<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K/A
Amendment No.1 to
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 10, 1997
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-25634 87-0365268
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
755 Boardman-Canfield Road, Building G West, Boardman, Ohio 44512
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 965-9910
Not applicable.
(Former name or former address, if changed since last report.)
<PAGE> 2
THE CURRENT REPORT ON FORM 8-K OF THE REGISTRANT PREVIOUSLY FILED ON DECEMBER
23, 1997 IS HEREBY AMENDED TO ADD THERETO THE FOLLOWING FINANCIAL STATEMENTS AND
EXHIBITS:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements relating to the transactions consummated on
December 10, 1997 pursuant to which American Architectural Products Corporation
acquired all of the issued and outstanding common and preferred stock of
Binnings Building Products, Inc. and substantially all of the assets of Danvid
Company, Inc. and Danvid Window Company, American Glassmith, Inc. and Modern
Window Corporation are filed herewith:
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
1. Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 1997 and Notes thereto
2. Unaudited Pro Forma Consolidated Statement of Operations for
the Nine Months Ended September 30, 1997 and Notes thereto
3. Unaudited Pro Forma Consolidated Statement of Operations for
the Year Ended December 31, 1996 and Notes thereto
BINNINGS BUILDING PRODUCTS, INC.
1. Report of Independent Public Accountants
2. Balance Sheets at December 31, 1995 and 1996, and September
30, 1997 (unaudited)
3. Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996 and for the Nine Months Ended September
30, 1997 (unaudited)
4. Statements of Stockholders' Deficit for the Years Ended
December 31, 1994, 1995 and 1996, and for the Nine Months
Ended September 30, 1997 (unaudited)
5. Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and for the Nine Months Ended September
30, 1997 (unaudited)
6. Notes to Financial Statements
<PAGE> 3
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
1. Report of Independent Public Accountants
2. Combined Balance Sheets at July 28, 1996 and July 27, 1997
3. Combined Statements of Income and Retained Earnings for the
Years Ended July 28, 1996 and July 27, 1997
4. Combined Statements of Cash Flows for the Years Ended July
28, 1996 and July 27, 1997
5. Notes to Combined Financial Statements
6. Independent Auditor's Report
7. Combined Balance Sheet at July 31, 1995
8. Combined Statement of Operations and Retained Earnings for
the Year Ended July 31, 1995
9. Combined Statement of Cash Flows for the Year Ended July 31,
1995
10. Notes to Combined Financial Statements
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunder duly authorized.
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
Date: January 14, 1998 /s/ Frank J. Amedia
-----------------------------------
Frank J. Amedia
President & Chief Executive Officer
<PAGE> 4
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Eagle & Taylor Company ("ETC") was incorporated on June 19, 1996 and had no
significant operations or assets until it acquired two companies, Eagle Window
and Door, Inc. ("Eagle") and Taylor Building Products Company ("Taylor"), from
MascoTech, Inc. on August 29, 1996. The acquisition of Eagle and Taylor was
accounted for as a purchase, with the assets acquired and liabilities assumed
recorded at estimated fair market values and the results of the Eagle and Taylor
operations included in ETC's consolidated financial statements from the date of
acquisition.
ETC's ultimate controlling stockholder acquired 100% ownership of two other
companies, Mallyclad Corp. ("Mallyclad") and Vyn-L Corporation ("Vyn-L"), on
June 25, 1996. On December 18, 1996, Mallyclad and Vyn-L collectively were
merged into ETC concurrently with the FCEI combination described below. The
merger was accounted for at historic cost in a manner similar to a pooling of
interests. The operating results of Mallyclad and Vyn-L from the date of
acquisition by ETC's ultimate controlling stockholder are included in the
consolidated financial statements. Eagle, Taylor, Mallyclad and Vyn-L, are
considered the predecessors of ETC for financial reporting purposes.
On December 18, 1996, ETC acquired and combined with Forte Computer Easy,
Inc. ("FCEI"). Subsequent to this transaction, the combined entity changed its
name to American Architectural Products Corporation ("AAPC"). On March 14, 1997,
AAPC acquired the stock of Western Insulated Glass, Co. ("Western"), and on July
18, 1997, AAPC acquired the stock of Thermetic Glass, Inc. ("Thermetic"). The
acquisitions were accounted for as purchases, with the purchase prices
allocated among the assets acquired and liabilities assumed based on their
estimated fair market values, and the results of their operations were included
in the consolidated financial statements from the respective dates of
acquisition.
On December 10, 1997, concurrently with the offering of $125,000,000 of
11 3/4% senior notes due 2007 (the "Offering"), AAPC consummated the
acquisitions of Binnings Building Products, Inc. ("Binnings"), Danvid Company,
Inc. and Danvid Window Company (collectively, "Danvid"), American Glassmith,
Inc. ("American Glassmith") and Modern Window Corporation ("Modern"),
collectively, the "Acquisitions." The Acquisitions will be accounted for as
purchases, with the purchase prices allocated among the assets acquired and
liabilities assumed based on their estimated fair market values. The results of
operations of the Acquisitions will be included in the consolidated financial
statements of AAPC from the date of the Acquisitions.
The accompanying unaudited pro forma consolidated financial statements
illustrate the effects of the ETC acquisition of Eagle and Taylor; the
acquisition of Mallyclad and Vyn-L by the ETC ultimate controlling stockholder
and the subsequent merger of Mallyclad and Vyn-L into ETC; the ETC acquisition
of FCEI; the AAPC acquisitions of Western and Thermetic; and the Offering and
the Acquisitions (collectively, the "Transactions"). In the unaudited pro forma
consolidated financial statements, the historical operating results of Eagle and
Taylor, Mallyclad and Vyn-L, for the periods prior to inclusion in the AAPC
consolidated financial statements are presented as "Predecessors"; the
historical operating results of FCEI, Western and Thermetic for the periods
prior to their inclusion in the AAPC consolidated financial statements are
presented as "Completed Acquisitions"; and the historical balance sheets and
results of operations of Binnings, Danvid, American Glassmith and Modern for the
periods presented are included as "Acquisitions" (due to the significance of
Binnings and Danvid, their historical financial data is presented separately
under this heading).
The unaudited pro forma consolidated balance sheet as of September 30, 1997
gives effect to the Acquisitions as though each transaction had occurred on
September 30, 1997 and is based on the historical consolidated balance sheets of
AAPC and the Acquisitions at that date. The unaudited pro forma consolidated
statement of operations for the nine months ended September 30, 1997 is based on
the historical statement of operations of AAPC for that period, of the Completed
Acquisitions for the periods in 1997 prior to the dates such acquisitions were
consummated and of the Acquisitions for the period from January 1, 1997 through
September 30, 1997. The unaudited pro forma consolidated statement of operations
for the year ended December 31, 1996 is based on the historical statements of
operations of the Predecessors for the periods in 1996 prior to their
acquisitions, of AAPC for the period from June 19, 1996 to December 31, 1996, of
the Completed Acquisitions for the periods in 1996 prior to the dates such
acquisitions were consummated and of the Acquisitions for the year ended
December 31, 1996. The unaudited pro forma consolidated statements of operations
give effect to the Transactions as though each transaction had occurred on
January 1, 1996.
<PAGE> 5
The unaudited pro forma consolidated financial statements reflect pro forma
adjustments that are based upon available information and assumptions that the
Company believes are reasonable and do not necessarily reflect the results of
operations or the financial position of the Company that actually would have
resulted had the Completed Acquisitions and Acquisitions to which pro forma
effect is given been consummated as of the date or for the periods indicated. In
preparing the unaudited pro forma consolidated financial statements, the Company
believes it has utilized reasonable methods to conform the basis of
presentation. The pro forma adjustments reflect those adjustments appropriate to
present pro forma financial statements, pursuant to regulations prescribed by
the Commission.
The unaudited pro forma consolidated financial statements may not be
indicative of the actual results of the Transactions. In particular, the
unaudited pro forma consolidated financial statements are based on management's
current estimate of the allocations of purchase price, the actual allocation of
which may differ. Further, the unaudited pro forma consolidated financial
statements do not reflect certain changes in the operating cost structure of the
companies acquired that are contemplated in connection with the Transactions.
The accompanying unaudited pro forma consolidated financial statements
should be read in conjunction with the historical financial statements of AAPC,
Eagle and Taylor, Mallyclad and Vyn-L, FCEI, Western, Thermetic, Binnings and
Danvid. See "Note 2 -- Recapitalization and Acquisitions" to the AAPC
consolidated financial statements regarding the Company's historical acquisition
transactions.
<PAGE> 6
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUISITIONS PRO FORMA PRO FORMA
-------------------------- OFFERING ACQUISITION AAPC PRO
AAPC BINNINGS DANVID OTHERS ADJUSTMENTS(1) ADJUSTMENTS(2) FORMA
------- -------- ------ ------ -------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash..................... $ 1,267 $ 1,074 $2,574 $ (18) $ 86,216 $(52,341) $ 38,772
Accounts receivable,
net.................... 10,389 5,101 4,554 1,360 0 0 21,404
Inventories.............. 13,526 5,351 1,152 1,332 0 679 22,040
Prepaid expenses and
other current assets... 1,446 585 108 55 0 (35) 2,159
------- ------- ------ ------ -------- -------- --------
Total current
assets....... 26,628 12,111 8,388 2,729 86,216 (51,697) 84,375
------- ------- ------ ------ -------- -------- --------
Property and equipment,
net.................... 18,902 9,930 443 2,141 0 9,139 40,555
Cost in excess of net
assets acquired, net... 10,594 0 0 0 0 20,525 31,119
Other.................... 925 448 289 85 5,555 (137) 7,165
------- ------- ------ ------ -------- -------- --------
Total assets... $57,049 $ 22,489 $9,120 $4,955 $ 91,771 $(22,170) $163,214
======= ======= ====== ====== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Revolving lines of
credit................. $ 9,932 $ 0 $ 0 $3,047 $ (9,932) $ (3,047) $ 0
Accounts payable......... 7,624 1,557 2,258 1,040 0 0 12,479
Accrued Expenses......... 3,982 2,104 2,016 547 0 881 9,530
Accrued warranty
obligations -- current
portion................ 1,500 0 73 0 0 0 1,573
Long term debt -- current
portion................ 2,857 14,269 39 0 (2,857) (14,308) 0
Capital lease
obligations -- current
portion................ 500 70 0 0 0 0 570
------- ------- ------ ------ -------- -------- --------
Total current
liabilities... 26,395 18,000 4,386 4,634 (12,789) (16,474) 24,152
------- ------- ------ ------ -------- -------- --------
Senior Notes, due 2007... 0 0 0 0 125,000 0 125,000
Long term debt, less
current portion........ 11,135 6,651 80 900 (11,135) (7,631) 0
Subordinated debt........ 8,000 0 0 0 (8,000) 0 0
Capital lease
obligations, less
current portion........ 953 52 0 45 0 0 1,050
Accrued warranty
obligations, less
current portion........ 2,871 0 440 0 0 0 3,311
Other.................... 1,481 218 0 0 0 2,151 3,850
------- ------- ------ ------ -------- -------- --------
Total
liabilities... 50,835 24,921 4,906 5,579 93,076 (21,954) 157,363
Stockholder's equity..... 6,214 (2,432) 4,214 (624) (1,305) (216) 5,851
------- ------- ------ ------ -------- -------- --------
Total liabilities and
stockholders' equity... $57,049 $ 22,489 $9,120 $4,955 $ 91,771 $(22,170) $163,214
======= ======= ====== ====== ======== ======== ========
</TABLE>
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(1) Represents the receipt of proceeds from the Offering net of fees and
expenses relating to the Offering and the use of proceeds from the Offering
to retire debt of the Company existing at the time of the Offering including
a prepayment penalty as follows:
<TABLE>
<S> <C>
Proceeds from Senior Notes, 11 3/4%, due 2007..................... $125,000
Retirement of Company's existing debt:
Revolving lines of credit....................................... (9,932)
Term debt....................................................... (13,992)
Subordinated debt............................................... (8,000)
Prepayment penalty................................................ (360)
Fees and expenses relating to the Offering........................ (6,500)
--------
Cash.............................................................. $ 86,216
========
</TABLE>
Fees and expenses relating to the Offering include special bonuses of $425
to employees of the Company which are to be recorded as a charge to the
Company's statement of operations and reflected as a reduction in equity in
the accompanying unaudited pro forma balance sheet. The remainder of the
fees and expenses will be recorded as deferred financing costs and will be
amortized to interest expense over the 10-year term of the underlying Notes.
In connection with the Offering, the Company will record an extraordinary
charge -- loss on retirement of debt -- consisting of the write-off of
deferred financing costs of $520 relating to the debt of the Company retired
with the proceeds of the Offering and the above-noted $360 prepayment
penalty. This extraordinary charge is reflected as a reduction in equity in
the accompanying unaudited pro forma balance sheet.
