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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under
Section 12(b) or (g) of the Securities Exchange Act of 1934
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(formerly known as Forte Computer Easy, Inc.)
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(Name of Small Business Issuer in its charter)
Utah 87-0365268
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1350 Albert Street, Youngstown, Ohio 44505
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (330) 746-3311
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
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THE UNDERSIGNED HEREBY AMENDS ITS FORM 10-SB REGISTRATION STATEMENT FILED MARCH
1, 1995, IN ITS ENTIRETY TO READ AS FOLLOWS:
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
American Architectural Products Corporation (the "Company") is a
Delaware corporation with two principal operating subsidiaries: Forte, Inc., an
Ohio corporation ("Forte") and American Architectural Products, Inc., a Delaware
corporation ("AAP"). Prior to April 1, 1997, the Company was known as Forte
Computer Easy, Inc., a Utah corporation. On April 1, 1997, the Company changed
its name to "American Architectural Products Corporation" to more accurately
reflect the current nature of its business. In connection with the name change,
the Company also reincorporated as a Delaware corporation.
The Company has been engaged in the business of manufacturing
residential, commercial and architectural windows and doors (also known as
"fenestration" products) since the acquisition of Forte in 1994. The Company was
previously engaged in the businesses of computer software publishing and
computer disk duplication and fulfillment; however, as described below, the
Company has discontinued its operations in these businesses and concentrated its
efforts on the fenestration business. Management of the Company concluded, for
the reasons described below, that the long-term interests of the Company would
be best served if the Company discontinued its operations in these businesses.
Accordingly, in November of 1995 and August of 1996, respectively, the Company
entered into transactions to dispose of its software publishing and disk
duplication/fulfillment businesses.
The original business of the Company was conducted by Computer Easy,
Inc., an Arizona corporation which was incorporated on August 2, 1983. Empire
Oil, Inc., a Utah corporation and predecessor of the Company, acquired the stock
of Computer Easy, Inc. in 1984. In September of 1985, the assets of Computer
Easy, Inc. were assigned to Empire Oil, Inc., the name of the surviving
corporation was subsequently changed to Computer Easy International, Inc. and
the separate existence of Computer Easy, Inc. was terminated. The name of the
Company was changed from Computer Easy International, Inc., to Forte Computer
Easy, Inc. as of January 3, 1995.
On December 18, 1996, the Company acquired one hundred percent (100%)
of the issued and outstanding common stock of AAP through a reverse acquisition.
AAP and its operating units consist of Eagle Window & Door, Inc. ("Eagle"),
Taylor Building Products Company ("Taylor") and Mallyclad Corp. and Vyn-L
Corporation ("Mallyclad"). AAP was formed on June 19, 1996 for the purpose of
acquiring Eagle and Taylor as a foundation for penetrating the architectural
products industry and capitalizing on the consolidation of small to
middle-market companies to provide a broad product offering to fenestration
customers.
The principal executive offices of the Company are located at 1350
Albert Street, Youngstown, Ohio 44505, and the Company's telephone number is
(330) 746-1331.
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DESCRIPTION OF BUSINESS
The Company is not directly engaged in business operations. The
business of the Company is conducted through Forte and AAP. AAP includes the
Eagle Window & Door, Taylor Building Products Company and Mallyclad divisions.
Mallyclad was merged into AAP prior to the acquisition of AAP by the Company.
The Company has been principally engaged in the fenestration business
since the acquisition of Forte in 1994. The Company and the AAP operating
divisions commenced business at various times. Forte began manufacturing
fenestration products in 1990, Eagle in 1977, Taylor in 1946, and Mallyclad
recently has expanded the scope of its business to enter the fenestration
industry.
The current business of the Company consists of the manufacturing and
distribution of a wide variety of fenestration products, including doors,
windows, security screens, storm doors and screen doors. The Company continually
strives to improve its products and to refine its product mix to better meet the
demands of its customers. As discussed below under "Business Strategy",
management believes changes in the fenestration industry will provide the
Company with significant opportunities for future growth.
Forte was formed to fill a perceived gap which developed in the
commercial fenestration market as a result of a number of plant closings and
mergers among manufacturers of commercial fenestration products. The original
market targeted by Forte was renovation and retrofit products, as opposed to new
construction. The first products developed by Forte placed great emphasis on
energy savings and security through sales of thermally improved replacement
windows and window protection screens of high grade construction, safe operation
and architecturally aesthetic appeal. The original product line of Forte
consisted of a variety of product variations with numerous applications,
including security screen lines, security screen door lines, storm door lines
and storm window lines.
Forte acquired various product line offerings in the early 1990's. In
October of 1991, Forte purchased the commercial window product lines and a glass
insulating product line of Airmaster Corporation. This transaction was
consummated in early 1992 and the product lines were moved to Forte's
headquarters in Youngstown, Ohio, at which time Forte began to do business as
"Forte/Airmaster." In exchange for equipment acquired as part of the Airmaster
transaction, the Company paid $25,000 in cash to, and executed a promissory note
in the original principal amount of $175,000 in favor of, secured parties which
had taken possession of the equipment. The total purchase price paid by the
Company was less than management's estimate of the fair market value of the
Airmaster equipment acquired by the Company.
In July of 1993, Forte acquired from Season-All Industries, Inc.
("Season-All") machinery and equipment related to certain commercial window
product lines, select inventories, and other related assets. In addition, Forte
was assigned major retrofit contracts from Season-All. In total, Forte paid
Season-All $840,000, which was less than Forte's estimate of the fair market
value of the assets acquired.
Upon the closing of the Season-All acquisition described above, Forte
made arrangements with AMAS, Inc., an affiliated Ohio corporation ("AMAS") which
owned a building located at 1450
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Albert Street, Youngstown, Ohio (the "AMAS Building") adjacent to the office and
manufacturing plant of Forte, to lease from AMAS approximately 120,000 square
feet of manufacturing and office space in that facility. Forte began production
in the AMAS Building in the fall of 1994
All of the issued and outstanding common stock of Forte was acquired by
the Company on June 8, 1994, in exchange for 33,110,092 shares of the Company's
common stock and options to acquire 4,881,918 shares of the Company's common
stock, based upon an approximate net book value of Forte of $3.6 million. In
connection with the Company's acquisition of Forte, AMAS was merged into Forte.
Based on the agreed net value of the assets of each corporation, the
shareholders of AMAS, Frank J. Amedia and John Masternick, received 1.660 shares
of Forte common stock in exchange for each outstanding share of AMAS common
stock.
AAP was incorporated on June 19, 1996 and had no significant operations
or assets until it acquired Eagle Window and Door, Inc. and Taylor Building
Products Company on August 29, 1996. Both Eagle and Taylor were merged into AAP
on August 29, 1996. AAP acquired the stock and certain assets and liabilities of
Eagle and Taylor from MascoTech, Inc. The purchase price approximated
$22,000,000. Eagle is based in Dubuque, Iowa and manufactures and distributes
aluminum clad and all wood windows and doors. Taylor is based in West Branch,
Michigan and manufactures entry and garage doors.
On October 25, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with AAP Holdings, Inc., a
Delaware corporation ("AAPH") and parent of AAP. The transaction contemplated by
the Reorganization Agreement was consummated on December 18, 1996. Pursuant to
the Reorganization Agreement, the Company acquired one hundred percent (100%) of
the issued and outstanding common stock of AAP in exchange for 1,000,000 shares
of Series A Convertible Preferred Stock (the "Preferred Stock") of the Company.
The Preferred Stock is convertible into 75,486,324 shares of the Company's
common stock which is equal to sixty percent (60%) of the issued and outstanding
common stock of the Company on the closing date of the transaction. In addition,
the Company issued to AAPH options to purchase 8,798,322 shares which is equal
to 1.5 times the number of shares of the Company's common stock subject to
options previously issued by the Company which were outstanding on the closing
date of the transaction. Such options are identical in price and exercise terms
to the previously outstanding options. The conversion ratio of the Preferred
Stock was negotiated between the Company and AAPH based upon, among other
things, the estimated fair market values of the respective entities as well as
the synergies of management and operations. The Company and AAPH also agreed
that Mallyclad Corp. and Vyn-L Corporation, which were separate companies
controlled by AAPH's ultimate controlling shareholder, would be merged into AAP
prior to the completion of this transaction.
On June 25, 1996, the controlling shareholder of AAPH acquired
ownership of Mallyclad. The purchase price was approximately $1,009,000. On
December 18, 1996, Mallyclad was merged into AAP in accordance with the previous
agreement between AAPH and the Company.
AAP is engaged in the fenestration manufacturing business through its
principal operating divisions, Eagle and Taylor. Eagle's primary product line
consists of aluminum clad and all-wood window and door products which are
targeted to high-end residential and certain "institutional" niche markets.
Taylor's primary products consist of urethane-insulated steel entry doors and
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polystyrene-insulated steel garage doors. Management expects the acquisition of
AAP to dramatically increase the Company's sales volume and to significantly
enhance the Company's competitive and strategic position in the manufacture and
distribution of windows, doors and other fenestration products.
Eagle was formed in 1977, when a facility formerly operated by Caradco,
another window manufacturer, was vacated. Caradco had operated a window plant at
the current Eagle location but, in 1977, moved its operations to a new location.
Eagle was conceived to take advantage of Caradco's vacant operations and launch
a new line of "high end" windows for custom homes. Eagle's founder was Windor,
Inc., a former distributor of Caradco products.
MascoTech, Inc. acquired Eagle in 1987 and Eagle became a part of
MascoTech Inc.'s architectural products group of building products
manufacturers. Eagle greatly expanded its product line offering to keep pace
with changing style trends and competition. Despite its product offering,
Eagle's results were adversely impacted by its growing complexity of its
operations and general market conditions. On August 29, 1996, Eagle was acquired
by AAP.
As stated above, Taylor's primary products consist of
urethane-insulated steel entry doors and polystyrene-insulated steel garage
doors. Taylor began building entry doors in 1962 and garage doors in 1946.
Taylor operated as Taylor Door Co., a privately held company, until MascoTech,
Inc. purchased the operating unit in 1987. MascoTech, Inc. combined this
purchase with other product lines, including Perma Door, and consolidated
various operating units throughout the country into the Taylor location. During
this time, Taylor automated its manufacturing process and continued to reduce
its product offering to optimize profitability. Taylor continued to operate as a
separate production facility within the MascoTech Inc. architectural products
group until the purchase by AAP on August 29, 1996.
Mallyclad and Vyn-L process and manufacture vinyl clad steel and
aluminum coils and cut-to-length sheets. Primary markets are the construction,
appliance and automotive industries.
The Company's operating subsidiaries currently market their products
primarily in the continental United States. Eagle, the Company's largest
operating division, also exports window and door products to Mexico and the
Pacific Rim. Although currently not significant, the Company plans to increase
exports of products as opportunities arise. Eagle currently services over one
hundred distributor customers, most of whom sell the products to building
contractors or homeowners. Approximately two-thirds of Eagle's sales are
attributable to high-end new residential construction markets, and the remainder
to light commercial construction and renovation markets. Taylor has designed a
marketing program for its steel entry doors incorporating retail display,
merchandising and training its distributors, primarily lumberyards and home
centers. Taylor also sells garage door panels to installing garage door dealers.
Mallyclad manufacturers vinyl metal laminates for a wide variety of end uses,
including production of vinyl metal doors, commercial roofing products and vinyl
clad metals for various applications. Products are marketed through
manufacturers representatives located throughout the United States. Forte
markets its products through a combination of sales representatives, direct
marketing and bidding on publicly advertised projects. The Company plans to
integrate its operating subsidiaries' products into the existing distribution
channels and markets of each of its constituent companies to the extent
practical.
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While the impact of certain customers may be significant to a specific
operating unit of the Company, the Company as a consolidated unit is not
dependent on any single customer or small group of customers and does not expect
to derive a substantial portion of its sales from such customers. The Company
projects that Eagle will account for approximately 54% of total sales in 1997.
In 1996, Eagle's largest customer accounted for only 6% of its total sales and
Eagle's ten largest customers accounted for less than half of its total sales.
The Company projects that Taylor will account for approximately 30% of total
sales in 1997. In 1996, Taylor's largest customer accounted for only 11% of its
total sales and its ten largest customers accounted for only 51% of Taylor's
sales. The Company projects that Forte will account for approximately 9% of
total sales in 1997. In 1996, Forte substantially completed a contract which
accounted for 23% of Forte's sales. Because of the different nature of Forte's
sales pattern, that of specific contract orders rather than repeat customers,
the Company cannot accurately forecast whether any customer will account for a
substantial portion of Forte's sales in the future. Mallyclad, which the Company
projects to generate approximately 7% of total sales in 1997, is, like Taylor
and Eagle, not dependent on any particular customer or customers. In 1996,
Mallyclad's largest customer accounted for only 8% of its total sales and its
ten largest customers accounted for less than half of its total sales.
The fenestration industry is highly competitive. The Company competes
for customers with other window manufacturers, door manufacturers and assemblers
of related products, many of which have significantly greater financial,
marketing and other resources than the Company. The Company estimates that the
residential fenestration industry generates approximately $6.5 billion in sales
annually, of which the Company's market share is small. The Company's sales,
however, have begun to grow as the Company has expanded through acquisition.
