will be successful.
Fluctuations in Raw Materials Cost and Supply. The Company purchases steel,
metal castings, aluminum and other raw materials from various suppliers. There
can be no assurance that severe shortages of such materials will not occur in
the future, which could increase the cost or delay the shipment of the Company's
products and have a material adverse effect on the Company's operating results.
Because such materials in the aggregate constitute significant components of the
Company's cost of goods sold, fluctuations in price could have a material
adverse effect on the Company's results of operations. Generally, the Company
has passed on any increases in prices of raw materials to its customers.
However, there can be no assurance that the company will be able to do so in the
future.
General Economic Conditions. The industries in which the Company operates are
affected by changes in general economic conditions, including national, regional
and local slowdowns in home building, remodeling, construction and other
industrial activity, all of which are outside of the Company's control. There
can be no assurance that economic slowdowns, adverse economic conditions,
cyclical trends, increases in interest rates and other factors will not have a
material adverse effect on the Company's consolidated operating results or
financial condition. Though Ames has a broad customer base, adverse economic
changes in home building, remodeling and construction may result in reductions
in the rental and sales of ATF tools and the sales of drywall related
merchandise. Ames would also be at greater risks of incurring higher levels of
bad debt expense.
Potential Legacy Liabilities. The Company has retained or assumed certain
environmental liabilities and risks of future liabilities associated with
businesses previously operated or acquired by it, including Bliss and Laughlin
Steel Company. The Company does not believe that these retained or assumed
liabilities and risks would be expected to have a material adverse effect on the
Company's financial condition or operating results. However, changes in laws or
regulations, liabilities identified or incurred in the future, or other
circumstances, might, individually or in the aggregate, have such an effect. In
addition, the Company is currently addressing certain legacy liabilities of this
nature.
Foreign Sales and Operations. In 1999 approximately 13% of the Company's net
revenues were derived from foreign sales and operations and export sales. A
portion of these net revenues are derived from sales in countries that have
recently experienced economic downturns. There can be no assurance that the
Company's net revenues will not be affected by these economic downturns in such
countries. In addition, a portion of the Company's anticipated growth is
expected to come from foreign sales and operations. Foreign sales and operations
involve varying degrees of risks and uncertainties inherent in doing business
abroad. Such risks include the possibility of unfavorable circumstances arising
from host country laws or regulations, including unexpected changes of
interpretations thereof. Other risks include partial or total expropriation;
export duties and quotas; currency exchange rate fluctuations; restrictions on
repatriation of funds; the disruption of operations from labor and political
disturbances, insurrection, or war; and the requirements of partial local
ownership of operations in certain countries. Furthermore, customer credit risks
are exacerbated in foreign sales and operations because there often is little
information available about the credit histories of customers in certain
countries.
The value of the Company's foreign sales and earnings may vary with currency
exchange rate fluctuations. To the extent that the Company does not take steps
to mitigate the effects of changes in relative values, changes in currency
exchange rates could have an adverse effect upon the Company's results of
operations, which in turn could adversely affect the ability of the Company to
meet its debt obligations, including payments on the Notes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices.
The Company is exposed to some market risk due to the floating interest rate
under its Bank Credit Agreement. As of December 31, 1999, the Bank Credit
Agreement had a principal balance of $31.9 million at an average floating
interest rate of 8.0% per annum. A 1.0% increase in interest rates could result
in a $.3 million annual increase in interest expense on the existing principal
balance (See also Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Risk Factors).
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company called for by this Item 8,
together with the reports thereon of the independent accountants are set forth
on pages 19 to 48 inclusive. Financial statement schedules not included in this
Report on Form 10-K have been omitted because they are not applicable or because
the information called for is shown in the consolidated financial statements or
notes thereto.
AXIA INCORPORATED
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Pages
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and 1998 19
Consolidated Statements of Stockholder's Equity and Comprehensive
Income for the year ended December 31, 1999, the periods ended December 31,
1998, and July 22, 1998, and the year ended December 31, 1997 20
Consolidated Statements of Income for the year ended December 31, 1999, the
periods ended December 31, 1998, and July 22, 1998, and the year ended
December 31, 1997 21
Consolidated Statements of Cash Flows for the year ended December 31, 1999,
the periods ended December 31, 1998, and July 22, 1998, and the year ended
December 31, 1997 22
Notes to the Consolidated Financial Statements 23 - 46
Independent Auditors' Report 47
Report of Independent Public Accountants 48
</TABLE>
18
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------ ------------------
ASSETS
- ------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 7,218 $ 5,904
Accounts receivable, net 17,600 14,133
Inventories 11,793 11,092
Prepaid income taxes and other current assets 1,100 1,135
Deferred income tax benefits 3,489 3,439
-------- --------
Total Current Assets $ 41,200 $ 35,703
PLANT AND EQUIPMENT, AT COST:
Land 984 984
Buildings and improvements 5,307 4,600
Machinery and equipment 19,903 18,750
Equipment leased to others 10,891 10,113
-------- --------
37,085 34,447
Less: Accumulated depreciation 5,965 1,758
-------- --------
Net Plant and Equipment $ 31,120 $ 32,689
OTHER ASSETS:
Goodwill, net 108,319 107,633
Intangible assets, net 1,122 807
Deferred charges, net 17,027 18,097
Other assets 20 28
-------- --------
Total Other Assets $126,488 $126,565
-------- --------
TOTAL ASSETS $198,808 $194,957
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 5,464 $ 4,655
Accounts payable 5,011 4,334
Payable to parent 603 --
Accrued liabilities 12,526 11,868
Accrued income taxes 151 11
-------- --------
Total Current Liabilities $ 23,755 $ 20,868
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities 126,618 131,020
Other non-current liabilities 7,913 7,970
Deferred income taxes 6,205 6,750
-------- --------
Total Non-Current Liabilities $140,736 $145,740
Commitments and contingencies
Common stock held by ESOP 2,183 1,620
Less: Note receivable from ESOP (1,445) (1,473)
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value; 100 shares
authorized, issued and outstanding) $ -- $ --
Additional paid-in capital 26,680 26,511
Retained earnings 7,086 1,482
Accumulated other comprehensive (loss) income (187) 209
-------- --------
Total Stockholder's Equity $ 33,579 $ 28,202
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $198,808 $194,957
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
19
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999,
THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998 AND
JANUARY 1, 1998 TO JULY 22, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Other Comprehensive Income
--------------------------------------------------
Accumulated
Common Additional Minimum Cumulative Other Compre-
Stock Paid-in Retained Pension Translation Comprehensive hensive
Par Value Capital Earnings Liability Adjustments Income (loss) Income
--------- ----------- --------- ---------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
BALANCE, DECEMBER 31, 1996 $ -- $ 16,723 $ 15,395 $(324) $ 324 $ --
Net income -- -- 8,423 -- -- -- $ 8,423
Cumulative translation adjustment -- -- -- -- (616) (616) (616)
Other, net of tax of $88 -- -- -- 142 -- 142 142
-------
Comprehensive income $ 7,949
---- -------- -------- ----- ----- ----- =======
BALANCE, DECEMBER 31, 1997 $ -- $ 16,723 $ 23,818 $(182) $(292) $(474)
==== ======== ======== ===== ===== =====
Net income -- -- (1,407) -- -- -- $(1,407)
Cumulative translation adjustment -- -- -- -- (64) (64) (64)
-------
Comprehensive loss $(1,471)
=======
---- -------- -------- ----- ----- -----
BALANCE, JULY 22, 1998 $ -- $ 16,723 $ 22,411 $(182) $(356) $(538)
==== ======== ======== ===== ===== =====
AXIA INCORPORATED:
Acquisition Adjustments:
Eliminate Predecessor
Company Equity $ -- $(16,723) $(22,411) $ 182 $ 356 $ 538
Contribution from Holdings -- 26,500 -- -- -- --
Net income -- -- 1,493 -- -- -- $ 1,493
Cumulative translation adjustment -- -- -- -- 210 210 210
Other -- 11 (11) (1) -- (1) (12)
-------
Comprehensive income $ 1,691
=======
---- -------- -------- ----- ----- -----
BALANCE DECEMBER 31, 1998 $ -- $ 26,511 $ 1,482 $ (1) $ 210 $ 209
==== ======== ======== ===== ===== =====
Net Income -- -- $ 5,827 -- -- -- $ 5,827
Cumulative translation adjustment -- -- -- -- (397) (397) (397)
Option compensation -- 37 -- -- -- --
Other -- 132 (223) 1 -- 1 (222)
-------
Comprehensive income $ 5,208
=======
---- -------- -------- ------ ----- -----
BALANCE, DECEMBER 31, 1999 $ -- $ 26,680 $ 7,086 $ -- $(187) $(187)
==== ======== ======== ====== ===== =====
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
20
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1999,
THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998 AND
JANUARY 1, 1998 TO JULY 22, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------
Year Ended July 23 January 1, Year Ended
December 31, 1998 to 1998 to December 31,
1999 December 31, July 22, 1997
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Net sales $ 95,887 $40,417 $46,257 $ 77,418
Net rentals 36,007 14,131 16,310 27,382
-------- ------- ------- --------
Net revenues $131,894 $54,548 $62,567 $104,800
Cost of sales 58,713 25,675 28,228 48,526
Cost of rentals 10,703 4,219 4,979 8,422
Selling, general and administrative expenses 29,466 11,799 14,507 23,786
Depreciation and amortization 7,572 3,097 2,659 4,712
Transaction expenses -- -- 11,280 --
-------- ------- ------- --------
Income from operations $ 25,440 $ 9,758 $ 914 $ 19,354
Interest expense 14,475 6,515 1,553 3,710
Interest income (298) (88) (9) (367)
Other expense, net 289 159 214 404
-------- ------- ------- --------
Income (loss) before income taxes and
extraordinary item $ 10,974 $ 3,172 $ (844) $ 15,607
Provision for income taxes 5,147 1,679 (119) 6,412
-------- ------- ------- --------
Income (loss) before extraordinary item $ 5,827 $ 1,493 $ (725) $ 9,195
Extraordinary item:
Loss on early extinguishments of debt, net of income
taxes of $404 and $479 respectively -- -- 682 772
-------- ------- ------- --------
Net income (loss) $ 5,827 $ 1,493 $(1,407) $ 8,423
======== ======= ======= ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
21
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999, THE
PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998, AND
JANUARY 1, 1998 TO JULY 22, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------
July 23 January 1,
Year Ended 1998 to 1998 to Year Ended
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,827 $ 1,493 $(1,407) $ 8,423
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,618 3,543 2,824 5,099
Extraordinary item - write-off of capitalized
financing costs and original issue discount -- -- 843 826
Deferred income tax provision (benefit) (595) (498) (506) 623
Loss (gain) on disposal of fixed assets 276 20 52 159
Gain on sale of investment -- -- -- (559)
Allocated ESOP shares 592 147 -- --
Provision for losses on accounts receivable 2,512 990 999 2,169
Provision for obsolescence of inventories 23 86 (80) 79
Loss (gain) on pension expense (262) (138) (191) (231)
Changes in assets and liabilities (net of effect
of acquired businesses):
Accounts receivable (5,858) (720) (2,587) (4,557)
Inventories (310) (663) (1,239) (426)
Accounts payable 545 (1,066) 1,250 442
Accrued liabilities 735 (6,505) 11,199 (1,244)
Payable to parent 603 -- -- --
Other current assets (205) 41 (90) (14)
Income taxes payable 391 1,553 (2,458) 1,532
Other non-current assets 43 (91) (273) (642)
Other non-current liabilities (144) 130 226 51
------- --------- ------- --------
Net Cash (used in) provided by Operating Activities $12,791 $ (1,678) $ 8,562 $ 11,730
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for acquisitions, (net of cash acquired) $(5,343) $ -- $ -- $ --
Cash used for capital expenditures (2,664) (978) (3,468) (3,475)
Proceeds from sale of fixed assets 62 15 4 357
Proceeds from sale of investment -- -- -- 1,459
Acquisition of Predecessor Company -- (120,784) -- --
------- --------- ------- --------
Net Cash (used in) provided by Investing Activities $(7,945) $(121,747) $(3,464) $ (1,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on new Revolving Credit Loan $ -- $ (2,750) $ -- $ --
Net (payments) receipts on prior Revolving Credit Loan 3,000 (8,900) 4,400 4,500
Payments of other long-term debt (6,593) (19,871) (8,319) (15,931)
Proceeds from other long-term debt -- 139,250 -- 944
Payments of deferred financing costs -- (7,352) -- --
Contribution from parent -- 26,500 -- --
Other equity transactions (53) (9) (58) 37
------- --------- ------- --------
Net Cash (used in) provided by Financing Activities $(3,646) $ 126,868 $(3,977) $(10,450)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 114 44 (14) (27)
------- --------- ------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $ 1,314 $ 3,487 $ 1,107 $ (406)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 5,904 2,417 1,310 1,716
------- --------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,218 $ 5,904 $ 2,417 $ 1,310
======= ========= ======= ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
22
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
AXIA Incorporated (the "Company") is a diversified manufacturer and marketer of
(i) formed and coated wire products, (ii) material handling and storage
equipment, (iii) industrial bag closing equipment, and (iv) tools and other
products for finishing drywall in new, manufactured, and renovated housing and
commercial construction. (See Note 13 for further discussion of the Company's
business segments.)
On July 22, 1998, the Company was acquired as part of a merger. (See Note 2.)
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include those of the Company and all
majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at the current
rate of exchange at the balance sheet date. Revenues and expenses are translated
at the average exchange rate for the period. Translation adjustments have been
excluded from the results of operations and are reported as a separate component
of Stockholder's Equity and Other Comprehensive Income. Gains and losses
resulting from foreign currency transactions, which are not material, are
included in the Consolidated Statements of Income.
ENVIRONMENTAL COSTS
Environmental costs are expensed unless the expenditures extend the economic
useful life of the assets. Costs that extend the economic life of the assets are
capitalized and depreciated over the remaining life of such assets. Liabilities
are recorded when environmental assessments and/or remedial efforts are
probable, and the cost can be reasonably estimated.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In preparing disclosures about the fair value of financial instruments, the
Company has assumed that the carrying amount approximates fair value for cash
and cash equivalents, receivables, accounts payable and certain accrued expenses
because of the short maturities of those instruments. Likewise, the carrying
amount of the Term and ESOP loans approximate their fair values due to the
variable interest rates on these obligations. The fair values of 10.75% Senior
Subordinated Notes are estimated based upon quoted market values. Considerable
judgment is required in developing these estimates and, accordingly, no
assurance can be given that the estimated values presented herein are indicative
of the amounts that would be realized in a free market exchange.
CASH AND CASH EQUIVALENTS
Cash equivalents are carried at cost, which approximates market. The Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market. Inventories have been reduced to reflect the Company's estimate of slow
moving and obsolete inventory.
23
<PAGE>
AXIA INCORPORATED AND SUBSIDIRIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income tax provisions are made for the estimated amount of income taxes on
reported earnings which are payable currently and in the future.
As required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", the deferred tax provision is determined using
the liability method. Under this method, deferred tax assets and liabilities are
recognized based on differences between the financial statements and the tax
basis of assets and liabilities as determined using presently enacted tax laws
and the appropriate tax rates.
PLANT AND EQUIPMENT
Depreciation on plant and equipment is provided on the straight-line method over
the estimated useful lives of the assets for financial reporting purposes.
