<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 December 31 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 February 5, 1999 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.
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<TABLE>
<CAPTION>
GLASSTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, 1998 JUNE 30, 1998
-------------------------------------------
(SEE NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,002 $ 13,121
Accounts receivable:
Contracts:
Uncompleted, including unbilled amounts of $4,645 and $6,841 9,291 7,930
Completed 272 931
Trade, less allowance of $40 for doubtful accounts 1,234 1,144
-------------------------------------------
10,797 10,005
Inventory:
Replacement and service parts 2,142 1,656
Furnace contracts and other 1,195 2,017
-------------------------------------------
3,337 3,673
Prepaid expenses 525 350
-------------------------------------------
Total current assets 22,661 27,149
Property, plant and equipment, net 7,428 6,947
Other assets:
Patents, less accumulated amortization of $2,590 and $1,727 15,692 16,556
Goodwill, less accumulated amortization of $3,887 and $2,629 46,538 47,796
Deferred financing costs and other 4,184 4,471
-------------------------------------------
Total other assets 66,414 68,823
===========================================
$ 96,503 $ 102,919
===========================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 2,522 $ 4,167
Billings in excess of costs and estimated earnings on uncompleted
contracts 4,206 4,309
Accrued liabilities:
Interest 4,462 4,462
Salaries and wages 1,887 3,851
Contract costs 1,653 2,382
Other 1,460 1,440
-------------------------------------------
9,462 12,135
-------------------------------------------
Total current liabilities 16,190 20,611
Long-term debt 69,411 69,357
Nonpension postretirement obligation 415 406
Shareholder's equity:
Common stock $.01 par value; 1,000 shares authorized, issued and
outstanding - -
Additional capital 15,750 15,750
Retained earnings (1,235) 823
-------------------------------------------
14,515 16,573
Shareholder's basis reduction (4,028) (4,028)
-------------------------------------------
Total shareholder's equity 10,487 12,545
-------------------------------------------
$ 96,503 $ 102,919
===========================================
</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
1998 1997 1998 1997
-------------------------------- --------------------------------
(SEE NOTE 1) (SEE NOTE 1)
<S> <C> <C> <C> <C>
Net revenue $ 14,433 $ 15,648 $ 30,259 $ 32,010
Cost of goods sold 9,153 7,791 18,905 16,330
-------------------------------- -------------------------------
Gross profit 5,280 7,857 11,354 15,680
Selling, general and administrative expenses 2,313 2,682 4,810 5,440
Research and development expenses 915 1,000 1,882 2,006
Amortization expense 1,060 1,089 2,121 2,179
-------------------------------- -------------------------------
Operating profit 992 3,086 2,541 6,055
Interest expense (2,417) (2,389) (4,834) (4,803)
Other income - net 99 157 235 241
-------------------------------- -------------------------------
Income (loss) before income taxes (1,326) 854 (2,058) 1,493
Income taxes not payable in cash - (695) - (1,216)
================================ ===============================
Net income (loss) $ (1,326) $ 159 $ (2,058) $ 277
================================ ===============================
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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
Shareholder's basis reduction (4,028) (4,028)
Net income 823 823
---------------------------------------------------------------------------------------
Balance, June 30, 1998 1 - 15,750 (4,028) 823 12,545
Net loss (2,058) (2,058)
---------------------------------------------------------------------------------------
Balance, December 31, 1998 1 $ - $15,750 $(4,028) $(1,235) $10,487
=======================================================================================
</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
GLASSTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
1998 1997
----------------------------------------
(SEE NOTE 1)
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $(2,058) $ 277
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 3,251 3,316
Income taxes not payable in cash - 1,216
Nonpension postretirement benefit obligation expense in excess of
payments 9 15
Accretion of debt discount 54 54
Changes in assets and liabilities affecting operations:
Restricted cash - 1,529
Accounts receivable (792) 631
Inventory (935) 790
Prepaid expenses (175) (14)
Accounts payable (1,645) (1,758)
Billings in excess of costs and estimated earnings on uncompleted
contracts (103) 538
Accrued liabilities (2,673) 3,410
-----------------------------------------
Net cash provided by (used in) operating activities (5,067) 10,004
INVESTING ACTIVITIES
Net assets purchased - (74,828)
Increase in long-term notes receivable - (656)
Additions to property, plant and equipment (25) (227)
Other (27) (1)
-----------------------------------------
Net cash used in investing activities (52) (75,712)
FINANCING ACTIVITIES
Issuance of long-term debt and related warrants - 70,000
Issuance of common stock - 15,000
Deferred financing costs - (4,269)
-----------------------------------------
Net cash provided by financing activities - 80,731
Increase (decrease) in cash and cash equivalents (5,119) 15,023
Cash and cash equivalents at beginning of year 13,121 -
-----------------------------------------
Cash and cash equivalents at end of period $ 8,002 $15,023
=========================================
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for the following:
Interest $ 4,463 $ -
=========================================
Income taxes $ 21 $ (272)
=========================================
</TABLE>
See accompanying notes.
