<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Quarter Ended September 30 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
GLASSTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-32185-01 13-3440225
- -------- ----------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) file number) Identification No.)
Ampoint Industrial Park, 995 Fourth Street, Perrysburg, Ohio 43551
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419)-661-9500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares common stock, $.01 par value as of November 5, 1998 was
1,000.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements presented herein are
unaudited but, in the opinion of management, reflect all adjustments necessary
to present fairly such information for the periods and at the dates indicated.
Since the following condensed unaudited financial statements have been prepared
in accordance with Article 10 of Regulation S-X, they do not contain all
information and footnotes normally contained in annual consolidated financial
statements. Accordingly they should be read in conjunction with the Consolidated
Financial Statements and notes thereto appearing in the Annual Report on Form
10-K for the fiscal year ended June 30, 1998, as filed with the Securities and
Exchange Commission on September 24, 1998. The interim results of operations are
not necessarily indicative of results for the entire year.
2
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GLASSTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------------------------
(SEE NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,632 $ 13,121
Accounts receivable:
Contracts:
Uncompleted, including unbilled amounts of $8,812 and $6,841 10,140 7,930
Completed 326 931
Trade, less allowance of $40 for doubtful accounts 1,953 1,144
--------------------------------
12,419 10,005
Inventory:
Replacement and service parts 1,655 1,656
Furnace contracts and other 1,055 2,017
--------------------------------
2,710 3,673
Prepaid expenses 618 350
--------------------------------
Total current assets 25,379 27,149
Property, plant and equipment, net 7,822 6,947
Other assets:
Patents, less accumulated amortization of $2,159 and $1,727 16,124 16,556
Goodwill, less accumulated amortization of $3,258 and $2,629 47,166 47,796
Deferred financing costs and other 4,343 4,471
--------------------------------
Total other assets 67,633 68,023
--------------------------------
$ 100,834 $ 102,919
================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 2,782 $ 4,167
Billings in excess of costs and estimated earnings on uncompleted
contracts 8,633 4,309
Accrued liabilities:
Salaries and wages 2,525 3,851
Interest 2,231 4,462
Contract costs 1,747 2,382
Other 1,309 1,440
--------------------------------
7,812 12,135
--------------------------------
Total current liabilities 19,227 20,611
Long-term debt 69,384 69,357
Nonpension postretirement obligation 410 406
Shareholder's equity:
Common stock $.01 par value; 1,000 shares authorized, issued and
outstanding - -
Additional capital 15,750 15,750
Retained earnings 91 823
--------------------------------
15,841 16,573
(4,028) (4,028)
--------------------------------
Total shareholder's equity 11,813 12,545
--------------------------------
$ 100,834 $ 102,919
================================
</TABLE>
See accompanying notes.
3
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GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-----------------------------
(SEE NOTE 1)
<S> <C> <C>
Net revenue $ 15,826 $ 16,362
Cost of goods sold 9,752 8,539
-----------------------------
Gross profit 6,074 7,823
Selling, general and administrative expenses 2,497 2,758
Research and development expenses 967 1,006
Amortization expense 1,061 1,090
-----------------------------
Operating profit 1,549 2,969
Interest expense (2,417) (2,414)
Other income - net 136 84
-----------------------------
Income (loss) before income taxes (732) 639
Income taxes not payable in cash - (521)
-----------------------------
Net income (loss) $ (732) $ 118
=============================
</TABLE>
See accompanying notes.
4
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GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK SHAREHOLDER'S
--------------------------- ADDITIONAL BASIS RETAINED
SHARES AMOUNT CAPITAL REDUCTION EARNINGS TOTAL
---------------------------------------------------------------------------------------
(SEE NOTE 1)
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock 1 $ - $15,750 $ - $ - $15,750
Shareholders' basis reduction (4,028) (4,028)
Net income 823 823
---------------------------------------------------------------------------------------
Balance, June 30, 1998 1 $ - $15,750 $(4,028) $823 $12,545
Net loss (732) (732)
---------------------------------------------------------------------------------------
Balance, September 30, 1998 1 $ - $15,750 $(4,028) $ 91 $11,813
=======================================================================================
</TABLE>
See accompanying notes.