The Company is working towards improving its competitive position in
the market in several ways. It has begun to exploit each operating unit's
existing distribution channels and market bases by coordinating the distribution
of products through such channels. The Company's operating units also are
targeting geographic market expansion. In addition, Eagle and Taylor have
organized sales training and development programs for retailers. Taylor recently
implemented a marketing strategy, unique in the industry, of selling steel
garage door panels rather than selling complete door units. The Company believes
this strategy eliminates the overhead associated with carrying garage door
hardware and capitalizes on a trend of garage door dealers purchasing hardware
directly from manufacturers rather than purchasing total packages. In addition,
the company expects that Mallyclad's specially designed laminating facility will
provide certain competitive advantages over many other laminators in the vinyl
metal door business. Mallyclad also plans to take advantage of the replacement
of tar and pebble commercial roofing with complete vinyl film systems.
At a special meeting held on April 1, 1997, the Company's shareholders
approved a reincorporation of the Company in Delaware and the change of the
Company's name to American Architectural Products Corporation. For many years,
Delaware has followed a policy of encouraging incorporation in that State. In
furtherance of that policy, Delaware has adopted comprehensive modern and
flexible corporate laws which periodically are updated and revised to meet
changing business needs. As a result, many major corporations initially have
chosen Delaware for their domicile or subsequently have reincorporated in
Delaware in a manner similar to that proposed by the Company. Delaware courts
have developed considerable expertise in dealing with corporate issues, and a
substantial body of case law has developed construing Delaware law and
establishing public policies with respect to Delaware corporations. The
favorable business corporation laws of
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Delaware should benefit the Company by allowing it to conduct its affairs in a
more flexible and efficient manner. Additionally, neither the Company's
principal offices nor any of the Company's employees are located in Utah and, as
such, the Company has no important ties to or presence in Utah that would make
incorporation in Utah convenient for the Company.
On October 31, 1996, the Company entered into a Letter of Intent to
acquire all the outstanding shares of common stock of Western Insulated Glass,
Co., an Arizona corporation ("Western"). The transaction was consummated on
March 14, 1997. The aggregate purchase price paid by the Company was
approximately $2.4 million and was determined through extensive negotiation
among the Company and the former shareholders of Western. Contemporaneously with
the closing, Western entered into a loan agreement and related documentation
with a third party financial institution, proceeds of which were used to finance
a portion of the purchase of the Western common stock by the Company. This loan
is secured by substantially all of the assets of Western. In addition, the
Company executed various other documents in connection with this loan, including
a guaranty in favor of the lender of Western's obligations under the loan
agreement and, to secure Western's obligations under the loan agreement, a
pledge in favor of the lender of the Western common stock acquired by the
Company. The Company also incurred indebtedness to the selling Western
shareholders in order to finance a portion of the purchase price for the Western
common stock. Western manufactures and distributes custom aluminum windows and
doors, principally to the residential home market. The Company believes that the
acquisition of Western, located in Phoenix, Arizona, will broaden its geographic
penetration in the custom aluminum window industry. Western distributes its
products primarily in Arizona, Nevada and California. The Company also plans to
use Western to expand the geographic markets and increase sales volumes for its
Eagle and Taylor product lines by using Western as a distributor for these
products in the States presently serviced by Western. This will permit Western
to broaden its product offerings to include wood windows and patio doors, steel
entry doors, and garage doors.
BUSINESS STRATEGY
Management believes consolidation in the fenestration manufacturing
industry presents significant growth opportunities for the Company. Although the
industry has historically been characterized by small, entrepreneurial
businesses scattered throughout the United States, the growing public demand for
more energy efficient windows and doors has resulted in increased manufacturing
costs. These increased costs and the competitive pressures brought about by
manufacturers' need for technology, computerization and enhanced marketing
efforts, have led to a shift away from small, independent manufacturers and
toward larger manufacturers that are able to spread higher costs across a broad
product line. The Company believes consolidation in the fenestration industry
will continue to accelerate and that this consolidation will present favorable
merger and acquisition opportunities.
The Company's business plan contemplates that the Company will target
as acquisition candidates small and medium-sized, established fenestration
companies and related material manufacturers that are leaders in established
national or regional niche markets. The Company intends to pursue acquisition
candidates that produce fenestration products and related materials which
complement the Company's growth and marketing strategy. In evaluating
acquisition candidates, the Company will focus on those candidates that display
strong growth potential, a stable customer base and predictable cash flows.
Following consummation of its acquisitions, the Company intends to implement
financial and operational improvements, product-line enhancements and
synergistic acquisitions to enhance the value of the acquired enterprises. The
Company currently intends to finance these acquisitions through a combination of
senior bank borrowings secured by assets of the target companies, subordinated
debt or mezzanine debt funded by institutional investors, and issuances of
common and preferred stock of the Company. The Company currently is discussing
acquisition opportunities with several companies.
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MANUFACTURING FACILITIES
Forte currently conducts manufacturing operations in a 120,000 square
foot facility located in Youngstown, Ohio. AAP currently conducts manufacturing
operations at a 320,000 square foot facility located in Dubuque, Iowa and a
210,000 square foot facility located in West Branch, Michigan. AAP also operates
a 39,000 square foot manufacturing facility in the Detroit, Michigan area
through its Mallyclad division. Management believes the Company's current
manufacturing facilities are sufficient to meet its current and projected
manufacturing needs.
DISCONTINUED BUSINESSES
Prior to November of 1995, the Company was engaged in the computer
software publishing business through its operating division known as Computer
Easy, Inc. ("CEI"). The business of CEI consisted primarily of publishing and
marketing applications software, educational software and entertainment software
products through major software distributors for resale in national software and
computer retail chain stores, discount stores, warehouse stores and other retail
outlets. CEI contracted with software developers to publish software programs,
generally on an exclusive worldwide basis. CEI also developed software in-house
through internal research and development and through contracting with
independent computer programmers to develop proprietary software products for
CEI. After the introduction by Microsoft Corporation of the new Windows 95
personal computer operating system in 1995, CEI faced significant potential
costs to modify its software products to be compatible with the Windows 95
operating system. In addition sales of the Company's software products had
decreased significantly in the preceding months as the market anticipated the
release of Windows 95. As a result, although the software publishing business
historically generated a significant portion of the Company's revenues,
management of the Company concluded that it was in the best long-term interest
of the Company to discontinue the operations of the software publishing
division. On August 30, 1995, the Company reached a tentative agreement to sell
assets constituting the principal software publishing business of CEI to
International Microcomputer Software, Inc. ("IMSI"). The parties subsequently
entered into a definitive Purchase Agreement, and the closing of the transaction
occurred on November 3, 1995.
Prior to August of 1996, the Company was also engaged in the computer
disk duplication and fulfillment business through a wholly owned subsidiary
known as Arizona Disk Fulfillment, Inc. ("ADF"). ADF was originally incorporated
under the laws of Arizona on November 1, 1991. The Company acquired all of the
issued and outstanding common stock of ADF in June of 1994. ADF's largest
customer was CEI, and the discontinuance of the Company's software publishing
business in 1995 (as discussed above) had a significant adverse impact on ADF's
operations. In addition, ADF did not have CD-ROM duplication capabilities, which
had an increasing negative impact on ADF's operations as demand for CD-ROM based
software increased. As a result of these changes in ADF's business, the Company
concluded in late 1995 that it was in the best long-term interest of the Company
to discontinue the operations of its computer disk duplication and fulfillment
division through the divestiture of the Company's ownership of ADF. On August 5,
1996, the Company entered into a stock purchase agreement pursuant to which it
agreed to sell one hundred percent (100%) of the issued and outstanding
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common stock of ADF to Beverly and James W. Schmidt. Mr. Schmidt had served as
president of ADF since 1993. The sale of ADF by the Company was consummated in
August of 1996.
INTELLECTUAL PROPERTY
In August of 1996, AAP acquired the stock of Eagle and Taylor. In
connection with the acquisitions, AAP acquired ownership to various domestic
patents, foreign patents, and select domestic patent applications. Additionally,
AAP acquired ownership to domestic trademark registrations, foreign trademark
registrations, domestic trademark applications and foreign trademark
applications. The patents are of the design and manufacturing types and the
trademark protection applies to entity name protection, as well as product name
and process type. The intellectual property is used in the on-going business of
AAP.
EMPLOYEES
As of December 31, 1996, the Company had a total of 662 employees.
Certain employees of Taylor and Mallyclad are covered under collective
bargaining agreements. Eagle and Forte hourly employees are not currently
covered under collective bargaining agreements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is an historical review of the Company's financial and
operating results for the periods indicated and should be read in conjunction
with the financial statements of the Company as at and for the year ended
December 31, 1995 and for the nine-month period ended September 30, 1996.
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Results of Operations
The following table sets forth the percentage of revenue represented by
certain items reflected in the Company's consolidated Statement of Operations
for the periods indicated.
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
1995 1994 1996 1995
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Revenue 83.7 78.9 79.2 81.2
Gross Profit 16.3 21.1 20.8 18.8
Operating Costs:
Selling, general and
administrative 13.7 22.5 18.9 12.2
Other Expenses 4.5 4.5 4.8 4.5
Income (Loss) from
Continuing Operations
before Income Taxes (1.9) (5.9) (2.9) 2.1
Income Tax Benefit
(Expense) 1.0 .1 1.1 .8
Income (Loss) from
Continuing Operations (.9) (5.8) (1.8) 1.3
Discontinued Operations (25.7) (4.2) (2.5) (11.6)
Net Income (Loss) (26.6)% (10.0)% (4.3)% (10.3)%
====== ====== ====== ======
</TABLE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. For the year ended December 31, 1995, revenue increased by
$1,029,520, or 23.4%, to $5,426,260 from $4,396,740. This increase was due to
contract revenue recognized under the two significant contracts acquired under
the Season-All acquisition. These contracts were materially completed by
December 31, 1995.
Cost of Revenue. For the year ended December 31, 1995, cost of revenue
increased by $1,071,605, or 30.9%, to $4,540,722 from $3,469,117. This increase
was due primarily to the Season-All contracts as mentioned above. As a
percentage of sales, cost of revenue increased by 4.8% for the year ended
December 31, 1995. This increase was mainly attributable to unabsorbed
manufacturing costs resulting from excess capacity during the latter part of the
year. Management of the Company believes it has taken corrective steps to
eliminate the excess capacity costs. Management has taken corrective action to
minimize excess capacity costs in the fenestration division by cutbacks in
manufacturing and plant overhead personnel; analyzing and reducing variable
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manufacturing costs where appropriate; minimizing overtime hours; and bidding on
select smaller contracts to optimize use of plant manufacturing capacity.
Gross Profit. For the year ended December 31, 1995, gross profit
decreased to 16.3% from 21.1%. This decrease was mainly attributable to
increased costs of revenue during the 1995 year due to unabsorbed manufacturing
costs resulting from excess capacity during the latter part of the year.
Selling, General and Administrative Expenses. For the year ended
December 31, 1995, selling, general and administrative expenses decreased by
$241,948, or 24.4%, to $747,659 from $989,607. This decrease was due to the fact
that Forte, Inc. incurred significant professional, travel and related expenses
during 1994 in conducting due diligence procedures relating to potential merger
candidates.
Other Expenses. For the year ended December 31, 1995, other expenses
increased by $44,014, or 22.1%, to $243,388 from $199,374. This increase was
primarily due to an increase in interest expense resulting from higher interest
rates on long-term debt.
Net Loss from Continuing Operations. For the year ended December 31,
1995, net loss from continuing operations decreased by $104,820, or 41%, to
$(50,538) from $(255,358). This decrease was due primarily to the fact that
Forte, Inc. incurred significant selling, general and administrative expenses
during 1994 related to due diligence procedures performed on potential merger
candidates.
Discontinued Operations. For the year ended December 31, 1995,
discontinued operations increased by $963,079, or 516.6%, to $1,149,518 from
$186,439. This increase was due to the Company's decision in 1995 to discontinue
the software publishing and disk duplication businesses and the subsequent
writedown of assets.
Nine Month Period Ended September 30, 1996 Compared to the Nine Month
Period Ended September 30, 1995
Revenue. For the nine month period ended September 30, 1996, revenue
decreased by $1,726,175, or 39.6%, to $2,635,113 from $4,361,288. This decrease
was due to the completion of two major contracts which were assumed in the
acquisition of the Season-All product lines. These two contracts amounted to
approximately $3,800,000 and were materially completed by December 31, 1995.
Cost of Revenue. For the nine month period ended September 30, 1996,
cost of revenue decreased by $1,454,334, or 41.1%, to $2,087,032 from
$3,541,366. This decrease was due primarily to the conclusion of the Season-All
contracts as mentioned above. As a percentage of sales, cost of revenue
decreased by 2% for the nine month period ended September 30, 1996 as compared
to the nine month period ended September 30, 1995. This improvement in cost of
revenue is due to a significant amount of revenue being recognized on a contract
with an above average gross profit margin during the nine month period ended
September 30, 1996.
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Gross Profit. For the nine month period ended September 30, 1996, gross
profit increased to 20.8% from 18.8%. This increase was mainly attributable to
the recognition of a significant portion of revenue on a contract with an
above-average profit margin.