Accelerated methods and lives are used for income tax purposes. Expenditures for
maintenance and repairs are charged to expense when incurred. Expenditures for
renewals and betterments are capitalized and depreciated over the estimated
remaining useful lives of the assets.
Depreciation is provided over the following useful lives:
Buildings and improvements.......... 2-40 years
Machinery and equipment............. 2-10 years
Equipment leased to others.......... 5-7 years
The original cost and related accumulated depreciation of assets sold or retired
are removed from the applicable accounts, with any gain or loss resulting from
the transaction included in income.
Plant, property and equipment assets are reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such review indicates that the carrying
amount of plant, property and equipment is not recoverable based upon estimated
future cash flows, the carrying amount of such assets is reduced to estimated
recoverable value.
DEFERRED CHARGES, INTANGIBLE ASSETS AND GOODWILL
Amortizable loan costs, organization costs, patents, customer lists, and other
intangible assets and deferred charges are stated in the accompanying
Consolidated Balance Sheets net of amortization and are amortized over their
estimated useful lives, which range from 2 to 40 years.
Goodwill represents the excess purchase price paid over the estimated fair value
of the net assets acquired in the July 22, 1998 merger discussed in Note 2 and
the excess purchase price paid over the estimated fair value of the net assets
of two acquisitions made during 1999. Goodwill is stated net of amortization and
is being amortized on a straight-line basis over the estimated period of benefit
of 16 to 40 years (see Note 6). Goodwill and other intangible assets are
reviewed for possible impairment whenever events or changes in circumstances
indicate the carrying amount of such assets may not be recoverable. If such
review indicates that the carrying amount of goodwill and other intangible
assets is not recoverable based upon estimated future cash flows, the carrying
amount of such assets is reduced to estimated recoverable value.
REVENUE RECOGNITION
Revenue from product sales is recognized at shipment of products to the
customer. Rental revenues are recorded over the rental term.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted the new disclosure standards discussed below.
Results of operations and financial position were unaffected by implementation
of these new standards.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components, and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from
24
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
investments by owners and distributions to owners. Among other disclosures, the
statement requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS No. 132, "Employer's Disclosures about Pensions and Other Post-retirement
Benefits," standardizes the disclosure requirements for pensions and other post-
retirement benefits to the extent practicable, requires additional information
on changes in the benefit obligations and fair values of plan assets, and
eliminates certain disclosures that are no longer considered useful. It does not
change the measurement or recognition of these plans.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," 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
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2001. Historically, the Company has not
entered into derivatives contracts 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.
NOTE 2 ORGANIZATION AND PRESENTATION
By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."), a
company organized to effect the acquisition (the "Acquisition") of Axia Holdings
Corp., entered into an Agreement and Plan of Merger (the "Merger Agreement")
with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the "Predecessor
Company" prior to the date of the Acquisition) to effect the acquisition for a
purchase price of $155,250,000 (including the repayment of specified
indebtedness), subject to certain post-closing adjustments. Upon completion of
the transaction (the "Transaction"): (i) Holdings and AXIA Incorporated (the
"Company") became direct and indirect subsidiaries of AXIA Group, Inc. ("Group"
the parent company of Acquisition Co.) and (ii) the Company became the primary
obligor on borrowings made under the bank credit agreement (the "Bank Credit
Agreement") and Senior Subordinated notes issued on the Transaction Date defined
below.
The Merger Agreement contains indemnification provisions binding each of the
parties to the Merger Agreement. Pursuant to such provisions, each of the
parties has agreed to indemnify each other for breaches of representations,
warranties and covenants. In addition, the selling stockholders, limited to the
amount set forth below, agreed to indemnify the Company for certain working
capital deficiencies, increases in tax liabilities, and for certain
environmental and litigation matters. In connection with the indemnity
provisions, $15,000,000 of the purchase price was placed into an escrow account,
including $12,000,000 to cover specified indemnification claims and $3,000,000
to cover purchase price adjustments. As a result of contractual distributions
and earnings on the escrowed funds, at December 31, 1999, approximately
$9,500,000 remained in the escrow accounts. Subsequent to the transaction date,
the selling stockholders received an additional $1,738,000 as a result of
increased working capital on the Transaction Date.
On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of its
common stock ("Common Stock") and contributed the proceeds thereof to
Acquisition Co. (the "Equity Investment"). Finance Co., an indirect subsidiary
of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit
Agreement and received approximately $100,000,000 in gross proceeds from the
sale of subordinated notes. Such funds were used: (i) to effect the Acquisition
pursuant to the Merger Agreement; (ii) to fund the ESOP; (iii) to repay existing
indebtedness of the Company and (iv) to pay fees and expenses in connection with
the transaction.
NOTE 3 MERGER AND REFINANCING EFFECTS
Goodwill of the surviving company as of December 31, 1999, represents the excess
purchase price paid over the estimated fair value of the net assets acquired,
excluding Predecessor Company goodwill, in the July 22, 1998 merger and the
excess purchased price paid
25
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
over the estimated fair value of the net assets of two acquisitions made during
1999. The merger was accounted for under the purchase method of accounting and
resulted in goodwill of $108,837,000 recorded on the Transaction Date. The 1999
acquisitions were also accounted for as purchases and resulted in additional
goodwill of $3,490,000. Goodwill is stated net of amortization and is being
amortized on a straight-line basis over the estimated period of benefit of 16 to
40 years. (See Note 6.)
The Predecessor Company recorded expenses related to the transaction including
compensation related expenses of $10,773,000 from the sale of stock or option
payments, or both, and payments pursuant to various employee incentive programs
as a result of the transaction which were paid by the former stockholders from
purchase price proceeds on the Transaction Date. This amount is included as
"Transaction expense" in the accompanying Consolidated Statements of Income.
Certain assets and liabilities were revalued upon the July 22, 1998 acquisition
to reflect their then-current estimated fair values. The following table
summarizes those revaluations including the goodwill recorded in the merger (in
thousands).
<TABLE>
<CAPTION>
July 22, 1998
Subsequent
to merger
--------------------
<S> <C>
Total current assets $ 29,336
Net property plant and equipment 33,581
Total other assets 128,022
Total current liabilities (16,061)
Long-term debt, less current maturities (133,698)
Other non-current liabilities (14,680)
---------
Net assets $ 26,500
=========
</TABLE>
Financing costs paid or accrued by the Company and associated with the debt
issued in the refinancing totaled $7,352,000 and are included above in other
assets. Such costs were deferred and will be amortized over the term of the
issued debt.
The following table illustrates the unaudited pro forma results of operations of
the Company for the year ended December 31, 1998 as if the merger and
refinancing occurred on January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
Pro Forma
------------------------
<S> <C>
Net revenues $117,115
Income from operations 20,726
Income before income taxes 6,286
Net income 3,301
</TABLE>
The preceding pro forma balances include the effect of an increase in goodwill
amortization, adjustments to depreciation expense as a result of the revaluation
of fixed assets, an increase in interest expense as a result of the new debt
structure, a reduction in the annual management fee, the addition of an ESOP
plan, the elimination of transaction related expenses and debt extinguishment
costs, and the income tax effect of these adjustments. The results are not
necessarily indicative of the results which would actually have occurred if the
merger and refinancing had taken place on January 1, 1998.
NOTE 4 ACCOUNTS RECEIVABLE
Trade accounts receivable are stated net of allowance for doubtful accounts.
Transactions affecting the allowance for doubtful accounts are shown in the
following table (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------------
December 31, 1999 December 31, 1998 July 22, 1998 December 31, 1997
------------------ ------------------ -------------- ------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 874 $ -- $1,846 $ 1,491
Additions, charged to income 2,512 990 999 2,169
Deductions, write-off of uncollectible
accounts, net of recoveries (984) (116) (647) (1,814)
------ ------ ------ -------
Balance, end of period $2,402 $ 874 $2,198 $ 1,846
====== ====== ====== =======
</TABLE>
26
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is a diversified distributor, marketer and manufacturer of a wide
range of high quality products used in the construction industry and
agricultural and durable goods businesses. As such, its customers range from
individual entrepreneurs to large corporations. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral
for accounts receivable.
NOTE 5 INVENTORIES
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market. The cost elements included in inventories are material, labor and
factory overhead.
Inventories, net of reserves of $386,000 and $531,000 as of December 31, 1999
and 1998, respectively, consist of (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------ --------------------------
<S> <C> <C>
Raw materials $ 4,651 $ 4,752
Work in process 1,073 1,176
Finished goods 6,069 5,164
------- -------
Total Inventories $11,793 $11,092
======= =======
</TABLE>
NOTE 6 GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGES
Goodwill, intangible assets and deferred charges consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------- ---------------------------
<S> <C> <C>
Goodwill $112,296 $108,837
Less amortization (3,977) (1,204)
-------- --------
Goodwill, net $108,319 $107,633
======== ========
Patents $ 404 $ 187
Computer software 800 646
Other intangibles 50 18
-------- --------
Subtotal 1,254 851
Less amortization (132) (44)
-------- --------
Intangible assets, net $ 1,122 $ 807
======== ========
Prepaid pension costs $ 7,749 $ 7,400
Life insurance deposits 3,263 3,638
Deferred financing costs 7,352 7,352
Other deferred charges 151 152
-------- --------
Subtotal 18,515 18,542
Less amortization (1,488) (445)
-------- --------
Deferred charges, net $ 17,027 $ 18,097
======== ========
</TABLE>
Total amortization expense related to the above assets was $3,939,000 for the
year ended December 31, 1999, $1,693,000 for the period ended December 31, 1998,
$664,000 for the period ended July 22, 1998, and $1,236,000 for the year ended
December 31, 1997.
NOTE 7 ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------- ----------------------
<S> <C> <C>
Salaries, wages, vacations and payroll taxes $ 2,764 $ 2,660
Insurance 812 1,057
Interest 4,998 4,785
Other current liabilities 3,952 3,366
------- -------
Total accrued liabilities $12,526 $11,868
======= =======
</TABLE>
27
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 LONG-TERM DEBT
Long-term debt, inclusive of capitalized lease obligations which are not
material, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------- ----------------------
<S> <C> <C>
10.75% Senior Subordinated Notes $100,000 $100,000
Term Loan 28,040 34,167
ESOP Loan 862 1,313
Acquisition Facility 3,000 --
Other 180 195
-------- --------
Total Debt $132,082 $135,675
Less: Current Maturities 5,464 4,655
-------- --------
Total Long-Term Debt $126,618 $131,020
======== ========
</TABLE>
The carrying amount of the Term Loan and ESOP Loan approximates their fair value
as the interest rates are variable. The fair value of the 10.75% Senior
Subordinated Notes at December 31, 1999 was $91,750,000 as determined by market
quotations.
SCHEDULED PRINCIPAL PAYMENTS
Scheduled principal payments of long-term debt outstanding at December 31, 1999,
including capitalized lease obligations, are (in thousands):
<TABLE>
<CAPTION>
Senior
Acquisition Subordinated
Term Loan ESOP Loan Facility Notes Other
--------- --------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
2000 $ 5,021 $359 $ -- $ -- $ 84
2001 5,476 335 375 -- 71
2002 6,369 168 900 -- 21
2003 7,263 -- 1,125 -- 4
2004 3,911 -- 600 -- --
Subsequent years -- -- -- 100,000 --
------- ---- ------ -------- ----
Total $28,040 $862 $3,000 $100,000 $180
======= ==== ====== ======== ====
</TABLE>
The scheduled maturities above include the impact of an estimated prepayment in
2000 related to an excess cash flow payment required under the Bank Credit
Agreement.
The Company made the following interest payments for the year ended December 31,
1999, the periods ended December 31, 1998, and July 22, 1998, and the year ended
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------ ------------ -------- -------------------
<S> <C> <C> <C> <C>
Interest payments $13,221 $1,281 $1,871 $3,551
</TABLE>
BANK CREDIT AGREEMENT
On the Transaction Date, the Company and its domestic subsidiaries entered into
a credit agreement (the "Bank Credit Agreement") which included a term loan
("Term Loan") with an original principal amount of $35,000,000, a $1,500,000
term loan for an ESOP (the "ESOP Loan"), an aggregate $25,000,000 in principal
amount available for acquisitions (the "Acquisition Facility"), and a non-
amortizing revolving credit loan ("Revolving Credit Facility") of up to
$15,000,000, including up to $2,000,000 of letters of credit. The Company, at
closing, borrowed $35,000,000 on the Term Loan, $1,500,000 of the ESOP Loan and
$2,750,000 against the Revolving Credit Facility. Borrowings under the Revolving
Credit Facility are subject to a borrowing base as determined per the agreement
and the satisfaction of certain conditions. At December 31, 1999, there were no
borrowings under the Revolving Credit Facility and the borrowing base was
$14,815,000.
28
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
The Revolving Credit Facility, Acquisition Facility, Term Loan and ESOP Term
Loan (collectively, the "Loans") bear interest at an alternate base rate, as
defined in the agreement, based in part on a prime rate, or at a LIBOR rate, in
each case plus an applicable margin, which is initially 2.25% for LIBOR rate
advances and 1.00% for alternate base rate advances. The applicable margin may
be adjusted based on the ratio of total debt to EBITDA, as defined, and will
range from 0% to 1.00% for alternate base rate advances and 1.00% to 2.25% for
LIBOR rate advances. The weighted average interest rate at December 31, 1999 was
8.00%.
All principal and interest on the Loans are due in 2004, except the ESOP Term
Loan, which is due in 2002, and are subject to certain mandatory prepayments and
scheduled payments. Accrued interest under the Loans is due quarterly and/or at
the end of the relevant interest period in the case of LIBOR rate advances. The
Term Loan matures June 30, 2004 with quarterly amortization payments commencing
December 31, 1998. Amounts borrowed under the Acquisition Facility are due on
the last day of each September, December, March and June, from September 2001 to
June 2004. The Bank Credit Agreement permits prepayments with notice, provides
for reimbursement for certain costs, and requires prepayments from a portion of
excess cash flow (as defined) as well as to the extent cash proceeds from
certain events exceed amounts determined by certain formulas.
Borrowings under the Acquisition Facility (which are available until September
2001) are subject to certain conditions precedent, including delivering certain
information to the Lenders about the proposed acquisition, the delivery of
guarantees and security documents as to the proposed acquisition and the
conformance of the acquisition to certain criteria. The Company had borrowings
of $3,000,000 outstanding under the Acquisition Facility at December 31, 1999.
10.75% SENIOR SUBORDINATED NOTES
The 10.75% Senior Subordinated Notes (the "Notes") were issued pursuant to the
Transaction and mature on July 15, 2008. Interest is payable January 15 and July
15 of each year, commencing January 15, 1999. The Notes are unsecured Senior
Subordinated obligations of the Company and, as such, are subordinated in right
of payment to all existing and future senior indebtedness of the Company.
The Notes may be redeemed at the option of the Company, in whole or in part, at
any time on or after July 15, 2003 at the redemption prices set forth in the
indenture plus accrued interest on the date of redemption. Up to an aggregate of
35% of the principal amount of the Notes may be redeemed from time to time prior
to July 15, 2001 at the option of the Company at the redemption price set forth
in the indenture plus accrued interest to the date of redemption, with the net
proceeds received from one or more public equity offerings.
Upon a change of control, the Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued interest to the date of repurchase.