5
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GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------------------------
(SEE NOTE1)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (732) $ 118
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 1,625 1,659
Income taxes not payable in cash - 521
Nonpension postretirement benefit obligation expense in excess of
payments 4 20
Accretion of debt discount 27 27
Changes in assets and liabilities affecting operations:
Restricted cash - 1,529
Accounts receivable (2,414) (563)
Inventory (308) 944
Prepaid expenses (268) (31)
Accounts payable (1,385) (1,308)
Billings in excess of costs and estimated earnings on uncompleted
contracts 4,324 530
Accrued liabilities (4,323) 1,562
------------------------------
Net cash provided by (used in) operating activities (3,450) 5,008
INVESTING ACTIVITIES
Net assets purchased - (74,828)
Increase in long-term notes receivable - (656)
Additions to property, plant and equipment (11) (24)
Other 3 (7)
------------------------------
Net cash used in investing activities (8) (75,515)
FINANCING ACTIVITIES
Issuance of long-term debt and related warrants - 70,000
Issuance of common stock - 15,000
Deferred financing costs - (4,279)
Other (31) -
------------------------------
Net cash provided by (used in) financing activities (31) 80,780
------------------------------
Increase (decrease) in cash and cash equivalents (3,489) 10,273
Cash and cash equivalents at beginning of year 13,121 -
------------------------------
Cash and cash equivalents at end of year $ 9,632 $ 10,273
==============================
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for the following:
Interest $ 4,463 $ -
------------------------------
Income taxes $ - $ (272)
==============================
</TABLE>
See accompanying notes.
6
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GLASSTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
Effective July 2, 1997, Glasstech, Inc. (the "Company") was acquired by
Glasstech Holding Co. ("Holding") (the "Transaction"). In connection with the
Transaction, Holding, a holding company formed for the purpose of completing the
Transaction, formed a wholly owned subsidiary, Glasstech Sub Co., which acquired
all of the outstanding stock of the Company by merger. Holding has no
significant activities other than its investment in the Company. The acquisition
was accounted for under the purchase method of accounting for financial
reporting purposes and the purchase price has been allocated to the underlying
net assets acquired. The Transaction resulted in the Company having substantial
goodwill and debt.
In connection with accounting for the Transaction, the Company applied the
provisions of Emerging Issues Task Force Issue 88-16 (EITF 88-16), whereby the
carryover equity interests of certain shareholders from the "Predecessor
Company" (the Company prior to the transaction) to the "Successor Company" (the
Company subsequent to the Transaction) were recorded at their predecessor basis.
As a result, shareholder's equity of the Successor Company has been reduced by
$4,028 with a corresponding reduction to the value of goodwill acquired.
The condensed consolidated financial statements for the three months ended
September 30, 1998 have been derived from the audited consolidated financial
statements at that date but do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
2. NOTES PAYABLE AND LONG-TERM DEBT
In connection with the Transaction, the Company issued $70,000 of 12 3/4%
Senior Notes due 2004 (the "Old Notes") in a private offering exempt from
registration under the Securities Act of 1933, as amended (the "1933 Act"), and
intended to permit resales under Rule 144A of the 1933 Act. In connection with
the issuance of the Old Notes, the Company received from Holding warrants to
purchase 877 shares of common stock of Holding valued at $750. These warrants
were issued to the purchasers of the Old Notes. On December 2, 1997, the Company
consummated an exchange offer (the "Exchange Offer") of its $70,000 Series B 12
3/4% Senior Notes Due 2004 (the "New Notes"), which were registered under the
1933 Act, for the Old Notes. The terms of the New Notes are substantially
identical to the terms of the Old Notes and as used herein, will be referred to
as the "Senior Notes". Interest on the Senior Notes is payable semi-annually on
each January 1 and July 1 beginning January 1, 1998. The terms of the Senior
Notes do not require any scheduled principal payments prior to maturity.
The Company also entered into a $10,000 revolving credit facility (the
"Credit Facility") in connection with the Transaction. The Credit Facility
expires on July 31, 2007, and provides for interest on outstanding borrowings at
the LIBOR rate plus 2% payable semi-annually. The Credit Facility will be used
to fund working capital requirements as needed and to secure standby letters of
credit, which totaled $2,826 at September 30, 1998 and reduces available
borrowing levels. The Company had no outstanding borrowings under the Revolving
Credit Facility at September 30, 1998. The Credit Facility is secured by
substantially all of the assets of the Company.