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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 balance sheet as of June 30, 1998 has been
derived from the audited consolidated financial statements at that date but,
does 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"). The
offering of the Old Notes was also structured 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 $3,200 at December 31, 1998 and reduces available
borrowing levels. The Company had no outstanding borrowings under the Revolving
Credit Facility at December 31, 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.
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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.
8
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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.
MANAGEMENT ESTIMATES
- --------------------
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
At June 30, 1998 and 1997, the estimated costs of contracts in the
Asia-Pacific region included provisions for loss exposures related to final
payments that would be due upon completion of such contracts in fiscal years
1998 and 1999. At the time these estimates were made, the Asia-Pacific region
was undergoing a period of financial instability and uncertainty that placed
receipt of these future final contract payments at risk. During the six months
ended December 31, 1998 and 1997, the Company was successful in the collection
of final payments on contracts completed during that time. These changes in
estimates resulted in additional contract revenues of $649 and $1,690 for the
six months ended December 31, 1998 and 1997. At December 31, 1998, the loss
exposure related to future final payments in this region is not considered
significant. The increase in estimated costs related to the Asia-Pacific Region
contracts at June 30, 1998 and 1997 had no impact on net cash provided by
operating activities since the cash payments were made as originally provided in
the underlying contracts.
9
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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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue (a)
Original Equipment $ 9,652 66.9% $ 11,460 73.2% $19,295 63.8% $ 21,640 67.6%
Aftermarket 4,781 33.1 4,188 26.8 10,964 36.2 10,370 32.4
------- ----- -------- ----- ------- ----- -------- -----
Total net revenue 14,433 100.0 15,648 100.0 30,259 100.0 32,010 100.0
Cost of goods sold (a) 9,153 63.4 7,791 49.8 18,905 62.5 16,330 51.0
------- ----- -------- ----- ------- ----- -------- -----
Gross profit 5,280 36.6 7,857 50.2 11,354 37.5 15,680 49.0
Selling, general and
administrative 2,313 16.0 2,682 17.1 4,810 15.9 5,440 17.0
Research and development expense 915 6.4 1,000 6.4 1,882 6.2 2,006 6.3
Amortization expense (b) 1,060 7.3 1,089 7.0 2,121 7.0 2,179 6.8
------- ----- -------- ----- ------- ----- -------- -----
Operating profit $ 992 6.9% $ 3,086 19.7% $ 2,541 8.4% $ 6,055 18.9%
======= ===== ======== ===== ======= ===== ======== =====
Amortization expense (b) 1,060 7.3 1,089 7.0 2,121 7.0 2,179 6.8
Depreciation expense 406 2.8 413 2.6 811 2.7 825 2.6
------- ----- -------- ----- ------- ----- -------- -----
EBITDA $ 2,458 17.0% $ 4,588 29.3% $ 5,473 18.1% $ 9,059 28.3%
======= ===== ======== ===== ======= ===== ======== =====
</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.
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1997
Net revenue for the three months ended December 31, 1998 decreased $1,215,
or 7.8%, to $14,433 from $15,648 for the three months ended December 31, 1997.
Original Equipment revenue decreased $1,808, or 15.8%, to $9,652 for the three
months ended December 31, 1998 compared to $11,460 for the three months ended
December 31, 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 partially offset this impact.
Aftermarket revenue increased $593, or 14.2% to $4,781 for the three months
ended December 31, 1998 from $4,188 the three months ended December 31, 1997.
The increase in aftermarket revenue was the result of an increase in retrofit
revenue, partially offset by a decline in replacement parts revenue.