Selling, General and Administrative Expenses. For the nine month period
ended September 30, 1996, selling, general and administrative expenses decreased
by $35,704, or 6.7%, to $497,196 from $532,900. This decrease was due to an
allocation of overhead costs to accrued discontinued operating costs. This
allocation represents an estimated portion of costs attributable to the two
discontinued divisions of the Company. This allocation of overhead costs to
accrued discontinued operating costs during the nine months ended September 30,
1996, was offset by increased costs in administrative compensation, travel and
related expenses of approximately $121,000.
Other Expenses. For the nine month period ended September 30, 1996,
other expenses decreased by $67,571, or 34.7%, to $127,393 from $194,964. This
decrease was due to the gain on the sale of the Company airplane and several
non-producing manufacturing assets.
Net Loss from Continuing Operations. For the nine month period ended
September 30, 1996, net loss from continuing operations decreased by $9,650, or
16.9% to $(47,508) from $(57,158). The decrease was due to the recognition of a
significant portion of revenue on a contract with an above-average profit margin
and the recognition of a gain on the sale of assets.
Discontinued Operations. For the nine month period ended September 30,
1996, discontinued operations decreased by $495,383, or 88.3%, to $65,607 from
$560,990. This decrease was due to the Company's decision in 1995 to discontinue
the software and disk duplication divisions. No further costs are anticipated to
be incurred in relation to discontinued operations.
Seasonality
Historically, the Company experiences little seasonality variation in
the recognition of revenue. Revenue recognition is dependent upon the Company
obtaining contracts for fenestration products. Such contracting revenue will
vary based upon the cyclical nature of construction activity. However, the
Company has found no identifiable trend related to these cycles.
Liquidity and Capital Resources
The Company's deficit in operating cash flow for the nine month period
ended September 30, 1996 was approximately $630,000. This deficit in operating
cash flow was offset by the sale of assets in the amount of $250,000, an
increase in net long-term borrowing of approximately $480,000, and the sale of
treasury stock of $113,000. In addition, the Company incurred approximately
$97,000 of additional capital expenditures during this period, including $60,098
on plant improvements, $13,241 on vehicles, $1,713 on office and shop equipment,
$6,847 on office improvements and $15,122 on tooling and dies.
The Company was a party to a Financing and Security Agreement dated
March 1, 1994 with RLC Financial Corp. This Agreement was terminated in 1995. As
discussed herein under
11
<PAGE> 13
"Legal Proceedings," certain disputes have arisen in connection with this
matter, and the parties are involved in litigation with respect to these
disputes.
In January, 1996, the Company restructured its long-term debt with its
principal bank, Second National Bank of Warren, Ohio. The debt restructure
consolidated nine existing loans, provided additional working capital, and
contains a fifteen year amortization period (with a call provision in five
years).
In December 1997, the Company consummated a consolidation transaction
with AAP Holdings, Inc. ("AAPH"), which was accomplished through the issuance of
convertible preferred stock of the Company in exchange for common stock of
AAPH's principal operating subsidiary, American Architectural Products, Inc.
("AAP"). The Company does not currently anticipate any material capital
expenditures in relation to either its existing operation, or the operations of
AAP.
The Company's business plan for 1997 and subsequent years contemplates
growth through mergers and acquisitions with companies specializing in the
fenestration and related materials and components industries. This will require
integration of various products and marketing of the Company's expanded product
line as the Company grows. The Company is committed to building its management
team to accommodate this growth. In order to finance its growth plans, the
Company intends to secure capital from a variety of sources. Potential sources
of capital may include, but are not limited to, expansion of the Company's
existing credit lines, financing of the Company's real and personal property,
private placements of the Company's common and preferred stock, issuances by the
Company of debt securities, and public offerings of the Company's common and
preferred stock.
While the Company's business plan for 1997 and beyond contemplates that
its growth will occur principally through mergers and acquisitions, the
Company's secondary growth strategy involves the exploitation of each operating
subsidiary's existing distribution channels and market bases by integrating the
goods and services produced by its various other subsidiaries into such
channels.
ITEM 2. LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are parties to the
following legal proceedings:
DALE BLEECHER AND MARLA BLEECHER V. EAGLE WINDOW & DOOR., ET L., CASE
NO. 75638, IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA IN AND FOR
THE COUNTY OF NAPA. This case is based upon allegations of negligence,
breach of express warranty, breach of implied warranty, breach of
contract and strict liability for defective products. This matter is
currently in the final phases of mediation pursuant to the California
"fast track" rules. Management has aggressively defended the suit.
DONALD L. BONE, INDIVIDUALLY AND AS TRUSTEE, BONE FAMILY TRUST V. EAGLE
WINDOW & DOOR, INC., CASE NO. C96- 03950, IN THE SUPERIOR COURT OF
CALIFORNIA IN AND FOR THE COUNTY OF
12
<PAGE> 14
CONTRA COSTA. This case is based upon allegations of breach of implied
warranty, breach of express warranty, negligence in manufacturer and
design, strict liability, negligent misrepresentation and fraud. This
matter is currently in the discovery phase of the litigation.
Management is vigorously defending this action.
CD WORLD PUBLISHING PLUS CORP. V. FORTE COMPUTER EASY, INC., AND
ARIZONA DISK FULFILLMENT, INC., CASE NO. CV 96-91630, FILED IN THE
MARICOPA COUNTY (ARIZONA) SUPERIOR COURT. D. Jess Riddle, a former
employee of the Company, is claiming a breach of agreement by the
Company to provide services by its former subsidiary, Arizona Disk
Fulfillment, Inc. and for failure to return glass CD masters belonging
to CD World Publishing Plus Corp. The Company denies the claim. On
September 11, 1996, a counterclaim was filed on behalf of the Company
asserting damages for breach of agreement, fraud and misrepresentation.
The Company is vigorously defending this action.
RLC FINANCIAL CORP V. FORTE COMPUTER EASY, INC., CASE IN ARBITRATION,
MARICOPA COUNTY, ARIZONA. This case is based on a dispute related to an
interpretation of the terms of a Financing and Security Agreement dated
March 1, 1994 and subsequent negotiations whereby RLC was to collect
pledged receivables assigned from a discontinued operation of the
Company. The Financing and Security Agreement was terminated on August
31, 1995. RLC claimed the Company was in violation of certain
provisions of the Agreement, and the Company claimed that RLC had
breached certain provisions of the Agreement. There was also a dispute
between the parties as to the interpretation of the pledge of specific
receivables and as to the principal form of the Agreement. RLC has
commenced arbitration proceedings against the Company to which the
Company has objected. The Company has pursued action against RLC in
Mahoning County Court, Ohio. In May, 1997, the parties agreed in
principle to settle the dispute and both parties withdrew their
complaints from arbitration in both Maricopa County, Arizona and
Mahoning County Court, Ohio. The final Settlement Agreement is being
completed by the parties' attorneys and is anticipated to be
formalized by July, 1997.
Eagle is also a party to an action before the National Labor Relations
Board (the "NLRB"). In early 1996, the Eagle facility was subjected to a union
vote; a successful outcome of which would cause Eagle to recognize the
International Association of Machinists, AFL-CIO (the "Union") at its facility.
The Union vote was successful. In connection with this vote, however,
approximately 47 ballots were not included in the final tally and the outcome
was disputed. Shortly after the disputed outcome, the NLRB agreed to include 9
of the disputed ballots in the final vote. The NLRB refused to include the
remaining 38 ballots alleging that these ballots were cast by supervisors and
not appropriately included for purposes of the Union vote. Eagle contested this
analysis and the 8th Circuit Court of Appeals ruled in its favor. The NLRB did
not appeal this decision and the 47 disputed ballots will be included in the
final tally. Eagle is presently awaiting the results of this recount by the
NLRB.
A former employee of the Company has filed a lawsuit against the
Company in Maricopa County (Arizona) Superior Court, seeking damages (trebled
under Arizona's wage statutes) in excess of $120,000 plus attorneys' fees. The
dispute arises out of a written employment agreement between the Company and the
former employee, pursuant to which the Company agreed to pay the former employee
a non-recoverable base draw of $36,000 per year. The former employee alleges
that the Company was also obligated to pay him a commission of 5% of his net
sales in addition to the base draw. The Company asserts that the commission is
payable against the base draw and has filed a counterclaim against the former
employee for approximately $54,000. In April, 1997, the court found in favor of
the plaintiff and against the Company in the amount of approximately $32,000
plus attorney's fees. The Company is preparing a motion for reconsideration of
the judgement.
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<PAGE> 15
The Company is not a party to any other pending or, to the knowledge of
the Company, threatened legal proceedings that it believes will have a material
impact on the Company's business.
ITEM 3. DESCRIPTION OF PROPERTY
Eagle. Eagle operates in a facility located at 375 East Ninth street,
Dubuque, Iowa, which consists of approximately 320,000 square feet. This
facility also includes the administrative offices of Eagle. Eagle also has an
interest in a facility located at 1000 Jackson Street, Dubuque, Iowa, which is
comprised of approximately 12,000 square feet. This facility houses inside sales
and purchasing offices for Eagle. The premises are leased on a month-to-month
basis. Eagle also leases distribution facilities in Bellevue, Washington and
Denver, Colorado.
Taylor. The operations of Taylor are located at 631 North First Street,
West Branch, Michigan, which is comprised of approximately 210,000 square feet.
This facility also includes the administrative offices of Taylor.
Mallyclad. The Mallyclad facility is located at 31301 Mally Road,
Madison Heights, Michigan, and is comprised of approximately 39,000 square feet
of a 53,000 square foot facility. The facility was built in 1965 and is leased
to Mallyclad by its former owner.
Forte. The Forte facility is located at 1350 Albert Street, Youngstown,
Ohio and is comprised of approximately 120,000 square feet. This facility houses
the executive offices and manufacturing facilities for Forte, Inc. and the
Company.
Management believes the Company's current manufacturing facilities are
sufficient to meet its current and projected manufacturing needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock and Preferred Stock as of
January 27, 1997, by (i) each beneficial owner of more than 5% of the Company's
Common Stock or Preferred Stock, (ii) each director of the Company, (iii) each
executive officer of the Company, and (iv) all executive officers and directors
as a group. The terms of the Series A Preferred Stock is discussed above under
"DESCRIPTION OF BUSINESS -- GENERAL" and elsewhere in this registration
statement. This information was determined in accordance with Rule 13(d)-3 under
the Securities Exchange Act of 1934, as amended, and is based upon the
information furnished by the persons listed below. Except as otherwise
indicated, each shareholder listed possesses sole voting and investing power
with respect to the shares indicated as being beneficially owned.
14
<PAGE> 16
<TABLE>
<CAPTION>
Number of
Shares Percent of
Name and Address Beneficially Held Ownership Class of Stock
- ---------------- ----------------- ---------- --------------
<S> <C> <C> <C>
Frank J. Amedia(1) 33,593,262(2) 61.2% Common
John Masternick 3,696,799(3) 7.5% Common
20 East Liberty Street
Girard, Ohio 44420
Anthony E. DePrima 3,029,692(4) 6.1% Common
c/o Forte Computer Easy, Inc.
1450 Albert Street
Youngstown, Ohio 44505
Charles E. Trebilcock(1) 508,333(5) 1.0% Common
George S. Hofmeister(1) 25,000 * Common
David McKelvey(1) 0(6) * Common
James E. Phillips(1) 0 0 Common
Joseph Dominijanni(1) 20,000 * Common
W.R. Jackson, Jr.(1) 0 0 Common
John J. Cafaro(1) 0 0 Common
AAP Holdings, Inc. 33,593,262(7,9) 61.2% Common
100 S. Broadway Avenue
Salem, Ohio 44460
All directors and executive officers as
a group (9 persons) 37,843,394(8) 67.1% Common
AAP Holdings, Inc. 1,000,000(9) 100.0% Series A
100 S. Broadway Avenue Preferred
Salem, Ohio 44460
</TABLE>
(1) c/o Forte Computer Easy, Inc., 1350 Albert Street, Youngstown, Ohio 44505.
(2) Includes 4,262,440 shares of common stock which are subject to unexercised
options that were exercisable on January 27, 1997 or within sixty days
thereafter. Also includes an additional 1,718,422 unissued shares of common
stock which the Company is obligated to issue to Mr. Amedia and 324,323
outstanding shares of common stock which Forte, Inc. holds and is obligated
to transfer to Mr. Amedia in connection with the acquisition of Forte, Inc.
in June 1994. Does not include 1,000,000 shares of common stock which are
subject to options granted subsequent to January 27, 1997.
(3) Includes 455,258 shares of common stock which are subject to unexercised
options that were exercisable on January 27, 1997 or within sixty days
thereafter.
15
<PAGE> 17
(4) Includes 1,000,000 shares of common stock which are subject to unexercised
options that were exercisable on January 27, 1997 or within sixty days
thereafter.
(5) Includes 258,333 shares of common stock owned individually and 250,000
shares held by a custodian for the benefit of an individual retirement
account of Mr. Trebilcock. In addition, LGL Company, owned by Lionel
Trebilcock, brother of Mr. Trebilcock, owns common shares. Mr. Trebilcock
does not have any beneficial interest in or control over the shares owned
by either LGL Company or Lionel Trebilcock. On October 3, 1994, Robert
Trebilcock, son of Mr. Trebilcock, purchased common shares, and Mr.
Trebilcock does not have any beneficial interest in or control over such
shares.
(6) Does not include 250,000 shares of common stock subject to options granted
subsequent to January 27, 1997.