The Notes are guaranteed, jointly and severally on a Senior Subordinated basis,
by each of the Company's existing and future direct and indirect subsidiaries,
excluding unrestricted subsidiaries, as defined, and foreign subsidiaries. The
guarantees are general unsecured obligations of the Guarantors hereinafter
referred to. The Guarantors also guarantee all obligations of the Company under
the Bank Credit Agreement. The obligations of each Guarantor under its Guaranty
is subordinated in right of payment to the prior payment in full of all
Guarantor senior indebtedness (as defined), including such subsidiary's
guarantee of indebtedness under the Bank Credit Agreement, of such Guarantor to
substantially the same extent as the Notes are subordinated to all existing and
future senior indebtedness of the Company.
RESTRICTIVE LOAN COVENANTS
The Bank Credit Agreement contains restrictive covenants limiting the ability
(subject to certain exceptions) of the Company and its subsidiaries to, among
other things: (i) incur debt or contractual contingent obligations; (ii) pay
certain subordinated debt or amend subordinated debt documents without the prior
consent of the Lenders; (iii) create or allow to exist liens or other
encumbrances; (iv) transfer assets outside the Company except for sales and
other transfers of inventory or surplus, immaterial or obsolete assets in the
ordinary course of business of the Company; (v) enter into mergers,
consolidations and asset dispositions of all or substantially all of its
properties; (vi) make investments; (vii) sell, transfer or otherwise dispose of
any class of stock or the voting rights of any subsidiary of the Company; (viii)
enter into transactions with related parties other than in the ordinary course
of business on an arm's-length basis on terms no less favorable to the Company
than those available from third parties; (ix) amend certain agreements, unless
such amendment is not expected to have a material adverse effect; (x) make any
material change in the general nature of the business conducted by the Company;
(xi) pay cash dividends or redeem shares of capital stock; (xii) make capital
expenditures and (xiii) pay dividends or repurchase stock.
Under the Bank Credit Agreement, the Company is required to satisfy certain
financial covenants, including (i) a fixed charge
29
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
coverage ratio; (ii) a minimum net worth test; (iii) a ratio of total debt to
EBITDA and (iv) a minimum interest coverage ratio, all as defined in the
agreement. The Company was in compliance with its loan covenants at December 31,
1999.
The indenture under which the Notes were issued contains certain covenants that,
among other things, limit the ability of the Company and/or its Restricted
Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay
dividends or make certain other restricted payments, (iii) make investments,
(iv) enter into transactions with affiliates, (v) make certain asset
dispositions, and (vi) merge or consolidate with, or transfer substantially all
of its assets to, another person. The indenture also limits the ability of the
Company's Restricted Subsidiaries to issue Capital Stock (as defined) and to
create restrictions on the ability of such Restricted Subsidiaries to pay
dividends or make any other distributions. In addition, the Company is
obligated, under certain circumstances, to offer to repurchase Notes at a
purchase price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase, with the net cash proceeds
of certain sales or other dispositions of assets. However, all of these
limitations and prohibitions are subject to a number of important
qualifications.
NOTE 9 CAPITAL STOCK
At December 31, 1999, the Company had 100 shares of common stock, par value $.01
per share, authorized, issued and outstanding, all of which are owned by
Holdings which is 100% owned by Group.
NOTE 10 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities presented in the financial
statements and the amounts used for income tax purposes. Deferred tax assets and
liabilities were composed of the following (in thousands):
<TABLE>
<CAPTION>
DEFERRED INCOME TAX ASSETS December 31, 1999 December 31, 1998
------------------------- ------------------------
Current Assets
- --------------
<S> <C> <C>
Bad Debt reserves $ 912 $ 893
Inventory valuation 617 778
Compensation and Benefits 509 285
Insurance accruals 328 312
Professional services 262 344
Rental tool repair 203 203
Environmental costs 199 199
Other, net 459 425
------- -------
Total deferred tax asset $ 3,489 $ 3,439
======= =======
DEFERRED INCOME TAX ASSETS (LIABILITIES) December 31, 1999 December 31, 1998
------------------------ -----------------------
Noncurrent Assets (Liabilities)
- -------------------------------
Depreciation & amortization $(6,316) $(6,888)
Pension plans (2,738) (2,630)
Insurance accruals 383 383
Post-retirement benefits (except pensions) 1,957 1,789
Environmental costs 191 191
Other net 318 405
------- -------
Total deferred tax (liability), net $(6,205) $(6,750)
======= =======
</TABLE>
The components of the income tax provision, excluding the amount attributable to
the extraordinary item, are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------- ------------- --------- ------------
<S> <C> <C> <C> <C>
U.S. and state taxes payable $5,209 $1,940 $ 187 $5,013
Foreign taxes payable 533 237 200 776
------ ------ ----- ------
Taxes currently payable $5,742 $2,177 $ 387 $5,789
Deferred taxes, net (595) (498) (506) 623
------ ------ ----- ------
Total provision $5,147 $1,679 $(119) $6,412
====== ====== ===== ======
</TABLE>
30
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income (loss) before income taxes and extraordinary items of the Company's
domestic and foreign operations are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
Domestic $ 9,661 $2,600 $(1,266) $14,285
Foreign 1,313 572 422 1,322
------- ------ ------- -------
Total $10,974 $3,172 $ (844) $15,607
======= ====== ======= =======
</TABLE>
A reconciliation between the statutory and the effective income tax rates,
excluding the amount attributable to the extraordinary item, is as follows:
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Statutory income tax rate 34.3% 34.0% (34.0%) 34.0%
Non-deductible expenses including amortization 8.3% 14.4% 26.3% 3.5%
State income taxes, net of federal income tax benefit 4.3% 3.4% (.5%) 2.5%
Other, net -- 1.1% (5.8%) 1.1%
---- ---- ----- ----
Effective income tax rate 46.9% 52.9% (14.0%) 41.1%
==== ==== ===== ====
</TABLE>
The Company made the following income tax payments, net of refunds, during the
year ended December 31, 1999, the periods ended December 31, 1998, and July 22,
1998, and the year ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
Income Taxes paid $5,189 $ 453 $2,313 $3,795
</TABLE>
The Company does not record deferred income taxes applicable to undistributed
earnings of foreign subsidiaries. The Company considers these earnings to be
invested for an indefinite period. If such earnings were distributed, the U.S.
income taxes payable would not be material as the resulting liability would be
substantially offset by foreign tax credits.
31
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 EMPLOYEE BENEFITS
RETIREMENT BENEFIT PLANS
The Company's pension plans provide benefits for substantially all employees. A
majority of plan assets are invested in cash, bonds, domestic and international
equities and real estate. Pension costs are funded by the Company at a rate
necessary to maintain the plans on an actuarially sound basis. Reconciliation of
the benefit obligations, plan assets at fair value and the funded status of the
plans are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------- -----------------------
<S> <C> <C>
Benefit obligation at beginning of year $31,490 $29,179
Service Cost 1,358 1,258
Interest cost 2,044 1,991
Actuarial loss (242) 1,266
Benefit payments (2,239) (2,204)
------- -------
Benefit obligation at end of year $32,411 $31,490
======= =======
Fair value of plan assets at beginning of year 38,020 36,996
Actual return on plan assets 4,759 3,228
Benefit payments (2,239) (2,204)
------- -------
Fair value of plan assets at end of year $40,540 $38,020
======= =======
Plan assets at fair value less benefit obligation (8,129) (6,530)
Unrecognized prior service cost (47) --
Unrecognized gain (loss) 999 (346)
------- -------
Net amount recognized $(7,177) $(6,876)
======= =======
Amounts recognized in the Consolidated Balance Sheet:
Prepaid benefit cost $ 7,749 $ 7,400
Accrued benefit liability (572) (525)
Accumulated other comprehensive income -- 1
------- -------
Net asset amount recognized $ 7,177 $ 6,876
======= =======
</TABLE>
The components of net periodic pension credit are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Service cost $ 1,358 $ 524 $ 734 $ 1,127
Interest cost 2,044 829 1,162 1,726
Expected return on plan assets (3,669) (1,491) (2,089) (3,095)
Prior service cost 5 -- 2 4
Actuarial gain -- -- -- 7
------- ------- ------- -------
Total $ (262) $ (138) $ (191) $ (231)
======= ======= ======= =======
</TABLE>
Assumptions used to develop periodic expense and the actuarial present value of
the benefit obligations were:
<TABLE>
<CAPTION>
Predecessor Company
-------------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Weighted average discount rate 6.75% 6.75% 7.00% 7.00%
Expected long term rate of return on plan assets 10.00% 10.00% 10.00% 10.00%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50%
</TABLE>
32
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also has contracts with certain former officers of the Company which
provide for benefits in excess of the accrual benefit from its defined benefit
pension plan. The supplemental retirement plan is not funded. The Company has
liabilities under the Plan of $437,000 in its Consolidated Balance Sheets at
December 31, 1999 and recorded expenses of $30,000, $29,000 and $32,000 for the
year ended December 31, 1999 and for the periods ended December 31, 1998 and
July 22, 1998, respectively. For the year ended December 31, 1997, the Company
recorded expenses of $50,000 for these benefits.
EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN
All U.S. salaried and non-bargaining hourly employees, who have provided service
to the Company for one-half of a year and are at least age 21, may participate
in the AXIA Incorporated 401(k) Plan ("401(k) Plan"). The 401(k) Plan is
designed to qualify under Section 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"). Each such employee has the option to defer taxation of
a portion of his or her earnings by directing AXIA Incorporated to contribute a
percentage of earnings to the 401(k) Plan ("Deferral Contributions"). A
participant may defer up to 15% of eligible earnings to the 401(k) Plan, subject
to certain limitations set forth in the 401(k) Plan. A participant is always
100% vested in his or her Deferral Contributions. A participant's Deferral
Contributions become distributable upon the termination of his or her employment
for any reason.
In connection with the Transaction, the Company established an Employee Stock
Ownership Plan (the "ESOP") covering substantially all full time employees,
including executive officers, of the Company, who satisfy the requirements
described below. As of December 31, 1998, the 401(k) Plan was merged into the
ESOP, and an employee satisfying the eligibility requirements under the 401(k)
Plan is able to make Deferral Contributions to the Employee Stock Ownership and
401(k) Plan as was allowed under the 401(k) Plan. The ESOP borrowed $1.5 million
from Finance Co. (the "Company ESOP Loan") to purchase 15,000 shares of Common
Stock at the Closing. Finance Co. funded the Company ESOP Loan from the ESOP
Term Loan. The 15,000 shares of Common Stock purchased by the ESOP are pledged
(the "ESOP Pledge") as security for the Company ESOP Loan, and such shares will
be released and allocated to ESOP participants' accounts as the Company ESOP
Loan is discharged. The Company makes ESOP contributions in amounts sufficient
to enable the ESOP to discharge its indebtedness under the Company ESOP Loan. A
percentage of the shares released under the ESOP Pledge will be allocated to
each participant based on a percentage of such participant's Deferral
Contributions ("Matching Contributions"), and (ii) the remaining percentage of
such shares released are allocated to each participant based on such
participant's compensation relative to total compensation for all ESOP
participants ("Discretionary Contributions"). Until the Company ESOP Loan is
paid in full, ESOP Contributions will be used to pay the outstanding principal
and interest on the Company ESOP Loan. Participation begins the earlier to occur
of (i) for all employees hired prior to July 21, 1998 and are age 21, the later
of (x) July 22, 1998 or (y) their date of hire or (ii) the date an employee
satisfies the eligibility requirements to make Deferral Contributions.
A participant's ESOP account, which is such participant's allocation of shares
based on Matching and/or Discretionary Contributions, vests at the rate of 20%
per year. Distributions from the participant's ESOP account are made in cash or
Common Stock upon a participant's retirement, death, disability or termination
of employment. In the event of retirement, death or disability, the entire
balance of a participant's ESOP account will be come distributable without
regard to the ordinary vesting schedule. In the event of termination of
employment for any other reason, the vested portion of a participant's ESOP
account will become distributable and the remaining portion, if any, will be
forfeited. If Common Stock is distributed to a participant, the participant may,
within two 60-day periods, require the Company to purchase all or a portion of
such Common Stock at the fair market value of the Common Stock as determined
under the ESOP (the "Put Options"). The first 60-day period commences on the
date the participant receives a distribution of Common Stock and the second 60-
day period commences a year from such date. If a participant fails to exercise
either of the two Put Options, the participant may transfer the shares of Common
Stock only upon receipt of a bona fide third party offer and only after first
offering the shares to the ESOP and then to the Company. Employees of the
Company own approximately 5.3% of the outstanding Common Stock through the ESOP.
1998 STOCK AWARDS PLAN
In connection with the closing of the Transactions, the Board of Directors and
the Company's stockholders approved the Company's 1998 Stock Awards Plan (the
"1998 Stock Awards Plan"). The 1998 Stock Awards Plan provides for the granting
of options (either incentive stock options within the meaning of Code Section
422(b), or options that do not constitute incentive stock options ("non-
qualified stock options")), restricted stock awards, stock appreciation rights,
performance awards and phantom stock awards, or any combination thereof. The
number of shares of Common Stock that may be subject to outstanding awards is
31,111 shares of Common Stock. Shares of Common Stock which are attributable to
awards which have expired, terminated, or been canceled or forfeited are
available for issuance or use in connection with future awards.
33
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1998 Stock Awards Plan is administered by the Compensation Committee of
AXIA Group. The Compensation Committee has the power to determine which
employees, consultants and other service providers will receive an award, the
time or times when such award will be made, the type of the award and the number
of shares of Common Stock to be issued under the award or the value of the
award. Only persons who at the time of the award are employees of or service
providers to AXIA Group or of any subsidiary of AXIA Group will be eligible to
receive awards under the 1998 Stock Awards Plan. A director of AXIA Group is not
eligible to receive an award under the 1998 Stock Awards Plan unless such
director is an employee of AXIA Group or any of its subsidiaries. At December
31, 1999, there were 24,230 options totaling $2.4 million in exercise price
outstanding.
NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The AXIA Group, Inc. Nonqualified Stock Option Plan for Non-Employee Directors
grants each non-employee director of the Company the option to purchase 150
shares of AXIA Group common stock. Currently, options of 450 shares are
outstanding. Under the plan, 1,500 shares of common stock are reserved for
issuances pursuant to the exercise of options granted under the plan.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors three defined benefit post-retirement plans exclusive of
pension plans. From 1980 to 1986 the Company entered into employment agreements
with then key executive employees which provide for death benefits to the
executive's estate upon the executive's death. A second plan provides
prescription drug benefits to nonsalaried employees at one of its plants, and
the third provides post-retirement life insurance benefits to selected salaried
and nonsalaried employees. All plans are noncontributory and unfunded. The
following table sets forth the plans' combined status reconciled with the amount
shown in the Company's Consolidated Balance Sheets as of December 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------- ---------------------------
<S> <C> <C>
Benefit obligation at beginning of year $ 4,751 $ 4,103
Service cost 21 46
Interest cost 155 261
Actuarial loss 616 419
Benefits paid (82) (78)
------- -------
Benefit obligation at end of year $ 5,461 $ 4,751
Fair Value of plan assets at end of year -- --
------- -------
Funded status $(5,461) $(4,751)
Net amount recognized $(5,461) $(4,751)
======= =======
</TABLE>
Components of post-retirement benefits (other than pension) expense (in
thousands):
<TABLE>
<CAPTION>
Predecessor Company
-----------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
Service cost $ 21 $ 18 $ 28 $ 85
Interest cost 155 161 100 224
----- ----- ----- -----
Net periodic benefit cost $ 176 $ 179 $ 128 $ 309
===== ===== ===== =====
</TABLE>
From 1980 to 1986 the Company entered into Salary Continuation Agreements with
then key executive employees which provide a death benefit, contingent upon
employment or service as a consultant with the Company until retirement or
death. Pursuant to the agreement with each such executive, upon the executive's
death, the Company will pay to the respective designated beneficiary, annually
for a period of ten years, an amount equal to 40% of the executives salary at
the date of retirement. The total post-retirement benefit obligation of this
benefit program included in the table above is $4,831,000 and $4,136,000 at
December 31, 1999 and 1998, respectively. The Company has purchased life
insurance policies on the lives of the former executives, naming the Company as
the sole beneficiary. The amount of such coverage is designed to provide to the
Company a source of funds to satisfy its obligations under the program. All plan
participants have retired from the Company.