The Senior Notes and Credit Facility contain numerous financial and other
covenants which include the maintenance of certain levels of earnings as
defined, restrictions on the payment of dividends and additional indebtedness as
well as other types of business activities and investments. The Company believes
that it is in material compliance with all such covenants.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") section and the attached
financial statements, in the Company's press releases and in oral statements
made by or with the approval of an authorized executive officer of the Company
constitute "forward-looking statements" as that term is defined under the
Private Securities Litigation Reform Act of 1995. These may include statements
projecting, forecasting or estimating the Company's performance and industry
trends. The achievement of projections, forecasts or estimates is subject to
certain risks and uncertainties. Actual results and events may differ materially
from those that were projected, forecasted or estimated. Applicable risks and
uncertainties include general economic and industry conditions that affect all
international businesses, as well as matters that are specific to the Company
and the markets it serves.
General risks that may impact the achievement of such forecasts include:
compliance with new laws and regulations; significant raw material price
fluctuations; currency exchange rate fluctuations; business cycles; and
political uncertainties. Specific risks to the Company include the risk of
recession in the international markets and industries in which its products are
sold; the concentration of a significant portion of the Company's revenues from
customers whose equipment needs are located in the Asia-Pacific region
(Australia, China, Indonesia, Japan, Malaysia, New Zealand, Pakistan, the
Philippines, Singapore, South Korea, Taiwan, and Thailand); the concentration of
a substantial percentage of the Company's sales with a few major customers,
several of whom have significant manufacturing presence in the Asia-Pacific
region; the timing of new system orders and the timing of payments due on such
orders; changes in installation schedules, which could lead to deferral of
progress payments or unanticipated production costs; new or emerging
technologies from current competitors, customers' in-house engineering
departments and others; competition from current competitors, customers'
in-house engineering departments and others; and the emergence of a substitute
for glass. In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
the Company that the Company's plans and objectives will be achieved.
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report and in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, as
filed with the Securities and Exchange Commission on September 24, 1998. The
interim results of operations, historical results and percentage relationships
set forth in this MD&A section and the financial statements, including trends
that might appear, should not be taken as indicative of future operations.
GENERAL OVERVIEW
- ----------------
The Company designs and assembles glass bending and tempering (i.e.,
strengthening) systems which are used by glass manufacturers and processors in
the conversion of flat glass into safety glass. Systems are sold worldwide,
primarily to automotive glass manufacturers and processors and, to a lesser
extent, to architectural glass manufacturers and processors. Revenues generated
by the sale of new systems are referred to below as "Original Equipment".
The Company has an installed base of more than 390 systems in 45 countries
on six continents. As a result of its installed base and the relatively long
useful life of a system, the Company also engages in sales of aftermarket
products and services (retrofit of systems with upgrades, tooling used to shape
glass parts, replacement parts and technical services). Revenues generated by
these types of products are referred to below as "Aftermarket".
In this MD&A section all dollars amounts are in thousands, unless otherwise
indicated.
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REVENUES
- --------
For financial reporting purposes, the Company includes in income the
ratable portion of profits on uncompleted contracts determined in accordance
with the stage of completion measured by the percentage of costs incurred to
estimated total costs of each contract (generally, Original Equipment, system
retrofits and tooling). Unbilled amounts included in uncompleted contract
receivables represent revenues recognized in excess of amounts billed. Billings
in excess of costs and estimated earnings on uncompleted contracts represent
amounts billed in excess of revenues recognized. Revenue from sales other than
contracts (spare parts and engineering services) is recognized when the products
are shipped.
SELLING EXPENSES
- ----------------
The Company maintains an in-house sales staff and uses the services of
commissioned agents around the world for the sale of Original Equipment and
Aftermarket products and services. In addition, the Company maintains a sales
and engineering support office in the United Kingdom. The substantial majority
of the Company's Original Equipment is sold directly to the largest glass
manufacturers and processors in the world or their affiliates.