(7) Does not include 8,798,322 shares of common stock which are subject to
unexercised options that are exercisable only upon the occurrence of
certain contingencies. Includes 27,288,077 shares of common stock owned by
Amedia, 1,718,422 shares of common stock issuable to Amedia by the Company,
324,323 shares of common stock that Forte, Inc. is obligated to transfer to
Amedia, and 4,262,440 shares of common stock subject to unexercised options
that were exercisable on January 27, 1997 or within sixty days thereafter.
In connection with the transaction between AAPH and the Company, Amedia
granted AAPH an irrevocable proxy to vote all shares of Common Stock
currently or hereafter owned by Amedia in favor of the reincorporation of
the Company from a Utah corporation to a Delaware corporation (including a
one-for-ten reverse stock split), any matters submitted to the shareholders
of the Company relating to the repayment of amounts owing to MascoTech,
Inc. from AAPH under those certain Promissory Notes dated August 29, 1996
in the original principal amount of $8,000,000, and any matters submitted
to the shareholders of the Company as to which the shares of Series A
Preferred Stock are not permitted to vote in accordance with their terms
but would have been permitted to vote had such shares of Series A Preferred
Stock been converted into common stock in accordance with their terms prior
to the record date for such vote. The proxy expires on December 31, 1997.
(8) Includes 5,717,698 shares of common stock which are subject to unexercised
options that were exercisable on January 27, 1997 or within sixty days
thereafter as described above and 2,042,745 shares of common stock the
Company and Forte, Inc. are obligated to issue to Mr. Amedia.
(9) George S. Hofmeister, Chairman of the Board of Directors of the Company, is
the controlling shareholder of the corporate parent of AAPH.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions of directors
and executive officers of the Company as of March 1, 1997. The Board of
Directors of the Company currently consists of nine (9) members. Directors hold
office until the next annual meeting of stockholders or until their successors
have been duly elected and qualified. Officers are chosen by and serve at the
discretion
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<PAGE> 18
of the Board of Directors. A summary of the background and experience of
each of these individuals is set forth after the table.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
George S. Hofmeister 45 Chairman of the Board
Frank J. Amedia 44 President, Chief Executive Officer and Director
John J. Cafaro 45 Director
Joseph Dominijanni 40 Director and Treasurer
W.R. Jackson, Jr. 63 Director
John Masternick 71 Director
James E. Phillips 40 Director
Charles E. Trebilcock 70 Director
James K. Warren 32 Director
David McKelvey 44 Secretary
</TABLE>
George S. Hofmeister has served as Chairman of the Board since December
19, 1996. Mr. Hofmeister has served as Chief Executive Officer and Chairman of
the Board of American Commercial Holdings, Inc., the parent company of AAP
Holdings, Inc. ("AAPH"), since December 15, 1995 and continues to serve in
such roles. Mr. Hofmeister also continues to serve as Vice Chairman of Tube
Products, Inc., a manufacturer of automobile exhaust systems. Mr. Hofmeister
has held that position since February 14, 1996. From June 1, 1991 until
December 15, 1995, Mr. Hofmeister served as Chief Executive Officer and
Chairman of the Board of EWI, Inc., a manufacturer of automotive metal
stampings.
Frank J. Amedia has been a director of the Company since June 8, 1994 and
now also serves as the President and Chief Executive Officer. Mr. Amedia was the
founder and served as the President of Forte, Inc. from its inception in 1989.
Prior thereto, Mr. Amedia was a manufacturer's representative in the
fenestration business.
John J. Cafaro joined the Board of Directors in December 1996. Mr. Cafaro
also serves as the Executive Vice President of The Cafaro Company, a major
domestic shopping mall developer engaged in the ownership, operation and
management of Enclosed Regional Shopping Centers. Mr. Cafaro has been a
principal officer of The Cafaro Company for the past 20 years.
Joseph Dominijanni has served as the Company's Treasurer since December 19,
1996. Mr. Dominijanni has also served as the Vice President - Finance of AAP
since its inception. Mr. Dominijanni also currently serves as Vice President -
Finance of American Commercial Holdings, Inc. ("ACH"), the parent corporation of
AAPH, and American Commercial Industries, Inc., ("ACI"), which is principally
engaged in the manufacturing of automotive components. Mr.
17
<PAGE> 19
Dominijanni joined ACH and ACI in May 1996. Mr. Dominijanni served as Vice
President - Finance of EWI, Inc. a manufacturer of automotive metal stampings,
from June 1990 until April 1996.
W.R. Jackson, Jr. has served as a director of the Company since December
19, 1996. Mr. Jackson has also served since 1982 on the Board of Directors of
Pitt-Des Moines, Inc., a steel construction, engineering and metal products
manufacturer. Mr. Jackson was also President and Treasurer of Pitt-Des Moines,
Inc. from 1983-1987.
John Masternick has been a director of the Company since June 14, 1994. Mr.
Masternick is a practicing attorney in Girard, Ohio, and is the Chairman of the
Board of Directors of Omni Manor, Inc. and Windsor House, Inc., owners and
operators of skilled nursing and extended care facilities in northeastern Ohio
and western Pennsylvania.
James E. Phillips has been a member of the Company's Board of Directors
since December 19, 1996. Mr. Phillips is also an attorney practicing with the
law firm of Arter & Hadden since 1985. Additionally, Mr. Phillips has served as
President and director of GPI Incorporated ("GPI"), Profile Extrusion Company
("PEC") and Daymonex Limited ("Daymonex") since April 1, 1994, April 1, 1994,
and May 2, 1996, respectively. GPI, PEC and Daymonex are engaged in the aluminum
extrusion industry.
Charles E. Trebilcock has been a director of the Company since June 14,
1994. Since 1964, Mr. Trebilcock has served as Chairman of Liberty Industries,
Inc., an Ohio-based manufacturer of industrial lumber packaging products and
equipment. Mr. Trebilcock is also a partner in Kings Company, which is also a
manufacturer of industrial lumber packaging products and equipment.
James K. Warren has been a director of the Company since February 27, 1997.
Mr. Warren holds the office of Vice President - Corporate Planning of American
Architectural Products, Inc., a subsidiary of Forte Computer Easy, Inc. Since
February 1, 1996, Mr. Warren has been employed by American Commercial
Industries, Inc. as its Vice President - Corporate Planning. During the same
time, Mr. Warren has also held the position of Vice President - Corporate
Planning for American Commercial Holdings, Inc. the parent company of ACI and
AAPH. Mr. Warren was previously a practicing attorney with the law firm of Arter
& Hadden.
David McKelvey joined the Company in August 1995 and has served as the
Company's Secretary since December, 1996, prior to which he served as its Vice
President. Prior to joining the Company, Mr. McKelvey was Executive Vice
President of Administration and Development for The Cafaro Company, a major
domestic shopping mall developer engaged in the ownership, operation and
management of enclosed regional shopping centers. From 1992 through 1995, Mr.
McKelvey also served as Executive Regional Director of Real Estate for The
Cafaro Company.
ITEM 6. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and all other executive officers of the Company whose total
annual salary and bonus exceeds $100,000 (the "Named Executive Officers") for
services rendered in all capacities to the Company and its subsidiaries during
the fiscal year ended December 31, 1996.
18
<PAGE> 20
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
OTHER ANNUAL RESTRICTED ALL OTHER
NAME AND YEAR ENDED SALARY BONUS COMPENSATION STOCK COMPENSATION
PRINCIPAL POSITION DECEMBER 31, ($) ($) ($)(2) AWARDS ($)
- ------------------- ------------ -------- ----- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Frank J. Amedia, 1996 168,718 0 -- -- --
President and
Chief Executive 1995 193,000 0 -- -- --
Officer(1)
1994 137,294 0 -- -- --
</TABLE>
(1) The amount of compensation paid to Mr. Amedia for 1994 consists of $47,384
paid from October 1, 1993 through June 7, 1994 (paid by Forte) and an
additional $89,910 paid to Mr. Amedia following the closing of the Forte
acquisition on June 7, 1994.
(2) Other compensation to Mr. Amedia did not exceed $50,000 or 10% of his total
annual salary and bonus during any fiscal year.
No stock options previously granted to the executive officers were
subject to repricing during the fiscal year ended December 31, 1996. The Company
does not have a long term incentive plan established for the benefit of its
executive officers or directors.
No stock options, stock appreciation rights or restricted stock awards
were granted as compensation to any officers, directors or employees of the
Company or its subsidiaries during either of the fiscal years ended December 31,
1994 or December 31, 1995. The Company entered into definitive stock option
agreements with Mr. Amedia and Mr. Masternick dated December 18, 1996,
memorializing the terms of stock options granted in 1994.
The following table sets forth certain information concerning each
exercise of stock options during the year ended December 31, 1996 by each of the
Named Executive Officers and the aggregated fiscal year-end value of the
unexercised options of each Named Executive Officer.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1996 and Option Value as of December 31, 1996
- ----------------------------------------------------------------------------------------------------
Name Shares Value Number of unexercised Value of unexercised in-the-
acquired on realized options/SARs at fiscal money options/SARs at
exercise (#) ($) year end (#) fiscal year end ($)(1)
- ---------- ------------ -------- --------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ---------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank J. Amedia 0 $0 4,262,440 0 $2,530,824 0
</TABLE>
(1) Based on average of reported bid and ask prices for the Common Stock on
December 31, 1996.
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<PAGE> 21
COMPENSATION OF DIRECTORS
No cash remuneration was paid to the directors of the Company, in their
capacities as directors, during the financial year ended December 31, 1996. The
Company reimburses directors for travel expenses incurred in connection with
attending meetings of the board of the directors.
EMPLOYMENT CONTRACTS
The Company was a party to an employment agreement with Anthony E.
DePrima who served as Executive Vice President and Director of the Company. This
agreement had a term extending through December 31, 1995 (subject to renewal).
Mr. DePrima's base compensation under this agreement was $120,000 per annum,
plus an incentive bonus equal 5% of the net profits of the Company. The Company
also provided a car for Mr. DePrima and assumed the cost of his legal
malpractice insurance. The Company exercised its option to terminate Mr.
DePrima's employment agreement effective December 31, 1995. Effective May 15,
1996, the Company retained Mr. DePrima as a business and legal consultant for a
twelve-month term. In connection therewith, the Company agreed to pay Mr.
DePrima a consulting fee of $1,500 per month.
ADF was, at the time of the sale by the Company of the common stock of
ADF, a party to an employment agreement with James W. Schmidt. Mr. Schmidt,
along with his wife, purchased ADF from the Company in August of 1996.
Accordingly, the Company has no ongoing liability to Mr. Schmidt with respect to
this employment agreement.
EMPLOYEE STOCK OPTION PLANS
1992 Incentive Stock Option Plan. In May of 1992, the Board of
Directors of the Company adopted an Employee Incentive Stock Option Plan (the
"Option Plan"). Options to purchase an aggregate of up to 5,000,000 shares of
the Company's common stock are authorized under the Option Plan. Options granted
under the Option Plan have a maximum duration of ten years from the date of
grant. In connection with the acquisition of Forte in June of 1994, Mr. Amedia
and Mr. Masternick (the former shareholders of Forte) received options to
purchase an aggregate of 4,717,698 shares of the Company's common stock at $.375
per share. The aforementioned options were issued in contemplation of the
Company effectuating a reverse stock split. Until such reverse stock split is
effectuated or until such time as additional shares of the Company's common
stock are authorized or purchased as treasury shares, these options will not be
exercisable.
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan"), which was approved by the shareholders of the Company, authorizes the
Board to grant options to Directors and employees of the Company to purchase in
the aggregate an amount of shares of Common Stock equal to 10% of the shares of
Common Stock issued and outstanding from time to time, but which aggregate
amount shall in no event exceed 10,000,000 shares of Common Stock. Directors,
officers and other employees of the Company who, in the opinion of the Board of
Directors, are responsible for the continued growth and development and the
financial success of the Company are eligible to be granted options under the
1996 Plan. Options may be nonqualified options, incentive stock options, or any
combination of the foregoing. In general, options granted under the 1996 Plan
are not transferable and expire ten (10) years after the date of grant. The per
share exercise price of an incentive stock option granted under the 1996 Plan
may not be less than
20
<PAGE> 22
the fair market value of the Common Stock on the date of grant. Incentive stock
options granted to persons who have voting control over 10% or more of the
Company's capital stock are granted at 110% of the fair market value of the
underlying shares on the date of grant and expire five years after the date of
grant. No option may be granted after December 19, 2006.
The 1996 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1996 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
As of December 31, 1996, options to purchase a total of 14,663,870
shares of the Company's common stock were outstanding, including options to
purchase 8,798,322 shares issued to AAPH on December 18, 1996, with exercise
prices ranging from $.25 to $.50 per share.
21
<PAGE> 23
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with a loan of $100,000 from Jack Martinez to the
Company, in 1988 two shareholders transferred 250,000 shares each to Mr.
Martinez as additional consideration for such loan. In November 1993, the Board
of Directors of the Company authorized the issuance of 250,000 shares of common
stock to each of those shareholders, Anthony E. DePrima and D. Jess Riddle, both
of whom were officers and directors of the Company at the time, to replace the
shares which each of them had transferred to Mr. Martinez.