The Company, in accordance with a union contract, provides prescription drug
benefits at one of its plants. For measurement
34
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purposes, a 6.75% annual rate of increase in the per capita cost of covered
prescription drug benefits was assumed for 1999 and 1998 . The prescription drug
cost trend rate assumption has an effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1 percentage point in
each year would increase the accumulated post-retirement benefit obligation as
of December 31, 1999 by approximately $36,000 and the aggregate of the service
and interest cost components of net periodic post-retirement benefit cost for
the year then ended by approximately $2,000. The discount rate used in
determining the accumulated post-retirement benefit obligation was 6.75% in 1999
and 1998.
NOTE 12 LEASES
Minimum rental commitments of the Company under noncancellable operating leases
(primarily real estate) with initial terms of one year or more are as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31
-----------------------
<S> <C>
2000............................................................................................. $1,881
2001............................................................................................. 1,318
2002............................................................................................. 1,011
2003............................................................................................. 723
2004............................................................................................. 616
Subsequent years................................................................................. 1,658
------
Total.......................................................................................... $7,207
======
</TABLE>
The Company incurred the following expense for operating leases for the year
ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998,
and for the year ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-----------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
Lease expenses $2,461 $1,136 $1,307 $2,369
</TABLE>
NOTE 13 BUSINESS SEGMENTS
The Company is a designer, manufacturer, distributor and marketer of a diverse
range of products in several niche markets including productivity enhancing
construction tools, formed wire products and industrial bag closing equipment
and systems, and conveyor handling systems. In 1998, the Company adopted SFAS
No. 131. The aggregation methodology under SFAS No. 131 does differ materially
from the prior disclosures under SFAS No. 14.
Nestaway ("Nestaway") is a manufacturer of formed wire products which are used
for a variety of commercial and consumer product applications. Nestaway
manufactures coated wire dishwasher racks and components which are sold to
dishwasher appliance manufacturers. Nestaway also manufactures other close
tolerance, formed, welded and coated formed wire products such as dish drainers,
sink protectors, shower caddies, dryer racks, golf cart baskets, bucket bails,
medical baskets and small gauge axles.
Fischbein ("Fischbein") is a worldwide manufacturer of industrial bag closing
equipment and systems, and a manufacturer of flexible conveyor handling systems
and stackable storage equipment. Bag closing equipment and systems include: (i)
portable and stationary industrial sewing heads and sewing systems for paper,
textile and woven polypropylene bags; (ii) industrial heat sealing and bag
handling systems for paper and plastic bags and (iii) consumables, including
thread, tape and service parts. Fischbein manufacturers extendable, flexible,
gravity and motorized conveyors and portable, nestable and stackable warehouse
storage racks.
Ames ("Ames") is the designer, manufacturer, distributor and marketer of
automatic taping and finishing tools, which are rented or sold to interior
finishing contractors to finish drywall joints prior to painting, wallpapering
and other forms of final treatment. In addition, Ames sells a variety of other
drywall tools, finishing accessories, and supplies through its network of
Company-owned stores.
One of Nestaway's dish rack customers accounted for 17%, 19% and 20% of the
Company's revenues for 1999, 1998 and 1997,
35
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively. Another customer of Nestaway who purchases various consumer and
other formed wire products accounted for 10%, 11% and 10% of the Company's
revenues for 1999, 1998 and 1997, respectively.
Nestaway competes directly with the dishwasher manufacturer's in-house
manufacturing capability. Frigidaire, General Electric and Whirlpool, major
dishwasher manufacturers, have dish rack manufacturing capability. As a result
of dish rack sourcing decisions made by its customers, in 1996 Nestaway shut
down a leased production facility in Canal Winchester, Ohio, and temporarily
idled a second plant in Clinton, North Carolina. The Clinton facility resumed
operations in 1997 when the Company was awarded a contract for dish racks by a
new customer. Nestaway's Beaver Dam, Kentucky plant, shut down in 1994 due to a
customer's decision to utilize an alternative source of supply and was reopened
in 1996 to produce dish rack components, lower volume dish racks, and other
formed and coated wire products. During 1997, Nestaway charged $624,000 of the
costs incurred against a facility realignment reserve established in prior
periods. The reserve was fully utilized as of December 31, 1997.
36
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of segment data for the year ended December 31, 1999, the periods
ended December 31, 1998, and July 22, 1998, and the year ended December 31,
1997, is as follows (in thousands):
<TABLE>
<CAPTION>
Nestaway Fischbein Ames Corporate Consolidated
-------- --------- ------- ---------- ------------
Year ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
Net revenues $43,600 $30,644 $57,650 $ -- $131,894
Income (loss) from operations 8,785 4,193 15,973 (3,511) 25,440
Total assets 58,085 36,189 80,364 24,170 198,808
Depreciation and amortization 2,630 1,085 3,829 1,074 8,618
Capital expenditures 499 268 1,787 110 2,664
Period July 23 to December 31, 1998:
Net revenues $19,496 $12,777 $22,275 $ -- $ 54,548
Income (loss) from operations 3,773 1,880 5,635 (1,530) 9,758
Total assets 59,672 33,108 77,952 24,225 194,957
Depreciation and amortization 1,073 476 1,532 462 3,543
Capital expenditures 39 284 652 3 978
PREDECESSOR COMPANY
Period January 1 to July 22, 1998:
(prior to acquisition)
Net revenues $21,945 $14,758 $25,864 $ -- $ 62,567
Income (loss) from operations 4,876 1,991 7,152 (13,105) 914
Total assets 40,279 19,042 30,843 11,772 101,936
Depreciation and amortization 1,181 374 1,083 186 2,824
Capital expenditures 1,644 88 1,735 1 3,468
Year ended December 31, 1997:
Net revenues $35,268 $27,104 $42,428 $ -- $104,800
Income (loss) from operations 6,575 3,838 11,693 (2,752) 19,354
Total assets 38,873 18,141 27,969 11,790 96,773
Depreciation and amortization 2,077 746 1,860 416 5,099
Capital expenditures 1,340 319 1,813 3 3,475
</TABLE>
The period ended July 22, 1998 includes $11,280,000 in nonrecurring transaction
related expenses at Corporate. This includes $10,773,000 in compensation related
expenses from the sale of stock or options, or both, and payments pursuant to
various employee incentive programs which were paid by the former stockholders
from purchase price proceeds at the Transaction Date.
The Company conducts the majority of its business within the United States.
Fischbein has operations in various other countries, primarily in Europe and
Singapore. Ames also conducts business in Canada. Activity in any single country
or area outside of the United States is not material. Foreign revenues which
represent approximately 13% of the Company's 1999 net revenues are derived from
approximately 75 foreign countries, none of which was in excess of 4% of the
Company's 1999 net revenues.
37
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of geographical data for the year ended December 31, 1999, the periods
ended December 31, 1998 and July 22, 1998, and the year ended December 31, 1997,
is as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
-----------------------
December 31, December 31, July 22, December 31,
1999 1998 1998 1997
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
Net revenue:
United States $115,276 $48,361 $54,317 $ 89,132
Foreign 16,618 6,187 8,250 15,668
-------- ------- ------- --------
Total $131,894 $54,548 $62,567 $104,800
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------------ -------------------
<S> <C> <C>
Net Plant, Property and Equipment:
United States $30,248 $32,450
Foreign 872 239
------- -------
Total $31,120 $32,689
======= =======
</TABLE>
NOTE 14 CONTINGENCIES
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental and employee health and safety matters,
including the handling, use, discharge and disposal of hazardous materials and
pollutants. The Company believes that the conduct of its operations is in
substantial compliance with current applicable environmental laws and
regulations. Maintaining such compliance in the conduct of its operations has
not had, and is not expected to have, a material adverse effect on the Company's
financial condition or operating results. However, changes in laws or
regulations or other circumstances might, individually or in the aggregate, have
a material adverse effect on the Company's financial condition or operating
results.
On February 25, 1991, the New York State Department of Environmental
Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had
documented the release and/or threatened release of "hazardous substances"
and/or the presence of "hazardous wastes" at a property located in Buffalo, New
York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the
Company. NYSDEC determined that the Company, among others, may be a responsible
party through its past ownership of the property. The site is currently listed
on the New York State Registry of Inactive Hazardous Waste Disposal Sites.
Environmental consultants engaged by the Company established a range of
estimated remediation costs of approximately $1.0 million to $3.0 million, plus
or minus 30% of those costs. From 1992 to 1994, the Company established an
accrual of $3.9 million for the remediation and associated costs.
In 1997, the Company entered into an agreement with an adjoining landowner, who
is obligated by NYSDEC to address environmental concerns at his property. By
this agreement, the adjoining landowner agreed to accept responsibility for
remediating the property formerly owned by the Company if a particular remedy
for that property is ultimately approved by NYSDEC. On the advice of its
environmental consultants, provided after reviewing available data about the
Company's former property, the Company believes it is likely that NYSDEC will
approve the remedy in question, but the Company can give no assurance that
NYSDEC will in fact offer its approval. The Company paid the $520,000 payable
under the agreement and has further exposure under the agreement of up to an
additional $120,000 if contamination is more widespread than estimated by the
Company's environmental consultants. In the event NYSDEC does not approve the
remedy envisioned in the agreement with the adjoining landowner, the Company may
terminate the agreement and demand the return of its payment with interest. In
that case, the adjoining landowner would no longer be obligated to undertake the
remediation of the property formerly owned by the Company.
Of the consideration paid pursuant to the Merger Agreement, $5,000,000 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
38
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
funds. In addition, if certain additional specified cleanup activities are not
completed by the Early Release Date, an additional $80,000 will be withheld in
the special escrow account until such cleanup is completed. If all of the funds
in the special escrow account have not been released by the third anniversary of
the Closing Date, the funds remaining in the special escrow account will be
disbursed to the Company to cover the remaining estimated costs, with the
balance to be distributed to the former stockholders of the Company, in
accordance with an agreement to be reached by the Stockholder Representative and
the Company, or upon failure of such parties to agree, through an arbitration
procedure. Since the escrow account is under the control of the representative
of the former stockholders and the escrow has sufficient funds to cover the
estimated costs to remediate the site, the Company has neither an asset nor a
liability on its Consolidated Balance Sheets related to this matter. The
settlement of this issue is dependant upon agreements by and between parties
unrelated to the Company and therefore the date upon which this matter will be
resolved cannot be estimated.
The Company is aware of other formerly-owned sites at which activities similar
to the operations previously conducted on the Buffalo, New York property have
taken place. However, the Company has received no claims in connection with
those sites, and has no information that would lead it to believe that any such
claim is likely to be made. The Company is also a part-owner and landlord at a
stainless steel and aluminum facility in Commerce, California that is leased to
and operated by an unrelated company. The Company has received no claims against
it in connection with this site, but the Company cannot rule out the possibility
that it might incur some liability should a claim actually be made against it as
current owner of the property.
The Buffalo, New York property formerly owned by the Company referred to above
was at one time used to mill uranium rods for the Atomic Energy Commission. The
U.S. Department of Energy has since identified residual radioactivity in a
building at the site. In 1996, the government estimated the costs of addressing
the residual radioactivity at $965,000. Given the available data, the Company
and its environmental consultants believe that a more likely total cost is less
than $100,000. To date, no cleanup costs have been assessed against the Company.
The Company has provided an accrual of $100,000 for this matter.
The Company may also make claims against the warranty fund of the escrow fund
for breach of certain representatives and warranties in the Merger Agreement
regarding other environmental matters for a period of 24 months after Closing
Date, subject to a specified threshold and deductible.
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.
NOTE 15 RELATED TRANSACTIONS
The equity portion of the financing for the Transaction was provided by an
investor group led by the Sterling Group, Inc. ("Sterling"). Sterling is a
private financial organization engaged in the acquisition and ownership of
operating businesses.
Sterling entered into an agreement with AXIA Group and the Company pursuant to
which Sterling is to provide consulting and advisory services concerning
employee benefit and compensation arrangements and other matters. The agreement
also provides that AXIA Group and the Company, jointly and severally, will
indemnify Sterling against liabilities related to its services. At the Closing,
the Company paid Sterling a one-time transaction fee of $2,500,000 for these
services and reimbursed Sterling for its expenses of $109,000. In addition,
through 2008, AXIA Group will pay Sterling an annual management fee of $100,000
in cash and annually grant Sterling AXIA Group Common Stock having a value of
$100,000 calculated based upon the latest ESOP valuation price. In addition,
each of AXIA Group and the Company has agreed that if any one or more of them or
any of their subsidiaries determines within ten years of the date of the closing
of the Acquisition to dispose of or acquire any assets or business having a
value of $1,000,000 or more (a "Future Corporate Transaction") or to offer its
securities for sale publicly or privately to raise any debt or equity financing
(a "Future Securities Transaction"), either AXIA Group or the relevant
subsidiary will retain Sterling as a consultant with respect to the transaction,
provided a principal, officer or director of Sterling or any of their respective
affiliates or family members owns any equity securities of AXIA Group or any of
its successors. For any Future Corporate Transactions, Sterling is entitled to
receive a fee in the amount of 1% of the aggregate consideration paid or
received plus the aggregate amount of any liabilities assumed in connection with
an acquisition or disposition and any expenses or fees incurred by Sterling in
connection therewith. In addition to the annual management fee discussed above,
Sterling received fees of $51,958 and was reimbursed $32,279 in expenses in
connection with the acquisitions of Concorde Tool Corporation and Thames
Packaging Equipment Company, Ltd. and other matters in 1999. For any Future
Securities Transactions, Sterling is entitled to receive a fee in the amount of
0.5% of the aggregate gross selling price of such securities and, regardless of
whether such Future Securities Transaction is consummated, Sterling is entitled
to receive reimbursements of any expenses or fees incurred by Sterling in
connection therewith. The agreement is automatically renewable for successive
one-year
39
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
periods, subject to notice of termination by either Sterling or AXIA Group. From
its transaction fee received at Closing, Sterling paid Mr. Rosenthal a fee of
$250,000 for consulting services rendered in connection with the Transaction.
Mr. Rosenthal became Chairman and President subsequent to the Transaction.
NOTE 16 SUPPLEMENTAL GUARANTOR INFORMATION
The Company's payment obligations under the Subordinated Notes are fully and
unconditionally guaranteed on a joint and several basis (collectively, the
"Subsidiary Guarantees") by Ames Taping Tool Systems, Inc., and TapeTech Tool
Co., Inc., each a wholly-owned subsidiary of the Company and each a "Guarantor."
These subsidiaries, together with the operating divisions of the Company,
represent all of the operations of the Company conducted in the United States.
The remaining subsidiaries of the Company are foreign subsidiaries.