RESEARCH & DEVELOPMENT
- ----------------------
The Company believes it is the technological leader in the design and
assembly of glass bending systems. The Company works with customers to identify
product needs and market requirements. Periodically, the Company enters into
joint development agreements with customers. From time to time, the Company
allocates a portion of its research and development resources to complete the
transition from new product development to new product introduction. When the
Company does this, these expenses are charged directly to the contracts relating
to the introduction of new products. The Company considers research and
development expenses and new product introductions a very integral part of its
future success.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the amounts and the percentage of total net
revenue for certain revenue and expense items for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue (a) $ 9,643 60.9% $10,180 62.2%
Original Equipment
Aftermarket 6,183 39.1 6,182 37.8
------- ----- ------- --------
Total net revenue 15,826 100.0 100.0 16,362
Cost of goods sold (a) 9,752 61.6 8,539 52.2
------- ----- ------- --------
Gross profit 6,074 38.4 7,823 47.8
Selling, general and
administrative 2,497 15.8 2,758 16.9
Research and development expense 967 6.1 1,006 6.1
Amortization expense (b) 1,061 6.7 1,090 6.7
------- ----- ------- --------
Operating profit $ 1,549 9.8% $ 2,969 18.1%
======= ===== ======= ========
Amortization expense (b) 1,061 6.7 1,090 6.7
Depreciation expense 405 2.6 412 2.5
------- ----- ------- --------
EBITDA $ 3,015 19.1% $ 4,471 27.3%
======= ===== ======= ========
</TABLE>
(a) Contract revenues and cost of goods sold are recognized on a percentage
completion basis measured by the percentage of costs incurred to the
estimated total costs of each contract.
(b) Amortization expense excludes the amortization of deferred financing costs,
which is included with interest expense.
9
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THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenue for the three months ended September 30, 1998 decreased $536,
or 3.3%, to $15,826 from $16,362 for the three months ended September 30, 1997.
Original Equipment revenue decreased $537, or 5.3%, to $9,643 for the three
months ended September 30, 1998 compared to $10,180 for the three months ended
September 30, 1997. The continuing economic difficulties in the Asia-Pacific
region are impacting Original Equipment revenue in fiscal 1999; however,
revenues from the United Sates and Europe have largely offset this impact.
Aftermarket revenue remained constant for the three months ended September 30,
1998 compared to the three months ended September 30, 1997.
A significant portion of the Company's net revenue is generated from
customers outside the United States. For the three months ended September 30,
1998, Original Equipment revenue from foreign customers was $4,396 (45.6% of
total Original Equipment revenue) as compared to $7,965 (78.2% of total Original
Equipment revenue) for the three months ended September 30, 1997. For the three
months ended September 30, 1998 and 1997 approximately 23.5% and 54.7%,
respectively, of the Company's net revenue was derived from sales of products
located in the Asia-Pacific region. As sales in the Asia-Pacific region declined
in fiscal 1998 and 1999, sales in North America and Europe have increased. The
percentage of aftermarket revenue from foreign customers increased to 71.7% of
total aftermarket revenue for the three months ended September 30, 1998 compared
to 65.7% for the three months ended September 30, 1997. The portion of the
Company's net revenue generated from customers outside the United States can
fluctuate from time to time depending on location of contract signings.
Gross profit decreased $1,749, or 22.4%, to $6,074 for the three months
ended September 30, 1998 as compared to $7,823 for the three months ended
September 30, 1997. The gross margin decreased to 38.4% from 47.8% as a result
of a shift in the current product mix from higher margin automotive contracts to
lower margin architectural contracts. Based upon the currently expected product
mix and related percentage of completion, management believes the gross margins
for fiscal 1999, which cannot be predicted with certainty, may be somewhat lower
than the gross margins for fiscal 1998.
Selling, general and administrative expenses decreased $261, or 9.5%, to
$2,497 for the three months ended September 30, 1998 as compared to $2,758 for
the three months ended September 30, 1997. This decrease was primarily the
result of lower incentive compensation costs due to decreased earnings.
Research and development expenses decreased $39, or 3.9%, to $967 for the
three months ended September 30, 1998 as compared to $1,006 for the three months
ended September 30, 1997. For the three months ended September 30, 1998, certain
developmental resources were dedicated to the completion of certain original
equipment contracts, thereby causing a reduction in research & development
expenses.
Amortization expense was $1,061 for the three months ended September 30,
1998 and $1,090 for the three months ended September 30, 1997.
Operating profit decreased $1,420, or 47.8%, to $1,549 for the three months
ended September 30, 1998 as compared to $2,969 for the three months ended
September 30, 1997. Operating profit as a percentage of revenue, was 9.8% for
the three months ended September 30, 1998 and 18.1% for the three months ended
September 30, 1997. The decrease in operating profit was the result of the
decline in gross profit partially offset by decreases in selling, general and
administrative expenses and research and development expenses.