(2) To reflect the acquisitions of Binnings, Danvid, American Glassmith and
Modern and the adjustments relating to the allocation of purchase price on
the basis of the estimated fair market values of the assets acquired and
liabilities assumed. The components of purchase price and adjustments to
reflect the related allocation to the assets and liabilities of the
Acquisitions are as follows:
<TABLE>
<S> <C>
Components of purchase price:
Cash............................................................ $ 51,033
AAPC common shares issued....................................... 942
Assumption of debt.............................................. 1,308
Present value of noncompete agreement with former owner of
one of the Acquisitions...................................... 2,151
--------
Total purchase price.............................................. $ 55,434
Adjustments relating to the allocation of purchase price:
Elimination of stockholders' equity of acquired companies....... $ (1,158)
Increase in property, plant and equipment....................... (9,139)
Elimination of debt not assumed................................. (23,678)
Elimination of debt retired..................................... (1,308)
Liabilities not assumed......................................... (319)
Elimination of LIFO reserve from inventory...................... (679)
Assets not acquired............................................. 172
Adjustment to accrued expenses including estimate of acquisition
costs........................................................ 1,200
--------
Cost in excess of net assets acquired............................. $ 20,525
========
</TABLE>
Cost in excess of net assets acquired will be amortized over 25 years.
<PAGE> 8
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
AAPC OFFERING
PRO FORMA ACQUISITIONS AND
COMPLETED PRO FORMA BEFORE -------------------------- ACQUISITION
AAPC ACQUISITIONS(1) ADJUSTMENTS ACQUISITIONS BINNINGS DANVID OTHERS ADJUSTMENTS
------- --------------- ----------- --------------- ------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........... $65,020 $ 3,969 $ 0 $68,989 $33,932 $33,013 $8,406 $ 0
Cost of sales....... 50,978 3,144 (23)(2) 54,099 24,653 26,869 6,445 85(6)
------- ------ ----- ------- ------- ------- ------ -------
Gross Profit...... 14,042 825 23 14,890 9,279 6,144 1,961 (85)
Selling, general and
administrative
expenses.......... 11,185 642 137(3) 11,964 7,342 4,317 1,995 (1,382)(7)
------- ------ ----- ------- ------- ------- ------ -------
Income (loss) from
operations...... 2,857 183 (114) 2,926 1,937 1,827 (34) 1,297
Interest expense.... 2,313 142 209(4) 2,664 1,574 17 122 7,376(8)
Other (income)
expense -- net.... (96) 6 0 (90) 27 (79) (16) 0
------- ------ ----- ------- ------- ------- ------ -------
Income (loss)
before income
taxes........... 640 35 (323) 352 336 1,889 (140) (6,079)
Income tax provision
(benefit)......... 257 (45) (71)(5) 141 8 720 0 (869)(5)
------- ------ ----- ------- ------- ------- ------ -------
Income (loss) from
continuing
operations...... 383 80 (252) 211 328 1,169 (140) (5,210)
Dividends on
Preferred Stock... (75) 0 0 (75) 0 0 0 0
------- ------ ----- ------- ------- ------- ------ -------
Income (loss)
available to
common
stockholders.... $ 308 $ 80 $(252) $ 136 $ 328 $ 1,169 $ (140) $(5,210)
======= ====== ===== ======= ======= ======= ====== =======
Earnings (loss) per
common share...... $0.01
Weighted average
number of shares
outstanding....... 13,359,578(9) 384,615(9)
SUPPLEMENTAL
INFORMATION
Depreciation and
amortization...... $1,966 $142 $65 $2,173 $492 $153 $266 $753
<CAPTION>
AAPC
PRO FORMA
---------
<S> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........... $144,340
Cost of sales....... 112,151
--------
Gross Profit...... 32,189
Selling, general and
administrative
expenses.......... 24,236
--------
Income (loss) from
operations...... 7,953
Interest expense.... 11,753
Other (income)
expense -- net.... (158)
--------
Income (loss)
before income
taxes........... (3,642)
Income tax provision
(benefit)......... 0
--------
Income (loss) from
continuing
operations...... (3,642)
Dividends on
Preferred Stock... (75)
--------
Income (loss)
available to
common
stockholders.... $ (3,717)
========
Earnings (loss) per
common share...... $(0.27)
Weighted average
number of shares
outstanding....... 13,744,193(9)
SUPPLEMENTAL
INFORMATION
Depreciation and
amortization...... $3,837
</TABLE>
<PAGE> 9
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(1) Represents historical financial data of the Completed Acquisitions for
the periods prior to their inclusion in the AAPC consolidated financial
statements.
(2) Represents reduction in depreciation and amortization expense in cost
of sales resulting from adjustments to asset bases and useful lives
relating to the Completed Acquisitions as follows:
<TABLE>
<S> <C>
Depreciation and amortization in cost of sales based on asset
bases resulting from Completed Acquisitions.................... $ 120
Eliminate depreciation and amortization in historical cost of
sales.......................................................... (143)
-----
$ (23)
=====
</TABLE>
(3) Represents incremental selling, general and administrative costs
relating to the Completed Acquisitions as follows:
<TABLE>
<S> <C>
Depreciation and amortization in selling, general and
administrative expenses based on asset bases resulting from
Completed Acquisitions.......................................... $ 94
Elimination of depreciation and amortization in historical
selling, general and administrative expenses.................... (6)
----
Incremental depreciation and amortization in historical selling,
general and administrative expenses............................. 88
----
Additional compensation to officers under terms of employment
agreements entered into in connection with the Completed
Acquisitions.................................................... 49
----
$137
====
</TABLE>
(4) Represents incremental interest expense relating to the debt of the
Company resulting from the Completed Acquisitions as follows:
<TABLE>
<S> <C>
Interest on Western term loans at weighted average rate of
10.8%........................................................... $ 32
Interest on Western revolving credit facility at rate of 9.5%.... 12
Interest on AAPC unsecured promissory notes at rate of 10%....... 20
Interest on $2,500,000 Convertible Debenture at rate of 7%....... 96
Interest expense relating to the obligation to issue additional
shares of common stock on the first anniversary date of the
Thermetic acquisition........................................... 47
Amortization of debt issue costs................................. 4
Elimination of historical interest expense....................... (2)
----
$209
====
</TABLE>
(5) Adjustment is made to provide for income taxes at the effective rate of
40 percent in determining pro forma income from continuing operations
when income before income taxes is presented. Adjustment is made to
eliminate tax provision (benefit) in determining pro forma loss from
continuing operations when a loss before income taxes is presented.
Management believes that sufficient evidence would not have existed to
recognize a deferred tax asset relating to these losses.
<PAGE> 10
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(6) Represents incremental depreciation and amortization expense in cost of
sales resulting from adjustments to asset bases and useful lives
relating to the Acquisitions as follows:
<TABLE>
<S> <C>
Depreciation and amortization in cost of sales based on asset
bases resulting from Acquisitions.............................. $ 754
Elimination of depreciation and amortization in historical cost
of sales....................................................... (669)
-----
$ 85
=====
</TABLE>
(7) Represents incremental costs (savings) in selling, general and
administrative expenses as follows:
<TABLE>
<S> <C>
Depreciation and amortization in selling, general and
administrative expenses based on asset bases resulting from
the Acquisitions............................................. $ 891
Elimination of depreciation and amortization in historical
selling, general and administrative expenses................. (223)
-------
Incremental depreciation and amortization in selling, general
and administrative expenses.................................. $ 668
-------
Savings on insurance costs due to the use of lower contractual
rates of the Company to provide insurance coverage on the
Acquisitions................................................. (301)
Elimination of compensation to executive officers, former
owners and members of the boards of directors which will be
nonrecurring as a result of the Acquisitions................. (1,749)
-------
$(1,382)
=======
</TABLE>
(8) Adjustment for interest represents the recording of interest expense on
the Notes issued in the Offering and the elimination of historical
interest expense as follows:
<TABLE>
<S> <C>
Interest on Notes issued in the Offering...................... $11,016
Amortization of deferred financing costs relating to the Notes
from the Offering............................................ 456
Other interest relating to the Acquisitions................... 100
Elimination of historical interest expense.................... (4,196)
-------
$ 7,376
=======
</TABLE>
(9) Weighted average number of shares used in pro forma presentation
includes shares outstanding at September 30, 1997, shares issued in
connection with the Acquisitions and shares the Company is committed to
issue under terms of the Thermetic acquisition. Common stock
equivalents are excluded as the effect would be anti-dilutive.
<PAGE> 11
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
COMPLETED AAPC PRO ACQUISITIONS OFFERING AND
PREDECESSORS ACQUISITIONS PRO FORMA FORMA BEFORE -------------------------- ACQUISITION
(1) AAPC (2) ADJUSTMENTS ACQUISITIONS BINNINGS DANVID OTHERS ADJUSTMENTS
------------ ------- ------------ ----------- ------------ -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 41,887 $25,249 $ 14,051 $ 0 $ 81,187 $43,060 $41,870 $10,276 $ 0
Cost of sales........... 35,430 19,027 11,276 (1,683)(3) 64,050 30,191 34,026 7,538 811(7)
---------- ------- ------- ------- ---------- ------- ------- ------- -------
Gross profit........ 6,457 6,222 2,775 1,683 17,137 12,869 7,844 2,738 (811)
Selling, general and
administrative
expenses.............. 7,440 4,060 3,460 540(4) 15,500 8,778 5,586 2,351 (932)(8)
---------- ------- ------- ------- ---------- ------- ------- ------- -------
Income (loss) from
operations(4)....... (983) 2,162 (685) 1,143 1,637 4,091 2,258 387 121
Interest expense........ 1,143 756 633 869(5) 3,401 2,370 3 193 9,590(9)
Other (income)
expense -- net........ 480 5 (227) 0 258 54 (99) (42) 0
---------- ------- ------- ------- ---------- ------- ------- ------- -------
Income (loss) before
income taxes........ (2,606) 1,401 (1,091) 274 (2,022) 1,667 2,354 236 (9,469)
Income tax provision
(benefit)............. (908) 640 494 (226)(6) 0 29 902 0 (931)(6)
---------- ------- ------- ------- ---------- ------- ------- ------- -------
Income (loss) from
continuing
operations.......... (1,698) 761 (1,585) 500 (2,022) 1,638 1,452 236 (8,538)
Dividends on Preferred
Stock................. 0 0 0 0 0 0 0 0 0
---------- ------- ------- ------- ---------- ------- ------- ------- -------
Income (loss)
available to common
stockholders........ $ (1,698) $ 761 $ (1,585) $ 500 $ (2,022) $ 1,638 $ 1,452 $ 236 $ (8,538)
========== ======= ======= ======= ========== ======= ======= ======= =======
Earnings (loss) per
share................. $ (0.15)
Weighted average number
of shares
outstanding........... 13,359,578 (10 384,615 (10
SUPPLEMENTAL
INFORMATION:
Depreciation and
amortization.......... $ 2,698 $ 442 $ 573 $(1,521) $ 2,192 $ 707 $ 201 $ 257 $ 989
<CAPTION>
AAPC PRO
FORMA
----------
<S> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 176,393
Cost of sales........... 136,616
---------
Gross profit........ 39,777
Selling, general and
administrative
expenses.............. 31,283
---------
Income (loss) from
operations.......... 8,494
Interest expense........ 15,557
Other (income)
expense -- net........ 171
---------
Income (loss) before
income taxes........ (7,234)
Income tax provision
(benefit)............. 0
---------
Income (loss) from
continuing
operations.......... (7,234)
Dividends on Preferred
Stock................. 0
---------
Income (loss)
available to common
stockholders........ $ (7,234)
=========
Earnings (loss) per
share................. $ (0.53)
Weighted average number
of shares
outstanding........... 13,744,193(10)
SUPPLEMENTAL
INFORMATION:
Depreciation and
amortization.......... $ 4,346
</TABLE>
<PAGE> 12
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(1) Represents historical financial data of the Predecessors for the periods
prior to their inclusion in the AAPC consolidated financial statements.
(2) Represents historical financial data of the Completed Acquisitions for the
periods prior to their inclusion in the AAPC consolidated financial
statements.