The Company's payment obligations under the Bank Credit Agreement are fully and
unconditionally guaranteed on a joint and several basis by the Company and each
Guarantor. The obligations of each Guarantor under its Subsidiary Guarantee are
subordinated to all senior indebtedness of such Guarantor, including the
guarantee by such Guarantor of the Company's borrowings under the Bank Credit
Agreement.
With the intent that the Subsidiary Guarantees not constitute fraudulent
transfers or conveyances under applicable state or federal law, the obligation
of each Guarantor under its Subsidiary Guarantee is also limited to the maximum
amount as will, after giving effect to such maximum amount and all other
liabilities (contingent or otherwise) of such Guarantor that are relevant under
such laws, and after giving effect to any rights to contribution of such
Guarantor pursuant to any agreement providing for an equitable contribution
among such Guarantor and other affiliates of the Company of payments made by
guarantees by such parties, result in the obligations of such Guarantor in
respect of such maximum amount not constituting a fraudulent conveyance.
The following supplemental, consolidating condensed financial data illustrates
the composition of the combined Guarantors. Management believes separate
complete financial statements of the respective Guarantors would not provide
additional material information which would be useful in assessing the financial
composition of the Guarantors. No single Guarantor has any significant legal
restrictions on the ability of investors or creditors to obtain access to its
assets in event of default on the Subsidiary Guarantee other than its
subordination to senior indebtedness described above.
Investments in subsidiaries are accounted for by the parent on the equity method
for purposes of the supplemental, consolidating presentation. Earnings of
subsidiaries are therefore reflected in the parent's investment accounts and
earnings. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
40
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF DECEMBER 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its 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 income (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>
41
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its Divisions Subsidiaries Subsidiaries Eliminations Totals
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $67,380 $21,722 $13,505 $ (6,720) $ 95,887
Net rentals 19,807 35,067 934 (19,801) 36,007
------- ------- ------- -------- --------
Net revenues $87,187 $56,789 $14,439 $(26,521) $131,894
Cost of sales $44,549 $12,672 $ 8,346 $ (6,854) $ 58,713
Cost of rentals 2,442 27,493 569 (19,801) 10,703
Selling, general and administrative expenses 15,177 10,750 3,539 -- 29,466
Depreciation and amortization 6,800 628 144 -- 7,572
------- ------- ------- -------- --------
Income from operations $18,219 $ 5,246 $ 1,841 $ 134 $ 25,440
Interest Expense $14,463 $ 11 $ 1 $ -- $ 14,475
Intercompany interest expense (income) (547) 442 105 -- --
Other expense (income), net (4,003) 107 422 3,465 (9)
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item $ 8,306 $ 4,686 $ 1,313 $ (3,331) $ 10,974
Provision for income taxes 2,613 2,001 533 -- 5,147
------- ------- ------- -------- --------
Net income (loss) $ 5,693 $ 2,685 $ 780 $ (3,331) $ 5,827
======= ======= ======= ======== ========
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its Divisions Subsidiaries Subsidiaries Eliminations Totals
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $12,288 $ 252 $ 251 $ -- $12,791
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (2,582) -- (82) -- (2,664)
Cash used for acquisition (2,523) -- (2,820) -- (5,343)
Proceeds from sale of fixed assets 62 -- -- -- 62
------- ----- ------- -------- -------
Net Cash used in Investing Activities $(5,043) $ -- $(2,902) $ -- $(7,945)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on Acquisition Facility 3,000 -- -- -- 3,000
Payments of other long-term debt (6,605) 12 -- -- (6,593)
Intercompany dividends 207 -- (207) -- --
Intercompany loan (2,000) -- 2,000 -- --
Net increase (decrease) in advance account 216 (144) (72) -- --
Equity contribution to subsidiary (753) -- 753 -- --
Other Equity transactions (53) -- -- -- (53)
------- ----- ------- -------- -------
Net Cash (used in) provided by
Financing Activities $(5,988) $(132) $ 2,474 $ -- $(3,646)
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ -- $ -- $ 114 $ -- $ 114
------- ----- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 1,257 $ 120 $ (63) $ -- $ 1,314
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,992 307 605 -- 5,904
------- ----- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,249 $ 427 $ 542 $ -- $ 7,218
======= ===== ======= ======= =======
</TABLE>
42
<PAGE>
AXIA INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
AS OF DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its Divisions Subsidiaries Subsidiaries Eliminations Totals
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 4,992 $ 307 $ 605 $ -- $ 5,904
Accounts receivable, net 6,601 6,049 2,716 (1,233) 14,133
Inventories, net 6,742 2,422 2,551 (623) 11,092
Prepaid income taxes and other current assets 894 140 101 -- 1,135
Deferred income tax benefits 3,439 -- -- -- 3,439
-------- ------- ------ -------- --------
Total Current Assets $ 22,668 $ 8,918 $5,973 $ (1,856) $ 35,703
-------- ------- ------ -------- --------
PLANT AND EQUIPMENT, AT COST:
Land $ 984 $ -- $ -- $ -- $ 984
Building and improvements 4,371 51 178 -- 4,600
Machinery and equipment 18,099 528 123 -- 18,750
Equipment leased to others 10,101 -- 12 -- 10,113
-------- ------- ------ -------- --------
$ 33,555 $ 579 $ 313 $ -- $ 34,447
Less: Accumulated depreciation 1,603 81 74 -- 1,758
-------- ------- ------ -------- --------
Net Plant and Equipment $ 31,952 $ 498 $ 239 $ -- $ 32,689
OTHER ASSETS:
Goodwill, net $ 92,706 $14,915 $ 12 $ -- $107,633
Intangible assets, net 796 11 -- -- 807
Deferred charges, net 17,184 912 1 -- 18,097
Investment in wholly-owned subsidiaries 17,806 -- -- (17,806) --
Other assets 28 -- -- -- 28
-------- ------- ------ -------- --------
Total Other Assets $128,520 $15,838 $ 13 $(17,806) $126,565
-------- ------- ------ -------- --------
TOTAL ASSETS $183,140 $25,254 $6,225 $(19,662) $194,957
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,621 $ 34 $ -- $ -- $ 4,655
Accounts payable 3,197 620 1,750 (1,233) 4,334
Accrued liabilities 10,566 795 507 -- 11,868
Accrued income taxes -- -- 11 -- 11
Advance account (9,693) 10,493 (800) -- --
-------- ------- ------ -------- --------
Total Current Liabilities $ 8,691 $11,942 $1,468 $ (1,233) $ 20,868
-------- ------- ------ -------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current maturities $130,967 $ 53 $ -- $ -- $131,020
Other non-current liabilities 7,970 -- -- -- 7,970
Deferred income taxes 6,750 -- -- -- 6,750
-------- ------- ------ -------- --------
Total Non-Current Liabilities $145,687 $ 53 $ -- $ -- $145,740
-------- ------- ------ -------- --------
Common stock held by ESOP $ 1,620 $ -- $ -- $ -- $ 1,620
Less: Note receivable from ESOP (1,473) -- -- -- (1,473)
STOCKHOLDER'S EQUITY:
Common stock and additional paid-in capital $ 26,511 $ 5,098 $1,176 $ (6,274) $ 26,511
Retained earnings 2,105 8,161 3,371 (12,155) 1,482
Accumulated other comprehensive (loss) income (1) -- 210 -- 209
-------- ------- ------ -------- --------
Total Stockholder's Equity $ 28,615 $13,259 $4,757 $(18,429) $ 28,202
-------- ------- ------ -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $183,140 $25,254 $6,225 $(19,662) $194,957
======== ======= ====== ======== ========
</TABLE>
43
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE PERIOD FROM JULY 23, 1998 TO DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its Divisions Subsidiaries Subsidiaries Eliminations Totals
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $30,643 $ 7,993 $4,982 $ (3,201) $40,417
Net rentals 7,773 13,734 396 (7,772) 14,131
------- ------- ------ -------- -------
Net revenues $38,416 $21,727 $5,378 $(10,973) $54,548
Cost of sales $20,931 $ 4,767 $3,143 $ (3,166) $25,675
Cost of rentals 855 10,893 243 (7,772) 4,219
Selling, general and administrative expenses 6,191 4,336 1,272 -- 11,799
Depreciation and amortization 2,876 182 39 -- 3,097
------- ------- ------ -------- -------
Income (loss) from operations $ 7,563 $ 1,549 $ 681 $ (35) $ 9,758
Interest Expense $ 6,511 $ 4 $ -- $ -- $ 6,515
Intercompany interest expense (income) 5 (5) -- -- --
Other expense (income), net (1,286) 45 109 1,203 71
------- ------- ------ -------- -------
Income (loss) before income taxes $ 2,333 $ 1,505 $ 572 $ (1,238) $ 3,172
Provision for income taxes 805 637 237 -- 1,679
------- ------- ------ -------- -------
Net income (loss) $ 1,528 $ 868 $ 335 $ (1,238) $ 1,493
======= ======= ====== ======== =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
THE PERIOD FROM JULY 23, 1998 TO DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its Divisions Subsidiaries Subsidiaries Eliminations Totals
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (2,175) $ 321 $176 $ -- $ (1,678)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (826) (130) (22) -- (978)
Proceeds from sale of fixed assets 15 -- -- -- 15
Acquisition of predecessor company (120,784) -- -- -- (120,784)
--------- ------- ---- ------- ---------
Net Cash used in Investing Activities $(121,595) $ (130) $(22) $ -- $(121,747)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ (2,750) $ -- $ -- $ -- $ (2,750)
Net payments on prior Revolving Credit (8,900) -- -- -- (8,900)
Payments of other long-term debt (19,905) 34 -- -- (19,871)
Proceeds from other long-term debt 139,250 -- -- -- 139,250
Net increase (decrease) in advance account 1,061 (1,067) 6 -- --
Payments of deferred financing costs (7,352) -- -- -- (7,352)
Contribution from parent 26,500 -- -- -- 26,500
Other equity transactions -- -- (9) -- (9)
--------- ------- ---- ------- ---------
Net Cash (used in) provided by Financing
Activities $ 127,904 $(1,033) $ (3) $ -- $ 126,868
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- $ -- $ 44 $ -- $ 44
-------- ------- ---- ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 4,134 $ (842) $195 $ -- $ 3,487
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 858 1,149 410 -- 2,417
--------- ------- ---- ------ ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,992 $ 307 $605 $ -- $ 5,904
========= ======= ==== ====== =========
</TABLE>
44
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its Divisions Subsidiaries Subsidiaries Eliminations Totals
-------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales $34,554 $ 9,595 $6,445 $ (4,337) $46,257
Net rentals 8,973 15,792 512 (8,967) 16,310
------- ------- ------ -------- -------
Net revenues $43,527 $25,387 $6,957 $(13,304) $62,567
Cost of sales $22,372 $ 5,747 $4,307 $ (4,198) $28,228
Cost of rentals 1,093 12,539 314 (8,967) 4,979
Selling, general and administrative expenses 8,057 4,801 1,649 -- 14,507
Depreciation and amortization 2,512 107 40 -- 2,659
Transaction expenses (see Note 6)) 11,280 -- -- -- 11,280
------- ------- ------ -------- -------
Income (loss) from operations $(1,787) $ 2,193 $ 647 $ (139) $ 914
Interest Expense $ 1,549 $ 4 $ -- $ -- $ 1,553
Intercompany interest expense (income) 58 (58) -- -- --
Other expense (income), net (1,635) 28 225 1,587 205
------- ------- ------ -------- -------
Income (loss) before income taxes and extraordinary item $(1,759) $ 2,219 $ 422 $ (1,726) $ (844)
Provision for income taxes (1,173) 854 200 -- (119)
------- ------- ------ -------- -------
Net income (loss) before extraordinary item $ (586) $ 1,365 $ 222 $ (1,726) $ (725)
======= ======= ====== ======== =======
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and Guarantor Non-Guarantor Consolidated
its Divisions Subsidiaries Subsidiaries Eliminations Totals
-------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 7,473 $ (7) $ 1,096 $ -- $ 8,562
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,389) (49) (30) -- (3,468)
Proceeds from sale of fixed assets 4 -- -- -- 4
------- ------ ------- ------ -------
Net Cash used in Investing Activities $(3,385) $ (49) $ (30) $ -- $(3,464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Revolving Credit $ 4,400 $ -- $ -- $ -- $ 4,400
Payments of other long-term debt (7,987) (8) (324) -- (8,319)
Net increase (decrease) in advance account (271) 288 (17) -- --
Intercompany dividends 669 -- (669) -- --
Other equity transactions (6) -- (52) -- (58)
------- ------ ------- ------ -------
Net Cash (used in) provided by Financing Activities $(3,195) $ 280 $(1,062) $ -- $(3,977)
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- $ -- $ (14) $ -- $ (14)
------- ------ ------- ------ -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 893 224 (10) -- 1,107
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD (35) 925 420 $ -- 1,310
------- ------ ------- ------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 858 $1,149 $ 410 $ -- $ 2,417
======= ====== ======= ====== =======
</TABLE>
45
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and its Guarantor Non-Guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $57,366 $14,837 $11,549 $ (6,334) $ 77,418
Net rentals 15,063 26,379 986 (15,046) 27,382
------- ------- ------- -------- --------
Net revenues $72,429 $41,216 $12,535 $(21,380) $104,800
Cost of sales $38,944 $ 8,683 $ 7,280 $ (6,381) $ 48,526
Cost of rentals 1,975 20,872 621 (15,046) 8,422
Selling, general and administrative expenses 13,041 7,903 2,842 -- 23,786
Depreciation and amortization 4,456 183 73 -- 4,712
------- ------- ------- -------- --------
Income (loss) from operations $14,013 $ 3,575 $ 1,719 $ 47 $ 19,354
Interest Expense 3,695 9 6 -- 3,710
Intercompany interest expense (income) (7) 7 -- -- --
Other expense (income), net (3,381) 205 391 2,822 37
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item $13,706 $ 3,354 $ 1,322 $ (2,775) $ 15,607
Provision for income taxes 4,558 1,295 559 -- 6,412
------- ------- ------- -------- --------
Income (loss) before extraordinary item $ 9,148 $ 2,059 $ 763 $ (2,775) $ 9,195
======= ======= ======= ======== ========
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Parent and its Guarantor Non-Guarantor Consolidated
Divisions Subsidiaries Subsidiaries Eliminations Totals
--------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 9,530 $ 1,899 $ 301 $ -- $ 11,730
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for capital expenditures (3,255) (71) (149) -- $ (3,475)
Proceeds from sale of investment 1,459 -- -- -- 1,459
Proceeds from sale of fixed assets 357 -- -- -- 357
-------- ------- ----- ------ --------
Net Cash used in Investing Activities $ (1,439) $ (71) $(149) $ -- $ (1,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Revolving Credit Loan 4,500 -- -- -- 4,500
Proceeds from other long-term debt 620 -- 324 -- 944
Payments of other long-term debt (15,907) (24) -- -- (15,931)
Dividends received from (paid by) subsidiaries 638 -- (638) -- --
Net increase (decrease) in advance account 1,471 (1,386) (85) -- --
Other equity transactions 145 -- (108) -- 37
-------- ------- ----- ------ --------
Net Cash used in Financing Activities $ (8,533) $(1,410) $(507) $ -- $(10,450)
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- (27) -- (27)
-------- ------- ----- ------ --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ (442) $ (418) $(382) $ -- $ (406)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 407 507 802 -- 1,716
-------- ------- ----- ------ --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ (35) $ 925 $ 420 $ -- $ 1,310
======== ======= ===== ====== ========
</TABLE>
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of AXIA Incorporated
We have audited the accompanying consolidated balance sheets of AXIA
Incorporated and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of income, stockholder's equity and
comprehensive income, and cash flows for the year ended December 31, 1999, and
for the period from July 23, 1998 to December 31, 1998 and for the period from
January 1, 1998 to July 22, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of the Company for the year ended December 31, 1997 were audited by
other auditors whose report, dated February 25, 1998, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of its operations and its cash flows for the year
ended December 31, 1999 and for the periods ended December 31, 1998 and July 22,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 11, 2000
47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of
Directors of AXIA Incorporated:
We have audited the consolidated balance sheet of AXIA INCORPORATED
(a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 (not presented
herein) and the related accompanying consolidated statements of income,
stockholder's equity and comprehensive income, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AXIA INCORPORATED
AND SUBSIDIARIES as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 25, 1998
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 9, 1998, the Board of Directors of AXIA Incorporated approved
management's recommendation on July 23, 1998 to engage the independent certified
public accounting firm of Deloitte & Touche LLP ("D&T") to audit the
consolidated financial statements of the Company for the year ending December
31, 1999. Prior to the sale of the predecessor company on July 22, 1998, the
predecessor company's independent auditor was Arthur Andersen LLP.