A significant portion of the Company's net revenue is generated from
customers outside the United States. For the three months ended December 31,
1998, Original Equipment revenue from foreign customers was $4,782 (49.5% of
total Original Equipment revenue) as compared to $7,673 (67.0% of total Original
Equipment revenue) for the three months ended December 31, 1997. For the three
months ended December 31, 1998 and 1997 approximately 32.8% and 38.6%,
respectively, of the Company's net revenue was derived from sales of products to
customers located in the Asia-Pacific region. As sales in the Asia-Pacific
region declined in fiscal 1998 and 1999, sales in the Unites States and Europe
have increased. The percentage of aftermarket revenue from foreign customers
decreased to 59.3% of total aftermarket revenue for the three months ended
December 31, 1998 compared to 69.8% for the three months ended December 31,
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 $2,577, or 32.8%, to $5,280 for the three months
ended December 31, 1998 as compared to $7,857 for the three months ended
December 31, 1997. The gross margin decreased to 36.6% from 50.2% as a result of
a shift in the current product mix from higher margin automotive contracts to
lower margin architectural contracts and developmental (first of a kind)
automotive contracts, which generally carry lower margins. Based upon the
currently
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expected product mix and related percentage of completion, management believes
the gross margins for fiscal 1999, which cannot be predicted with certainty,
will be lower than the gross margins for fiscal 1998.
Selling, general and administrative expenses decreased $369, or 13.8%, to
$2,313 for the three months ended December 31, 1998 as compared to $2,682 for
the three months ended December 31, 1997. This decrease was primarily the result
of lower incentive compensation costs due to decreased earnings.
Research and development expenses were $915 for the three months ended
December 31, 1998 and $1,000 for the three months ended December 31, 1997.
Amortization expense was $1,060 for the three months ended December 31,
1998 and $1,089 for the three months ended December 31, 1997.
Operating profit decreased $2,094, or 67.9%, to $992 for the three months
ended December 31, 1998 as compared to $3,086 for the three months ended
December 31, 1997. Operating profit as a percentage of revenue, was 6.9% for the
three months ended December 31, 1998 and 19.7% for the three months ended
December 31, 1997. The decrease in operating profit was the result of the
decline in gross profit partially offset by the decrease in selling, general and
administrative expenses.
Interest expense was $2,417 for the three months ended December 31, 1998
and $2,389 for the three months ended December 31, 1997.
No income tax expense or benefit has been provided in the three months
ended December 31, 1998 due to the recorded loss and the uncertainty related to
the future realization of such amounts. The effective tax rate for the three
months ended December 31, 1997 was 81.4%. 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 $1,326 for the three months ended December 31, 1998 compared
to net income of $159 for the three months ended December 31, 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 $2,458 for the three months ended December 31, 1998 compared
to $4,588 for the three months ended December 31, 1997. The decrease in EBITDA
was the result of the decline in operating profit.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE SIX MONTHS ENDED
DECEMBER 31, 1997
Net revenue for the six months ended December 31, 1998 decreased $1,751, or
5.5%, to $30,259 from $32,010 for the six months ended December 31, 1997.
Original Equipment revenue decreased $2,345, or 10.8%, to $19,295 for the six
months ended December 31, 1998 compared to $21,640 for the six months ended
December 31, 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 partially offset this impact.
Aftermarket revenue increased $594, or 5.7%, to $10,964 for the six months ended
December 31, 1998 from $10,370 the six months ended December 31, 1997. The
increase in aftermarket revenue was the result of an increase in retrofit
revenue, partially offset by declines in tooling and replacement parts revenue.
For the six months ended December 31, 1998, Original Equipment revenue from
foreign customers was $9,178 (47.6% of total Original Equipment revenue) as
compared to $15,638 (72.3% of total Original Equipment revenue) for the six
months ended December 31, 1997. For the six months ended December 31, 1998 and
1997 approximately 27.9% and 46.9%, respectively, of the Company's net revenue
was derived from sales of products to customers located in the Asia-Pacific
region. As sales in the Asia-Pacific region declined in fiscal 1998 and 1999,
sales in
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<PAGE> 12
the United States and Europe have increased. The percentage of aftermarket
revenue from foreign customers decreased to 66.3% of total aftermarket revenue
for the six months ended December 31, 1998 compared to 67.4% for the six months
ended December 31, 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 $4,326, or 27.6%, to $11,354 for the six months
ended December 31, 1998 as compared to $15,680 for the six months ended December
31, 1997. The gross margin decreased to 37.5% from 49.0% as a result of a shift
in the current product mix from higher margin automotive contracts to lower
margin architectural contracts and developmental (first of a kind) automotive
contracts, which generally carry lower margins. 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,
will be lower than the gross margins for fiscal 1998.
Selling, general and administrative expenses decreased $630, or 11.6%, to
$4,810 for the six months ended December 31, 1998 as compared to $5,440 for the
six months ended December 31, 1997. This decrease was primarily the result of
lower incentive compensation costs due to decreased earnings.
Research and development expenses decreased $124, or 6.2%, to $1,882 for
the six months ended December 31, 1998 as compared to $2,006 for the six months
ended December 31, 1997. For the six months ended December 31, 1998, certain
developmental resources were dedicated to the completion of certain original
equipment contracts, thereby causing a reduction in research and development
expenses.