(3) Represents reduction in depreciation and amortization expense in cost of
sales resulting from adjustments to asset bases and useful lives relating
to the Predecessors and the Completed Acquisitions as follows:
<TABLE>
<S> <C>
Depreciation and amortization in cost of sales based on asset bases
resulting from the acquisitions of the Predecessors Completed
Acquisitions....................................................... $ 1,152
Elimination of depreciation and amortization in historical cost of
sales.............................................................. (2,835)
-------
$(1,683)
=======
</TABLE>
(4) Represents incremental selling, general and administrative costs relating
to the Predecessors and the Completed Acquisitions as follows:
<TABLE>
<S> <C>
Depreciation and amortization in selling, general and administrative
expenses based on asset bases resulting from the acquisitions of the
Predecessors Completed Acquisitions.................................. $ 598
Elimination of depreciation and amortization in historical selling,
general and administrative expenses.................................. (437)
-----
Incremental depreciation and amortization in selling, general and
administrative expenses.............................................. $ 161
-----
Management fee to AAP Holdings, Inc., in accordance with agreement
dated December 18, 1996.............................................. 250
Additional compensation to officers under terms of employment
agreements entered into in connection with the Completed
Acquisitions......................................................... 129
-----
$ 540
=====
</TABLE>
(5) Represents incremental interest expense relating to the debt of the Company
resulting from the acquisitions of the Predecessors Completed Acquisitions
as follows:
<TABLE>
<S> <C>
Adjustments to interest expense relating to Eagle & Taylor and
Mallyclad & Vyn-L for periods prior to their acquisition:
Interest on term loans at rate of 9.75%............................ $ 202
Interest on revolving credit facility at rate of 9.75%............. 729
9.75% Interest on subordinated note at rate of 10.0%............... 533
Amortization of debt issue costs................................... 77
Elimination of historical interest................................. (1,143)
-------
398
-------
</TABLE>
<PAGE> 13
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS -- (CONTINUED)
<TABLE>
<S> <C>
Adjustments to AAPC interest expense relating to acquisition of
Western and Thermetic:
Interest on Western term loans at weighted average rate of 10.8%... 100
Interest on Western revolving credit facility at rate of 9.5%...... 40
Interest on AAPC unsecured promissory notes at rate of 10.0%....... 70
Increase in amortization of debt issue costs....................... 17
Interest on $2,500,000 Convertible Debenture at rate of 7.0%....... 175
Interest expense relating to the obligation to issue additional
shares of common stock on the first anniversary date of the
Thermetic acquisition........................................... 85
Elimination of historical interest expense......................... (16)
-------
471
-------
$ 869
=======
</TABLE>
(6) Adjustment to eliminate tax provision in determining pro forma loss from
continuing operations. Management believes that sufficient evidence would
not have existed to recognize a deferred tax asset relating to these
losses.
(7) Represents incremental cost of sales as follows:
<TABLE>
<S> <C>
Additional cost of sales relating to the use of the first-in,
first-out (FIFO) method to determine inventory value at Binnings
compared to the last-in, first- out (LIFO) method historically
used................................................................ $ 679
------
Incremental depreciation and amortization expense in cost of sales
resulting from adjustments to asset bases and useful lives relating
to the Acquisitions as follows:
Depreciation and amortization in cost of sales based on asset bases
resulting from Acquisitions...................................... 1,016
Elimination of depreciation and amortization in historical cost of
sales............................................................ (884)
------
132
------
$ 811
======
</TABLE>
(8) Represents incremental costs (savings) in selling, general and
administrative expenses as follows:
<TABLE>
<S> <C>
Additional depreciation and amortization relating to adjustments to
asset bases and useful lives resulting from the Acquisitions....... $ 1,138
Elimination of depreciation and amortization in historical selling,
general and administrative expenses................................ (281)
-------
Incremental depreciation and amortization in selling, general and
administrative expenses............................................ 857
-------
Savings on insurance costs due to the use of lower contractual rates
of the Company to provide insurance coverage on the Acquisitions... (402)
Elimination of compensation to executive officers, former owners and
members of the boards of directors which will be nonrecurring as a
result of the Acquisitions......................................... (1,387)
-------
$ (932)
=======
</TABLE>
<PAGE> 14
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS -- (CONTINUED)
(9) Adjustment for interest represents the recording of interest expense on the
Notes issued in the Offering and the elimination of historical interest
expense as follows:
<TABLE>
<S> <C>
Interest on Notes issued in the Offering............................. $14,688
Amortization of deferred financing costs relating to the Notes from
the Offering....................................................... 608
Other interest relating to the Acquisitions.......................... 134
Elimination of historical interest expense........................... (5,840)
-------
$ 9,590
=======
</TABLE>
(10) Weighted average number of shares used in pro forma presentation includes
shares outstanding at September 30, 1997, shares issued in connection with
the Acquisitions and shares that the Company is committed to issue under
terms of the Thermetic acquisition. Common stock equivalents are excluded
as the effect would be anti-dilutive.
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Binnings Building Products, Inc.:
We have audited the accompanying balance sheets of Binnings Building
Products, Inc. (a Delaware corporation) as of December 31, 1996 and 1995, and
the related statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Binnings Building Products,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
March 21, 1997 (except with respect to
the matters discussed in Note 10 as to
which the date is December 10, 1997).
<PAGE> 16
BINNINGS BUILDING PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS -------------------------- --------------------------
(SUBSTANTIALLY ALL PLEDGED -- NOTE 4) 1995 1996 1996 1997
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 200,000 $ 844,000 $ 533,000 $ 1,074,000
Receivables
Trade................................................... 4,062,000 4,948,000 5,157,000 5,003,000
Other................................................... 98,000 87,000 145,000 98,000
Inventories............................................... 5,915,000 6,549,000 6,014,000 5,351,000
Prepaid expenses.......................................... 352,000 619,000 704,000 585,000
----------- ----------- ----------- -----------
Total current assets................................ 10,627,000 13,047,000 12,553,000 12,111,000
----------- ----------- ----------- -----------
Property, plant and equipment held for sale, net of
accumulated depreciation of $1,319,000 (Note 2)........... 0 0 0 5,127,000
Property, plant and equipment, at cost:
Land...................................................... 2,189,000 2,189,000 2,189,000 288,000
Buildings................................................. 8,825,000 8,829,000 8,825,000 4,320,000
Machinery and equipment................................... 6,828,000 7,249,000 7,159,000 7,648,000
----------- ----------- ----------- -----------
17,842,000 18,267,000 18,173,000 12,256,000
Less -- Accumulated depreciation.......................... (7,779,000) (8,461,000) (8,318,000) (7,453,000)
----------- ----------- ----------- -----------
10,063,000 9,806,000 9,855,000 4,803,000
----------- ----------- ----------- -----------
Deferred income taxes (Note 9).............................. 448,000 262,000 393,000 161,000
----------- ----------- ----------- -----------
Other assets, net........................................... 222,000 251,000 265,000 287,000
----------- ----------- ----------- -----------
$21,360,000 $23,366,000 $23,066,000 $22,489,000
=========== =========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 4)............. $ 350,000 $ 7,044,000 $ 7,128,000 $14,339,000
Accounts payable and accrued liabilities (Note 3)......... 3,728,000 4,377,000 4,137,000 3,500,000
Deferred income taxes (Note 9)............................ 448,000 262,000 393,000 161,000
----------- ----------- ----------- -----------
Total current liabilities........................... 4,526,000 11,683,000 11,658,000 18,000,000
Long-term debt to certain common stockholders, net of
current maturities (Note 4)............................... 20,628,000 13,860,000 13,994,000 6,550,000
Other long-term debt, net of current maturities (Note 4).... 163,000 76,000 97,000 14,000
Other long-term obligations (Note 4)........................ 0 218,000 0 218,000
Puttable common stock, voting, 59,524 shares issued and
outstanding at December 31, 1996, and September 30, 1997
(unaudited) (Note 4)...................................... 0 139,000 0 139,000
----------- ----------- ----------- -----------
Total liabilities................................... 25,317,000 25,976,000 25,749,000 24,921,000
----------- ----------- ----------- -----------
Commitments and contingencies (Notes 4, 5 and 6)
Stockholders' deficit:
Preferred stock, Series A, $1 par value, 8% cumulative,
500,000 shares authorized; 168,775 and 149,158 shares
issued and outstanding at December 31, 1995 and 1996,
respectively, 168,775 (unaudited) and 149,158
(unaudited) shares issued and outstanding at September
30, 1996 and 1997, respectively, stated at $10 per share
liquidating preference price, redeemable at $10 per
share at the Company's option (Note 6).................. 1,688,000 1,492,000 1,688,000 1,492,000
Preferred stock, Series B, $1 par value, 9% cumulative,
500,000 shares authorized; 35,000 and 30,000 shares
issued and outstanding at December 31, 1995 and 1996,
respectively, 35,000 (unaudited) and 30,000 (unaudited)
shares issued and outstanding at September 30, 1996 and
1997, respectively, stated at $10 per share liquidating
preference price, redeemable at $10 per share at the
Company's option (Note 6)............................... 350,000 300,000 350,000 300,000
Common stock, $.01 par value, 1,000,000 shares authorized,
voting, 187,291 and 158,176 shares issued and
outstanding at December 31, 1995 and 1996, respectively,
158,176 (unaudited) shares issued and outstanding at
September 30, 1996 and 1997............................. 2,000 2,000 2,000 2,000
Common stock purchase options (Note 6).................... 103,000 103,000 103,000 0
Capital in excess of par value............................ 236,000 330,000 236,000 330,000
Accumulated deficit....................................... (6,336,000) (4,837,000) (5,062,000) (4,556,000)
----------- ----------- ----------- -----------
Total stockholders' deficit......................... (3,957,000) (2,610,000) (2,683,000) (2,432,000)
----------- ----------- ----------- -----------
$21,360,000 $23,366,000 $23,066,000 $22,489,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE> 17
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 -----------------------------
--------------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $35,465,000 $34,503,000 $43,060,000 $ 31,645,000 $ 33,932,000
Cost of sales................... 26,245,000 25,353,000 30,191,000 22,370,000 24,653,000
----------- ----------- ----------- ----------- -----------
Gross profit.................... 9,220,000 9,150,000 12,869,000 9,275,000 9,279,000
Selling, general and
administrative expenses....... 8,271,000 7,764,000 8,778,000 6,356,000 7,342,000
----------- ----------- ----------- ----------- -----------
Income from operations.......... 949,000 1,386,000 4,091,000 2,919,000 1,937,000
----------- ----------- ----------- ----------- -----------
Other expense (income):
Interest...................... 2,540,000 2,527,000 2,370,000 1,591,000 1,574,000
Amortization of other
assets..................... 86,000 88,000 16,000 12,000 15,000
Other, net.................... (91,000) 16,000 38,000 20,000 12,000
----------- ----------- ----------- ----------- -----------
2,535,000 2,631,000 2,424,000 1,623,000 1,601,000
----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes.............. (1,586,000) (1,245,000) 1,667,000 1,296,000 336,000
Provision for income taxes (Note
9)............................ 0 0 29,000 22,000 8,000
----------- ----------- ----------- ----------- -----------
Net income (loss)............... $(1,586,000) $(1,245,000) $ 1,638,000 $ 1,274,000 $ 328,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 18
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON CAPITAL
PREFERRED PREFERRED STOCK IN
STOCK, STOCK, COMMON PURCHASE EXCESS OF ACCUMULATED
SERIES A SERIES B STOCK OPTION PAR VALUE DEFICIT TOTAL
---------- --------- ------ --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993......... $1,696,000 $ 0 $2,000 $ 325,000 $236,000 $(3,327,000) $(1,068,000)
Net loss......................... 0 0 0 0 0 (1,586,000) (1,586,000)
Issuance of 35,000 shares of
Preferred Stock, Series B (Note
6)............................. 0 350,000 0 0 0 0 350,000
Redemption of common stock
purchase options, net (Note
6)............................. 0 0 0 (222,000) 0 (178,000) (400,000)
Repurchase of 819 shares of
Preferred Stock, Series A...... (8,000) 0 0 0 0 0 (8,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, December 31, 1994......... 1,688,000 350,000 2,000 103,000 236,000 (5,091,000) (2,712,000)
Net loss......................... 0 0 0 0 0 (1,245,000) (1,245,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, December 31, 1995......... 1,688,000 350,000 2,000 103,000 236,000 (6,336,000) (3,957,000)
Net income (unaudited)........... 0 0 0 0 0 1,274,000 1,274,000
---------- -------- ------ --------- -------- ----------- -----------
Balance, September 30, 1996
(unaudited)...................... 1,688,000 350,000 2,000 103,000 236,000 (5,062,000) (2,683,000)
Net income....................... 0 0 0 0 0 364,000 364,000
Repurchase of 29,115 shares of
common stock................... 0 0 0 0 (15,000) 0 (15,000)
Repurchase of 19,617 shares of
Preferred Stock, Series A...... (196,000) 0 0 0 109,000 0 (87,000)
Retirement of 5,000 shares of
Preferred Stock, Series B (Note
6)............................. 0 (50,000) 0 0 0 0 (50,000)
Puttable common stock redemption
accretion (Note 4)............. 0 0 0 0 0 (139,000) (139,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, December 31, 1996......... 1,492,000 300,000 2,000 103,000 330,000 (4,837,000) (2,610,000)
Net income (unaudited)........... 0 0 0 0 0 328,000 328,000
Redemption of common stock
purchase option (unaudited)
(Note 6)....................... 0 0 0 (103,000) 0 (47,000) (150,000)
---------- -------- ------ --------- -------- ----------- -----------
Balance, September 30, 1997
(unaudited)...................... $1,492,000 $ 300,000 $2,000 $ 0 $330,000 $(4,556,000) $(2,432,000)
========== ======== ====== ========= ======== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 19
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------------
-------------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997
----------- ----------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(1,586,000) $(1,245,000) $1,638,000 $ 1,274,000 $ 328,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation..................................... 870,000 858,000 691,000 545,000 477,000
Amortization..................................... 86,000 88,000 16,000 12,000 15,000
Gain on sale of property, plant and equipment.... (62,000) (6,000) (1,000) (1,000) 0
Conversion of accrued interest to long-term debt
(Note 4)....................................... 0 980,000 0 0 0
Minority interest in loss of joint venture....... 0 0 14,000 0 0
Accretion of capital appreciation rights (Note
4)............................................. 0 0 218,000 0 0
Change in current assets and liabilities:
(Increase) decrease in receivables............. 372,000 121,000 (837,000) (1,142,000) (66,000)
(Increase) decrease in inventories............. 391,000 939,000 (634,000) (99,000) 1,198,000
(Increase) decrease in prepaid expenses........ 1,000 (162,000) (267,000) (352,000) 34,000
Increase in other assets....................... 0 (67,000) (49,000) (15,000) (51,000)
Increase (decrease) in accounts payable and
accrued liabilities......................... 408,000 (613,000) 599,000 409,000 (877,000)
----------- ---------- ---------- ---------- ----------
Net cash provided by operating activities... 480,000 893,000 1,388,000 631,000 1,058,000
----------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures............................... (280,000) (405,000) (435,000) (338,000) (462,000)
Proceeds from sale of property, plant and
equipment........................................ 106,000 6,000 2,000 2,000 0
Investment in joint venture........................ 0 0 (2,000) (2,000) 0
Advances to joint venture.......................... 0 0 (38,000) (38,000) 0
----------- ---------- ---------- ---------- ----------
Net cash used in investing activities....... (174,000) (399,000) (473,000) (376,000) (462,000)
----------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Principal payments on capital lease and other
obligations...................................... (275,000) (178,000) (219,000) (164,000) (111,000)
Borrowings (repayments) on revolving credit
facility, net.................................... (111,000) (119,000) 174,000 329,000 (11,000)
Proceeds from issuance of preferred stock (Note
6)............................................... 350,000 0 0 0 0
Principal payments on notes payable................ 0 (28,000) (116,000) (87,000) (94,000)
Repurchase of Preferred Stock, Series A............ (8,000) 0 (87,000) 0 0
Repurchase of common stock......................... 0 0 (15,000) 0 0
Redemption of common stock purchase option (Note
6)............................................... (400,000) 0 0 0 (150,000)
Increase in deferred financing costs............... (29,000) (136,000) (8,000) 0 0
----------- ---------- ---------- ---------- ----------
Net cash used in (provided by) financing
activities................................ (473,000) (461,000) (271,000) 78,000 (366,000)
----------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash...................... (167,000) 33,000 644,000 333,000 230,000
Cash, beginning of period............................ 334,000 167,000 200,000 200,000 844,000
----------- ---------- ---------- ---------- ----------
Cash, end of period.................................. $ 167,000 $ 200,000 $ 844,000 $ 533,000 $ 1,074,000
=========== ========== ========== ========== ==========
Supplemental disclosure -- Cash paid for interest.... $ 2,527,000 $ 1,436,000 $2,074,000 $ 1,530,000 $ 1,677,000
=========== ========== ========== ========== ==========
Supplemental disclosure -- Cash paid for income
taxes.............................................. $ 0 $ 0 $ 0 $ 0 $ 70,000
=========== ========== ========== ========== ==========
Supplemental schedule of noncash financing activities -- In 1997, the Company acquired equipment through the issuance of a
capital lease obligation of $139,000. In 1996, the Company retired 5,000 shares of $10 par value Preferred Stock, Series B,
without compensation to the preferred stockholder (Note 6). In 1995, the Company's accrued interest obligation of $245,000
at December 31, 1994, was converted to long-term debt in 1995 (Note 4).