Interest expense was $2,417 for the three months ended September 30, 1998
and $2,414 for the three months ended September 30, 1997.
No income tax expense or benefit has been provided in the three months
ended September 30, 1998 due to the recorded loss and the uncertainty related to
the future realization of such amounts. The effective tax rate for the three
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months ended September 30, 1997 was 81.5%. The Company's effective tax rates
differ from the statutory rate due primarily to goodwill amortization, which is
not deductible for income tax purposes, and the effects of not recognizing the
income tax benefit of recorded losses.
Net loss was $732 for the three months ended September 30, 1998 compared to
net income of $118 for the three months ended September 30, 1997. The net loss
was the result of the decline in operating profit.
EBITDA, which is defined as operating profit plus depreciation and
amortization, was $3,015 for the three months ended September 30, 1998 compared
to $4,471 for the three months ended September 30, 1997. The decrease in EBITDA
was the result of the decline in operating profit.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity and capital resources were significantly impacted
by the Transaction. The Company's primary sources of liquidity are funds
provided by operations and amounts available under the Credit Facility. The
Senior Notes do not require any principal payments prior to maturity. The Credit
Facility will be used to fund working capital requirements as needed and to
secure standby letters of credit, which totaled $2,826 at September 30, 1998. At
September 30, 1998, the Company was in compliance with all material covenants in
the Senior Notes and the Credit Facility.
Net cash provided by operating activities can vary significantly from
quarter to quarter due to the number of new system signings and the amount and
timing of new system payments. In most instances, progress payments on new
system orders are invoiced or received in advance of revenue recognition. When
progress payments are invoiced or received in advance of such revenue
recognition, the Company increases current liabilities represented by its
billings in excess of costs and estimated earnings on uncompleted contracts.
When the revenue is earned, the Company recognizes the revenue and reduces the
billings in excess of costs and estimated earnings on uncompleted contract
balances. Net cash used by operating activities for the three months ended
September 30, 1998 was $3,450 whereas for the three months ended September 30,
1997, net cash provided by operating activities was $5,008. The decrease in net
cash provided by operating activities for the three months ended September 30,
1998 was due in part to the $4,463 interest payment made on July 1, 1998. No
such payment was required for the three months ended September 30, 1997.
The Company has a backlog (on a percentage of completion basis) at
September 30, 1998 of approximately $28,081 as compared to $34,848 at June 30,
1998. The Company expects to complete a substantial majority of this backlog
within the next twelve months.
Capital expenditures, including demonstration furnaces classified as fixed
assets, were $11 for the three months ended September 30, 1998 and $24 for the
three months ended September 30, 1997. In addition, during the first quarter of
fiscal 1999 certain non-contract furnace inventory, with a value of $1,270, was
transferred to demonstration furnaces. Future capital expenditures, excluding
demonstration furnaces, used to replace or improve operating equipment and
facilities are estimated to approximate $1,500 per year. In addition, the
Company intends to make periodic replacements and improvements on demonstration
furnaces, which are used for customer demonstrations and research and
development purposes. Demonstration furnaces, which outlive their usefulness for
customer demonstrations or research and development purposes, or both, may be
refurbished and sold or put to other applicable uses.
As of June 30, 1998, the Company had net operating loss ("NOL")
carryforwards for regular and alternative minimum tax purposes of approximately
$36,301 and $33,071, respectively, which expire in the years 2009 through 2013.
These NOL's are subject to annual usage limitations which, if not utilized in a
given year, may be utilized in a subsequent year.
Although the Company's ability to generate cash has been affected by the
increased interest costs resulting from the Transaction, management believes
that internally generated funds, together with amounts available under the
Credit Facility, will be sufficient to satisfy the Company's operating cash and
capital expenditure
11
<PAGE> 12
requirements, make required payments under the Credit Facility and make
scheduled interest payments on the Senior Notes. However, the ability of the
Company to satisfy its obligations will ultimately be dependent upon the
Company's future financial and operating performance and upon its ability to
renew or refinance borrowings or to raise additional equity capital as
necessary. The Company's business is subject to rapid fluctuations due to
changes in the world markets for the end products produced by its equipment
(largely in the cyclical markets of automobiles and construction), currency
fluctuations, the local economies of those countries where users and potential
users of the Company's equipment are located, geopolitical events and other
macroeconomic forces largely beyond the ability of the Company to predict or
control. Except as discussed below, management is not currently aware of any
trends, demands, commitments or uncertainties which will or which are reasonably
likely to result in a material change in the Company's liquidity.