Amortization expense was $2,121 for the six months ended December 31, 1998
and $2,179 for the six months ended December 31, 1997.
Operating profit decreased $3,514, or 58.0%, to $2,541 for the six months
ended December 31, 1998 as compared to $6,055 for the six months ended December
31, 1997. Operating profit as a percentage of revenue, was 8.4% for the six
months ended December 31, 1998 and 18.9% for the six months ended December 31,
1997. The decrease in operating profit was the result of the decline in gross
profit partially offset by the decreases in selling, general and administrative
expenses and research and development expenses.
Interest expense was $4,834 for the six months ended December 31, 1998 and
$4,803 for the six months ended December 31, 1997.
No income tax expense or benefit has been provided in the six months ended
December 31, 1998 due to the recorded loss and the uncertainty related to the
future realization of such amounts. The effective tax rate for the six months
ended December 31, 1997 was 81.4%. 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 $2,058 for the six months ended December 31, 1998 compared to
net income of $277 for the six months ended December 31, 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 $5,473 for the six months ended December 31, 1998 compared to
$9,059 for the six months ended December 31, 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
12
<PAGE> 13
totaled $3,200 at December 31, 1998. At December 31, 1998, the Company believes
it 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 six months ended
December 31, 1998 was $5,067 whereas for the six months ended December 31, 1997,
net cash provided by operating activities was $10,004. The decrease in net cash
provided by operating activities for the six months ended December 31, 1998 was
due in part to the timing of system payments as previously discussed and to the
$4,463 interest payment made on July 1, 1998. No such payment was required for
the six months ended December 31, 1997.
The Company has a backlog (on a percentage of completion basis) at December
31, 1998 of approximately $19,999 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 $25 for the six months ended December 31, 1998 and $227 for the six
months ended December 31, 1997. In addition, during the first quarter of fiscal
1999 certain non-contract furnace inventory, with a value of $1,271, was
transferred to demonstration furnaces. Future capital expenditures, excluding
demonstration furnaces, used to replace or improve operating equipment and
facilities are estimated to be less than $1,000 for the 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 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 six months ended December 31, 1998
approximately 59.2%, 39.7% and 27.9% of the Company's net revenue was derived
from sales of products located in the Asia-Pacific region
13
<PAGE> 14
(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 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.
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
installed 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. These upgrades were completed by December 31,
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
14
<PAGE> 15
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 March 1999.
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 has made software
upgrades available to its customers 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 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.
15
<PAGE> 16
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
10.1.1** Second Amendment to 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.
16
<PAGE> 17
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: February 11, 1999 /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)
17
<PAGE> 1
Exhibit 10.1.1
SECOND AMENDMENT
TO
FINANCING AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this
"Agreement") is made as of the 31st day of December, 1998, by GLASSTECH, INC., a
corporation organized under the laws of Delaware (the "Borrower"), and
NATIONSBANK, N.A., a national banking association (the "Lender").
RECITALS
--------
A. The Borrower and the Lender entered into a Financing and Security
Agreement dated July 2, 1997 (the same, as amended by First Amendment to
Financing and Security Agreement dated October 29, 1997 and as amended,
modified, substituted, extended, and renewed from time to time, the "Financing
Agreement"). The Financing Agreement provides for some of the agreements between
the Borrower and the Lender with respect to the "Loans" (as defined in the
Financing Agreement), including revolving credit facility in an amount not to
exceed $10,000,000.
B. The Borrower has requested that the Lender agree to the changes to
certain reporting requirements contained in the Financing Agreement.
C. The Lender is willing to agree to the Borrower's request on the
condition, among others, that this Agreement be executed.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, receipt of which is hereby acknowledged, the Borrower
and the Lender agree as follows:
1. The Borrower and the Lender agree that the Recitals above are a part
of this Agreement. Unless otherwise expressly defined in this Agreement, terms
defined in the Financing Agreement shall have the same meaning under this
Agreement.
2. The Borrower represents and warrants to the Lender as follows:
(a) The Borrower is a corporation duly organized, and validly
existing and in good standing under the laws of the state in which it was
organized and is duly qualified to do business as a foreign corporation in good
standing in every other state wherein the conduct of its business or the
ownership of its property requires such qualification and in which the failure
to qualify would materially adversely affect the business, operations or
properties of the Borrower and/or its Subsidiaries.
-1-
<PAGE> 2
(b) The Borrower has the power and authority to execute and deliver
this Agreement and perform its obligations hereunder and has taken all necessary
and appropriate corporate action to authorize the execution, delivery and
performance of this Agreement.