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 20
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Binnings Building Products, Inc. (the Company) was incorporated in February
1986 under the laws of the state of Delaware. On April 29, 1986, the Company
(which was previously inactive) acquired substantially all of the assets and
assumed certain liabilities of the Binnings Building Products Division of
National Gypsum Company in a leveraged buyout transaction. The purchase price
was allocated to the assets purchased and liabilities assumed based on their
estimated fair values.
The Company is engaged in the manufacturing, marketing and distribution of
aluminum storm windows and doors, screens, primary windows, patio doors,
insulating glass and vinyl windows from its facilities in North Carolina and
Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Prior to 1996, the Company incurred losses before extraordinary items in
each year since 1988. As reflected in the accompanying financial statements, the
Company had net income of $1,638,000 in the year ended December 31, 1996,
$1,274,000 (unaudited) and $328,000 (unaudited) in the nine months ended
September 30, 1996 and 1997, respectively, and net losses of $1,245,000 and
$1,586,000 in the years ended December 31, 1995 and 1994, respectively, and had
an accumulated deficit of $4,837,000 at December 31, 1996 and $4,556,000
(unaudited) at September 30, 1997. The Company is in the highly competitive
building products market and its products are subject to substantial pricing
competition. The Company's primary raw material is subject to commodity-based
price fluctuations. The Company closed several distribution centers in Florida
in prior years and modified significant debt terms in 1995 (Note 4).
Management's plans for 1997 provide for increases in sales due to price
increases and increases in market penetration for its products. Management's
plans also include efforts to control selling, general and administrative
expenses as it increases its service area and product offerings.
Historically, the Company has not been in compliance with certain financial
covenants of its notes payable from certain common stockholders and has obtained
waivers from the holders of these notes. During 1997, the Company obtained
waivers from its lenders for its events of default through January 1, 1998. Upon
the expiration of these waivers, the Company will likely be in default of these
covenants (Note 4). Subsequent to the year ended December 31, 1996, the
revolving credit facility and notes payable to certain common stockholders were
repaid in conjunction with the purchase of all of the Company's outstanding
preferred and common shares by American Architectural Products Corporation (Note
10).
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business, rather than
through a process of forced liquidation. Management is of the opinion that
results of future operations will be sufficient to fund the Company's liquidity
requirements; however, there can be no assurance that the Company's operations
will continue to be profitable or produce positive cash flow. Accordingly, the
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Unaudited Interim Financial Information
The unaudited interim financial statements for the nine months ended
September 30, 1996 and 1997, include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the results of its operations for the periods presented. The
interim periods' results are not necessarily indicative of the results of
operations for a full fiscal year.
<PAGE> 21
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity of three months or less.
Concentration of Credit Risk and Accounts Receivable
The Company's customers are concentrated in the Southeastern United States
construction and home improvement retail markets. No single customer accounted
for a significant amount of the Company's sales, and there were no significant
trade receivables outstanding from any single customer at December 31, 1994,
1995, 1996, September 30, 1996 and 1997. The Company performs on-going credit
evaluations of its customers' financial condition and generally does not require
collateral. Allowances for doubtful accounts are $138,000, $223,000, $203,000
(unaudited) and $378,000 (unaudited) at December 31, 1995 and 1996, and
September 30, 1996 and 1997, respectively.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives for financial
reporting purposes, presently ranging from 3 to 40 years, and accelerated
methods for income tax purposes.
During 1997, the Company decided to relocate its manufacturing facility in
Florida and sell and lease back the land and buildings of several of its
distribution centers in Florida and began to market these facilities for sale.
Accordingly, the net book value of these facilities at September 30, 1997 of
$5,127,000 (unaudited) has been reflected as property held for sale in the
accompanying balance sheet. In management's opinion, the fair market value less
estimated costs to sell the property, plant and equipment designated as held for
sale is greater than the net book value of this property.
The Company reviews the carrying values of property, plant and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated to be
generated during the remaining useful life to the carrying value of the asset.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method. Inventories consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------------
1995 1996 1996 1997
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Raw materials............... $ 3,144,000 $2,358,000 $2,216,000 $2,659,000
Work in process............. 1,652,000 1,832,000 1,442,000 839,000
Finished goods.............. 2,515,000 3,038,000 3,214,000 2,532,000
----------- ---------- ---------- ----------
7,311,000 7,228,000 6,872,000 6,030,000
Less -- Allowance to reduce
inventories to LIFO
cost...................... (1,396,000) (679,000) (858,000) (679,000)
----------- ---------- ---------- ----------
$ 5,915,000 $6,549,000 $6,014,000 $5,351,000
=========== ========== ========== ==========
</TABLE>
During 1994, 1995 and 1996, the Company liquidated certain LIFO inventory
that was carried at lower costs which prevailed in prior years. The effect of
these liquidations was to decrease cost of goods sold by $104,000, $211,000 and
$8,000 in 1994, 1995 and 1996, respectively.
<PAGE> 22
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company prepares detail calculations of its LIFO inventory reserve as
of its fiscal year end. For the unaudited nine months ended September 30, 1996
and 1997, the Company estimated its allowance to reduce inventories to LIFO cost
based on the level and mix of inventory on hand and changes in prices of
significant components of inventory. In management's opinion, the allowances at
September 30, 1996 and 1997 are reasonable.
Other Assets
Other assets include deferred financing and other costs incurred primarily
in connection with the Company's financing arrangements. These costs are stated
at the remaining unamortized original cost and are being amortized on a
straight-line basis over the terms of the related loans. Accumulated
amortization of deferred financing and other costs was $49,000, $65,000, $61,000
(unaudited), and $111,000 (unaudited) at December 31, 1995 and 1996, and
September 30, 1996 and 1997, respectively.
Joint Venture
In 1996, the Company formed a joint venture with seven other equal
investors, consisting primarily of other manufacturers of window and door
products. The Company's ownership interest in the joint venture is 12.5%. The
joint venture was formed for the purpose of distributing vinyl windows
throughout the Southeastern United States to certain major retail customers.
The Company's share of losses incurred by the joint venture is recorded on
the equity method and is included in other expenses. The Company's share of
losses of the joint venture for the year ended December 31, 1996, and for the
nine months ended September 30, 1996 and 1997 were $14,000, $2,000 (unaudited)
and $0 (unaudited), respectively.
Income Taxes
Deferred income tax liabilities and assets are determined based on the
difference between the financial statement and income tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
using enacted income tax rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be
realized.
Revenue Recognition
The Company recognizes a sale when goods are shipped or when ownership is
assumed by the customer.
Use 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
disclosures 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.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, payable and accrued expenses
approximate fair value because of the short maturity of these items. Based on
the borrowing rates currently available to the Company, the carrying amounts of
long-term debt approximate fair value.
<PAGE> 23
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accounts payable -- Trade.... $2,049,000 $2,070,000 $2,168,000 $1,557,000
Payroll and related
benefits................... 728,000 1,097,000 824,000 1,266,000
Other........................ 951,000 1,210,000 1,145,000 677,000
----------- ---------- ---------- ----------
$3,728,000 $4,377,000 $4,137,000 $3,500,000
=========== ========== ========== ==========
</TABLE>
4. LONG-TERM DEBT:
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Borrowings from certain common
stockholders, secured by
substantially all assets....
Notes payable due September
1, 2000, with monthly
sinking fund requirements
of $10,475 beginning
October 1, 1995, interest
of 9.0% per annum payable
monthly.................. $ 659,000 $ 543,000 $ 572,000 $ 447,000
Notes payable due September
1, 2005, with monthly
sinking fund requirements
of $116,400 beginning
October 1, 1997, interest
of 9.25% per annum
payable monthly.......... 13,738,000 13,738,000 13,738,000 13,738,000
Revolving credit facility
due on August 31, 1999,
interest payable monthly
in arrears at the prime
rate (8.25% at December
31, 1996, and 8.50% at
September 30, 1997) plus
3%....................... 6,256,000 6,430,000 6,585,000 6,421,000
----------- ---------- ---------- ----------
Total borrowings......... 20,653,000 20,711,000 20,895,000 20,606,000
Capital lease obligations..... 151,000 22,000 54,000 122,000
Other......................... 337,000 247,000 270,000 175,000
----------- ---------- ---------- ----------
21,141,000 20,980,000 21,219,000 20,903,000
Less -- Current maturities.... 350,000 7,044,000 7,128,000 14,339,000
----------- ---------- ---------- ----------
$20,791,000 $13,936,000 $14,091,000 $ 6,564,000
=========== ========== ========== ==========
</TABLE>
On September 1, 1995, the Company completed the renegotiation of
significant terms of its debt obligations. The notes payable to certain common
stockholders ($13,200,000 outstanding at December 31, 1994) were modified such
that the interest rates were reduced to 9% and 9.25% and the terms extended. In
addition, unpaid accrued interest of $1,225,000 on September 1, 1995, ($245,000
at December 31, 1994) was converted to principal and will be repaid under
similar terms as the corresponding debt obligations. The 9.25%
<PAGE> 24
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
notes contain a mandatory redemption clause which stipulates that in the event
there are insurance or condemnation proceeds, an Asset Disposition (as defined),
or when there is excess cash availability (as defined) exceeding $750,000,
redemption payments equal to the excess cash availability over $500,000 must be
made (at no premium). There were no events which occurred during 1996 or 1997
that required a redemption payment to be made. The Company may also redeem, at
its option, the notes payable at a redemption price equal to 100% of the
principal amount, subject to notification requirements to the holders as
specified in the Loan and Security agreements.