During fiscal 1997, 1998 and for the three months ended September 30, 1998
approximately 59.2%, 39.7% and 23.5%, respectively, of the Company's net revenue
was derived from sales of products located in the Asia-Pacific region
(Australia, China, Indonesia, Japan, Malaysia, New Zealand, Pakistan, the
Philippines, Singapore, South Korea, Taiwan, and Thailand). Given the continuing
significant economic uncertainties facing this region, and the impact of those
uncertainties on customers' capital expenditure plans and local demand for the
products manufactured by the Company's customers in that region, the Company
cannot predict with any degree of certainty what final impact the economic
issues facing the Asia-Pacific region will ultimately have on the Company's
future contract signings.
Management believes the current economic uncertainties in the Asia-Pacific
region indicate that the timing of orders for the Company's products will likely
be adversely affected. The impact of this situation on fiscal 1999 financial
performance may be somewhat mitigated by offsetting equipment sales to customers
in other regions of the world. However, given the inherent difficulty in
predicting with certainty the timing of contract signings and geographic areas
into which equipment will be delivered in fiscal 1999 and beyond, the ultimate
severity of the impact of this situation on the Company's financial performance
in fiscal 1999 and beyond is impossible to predict. The Company will continue to
monitor the situation in the Asia-Pacific region. Notwithstanding the current
economic conditions in the Asia-Pacific region, the Company believes that given
world demographics and long term economic trends, the Asia-Pacific region will
continue to represent a significant market for the Company's products and it
intends to continue its presence in this area.
YEAR 2000 COMPLIANCE
Since March, 1998, the Company has had a committee reviewing issues and
problems relating to potential year 2000 problems which may arise because
computers, software and firmware programs, applications and information
technology systems (the "IT Systems") and items with embedded microchips (the
"Non-IT Systems" and, together with the IT Systems, the "Systems") only utilize
two digits to refer to a year. The Company has recognized that this year 2000
problem, may cause many of the Systems to fail or perform incorrectly because
they will not properly recognize a year that begins with "20" instead of the
familiar "19." If a computer system or software application used by the Company
or by a third party dealing with the Company fails because of the inability of
the system to properly read the year "2000," this failure could have a material
adverse effect on the Company.
The Company's review and assessment of the year 2000 problem has focused on
four primary areas: (i) the Systems and their relationship to the Company's
operations, (ii) Glasstech systems currently being used by the Company's
customers and currently being sold by the Company, (iii) compliance by the
Company's largest suppliers, and (iv) compliance by the suppliers of the
Company's building and utility systems. The Company has not incurred, and does
not anticipate incurring, material costs related to year 2000 compliance.
12
<PAGE> 13
The Systems
The Company has completed its review of the Systems, including both the IT
Systems and the Non-IT Systems. In reviewing the Systems, the Company found that
some of them were not year 2000 compliant. The Company has purchased, and is in
the process of installing, upgraded versions of the IT Systems, including the
software programs used for financial reporting, purchasing, order entry, payroll
and product design/development that the Company has been assured are year 2000
compliant by the vendors of those programs. The Company expects these upgrades
to be completed by December 1998. The Company believes that, with the exception
of one of its computer-aided design ("CAD") systems, its manufacturing and
design operations are year 2000 compliant. The Company is reviewing the
non-compliant CAD system to determine if the system should be upgraded or shut
down, because the system's functions can be performed by other year 2000
compliant systems currently operated by the Company.
Although there can be no assurance that the Company has identified and
corrected, or will identify and correct, every year 2000 problem found in the
Systems, the Company believes that it has a comprehensive program in place to
identify and correct any such problems. The Company is in the process of
developing contingency plans for use in the event of the failure of any of the
Systems and expects to have this process completed by December 1998.
Glasstech Systems
The Company assessed the year 2000 compliance of the Glasstech systems
currently in service. The Company determined that the majority of the Glasstech
systems currently in service should continue to operate after the year 2000;
however, the internal date function on certain systems may not perform properly,
which would require the end-user of a Glasstech system to make certain manual
changes to the maintenance reports printed by the system. The Company has
identified one type of software within certain Glasstech systems which, if not
properly reset, may cause this type of Glasstech system to fail. The Company has
addressed the year 2000 problems in all of the Glasstech systems currently being
sold, and has put out a service bulletin on the Glasstech systems currently in
service to inform customers of the problems. The Company intends to make
software upgrades available to its customers by December 1998 that address these
problems.