See Form 8-K filed on December 15, 1998 for change in accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information is set forth under the heading "Directors and Executive Officers
of the Registrant" in Part I, Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by the
Chairman, President and Chief Executive Officer and the four most highly
compensated executive officers, other than the Chairman, President and Chief
Executive Officer who served as executive officers of the Company as of December
31, 1999 (the "Named Executive Officers") for services rendered in all
capacities to the Company for the years ended December 31, 1999, 1998 and 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Incentive Other Annual
Name and Principal Position (1) Year Salary Compensation (2) Compensation (3) (4)
- -------------------------------------------------- ---- -------- ---------------- --------------------
<S> <C> <C> <C> <C>
Gary L. Rosenthal 1999 $296,301 $159,000 $ 1,857
Chairman, President and Chief Executive Officer 1998 $121,323 $ 50,000 --
Dennis W. Sheehan (5) 1998 $283,386 -- $13,725
Chairman, President and Chief Executive Officer 1997 $336,000 $200,000 $19,837
Lyle J. Feye 1999 $166,312 $ 56,700 $74,820
Vice President-Finance, Treasurer and 1998 $150,667 $ 57,500 $10,725
Chief Financial Officer 1997 $140,500 $ 45,000 $10,210
Robert G. Zdravecky 1999 $189,287 $ 70,000 $11,359
President and General Manager of Ames 1998 $179,983 $ 75,594 $11,889
1997 $171,500 $ 62,640 $11,766
David H. Chesney 1999 $181,035 $ 66,000 $ 9,997
President and General Manager of Nestaway 1998 $174,525 $112,952 $10,660
1997 $166,900 $ 25,000 $ 9,317
Ian G. Wilkins 1999 $174,525 $ 35,000 $ 8,796
President and General Manager of Fischbein 1998 $170,084 $ 17,000 $12,212
1997 $163,083 $ 48,000 $ 8,611
</TABLE>
(1) These individuals have not received any restricted stock awards or
options for the periods indicated. None of the executive officers has
received perquisites, the value of which exceeded the lesser of $50,000 or
10% of the salary and bonus of such executive officer.
(2) The company provides a management incentive plan with payments to be
made in cash.
(3) Includes payments for life insurance and automobile allowance and Mr.
Feye had additional earnings of $64,296 as a result of compensation recorded
due to reimbursement of moving expenses related to relocation of the
Corporate office.
(4) In connection with the closing of the Transaction, Mr. Sheehan, Mr.
Feye, Mr. Zdravecky, Mr.Chesney and Mr. Wilkins received compensation as a
result of the sale of stock, the exercising of options, or both, and payments
pursuant to various
49
<PAGE>
employee incentive bonus programs. Compensation recognized as a result of the
Transaction for these individuals was $1.2 million, $2.1 million, $2.3
million, $2.1 million and $2.1 million, respectively. Mr. Feye, Mr.
Zdravecky, Mr. Chesney and Mr. Wilkins received additional compensation of
$43,171 as a result of the Transaction from escrow disbursement in 1999. In
1998, Mr. Rosenthal received a fee of $250,000 from Sterling for consulting
services rendered prior to and in connection with the Transaction.
(5) Dennis W. Sheehan retired concurrently with the Transaction.
EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN
All U.S. salaried and non-bargaining hourly employees, who have provided service
to AXIA Incorporated for one-half of a year and are at least age 21, may
participate in the AXIA Incorporated 401(k) Plan ("401(k) Plan"). The 401(k)
Plan is designed to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"). Each such employee has the option to defer
taxation of a portion of his or her earnings by directing AXIA Incorporated to
contribute a percentage of earnings to the 401(k) Plan ("Deferral
Contributions"). A participant may defer up to 15% of eligible earnings to the
401(k) Plan, subject to certain limitations set forth in the 401(k) Plan. A
participant is always 100% vested in his or her Deferral Contributions. A
participant's Deferral Contributions become distributable upon the termination
of his or her employment for any reason.
In connection with the Transaction the Company established an Employee Stock
Ownership Plan (the "ESOP"), covering substantially all full time employees,
including executive officers of the Company who satisfy the requirements
described below. As of December 31, 1998, the 401(k) Plan was merged into the
ESOP, and an employee satisfying the eligibility requirements under the 401(k)
Plan is able to make Deferral Contributions to the Employee Stock Ownership and
401(k) Plan as was allowed under the 401(k) Plan. The ESOP borrowed $1.5 million
from Finance Co. (the "Company ESOP Loan") to purchase 15,000 shares of Common
Stock at the Closing. Finance Co. funded the Company ESOP Loan from the ESOP
Term Loan. The Company ESOP Loan matures on December 31, 2003 and bears interest
at interest rates based on the Alternative Base Rate (as defined) or the LIBOR
Rate (as defined). The outstanding principal of the Company ESOP Loan is payable
in equal quarterly installments of $68,182 during the period beginning
September 30, 1998, but payments may be accelerated to allocate sufficient
shares to participants. The 15,000 shares of Common Stock purchased by the ESOP
are pledged (the "ESOP Pledge") as security for the Company ESOP Loan, and such
shares will be released and allocated to ESOP participants' accounts as the
Company ESOP Loan is discharged. The Company will make ESOP contributions in
amounts sufficient to enable the ESOP to discharge its indebtedness under the
Company ESOP Loan. A percentage of the shares released under the ESOP Pledge
will be allocated to each participant based on a percentage of such
participant's Deferral Contributions (Matching Contributions"), and (ii) the
remaining percentage of such shares released are allocated to each participant
based on such participant's compensation relative to total compensation for all
ESOP participants ("Discretionary Contributions"). Until the Company ESOP Loan
is paid in full, ESOP Contributions will be used to pay the outstanding
principal and interest on the Company ESOP Loan. Participation begins the
earlier to occur of (i) for all employees hired prior to July 31, 1998 and are
age 21, the later of (x) July 22, 1998 or (y) their date of hire or (ii) the
date an employee satisfies the eligibility requirements to make Deferral
Contributions.
A participant's ESOP account, which is such participant's allocation of shares
based on Matching and/or Discretionary Contributions, vests at the rate of 20%
per year. Distributions from the participant's ESOP account are made in cash or
Common Stock upon a participant's retirement, death, disability or termination
of employment. In the event of retirement, death or disability, the entire
balance of a participant's ESOP account will become distributable without regard
to the ordinary vesting schedule. In the event of termination of employment for
any other reason, the vested portion of a participant's ESOP account will become
distributable and the remaining portion, if any, will be forfeited. If Common
Stock is distributed to a participant, the participant may, within two 60-day
periods, require the Company to purchase all or a portion of such Common Stock
at the fair market value of the Common Stock as determined under the ESOP (the
"Put Options"). The first 60-day period commences on the date the participant
receives a distribution of Common Stock and the second 60-day period commences a
year from such date. If a participant fails to exercise either of the two Put
Options, the participant may transfer the shares of Common Stock only upon
receipt of a bona fide third party offer and only after first offering the
shares to the ESOP and then to the Company. Employees of the Company own
approximately 5.3% of the outstanding Common Stock through the ESOP.
RETIREMENT PLAN
Substantially all salaried and non-bargaining hourly employees participate in
the AXIA Incorporated Salaried Employees' Retirement Plan. Under the terms of
the Plan, each eligible employee receives a retirement benefit based on the
number of years of Credited Service with the Company and average total earnings
for the five consecutive years of highest earnings during the fifteen years
preceding termination of employment.
As of December 31, 1999, the number of years of Credited Service for the
indicated persons are: Mr. Rosenthal, .42 year; Mr. Feye, 10.33 years; Mr.
Zdravecky, 11.08 years; Mr. Chesney, 7.83 years; and Mr. Wilkins, 4.58 years.
50
<PAGE>
The amounts shown in the following table are estimated annual retirement
benefits (payable as a straight life annuity) for the respective compensation
levels and years of service, after deduction of an offset of anticipated Social
Security benefits as provided under the terms of the Plan.
<TABLE>
<CAPTION>
Years of Service
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Annual Earnings 10 15 20 25 30
------- ------- ------- ------- -------
Average
$120,000 $21,382 $32,073 $42,764 $53,455 $64,146
$140,000 25,382 $38,073 $50,764 $63,455 $76,146
$160,000* $29,382 $44,073 $58,764 $73,455 $88,146
</TABLE>
* The Internal Revenue Code limits the amount of compensation that can be taken
into account in 1999 to $160,000.
MEDICAL INSURANCE
Certain Company officers participate in a medical insurance plan covering up to
$100,000 per participant in annual medical expenses. The aggregate benefit
amount paid for such participants totaled $8,140 for 1999.
SALARY CONTINUATION
In order to attract and encourage key executives to remain with the Company from
1980 to 1986, the Company instituted a salary continuation program to provide
certain then key executives with a death benefit, contingent upon employment or
service as a consultant with the Company until retirement or death. The program
provides that upon the executive's death, the Company will pay to his designated
beneficiary, annually for a period of ten years, an amount equal to 40% of the
executive's current annual salary or salary at date of retirement. The Company
has purchased life insurance policies on the lives of the executives, naming the
Company as the sole beneficiary. The amount of such coverage is designed to
provide to the Company a source of funds to satisfy its obligations under the
program. Annual premiums paid in 1999 were approximately $41,850; however, if
current assumptions as to mortality experience, policy dividends and other
factors are realized, the Company will recover, through tax deductions over the
life of the program, all of its payments to the insurance company and the
executives. As of the Transaction date, all plan participants were retired.
MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company has adopted an incentive plan which provides to certain employees,
including the executives listed above, an annual performance bonus. These
bonuses are calculated on the basis of the employee's level of participation and
achievement of objectives as defined in the plan. Bonuses are paid in the first
quarter of the following year, assuming the Company meets a targeted earnings
improvement, revenues, gross margin, cash flow, and/or such other measures as
may be determined annually by the Company's Compensation Committee.
1998 STOCK AWARDS PLAN
In connection with the closing of the Transaction, the Board of Directors and
the Company's stockholders approved the Company's 1998 Stock Awards Plan (the
"1998 Stock Awards Plan"). The 1998 Stock Awards Plan is intended to provide
employees, consultants and other service providers with an opportunity to
acquire a proprietary interest in AXIA Group and additional incentive and reward
opportunities based on the growth in the Common Stock price of AXIA Group. The
1998 Stock Awards Plan provides for the granting of options (either incentive
stock options within the meaning of Code Section 422(b), or options that do not
constitute incentive stock options ("non-qualified stock options")), restricted
stock awards, stock appreciation rights, performance awards and phantom stock
awards, or any combination thereof. The number of shares of Common Stock that
may be subject to outstanding awards is 31,111 shares of Common Stock. Shares of
Common Stock which are attributable to awards which have expired, terminated or
been canceled or forfeited are available for issuance or use in connection with
future awards. As of December 31, 1999, options were outstanding for 26,600
shares of common stock.
Administration. The 1998 Stock Awards Plan will be administered by the
Compensation Committee of AXIA Group. The Compensation Committee will have the
power to determine which employees, consultants and other service providers will
receive an award, the time or times when such award will be made, the type of
the award and the number of shares of Common Stock to be issued under the award
or the value of the award. Only persons who at the time of the award are
employees of or service providers to
51
<PAGE>
AXIA Group or of any subsidiary of AXIA Group will be eligible to receive awards
under the 1998 Stock Awards Plan. A director of AXIA Group is not eligible to
receive an award under the 1998 Stock Awards Plan unless such director is an
employee of AXIA Group or any of its subsidiaries.
Options. The 1998 Stock Awards Plan provides for two types of options: incentive
stock options and non-qualified stock options. The Compensation Committee will
designate the persons to receive the options, the number of shares subject to
the options and the terms and conditions of each option granted under the 1998
Stock Awards Plan. The term of any option granted under the 1998 Stock Awards
Plan shall be determined by the Compensation Committee; provided, however, that
an incentive stock option may only be awarded to an employee and that the term
of any incentive stock option cannot exceed ten years from the date of the grant
and any incentive stock option granted to an employee who possesses more than
10% of the total combined voting power of all classes of shares of AXIA Group or
of its subsidiary within the meaning of Section 422(b)(6) of the Code must not
be exercisable after the expiration of five years from the date of grant. The
exercise price of options granted under the 1998 Stock Awards Plan will be
determined by the Compensation Committee; provided, however, that an incentive
stock option exercise price cannot be less than the fair market value of a share
of Common Stock on the date such option is granted (subject to certain
adjustments provided under the 1998 Stock Awards Plan). Further, the exercise
price of any incentive stock option granted to an employee who possesses more
than 10.0% of the total combined voting power of all classes of shares of AXIA
Group or of its subsidiaries within the meaning of Section 422(b)(6) of the Code
must be at least 110% of the fair market value of the Common Stock on the date
such option is granted. The exercise price of options granted under the 1998
Stock Awards Plan will be paid in full in a manner prescribed by the
Compensation Committee.
Restricted Stock Awards. Pursuant to a restricted stock award, Common Stock will
be granted to an eligible person at the time the award is made without any cash
payment to AXIA Group, except to the extent otherwise provided by the
Compensation Committee or required by law; provided, however, that such shares
will be subject to certain restrictions on the disposition thereof and certain
obligations to forfeit such shares to the Company as may be determined in the
discretion of the Compensation Committee. The restrictions on disposition may
lapse based upon (a) AXIA Group's attainment of specific performance targets
established by the Compensation Committee that are based on: (i) the fair market
value of a share of Common Stock; (ii) AXIA Group earnings per share; (iii) the
Company's revenue; (iv) the revenue of a business unit of AXIA Group designated
by the Compensation Committee; (v) the return on stockholders' equity achieved
by AXIA Group or (vi) AXIA Group's pre-tax cash flow from operation (b) the
grantee's tenure with AXIA Group, or (c) a combination of factors. AXIA Group
will retain custody of the Common Stock issued pursuant to a restricted stock
award until the disposition restrictions lapse. A grantee may not sell,
transfer, pledge, exchange, hypothecate, or otherwise dispose of such shares
until the expiration of the restriction period. However, upon the issuance to
the grantee of Common Stock pursuant to a restricted stock award, except for the
foregoing restrictions, such grantee will have all the rights of a stockholder
of the Company with respect to such shares, including the right to vote such
shares and to receive all dividends and other distributions paid with respect to
such shares.