In lieu of a restructuring fee paid to holders of the 9.25% notes, the
Company issued capital appreciation rights exercisable for cash payments based
on the value of these rights, as defined. The holders of the capital
appreciation rights may receive payment on the appreciation of the rights, as
defined, following the earlier of (a) September 1, 2000, or (b) the sale or
transfer of all or substantially all of the assets of the Company, the sale or
transfer of a majority of its common stock or a majority of its voting common
stock, the public offering of its common stock or other capital stock, the
bankruptcy or insolvency of the Company, or any other extraordinary corporate
event or (c) the payment in full of the securities. The right to receive payment
on the appreciation of the rights expires on September 1, 2005. In addition to
the capital appreciation rights, the Company granted each holder an option to
put to the Company, in connection with the holder's demand for payment on the
capital appreciation rights, the common shares of the Company it holds, for
which the Company would be required to purchase these shares based on the value,
as defined, on such date. As defined in the agreements, the formula value of
these rights is recalculated at each fiscal year end. The Company accrues the
estimated purchase price of these rights ratably over the period to the earliest
stated payment date of September 1, 2000. Changes in the purchase price due to
the most recent fiscal year calculation are recognized prospectively over the
remaining period. At December 31, 1996, the purchase price for the capital
appreciation rights was approximately $1,019,000 and approximately $645,000
related to the common stock put options. In 1996, the Company recorded interest
expense of $218,000 and a corresponding long-term liability related to the
capital appreciation rights and a charge to accumulated deficit of $139,000 and
a corresponding common stock put option as a component of stockholders' deficit
in the accompanying balance sheets.
As of September 30, 1997, the Company has estimated the change in the
purchase price of these rights based on its unaudited results to date during
1997 and its budgeted results for the remainder of 1997 and determined no
additional accrual of interest expense for the capital appreciation rights or
accretion of the common stock put options is necessary for the nine months ended
September 30, 1997. Subsequent to the year ended December 31, 1996, all of the
Company's capital appreciation rights and the common stock put option were
extinguished in conjunction with the purchase of all of the outstanding
preferred and common shares of the Company by American Architectural Products
Corporation (Note 10).
In connection with modification of the Company's debt terms, the Company
increased its available borrowings under the revolving credit facility from
$6,570,000 to the lesser of $7,000,000 or the borrowing base of 85% of eligible
trade receivables, plus 45% of eligible inventory at the lower of cost or market
value on a first-in, first-out basis. Total credit availability resulting from
the borrowing base was $7,000,000, $7,000,000 (unaudited), and $6,979,000
(unaudited) at December 31, 1996 , September 30, 1996 and 1997, respectively, of
which $6,430,000, $6,585,000 (unaudited), and $6,421,000 (unaudited) was
outstanding at December 31, 1996, September 30, 1996 and 1997, respectively.
The debt agreements contain various covenants which, among other
requirements, limit dispositions of property, plant and equipment, require
maintenance of insurance satisfactory to the lenders, restrict payment of cash
dividends and dispositions of stock, prohibit additional debt, mergers and
acquisitions, and require maintenance of certain financial covenants. At
December 31, 1996, there were no events of noncompliance with the debt
agreements that were not waived by the lenders. As of September 30, 1997, in the
opinion of management, the Company will not be in compliance with certain
financial covenants upon expiration of the waivers from the lenders in January
1998. Accordingly, the Company classified the notes payable to certain
<PAGE> 25
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
common stockholders as current liabilities as of September 30, 1997. Subsequent
to the year ended December 31, 1996, the revolving credit facility and notes
payable to certain common stockholders were repaid in conjunction with the
purchase of all of the outstanding preferred and common shares of the Company by
American Architectural Products Corporation (Note 10).
During 1991, the Company entered into a capital lease for certain of its
data processing equipment. The lease contains a bargain purchase option. The net
book value of this equipment of approximately $126,000, $116,000, $119,000
(unaudited) and $109,000 (unaudited) at December 31, 1995 and 1996, September
30, 1996 and 1997, respectively, is included in property, plant and equipment in
the accompanying balance sheets.
Maturities of long-term debt are as follows as of December 31, 1996, and
September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
PERIOD ENDING DECEMBER 31, 1996 1997
---------------------------------- ------------ -------------
(UNAUDITED)
<S> <C> <C>
1997.............................. $ 7,044,000 $ 471,000
1998.............................. 1,460,000 13,941,000
1999.............................. 1,518,000 6,463,000
2000.............................. 1,620,000 28,000
2001.............................. 1,641,000 0
Thereafter........................ 7,697,000 0
----------- -----------
$ 20,980,000 $ 20,903,000
=========== ===========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities and transportation equipment under
noncancellable operating leases expiring through 2001. Rental expense under
operating leases was approximately $377,000, $384,000, $471,000, $353,000
(unaudited) and $212,000 (unaudited) for the years ended December 31, 1994, 1995
and 1996 and the nine months ended September 30, 1996 and 1997, respectively.
The future minimum rental payments under these lease agreements having initial
or remaining terms in excess of one year are as follows as of December 31, 1996,
and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
PERIOD ENDING DECEMBER 31, 1996 1997
----------------------------------- ------------ -------------
(UNAUDITED)
<S> <C> <C>
1997............................... $ 476,000 $ 134,000
1998............................... 401,000 432,000
1999............................... 327,000 358,000
2000............................... 112,000 139,000
2001............................... 8,000 18,000
---------- ----------
$1,324,000 $ 1,081,000
========== ==========
</TABLE>
In prior years, the Company identified potential groundwater contamination
as part of continuous monitoring procedures in place at its Florida
manufacturing facility. The Company is in the process of implementing an
approved Remedial Action Plan (RAP) from the Dade County Department of
Environmental Resources (DERM), to address the groundwater conditions. Based on
the approved RAP, the cost of remediation will be approximately $150,000 to
install, operate and maintain the remediation system. The required period of
monitoring is dependent upon the results of the monitoring. Potential
modification to the RAP could occur if levels of contamination are found above
or below specified DERM limits. During 1993, a charge of $218,000 was provided
to cover the estimated future costs of this monitoring and other environmental
investigation and remediation costs. At December 31, 1996, and September 30,
1997,
<PAGE> 26
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively, remaining environmental accruals amounted to $166,000 and $159,000
(unaudited), respectively, and are included in accrued liabilities in the
accompanying balance sheets. In management's opinion, based upon the facts
currently known, adequate provision has been made for this contingency, and the
final resolution of all environmental matters will not have a material adverse
effect on the Company's financial position.
The Company is a party to certain legal actions and claims in the normal
course of business, none of which individually or in the aggregate, in the
opinion of management, based upon the facts currently known, are expected to
have a material adverse effect on the Company's financial position.
6. STOCKHOLDERS' DEFICIT:
In 1991, the Company issued common stock purchase options which, after full
exercise thereof, would give the holder a maximum of 49% of the common stock of
the Company. In 1994, the Company terminated those common stock purchase options
through payment of $400,000 in cash and issuance of common stock purchase
options which, after full exercise thereof, would give the holder a maximum of
10% of the voting common stock of the Company. The options were exercisable at a
price of $.01 per share on or before February 28, 1997. The Company retained the
right to terminate these options at a price as defined in the option agreement.
The price to terminate all of the options outstanding at December 31, 1996,
based on the terms of the agreement was $1,348,000. The options outstanding at
December 31, 1995 and 1996, were stated at fair market value based on the
purchase price of the terminated options in 1995 and were included in
stockholders' deficit in the 1995 and 1996 accompanying balance sheets. In
February 1997, the Company terminated the remaining outstanding common stock
purchase options through a payment of $150,000.
During 1994, the Company issued 9% Series B Preferred Stock (the previously
issued preferred stock now being designated as Series A Preferred Stock) to a
stockholder in exchange for cash of $350,000. An additional $50,000 was obtained
through the same stockholder in exchange for an exclusive supply agreement,
whereby the Company agreed to purchase from an unrelated supplier all of the
Company's requirements for specialty windows from October 1, 1994, to September
30, 1997, or longer, if required, to meet a total of $3,000,000 of purchases.
The unrelated supplier, in consideration to the stockholder for facilitating the
supply agreement, agreed to give the $50,000 to the stockholder and, in
addition, promised to pay the stockholder $50,000 in 1996 and 1997 so long as
the supply agreement is still in full force and effect. Additionally, the
stockholder, in consideration to the Company for entering into the agreement
with the unrelated supplier, agreed to transfer to the Company, at no cost,
5,000 shares of Series B Preferred Stock in 1996 and 1997 concurrently with its
receipt of the $50,000 payments so long as the supply agreement is still in full
force and effect. In 1996, the Company received the 5,000 shares of Series B
preferred stock from the stockholder. At September 30, 1997, the Company had not
met its minimum purchase commitments and thus, received no additional shares of
Series B Preferred Stock from the stockholder under this agreement. At September
30, 1997, the agreement was in full force and effect.
The Company and its stockholders have entered into an agreement which
restricts the right of the stockholders to sell or transfer their shares unless
specified conditions are met. The Company has a right of first refusal, as
defined in the agreement, to purchase any shares offered for sale. The
stockholders have certain registration rights and the right of first refusal to
purchase additional capital stock offered by the Company.
The Company has the right to redeem the cumulative preferred stock, Series
A and Series B, in whole or in part, at any time by giving notice of redemption
to all holders. The redemption price for such optional redemption is $10 per
share. In the event of liquidation, dissolution or winding up of the Company,
the Series B stockholders are given preference over the Series A and common
stockholders. Otherwise, all equity stockholders are given the same preference.
<PAGE> 27
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The holders of both series of the preferred stock are entitled to receive,
if and when declared by the Board of Directors, dividends of additional fully
paid and nonassessable shares of cumulative preferred stock at the rate of 8%
for Series A Preferred Stock and 9% for Series B Preferred Stock per annum
payable semiannually, commencing October 30, 1986, for the Series A Preferred
Stock and commencing April 30, 1995, for the Series B Preferred Stock. The
Company has not declared any dividends subsequent to April 30, 1988, and,
accordingly, as of December 31, 1996 and September 30, 1997, respectively,
approximately $1,428,000 and $1,485,000 (unaudited) Series A Preferred Stock
dividends are in arrears, and approximately $70,000 and $77,000 (unaudited) of
Series B Preferred Stock dividends are in arrears. Subsequent to the year ended
December 31, 1996, a stock dividend was declared on all stock dividends in
arrears for Series A Preferred Stock and Series B Preferred Stock in conjunction
with the purchase of all of the outstanding preferred and common shares of the
Company by American Architectural Products Corporation (Note 10).
Under an employment contract, an employee of the Company is eligible to
receive additional compensation and a bonus if the Company achieves certain
defined earnings levels. The additional compensation and bonus are payable all
or in part by one or more of the following methods: cash, common stock options
with an exercise price of $2.16 per share and stock appreciation rights
exercisable at a price of $2.16 per share. Under this agreement, $55,000 and
$57,000 (unaudited) were earned and paid to the employee for the year ended
December 31, 1996 and September 30, 1997, respectively. The employment contract
also granted the employee 37,500 options to purchase common stock of the Company
at an exercise price of $2.16 per share.
In September 1997, the Company entered into employment agreements with two
officers. Under these agreements, 16,750 options to purchase common stock of the
Company were granted. The exercise dates are December 31, 1998 through December
31, 2000 at exercise prices of $2.00 to $4.00 per share. Upon sale of the
Company on or before June 30, 1998, the exercise price is adjusted to $.50 per
share, as defined in the agreement (Note 10). At September 30, 1997, no stock
options are exercisable. In addition, 16,750 stock appreciation rights were
granted. The exercise price is $0.01 per right and are exercisable through
December 31, 2000. At September 30, 1997, no obligation had been earned under
the stock appreciation rights agreement (Note 10).
In December 1996, the Company entered into an agreement with a consultant
and issued warrants for the purchase of 70,889 shares of common stock. The
exercise price is based on a formula and vesting is based on triggering events,
as defined in the agreement. At September 30, 1997, these warrants are not
exercisable. Subsequent to the year ended December 31, 1996, the common stock
purchase warrants were extinguished in conjunction with the purchase of all of
the outstanding preferred and common shares of the Company by American
Architectural Products Corporation (Note 10).
7. BENEFIT PLANS:
Effective January 1, 1989, the Company established an enhanced 401(k)
defined contribution plan for substantially all employees. Under this plan,
employees may contribute between 2% and 15% of their salaries and wages with the
Company matching up to 100% of the first 3% of employee contributions. The
expense under this plan was $58,000, $53,000, $66,000, $51,000 (unaudited) and
$145,000 (unaudited) for the years ended December 31, 1994, 1995 and 1996, and
the nine months ended September 30, 1996 and 1997, respectively.