(c) The Financing Agreement, as amended by this Agreement, and each
of the other Financing Documents remains in full force and effect, and each
constitutes the valid and legally binding obligation of the Borrower,
enforceable in accordance with its terms.
(d) All of the Borrower's representations and warranties contained
in the Financing Agreement are true and correct on and as of the date of the
Borrower's execution of this Agreement.
(e) No Event of Default and no event which, with notice, lapse of
time or both would constitute an Event of Default, has occurred and is
continuing under the Financing Agreement or the other Financing Documents which
has not been waived in writing by the Lender.
3. The definition of "Net Worth" contained in Section 1.1 of the
Financing Agreement is hereby amended to read as follows:
"Net Worth" means as to the Borrower its shareholders
equity, as determined in accordance with GAAP except that there shall
be excluded from the calculation of shareholders equity any provision
for income taxes imputed in accordance with GAAP, but for which there
is no corresponding tax liability or for which there has been and will
be no payment, provided, however, that the amount of the exclusion
shall not exceed the amount deducted from goodwill with respect to such
provision.
4. Section 6.1.15 of the Financing Agreement is hereby amended in its
entirety to read as follows:
6.1.15 Financial Covenants.
--------------------
(b) Net Worth. The Borrower will at
all times maintain, tested on the Closing Date and as of the end of
each of the Borrower's fiscal quarters commencing September 30, 1997,
a Net Worth of not less than the following:
-2-
<PAGE> 3
<TABLE>
<CAPTION>
------------------------------------------ ------------------------------------
Period Amount
------------------------------------------ ------------------------------------
<S> <C>
July 3, 1997 through and including $14,500,000
June 29, 2001
------------------------------------------ ------------------------------------
June 30, 2001 and thereafter $16,000,000
------------------------------------------ ------------------------------------
</TABLE>
5. The Borrower and the Lender confirm their prior letter agreement
that all computations determining compliance with financial covenants in the
Financing Agreement shall be made without giving to the effect to the reduction
in the Borrower's opening shareholder's equity required by EITF 88-16 and that
no Default or Event of Default exists or shall exist under the Financing
Agreement on account of such reduction.
6. The Borrower hereby issues, ratifies and confirms the
representations, warranties and covenants contained in the Financing Agreement,
as amended hereby. The Borrower agrees that this Agreement is not intended to
and shall not cause a novation with respect to any or all of the Obligations.
7. The Borrower shall pay at the time this Agreement is executed and
delivered an amendment fee in the amount of $5,000 and all fees, commissions,
costs, charges, taxes and other expenses incurred by the Lender and its counsel
in connection with this Agreement, including, but not limited to, reasonable
fees and expenses of the Lender's counsel and all recording fees, taxes and
charges.
8. This Agreement may executed in any number of duplicate originals or
counterparts, each of such duplicate originals or counterparts shall be deemed
to be an original and taken together shall constitute but one and the same
instrument. The parties agree that their respective signatures may be delivered
by facsimile. Any party who chooses to deliver its signature by facsimile agrees
to provide a counterpart of this Agreement with its inked signature promptly to
each other party.
IN WITNESS WHEREOF, the Borrower and the Lender have executed this
Agreement under seal as of the date and year first written above.
WITNESS: NATIONSBANK, N.A.
/s/ Cherilyn Sauers By: /s/ Melba B. Quizon (SEAL)
- ------------------- --------------------------------
Melba B. Quizon
Vice President
-3-
<PAGE> 4
WITNESS: GLASSTECH, INC.
/s/ Brenda M Rogge By: /s/ Diane S. Tymiak (SEAL)
- ------------------- --------------------------------
Name: Diane S. Tymiak
Title: Vice President
and Chief Financial Officer
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,002
<SECURITIES> 0
<RECEIVABLES> 10,837
<ALLOWANCES> (40)
<INVENTORY> 3,337
<CURRENT-ASSETS> 22,661
<PP&E> 9,641
<DEPRECIATION> (2,213)
<TOTAL-ASSETS> 96,503
<CURRENT-LIABILITIES> 16,190
<BONDS> 69,411
0
0
<COMMON> 0
<OTHER-SE> 10,487
<TOTAL-LIABILITY-AND-EQUITY> 96,503
<SALES> 30,259
<TOTAL-REVENUES> 30,259
<CGS> 18,905
<TOTAL-COSTS> 18,905
<OTHER-EXPENSES> 8,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,834
<INCOME-PRETAX> (2,058)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,058)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,058)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