Stock Appreciation Rights. A stock appreciation right permits the holder thereof
to receive an amount in cash, Common Stock, or a combination thereof (as
determined by the Compensation Committee), equal in value to the number of stock
appreciation rights exercised by the holder multiplied by the excess of the fair
market value of Common Stock on the exercise date over the stock appreciation
rights' exercise price. Stock appreciation rights may or may not be granted in
connection with the grant of an option and no stock appreciation right may be
exercised earlier than six months from the date of grant. A stock appreciation
right may be exercised in whole or in installments and at such time as
determined by the Compensation Committee.
Performance and Phantom Stock Awards. The 1998 Stock Awards Plan permits grants
of performance awards and phantom stock awards, which may be paid in cash,
Common Stock, or a combination thereof as determined by the Compensation
Committee. Performance awards granted under the 1998 Stock Awards Plan will have
a maximum value established by the Compensation Committee at the time of the
grant. A grantee's receipt of such amount will be contingent upon satisfaction
by AXIA Group, or any subsidiary, division or department thereof, of performance
conditions established by the Compensation Committee prior to the beginning of
the performance period. Future performance conditions may be based on: (i) the
price of a share of Common Stock; (ii) AXIA Group's earnings per share; (iii)
the Company's revenue; (iv) the revenue of a business unit of AXIA Group
designated by the Compensation Committee; (v) the return on stockholder's equity
achieved by AXIA Group; (vi) AXIA Group or business unit's pre-tax cash flow
from operations or (vii) a combination of such factors. Such performance awards,
however, may be subject to later revisions as the Compensation Committee deems
appropriate to reflect significant unforeseen events or changes. A performance
award will terminate if the grantee's employment or service with the Company
terminates during the applicable performance period except as otherwise provided
by the Compensation Committee at the time of grant. Phantom stock awards granted
under the 1998 Stock Awards Plan are awards of Common Stock or rights to receive
amounts equal to stock appreciation over a specific period of time. Such awards
vest over a period of time or upon the occurrence of a specific event(s)
established by the Compensation Committee, without payment of any amounts by the
holder thereof (except to the extent required by law) or satisfaction of any
performance criteria or objectives. Future performance conditions may be based
on (i) the price of a share of Common Stock; (ii) AXIA Group's earnings per
share; (iii) AXIA Group's revenue; (iv) the revenue of a business unit of AXIA
Group designated by the
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<PAGE>
Compensation Committee; (v) the return on stockholder's equity achieved by AXIA
Group; (vi) AXIA Group or business unit's pre-tax cash flow from operations or
(vii) a combination of such factors. A phantom stock award will terminate if the
grantee's employment or service with the Company terminates during the
applicable vesting period or, if applicable, the occurrence of a specific
event(s), except as otherwise provided by the Compensation Committee at the time
of grant. In determining the value of performance awards or phantom stock
awards, the Compensation Committee must take into account a grantee's
responsibility level, performance, potential, other awards under the 1998 Stock
Awards Plan and such other considerations as it deems appropriate. Such payment
may be made in a lump sum or in installments as prescribed by the Compensation
Committee. Any payment made in Common Stock will be based upon the fair market
value of the Common Stock on the payment date.
Income Tax Considerations. Upon the exercise of a nonqualified option, the
optionee will recognize ordinary taxable income on the amount by which the fair
market value of the Common Stock purchased exceeds the price paid for such
Common Stock under the option. The Company shall be able to deduct the same
amount for federal income tax purposes. The exercise of an incentive stock
option has no tax consequence to an optionee or the Company. At the time the
restrictions lapse on a restricted stock award, the holder of such award will
recognize ordinary taxable income in an amount equal to the fair market value of
the shares of Common Stock on which the restrictions lapse. The amount of
ordinary taxable income recognized by such holder of a restricted stock award is
deductible by the Company. Upon the exercise of a stock appreciation right, the
holder of such right must include in ordinary taxable income the amount of cash
or the fair market value of the shares of Common Stock received. The amount of
ordinary taxable income recognized by such holder of the stock appreciation
right is deductible by the Company. A holder of a performance award or a phantom
stock award will include in his or her ordinary taxable income the fair market
value of the shares of Common Stock related to such award when the holder's
rights in such award first becomes transferable or is no longer subject to a
substantial risk of forfeiture. The amount of ordinary taxable income recognized
by the holder of either award is deductible by the Company.
NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The AXIA Group, Inc. Nonqualified Stock Option Plan for Non-Employee Directors
grants each non-employee director of the Company the option to purchase 150
shares of AXIA Group common stock. Currently, options of 450 shares are
outstanding. Under the plan, 1,500 shares of common stock are reserved for
issuances pursuant to the exercise of options granted under the plan.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP
BENEFICIAL OWNERSHIP
The Company is wholly owned by Holdings, a wholly-owned subsidiary of
AXIAGroup, Inc.
The following table sets forth as of December 31, 1999, the number and
percentage of the outstanding shares of AXIA Group's Common Stock beneficially
owned by the ESOP, the Named Executive Officers, each director of AXIA Group and
the Company, all directors and officers as a group and each person who is the
beneficial owner of more than 5% of the outstanding Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER OWNERSHIP OF COMMON STOCK COMMON STOCK (1)
-------------------- ------------------------------- -------------------------
<S> <C> <C>
David H. Chesney 3,804 1.3%
9501 Granger Rd
Cleveland, Ohio 44125
Lyle J. Feye 3,067 1.1%
801 Travis - Suite 1400
Houston, Texas 77002
Susan O. Rheney 5,000 1.7%
Eight Greenway Plaza - Suite 702
Houston, Texas 77046
Gary L. Rosenthal 5,358(2) 1.9%
600 Travis - Suite 6110
Houston, Texas 77002
C. Byron Snyder 1,000 .4%
1502 Augusta #425
Houston, Texas 77057
Ian G. Wilkins 2,553 0.9%
151 Walker Road
Statesville, North Carolina 28625
James D. Woods 2,000 .7%
600 Travis - Suite 6602
Houston, Texas 77002
Robert G. Zdravecky 3,556 1.2%
3305 Breckinridge Blvd., Suite 122
Duluth, Georgia 30096
All directors and Named Executive Officers as a group (8 persons) 26,338 9.2%
The CIT Group/Equity Investments, Inc 25,000 8.8%
650 CIT Drive
Livingston, New Jersey 07039
Fayez Sarofim Investment Partnership No. &, L.P. 25,000 8.8%
Two Houston Center - Suite 702
Houston, Texas 77010
Frank J. Hevrdejs 24,190 8.5%
Eight Greenway Plaza - Suite 702
Houston, Texas 77046
Paribas North America 25,000 8.8%
787 Seventh Avenue
New York, New York 10019
Gordon A. Cain 17,500 6.1%
Eight Greenway Plaza - Suite 702
Houston, Texas 77046
AXIA Incorporated Employee Stock Ownership Plan (3) 15,000 5.3%
</TABLE>
54
<PAGE>
(1) Gives effect to the conversion of outstanding Class B Common Stock to Class
A Common Stock. At December 31, 1999, AXIA Group had 261,318 shares of Class A
Common Stock and 24,500 shares of Class B Common Stock outstanding. Class B
Common Stock is non-voting stock and is fully convertible at any time at the
option of the holder into an equal number of shares of Class A Common Stock.
Prior to such conversion, the CIT Group/Equity Investments Inc., Fayez Sarofim
Investment partnership, Paribas North America, Frank Hevrdejs and all directors
and officers as a group own beneficially 4.9%, 9.6%, 4.9%, 9.3% and 10.1% of the
outstanding Class A Common Stock.
(2) Does not include 2,675 shares held in trust for Mr. Rosenthal's descendants.
Mr. Rosenthal disclaims beneficial ownership of such shares.
(3) Any shares of Common Stock acquired by the ESOP in the Equity Investment
will be voted by the trustee of the ESOP (the "ESOP Trustee") pursuant to the
direction of the Board of Directors or by a committee to be designated by the
Board of Directors, except that participants will be entitled to direct the ESOP
Trustee to vote the shares of Common stock allocated to their accounts with
respect to the approval or disapproval of any corporate merger or consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets of a trade or business or such similar transactions as
may be prescribed in regulations under the Code.
ITEM 13. CERTAIN RELATIONSHIPS
The following is information concerning certain transactions between the Company
and certain affiliates. The Company believes that these transactions are on
terms at least as favorable to the Company as it could obtain from unaffiliated
third parties. These transactions were not approved by a majority of the
disinterested members of the Board of Directors.
RELATED TRANSACTIONS
Sterling entered into an agreement with AXIA Group and Acquisition Co. pursuant
to which Sterling is to provide consulting and advisory services with respect to
the organization of AXIA Group, Acquisition Co. and Finance Co., the structuring
of the Transaction, employee benefit and compensation arrangements and other
matters. The agreement also provides that AXIA Group and Acquisition Co.,
jointly and severally, will indemnify Sterling against liabilities relating to
its services. At the Closing, the Company paid Sterling a one-time transaction
fee of $2.5 million for these services, and reimbursed Sterling for its
expenses. From the transaction fee received at Closing, Sterling paid Gary
Rosenthal a fee of $250,000 for consulting services rendered in connection with
the Transaction, and AXIA Group and the Company will indemnify Mr. Rosenthal
against liabilities related to his services. In addition, through 2008 AXIA
Group will pay Sterling an annual management fee of $100,000 in cash and
annually grant Sterling AXIA Group Common Stock having a value of $100,000
calculated based upon the latest ESOP valuation price. In addition, each of AXIA
Group, and Acquisition Co. has agreed that if any one or more of them or any of
their subsidiaries determines within ten years of the date of the closing of the
Acquisition to dispose of or acquire any assets or business having a value of $1
million or more (a "Future Corporate Transaction") or to offer its securities
for sale publicly or privately to raise any debt or equity financing (a "Future
Securities Transaction"), either AXIA Group, Acquisition Co., or the relevant
subsidiary will retain Sterling as a consultant with respect to the Transaction,
provided a principal, officer or director of Sterling or any of their respective
affiliates or family members owns any equity securities of AXIA Group or any of
its successors. For any Future Corporate Transaction, Sterling is entitled to
receive a fee in the amount of 1% of the aggregate consideration paid or
received plus the aggregate amount of any liabilities assumed in connection with
an acquisition or disposition and reimbursement of any expenses or fees incurred
by Sterling in connection therewith. In addition to the annual management fee
discussed above, Sterling received fees of $51,958 and was reimbursed $32,279 in
expenses in connection with the acquisitions of Concorde Tool Corporation and
Thames Packaging Equipment Company, Ltd. and other matters in 1999. For any
Future Securities Transaction, Sterling is entitled to receive a fee in the
amount of 0.5% of the aggregate gross selling price of such securities and,
regardless of whether such Future Securities Transaction is consummated,
Sterling is entitled to receive reimbursements of any expenses or fees incurred
by Sterling in connection therewith. The agreement is automatically renewable
for successive one-year periods, subject to notice of termination by either
Sterling or AXIA Group.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report or incorporated
herein by reference: (1) The Consolidated Financial Statements and Financial
Statement Schedules of AXIA Incorporated are listed on the Index, page 18 of
this Form 10-K. (2) Exhibits required to be filed by Item 601 of Regulation
S-K are listed under the caption "Exhibits" below:
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------
<C> <S>
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 renames 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
23.4 Consent of Arthur Andersen LLP
</TABLE>
* Filed as an exhibit to the Company's Form S-4 (Registration No. 333-64555)
under an exhibit number identical to that described herein and incorporated
herein by this reference.
(b) Reports on Form 8-K: None
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AXIA INCORPORATED
By /s/ Lyle J. Feye
-------------------
Lyle J. Feye
Vice President, Treasurer, Chief Financial Officer
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gary L. Rosenthal Chairman, President and Director March 24, 2000
- ----------------------
Gary L. Rosenthal
/s/ Lyle J. Feye Vice President Finance, March 24, 2000
- ---------------- Principal Financial Officer
Lyle J. Feye Principal Accounting Officer
/s/ Susan O. Rheney Director March 24, 2000
- -------------------
Susan O. Rheney
/s/ C. Byron Snyder Director March 24, 2000
- -------------------
C. Byron Snyder
/s/ James D. Woods Director March 24, 2000
-----------------
James D. Woods
57
<PAGE>
EXHIBIT 4.2
FIRST SUPPLEMENTAL INDENTURE, dated as of January 1, 2000, among AXIA
INCORPORATED, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
801 Travis Street, Suite 1400, Houston, Texas 77002, STATE STREET BANK AND TRUST
COMPANY, a Massachusetts chartered trust company having an office at 225 Asylum
Street, Goodwin Square, 23rd Floor, Hartford, Connecticut 06103 (herein called
the "Trustee"), and AMES TAPING TOOL SYSTEMS, INC. (herein called "Ames") and
TAPETECH TOOL CO., INC. (herein called "TapeTech"), each a corporation duly
organized and existing under the laws of the State of Delaware and having its
principal office at 801 Travis Street, Suite 1400, Houston, Texas 77002.
RECITALS OF THE COMPANY
WHEREAS, the Company has heretofore executed and delivered to the
Trustee its Indenture, dated as of July 22, 1998 (herein called the "Original
Indenture") to provide for the issuance of up to an aggregate principal amount
of $150,000,000 of the Company's 10 3/4% Senior Subordinated Notes due July 15,
2008 (the "Notes"); and
WHEREAS, there is currently outstanding $100,000,000 aggregate principal
amount of the Notes; and
WHEREAS, AXIA FINANCE CORP., an original party to the Original
Indenture, has merged with and into the Company and no longer exists separately;
and
WHEREAS, Ames and TapTech are Guarantors; and
WHEREAS, Section 10.01 of the Original Indenture provides that, subject
to certain limitations, without the consent of any holders of the Notes, the
Company, when authorized by a resolution of its Board of Directors, and the
Trustee may at any time and from time to time enter into an indenture or
indentures supplemental to the Original Indenture; and
WHEREAS, the Company's Board of Directors has duly authorized the
substance of the modifications of the Original Indenture hereinafter set forth
(the "First Supplemental Indenture") and the execution and delivery of this
First Supplemental Indenture; and
WHEREAS, the respective Boards of Directors of Ames and TapeTech have
authorized the execution and delivery of this First Supplemental Indenture; and
WHEREAS, the Company, Ames, TapeTech and the Trustee desire to execute
this First Supplemental Indenture; and
WHEREAS, all things necessary to make this First Supplemental Indenture
a valid agreement of the Company, in accordance with its terms, have been done.
<PAGE>
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the Notes, as
follows:
1. The Original Indenture shall be modified as follows. Brackets
indicate maters to be added.