Pursuant to an Agreement and Plan of Reorganization dated on May 27,
1994, which was consummated on June 8, 1994 (as amended, the "Forte Agreement"),
Forte became a wholly owned subsidiary of the Company. Pursuant to that
transaction, as modified, the Company agreed to issue to the prior Forte
shareholders a total of 32,479,290 shares of the Company's common stock,
consisting of 29,346,499 shares to Amedia, of which 27,628,077 have been issued
(with the balance of 1,718,422 to be issued by the Corporation when there are
sufficient authorized shares available), and 3,132,791 shares to Masternick. As
part of the same transaction, options were granted to Amedia and Masternick to
purchase 4,262,440 shares and 455,258 shares, respectively, of the Company's
common stock at $.375 per share. In addition, the Company realized $250,000 from
the sale of 1,000,000 Series A Preferred shares at $0.25 per share to Forte
under the Forte Agreement. Forte had assigned its rights to acquire the Series A
Preferred shares at $.37 per share to a group of accredited investors, resulting
in the investors purchasing 675,677 shares and Forte acquiring 324,323 shares.
The 324,323 shares of the Company's common stock acquired by Forte are to be
issued to Amedia as a former shareholder of Forte. These shares have not yet
been issued and are in addition to the 1,718,422 shares which, as noted above,
the Company is obligated to issue to Amedia.
In connection with the Company's acquisition of the stock of Forte in
June of 1994, the Company also entered into an agreement with D. Jess Riddle, a
former officer and director of the Company, regarding certain matters. Under
this Agreement, for a period of ninety days following the closing of the
transaction, the Company had a right of first refusal to acquire 500,000 shares
of Company common stock held by Riddle. During the same time period, the Company
also had an exclusive option to acquire 1,200,000 shares of Company common stock
held by Riddle at $.40 per share. If the option was not exercised in the first
ninety days of the option period, then the Company had an additional 270 days to
acquire such shares at $.50 per share. If the Company purchased all 1,200,000
shares from Riddle, then simultaneously with the payment for the last shares,
the Company could purchase at $.15 per share certain options previously granted
to Riddle to acquire 1,000,000 shares (the "Riddle Option"). If, within 180 days
after the closing of the transaction, the market price of the Company's common
stock exceeded $1.50 per share, then the exercise price for the Company to
acquire any unpurchased portion of the 1,200,000 Riddle shares would be adjusted
to $.75 per share. The Company also agreed to retain Riddle as a consultant for
six months following closing of the transaction at a compensation rate equal to
his base salary (with no commission override) as in effect prior to the closing.
The Company also agreed to pay Riddle $3,000 on the first day of each month
until the first 500,000 Riddle shares were sold, or the end of ninety days after
the close of the transaction, whichever occurred first. On September 15, 1994,
Riddle and Forte agreed to several modifications of this Agreement, as follows:
(i) Riddle was permitted to sell 500,000 shares at $.60 per share to four
separate investors; (ii) designees of Forte purchased 750,000 shares from Riddle
at $.40 per share; (iii) Forte, or its designees, could purchase the remaining
22
<PAGE> 24
500,000 shares owned by Riddle at $.50 per share prior to the expiration date of
the original 360 day period following closing of the Forte acquisition
transaction; and (iv) If Forte purchased all the remaining 500,000 shares owned
by Riddle within the 360 day period following closing of the Forte acquisition
transaction, the Company could repurchase the Riddle Option at $.15 per share.
Subsequent to December 31, 1995, the Company entered into an agreement
with Riddle pursuant to which the Company would purchase all remaining shares of
the Company's common stock owned by Riddle. The shares and 1,000,000 options
were acquired in exchange for (i) the discharge of approximately $180,000 in
indebtedness owing from CD World, a company owned by Riddle, to Arizona Disk
Fulfillment, Inc. ("ADF") and (ii) for a $195,000 credit in favor of Riddle or
his nominees against the retail price of goods and services of ADF.
In connection with the Forte transaction in June of 1994, the Company
entered into separate stock option agreements, dated June 7, 1994, whereby the
Company obtained the right, for a period of one (1) year from June 8, 1994, to
purchase 30% of the shares owned by certain large shareholders of the Company
for $.50 per share. Anthony E. DePrima, a director and former officer of the
Company, was a party to such an agreement with the Company. The Company did not
exercise any of these options, which expired on June 8, 1995.
In June, 1994, Forte purchased all of the issued and outstanding shares
of MoCorp Air, Inc. ("MoCorp") from Amedia for $215,000, which consisted of the
assumption by Forte of the balance due from MoCorp to Cessna Financing Company
in the amount of $147,902 and seller-provided financing for the balance of the
purchase price of $67,098. The total consideration paid by Forte represented the
estimated value of the sole asset of MoCorp, a Cessna Chieftain Piper Aircraft,
U.S. Registration No. N27363.
In connection with the Reorganization Agreement between the Company and
AAPH, the Company and its subsidiary, American Architectural Products, Inc.
("AAP"), agreed to use their best efforts to secure the release of Amedia,
Masternick and Hofmeister from all obligations as either a co-obligor or
guarantor of Company or AAP debt. See "DESCRIPTION OF BUSINESS -- Description of
Business." In addition, the Company agreed to indemnify, defend and hold
harmless Amedia, Masternick and Hofmeister against any loss, cost or expense
which any of them may incur as a result of being a co-obligor or guarantor of
any Company or AAP debt. Furthermore, the Company and AAPH agreed not to dispose
of assets securing any Company or AAP debt without the prior written consent of
any person who is a co-obligor or guarantor of such debt.
Forte performs management services for 78 rental units owned by Amedia
and his wife. Such services involve accounting, performing maintenance, making
repairs and coordinating tenant requirements. Mr. Amedia and his wife paid the
Company $52,257 for such services during the year ended December 31, 1996,
$49,804 during the year ended December 31, 1995, and $29,925 during the year
ended December 31, 1994.
Upon consummation of the transaction contemplated by the Reorganization
Agreement, the Company agreed that AAP would pay a management fee to AAPH of
$250,000 during 1997 and to reimburse AAPH and its affiliates for out-of-pocket
expenses incurred in providing services to AAP. The management fee agreement
will terminate on December 31, 1997. In addition, the Company agreed to pay AAPH
an acquisition consulting fee of one percent (1%) of the transaction
23
<PAGE> 25
price of each acquisition transaction consummated by the Company with respect to
which AAPH or its affiliates provides acquisition consulting services. For
purposes of calculating the acquisition fee, the transaction price means the
aggregate amount of consideration paid by the Company or its affiliates for the
acquisition in the form of cash, stock, stock options, warrants, debt
instruments and other assumed liabilities. The acquisition consulting fee
agreement will terminate on December 31, 1997, except with respect to
acquisition transactions already in progress at such date.
ITEM 8. DESCRIPTION OF SECURITIES.
COMMON STOCK
As of December 31, 1996, the Company's authorized common stock
consisted of 50,000,000 shares, $.01 par value per share. As of September 30,
1996, 48,610,111 shares of common stock were issued and 48,605,794 shares were
outstanding. Effective April 1, 1997, the Company reincorporated as a Delaware
corporation. In connection with this reincorporation, the number of shares of
the Company's authorized common stock, $.001 per share par value, was set at
100,000,000. Holders of the Company's common stock are entitled to one vote for
each share held of record by them of record on all matters submitted to a vote
of the shareholders. At any meeting of the Company's shareholders, the presence,
in person or by proxy, of a majority of the outstanding shares of common stock
constitutes a quorum. Unless otherwise provided by applicable law or by the
Company's articles of incorporation, the affirmative vote of a majority of the
shares of common stock represented at any such meeting constitutes an act of the
Company's shareholder. Pursuant to applicable law, the Company generally has the
right to redeem outstanding shares of common stock. No holder of the Company's
common stock has any preemptive rights to additional shares of common stock
issued in the future. Holders of common stock will be entitled to receive
dividends ratably when, as and if declared by the Board of Directors of the
Company in its discretion out of funds legally available. In the event of
liquidation, dissolution or winding up of the Company, the holders of common
stock will be entitled to share ratably in all assets of the Company remaining
after payment of liabilities and liquidation preferences to the holders of any
shares of preferred stock then outstanding. The holders of the common stock will
have no preemptive, conversion or other subscription rights and will not be
subject to further calls or assessments by the Company. There are no redemption
or sinking fund provisions applicable to the common stock. The rights of holders
of the Company's common stock will be subject to the rights of the holders of
any preferred stock which may be outstanding from time to time.
PREFERRED STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
issuance of 20,000,000 shares of serial preferred stock, par value $0.001 per
share. On December 11, 1996 the Company's Board of Directors designated a series
of preferred stock as "Series A Convertible Preferred Stock" and authorized the
issuance of 1,000,000 shares thereof. The Series A Convertible Preferred Stock
("Series A Preferred") is convertible into the aggregate number of shares of
Common Stock which would equal sixty percent of the issued and outstanding
shares of Common Stock on December 19, 1996, assuming all shares of Series A
Preferred were converted in full and all shares issuable to Amedia were issued
and outstanding. The Series A Preferred is only
24
<PAGE> 26
convertible, and is automatically converted, into Common Stock at such time as
the Company or any successor corporation has sufficient authorized shares of
common stock to permit such conversion.
The holders of Series A Preferred have the right to vote together with
the holders of common stock as a single class on all matters submitted to a vote
of the Company's shareholders, with each share of Series A Preferred having the
same number of votes as the number of share of Common Stock into which such
share of Series A Preferred would be convertible if converted in full on the
record date for such shareholder vote. No dividends may be paid with respect to
the Common Stock unless, at the same time, a dividend is paid with respect to
the Series A Preferred. Any dividends paid shall be allocated pro rata among the
holders of the Common Stock and Series A Preferred as though the Series A
Preferred had been converted in full to Common Stock on the date of such
dividend payment. Finally, the Series A Preferred has a liquidation preference
over the Common Stock in the amount of $.10 per share. Any amounts remaining to
be paid to the Company's shareholders upon liquidation shall be allocated pro
rata among the holders of Common Stock and Series A Preferred as though the
Series A Preferred had been converted in full to Common Stock upon such
liquidation.
AUDITORS, REGISTRAR AND TRANSFER AGENT
The Company's independent accountants and auditors of the books of
account for the Company are BDO Seidman LLP of Detroit, Michigan. Registrar and
Transfer Agent for the Company's common stock is American Securities Transfer &
Trust, Inc. of Denver, Colorado.
25
<PAGE> 27
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The shares of common stock of the Company are not listed on any
exchange. The Company's common stock is currently traded on the Nasdaq OTC
Electronic Bulletin Board under the symbol "AAPC". Brookstreet Securities,
Paulson Investment, Paragon Capital Corporation, and Fahnestock & Co. have
served as market makers for the Company's common stock. The following table
represents the range of high and low bid prices for each quarter commencing
January 1, 1994, through December 31, 1996. The range of bids reflects actual
transactions for the shares traded during these periods, separate and apart from
any interdealer prices, without taking into account any retail mark up, mark
down or commission.
<TABLE>
<CAPTION>
Period High Low
- ------ ---- ---
<S> <C> <C>
1994
- ----
1st quarter .50 .25
2nd quarter .50 .25
3rd quarter .875 .5625
4th quarter .625 .4025
1995
- ----
1st quarter .50 .3125
2nd quarter .5625 .3125
3rd quarter .3125 .125
4th quarter .125 .0625
1996
- ----
1st quarter .25 .125
2nd quarter .125 .03125
3rd quarter .5625 .03125
4th Quarter .6875 .4200
</TABLE>
There were approximately 464 holders of record of the shares of the
Company as of February 20, 1997. The Company has never paid any dividends on its
outstanding common shares. The current Board of Directors of the Company does
not presently intend to implement a policy respecting the payment of regular
cash dividends on the common shares and it is unlikely that
26
<PAGE> 28
dividends will be paid on the common shares in the immediate future. The Board
of Directors will review this policy from time to time depending on the
financial condition of the Company and other factors that the Board of Directors
may consider appropriate in the circumstances. In addition, the ability of the
Company to pay dividends is limited by various loan and financing agreements. As
of December 31, 1996, options to purchase a total of 14,663,870 shares of the
Company's common stock were outstanding, including options to purchase 8,798,322
shares issued to AAPH on December 18, 1996.
ITEM 2. LEGAL PROCEEDINGS
See Part I, Item 2.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On February 17, 1997, Semple & Cooper, P.L.C. ("Semple & Cooper")
resigned as the principal accountant of the Company. Semple & Cooper's reports
on the Company's financial statements for the past two years contained no
adverse opinion and no disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles. In the
Company's two most recent fiscal years and the subsequent interim period
preceding the resignation of Semple & Cooper, there were no disagreements with
Semple & Cooper on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Semple & Cooper, would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports. Semple & Cooper furnished the Company with a letter addressed to the
Securities and Exchange Commission pursuant to Item 304(a)(3) of Regulation S-K,
which was filed by the Company on Form 8-K/A dated February 21, 1997.
The board of directors of the Company approved the engagement of BDO
Seidman LLP as independent accountants and auditors of the books of account for
the Company and to advise the Company on accounting matters. The Company's
engagement of BDO Seidman LLP became effective as of February 17, 1997.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Within the past three (3) years, the Company has made sales of
securities as described below. In each instance there were no underwriters and
the securities were sold as part of private placements. To the best of the
Company's knowledge, in each instance each purchaser was an accredited investor,
as defined by Regulation D under the Securities Act of 1933, as amended, and
each purchaser was acquiring the shares for purposes of investment only.