8. RELATED PARTIES:
During 1996 and the unaudited nine months ended September 30, 1996 and
1997, the Company sold certain finished products to the joint venture referred
to in Note 2. Sales to the joint venture totaled $1,542,000, $872,000
(unaudited) and $2,409,000 (unaudited) for the year ended December 31, 1996, and
the nine months ended September 30, 1996 and 1997, respectively. Accounts
receivable from the joint venture
<PAGE> 28
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
were $234,000, $240,000 (unaudited) and $430,000 (unaudited) at December 31,
1996, and September 30, 1996 and 1997, respectively.
9. INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition
of future tax benefits, to the extent that realization of such benefits is more
likely than not, attributable to deductible temporary differences between the
financial statement and income tax basis of assets and liabilities and net
operating loss carryforwards.
The net deferred income tax liability at December 31, 1995 and 1996, and
September 30, 1996 and 1997, is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets................ $ 5,063,000 $ 4,341,000 $ 4,630,000 $ 4,216,000
Liabilities........... (5,063,000) (4,341,000) (4,630,000) (4,216,000)
----------- ----------- ----------- -----------
$ 0 $ 0 $ 0 $ 0
=========== =========== =========== ===========
</TABLE>
Temporary differences and carryforwards which give rise to significant
deferred income tax assets (liabilities) as of December 31, 1995 and 1996, are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current deferred income taxes --
Allowance for doubtful
accounts.................... $ 54,000 $ 87,000 $ 79,000 $ 147,000
Inventory valuation
differences................. (847,000) (947,000) (973,000) (836,000)
Accrued expenses not currently
deductible for income tax
purposes.................... 271,000 318,000 242,000 274,000
Accrued environmental
expenses.................... 62,000 131,000 120,000 128,000
Other.......................... 12,000 149,000 139,000 126,000
----------- ----------- ----------- -----------
Total current deferred income
taxes.......................... $ (448,000) $ (262,000) $ (393,000) $ (161,000)
=========== =========== =========== ===========
Long-term deferred income
taxes --
Property, plant and equipment.... $(2,152,000) $(2,013,000) $(2,046,000) $(2,101,000)
Federal net operating loss
carryforwards............... 3,971,000 3,128,000 3,361,000 3,011,000
State net operating loss
carryforwards............... 501,000 295,000 467,000 289,000
Alternative minimum tax
carryforwards............... 0 29,000 22,000 37,000
Valuation allowance............ (1,872,000) (1,177,000) (1,411,000) (1,075,000)
----------- ----------- ----------- -----------
Total long-term deferred income
taxes.......................... $ 448,000 $ 262,000 $ 393,000 $ 161,000
=========== =========== =========== ===========
</TABLE>
<PAGE> 29
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision for the years ended December 31, 1994, 1995 and
1996, and for the nine-month periods ended September 30, 1996 and 1997, consists
of the following elements:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------------------
1994 1995 1996 1996 1997
---- ---- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Currently payable................... $0 $0 $29,000 $22,000 $ 8,000
Deferred payable.................... 0 0 0 0 0
-- --
------- ------- ------
$0 $0 $29,000 $22,000 $ 8,000
== == ======= ======= ======
</TABLE>
A reconciliation between income taxes computed at the statutory federal
rate of 35% and the provisions for income taxes for the years ended December 31,
1994, 1995 and 1996, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Amount at statutory
federal rate......... $(555,000) $(436,000) $ 583,000 $ 454,000 $ 118,000
Change in valuation
allowance............ 468,000 311,000 (695,000) (461,000) (102,000)
Alternative minimum
taxes (AMT).......... 0 0 29,000 22,000 8,000
Nondeductible
expenses............. 2,000 2,000 47,000 43,000 12,000
Other.................. 85,000 123,000 65,000 (36,000) (28,000)
--------- --------- -------- -------- --------
$ 0 $ 0 $ 29,000 $ 22,000 $ 8,000
========= ========= ======== ======== ========
</TABLE>
In fiscal years 1994 and 1995 and prior years, the Company incurred
significant financial reporting and taxable losses principally as a result of a
capital structure that contained a substantial amount of high interest rate
debt. Although substantial net deferred income tax assets were generated during
these periods, a valuation allowance was established because in management's
assessment the historical operating trends made it uncertain whether the net
deferred income tax assets would be realized. Accordingly, no provision or
benefit for income taxes was recognized in 1994 and 1995.
During late 1995, the Company renegotiated the significant terms of its
debt obligations which lowered interest expense and provided liquidity for
operations. For the nine months ended September 30, 1996 and the year ended
December 31, 1996, the Company reported taxable income and net income for
financial reporting purposes. The provision for income taxes for the nine months
ended September 30, 1996 and the year ended December 31, 1996 of $22,000
(unaudited) and $29,000, respectively, is comprised solely of AMT as the Company
was able to utilize a portion of its net operating loss carryforwards. At
December 31, 1996 and at September 30, 1997, management determined, largely
because of the Company's prior losses, that it remains uncertain whether the net
deferred tax assets would be realized. As a result a valuation allowance of
$1,177,000 and $1,075,000 (unaudited) was recorded at December 31, 1996 and at
September 30, 1997, respectively.
For federal income tax reporting purposes, the Company had net operating
loss carryforwards of approximately $9,776,000 as of December 31, 1996. These
losses may be used to reduce future taxable income, if any, and expire from 2001
through 2010. These carryforwards may be subject to annual limitation in the
future in accordance with the Tax Reform Act of 1986 (Note 10). For state income
tax reporting purposes, the Company had net operating loss carryforwards of
approximately $5,291,000 as of December 31, 1996, which expire from 1997 through
2010.
<PAGE> 30
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS:
Effective December 10, 1997, the stockholders of the Company sold all of
their outstanding preferred and common shares to American Architectural Products
Corporation (American) for approximately $26,500,000. In accordance with the
terms of the sale agreement, the revolving credit facility and notes payable to
certain common stockholders (Note 4) were repaid in full. The agreement provides
for a payment of approximately $1,100,000 to the holders of the 9.25% notes
payable extinguishing the holders' common stock put option and capital
appreciation rights as well as repurchasing 62,500 shares of common stock held
by the holders of the 9.25% notes payable. On December 10, 1997, the Board of
Directors of the Company declared stock dividends payable to cover all Series A
Preferred and Series B Preferred stock dividends that were in arrears through
the date of the sale of the Company. The Company called all of the Series A
Preferred and Series B Preferred shares for redemption as of December 10, 1997.
The Company expects to redeem all of the Series A Preferred and Series B
Preferred shares at the stated redemption value of $10 per share. Payments to
the holders of the Series A Preferred and Series B Preferred shares totaling
approximately $3,169,000 and $394,000, respectively, will be made as the stock
certificates are tendered by the holders. The common stock purchase warrants
held by a consultant expired unexercised on December 10, 1997. Additionally, on
December 10, 1997, the holders of the 54,250 outstanding common stock options
exercised their options and purchased 54,250 shares of common stock of the
Company. The amount to be distributed to the common stockholders will represent
the remaining proceeds from the $26,500,000 payment by American after repayment
of the notes payable, revolving credit facility, Series A Preferred shares,
Series B Preferred shares and closing fees and expenses.
As a result of the purchase of the Company's common stock, the estimated
value associated with the 16,750 stock appreciation rights held by two officers
was approximately $117,000 at December 10, 1997. As of December 10, 1997, the
officers had not exercised their redemption rights.
On November 11, 1997, the Company signed a letter of intent to sell its
Miami production facility and real estate for approximately $4,500,000. The net
book value of the property was approximately $3,629,000 (unaudited) at September
30, 1997. Management anticipates the sale to close by the end of June 1998.
<PAGE> 31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Danvid Company, Inc. and Danvid Window Company
We have audited the accompanying combined balance sheets of Danvid Company,
Inc. and Danvid Window Company as of July 28, 1996 and July 27, 1997, and the
related combined statements of income and retained earnings and cash flows for
the years then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 6 to the accompanying combined financial statements,
the Companies may be subject to additional federal income tax liabilities as a
result of an investigation by the Internal Revenue Service.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Danvid
Company, Inc. and Danvid Window Company at July 28, 1996 and July 27, 1997, and
the results of their combined operations and their combined cash flows for the
years then ended in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Dallas, Texas
October 20, 1997
<PAGE> 32
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 28, JULY 27,
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current
Cash.............................................................. $ 678,459 $1,059,761
Short-term investments (Note 4)................................... 1,004,967 1,052,250
Accounts receivable:
Trade, less allowance for doubtful accounts of $353,400 and
$125,600...................................................... 3,846,336 4,667,013
Employees...................................................... 60,004 92,735
Other.......................................................... 13,597 8,861
Inventories (Note 1).............................................. 1,099,859 1,151,992
Prepaid expenses.................................................. 31,275 39,998
Notes receivable -- current portion (Note 2)...................... 11,748 12,342
Deferred tax benefit (Note 8)..................................... 236,424 149,565
---------- ----------
Total current assets...................................... 6,982,669 8,234,517
---------- ----------
Machinery and equipment net (Note 3)................................ 398,643 443,071
---------- ----------
Other
Deposits.......................................................... 26,903 23,300
Investments (Note 4).............................................. 38,485 55,300
Notes receivable, less current portion (Note 2)................... 58,606 39,010
Deferred tax benefit (Note 8)..................................... 56,213 45,932
---------- ----------
Total other assets........................................ 180,207 163,542
---------- ----------
$7,561,519 $8,841,130
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable -- trade......................................... $2,833,765 $2,606,979
Notes payable -- current portion (Note 5)......................... 17,033 36,781
Accrued expenses:
Payroll and payroll taxes...................................... 368,196 429,379
Profit-sharing plan contribution............................... 150,000 --
Other taxes.................................................... 173,378 233,407
Warranty expenses -- current portion........................... 324,294 354,139
Federal income taxes........................................... 454,737 201,858
---------- ----------
Total current liabilities................................. 4,321,403 3,862,543
Notes payable, less current maturities (Note 5)..................... 117,371 82,000
Accrued warranty expenses, less current portion..................... 191,583 159,343
---------- ----------
Total liabilities......................................... 4,630,357 4,103,886
---------- ----------
Commitments and contingencies (Notes 6, 7 and 10)
Shareholders' equity (Note 9)
Common stock -- par............................................... 1,000 1,000
Common stock -- no par............................................ 1,000 1,000
Retained earnings................................................. 3,059,162 4,848,429
---------- ----------
3,061,162 4,850,429
Less: Treasury stock, at cost (Note 9).............................. (130,000) (130,000)
Plus: Unrealized securities gain.................................... -- 16,815
---------- ----------
Total shareholders' equity................................ 2,931,162 4,737,244
---------- ----------
$7,561,519 $8,841,130
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to combined financial
statements.
<PAGE> 33
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
JULY 28, JULY 27,
1996 1997
----------- -----------
<S> <C> <C>
Sales............................................................. $40,731,403 $42,003,176
Cost of Goods Sold................................................ 33,777,787 33,807,196
----------- -----------
Gross Margin...................................................... 6,953,616 8,195,980
----------- -----------
Operating Expenses:
Selling expenses................................................ 1,412,078 2,039,554
General and administrative expenses............................. 4,115,884 3,637,973
----------- -----------
Total Operating Expenses................................ 5,527,962 5,677,527
----------- -----------
Operating Profit.................................................. 1,425,654 2,518,453
----------- -----------
Other Income (Expense):
Interest and dividend income.................................... 22,766 61,349
Other income.................................................... 53,055 51,826
Interest expense................................................ (14,946) (2,656)
----------- -----------
Total Other Income (Expense)............................ 60,875 110,519
----------- -----------
Income Before Income Taxes........................................ 1,486,529 2,628,972
----------- -----------
Income Taxes (Benefit):
Current......................................................... 744,607 737,565
Deferred........................................................ (138,079) 97,140
----------- -----------
Total Income Taxes...................................... 606,528 834,705
----------- -----------
Net Income........................................................ 880,001 1,794,267
Retained Earnings, beginning of year.............................. 2,184,161 3,059,162
Dividends......................................................... (5,000) (5,000)
----------- -----------
Retained Earnings, end of year.................................... $ 3,059,162 $ 4,848,429
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to combined financial
statements.