Suppliers
The Company has completed a program to determine the year 2000 compliance
efforts of its equipment and raw materials suppliers. The Company sent out
questionnaires to its 47 largest suppliers and the Company has received
responses from all of these suppliers. This program has not revealed any
material problems.
However, this program is ongoing and the Company's efforts with respect to
specific problems identified will depend in part on its assessment of the
likelihood that any such problems may have a material adverse impact on the
Company. Unfortunately, the Company cannot fully control the conduct of its
suppliers, and there can be no guarantee that year 2000 problems originating
with a supplier will not occur. The Company believes that it has made adequate
arrangements with backup suppliers to avoid any material adverse effect that
would occur if one of its primary suppliers were unable to fill the Company's
orders for any reason, including as a result of year 2000 problems.
Building and Utility Suppliers
The Company is currently reviewing its building and utility systems (gas,
electrical, telephone, etc.) for the impact of the year 2000 problem. The
Company intends to complete this review by March 1999. If the Company did not
receive utility service from certain of these suppliers, the Company could be
unable to produce Glasstech
13
<PAGE> 14
systems or take orders for new systems. While the Company is working diligently
with all of its utility suppliers and has no reason to expect that they will not
be able to provide service after the year 2000, there can be no assurance that
these suppliers will be able to meet the Company's requirements. In the case of
these suppliers, an acceptable contingency plan has not yet been developed.
Because of the nature of these suppliers and the fact that they are often the
only suppliers of a given service available in the Company's geographic region,
management believes that it may prove impossible to develop an acceptable
contingency plan for certain of the building and utility systems. The failure of
any such supplier to fully remediate its systems for year 2000 compliance could
cause a shut down of the Company's manufacturing and design facility, which
could impact the Company's ability to meet its obligations to supply Glasstech
systems to its customers and could have a material adverse affect on the
Company.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of any
ultimate liability with respect to these actions will not materially affect the
financial statements of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
2.1* Agreement and Plan of Merger
2.2* Amendment to Agreement and Plan of Merger
3.1* Restated Certificate of Incorporation of the Registrant
3.2* By-laws of the Registrant
4.1* Indenture (including form of Note)
4.2* First Supplemental Indenture
10.1* Financing and Security Agreement between NationsBank, N.A. and the
Registrant
10.2* Plant and Office Lease
10.3* Warehouse Lease
10.4* Advisory Agreement between the Registrant and Key Equity Capital
Corporation
10.5* Form of Exchange Agent Agreement between United States Trust Company
of New York and the Registrant
10.6* Employment Agreement among Glasstech Holding Co., the Registrant and
John S. Baxter
10.7* Employment Agreement among Glasstech Holding Co., the Registrant and
Mark D. Christman
10.8* Employment Agreement among Glasstech Holding Co., the Registrant and
Larry E. Elliott
10.9* Employment Agreement among Glasstech Holding Co., the Registrant and
Ronald A. McMaster
10.10* Employment Agreement among Glasstech Holding Co., the Registrant and
James P. Schnabel, Jr.
10.11* Employment Agreement among Glasstech Holding Co., the Registrant and
Diane S. Tymiak
10.12* Employment Agreement among Glasstech Holding Co., the Registrant
and Kenneth H. Wetmore
10.13* Securities Purchase Agreement between the Registrant, as successor
to Glasstech Sub Co., and CIBC Wood Gundy Securities Corp.
10.14* Registration Rights Agreement between the Registrant, as successor
to Glasstech Sub Co., and CIBC Wood Gundy Securities Corp.
27.1** Financial Data Schedule
* Incorporated by reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-34391) (the "Form S-4") filed on August
26, 1997. Each of the above exhibits has the same exhibit number in the
Form S-4.
** Filed herewith.
(b) No reports on Form 8-K were filed during the fiscal quarter covered by this
report.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLASSTECH, INC., a Delaware Corporation
Date: November 11, 1998 /s/ Mark D. Christman
-------------------- --------------------------------------------
MARK D. CHRISTMAN
President and Chief Executive Officer
/s/ Diane S. Tymiak
--------------------------------------------
DIANE S. TYMIAK
Vice President and Chief Financial Officer
(Principal Accounting Officer)
16
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