27
<PAGE> 29
<TABLE>
<CAPTION>
Date Title Amount
- ---- ----- ------
<S> <C> <C>
March 31, 1994 Common Voting 1,900,000 to nine (9) former shareholders of
ADF in exchange for all the issued and
outstanding shares of ADF, valued at
approximately $742,000
June 8, 1994 Series A Preferred 1,000,000 sold to Forte at $.25 per share,
for which the Company received $250,000;
Forte resold 675,677 shares to seven (7)
individual investors at $.37 per share. All
of these shares were converted to Common
Stock effective as of December 8, 1994
June 8, 1994 Common Voting 32,479,290 shares to two (2) individuals in
exchange for all shares of Forte, of which
30,760,868 have been issued to the
shareholders of Forte, together with options
to acquire 4,717,698 shares at $.375 per
share. The consideration received by the
Company was valued at approximately $3.6
million.
June 14, 1994 Common Voting 337,500 shares sold to three (3) investors at
$.40 per share, for the total consideration
paid to the Company of $135,000.
July 25, 1994 Common Voting 100,000 shares at $.50 per share sold to one
(1) investor, 100,000 at $.60 per share sold
to three (3) investors, 97,272 shares at $.55
per share to one (1) investor and 30,000
shares at $.55 per share sold to one (1)
investor. The total consideration received
by the Company was $126,500 in cash and
cancellation of $53,500 in indebtedness.
October 11, 1994 Common Voting 800,002 shares issued to debenture holders
of Forte in exchange for $300,000 of
principal amount of Debentures
December 8, 1994 Common Voting 1,000,000 shares issued to Forte and seven
(7) other investors pursuant to conversion of
1,000,000 shares of the Company's Series A
Preferred Stock
December 29, 1994 Common Voting 8,333 shares sold to one investor for $5,000
and 157,660 shares issued to a creditor in
exchange for cancellation of indebtedness in
the amount of $86,713
</TABLE>
28
<PAGE> 30
<TABLE>
<S> <C> <C>
May 19, 1995 Common Voting 100,000 shares sold to one (1) investor for
$50,000, subject to "put" options which
allow the purchaser to sell the shares back to
the Company for $.625 per share on May 19,
1996 and $.75 per share on May 19, 1997
May 23, 1995 Common Voting 266,667 shares issued to debenture holders
of Forte in exchange for $100,000 principal
amount of Debentures
June 14, 1995 Common Voting 50,000 shares sold to one (1) investor for
$25,000, subject to "put" options which allow
the purchaser to sell the shares back to
the Company for $.625 per share on June 14,
1996 and $.75 per share on June 14, 1997
September 24, 1996 Common Voting 452,000 shares sold to two (2) investors for
$.25 per share. The total consideration
received by the Company was $113,000.
</TABLE>
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The certificate of incorporation of the Company does not limit the
indemnification provisions provided by Delaware law. In addition, Section 11 of
the Company's certificate of incorporation provides as follows:
11. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that nothing contained
herein shall eliminate or limit the liability of a director of the
Corporation to the extent provided by applicable laws (i) for any
breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) for
authorizing the payment of a dividend or repurchase of stock, or (iv)
for any transaction from which the director derived an improper
personal benefit. The limitation of liability provided herein shall
continue after a director has ceased to occupy such position as to acts
or omissions occurring during such director's term or terms of office.
29
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Forte Computer Easy, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Forte Computer
Easy, Inc. and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the consolidated financial position of Forte
Computer Easy, Inc. and Subsidiaries as of December 31, 1995, and the
consolidated results of its operations, changes in stockholders' equity, and
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Semple & Cooper, P.L.C.
Phoenix, Arizona
May 28, 1996
<PAGE> 32
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED) Year Ended
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Current Assets:
Cash $ 255,549 $ 143,254
Accounts receivable, less allowance for
doubtful accounts and returns of
$0 and $299,939, respectively 198,394 437,160
Inventory 1,782,078 1,666,832
Prepaid expenses 15,002 31,474
Costs and estimated earnings in
excess of billings on
uncompleted contracts 43,574 246,472
----------- -----------
Total Current Assets 2,294,597 2,525,192
----------- -----------
Property, Plant and Equipment:
Land 74,969 74,969
Buildings and improvements 2,968,203 2,957,795
Equipment, machinery and tooling 1,839,282 2,099,581
Office furniture and equipment 85,423 122,709
Vehicles 171,725 140,787
Airplane -- 207,600
----------- -----------
5,139,602 5,603,441
Less: accumulated depreciation (1,118,303) (1,196,182)
----------- -----------
4,021,299 4,407,259
----------- -----------
Other Assets:
Net assets of discontinued operations -- 74,000
Goodwill, net 318,926 360,533
Other intangible costs, net 29,598 27,170
Deposits and other 2,913 3,467
----------- -----------
351,437 465,170
----------- -----------
$ 6,667,333 $ 7,397,621
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements
F-2
<PAGE> 33
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED) Year Ended
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt $ 242,000 $ 243,438
Revolving line of credit 107,906 107,906
Amount due officer 18,013 18,013
Accounts payable 353,673 596,369
Accrued liabilities 53,455 457,170
Net liabilities of discontinued
operations 209,945 --
Accrued costs of discontinued operations -- 277,619
Billings in excess of costs
and estimated earnings on
uncompleted contracts 17,408 371,778
----------- -----------
Total Current Liabilities 1,002,400 2,072,293
----------- -----------
Long-Term Debt, Net of Current Portion 4,429,684 4,021,664
Lease Deposit 9,575 9,575
Deferred Tax Liability 92,273 160,573
----------- -----------
4,531,532 4,191,812
----------- -----------
Commitments -- --
Stockholders' Equity:
Preferred stock - $.01 par value;
20,000,000 shares authorized; no
shares issued or outstanding --
Common stock - $.01 par value;
50,000,000 shares authorized;
48,460,111 shares issued and
outstanding; 1,718,422 shares
subscribed 484,601 484,601
Paid-in capital 2,413,902 2,669,485
Common stock subscribed 79,143 79,143
Accumulated deficit (1,840,724) (1,727,609)
----------- -----------
1,136,922 1,505,620
Less: Treasury stock, 456,317
shares at cost (3,521) (372,104)
----------- -----------
1,133,401 1,133,516
----------- -----------
$ 6,667,333 $ 7,397,621
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements
F-3
<PAGE> 34
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) Years Ended
Nine Months Ended -----------
----------------- (UNAUDITED)
September 30, September 30, December 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues $ 2,635,113 $ 4,361,288 $ 5,426,260 $ 4,396,740
Cost of Revenues 2,087,032 3,541,366 4,540,722 3,469,117
------------ ------------ ------------ ------------
Gross Profit 548,081 819,922 885,538 927,623
Selling, General and
Administrative 497,196 532,900 747,659 989,607
------------ ------------ ------------ ------------
Income Loss 50,885 287,022 137,879 (61,984)
Other Income (Expense):
Gain on sale of assets 123,439 -- -- --
Other income (expense) 12,841 37,018 22,086 67,721
Rental income 71,905 67,596 86,929 68,750
Interest expense (285,646) (254,879) (352,403) (316,735)
Amortization of
intangibles (49,932) (44,699) -- (19,110)
------------ ------------ ------------ ------------
Income (Loss) from Continuing
Operations before Provision
for Income Taxes (76,508) 92,058 (105,509) (261,358)
Provision for Income Tax
Benefit (Expense) 29,000 (34,900) 54,971 6,000
------------ ------------ ------------ ------------
Loss from Continuing Operations (47,508) (57,158) (50,538) (255,358)
Discontinued Operations:
Loss from operations of
software division and disk
fulfillment division (35,454) (560,990) (1,149,518) (186,439)
Loss on disposal of disk
fulfillment division (30,153) -- (245,419) --
------------ ------------ ------------ ------------
Net Loss $ (113,115) $ (503,832) $ (1,445,475) $ (441,797)
============ ============ ============ ============
Earnings per Share
Income (loss) from
continuing operations (--) -- (--) (--)
Loss of discontinued
operations and operations
to be disposed of (--) (.01) (.03) (.01)
Income (loss) from disposal
of disk and fulfillment
division (--) -- (--) --
------------ ------------ ------------ ------------
Net Income (Loss) $ (--) $ (.01) $ (.03) $ (.01)
============ ============ ============ ============
Weighted Average Shares
Outstanding 49,813,420 49,630,799 50,000,000 32,487,493
============ ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements
F-4
<PAGE> 35
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
For The Period From December 31, 1993 Through September 30, 1996
<TABLE>
<CAPTION>
Common
Shares Paid-in Stock Treasury Accumulated Total
Preferred of Common Common Capital Subscribed Stock Deficit Equity
--------- --------- ------ ------- ---------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1993 $ -- 12,901,809 $129,018 $ 566,004 $ -- $ -- $ (408,638) $ 286,384
Sale of 1,000,000
shares of
preferred stock 10,000 -- -- 240,000 -- -- -- 250,000
Acquisition of
subsidiary
for stock -- 1,900,000 19,000 505,400 -- -- -- 524,400
Reverse merger and
conversion of S
Corporation
losses -- 30,760,868 307,609 570,342 79,143 -- 568,301 1,525,395
Sales of common
stock -- 575,833 5,757 260,743 -- -- -- 266,500
Common stock
issued in
payment of debt -- 1,321,601 13,217 526,996 -- -- -- 540,213
Preferred stock;
1,000,000 shares
converted to
common stock (10,000) 1,000,000 10,000 -- -- -- -- --
Net loss
(unaudited) -- -- -- -- -- -- (441,797) (441,797)
-------- ---------- -------- ----------- ------- --------- ----------- -----------
Balance,
December 31, 1994 -- 48,460,111 484,601 2,669,485 79,143 -- (282,134) 2,951,095
Acquisition of
456,317 shares of
treasury stock,
at cost -- -- -- -- -- (372,104) -- (372,104)
Net loss -- -- -- -- -- -- (1,445,475) (1,445,475)
-------- ---------- -------- ----------- ------- --------- ----------- -----------
Balance,
December 31, 1995 -- 48,460,111 484,601 2,669,485 79,143 (372,104) (1,727,609) 1,133,516
Sale of Treasury
Shares -- -- -- (255,583) -- 368,583 -- 113,000
Net loss
(unaudited) -- -- -- -- -- -- (113,115) (113,115)
-------- ---------- -------- ----------- ------- --------- ----------- -----------
Balance,
September 30, 1996 $ -- 48,460,111 $484,601 $ 2,413,902 $79,143 $ (3,521) $(1,840,724) $ 1,133,401
======== ========== ======== =========== ======= ========= =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements
F-5
<PAGE> 36
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
----------------- -----------
September 30, September 30, December 31, December 31,
------------- ------------- ------------ ------------
1996 1995 1995 1994
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (Loss) $(113,115) $(503,832) $(1,445,475) $ (441,797)
Adjustments to reconcile net
income (loss) to net cash
provided (used) by
operating activities:
Depreciation and
amortization 227,451 281,977 378,886 226,634
Amortization of software
development costs -- 141,247 109,899 88,509
Amortization of
intangibles 49,932 65,209 76,078 48,973
Decrease in provision for
returns and doubtful
accounts -- (71,947) (180,468) (37,250)
Gain on sale of assets (123,439) (77,601) -- (3,188)
Increase (decrease) in
provision for inventory
obsolescence -- -- (284,540) 284,540
Impairment of intangible
assets of discontinued
operations -- -- 246,083 --
Cash received from purchase
of subsidiary -- -- -- 61,413
Changes in Assets and Liabilities:
(Increase) Decrease in Assets:
Accounts receivable 174,660 591,626 1,272,684 (784,808)
Inventory (115,246) 416,386 908,156 (1,290,398)
Prepaid expenses 16,472 68,031 80,204 (25,253)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts 202,898) (44,541) 72,848 500,982
Deposits and intangibles (10,199) 5,641 5,433 12,921
Increase (Decrease) in
Liabilities:
Accounts payable (242,696) (385,410) (1,692,059) 547,967
Accrued liabilities (371,904) 25,055 (12,103) 136,373
Amount due officer -- -- 713 --
Accrued costs of
discontinued operations (207,827) -- 277,619 --
Net liabilities of
discontinued operations 303,945 -- -- --
Billings in excess of costs
and estimated earnings on
uncompleted contracts (354,370) 124,025 231,618 107,460
Net deferred tax liability (68,300) (308,700) (154,828) (10,600)
--------- --------- ----------- -----------
Net cash used by
operating activities (631,738) 327,158 (109,252) (577,792)
--------- --------- ----------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements
F-6
<PAGE> 37
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
----------------- -----------
September 30, September 30, December 31, December 31,
------------- ------------- ------------ ------------
1996 1995 1995 1994
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Investing
Activities:
Capital expenditures (97,376) (121,943) (153,285) (163,416)
Computer software
development costs -- (30,102) (30,102) (255,542)
Proceeds from the sale
of assets 250,000 50,000 686,250 --
Proceeds from trade-in of
assets -- -- -- 28,498
Acquisition of subsidiaries -- -- -- (150,000)
----------- --------- --------- -----------
Net cash used by
investing activities 152,624 (102,045) 502,863 (550,460)
----------- --------- --------- -----------
Cash Flows from Financing
Activities:
Proceeds from sale of
treasury stock $ 113,000 $ -- $ 75,000 $ 516,500
Proceeds from debt 2,942,000 337,971 337,971 2,926,835
Principal payments on
debt (2,463,591) (661,085) (785,959) (2,053,823)
Payments on amount due
officers, net -- (20,164) -- (90,442)
----------- --------- --------- -----------
Net cash provided by
financing activities 591,409 (343,278) 372,988 1,299,070
----------- --------- --------- -----------
Net Increase in Cash 112,295 (118,165) 20,623 170,818
Cash, Beginning of Year 143,254 122,631 122,631 48,187
----------- --------- --------- -----------
Cash, End of Year $ 255,549 $ 4,466 $ 143,254 $ 122,631
=========== ========= ========= ===========
</TABLE>
The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements
F-7
<PAGE> 38
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosure of Non-Cash Investing and Financing Activities
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
September 30, September 30, December 31, December 31,
------------- ------------- ------------ ------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Payment of accrued
liability with equity
in a building $ 31,811 $ -- $ -- $ --
============ ======== ========== ==========
Negotiated accounts payable
settlement reductions of
discontinued operations $ -- $ -- $ 124,744 $ --
Acquisition of subsidiaries
with common stock -- -- -- 2,170,261
Payment of accounts payable
with common stock -- -- -- 140,213
Conversion of debentures
with common stock -- -- -- 400,000
------------ -------- ---------- ----------
$ -- $ -- $ 124,744 $2,710,474
============ ======== ========== ==========
Purchase of treasury stock
through the reduction of
accounts receivable and
accrual of expenses $ -- $ -- $ 372,104 $ --
============ ======== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements
F-8
<PAGE> 39
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business:
Forte Computer Easy, Inc. is a Corporation which was duly formed and
organized under the laws of the State of Utah. Through June 8, 1994,
the acquisition date of Forte, Inc. and Arizona Disk Fulfillment, Inc.,
the Company was principally engaged in the business of software
publishing. Based upon the aforementioned acquisitions, the Company
expanded its operations through the acquired subsidiaries into
manufacturing of commercial and architectural fenestration products,
and into computer disk duplication and fulfillment services for
software publishers and technology based industries throughout the
United States.