<PAGE> 34
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
JULY 28, JULY 27,
1996 1997
----------- ----------
<S> <C> <C>
Operating Activities:
Net income....................................................... $ 880,001 $1,794,267
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 201,139 204,000
Deferred taxes................................................ (138,079) 97,140
Gain on investments........................................... -- (47,283)
Changes in operating assets and liabilities
Accounts receivable -- trade................................ 184,293 (820,677)
Accounts receivable -- other................................ 11,587 (27,995)
Inventories................................................. 119,962 (52,133)
Prepaid expenses............................................ 164,871 (8,723)
Other assets................................................ 3,604 3,600
Accounts payable............................................ (94,868) (225,786)
Accrued expenses............................................ 808,750 (284,062)
----------- ----------
Net cash provided by operating activities.......................... 2,141,260 632,348
----------- ----------
Investing Activities:
Increase in short-term investments............................... (1,004,967) --
Decrease in non-current investments.............................. 4,811 --
Payments received on notes receivable............................ 4,834 19,002
Purchase of property and equipment............................... (101,390) (248,428)
----------- ----------
Net cash used in investing activities.............................. (1,096,712) (229,426)
----------- ----------
Financing Activities:
Dividends paid................................................... (5,000) (5,000)
Note payments.................................................... (475,836) (16,620)
----------- ----------
Net cash used in financing activities.............................. (480,836) (21,620)
----------- ----------
Increase in cash and cash equivalents.............................. 563,712 381,302
Cash and Cash Equivalents:
Beginning of year................................................ 114,747 678,459
----------- ----------
End of year...................................................... $ 678,459 $1,059,761
=========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest........................... $ 14,946 $ 2,656
=========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to combined financial
statements.
<PAGE> 35
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Danvid Company, Inc. (the Company) is a manufacturer of residential windows
and doors with its office and facilities located in Carrollton, Texas. The
Company is related to Danvid Window Company (Affiliate) through common
management and shareholders. The Company's products are principally sold to
Danvid Window Company which sells the products to wholesalers, retailers and
builders. Approximately 92 and 98 percent of the Company's 1996 and 1997 sales
are to Danvid Window Company, respectively. These financial statements are the
combined financial statements of Danvid Company, Inc. and Danvid Window Company.
All significant intercompany accounts and transactions have been eliminated.
USE 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 the
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 these estimates.
CASH AND CASH EQUIVALENTS
The Company and its Affiliate maintain a portion of their cash in bank
deposit accounts which at times may have exceeded federally insured amounts. The
companies have not experienced any losses in such accounts and believe they are
not exposed to any significant credit risk on cash and cash equivalents.
INVESTMENTS
Short-term investments are stated at fair value and include investments in
equity and bond mutual funds. In accordance with company policy, these
investments, which the Company intends to hold for less than one year but longer
than three months, are not included as cash equivalents. These securities are
considered trading securities with the unrealized holding gains and losses
reported in earnings.
Non-current investments are stated at fair value and include investments in
equity securities which the Company intends to hold for periods longer than one
year. Unrealized holding gains and losses on securities are carried as a
separate component of shareholders' equity.
ACCOUNTS RECEIVABLE
The Company's customers, as well as the Affiliate's customers, are
primarily related to the home building and remodeling industries. Trade accounts
receivable are normally uncollateralized and payment terms are generally 30
days. Management performs periodic reviews of the creditworthiness of customers
and provides an allowance for losses on receivables based upon prior years'
experience.
INVENTORIES
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventory costs include materials, direct labor, and
manufacturing overhead. Costs of miscellaneous manufacturing supplies are
expensed as incurred.
<PAGE> 36
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MACHINERY AND EQUIPMENT
Machinery and equipment are stated at cost. Depreciation has been
calculated using an accelerated method over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
---------------------
<S> <C>
Transportation equipment.......................................... 5 years
Office furniture and equipment.................................... 7 - 10 years
Machinery and shop equipment...................................... 7 - 10 years
Computer equipment................................................ 5 years
</TABLE>
ACCRUED WARRANTY EXPENSES
The Company provides a 10-year warranty on its products and has established
a product warranty reserve. The warranty reserve is based on management's
estimates of future costs associated with fulfilling the warranty obligation.
Management's estimates were derived from the Company's historical experience.
REVENUES
The Company and Affiliate recognize revenue on its window products when
shipped to the customer. Repair, service, and freight revenue is recognized as
the services are performed. All sales between the Company and the Affiliate have
been eliminated.
INCOME TAXES
Statement of Financial Accounting Standards Board No. 109, "Accounting for
Income Taxes" (SFAS No. 109), provides for deferred income tax assets and
liabilities resulting from temporary differences (see Note 8). Temporary
differences are the differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years. In accordance with SFAS No. 109,
the Company has considered the need for a valuation allowance to reduce its
deferred tax asset to an amount which will, more likely than not, be realized.
No valuation allowance was considered necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated.
Additionally, in June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," (SFAS 131) which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 establishes standards for the
reporting by public companies of information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements. It also establishes
standards for disclosures regarding products and services, geographic areas and
major customers.
<PAGE> 37
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated.
Because of the recent issuance of these standards, management has been
unable to fully evaluate the impact, if any, they may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of these two standards.
<PAGE> 38
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
JULY 28, JULY 27,
1996 1997
---------- ----------
<S> <C> <C>
Raw materials....................................... $ 620,917 $ 663,676
Work-in-process..................................... 143,773 180,678
Finished goods...................................... 335,169 307,638
---------- ----------
Total $1,099,859 $1,151,992
========== ==========
</TABLE>
2. NOTES RECEIVABLE
Included in notes receivable is a loan due from a shareholder of the
Company totaling $8,320 and $13,520 at July 28, 1996 and July 27, 1997,
respectively. This loan is a demand note, bears no interest, and is payable
monthly. The loan is secured by an automobile owned by the officer.
The Company has an undivided interest in a note receivable with an
unrelated party that is secured by land and payable in quarterly installments of
principal and interest at 8 percent per annum. The note matures February 1,
2004.
The above referenced notes receivable have scheduled maturities as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------- -------
<S> <C>
1998............................................... $12,342
1999............................................... 11,624
2000............................................... 8,777
2001............................................... 9,505
2002............................................... 9,104
-------
Total.............................................. $51,352
=======
</TABLE>
3. MACHINERY AND EQUIPMENT
Machinery and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Transportation equipment............................ $ 522,806 $ 643,231
Office furniture and equipment...................... 15,194 24,399
Machinery and shop equipment........................ 502,088 613,410
Computer equipment.................................. 184,413 191,889
---------- ----------
Total............................................... 1,224,501 1,472,929
Accumulated depreciation............................ 825,858 1,029,858
---------- ----------
Net machinery and equipment......................... $ 398,643 $ 443,071
========== ==========
</TABLE>
<PAGE> 39
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The cost and estimated fair value of the investment securities are as
follows:
<TABLE>
<CAPTION>
JULY 28, 1996
--------------------------------------------------
COST GAIN LOSS FAIR VALUE
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
Trading securities (short-term)............... $1,004,967 $ -- $ -- $1,004,967
Available-for-sale securities (long-term)..... 38,485 -- -- 38,485
---------- --- --- ----------
Total investment securities................... $1,043,452 $ -- $ -- $1,043,452
========== === === ==========
</TABLE>
<TABLE>
<CAPTION>
JULY 27, 1997
--------------------------------------------------
COST GAIN LOSS FAIR VALUE
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
Trading securities (short-term)............... $1,004,967 $47,283 $ - $1,052,250
Available-for-sale securities (long-term)..... 38,485 16,815 - 55,300
---------- ------- ------- ----------
Total investment securities................... $1,043,452 $64,098 $ - $1,107,550
========== ======= ======= ==========
</TABLE>
5. NOTES PAYABLE
The Company and its Affiliate have an $800,000 line-of-credit with Comerica
Bank -- Texas which bears interest at prime rate plus one percent and is payable
on demand. This line-of-credit has no outstanding balance as of July 28, 1996 or
July 27, 1997. Any borrowings under the line-of-credit are collateralized by
inventory and accounts receivable.
Long-term debt consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
13.65% installment note, payable monthly in the amount
of $717 including interest, due May 30, 1998 and
secured by an automobile............................. $ 28,404 $ 23,781
Non-interest bearing, promissory note to former
shareholder, payable monthly in the amount of $1,000,
secured by company stock............................. 106,000 94,000
-------- --------
Total.................................................. 134,404 117,781
Less: Current maturities............................... (17,033) (35,781)
-------- --------
Long-term debt......................................... $117,371 $ 82,000
======== ========
</TABLE>
Future maturities of long-term debt at July 27, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-------------------------------------------------------- --------
<S> <C>
1998.................................................... $ 35,781
1999.................................................... 12,000
2000.................................................... 12,000
2001.................................................... 12,000
2002.................................................... 12,000
Thereafter.............................................. 34,000
--------
Total......................................... $117,781
========
</TABLE>
<PAGE> 40
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Internal Revenue Service is currently conducting an investigation of
the Companies and their shareholders. Although there have not been any
assessments against the Companies, the Companies may be subject to additional
federal income tax liabilities. The ultimate outcome of the investigations and
their effects on the Companies cannot presently be determined. Accordingly no
provision for any liability that may result upon the resolution of this matter
has been recognized in the combined financial statements.
At July 27, 1997, the Companies are defendants in several lawsuits. The
Companies may be liable in these matters to the extent that the lawsuits are
found in favor of the plaintiffs and to the extent that these matters are not
covered by the Companies' insurance. In the opinion of management, such
liabilities, if any, would not have a material effect on the combined financial
statements.
At July 27, 1997, the Company was committed to various operating leases of
its office, production facility, production and office equipment, and
transportation equipment. Operating lease expense was approximately $1,135,000
and $1,080,000 for the years ended 1996 and 1997, respectively.
Future estimated minimum lease payments under operating leases at July 27,
1997, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------- ----------
<S> <C>
1998..................................................... $1,072,440
1999..................................................... 1,033,145
2000..................................................... 736,536
2001..................................................... 699,716
2002..................................................... 578,212
Thereafter............................................... 1,431,128
----------
Total.......................................... $5,551,177
==========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company and its Affiliate have adopted qualified defined contribution
profit-sharing plans during fiscal year 1996. The Plans cover all employees
meeting minimum age and length of service requirements. Contributions to the
Plans are made at the discretion of each company's Board of Directors. Expense
related to these Plans were $150,000 and $200,000 for the years ended July 28,
1996 and July 27, 1997, respectively.
8. INCOME TAXES
The Company's effective tax rate in 1996 is 41 percent. This differs from
the statutory tax rate of 34 percent due to non-deductible expenses (e.g. meals
and entertainment) and an additional provision for potential income tax
liabilities.
<PAGE> 41
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Cumulative temporary differences consist of the following:
<TABLE>
<CAPTION>
JULY 28, JULY 27,
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued warranty expense............................. $175,398 $174,584
Capitalized inventory costs.......................... 8,840 8,840
Allowance for bad debts.............................. 117,324 20,318
-------- --------
Gross deferred tax assets.............................. 301,562 203,742
-------- --------
Deferred tax liabilities:
Machinery and equipment.............................. (8,925) (8,245)
-------- --------
Net deferred tax assets................................ $292,637 $195,497
======== ========
</TABLE>
9. SHAREHOLDERS' EQUITY
Danvid Company, Inc. has 100,000 shares of no par common stock authorized,
4,500 shares issued, 4,275 shares outstanding and 225 shares in treasury valued
at cost at July 28, 1996 and July 27, 1997.
Danvid Window Company has 100,000 shares of $1 par common stock authorized,
1,000 shares issued and outstanding at July 28, 1996 and July 27, 1997. In
January 1996 and February 1997, common stock dividends of $5 par share were paid
totaling $5,000.
10. BUY -- SELL AGREEMENT
The Company and its Affiliate have an agreement regarding the disposition
of the Affiliate's sole shareholder's shares of common stock. In accordance with
the agreement, a shareholder of the Company can exercise an option to purchase a
controlling share of the Affiliate's common stock from the Affiliate's sole
shareholder. The purchase price as set forth in the agreement is $1.00 per
share.
11. MAJOR CUSTOMERS
The Company sells its products to homebuilders and distributors primarily
in its regional area. For the years ended July 28, 1996 and July 27, 1997, the
Company and its Affiliate had sales to one major distributor that approximated
12 percent in both years. The concentration in accounts receivable also
approximated 12 percent of the total balance in both years for the same
distributor.
12. SUBSEQUENT EVENT
Subsequent to their fiscal year end, the Company and the Affiliate and
their shareholders entered into a letter of intent with an unrelated company to
sell the net assets of the Company and the Affiliate.