SECTION 4.19. Guarantee of Securities by Restricted Subsidiaries, shall
be amended to read as follows:
In the event the Company (i) organizes or acquires any
Restricted Subsidiary [(other than a Foreign Subsidiary)] after the Issue Date
that is not a Guarantor or (ii) causes or permits any Foreign Subsidiary that is
not a Guarantor to, directly or indirectly, guarantee the payment of any
Indebtedness of the Company or any Restricted Subsidiary ("Other Indebtedness")
then, in each case the Company shall cause such Restricted Subsidiary to
simultaneously execute and deliver a supplemental indenture to this Indenture
pursuant to which it will become a Guarantor under this Indenture; provided,
however, that in the event a Restricted Subsidiary is acquired in a transaction
in which a merger agreement is entered into, such Restricted Subsidiary shall
not be required to execute and deliver such supplemental indenture until the
consummation of the merger contemplated by any such merger agreement; provided,
further, that if such Other Indebtedness is (i) Indebtedness that is ranked pari
passu in right of payment with the Securities or the Guarantee of such
Restricted Subsidiary, as the case may be, the Guarantee of such Subsidiary
shall be pari passu in right of payment with the guarantee of the Other
Indebtedness; or (ii) Subordinated Indebtedness, the Guarantee of such
Subsidiary shall be senior in right of payment to the guarantee of the Other
Indebtedness (which guarantee of such Subordinated Indebtedness shall provide
that such guarantee is subordinated to the Guarantees of such Subsidiary to the
same extent and in the same manner as the Other Indebtedness is subordinated to
the Securities or the Guarantee of such Restricted Subsidiary, as the case may
be).
2. Capitalized terms used herein but not defined herein shall have the
meanings given to them in the Original Indenture.
3. Except as specifically supplemented and amended by this First
Supplemental Indenture, the terms and provisions of the Original Indenture shall
remain in full force and effect.
4. The Recitals of the Company preceding Section 1 of this First
Supplemental Indenture are statements of the Company, and the Trustee has no
responsibility for the accuracy or completeness thereof.
5. This First Supplemental Indenture shall be governed by, and
construed in accordance with, the law of the State of New York without giving
effect to the conflicts of laws principles thereof.
-2-
6. This First Supplemental Indenture may be executed in one or more
counterparts, all of which, taken together, shall constitute one and the same
First Supplemental Indenture.
-3-
<PAGE>
6. This First Supplemental Indenture may be executed in one or more
counterparts, all of which, taken together, shall constitute one and the same
First Supplemental Indenture.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
AXIA INCORPORATED
/s/ LYLE J. FEYE
By: _______________________________
Lyle J. Feye
Vice President and Treasurer
STATE STREET BANK AND TRUST COMPANY,
as Trustee
/s/ ROBERT L. REYNOLDS
By: ____________________________
Name: Robert L. Reynolds
Title: Vice President
AMES TAPING TOOL SYSTEMS, INC.
as Guarantor
/s/ LYLE J. FEYE
By: ____________________________
Lyle J. Feye
Vice President
TAPETECH TOOL CO., INC.
as Guarantor
/s/ LYLE J. FEYE
By: ____________________________
Lyle J. Feye
Vice President
4
<PAGE>
EXHIBIT 10.14
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
December 27, 1999, is by and among AXIA Incorporated, a Delaware corporation
(the "Company"), Ames Taping Tool Systems, Inc., a Delaware corporation and Tape
Tech Tool Company, Inc., a Delaware corporation (collectively, Ames Taping Tool
Systems, Inc. and Tape Tech Tool Co. Inc. are referred to as the "Guarantors"),
PARIBAS, a bank organized under the laws of France acting through its Houston
Agency ("Paribas") as Agent (Paribas in such capacity, the "Agent") for the
Lenders (as such term is defined below), and the banks and other financial
institutions listed on the signature pages hereto under the caption "Lender"
(collectively, together with all successors and assigns, the "Lenders").
PRELIMINARY STATEMENTS
The Company, the Guarantors, Agent and the Lenders are parties to that
certain Credit Agreement dated as of July 22, 1998 (the "Credit Agreement").
The Company, the Guarantors, the Agent and the Lenders now desire to
amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:
AGREEMENT
ARTICLE I. DEFINITIONS
SECTION 1.01 Certain Defined Terms. Capitalized terms used in this
Amendment which are not otherwise defined in this Amendment are used as defined
in the Credit Agreement, as amended hereby.
ARTICLE II. AMENDMENTS
SECTION 2.01 Amendment to Section 1.01: Definition of "Excess Cash
Flow". Effective as of the date hereof, the definition of "Excess Cash Flow"
contained in Section 1.01 of the Credit Agreement is hereby amended and restated
to read in its entirety as follows:
"Excess Cash Flow" means, with respect to the Company and its
Subsidiaries determined on a consolidated basis for any fiscal year period
ending after the Effective Date, the sum of the following to the extent
accruing after the Effective Date, (a) EBITDA for such period, minus (b) the
amount equal to (i) actual Capital Expenditures (exclusive of Capitalized Lease
Obligations) incurred during such period plus (ii) the amount of Capital
Expenditures for such period permitted to be made in the next succeeding fiscal
year under Section 8.14(c), minus (iii) the amount of Capital Expenditures
carried forward from the prior fiscal year under Section 8.14(c) for such
1
<PAGE>
period, minus (c) cash taxes, cash Interest Expense and scheduled
payments of principal made under the Term Loan, the Acquisition Loan and
the ESOP Loan (but only to the extent that net income for such period
was not reduced for any expense incurred by the Company for
contributions to the ESOP), minus (d) any dividend or payment permitted
under Section 8.07(a)(ii) to the extent not deducted in determining
EBITDA for such period, minus (e) scheduled principal payments under
Capitalized Lease Obligations made during such period, and minus (f)
scheduled principal payments under all other Indebtedness made during
such period (but only to the extent that net income for such period was
not reduced for any expense incurred by the Company for contributions to
any Additional ESOP)."
SECTION 2.02 Amendment to Section 2.09 (b) (iii) of the Credit
Agreement. Effective as of the date hereof, subclause (iii) of subparagraph (b)
of Section 2.09 of the Credit Agreement is hereby amended and restated to read
in its entirety as follows:
"(iii) 50% of Excess Cash Flow less any voluntary prepayment of
principal applied to the Term Loan, the Acquisition Loan, and the ESOP Loan for
the immediately proceeding fiscal year (such payment to be made on or before
each April 15 beginning April 15, 1999);"
SECTION 2.03 Amendment to Section 11.01(f) of the Credit Agreement.
Effective as of the date hereof, subparagraph (f) of Section 11.01 of the Credit
Agreement is hereby amended to delete the reference to "Section 2.08" contained
therein and insert in place thereof a reference to "Section 2.09".
SECTION 2.04 Amendment to Section 11.02(a) and 11.02(b) of the
Credit Agreement. Effective as of the date hereof, subparagraph (a) and
subparagraph (b) of Section 11.02 are amended and restated and to read in their
entirety as follows:
a) If to the Company: 801 Travis
Suite 1400
Houston, Texas 77002
Telecopy No: (713) 425-2151
Attention: Lyle Feye
b) If to the Agent: 2121 San Jacinto, Suite 930
Dallas, Texas 75201
Telecopy No: (214) 969-0260
Attention: Christopher S. Goodwin
with copies to: Paribas
1200 Smith Street, Suite 3100
Houston, Texas 77002
Telecopy No: (713) 659-3832
Attention: Loan Administration
2
<PAGE>
and to: Patton Boggs LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201-8001
Telecopy No. (214) 758-1550
Attention: James C. Chadwick, Esq.
if to any Lender: To the address specified by such Lender
(or the Agent on behalf of such Lender)
to the Company
ARTICLE III. LIMITED WAIVER
SECTION 3.01 Waiver of Conditions Precedent to, and Consent to,
Acquisition of Assets of Concorde Tool Acquisition. Agent hereby waives solely
with respect to the acquisition by AXIA Incorporated of certain assets of
Condcorde Tool Corporation in the terms and conditions specified in Annex I
attached hereto (hereinafter referred to as the "Concord Tool Acquisition") the
conditions precedent otherwise applicable thereto set forth in Article V of the
Credit Agreement. The Agent, the Lenders, the Company and the Guarantors hereby
consent and agree that (a) the Concord Tool Acquisition is deemed to be a
Permitted Acquisition and (b) the expenditures by the Company for the purchase
price specified in the Concord Tool Acquisition shall not constitute a Capital
Expenditure. This waiver and consent applies only to the foregoing matters and
nothing contained in this Amendment or any other communication between the
Agent, the Lenders, the Company or the Guarantors shall be a waiver of any other
present or future violation, Default or Event of Default under the Credit
Agreement or any other Loan Document (collectively, "Other Violations").
Similarly, nothing contained in this Amendment shall directly or indirectly in
any way whatsoever either: (i) impair, prejudice or otherwise adversely affect
the Agent's and the Lenders' right at any time to exercise any right, privilege
or remedy in connection with the Credit Agreement or any other Loan Document
with respect to any Other Violations, (ii) amend or alter any provision of the
Credit Agreement or any other Loan Document or any other contract or instrument
except as specifically set forth herein, or (iii) constitute any course of
dealing or other basis for altering any obligation of the Company or the
Guarantors under the Credit Agreement or any other Loan Documents or any right,
privilege or remedy of the Agent and the Lenders under the Credit Agreement or
any other Loan Document or any other contract or instrument with respect to
Other Violations. Nothing in this letter shall be construed to be a waiver or
consent by the Agent and the Lenders to any Other Violations.
ARTICLE IV. CONDITIONS PRECEDENT
SECTION 4.01 Conditions to Effectiveness. The effectiveness of this
Amendment is subject to the satisfaction of the following conditions precedent:
(a) The Lenders shall have received (i) this Amendment, duly
executed by the Company, the Guarantors, the Agent and the Lenders, (ii) a
certificate of the Secretary of the Company acknowledging (A) that the Company's
Board of Directors has adopted, approved, consented to and ratified resolutions
which authorize the execution, delivery and performance by
3
<PAGE>
the Company of this Amendment, and all other Loan Documents to which the Company
is or is to be a party, and (B) the names of the officers of the Company
authorized to sign this Amendment and each of the other Loan Documents to which
the Company is or is to be a party hereunder (including the certificates
contemplated herein) together with specimen signatures of such officers, and
(iii) such additional documents, instruments and information as the Lenders may
reasonably request;
(b) The representations and warranties contained herein and in the
Credit Agreement and the Loan Documents, as each is amended hereby, shall be
true and correct in all material respects as of the date hereof, as if made on
the date hereof (except insofar as such representations and warranties relate
expressly to an earlier date);
(c) After giving effect to this Amendment, no Default or Event of
Default shall have occurred and be continuing; and
(d) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments and
other legal matters incident thereto shall be satisfactory to the Agent and
their legal counsel.
ARTICLE V. REPRESENTATIONS AND WARRANTIES
SECTION 5.01 Representations and Warranties. The Company hereby
represents and warrants to the Agent and the Lenders that (a) the
representations and warranties contained in the Credit Agreement, as amended
hereby, and in any other Loan Documents are true and correct in all material
respects on and as of the date hereof as though made on and as of the date
hereof (except insofar as such representations and warranties relate expressly
to an earlier date); (b) no Default or Event of Default under the Credit
Agreement, as amended hereby, has occurred and is continuing; and (c) the
Company is in full compliance with all covenants and agreements contained in the
Credit Agreement and in the other Loan Documents, as amended hereby.
ARTICLE VI. CONSENT AND CONFIRMATION BY GUARANTORS
SECTION 6.01 Consent and Confirmation. Each Guarantor hereby
consents and agrees to the terms of the foregoing Amendment, and such Guarantor
agrees that its Guaranty shall remain in full force and effect and shall
continue to be the legal, valid and binding obligation of such Guarantor
enforceable against it in accordance with its terms. Furthermore, each
Guarantor hereby agrees and acknowledges that (a) its Guaranty is not subject to
any claims, defenses or offsets, (b) nothing contained in the Credit Agreement,
this Amendment or any other agreement, instrument or document executed in
connection therewith shall adversely affect any right or remedy of Agent or the
Lenders under the Guaranty, (c) the execution and delivery of the Amendment
shall in no way reduce, impair or discharge any obligations of the Guarantor as
guarantor pursuant to the Guaranty and shall not constitute a waiver by Agent or
the Lenders of any of Agent's or the Lenders' rights against such Guarantor, (d)
by virtue hereof and by virtue of its Guaranty, each Guarantor hereby guarantees
to Agent and the Lenders the prompt and full payment and full and faithful
performance by the Company of the entirety of the "Obligations" (as defined in
each Guaranty) on the terms and conditions set forth therein and any
4
<PAGE>
time further modified or amended, (e) such Guarantor's consent is not required
to the effectiveness of this Amendment, and (f) no consent by such Guarantor is
required for the effectiveness of any future amendment, modification,
forbearance or other action with respect to the Credit Agreement.
ARTICLE VII. MISCELLANEOUS PROVISIONS
SECTION 7.01 Ratification of Credit Agreement and Other Loan
Documents. Except as expressly provided herein, the Credit Agreement and all
other Loan Documents shall remain unmodified and in full force and effect as
supplemented and amended hereby. The Company and the Guarantors hereby affirm
all the provisions of the Credit Agreement, as amended hereby, and the Loan
Documents.
SECTION 7.02 Confirmation of the Security Documents. The Company
and the Guarantors hereby acknowledge and confirm that the Collateral (as
defined in the Security Documents) continues to secure the Secured Obligations
(as defined in the Security Documents), including those arising under the Credit
Agreement, as amended hereby.
SECTION 7.03 Counterparts. This Amendment may be executed in one
or more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed and is effective as
of the date first above written.
AXIA
AXIA INCORPORATED
/s/ LYLE J. FEYE
By: ____________________________
Lyle J. Feye
Name: __________________________
Title: Vice President
_________________________
GUARANTORS
AMES TAPING TOOL SYSTEMS, INC.
/s/ LYLE J. FEYE
By: ____________________________
Lyle J. Feye
Name: __________________________
Title: Vice President
_________________________
TAPE TECH TOOL CO. INC.
/s/ LYLE J. FEYE
By: ____________________________
Lyle J. Feye
Name: __________________________
Title: Vice President
_________________________
AGENT
PARIBAS, as Agent
/s/ CHRISTOPHER S. GOODWIN
By: ____________________________
Christopher S. Goodwin
Name: __________________________
Title: Director
_________________________
/s/ CHARLES N. ROLFE
By: ____________________________
Charles N. Rolfe
Name: __________________________
Title: Director
_________________________
6
<PAGE>
LENDERS
PARIBAS
/s/ CHRISTOPHER S. GOODWIN
By: ____________________________
Christopher S. Goodwin
Name: __________________________
Title: Director
_________________________
/s/ CHARLES N. ROLFE
By: ____________________________
Charles N. Rolfe
Name: __________________________
Title: Director
_________________________
THE CIT GROUP/BUSINESS CREDIT, INC.
By: ____________________________
Name: __________________________
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By: ____________________________
Name: __________________________
Title: _________________________
LASALLE NATIONAL BANK
By: ____________________________
Name: __________________________
Title: _________________________
NATIONAL BANK OF CANADA
By: ____________________________
Name: __________________________
Title: _________________________
By: ____________________________
Name: __________________________
Title: _________________________
7
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
Report dated February 25, 1998, included in this Form 10-K into the Company's
previously filed Registration Statement on Form S-4 (File No. 333-64555).
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,218
<SECURITIES> 0
<RECEIVABLES> 17,600
<ALLOWANCES> 0
<INVENTORY> 11,793
<CURRENT-ASSETS> 41,200
<PP&E> 37,085
<DEPRECIATION> 5,965
<TOTAL-ASSETS> 198,808
<CURRENT-LIABILITIES> 23,755
<BONDS> 100,000
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 198,808
<SALES> 95,887
<TOTAL-REVENUES> 131,894
<CGS> 58,713
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<OTHER-EXPENSES> 289
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<INTEREST-EXPENSE> 14,475
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