In late 1995, the Company decided to discontinue its operations in the
software publishing and computer disk duplication and fulfillment
divisions, as disclosed in Note 11, Discontinued Operations.
Acquisition of Subsidiaries:
Effective June 8, 1994, the Company finalized the acquisition of all of
the outstanding stock of Forte, Inc. and Subsidiary, an Ohio
corporation and Arizona Disk Fulfillment, Inc., an Arizona corporation.
The acquisition of Forte, Inc. was effected through the exchange of
32,479,290 (unaudited) shares, of which 1,718,422 (unaudited) shares
are subscribed of the Company's common stock for all of the outstanding
shares of Forte, Inc. under a tax-free reorganization within the
meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986,
as amended. The acquisition was accounted for financial statement
purposes as a reverse acquisition, with Forte, Inc. as the acquiring
company.
The acquisition of Arizona Disk Fulfillment, Inc. was completed through
the payment of $150,000 (unaudited) and the issuance of 1,900,000
(unaudited) shares of the Company's common stock for all of the
outstanding shares of Arizona Disk Fulfillment, Inc. This transaction
was also completed as a tax-free reorganization.
For financial accounting purposes, the acquisitions are accounted for
as purchases in accordance with Accounting Principles Board Opinion No.
16. For tax reporting purposes, these acquisitions were structured as
tax-free reorganizations.
Principles of Consolidation:
The consolidated financial statements include the accounts of Forte
Computer Easy, Inc. and its wholly-owned subsidiaries, Forte, Inc.
F-9
<PAGE> 40
and Arizona Disk Fulfillment, Inc. All significant inter-company
balances and transactions have been eliminated in consolidation.
Pervasiveness of 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.
Unaudited Financial Statements:
The unaudited interim consolidated financial statements include all
adjustments for normal recurring accruals considered necessary to
present fairly the Company's consolidated statements for the periods
presented. Operating results for the nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996.
Revenue Recognition:
Computer Software:
The Company recognizes its computer software sales revenue in
accordance with the American Institute of Certified Public Accountants
Statement of Position 91-1 regarding software revenue recognition.
Product revenue is recognized, net of an allowance for estimated
returns, upon product shipment. The Company has established a program
which enables distributors to return products for credit against future
purchases.
Contracting Revenues:
The Company recognizes contract manufacturing income from fixed-price
and modified-fixed price contracts on the percentage-of-completion
method of accounting. Direct labor is allocated on a standard cost
basis, based on the estimated time to manufacture each type of
production unit, and manufacturing overhead is allocated by
manufacturing labor hours. Installation labor is allocated by contract
as incurred. Contract material costs are accumulated on a standard cost
basis based upon the type of production unit manufactured under
contract. The amount recorded as the percentage complete for each
individual contract is based upon the units of production method. The
cost of materials purchased but not utilized in completion of the
manufacturing process are not considered in determining the progress
toward completion.
F-10
<PAGE> 41
Incurred contract costs include all direct material utilized, labor
costs, installation costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs, factory
costs, and depreciation. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions and estimated
profitability, including those arising from final contract settlements,
may result in revisions to cost and revenue and are recognized in the
period in which the revisions are determined.
The asset, "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts" represents revenues recognized in excess of
amounts billed, and the liability "Billings in Excess of Costs and
Estimated Earnings on Uncompleted Contracts" represents revenues
recorded in excess of recognized costs and estimated earnings.
Concentrations of Risk:
The Company sells its software inventory on credit primarily to
software distributors and national retailers who market the Company's
products and other software products principally in the United States.
The majority of the Company's consolidated accounts receivable balance
as of December 31, 1995 is due from six (6) major customers.
In addition, the Company currently has two (2) major contracts in
process from its fenestration operations, which together represent
approximately fifty-four percent (54%) of the total contracts in
process at December 31, 1995. These two contracts were substantially
completed at December 31, 1995.
Accounts Receivable:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense
as a percentage of accounts receivable, based on a review of the
individual accounts outstanding and the Company's prior history of
uncollectible accounts receivable.
Inventory:
Inventories are stated at the lower of cost or market. Cost is
determined on the weighted average basis for software product
inventory, and the first-in, first-out basis for all other inventory.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
the related assets for financial reporting purposes and on an
accelerated method for tax purposes. The estimated useful lives are as
follows:
F-11
<PAGE> 42
<TABLE>
<S> <C>
Buildings 31.5 - 40 years
Leasehold improvements 5 - 7 years
Office furniture and
fixtures 7 - 10 years
Equipment 5 - 15 years
</TABLE>
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to operations as
incurred. Betterments or renewals are capitalized when incurred. For the
nine months ended September 30, 1996 and 1995, depreciation expense was
$227,451 and $281,977 (unaudited), respectively. For the years ended
December 31, 1995 and 1994, depreciation expense was $378,886 and
$226,634, respectively.
Capitalized Software Development Costs:
The Company capitalizes software development costs in accordance with
Financial Accounting Standards Board Statement No. 86. Software
development costs not qualifying for capitalization are expensed as
research and development costs, as incurred. These costs totaled
approximately $175,708 and $238,000 (unaudited) for the years ended
December 31, 1995 and 1994, respectively.
Capitalized costs are amortized on a product-by-product basis using
straight-line amortization with useful lives of 3 to 5 years. The Company
evaluates the estimated net realizable value of each software product at
each balance sheet date and records write-downs to net realizable value
for any products for which net book value is in excess of net realizable
value. During the years ended December 31, 1995 and 1994, amortization of
capitalized software development costs charged to cost of revenues
totaled $109,899 and $88,509 (unaudited), respectively. Based upon
management's decision to phase-out the software division in 1995, all
capitalized software development costs were written off.
Goodwill:
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the date of acquisition and is being
amortized on the straight-line method over 8 to 25 years. Amortization
expense charged to operations for the nine months ended September 30,
1996 and 1995 was $41,602 and $39,447 (unaudited), respectively.
Amortization expense charged to operations for the years ended December
31, 1995 and 1994 amount to $47,567 and $26,413 (unaudited),
respectively.The Company evaluates the estimated net realizable value of
its goodwill at each balance sheet date, and records writedowns if the
carrying value exceeds the expected future net operating cash flows from
the related operations. If the expected future net operating cash flows
are less than the carrying value, the Company recognizes an impairment
loss equal to the amount by which the carrying value exceeds the
discounted expected future net operating cash flows from the related
operations. During the current year the Company recognized an impairment
of intangible assets of discontinued operations in the approximate amount
of $246,083.
F-12
<PAGE> 43
Other Intangible Costs:
Other intangible costs are comprised primarily of deferred loan costs,
which are amortized over the term of the related loan on a straight-line
basis. For the nine months ended September 30, 1996 and 1995,
amortization of other intangible costs was $8,325 and $5,252,
respectively. Amortization for the years ended December 31, 1995 and 1994
(unaudited) amounted to $28,511 and $22,560, respectively.
Income Taxes:
Effective January 1, 1993, the Company implemented Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities
are computed annually for differences between the financial statement and
tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income, and tax net operating loss and credit carryforwards.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change in
deferred tax assets and liabilities during the period.
2. SEGMENT REPORTING:
The following table presents the total assets of Forte Computer Easy,
Inc. and Subsidiaries at December 31, 1995 and 1994, and the net revenues
and net loss of Forte Computer Easy, Inc. and Subsidiaries for the year
ended December 31, 1995. In addition, the net revenues and loss of Forte,
Inc. for the year ended December 31, 1994 and the net revenues and income
(loss) of Computer Easy International, Inc. and Arizona Disk Fulfillment,
Inc. for the period June 9, 1994 through December 31, 1994, are as
follows:
F-13
<PAGE> 44
<TABLE>
<CAPTION>
(UNAUDITED)
1995 1994
---- ----
<S> <C> <C>
Total Assets:
Forte Computer Easy, Inc. $ 150,198 $ 1,926,308
Forte, Inc. 7,260,315 8,887,878
Arizona Disk Fulfillment,
Inc (12,892) 625,954
----------- ------------
Total $ 7,397,621 $ 11,440,140
=========== ============
Net Revenues:
Forte Computer Easy, Inc. $ 1,010,242 $ 1,574,357
Forte, Inc. 5,426,260 4,396,740
Arizona Disk Fulfillment,
Inc 1,541,650 429,859
Less: amount included in
discontinued
operations (2,551,892) (2,004,216)
----------- ------------
Total $ 5,426,260 $ 4,396,740
=========== ============
Net Loss:
Forte Computer Easy, Inc. $(1,026,029) $ (239,780)
Forte, Inc. (50,538) (255,358)
Arizona Disk Fulfillment,
Inc (368,908) 53,341
----------- ------------
Total $(1,445,475) $ (441,797)
=========== ============
</TABLE>
CONTRACTS IN PROGRESS:
Costs and estimated earnings in excess of billings and billings in excess of
costs and estimated earnings on uncompleted contracts consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Costs incurred on uncompleted
contracts $ 882,983 $ 4,466,544
Profit earned to date 415,165 1,623,862
----------- -----------
1,298,148 6,090,406
Less: billings to date (1,271,982) (6,215,712)
----------- -----------
$ 26,166 $ (125,306)
=========== ===========
</TABLE>
F-14
<PAGE> 45
Presentation in the accompanying balance sheets, is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 43,574 $ 246,472
Billings in excess of costs
and estimated earnings on
uncompleted contracts (17,408) (371,778)
--------- ---------
$ 26,166 $(125,306)
========= =========
</TABLE>
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 1,669,078 $ 1,761,561
Finished goods 185,000 110,188
Work in process 38,000 44,185
Packaging materials and
components -- 10,898
Less: amounts included in net
assets of discontinued
operations (110,000) (260,000)
----------- -----------
$ 1,782,078 $ 1,666,832
=========== ===========
</TABLE>
5. REVOLVING CREDIT LINE:
The Company had an operating agreement for a line of credit under which
it could borrow $300,000 or 80% of the eligible accounts receivable of
Computer Easy International, Inc. at a monthly rate of 3%. The credit
line was terminated on August 31, 1995, as the Company is in default.
6. RELATED PARTY TRANSACTIONS:
The Company sells fenestration products to a contractor, whose owner is
related to an officer of the Company. Revenue for the nine months ended
September 30, 1996 was $0, and sales for the years ended December 31,
1995 and 1994 totaled $43,459 and $82,537 (unaudited), respectively. No
amount is owed the Company at September 30, 1996 and December 31, 1995.
The Company performs management services for various rental properties
owned by an officer of the Company. Management services billed during the
nine months ended September 30, 1996, and for the years ended December
31, 1995 and 1994 amounted to $37,724, $49,804, and $29,925 (unaudited),
respectively. Amounts included in accounts receivable at September 30,
1996 and December 31, 1995
F-15
<PAGE> 46
totaled $44,802 and $14,109, respectively, and in the opinion of
management, are expected to be collected.