<PAGE> 42
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Danvid Company, Inc. and Danvid Window Company
We were engaged to audit the accompanying combined balance sheet of Danvid
Company, Inc. and Danvid Window Company (a Texas corporation) as of July 31,
1995, and the related combined statement of operations and retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Danvid Company, Inc.
and Danvid Window Company as of July 31, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
FOX, BYRD & GOLDEN
Dallas, Texas
October 13, 1995
<PAGE> 43
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED BALANCE SHEET
JULY 31, 1995
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents.............................................................. $ 114,747
Short-term investments (Note 1G)....................................................... 43,296
Accounts receivable--trade (Notes 2 and 4)............................................. 4,030,629
Accounts receivable--other............................................................. 64,888
Notes receivable--current portion (Note 3)............................................. 19,613
Due from officer (Note 6).............................................................. 20,300
Inventory (Notes 1B and 4)............................................................. 1,219,821
Prepaid expenses....................................................................... 71,803
Income taxes receivable................................................................ 124,343
Deferred income taxes receivable (Notes 1D and 7)...................................... 49,132
----------
Total Current Assets............................................................ 5,758,572
----------
Property, Plant and Equipment (Notes 1C and 4)
Transportation equipment............................................................... 538,193
Office furniture and equipment......................................................... 15,194
Machinery and shop equipment........................................................... 458,878
Computer equipment..................................................................... 128,852
----------
1,141,117
Less: Accumulated depreciation......................................................... 642,861
----------
498,256
----------
Other Assets
Organization costs--net (Note 1H)...................................................... 327
Deposits............................................................................... 30,316
Notes receivable (Note 3).............................................................. 55,575
Deferred income taxes receivable (Notes 1D and 7)...................................... 105,426
----------
191,644
----------
$6,448,472
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade................................................................ $2,928,634
Line-of-credit--bank (Note 4).......................................................... 350,000
Notes payable--current portion (Note 4)................................................ 124,836
Accrued payroll and commissions........................................................ 310,135
Accrued payroll taxes.................................................................. 80,335
Accrued warranty expense............................................................... 97,000
Accrued other expenses................................................................. 74,968
----------
Total Current Liabilities....................................................... 3,965,908
----------
Long-Term Debt
Notes payable (Notes 4 and 6).......................................................... 260,240
Less: Current portion.................................................................. 124,836
----------
135,404
----------
Other Liabilities
Accrued warranty expenses.............................................................. 291,000
----------
Total Liabilities............................................................... 4,392,312
----------
Stockholders' Equity
Common stock (Note 8).................................................................. 2,000
Retained earnings...................................................................... 2,184,160
----------
2,186,160
Less: Treasury stock, at cost (Note 8)................................................. 130,000
----------
2,056,160
----------
$6,448,472
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 44
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<S> <C>
Sales........................................................................... $37,909,147
Cost of Goods Sold.............................................................. 33,739,455
-----------
Gross Profit.................................................................... 4,169,692
-----------
Operating Expenses
Selling expenses.............................................................. 1,977,022
General and administrative expenses........................................... 2,405,330
-----------
4,382,352
-----------
Net Operating Loss.............................................................. (212,660)
-----------
Other Income (Expense)
Interest and dividend income.................................................. 13,056
Other income.................................................................. 69,994
Interest expense.............................................................. (30,782)
Loss on investment............................................................ (1,738)
-----------
50,530
-----------
Loss Before Federal Income Tax.................................................. (162,130)
-----------
Federal Income Tax Expense (Benefit) (Notes 1D and 7)
Current....................................................................... (45,251)
Deferred...................................................................... (19,578)
-----------
(64,829)
-----------
Net Loss........................................................................ (97,301)
Retained Earnings, Beginning of year............................................ 2,306,507
Dividends....................................................................... (25,046)
-----------
Retained Earnings, End of year.................................................. $ 2,184,160
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 45
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss...................................................................... $ (97,301)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.............................................. 159,045
Loss on sale of investments................................................ 1,738
Decrease in accounts receivable............................................ 760,118
Decrease in income taxes receivable........................................ 6,211
Decrease in inventory...................................................... 83,179
Increase in prepaid expenses............................................... (10,397)
Decrease in other assets................................................... 26,030
Increase in deferred income taxes.......................................... (19,578)
Decrease in payables....................................................... (475,425)
Decrease in accrued expenses............................................... (419,111)
---------
Net Cash Provided by Operating Activities............................. 14,509
---------
Cash Flows from Investing Activities:
Decrease in investments in mutual funds....................................... (1,032)
Note proceeds................................................................. (15,000)
Payments received on notes receivable......................................... 13,651
Purchase of property and equipment............................................ (405,989)
---------
Net Cash Used in Investing Activities................................. (408,370)
---------
Cash Flows from Financing Activities:
Net proceeds from line-of-credit.............................................. 350,000
Dividends paid................................................................ (25,046)
Note payments................................................................. (156,232)
Purchase of treasury stock.................................................... (10,000)
---------
Net Cash Provided by Financing Activities............................. 158,722
---------
Decrease in Cash and Cash Equivalents........................................... (235,139)
Cash and Cash Equivalents
Beginning of year............................................................. 349,886
---------
End of year................................................................... $ 114,747
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 46
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Schedule of Noncash Investing and Financing Transactions:
Purchase of automobile................................................................ $ (33,475)
Note payable.......................................................................... 33,475
Purchase of treasury stock............................................................ (130,000)
Note payable.......................................................................... 120,000
---------
Cash Paid..................................................................... $ (10,000)
=========
Cash Payments (Refunds):
Interest.............................................................................. $ 30,782
Income taxes.......................................................................... $ (51,462)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 47
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS
JULY 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Danvid Company, Inc. (the Company) is a manufacturer of aluminum windows
and doors with its office and facilities located in Carrollton, Texas. The
Company is related to Danvid Window Company (affiliate) and Advantage Discount
Glass through common management and shareholders. The Company's products are
principally sold to Danvid Window Company which sells the products to
wholesalers, retailers and builders. Approximately 94% of the Company's sales
are to Danvid Window Company. These financial statements are the combined
financial statements of Danvid Company, Inc. and Danvid Window Company. All
significant intercompany accounts and transactions have been eliminated. The
more significant accounting policies are as follows:
A. Sales are recognized when the product is shipped. Title actually
passes when the product is delivered, which is usually the same day that it
is shipped and no longer than three days after shipment. There were no
material shipments undelivered at July 31, 1995.
B. Inventory is carried at the lower of cost or market determined on a
first-in, first-out basis.
C. Property, plant and equipment, stated at cost, are depreciated
using an accelerated method over the estimated useful lives of the assets.
Depreciation expense was $158,527 for the year ended July 31, 1995.
<TABLE>
<CAPTION>
ASSETS ESTIMATED USEFUL LIFE
---------------------------------------------------------- ---------------------
<S> <C>
Transportation equipment.................................. 5 years
Office furniture and equipment............................ 7 - 10 years
Machinery and shop equipment.............................. 7 - 10 years
Computer equipment........................................ 5 years
</TABLE>
D. The Company has adopted Statement of Financial Accounting Standards
Board No. 109 for accounting for income taxes. For all significant items
where there is a timing difference between financial and income tax
reporting, deferred taxes are provided. Deferred taxes are classified as
current or noncurrent, depending on the classification of the assets and
liabilities to which they related.
E. Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and trade
receivables. The Company sells its principal products to customers related
to the home building and remodeling industries. To reduce credit risk, the
Company performs on-going credit evaluations of its customers' financial
conditions and does not generally require collateral.
In the normal course of business, the Company may have bank account balances
in excess of federally insured limits.
F. For purposes of the statement of cash flows, cash equivalents
include time deposits, certificates of deposit, and all highly liquid debt
instruments with original maturities of three months or less.
G. Short-term investments are stated at the lower of cost or market
and include investments in equity and bond mutual funds.
H. Organization costs are being amortized over 5 years. Amortization
expense was $518 for 1995.
I. The Company provides a 10-year warranty on its products. The
Company has established an estimated accrual for these anticipated future
warranty costs.
<PAGE> 48
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995
NOTE 2--ACCOUNTS RECEIVABLE--TRADE
Accounts receivable--trade of the Company and its affiliate are pledged as
collateral on the Comerica Bank note and stated net of an allowance for doubtful
accounts of $232,358 at July 31, 1995. An aged analysis of accounts receivable
at July 31, 1995, is as follows:
<TABLE>
<CAPTION>
AMOUNT %
---------- ---
<S> <C> <C>
Current......................................... $3,138,427 74
30 days......................................... 937,150 22
60 days......................................... 187,410 4
---------- ---
$4,262,987 100
========== ===
</TABLE>
NOTE 3--NOTES RECEIVABLE
The Company has an undivided interest in a note receivable secured by land
payable in quarterly installments of principal and interest at 8% per annum
which matures February 1, 2004, and has an unsecured note being repaid in
monthly installments of $692, including interest at 10% per annum.
<TABLE>
<S> <C>
Total notes receivable..................................... $75,188
Less: Current portion...................................... 19,613
-------
Long-term notes receivable................................. $55,575
=======
</TABLE>
NOTE 4--NOTES PAYABLE
The Company has a line-of-credit with Comerica Bank in the amount of
$800,000 at prime plus 1% secured by eligible accounts receivable and inventory.
The line-of-credit is a demand note payable. At July 31, 1995, there was
$350,000 drawn against the line-of-credit.
A summary of long-term debt at July 31, 1995 is as follows:
<TABLE>
<S> <C>
General Motors Acceptance Corporation Installment note payable
monthly in the amount of $717 including interest at 13.65% with
balloon balance due May 30, 1998, secured by an automobile...... $ 32,663
Individual (Ex-stockholder) (Note 6) Promissory note payable
monthly in the amount of $1,000 with no interest, secured by
company stock................................................... 119,000
Officer Promissory note payable monthly in the amount of $8,484
plus interest at 10%, matures February 28, 1997, unsecured
(subsequent payments through September 30, 1995 totaled
$82,865)........................................................ 108,577
--------
Total Indebtedness...................................... 260,240
Less: Current Portion................................... 124,836
--------
Long-Term Debt.......................................... $135,404
========
</TABLE>
<PAGE> 49
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995
NOTE 4--NOTES PAYABLE (CONTINUED)
The following are maturities of long-term debt at July 31, 1995:
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
JULY 31, AMOUNT
-------------------------------------------------- --------
<S> <C>
1996............................................ $124,836
1997............................................ 17,033
1998............................................ 35,371
1999............................................ 12,000
2000............................................ 12,000
Thereafter........................................ 59,000
--------
$260,240
========
</TABLE>
NOTE 5--COMMITMENTS AND CONTINGENT LIABILITIES
A. At July 31, 1995, the Company was committed to various operating leases
of its office and production facility and equipment. Rent expense for the year
ended July 31, 1995, was $481,649. Future estimated minimum lease payments under
noncancellable leases are:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, AMOUNT
---------------------------------------------------------------- --------
<S> <C>
1996............................................................ $514,200
1997............................................................ 225,400
1998............................................................ 23,800
1999............................................................ 21,800
--------
$785,200
========
</TABLE>
B. Employees of the Company are entitled to paid vacation, paid sick days
and personal days off, depending on job classification, length of service, and
other factors. It is impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been recorded in the
accompanying financial statements. The Company's policy is to recognize the
costs of compensated absences when actually paid to employees.
C. A workmen's compensation claim for approximately $40,000 has been filed
against Danvid Window Company. Management's opinion is that their insurance
company will cover the majority of any ultimate settlement and any payment by
the Company will not materially affect the Company's results of operations or
financial position.
NOTE 6--RELATED PARTY TRANSACTIONS
The following are related party transactions and balances for the year
ended July 31, 1995:
<TABLE>
<S> <C>
Note payable--officer........................................... $108,577
Accounts receivable--officer.................................... $ 20,300
Interest expense--officers...................................... $ 20,220
Note payable--Mary Crawford..................................... $119,000
</TABLE>
<PAGE> 50
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995
NOTE 7--INCOME TAXES
The Company's effective tax rate is higher than what would be expected if
the federal statutory rate was applied to net income because of expenses
deducted for financial reporting purposes that are not deductible for federal
income tax purposes. These permanent timing differences for calculation of
income tax include amounts related to meals and entertainment and officers life
insurance. Cumulative temporary timing differences consist of the following at
July 31, 1995:
<TABLE>
<S> <C>
Excess of depreciation for tax purposes over the amount taken for
book purposes.................................................. $ 6,427
Accrued warranty expense recognized for book purposes only....... (388,000)
Additional costs related to inventory, capitalized for tax
purposes only.................................................. (47,506)
---------
$(429,079)
=========
</TABLE>
The Company has the following capital loss carryforwards for regular
federal income tax purposes at July 31, 1995:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION AMOUNT
----------------------------------------------------------------- -------
<S> <C>
1997............................................................. $23,687
1999............................................................. 76
2000............................................................. 1,739
-------
$25,502
=======
</TABLE>
NOTE 8--SHAREHOLDERS' EQUITY
Danvid Company, Inc. has 100,000 shares of no par common stock authorized,
4,500 shares issued, 4,275 shares outstanding and 225 shares in treasury at July
31, 1995. In June 1995, the Company purchased 225 shares of its stock in full
redemption of a stockholder's interest for $130,000. In July 1995, common stock
dividends of $2.35 per share were paid totaling $10,046.
Danvid Window Company has 100,000 shares of $1 par common stock authorized,
1,000 shares issued and outstanding at July 31, 1995. In January 1995, common
stock dividends of $15 per share were paid totaling $15,000.