7. INCOME TAXES:
For financial accounting and tax reporting purposes, the Company reports
income and expenses on the accrual basis of accounting. For the year
ended December 31, 1995, the Company made provisions for net federal and
state income tax benefits in the approximate amounts of $69,100 and
$155,000, respectively. This tax benefit was due to the net increase of
the deferred tax asset arising from the net operating loss carryforwards.
For the year ended December 31, 1994, the Company made provision for net
federal and state income tax expense in the amount of $14,600. This
expense was due to the net reduction of the deferred tax asset arising
from the net operating loss carryforwards, for which a valuation
allowance was recorded.
At December 31, 1995, there are federal and state net operating loss
carryforwards available to offset future federal and state taxable
income, expiring as follows:
<TABLE>
<CAPTION>
Federal Net State Net
Expiration Operating Loss Expiration Operating Loss
December 31, Carryforward December 31, Carryforward
------------ -------------- ------------ ------------
<S> <C> <C> <C>
2002 $ 86,238 1997 $ 74,152
2005 74,252 1998 608,297
2008 608,297 1999 564,044
2009 564,044 2000 1,014,207
2010 1,014,207 -- --
---------- ----------
$2,347,038 $2,260,700
========== ==========
</TABLE>
Federal net operating losses are further limited due to ownership changes
to approximately $300,000 per year.
Deferred income taxes arise from timing differences resulting from
revenues and costs reported for financial accounting and tax reporting
purposes in different periods. Deferred income taxes represent the tax
liability or asset based on different depreciation methods used for
financial accounting and tax reporting purposes, research and development
costs which are expended as period costs for tax reporting purposes,
contract accounting under the percentage of completion method for
financial reporting and completed contract basis for tax purposes, and
differences in asset basis for financial reporting and tax purposes due
to the purchase method of accounting used in the business acquisitions.
F-16
<PAGE> 47
Amounts for components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Asset:
Estimated benefit from federal
and state net operating loss
carryforwards $ 758,800 $ 704,111
Deferred Income Taxes Payable:
Depreciation differences (521,000) (510,450)
Contract accounting
differences (330,073) (354,234)
--------- ---------
Net deferred tax liability $ (92,273) $(160,573)
========= =========
</TABLE>
8. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Borrowings under loan agreements
with a bank $ 3,254,707 $ 2,796,125
Lines of credit with a bank 250,000 495,000
Borrowings under other loan
agreements 1,166,977 1,050,977
----------- -----------
4,671,684 4,342,102
Less: amount included in net
assets of discontinued
operations -- (77,000)
----------- -----------
Total long-term debt 4,671,684 4,265,102
Less: current portion of
long-term debt (242,000) (243,438)
----------- -----------
Long-term debt $ 4,429,684 $ 4,021,664
=========== ===========
</TABLE>
Borrowings under loan agreements and lines of credit with a bank are
collateralized by equipment, inventory, accounts receivable, assignment
of a $400,000 life insurance policy on an officer of the Company, and an
assignment of rents on an operating lease. The loan agreements have
interest rates varying from 8.25% per annum to variable rates of prime
plus 2.25% per annum. The prime rate at September 30, 1996 and December
31, 1995 was 8.25% and 8.5%, respectively.
Borrowings under other loan agreements are collateralized by equipment
and real estate and have interest rates varying from 3% to 10% per annum.
F-17
<PAGE> 48
On January 30, 1996, Forte, Inc. restructured its long-term debt with the
Second National Bank of Warren, Ohio. The debt restructure consolidated
nine (9) existing loans, and provides for a fifteen (15) year
amortization, with a five (5) year call. The gross proceeds of the debt
restructure amounted to $2,675,000, with an interest rate of two (2)
points over the bank's prime rate. The initial rate of interest is ten
and one-half percent (10.5%). The loan agreement calls for monthly
payments, including principal and interest, of $25,000 for the period
February, 1996 through July, 1996, and thereafter monthly payments,
including principal and interest, of $30,000. The note is secured by a
first mortgage assignment of rents on property leased by the Company; a
blanket assignment of life insurance on Frank J. Amedia, Chief Executive
Officer, in the amount of $1,650,000, and all inventory, accounts,
contract rights, equipment, fixtures and general intangibles.
At December 31, 1995, the approximate aggregate maturities of debt for
the succeeding five years, are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, Amount
------------ ------
<S> <C>
1996 $ 243,438
1997 266,386
1998 259,495
1999 279,841
2000 293,443
Subsequent 2,922,499
----------
$4,265,102
==========
</TABLE>
10. INCENTIVE STOCK OPTION PLANS AND STOCK OPTIONS:
In May, 1992, the Board of Directors adopted an Employee Incentive Stock
Option Plan which was approved by the shareholders in May, 1992. The plan
calls for reservation of 5,000,000 shares of the Company's common stock.
The plan also provides for the issuance of options to purchase the
Company's common stock at 100% of the fair market value at the date of
grant. Options have a maximum duration of ten (10) years after the date
of grant.
As part of the Plan and Agreement of Reorganization with Forte, Inc.,
stock options were granted to the former stockholders of Forte, Inc. for
4,717,698 shares at $.375 per share and are exercisable through June 8,
1998. The Plan also provides for the Company to enter into separate Stock
Option Agreements dated June 7, 1994, whereby the Company has the right,
for a period of one (1) year from June 8, 1994, to purchase 30% of the
shares owned by certain major stockholders at the rate of $.50 per share.
The number of shares which can be redeemed by the Company under this
agreement is 1,940,202. The Company did not exercise any of its options
to repurchase any of the returned shares.
F-18
<PAGE> 49
Outstanding options would be adjusted in the event of any forward or
reverse stock split or similar activity.
Stock option activity is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended
September 30, December 31,
1996 1995 1994 Option Price
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Outstanding,
beginning
of period 5,815,548 6,815,548 2,097,850 $.25 - $ .50
Granted during
the period -- -- 4,717,698 .375
Exercised during
the period -- -- -- .00
Cancelled during
the period -- 1,000,000 -- .00
--------- --------- --------- ------------
5,815,548 5,815,548 6,815,548 $.25 - $ .50
========= ========= ========= ============
</TABLE>
In addition, during the year ended December 31, 1995, the Company sold
150,000 shares of common stock, at $.50 per share, subject to put
options. The put options provide the purchasers the right to put the
shares to the Company one year after the date of issuance of the common
stock at $.625 per share or two years after the date of issuance at
$.75 per share. As of the balance sheet date at September 30, 1996 and
December 31, 1995, an accrual for the put option, in the amount of
$75,000, has been made.
11. DISCONTINUED OPERATIONS:
Software Division
On September 6, 1995, Forte Computer Easy, Inc. sold its rights to the
Floor Plan Plus(TM) and 3D Design(TM) lines for $691,889, together with
a $200,000 contingent payment based upon future performance goals of
the acquiring company, International Microcomputer Software, Inc. These
product lines represent a significant portion of the historical sales
of the software operating division. The Company determined that it was
in the best long-range interest of the Company to phase-out the
software division. Proceeds from the sale were utilized for debt
reduction of this division.
The software division's operating loss for the year ended December 31,
1995 of $1,026,029 (net of income tax benefit of $16,500), is shown
separately in the accompanying statements of operations for the nine
months ended September 30, 1996 and 1995, and for the year ended
December 31, 1995.
F-19
<PAGE> 50
A provision of $50,000 for expected operating losses during the final
phase-out period in 1996 has been made at December 31, 1995.
Net revenue for the software division for 1995 was $1,010,242. This
revenue is not included in net revenue in the accompanying statement of
operations.
Arizona Disk Fulfillment, Inc.
The disk and fulfillment division operating loss for the year ended
December 31, 1995 of $368,908 (net of income tax benefit of $18,500),
is shown separately in the accompanying statement of operations.
Estimated losses on the disposal of the disk and fulfillment division
of $227,619, which includes $80,000 for expected operating losses for
the period January 1, 1996 to August 31, 1996, have been provided for
at December 31, 1995.
Net revenue for the disk fulfillment division for 1995 was $1,541,650.
This revenue is not included in net revenue in the accompanying
statement of operations.
On August 5, 1996, the Company entered into a Stock Purchase Agreement
pursuant to which it agreed to sell one hundred percent (100%) of the
issued and outstanding common stock of Arizona Disk Fulfillment, Inc.
to Beverly and James W. Schmidt. Mr. Schmidt has served as president of
Arizona Disk Fulfillment, Inc. since 1993. The sale of Arizona Disk
Fulfillment, Inc. by the Company was fully consummated in August, 1996.
12. ASSETS AND LIABILITIES TO BE DISPOSED OF:
Assets and liabilities of the following operating divisions to be
disposed of consisted of the following at September 30, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
September 30, 1996:
------------------
<S> <C>
Software Division:
Inventory $110,000
Miscellaneous assets 9,080
--------
Total assets 119,080
--------
Accounts payable 85,989
Accrued liabilities 243,036
--------
329,025
--------
Net liabilities of discontinued operations $209,945
========
</TABLE>
F-20
<PAGE> 51
<TABLE>
<CAPTION>
December 31, 1995:
-----------------
Disk and
Software Fulfillment
Division Division Total
-------- -------- -----
<S> <C> <C> <C>
Accounts receivable $ -- $ 60,000 $ 60,000
Inventory -- 260,000 260,000
Equipment and property 110,000 262,000 372,000
Deposits -- 16,000 16,000
-------- -------- --------
Total assets 110,000 598,000 708,000
-------- -------- --------
Current portion of
long-term debt 70,000 -- 70,000
Accounts payable and current
accrued liabilities -- 557,000 557,000
Long-term debt -- 7,000 7,000
-------- -------- --------
70,000 564,000 634,000
-------- -------- --------
Net Assets to be
Disposed of $ 40,000 $ 34,000 $ 74,000
======== ======== ========
</TABLE>
Assets and liabilities are shown at their expected net realizable value,
and have been separately classified in the accompanying balance sheets.
13. LITIGATION:
The Company is a defendant in a lawsuit filed by an individual for
non-compliance and other claims related to an employment agreement. The
lawsuit seeks actual and punitive damages in excess of $129,000. The
Company's legal counsel believes that the lawsuit is without merit.
Therefore, as of September 30, 1996 and December 31, 1995, no accrual has
been made for a loss contingency related to the subject litigation claim.
Management intends to vigorously defend its position.
The Company is a defendant in a lawsuit filed by a corporation for claims
relating to a contractual agreement. The plaintiff has proposed a
settlement in the amount of $11,000. Counsel anticipates this matter to
be resolved in the near future.
14. SUBSEQUENT EVENT:
Subsequent to the balance sheet date of December 31, 1995, the Company
entered into an agreement with a former shareholder to purchase all of
the outstanding common stock owned by the shareholder. The common stock
was acquired in exchange for the relief of debt owing the Company and
discounted future services to be provided by the Company, in the
aggregate amount of $372,000. The financial statements at December 31,
1995 give retroactive
F-21
<PAGE> 52
effect to this transaction. In addition, the Company believes that it has
a claim for additional shares of common stock controlled by the
shareholder, in the amount of approximately 260,000 shares.
F-22
<PAGE> 53
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation A
3.2 Bylaws A
4.1 Specimen Stock Certificate ***
10.1 1992 Incentive Stock Option Plan **
10.2 Purchase Agreement dated November 3, 1995 among B
Forte Computer Easy, Inc., International
Microcomputer Software, Inc. and Computer Easy
International, Inc.
10.3 Stock Purchase Agreement dated August 5, 1996 C
among Forte Computer Easy, Inc., James W. Schmidt
and Beverly Schmidt, and Arizona Disk Fulfillment,
Inc.
10.4 Addendum to Stock Purchase Agreement dated C
August 20, 1996 among Forte Computer Easy, Inc.,
James W. Schmidt and Beverly Schmidt, and Arizona
Disk Fulfillment, Inc.
10.5 Agreement and Plan of Reorganization dated October D
25, 1996 between Forte Computer Easy, Inc. and
AAP Holdings, Inc.
10.6 1996 Stock Option Plan A
10.7 Irrevocable Proxy of Frank J. Amedia in favor of ***
AAP Holdings, Inc.
11 Statement re: computation of per share earnings **
21 Subsidiaries of the Registrant **
23 Consent of Semple & Cooper, P.L.C. **
27 Financial Data Schedule **
</TABLE>
- --------------------
* Filed herewith.
** Previously filed as an exhibit to the Registrant's Amendment No. 1 to Form
10-SB Registration Statement filed with the Commission on November 22, 1996.
*** Previously filed as an exhibit to the Registrant's Amendment No. 2 to Form
10-SB Registration Statement filed with the Commision on April 17, 1997.
A Incorporated by reference to Registrant's Definitive Information Statement
relating to special shareholders meeting held on April 1, 1997.
B Incorporated by reference to Registrant's Amendment No. 1 to Current Report
on Form 8-K/A dated August 30, 1995
<PAGE> 54
C Incorporated by reference to Registrant's Current Report on Form 8-K dated
August 5, 1996
D Incorporated by reference to Registrant's Current Report on Form 8-K dated
October 25, 1996
<PAGE> 55
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Amendment No. 2 to Form 10-SB Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN ARCHITECTURAL PRODUCTS
CORPORATION (formerly known as
Forte Computer Easy, Inc.)
Date: June 23, 1997 By /s/ Frank J. Amedia
----------------------
Frank J. Amedia,
President, Chief Executive Officer
